Monday, December 29, 2014

On "Privatized Keynesianism"

I have been reading Colin Crouch's The Strange Non-Death of Neoliberalism1. A major theme is that an ideological divide between more reliance on markets and on government misses issues raised by the existence of large - including multinational - corporations. The neoliberal assault on government has been increasing the strength of corporations, not competitive markets. Furthermore, corporations have been taking on the role of government. Crouch mentions, for example, the "seconding" of corporate executives to various ministries; the likelihood that internal policies of a Multi-National Corporation on, say, child labor may be more restrictive than laws in many third world countries; and the role of corporations in setting international standards, where organizations with nation-states may be weak.

But my point in this post is to note Crouch's introduction(?) of a new technical term, Privatized Keynesianism. A contrast between the post-World War II golden age and the later neoliberal era2 is needed to make sense of this term. After the war, in the United States - and, I gather, in other advanced industrial capitalist economies - wages rose with average productivity. Furthermore, governments, under a somewhat Keynesian ideology, saw it as their responsibility to maintain aggregate demand. These conventions came undone in the 1970s. Productivity increased (at a slower pace), but wages failed to keep up, and governments came to emphasize fighting inflation, not unemployment.

Increased inequality, however, did not eliminate the need to manage aggregate demand. Neither consumer spending from wages nor an abdication from fiscal polity by government could fill this lacuna. This period saw the increased availability of debt, the creation of secondary markets for the trading of bets on bets on bundles of debts (derivatives), and the capture of credit rating agencies by sellers of debts. This institutional structure led to the collective, but private, macroeconomic regulation of aggregate demand3. This institutional structure is what Crouch calls privatized Keynesianism4. The irresponsibility of banks, in some sense, produced a (temporary, unsustainable) positive externality.

  1. I might as well note two mistakes I found irritating. Somewhere in one of the early chapters, Crouch, who I gather is British, refers to Eugene McCarthy when he means Joe McCarthy. I also thought that Crouch's account of the role of Fanny Mae and Freddy Mac in subprime mortages reflected too much credence for right-wing liars.
  2. I date the start of the neoliberal era with Nixon ending the fixed exchange rate between the United States dollar and gold, a major element of the Bretton Woods system.
  3. Is this a non-microfounded, functionalist account?
  4. From this perspective, the accumulation of private debt was a symptom, not the ultimate cause of the recent Global Financial Crisis, a cause that has yet to be addressed. These ideas seem to me to be close to Thomas Palley's Structural Keynesianism. Has anybody read James K. Galbraith's The End of Normal: The Great Crisis and the Future of Growth?


Blissex said...

I was very impressed by the "private keynesianism" term invented by Crouch, because it describes well one aspect of what I call the debt-collateral spiral.

My interpretation of Crouch is roughly:

* Governments do like to boost "economic activity" with demand management.

* Neoliberal governments dislike fiscal policy because it means in one variant to tax the "deserving" rich to create jobs for the "parasitic" poor, and in another to increase public debts that might require later to increase taxes on the "deserving" rich.

* Neoliberal governments dislike that boosting "economic activity" creates a higher demand for labour, and therefore reduces the profits of "productive" corporations to the benefit of their "improductive" workers.

* The solution found has been therefore to boost "economic activity" by funding it with more *private* debt, at the large scale (corporates, PPI) or small scale (mortgages), as that has the appearance of being monetary policy instead of fiscal policy.

* Also boosting private debt or boosting GDP by redefining it improves the debt-GDP ratio, because the debt-GDP ratio that neoliberal Economists consider is only that of public debt to total GDP.

* In order to give the appearance of proper debt management and benefit only those who are already rich, it is vital that the ballooning credit be "safely" collateralized; that has meant it can only go to big financial corporates and to small and big property owners, with collateral being accepted as debt itself from corporates and real estate from property owners.

Since according to ostensible practices the private debt is fully collateralized by "safe" "AAA" assets, it does not matter how much such debt is ballooned into existence.

And here comes in my intuition that there is a debt-collateral spiral: because the valuation of collateral usually grows when debt grows, as more debt is created, the higher go the valuations of the assets that can be bought with that debt, which justifies more debt.

And everybody knows that if ever collateral valuations drop, lenders will be bailed out by the government and the private debt will be nationalized.

Put another way "private keynesianism" is boils down to government sponsored lending on margin, that is delayed public keynesianism, with the profits being privatized to "friends of friends" as long as the debt-collateral spiral turns, and the eventual losses will be socialized.

If you stand back, using property to collateralize huge amounts of lending on margin is the central technique of asset stripping, and I think that in most neoliberal countries asset stripping has been the main "value generating" strategy of neoliberal governments.

Blissex said...

"Private keynesianism" manifests itself as rising debt collateralized by property (real estate or securities).

The effects can be huge, one of my favorite quotes is how huge the "benefits" have been just from HELOs (residential equity withdrawals, second mortgages or expanding first mortgages) on residential property in the UK:
«Under Thatcher, this exploded to over £250bn across her premiership – a staggering 104% of GDP growth. ... But Blair did his homework and let loose – as did Thatcher – a wave of cheap credit, financial deregulation, house price inflation and an equity withdrawal-led consumption boom. Withdrawals under Blair’s leadership totalled around £365bn, that’s a full 103% of GDP growth over the same period,»

Blair himself described the technique in a lucid article 10 years earlier:
««Mrs Thatcher has enjoyed two advantages over any other post-war premier. First, her arrival in Downing Street coincided with North Sea oil. The importance of this windfall to the Government’s political survival is incalculable. It has brought almost 70 billion pounds into the Treasury coffers since 1979, which is roughly equivalent to sevenpence on the standard rate of income tax for every year of Tory government.
Without oil and asset sales, which themselves have totalled over £30 billion, Britain under the Tories could not have enjoyed tax cuts, nor could the Government have funded its commitments on public spending.
More critical has been the balance-of-payments effect of oil. The economy has been growing under the impetus of a consumer boom that would have made Lord Barber blush. Bank lending has been growing at an annual rate of around 20 per cent (excluding borrowing to fund house purchases); credit-card debt has been increasing at a phenomenal rate; and these have combined to bring a retail-sales boom – which shows up dramatically in an increase in imported consumer goods.»

Something like this magnitude of debt-fueled capital gains has been happening in Australia, and also in the USA.

Blissex said...

Two more quotes from UK sources about "private keynesianism", the Chancellor (Treasury) and the Prime Minister:
«A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.»
«It is hard to overstate the fundamental importance of low interest rates for an economy as indebted as ours… …and the unthinkable damage that a sharp rise in interest rates would do.
When you’ve got a mountain of private sector debt, built up during the boom… …low interest rates mean indebted businesses and families don’t have to spend every spare pound just paying their interest bills.
In this way, low interest rates mean more money to spare to invest for the future.
A sharp rise in interest rates – as has happened in other countries which lost the world’s confidence – would put all this at risk… …with more businesses going bust and more families losing their homes.»

BTW being «monetarily active» is code for booming private debt, and since that would be "inflationary", «fiscally conservative» is code for cutting government jobs and spending to push down wages.

Blissex said...

«debt-fueled capital gains has been happening in Australia, and also in the USA.»

As to the USA, how important "private keynesianism" is and how hypocritical it is in the end is demonstrated to abundance by the fact that the USA mortgage market is 95% nationalized and there have been essentially no calls from either party to privatize Fannie and Freddie, for quite a few years.

Blissex said...

«neoliberal countries asset stripping has been the main "value generating" strategy»

A beautifully pithy summary by Kevin Drum on Republican strategy:

«Rather than workable solutions, my party is offering low taxes for the currently rich and high spending for the currently old, to be followed by who-knows-what and who-the-hell-cares. This isn’t conservatism; it’s a going-out-of-business sale for the baby-boom generation.»

"Private keynesianism" is what finances the «sale», and is a large part of what bridges the gap between «low taxes» and «high spending», because a lot of that «high spending» is actually privately financed thanks to HELOs.

Blissex said...


USA readers may not be aware withe the Public-Private Infrastructure or Private Participation in Infrastructure or also PPP Public Private Partnership or PFI Private Finance Initiative.

It is in essence an accounting trick that is the epitome of private keynesianism: the idea is to finance public infrastructure with private sector debt.

The infrastructure such as a hospital or a school is financed by debt raised by a private corporation that builds it and operates it after getting in advance a long term leasing contract from the government usually with the same duration as the debt plus an operating contract over the same lifetime.

So the debt technically is owed by the private contractor, even if the contractor is guaranteed that the government will pay enough under the contract to repay that debt. Plus a substantial profit usually hidden in some obscure clause of the operating contract, which is the bait used by the government to find corporates willing to borrow on its behalf.

The trick is that a contractual obligation to pay leasing and operating fees over 30 years *does not count as government debt* under existing accounting rules, while borrowing a smaller sum and repaying it over 30 years counts as government debt.

Politically it has several other advantages: it results in huge fees for the banks that "advise" on the deal, a big nearly guaranteed profit for the corporate, it backloads the cost of the deal onto future governments, ...

Blissex said...

Yet another comment that should have come earlier, a pithy summary of what "Private Keynesianism" means from an UK source:
«The postwar British state used to protect citizens against market failure through the welfare state, through government pump-priming of the economy and through rising wages. But after Thatcher, it was increasingly left to Britons to protect themselves by taking on shares in privatised utilities, by buying up council houses – and by taking on debt, with all the attendant risks. This is what the political economist Colin Crouch has dubbed "privatised Keynesianism": debt is used to reflate the economy, but it is taken on not by the public sector but by individuals, couples, families.
Privatised Keynesianism sounds a bit joyless, but the political classes found something to give it extra zap. Call it housing-market heroin: the special high the Brits get when property prices are really taking off and Sarah Beeny is on the telly explaining how we can all cash in.»

Blissex said...

Another excellent and in my view similar summary of "private Keynesianism":
«In response Mrs Thatcher in 1979 inverted the priority given to workers by the British state and favoured capital – arguing that in the end this would be to the benefit of everyone. Defeating inflation was the only way to resist investment strike and restore profitable returns to invested capital and therefore productive assets to industry. But the resources of the state were exhausted it could no longer maintain demand, and since UK growth was not productive enough to raise wages to sufficient levels the burden of financing low productivity passed from the state to the individual.
So the economy gradually moved from Mrs Thatcher to New Labour from maintaining capital supply through public debt to maintaining public demand through private debt. America sang the same tune. Europe its prior settlement now ossified into vested interest and bureaucracy increasingly followed suit.
Neoliberalism succeeded not through supply side innovations but through privatising the debt demand function. For what deregulation allowed was massive capital inflows not to productive investment but to finance the extraordinary taking on of debt by private individuals and corporations and it was this debt driven growth that kept us in business over the last 20 years.
In short if the period from 1945 – 1979 was public Keynesianism the period from 1979-2008 was private Keynesianism. Across the West from the 1990s onwards as government debt gradually fell, private and corporate debt rose to unprecedented levels. The 2008 crash exposed this fake separation and collapsed both together when the state had to take back the debt (greatly increased through leverage and asset deflation) it had thought effectively privatised.»