There is no alternative: the coming triumph of the left

By Ruy Teixeira
5 June 2017
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Western capitalism is having its populist moment. The rise of Donald Trump to the American presidency provides the most recent and vivid illustration of this trend. Before that, there was Brexit, the UK’s vote to leave to leave the European Union. And in recent years, various populist parties in advanced countries have gone from strength to strength: on the right, parties like the National Front (France), Ukip (Britain), Freedom Party (Austria), True Finns (Finland) and the PVV or Party for Freedom (Netherlands); on the left, parties like Podemos (Spain), Syriza (Greece), Socialist Party (Netherlands), Five Star Movement (Italy) and Socialist People’s Party (Denmark). To a greater or lesser degree, these parties have fundamentally altered the electoral landscapes in their countries, disrupting long-standing party systems and becoming serious contenders for power in many of them.

But if the populist surge is unlikely to disappear anytime soon, recent events suggest it has its limits. The PVV did not do nearly as well as many feared in the recent Dutch election, winding up with just 13% of the vote and 20 of the 150 seats in parliament, about half what they were projected to get in early 2016 polling. The National Front’s Marine Le Pen, who led in early polling for the French Presidential election, came second to Emmanuel Macron in the first round and then lost to him decisively in the second round runoff.

To understand populism’s limits, we must first understand why it has been relatively successful in recent years. The basic reason for this is simple. Capitalism is in a long transition from an industrial to a postindustrial, service-based economic model, and so far the change has not gone well. As this transition unfolded in the final two or three decades of the 20th century, western capitalist societies saw a distinct slowdown in economic growth, twinned with a startling rise in inequality. The early 21st century continued these trends with the global financial crisis of 2007-8 dealing a grievous blow to advanced economies, the worst since the Great Depression of the 1930s. Many countries have recovered from this damage only recently and some have not yet done so.

So we are now talking about many decades of poor economic performance, particularly affecting those with low or modest skills, whose livelihoods were connected to the old industrial economy. Elites on both the right and the left have appeared powerless to either accelerate this transition so it arrives at someplace good for most people, or push it back to a better place. Thus mainstream parties and leaders are suffering and populist ones are rising.

For the left, this dynamic has been particularly problematic. Across advanced countries, the left has faced, and is facing, the same general problem.

On the one hand, the transition to postindustrial society has thrown up a raft of newly left-leaning constituencies. Minorities and women appreciate the fall of barriers to their full participation in society and the economy and see progressive government as a guarantor of further upward mobility. Professionals and the highly-educated have fared relatively well from the transition, generally support the emerging cosmopolitan values of postindustrial society and see government as a provider of the essential services and investments such a society needs. Younger generations too support these new values, know that their future lies in postindustrial society and want government to help them find their place within it.

On the other, the left, particularly the mainstream left, has seen its support decline among formerly left-leaning traditional working-class voters who fared well in the old industrial society and cannot find a satisfactory place in the new one. It is these voters who have powered the emergence of rightwing populist figures like Trump and his ilk. The rapid pace of desertion has undermined the left’s ability to assemble effective political coalitions that include both their new constituencies and a sufficient portion of their old-working class voters.

That is the left’s challenge and it is not an easy one to meet. In fact, many on the left fear

rightwing populism will just continue to grow, riding a tide of economic anxiety and cultural resentment to a commanding political position and providing a permanent barrier to the left’s advance. This is highly unlikely, as recent events suggest. Those on the left would be well-advised to keep in mind the prescient words of economist Herbert Stein, “if something cannot go on forever, it will stop”.

The real question then is what comes next. What political force could undercut the populist dynamic and stabilise support for postindustrial society? The obvious answer is one that can reduce the collateral damage from the transition and make it work for a much larger segment of the population.

As it happens, the left is far better-positioned to do this than the right. This is because the right now has two contending imperatives, neither of which will allow them to accomplish these goals. The newer working-class supporters of the right would like to somehow return to the economy and culture of the industrial past. That is simply not feasible. The more traditional supporters of the right appear to have no ideas that go beyond the standard conservative chestnuts of budget austerity and lower taxes for the rich. But such policies will only make postindustrial society worse, not better. Indeed, at this point in the rolling crisis of Western capitalism, the idea that ratcheting up inequality will somehow lead to strong growth, better jobs and higher living standards is ludicrous. It is not at all what the right’s working class supporters have in mind and will utterly fail to defuse populist sentiment.

The Piketty problem of modern capitalism

The left on the other hand, is increasingly united around an approach that could stabilize the postindustrial transition by spreading its benefits more widely. This approach takes direct aim at what we might call contemporary capitalism’s ‘Piketty problem’, after French economist Thomas Piketty’s magisterial work, Capital in the 21st Century[1]. Piketty’s work made a huge splash after it appeared in English translation in 2014, both because of its exceptional – indeed unprecedented – empirical documentation, and because it spoke clearly and rigorously to people’s sense that modern economies have fundamental, not episodic, problems.

The essence of Piketty’s argument is that capitalism, left to itself, does not produce ever-more equal outcomes, but, contra Simon Kuznets and other traditional economic theorists, naturally tends toward high levels of inequality, toward divergence rather than convergence. This does not mean there are no forces for convergence. The diffusion of knowledge and skills over time is a very powerful force in this direction, as common sense and economic analysis suggest.

However, the forces for divergence can be more powerful still, as we have been seen over the last 40 years and, Piketty argues, as we are likely to see in the rest of the 21st century. This is where Piketty really strikes a nerve. It is one thing to clearly describe how income and wealth inequality are growing in advanced societies and provide a convincing analysis of same. It is quite another for that analysis to provide a solid theoretical and empirical case that people’s greatest fears about the current age of inequality are completely justified: as bad as things are, they are highly likely to get worse – indeed, much worse.

This will be the result, Piketty argues, if economic growth rates continue to be modest, ensuring, in his famous equation, that r > g, where r is the rate of return on capital and g is the growth rate. This inequality leads inexorably to a rise in the ratio of capital to income in the economy and the increasing concentration of wealth at the top of the social structure.

Reinforcing this trend is the increasing inequality of income itself. It is not the case, as standard economic theory would have it, that inequality of income under capitalism is simply a natural reflection of differences in productivity. Compensation in modern economies, particularly in the US, can diverge and has diverged radically from this ideal, as norms and policy regimes that held inequality in check have disintegrated. As a result, the highest earners – the “supermanagers” in Piketty’s term – increasingly decide how to reward themselves and each other, with predictable results[2].

Going forward, there appears to be little to stop these trends from continuing to drive inequality ever upward. Potentially, the trends toward wealth and income inequality could become so entwined that together they produce “levels of inequality never before seen” in the 21st century[3]. This is a bleak picture but it accords very well with most people’s sense of what has happened and where we are going on our current course.

And that’s not all. Rising inequality clearly played an important role in the Great Financial Crisis of 2008-9, as the struggling bottom 90% took on more and more debt in the years preceding the crisis, aided and abetted by a burgeoning financial industry seeking investment outlets for wealthy clients with little regard for risk. Regulations on the financial industry have been tightened but, if inequality is a root cause of instability, then continuously rising inequality puts capitalist economies at great risk in the future.

Then there is the general problem of growth. It has become increasingly obvious from academic research and the experience of the last 40 years that highly unequal societies are not predisposed to fast growth. On the contrary, inequality past a level that provides reasonable rewards for entrepreneurship, skill acquisition and performance is actually a drag on growth, subtracting consumer demand from the economy, promoting destabilising consumer debt, reducing human capital acquisition, breaking down social trust, stifling economic mobility and encouraging rent-seeking unproductive economic activity by the wealthy.

Therein lies the Piketty problem of contemporary capitalism:

1. The basic dynamic of the system tends toward higher inequality.

2. This reduces the effectiveness of economic growth in raising living standards.

3. Sluggish living standards growth could potentially be mitigated by faster overall economic growth, even if it is unequally distributed.

4. But rising inequality slows down economic growth, rather than speeds it up, so that avenue is closed off as well.

Result: a vicious cycle of rising inequality, stagnating living standards and slowing economic growth.

That’s the Piketty problem. And contemporary capitalism, left to its own devices, is highly unlikely to solve it.

The equitable growth approach

So, is there a way out of this vicious cycle? Yes there is, once we accept the idea that capitalism cannot be expected to break out of it on its own. Instead, capitalism must be actively pointed in a different direction by adopting a new approach that pushes back against inequality and promotes the economic health of the middle and working classes as the key driver of growth. That is, instead of seeing the economic health of the great middle of society as simply a desirable outcome of growth, this new approach posits that a thriving middle is what allows the attainment of relatively fast growth. Conversely, high inequality is seen as not just unfair and injurious to those who get the short end of the stick but as an active obstacle to growth[4].

Known generally as equitable growth economics, this approach has rapidly become the new conventional wisdom on the left. As currently articulated it has three broad components: (1) measures to directly improve economic outcomes for the working and middle classes; (2) measures to directly reduce the flow of excessive benefits to the wealthy; and (3) measures to increase societal investment in the jobs of the future.

The latter component deserves particular attention. Direct measures to lift up the middle and push down the top are clearly necessary and important parts of an equitable growth program. But they are not sufficient. Sustained healthy economic growth also depends on increased long-term societal investment in the infrastructure, research and sectoral innovation that will underpin the jobs of the future.

There are obviously a lot of moving parts here. But several things are clear. There has been a systematic tendency to underinvest in infrastructure, both its maintenance and expansion to suit the needs of modern postindustrial economies. This tendency has been particularly acute in the US, where investment is now at historical lows, despite an immense backlog of deferred maintenance and mostly unfilled needs for new infrastructure.

This underinvestment reflects, in large part, unwarranted faith in the ability of the private sector to “go it alone” and drive growth purely on the basis of entrepreneurship and profit-seeking. This ignores, of course, the well-known economic problem of “public goods” that are useful and necessary for many economic actors but are available to all regardless of whether they have contributed anything to its availability or not (“free-riding”) and so cannot be appropriated for the exclusive use of any profit-making firm. Infrastructure is a classic example of such a public good, as is some basic research.

In the absence of a robust supply of public goods, some firms will still make healthy profits and economic growth will still continue. But growth will be lower than it otherwise would be and it will be tilted toward areas where large profits do not depend on public goods (think finance): good for those firms that do make large profits; bad for the working and middle classes.

Worse, the problem goes beyond that indicated by the public goods framework. As economist Mariana Mazzucato[5] points out, the role of the state is not just to supply public goods the private sector ignores but needs (though this is very important) but also to be an entrepreneurial agent investing in areas that are far off the private sector’s radar screen because of extreme uncertainty in economic returns. This is particularly the case with fundamental knowledge generation and very early investments in new technological sectors. Current theories of economic growth assign such innovation a key role and it is the “entrepreneurial state”, in Mazzucato’s words, that can afford – and is willing – to bear the inherently immeasurable risks of such innovation.

This has been the case in the US where pretty much all research underlying the internet and modern computing was funded and initially capitalized by the state. For example, the immensely profitable Apple corporation’s signature products, like the iphone and ipad, rest on fundamental innovations developed by government funding[6]. This includes everything from the internet to GPS to touch screens to Siri voice recognition.  In other words, no entrepreneurial state, no Apple.

More generally, a Brookings Institution study found that 18 of the 25 most important breakthroughs in computer technology in the seminal 1946-65 period were underwritten by the federal government[7]. And it’s not just information technology where the role of the state has been critical: between 1971 and 2006, 77 out of the 88 most important innovations outside of computing/communications[8], as rated by R&D Magazine, were heavily dependent on government support, especially in their earliest developmental stages.

The role of the entrepreneurial state has been critical to growth in the past and there is no reason to think it will not be critical in the future. Progress in such emerging fields as biotechnology, nanotechnology and, of paramount importance, green technology will continue to depend on the entrepreneurial state being willing to provide support in areas where the private sector sees only unknowable risks. And without such progress economic growth will fall well short of potential.

The opportunity state

Overall, it is the aim of the equitable growth vision of the state to improve both the quality and quantity of economic growth. In this, it can be distinguished from the post World War II model of the classic welfare state, where emphasis was on post-market redistribution by the state and basic economic security. Call it the “opportunity state”.

The prime directive of the opportunity state is to promote massive upward mobility for the working and middle classes by achieving the highest possible levels of economic growth and providing the great middle with the tools to grow along with the economy – to take advantage of opportunity. This includes a certain level of economic security, as embodied in wage floors, social insurance programs and mandated basic benefits. Security is not the end goal of such measures, but rather provides the opportunity to rise by taking away the endless struggle to simply exist day to day and avoid financial catastrophe.

In this sense, the opportunity state is antithetical to measures that encourage workers in protected sectors to stay in one place, make it difficult for entrepreneurs to start new businesses or allow workers to leave the labor market at very early ages. The purpose of economic security in the opportunity state is to make it universally easier for workers to move around, achieve upward mobility and prosper. Measures that divide the labor market into insiders, whose security is ironclad, and outsiders, who have none, are to be avoided. The goal is a labor market that is both flexible and underpinned by reasonable levels of economic security. This is the “flexicurity” model pioneered by the Nordic states of Europe – a good fit for the opportunity state going forward.

The opportunity state is thus the logical successor to the welfare state: an active state for the 21st century. But it is undeniably a robust vision of the state which, while having a lighter and different hand in key areas, nevertheless envisions a large role for the state – indeed in some areas significantly larger than today.

There is no alternative

This is the approach that has taken over the Democratic party in the US. The Democrats have shifted away from an era of modest ambitions and now embrace an expansive equitable growth agenda. That agenda includes universal pre-K, vastly expanded access to college education, paid family leave, subsidised child care, higher minimum wages, a commitment to full employment, robust investments in infrastructure, regional development and scientific research, especially around clean energy, and a rejection of budget austerity. Granted, such an agenda has little chance of passage with the current President and Congress but the Democrats – whether they are from the so-called Clinton or Sanders wings of the party – are placing their bets that this is the agenda of the future. When they get back into power, which they will and perhaps sooner than people think, this is what they will try to do.

In France, Emmanuel Macron has won the presidency under a programme that seeks to move the country down the opportunity state road. Mistakenly typecast by some on the hard left as neoliberal, in reality Macron’s programme includes a variety of progressive commitments fully consistent with an opportunity state framework. He explicitly invokes the Nordic flexicurity model, proposing to twin greater labour market flexibility with increased spending on universal unemployment benefits, income support for job-changers, worker training and other mobility-promoting programs. He also proposes substantial increases in education spending and public investment, particularly around clean energy. Critically, he insists that the current Eurozone structure is not sustainable and must shift toward a common Eurozone budget and growth promotion.

Will Macron succeed? That depends on a number of things: how the French legislative elections in June turn out; whether the Germans can really work with Macron to strike a Eurozone deal; whether Macron will be undermined by Eurozone budget rules even as he’s seeking to change them; and whether Macron is politically skillful enough to unite the centre and left, and outmaneuver the right.

Those are significant challenges but his approach has a real chance of producing faster and better-distributed economic growth with declining unemployment and rising mobility. That is exactly what is needed to defuse the current populist rebellion. In fact, it is the only thing that is likely to do so. Until postindustrial capitalism performs better – and only the left has reasonable ideas on how to make that happen – the rebellion will continue.

This is why the fractured European left, including its beleaguered social democratic parties, will eventually come around to the idea that only the equitable growth/opportunity state approach, in some form, offers a way forward. In the 1980s, Margaret Thatcher famously proclaimed that “there is no alternative” (abbreviated to TINA) to unregulated markets and slashing government spending for prosperity under capitalism, a view that was embraced by conservatives across the world, including in Reagan-era America. That no longer works (if it ever did) and it is now the left’s turn to proclaim a new TINA: the opportunity state.

It is the new TINA because only such an approach can guide the current postindustrial transition to a new stage of healthier growth. It is the new TINA because such growth offers the left a plausible way of both consolidating their emerging constituencies and generating stronger support among the traditional working class. It is the new TINA because it can defuse populism while other approaches have not and will not.

That is why it is the left, not the right, which is likely to end populism and inaugurate a new era. The road will be long and twisting but we will get there. There is no alternative.

 

Notes

[1]  Piketty, op cit.

[2]  Piketty, op. cit., 304-335

[3]  Piketty, op cit., 23

[4]  See Jonathan D. Ostry, Andrew Berg and Charalambos G. Tsangarides, “Redistribution, Inequality and Growth” (IMF Staff Discussion Note, April, 2014) https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf; Andrew G. Berg and Jonathan D. Ostry, “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” (IMF Staff Discussion Note, April 8, 2011) https://www.imf.org/external/pubs/cat/longres.aspx?sk=24686.0; Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, Evridiki Tsounta, “Causes and Consequences of Income Inequality: A Global Perspective” (IMF Staff Discussion Note, June, 2015) http://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf; OECD, “Focus on Inequality and Growth” (OECD Directorate for Employment, Labour and Social Affairs, December 2014) https://www.oecd.org/social/Focus-Inequality-and-Growth-2014.pdf; Jared Bernstein, “The Impact of Inequality on Growth” (Center for American Progress, December, 2013) https://www.americanprogress.org/wp-content/uploads/2013/12/BerensteinInequality.pdf; Heather Boushey and Carter C. Price, “How Are Economic Inequality and Growth Connected?: A Review of Recent Research” (Washington Center on Equitable Growth, October, 2014) http://equitablegrowth.org/wp-content/uploads/2014/10/100914-ineq-growth.pdf

[5]  Mariana Mazzucato, The Entrepreneurial State: Debunking Public Vs. Private Sector Myths (New York: Anthem Press, 2014) 57-71

[6] Mazzucato, op cit., 87-112

[7] Jacob S. Hacker and Paul Pierson, “Why Technological Innovation Relies on Government Support” The Atlantic, March 28, 2016 http://www.theatlantic.com/politics/archive/2016/03/andy-grove-government-technology/475626/; Hacker and Pierson, American Amnesia: How the War on Government Led Us to Forget What Made America Prosper (New York: Simon & Schuster, 2016) 45-69

[8]  Mazzucato, op cit., 63

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