The return of industrial policy is unmissable, catalyzed by the cumulative shocks of Covid-19 and the war in Ukraine as well as longer-term structural issues: the ecological crisis, faltering productivity and alarm at the dependence of Western states on China’s productive apparatus. Together, these factors have steadily undermined governments’ confidence in the ability of private enterprise to drive economic development.
Of course, the ‘entrepreneurial state’ never disappeared, especially in the US. The deep pockets of the Defense Advanced Research Projects Agency and the National Institutes of Health have been crucial in maintaining the country’s technological advantage – funding research and product development over the past few decades. Still, it is clear that a substantial shift is taking place. As a group of OECD economists noted, ‘So-called horizontal policies, i.e. interventions available to all firms and which include business framework conditions such as taxes, product or labour market regulations, are increasingly questioned’. Meanwhile, ‘the case for governments to more actively direct the structure of the business sector is gaining traction’. Hundreds of billions of targeted funding is now flooding businesses in the military, high-tech and green sectors on both sides of the Atlantic.
This pivot is part of a broader macro-institutional reconfiguration of capitalism, in which a high-pressure post-pandemic economy has tightened labour markets while the centrality of finance continues to wane. These phenomena are highly complementary: public funding stimulates the economy and may boost job creation, while the administrative allocation of credit serves as an admission that financial markets are unable to attract the investment necessary to meet major conjunctural challenges. At a very general level, this neo-industrial turn should be welcomed, since it implies that political deliberation may play a somewhat greater role in investment decisions. More concretely, though, there is much to worry about. At this stage, we can identify at least three problematic dimensions.
First is the extent of this turn itself. Though the sums are significant, they do not match the civilizational challenges we are facing – falling well short of the complete restructuring of the economy demanded by climate breakdown. This is particularly true in Europe, afflicted by chronic structural vulnerability due to self-inflicted austerity measures – currently rebranded ‘fiscal adjustment paths’ – and deepening divisions between core and periphery. The geopolitics of industrial policy are especially fraught within the context of the EU single market. Hayek was a strong supporter of federalism precisely because he knew that a union of this sort would create serious obstacles to state intervention. Reaching an agreement at the federal level to support a particular sector is exceptionally difficult due to diverging national interests, themselves a result of productive specialization and uneven development. At the national level, conversely, the relaxation of state aid provisions tends to elicit resistance from weaker member states, who fear that countries with larger fiscal space – Germany in particular – would be able to improve their competitive edge, further aggravating the Union’s productive polarization.
Because the entire European edifice was built on the premise that competition is sufficient to guarantee economic efficiency, there is close to zero technical-administrative capability to enforce industrial policy. Meanwhile, across the Atlantic, austerity has had similarly damaging effects on state capacity. Asked about the viability of Biden’s programme, Brian Deese, the former director of the National Economic Council, sounded a cautious note: ‘A lot of that comes down to the professionalism of the civil service at the federal level and the state and local level – a lot of which has been hollowed out.’
Second, the substance of neo-industrialism is troubling. The choices currently being made about the direction of funding will shape the productive structure for decades to come. On the ecological front, the main issue is that they are almost exclusively conceived as subsidies for greening existing institutions and commodities, rather than reorienting the economy on the basis of sustainability. The car industry is a case in point. Ideally, green policies would develop multimodal transports solutions with a limited role for small, electrified vehicles. Yet this would imply a drastic downsizing of the car automotive sector – something unthinkable for profit-driven carmakers, who are instead pushing for fully electrified high-margin SUVs.
To reconcile increased productivity with environmental imperatives, industrial policy would need not only the resources to support structural change but also the means for state planners to discipline capitalists. The lessons of post WWII developmentalism drawn by Vivek Chibber remain valid: businesses understand industrial policy as ‘the socialization of risk, while leaving the private appropriation of profit intact’. They therefore strongly resist ‘measures which would give planners any real power over their investment decisions’.
Another qualitative issue is the global increase in military spending. In the absence of what Adam Tooze calls ‘a new security order based on the accommodation of China’s historic rise’, we have entered a New Cold War with the frightening potential to spread beyond the Ukrainian theatre. While some businesses have a lot to lose from a confrontation with China, others may stand to benefit. Along with the industrial-military complex, Silicon Valley corporations are deliberately fuelling fears about Chinese capabilities in AI, in the hope of securing public support for their activities and locking in access to foreign allied markets. This has created a mutually reinforcing relationship between private profit-seeking and state power, in traditional imperialist fashion.
The third problem involves the balance between classes. In her recently published book L’Etat droit dans le mur, Anne-Laure Delatte interrogates the economic roots of declining state legitimacy. She argues that, in France as elsewhere, rising taxes on households – most of them regressive – were accompanied by increased public spending for the benefit of corporations. This created a vitiated state, oriented largely towards the financial sector, and a general population increasingly distrustful of public policymaking. Today, it is easy to see how an ambitious industrial policy could aggravate such pro-corporate biases. Asset managers are especially eager to take advantage of the new rentier opportunities arising from state-backed infrastructure investment. Without increasing taxes on corporations and capital income, or taking industries into direct public ownership, state subsidies imply a transfer of resources from labour and the public sector to capital, exacerbating inequalities and resentments.
The West’s embrace of industrial policy is explicitly motivated by Chinese productive prowess. Yet one cannot overstate China’s singularity. There, state capital is dominant thanks to public ownership in strategic, upstream sectors of the economy – the ‘commanding heights’ in Leninist terms. As well as enjoying formal property rights to key assets, a highly specific form of state-class organization allows the CCP to exercise some control over the country’s general developmental path. Its culture of internal discipline is crucial in assigning politicians dual identities as masters of capital and servants of the party-state. This provides a firm foundation for public planning, allowing private accumulation to coexist with market-shaping forces such as credit and procurement policies. The CCP’s public-private network is also highly adaptable, enabling the government to implement major policy changes relatively quickly. Following the 2008 financial crisis, political instructions were immediately passed down to party members in anticipation of the huge state stimulus package, resulting in a much more rapid and effective fiscal response than in the US or EU.
In democratic societies, by contrast, effective discipline on corporations can only come from external popular pressure. Thus, for campaigning organizations and left parties, the neo-industrial turn is good news only to the extent that it gives new impetus to old concerns: Who decides where the money goes? What are its objectives? How is it used and misused? Perhaps, in helping us to formulate such questions, neo-industrialism will end up exposing the inadequacy of its own answers.Clio the cat, ? July 1997 - 1 May 2016 Kira the cat, ? ? 2010 - 3 August 2018 Jasper the Ruffian cat ? ? ? - 4 November 2021
Next phase
Posted by Keith-264 on May 20, 2023, 6:20 am, in reply to "Hollow States"
According to the establishment media, the persistently high rate of inflation in the UK is something of a puzzle. Particularly since the latest data on the other side of the Atlantic shows a significant disinflation, while the UK Consumer Price Index (CPI) remains stubbornly above 10 percent.
But is there really a puzzle? After all, most of what was called “inflation” was actually a series of supply-side shocks brought about by two-years of lockdowns and the self-destructive sanctions on the Russian energy and resources which have kept European prices low for decades. And since these have directly impacted the essential “Three ‘F’s – fuel, fertiliser and food – whose prices have risen at more than 20 percent, there is no real mystery as to why prices have remained high.
This though, is not really the question being posed by establishment media. What is actually being asked is, why, after 12 consecutive interest rate rises, have we not seen the CPI plummet? And behind this question is an assumption about the omnipotence of central banks which is not born out in practice. If the primary function of the central bank is the maintenance of the banking system, then its secondary function is to reassure the rest of us – politicians and public – that somebody is in control. Except, of course, that central banks are not really in control, and their one tool – interest rates – is an incredibly blunt instrument which, used inappropriately – such as during a supply-side crisis – may do more harm than good.
This possibility has already occurred to a few members of the Monetary Policy Committee (MPC) who have voted in favour of a pause on further rate rises until the full extent of the damage done so far can be assessed. But the bank cannot pause while the US Federal reserve continues to raise rates without risking a fall in the value of the pound. Were this to happen in an import-dependent economy like the UK, the result would be a further increase in the price of imported goods and of anything made using imported materials. Rates simply have to keep rising until prices come tumbling down.
In this, and despite their public reassurances, the MPC is all too aware that the higher they push interest rates up, the bigger the shock when the effects filter through to the real economy. But this takes time. Even on the shortest time frame, it takes a month before the decision to raise interest rates results in increased payments for households and businesses. But even then, there are various ways in which the increased cost can be handled. Businesses, for example, may allow annual profits to fall in order to absorb the additional cost. In the same way, households might choose to eat into savings rather than cut back on spending.
Longer-term issues also apply. Businesses which took out loans during the pandemic when the interest rate was just 0.1%, will not have even experienced the first interest rate increase yet – although a prudent business manager will have taken steps to deal with higher rates when the debt has to be renewed. Households which took out mortgages during the pandemic are in a similar quandary – according to the Bank of England, while the average new mortgage rate is 4.5%, the average for all mortgages is still below 3% because of the low rates that were available two years ago. But many of those mortgages – as with pandemic business loans – are coming up for renewal. For the average homebuyer who took out a mortgage in 2021, by the beginning of 2023 this translated to an additional £481 per month. And since – unlike the USA, where a mortgage can be fixed for 30 years – many of those mortgages were only fixed for two years, that’s a lot of households facing a massive spending hit this summer.
As we learned between 2005 – when a peak in conventional oil production generated a similar supply-side shock – and 2007, when the central bankers paused their rate rises – using interest rate rises in an attempt to dampen the effects of a supply-side crisis risks pulling the rug out from beneath an already precarious banking Ponzi system. And for all the reassurances that “this time is different,” the only real difference is that this time the central bankers aren’t even pausing.
Meanwhile, banks have tightened their lending standards, making it harder for businesses and households to refinance existing debt, and leaving many would-be borrowers unable to access loans at all. Until now, businesses have avoided the nuclear option of laying-off workers… in part because of the temporary labour shortages which followed the lockdowns. But unemployment – even according to the rigged government data – has finally begun to increase, suggesting that businesses are no longer able to absorb increased costs. Something similar is happening to households as they run out of savings, and resort either to non-payment or late-payment of bills or to using credit card debt to fill the gap between income and expenditure – both of which serve to exacerbate the problem beyond the short-term.
This suggests that we are at the beginning of a new phase in the unfolding economic crisis. Until now, the establishment media and the politicians they serve, have been able to brush over low growth rates and stubbornly high prices with reference to additional bank holidays, strikes and the weather. But with unemployment rising and business insolvencies gathering pace, the unfolding economic downturn will be far harder to ignore.
The policy problem this raises concerns which data the MPC is looking at. If their sole concern is to bring the CPI back to the 2% target set by Gordon Brown in altogether different economic circumstances, then – as in 2008 – they are likely to be spectacularly successful. But the cost to the wider economy in the shape of debt-defaults, business closures, bankruptcies and bank failures will likely be worse than the fall-out from the 2008 crash. Moreover, an isolated post-Brexit UK economy which has wilfully disconnected itself from the last of Europe’s supply of cheap energy and resources may well face a Greek-style currency crisis too. If, on the other hand, the MPC has one eye on maintaining at least some GDP growth, then it may be obliged to lower rates sooner and further than it might like… even if this comes at the cost of higher consumer prices for much longer.
The real risk though, is that we are on the verge of a new stagflationary era – which rising interest rates have accelerated – in which the cost of energy-dependent essentials remains high even as the prices of discretionary goods and services deflate. This may sound academic, but its potential consequences would make the Great Depression of the 1930s look like a golden age of prosperity in comparison. Such a stagflation – with the absence of any cheap and abundant alternative energy source to save the day, as happened in the 1930s and 1940s – would entail an almost total collapse of an over-financialised import economy like the UK, as we had to abandon consumerism in a desperate attempt to produce essentials ourselves or to figure out how to manufacture something of value to continue trading for vital imports… And no, computer coding, search engine optimisation, making artwork using machine learning, and all the other bullshit jobs so many of us do these days do not count as essential skills within a collapsing economy.Clio the cat, ? July 1997 - 1 May 2016 Kira the cat, ? ? 2010 - 3 August 2018 Jasper the Ruffian cat ? ? ? - 4 November 2021
on May 19, 2023, 6:11 pm