Thursday, 3 July 2014

The End Of The Experiment? Part 2

The free market experiment began with the Thatcher government of 1979 and continued under Major, Blair and Brown. Looking back, many of the changes that occurred in the UK were not well anticipated by the arguments made for markets at that time. Yet despite these undisclosed outcomes, our political classes have yet to consider a 'null hypothesis' result.

The 1980s experiment was premised on a set of visionary promises about what the market could deliver. The vision centred on a critique of the State as a blockage on jobs, growth and competitiveness and a distorter of price signals in a market setting. Drawing on the sentiment, if not the detail, of the Bacon and Eltis thesis, it was argued that the public, non-marketed sector ‘crowded out’ private sector investment and enterprise. Similarly the debate over the public utilities was transformed by an Austrian view that the market would bring the rigour of competition and efficiency of co-ordination to cumbersome public utilities industries. The solution was wholesale de-regulation and privatisation to release entrepreneurial spirit and build an enterprise culture that would benefit ‘the public’ in its multiple identities: as producers, consumers and taxpayers.

The reforms may have had effects, but they were often not the effects that were expected. Surprisingly, public sector job creation increased, both absolutely and relative to private sector job creation under Tory administrations (figure 1). 86.4% of net new jobs created from the beginning of the Thatcher administration to the end of the Major administration came from the public sector. Whilst some of that is explained by the economic cycle, it was mostly the result of a secular decline in manufacturing jobs (over 3m net jobs were lost) which the growth of financial services could not rebalance (only 250k net new jobs were created). By the end of New Labour in 2007 this figure had risen: 4.4m manufacturing jobs had been lost since 1979, with only 330k new financial services jobs created to compensate. What the Conservatives - and later New Labour - discovered was that public sector jobs were a necessary cost, ‘filling in’ for (not crowding out) anaemic private sector job creation and buying in public quiescence at a time of unrest.

Figure 1

Equally unanticipated  was the lack of new entrepreneurial sole traders and SMEs, despite the promise that deregulation extended. From 1992 (when our time series began), the number of full time self-employed workers was virtually flat, until redundancy forced expansion after the 2007 crash. Instead, there was a growth in casualised, insecure low paid jobs: part-time self-employed jobs increased 116%, while part time workers for corporations increased 32% (figure 2). At the same time, large firms failed to show the entrepreneurial flair promised in the discourse of free markets, choosing often to sacrifice high risk/high return activities for modest returns, low risk activities plus scale. The free market experiment, in other words, created an environment where capital satisfices: large companies calcifying around the apparatus of the state, lobbying hard for the release of ever more low return but safe public activities.

Figure 2

This pattern of satisficing was also evident in investment, which always carries risk because it is a gamble on management's strategic and orgranisational competences. The free market experiment promised to stimulate investment, but these problems stubbornly remain. Investment as a % of GDP fell from 17.6% in 1980 to 14.4% in 2013; and the UK continues to have the lowest investment share of GDP among all G7 countries (figure 3).

Figure 3

If the hypothesis that markets would stimulate private sector job growth and investment proved faulty, it equally did not capture unexpected drivers of growth in a more marketised economy. Both Tory and Labour administrations assumed that growth would come from operating efficiencies, competitiveness and specialisation forged within dynamic markets. What they did not anticipate was the importance of credit and asset prices as key sources of growth in a liberalised economy. The push of newly minted credit against real estate assets allowed households to cash out equity gains as income. That income was spent, and GDP rose. It is a staggering fact that housing equity withdrawal was equal to 104.2% of GDP growth under the Thatcher administration and 101.7% of GDP growth under Blair (figure 4). And whilst equity withdrawals were not always spent on items accounted for under GDP measures, its contribution to growth should not be underestimated.

Figure 4

So what were the outcomes? It is clear that the opportunity culture did appear for some: house-flippers, upper income employees in the state subvented sectors, the (subsidised) financial services industry and certain professions all did well. But for many, the disposable income inequalities that emerged put a ceiling on opportunity as income mobility rates fell. By the end of the 1970s the tenth richest households (D10) had five times as much disposable income (before indirect taxes) as the tenth poorest households (D1). By the 2000s the average ratio was almost ten times. These effects were further amplified by the shift from direct to indirect taxes which hit the poor disproportionately: D10 to D1 inequality was 13.4 times on average over the 2000s, up from just over 5 times at the end of the 1970s by this measure (figure 5).

Rising inequalities between households should be understood within a broader context of disenfranchisement as household's lost their stake in GDP growth. At the beginning of the 1980s average disposable household incomes were – effectively – a lien on growth. That changed by the mid-1980s, so that by 2011 (when our series ends) the disposable household income growth of the bottom 90% of households had not kept up with GDP (figure 6). And even the top 10% of households had only just kept pace with GDP growth. Where did this share go? Labour’s pre-tax share of GDP fell 3.5 percentage points from 1979 to 2010 - this was almost identical to the growth of financial corporation gross operating surpluses share of GDP, which increased 2.9 percentage points; although taxes on products and production also claimed a similar increased share of GDP.

Figure 5

Figure 6

These unexpected outcomes may truly surprise us. But surprises are commonplace in all experiments. Learning from those unanticipated results – in this case – seems something that our political classes are less willing to contemplate.

Part 3 will be posted next week...

Manchester Capitalism