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The new economics is anything but liberal

The left-wing’s easy assumptions on the primacy of neoliberal economics is at odds with the level of state intervention in the economy, as the experience of the eurozone bears out
September 25, 2018

This week, Jeremy Corbyn played to the Momentum crowd at the World Transformed Festival in Liverpool, with a commitment to reverse the policy effects of “neoliberal economics”, which he maintains has dominated political discourse since the 1970s. The Labour leader was obviously preaching to the converted at this curiously evangelistic-sounding shindig, so his warning that the rich were “living on borrowed time” was as tiresome as it was predictable.

But that doesn’t mean shareholders shouldn’t factor in a degree of political risk the next time voters are asked to go to the polls, particularly if political support becomes even more fragmented ahead of the next general election. After all, the impact of proposals to increase corporate taxation and force private companies to hand over a 10 per cent share of their equity to workers isn’t likely to be benign.

Policy issues aside, you’re left wondering whether the left-wing’s easy assumptions on the primacy of neoliberal economics tally with the numbers. Even after years of so-called ‘austerity’ measures, state spending as a proportion of gross domestic production came in at 41.1 per cent last year, just 190 basis points down on its long-term average. If the primary objective of neoliberal economics is to roll back the frontiers of the state, we can only assume that successive administrations have made a hash of implementing the policies.

And if the economic theories of Milton Friedman and his ilk have really taken root, then how do we square the increased regulatory burden on UK businesses, whether homegrown or through supranational bodies such as the European Union (EU)? A trawl through publications from the National Audit Office reveals that no reliable consensus exists as to the aggregate cost to business, but over 900 pieces of legislation a year were imposed by the EU in the decade following the Maastricht Treaty. That’s perhaps unsurprising given the scope of Maastricht, but surely the proliferation of red tape is also at odds with the notion that we’ve somehow embraced laissez-faire capitalism at the expense of state intervention. 

We may have opened up capital markets and sold off state utilities, but you could argue that the economic policies we’ve been pursuing since the 1970s could just as easily be described as neo-Keynesian, a rejection of the view that government capital expenditures and government deficits displace private economic activity.

 

Next week’s economics…

Following on from the deterioration in IHS Markit’s eurozone purchasing managers’ index (PMI) in September, we’ll get some idea of whether the PMI reading – a four-month low of 54.2 – is reflected in data covering manufacturing output and the bloc’s unemployment rate due out at the beginning of October. Businesses have cited worsening trade relations between the US and China as a reason why hiring plans have been put on the back burner, a point subsequently reiterated by Mario Draghi, European Central Bank (ECB) president.

And while the lurch towards protectionist measures by Washington and Beijing can’t be ignored, it seems that Europe’s policymakers, as ever, are sadly lacking in perspective on this issue. The fact that the continent’s manufacturers have begun to rein in spending may only be partly explicable in terms of the tit-for-tat tariff impositions. There is the primary structural issue to take on board; the single currency can never be an effective one-size-fits-all medium of exchange for a widely divergent set of economies unless it operates within full political and fiscal union. Unfortunately, the advocates of a fully unified Europe are out of kilter with the public mood on this score.  

The trade war between the world’s biggest national economies is escalating at a time when the ECB is phasing out its bond purchase programme. Yet it’s far from certain whether this large-scale intervention has had any lasting impact beyond masking the deflationary environment that has acted as a brake on consumer spending. Monthly retail sales figures for the region are due out on 3 October and it’s likely they’ll mirror the deterioration in the European Commission’s consumer confidence survey for September.

The UK is firmly in the down-leg of its credit cycle, but still hit a consumer prices index (CPI) rate of 2.7 per cent in August. But the core inflation rate in the eurozone has struggled to move up beyond 1 per cent for much of this year. So, attention will focus on the latest core CPI reading due out on 28 September.

Mr Draghi recently stated that the risk of deflation in the eurozone economies was fading after figures were released showing stronger wage growth than anticipated, but some economists maintain that the ECB wasn’t quick enough off the mark with its bond buying spree, thus the programme did little to stimulate growth momentum, as aggregate demand remained subdued on the back of a general expectation that inflation rates would remain low.

It would be premature to say that the single currency economies have fallen into a deflationary trap, but at a time of increased protectionism the head of the ECB thinks the way forward is to remove all existing barriers to internal trade among the member states, while other influential figures, including German finance minister Olaf Scholz, have called on eurozone governments to step up negotiations to complete the proposed banking union. Proponents of the union believe it will shore up the industry ahead of any future financial crisis. But against the calls for greater integration, Italy’s new government has challenged EU fiscal rules, while floating the possibility that it could exceed its deficit limits, even as it relies on further ECB support. Why wouldn't you want to stay in the club?