Challenging ‘stagffluence’ will require radical changes we may not be ready for
The changes required to economic policy practice to challenge stagnation and inequality are far-reaching, yet articulating a transformative agenda is proving tricky
For the last few weeks, I have been unable to stop myself observing the world through the lens of ‘productivism’, Dani Rodrik’s rather intoxicating account of the new paradigm of economic policy practice he argues is beginning to replace neoliberalism.
Rodrik argues that productivism entails ‘the dissemination of productive economic opportunities’ to all industries, places, and people. Government and civil society have a role in this: productivism eschews blind faith in markets, large corporations and finance. But it does not advocate a Keynesian state geared towards demand management and redistribution through cash transfers, rather a focus on creating (and allocating) ‘good jobs’ for all.
In other words, it advocates a focus on the capabilities of economic actors, including the public sector, to contribute to the public good, rather than assuming that the private pursuit of profit — with the state concerned only with the wider macro-economic environment — will add up to efficiency. Local economies taking an asset-based approach to development, instead of simply trying to enhance private sector ‘competitiveness’ in their area, might be one example of this shift.
Alas, while policy elites may be starting to change how they think about the economy, and state/market relationships, countries like the UK are clearly not all the way there yet.
Rowland Atkinson and Andrew Baker would argue in fact that we are heading in the opposite direction. The rise in inflation has led to comparisons with 1970s ‘stagflation’. But Atkinson and Baker contend that we are now experiencing ‘stagffluence’, with the UK’s economic malaise going hand-in-hand with rampant inequality as the affluent are able to maintain their wealth through asset ownership and rent-seeking.
These groups are insulated from economic downturns, and in extracting value rather than supporting productive capacity, may be a cause as well as symptom of economic weakness. The new stratum of rentiers is at least partly responsible for inflation, in particular, as short-term profit maximisation is prioritised above all other considerations:
[T]he world of stagffluence is also one in which a strata of the world’s leading firms operate as conversion machines, concentrating greater short-term rewards and wealth in the hands of an assetocracy of shareholders and management executives, but at the expense of supply chains and the needs of consumers, suppliers and employees… Such extractive siphoning of wealth reduces productive capacity, disrupts supply chains, and increases cost-push price pressures while placing a downward pressure on real wages for many.
Will a productivist framework for economic policy provide the answers we need? Radical supply-side interventions are of course welcome and long overdue. But the political economy required to help productivism succeed seems a distant prospect — and it is not yet clear how it might be constructed.
Problematic productivism
There is at least some danger that the productivist paradigm denotes little more than a commitment to industrial policy in a conventional sense. Rodrik has championed the embrace of industrial policy among high-income countries since the 2008 financial crisis.
Of course, it requires a rather caricatured view of both neoliberalism and Keynesianism to suggest that these paradigms have not been accompanied by industrial policy in practice, in the UK and elsewhere. Indeed, Rodrik himself argues for the ‘normalisation’ of our understanding of industrial policy insofar as all states intervene to support industrial development, whether or not interventions are described as industrial policy.
There are other ways in which the productivist break from neoliberalism might be over-stated. Rodrik identifies a more protectionist trade policy as a hallmark of the Biden administration’s embrace of productivism – a continuity from the Trump presidency – but neoliberalism has long been highly selective (and duplicitous) about the application of ‘free trade’.
And on a more fundamental level, the fact that productivism appears to ascribe value to all or most aspects of human organisation primarily in relation to their contribution to the economy, is consistent with neoliberal ‘normativity’. The casual marginalisation of redistributive politics is perhaps a bit of a red flag in this regard.
Other questions remain unanswered. There is no guide to fiscal or monetary policy in Rodrik’s account of productivism. Will the new era encompass ‘balancing the books’ following the additional spending required as a result of the pandemic in many countries? What do productivists think about the failure of monetary policy, and the challenge of modern monetary theory to macroeconomic orthodoxy? And while Rodrik indicates support for the view that corporate profiteering is to blame for high inflation, broader questions around the relationship between capital and labour are not addressed. Do we need to strengthen workers’ rights, or will higher investment — creating better jobs with higher productivity — end industrial struggle once and for all?
The logical conclusion of productivism is the greater use of economic planning, public ownership and price controls, as well as the reshoring of supply chains. But planning for what? What industries will create all the good jobs? Who will be the consumers of the stuff they produce? The implicit recognition that the challenge of climate change requires a shift from neoliberalism should be applauded, but this alone does not tell us very much about how most people will earn a living.
Morbid interim
I had a similar thought when reading the interim report of Resolution Foundation’s The Economy 2030 Inquiry (note that Rodrik is one of the commissioners). The report is an indictment of the UK’s recent economic performance, particularly in terms of productivity and pay, and documents the toxic mix of low growth and high inequality which characterises our economy.
The report is political economy-lite (despite Adam Tooze being one of the commissioners too), but hints at the divergence between rising wealth and stagnating income, and the political incentives to protect wealth this creates, as a source of the UK’s failure to address its economic weaknesses. Capital is not being allocated to the right parts of the economy. As the report points out, the value of wealth has risen ‘from 3 to almost 8 times national income since the 1980s, while wealth taxes have not risen at all as a share of GDP’. Meanwhile, unlike most similar countries, real wages have fallen since 2010, having previously grown by 33 per cent each decade since the 1970s.
A final report will follow with policy recommendations, but the outlines of the inquiry’s perspective are already visible:
Fundamentally we need to recognise that the path to future prosperity lies in being a better version of Britain, not a British version of Germany.
The report argues that the UK is a ‘broad-based services superpower’, and needs to focus on enhancing the productivity of its services sector to prosper (and since these industries are often characterised by low pay, this would help to challenge inequality too). By the way, this should not be seen as a challenge to the advocacy of industrial policy at the heart of productivism: one of the key aspects of Rodrik’s work on industrial policy is a recognition that it is relevant to all sectors, not only manufacturing.
In particular, the report advocates a focus on tradeable services. Tradeable sectors (which have always been the main focus of conventional industrial policies) have higher productivity and pay, so growth would help to address inequality. And it stresses that services exports are not composed principally of financial services (which have declined since the double whammy of the 2008 crisis and Brexit), but rather ‘information and communications, cultural, and intellectual property services’.
The UK’s comparative advantage in services is demonstrated by this key chart:
However, the story being told here is not quite as strong as the report suggests. UK services exports have almost tripled as a proportion of GDP since 1990, but in the context of goods exports declining; the OECD average has almost doubled over the same period, even as goods exports have also increased. Services imports into the UK as a proportion of GDP have also risen sharply over this period, far more than the OECD average.
Similarly, the report tells us that UK services exports are worth $418 billion. This is 45% of all exports, double the OECD average rate. But it does not tell us the actual OECD average value of services exports. And a claim that the UK is the ‘second largest’ services exporter in the world (behind the United States) is repeated several times, but never quantified. This is perhaps because the UK is really not that far ahead of the rest, according to OECD data. Germany, for instance — the country we must not try to emulate, remember — is third in this particular league table, with services exports valued at $388 billion. Ireland is fifth, with $338 billion (just behind China, and closely followed by France).
The report is of course well-justified in warning of the rarity of meaningful shifts in any economy’s industrial composition, at least not without a painful and risky transition process. It is therefore fair to question the view that the UK simply needs to manufacture more, à la Germany or Korea.
That said, any strategy for the UK economy based on increasing tradeability is risky. As the report makes clear, the UK’s trade openness has declined significantly as a result of Brexit (and is likely to decline further). It makes a persuasive case that this barrier can be overcome with higher investment in tradeable sectors — a key plank of productivism — but still relies on an increase in overseas demand for UK services which we cannot necessarily take for granted.
The report is not wrong to claim that ‘global demand actually grew faster in our key export industries than in China’s in the decade to 2019’ (see also this accompanying paper). But the fact that China’s exports nevertheless grew twice as fast as the UK’s over this period, as the report points out, suggests that something is very wrong with the UK economy, just as well as it makes the case that we are sitting on rich reserves of untapped potential. As Brexit testifies, the UK has always been bad at understanding its export markets.
The things that are most obviously ‘very wrong’ in the UK economy are the state’s unwillingness to steer economic development, and the private sector’s unwillingness to undertake long-term investment. That solving these problems will require major reforms is strongly implied by the report. Yet why would we assume that these issues can be overcome fairly straightforwardly, while at the same time accepting that altering the economy’s industrial composition is too difficult? These problems are also many centuries in the making, and tied up with the balance of political-economic forces. They will be similarly stubborn.
I am not arguing that there is an alternative strategy at our fingertips. I am saying instead that any road back to prosperity for the UK, including one centring services exports, is going to be extremely treacherous. It will require some very radical policy shifts, and I worry the framing that the UK economy needs to become merely a ‘better version’ of itself might breed an unhelpful complacency.
Reticent radicalism
Insofar as the (centre) left has a plan for the UK economy, it is rooted in three main agendas:
Green industry. An emphasis on cleaner production, the dissemination of low-carbon technologies, and renewable energy sources underpins Labour’s promise of £28 billion of public investment in decarbonising the economy.
Public services expansion. Labour has also vowed to construct a National Care Service along the lines of the National Health Service. The fact that social care will continue to grow as proportion of the services sector is seen by many as an opportunity to create high-quality jobs in local economies with a very limited carbon footprint.
Community wealth building. The movement advocating that ‘anchor’ institutions procure more services locally is gathering strength, with the prospect of community-owned enterprises emerging to deliver services at its heart. Relatedly, Labour recently announced a ‘Community Right to Buy’ policy whereby community groups would be supported to take control of local assets rather than see them sold off to the highest bidder — who may have an extractivist or asset-stripping business model — or falling into disrepair.
I would argue that each of these agendas is consistent with a productivist paradigm: they focus on building capabilities at industry, firm and individual levels, and within the public sector. Yet clearly none would be the centrepiece of an economic strategy based on services exports.
This is not to say we should not try to have ‘all of the above’. But something is not quite adding up. The three agendas on my list are all typically presented as part of a radical programme of social and economic transformation. In practice, they are quite limited in ambition, when set against the scale of the problems they are addressing.
In contrast, the plan of The Economy 2030 Inquiry is radical in implication, but not articulation. To succeed it will require seismic economic changes, that is, productivism at its boldest. First, the report makes clear that centuries of economic centralisation will have to be addressed, requiring major cities beyond London to be granted autonomy and resources to increase their productivity levels substantially through industrial upgrading. Second, transforming private sector investment practice throughout the UK will require us to confront and uproot structures of corporate governance norms; at the very least, we will have to think seriously about how to incentivise large companies to deliver public goods beyond their thirst for short-term rewards (see IIPP’s Biscay Model for a possible example).
Above all, a committed effort to challenge the causes of stagffluence will be required. This means recognising that the UK’s economic malaise is not simply a case of poor policy design, which can be fixed technocratically, but also of the entrenchment of rentier interests throughout key political and economic structures.