It is interesting to compare the debate on public-state debt with that of personal-private debt. To date, very few have made a theoretical or political-economic link between the two.
What we have witnessed over the past 20 years is not a pure neo-liberal return to markets but a form of privatised debt. Instead of governments taking on debt to stimulate the economy (post war Keynesianism), low to middle-income individuals did so. What Colin Crouch calls ‘Privatised Keynesianism’. The debt-model is central to both. The bearer of debt different. In traditional Keynesianism, the generalised interest of the industrial working class was embodied in public policy and socio-economic institutions (and politically through social democratic parties). In privatised Keynesianism, the generalised interest of a new financial-capital class was embodied in public policy. Both, arguably, increased overall social welfare and the standard of living for a time being. Both, attempt to reconcile the need for capital to have a mass consumer class. One does it through government-fiscal policy, the other through individual-credit consumption.
Most varieties of capitalism in the heyday of Keynesianism depended upon a social compromise between rising wages, an expansive welfare state and government demand management to ensure mass consumption. This social democratic formula that linked markets to the state shifted in the late 1970′ and early 1980’s to a compromise between active states, banks, stock exchanges and financial markets. A shift that arguably changed the rules of the game to such an extent that made political parties defunct in attempting to devise alternative economic strategies.
The market will always need mass consumption and confident consumers. The irony is how it managed to achieve this over the past 20 years in the absence of secure employment and secure labour markets. One would think that insecure-flexible labour markets, reduced trade union density and volatile employment would make people less ‘confident’ to consume. Not if you can buy everything with your cheap credit card. Domestic consumer spending facilitated by private-finance institutions not the public-state was the Anglo-Saxon model.
Credit card growth and mortgages kept the lid on what was, from the beginning, a completely unsustainable form of macro-economic management. Yet, the policy response, to date, has been to cut public spending and thus minimise security for individuals and small businesses against market volatility, and provide security for the credit providers who amassed the wealth from privatised debt that people will now have to re-pay.
Colin Crouch also makes interesting comparisons between national economies that depend upon exports rather than domestic consumption to fuel ‘growth’. Germany and other continental Euro economies that depend upon exports adopt public polices that keep prices low. Germany, Japan (and China) require the UK and USA (and Ireland) to consume more and thus, are also dependent upon the ‘debt model’ but for different functional reasons.Economies heavily dependent upon consumer spending, are, in this regard, fuelled not by exports but domestic of locally produced services and assets. Thus, Ireland falls into this category despite the constant rhetoric that we are a small nimble smart export led economy. Exports have held up and increased in Ireland (mostly highly productive foreign owned MNC’s).
Anti-inflationary policies that are embodied in the ECB and the Euro zone made little difference to our type of domestic consumption. Anti inflationary policies only concern goods and services that lose their value when consumed (food, cosmetics, going to the gym, staying in a hotel, buying a car). People do not want to see a rise in the price of food because rarely is it considered a rise it value. The opposite is the case with so-called assets such as housing. An increase in the price of a house is perceived to be an increase in value. Thus, government led (fueled by cheap credit) public policy was to encourage rising house prices and rising domestic consumption of housing. Our domestic demand was more and more mortgages (which ironically translates from the original latin-french into dead peasant).
Governments, according to Crouch, incorporated privatised Keynesianism into their public policy thinking. A reduction in the price of oil, gas or labour is welcomed as good news. But, a reduction in the price of housing is seen as a disaster. This can be observed in the current policy decision to create NAMA. A public body owning bad debts, but which, by default, puts a floor on how far prices can fall. It is, even by neo-classical standards, a distortion of supply and demand. If house prices fall far enough people will buy them. But, such a distortion of basic market principles was integral to privatised Keynesianism (or what I often call institutionalised Monetarism). It was based on the selling of bundled derivatives by banks and other financial companies. An exchange that got so complex it was impossible to know the value of what was being bought. This violates the most fundamental assumption of ‘market economics’ : perfect information. It did the reverse: provided an incentive to be ignorant and ignore information.
An empirical observation of this can be found in the highly regarded ‘credit rating agencies’. Two weeks before the Icelandic banking system collapsed it was given the highest rating possible.
Are we witnessing the end of privatised Keynesianism? If so, what will replace it? When Keynesianism collapsed their was an arsenal of neo-liberal ideas and actors ready to replace it. Peter Hall documents this as a policy-paradigm shift. It is hard to see such a ready made replacement in the current context. Economic prosperity is far more reliant upon the flexibility of capital than secure labour. Some countries have adopted a flexicurity to model to balance this situation. Secure the person not the job. But, in Ireland, such a compensation does not exist. The policy priority remains, broadly speaking, the security of capital investment. Crouch predicts that we will witness a new era of large corporations working in partnership with government. A shift from unregulated privatised Keynesianism to self-regulated privatised Keynesianism. The interests of financial firms will remain the basis of what is perceived to be the generalised social interest.
We can empirically observe this trend in Ireland. New legislation has been passed that allows international companies locating in Ireland to use US accounting practices for a number of years. The Sunday Business Post reported at the weekend that ‘The Companies (Miscellaneous Provision) Act 2009 gives such companies four years to comply with International Financial Reporting Standards (IFRS) required for all large Irish-registered firms”. Since Obama decided to clamp down on US companies using tax havens such as Bermuda to ensure tax free profits, Ireland has been quick to locate itself as the next best location. The global management firm ‘Accenture’ located its head offices here in 2009 for this very reason. We are not witnessing the end of finance capital in Ireland, let alone, anglo-saxon capitalism (LME).