Sunday 28 May 2023

Untangling Reevenomics

Rachel Reeves hit the headlines last week after flashing her swanky first class pass on the plane to New York. But the reason for her trip was of more political import. Speaking at the Peterson Institute in Washington DC, Reeves outlined what the economics would be like under an incoming Labour government. Again, following Keir Starmer's NHS speech, this was more an exercise on contouring the policy to come rather than promising anything concrete. An approach we'll see repeated on social security, education, and the other "missions" before promises are made ahead of the next election.

What did Reeves have to say for herself? Her speech, which is expanded on in her pamphlet for Labour Together calls her approach "securonomics". This is based on two positions: a recentering of the nation state as the centre for economic policy making, and a move away from the deregulated phase of globalisation to one overseen by greater state management - based on multilateral agreements, and particularly a convergence of and greater cooperation between liberal democratic states.

Praising Joe Biden's economic policies, she approvingly notes that the United States has
A more active state, pursuing a modern industrial strategy, is selecting the areas where America must guarantee its ability to produce what America needs ... Your government is working in partnership with a dynamic open market, where the state does what a government does best. Making and shaping markets that are essential to America’s resilience and future prosperity. Meanwhile, the free market does what only it can do - innovating, competing, creating wealth.
Translating this into the UK means "good jobs, decent pay, strong public services and an end to relentless increases in the cost of living." Okay, but how does this differ from the Tories? Aren't they, on face value, for these things as well? Reeves's economics, she argues, differs because it starts with where Britain is and what its strengths are. The model is not the Singapore-on-Thames beloved of the Tories nor the idea of Germany, which used to so beguile George Osborne. Rather, the model is Britain - but better. For Reeves, building on Britain's strengths requires state promotion of green energy, life sciences, professional services, universities, remaining strategic industries, as well as promoting "financial resilience" for every household.

This requires state activism. Reeves talked about industrial strategy and her "green prosperity plan", as well as institutions like a Norway-style "national wealth fund" and the much-vaunted GB Energy, which is often sold as a state-owned renewable energy entity but is in actual fact a repackaging of the Private Finance Initiative - but for green electricity generation. This is also where Starmer's plan to fix public services comes in: Reeves sells the putative programme as the "removal of barriers that hold people back". This is premised on sorting out the NHS, childcare, more vocational education, and employment support "to get people back to work". In this light a Labour government would be working toward easier and better trading relationships with the EU when the trade deal is reviewed in 2025.

The speech got some excited. Martin Kettle for the Graun gushed that this was a vision for social democracy and was a break with Blairite thinking. Stacking in his argument's favour is the idea the politics should shape the economics, though in Reeves's hands state intervention is just technocratic common sense. No need for the socialist gloss as per Tony Crosland. It's economically efficient, and has little do do with social justice which even the Blairites used to invoke for their own purposes. Multilateral cooperation sounds nice, until you look at foreign affairs custom and practice and see it as a realisation of the West (and Japan) pooling their efforts to remain at the top of the global economic tree. And, not mentioned by Kettle but noted here a while back, a move to tripartite industrial governance with the state, business, and the trade unions each having their say about economic policy. Though into this corporatist mix Reeves adds universities as one of the "partners". Interesting.

There are other items in Reeves's speech and pamphlet that do sound decidedly Blairish. She wants to see "dynamic markets" and more competition, which means breaking up concentrations and monopolies. I'll believe that when I see it. She wants some deregulation, such as reform of the planning laws - in line with Starmer's recent desire to see more building on the green belt. There's a promise of reforming corporate governance to tackle the short-termism of shareholder value, and a change to business taxation to encourage longer-term investment. If the latter sounds like a bung ... But perhaps the biggest tell, and one that will assuage the UK's economics establishment is her continued commitment to Bank of England independence. That's going to be music to the City's ears. As a former Bank economist, of course she'll be their woman in Number 11. That, more than anything, says no matter what happens with governance, state strategies, and industrial councils the core relations between the Bank, the Treasury, and the City are going to weather the next Labour government and that the priorities of finance and commercial capital will continue its hegemony over the policy preferences, personnel, and habits of the core state apparatus. To throw things into sharp relief, even someone as awful as Kemi Badenoch favours breaking up this cosy relationship. Then again, even when the Bank was under political control did post-war Labour governments challenge the power of the City, or did their best to cultivate it?

Assuming Labour accomplishes its restructuring of the state (or does it half-arsed, which is more likely given custom and practice), this will open up political opportunities and dangers for the labour movement. Reeves is apparently relaxed with a return to collective bargaining and the extension of workers' rights, but as we saw with post-war trade unionism partial integration into the state incentivises labour movement growth and firmly weds union officialdom to industrial priorities. Let's be clear, it's better for trade unions to be in that position than what we have now. It creates a space for labour movement consolidation and for that reason alone means there's a qualitative difference between Labour and the Tories, but let there be no illusions. What Reevenomics offers is a more favourable terrain for struggle, not a land of milk and honey.

Image Credit


Blissex said...

«promoting "financial resilience" for every household.»
the basic core security of having your own home matters hugely.

The rest is just cheap feel-good talk-talk-talk, but this is basic toryism, in that security comes not from a robust social insurance system, but from individual property ownership. Here "core security" and "financial resilience" are simply new names for "aspiration", which in turn was just an euphemism "big tax free profits from southern property prices doubling every 7-10 years".

BTW as to Starmer's speech this bit is funny:
«encourage councils to approve developments on greenbelt land.»

Note that implies that the councils would not be building themselves any council housing, of course, and would not be required by "encouraged", that is somehow they would choose to attract all the hate for that leaving Starmer to claim the political benefits. Cannot see many tory or libdem local councils giving him that big gift, and obviously they are those where it would be most beneficial.
A perfect recipe for inaction.

As to NIMBYs, New New Labour have promised to be the champion of NIMBYs after the Chesham by-election:
«Labour will attempt to heap pressure on Boris Johnson over his planning reforms after the Tories’ byelection defeat by calling on backbench rebels to support the opposition in a Commons vote. Sir Keir Starmer’s party has tabled a debate calling for the prime minister to change one of the most controversial proposals by giving communities greater oversight of planning applications.»

Zoltan Jorovic said...

I sometimes wonder if any of these people actually know what are planning laws are, and why there is a housing crisis. It is not because of not building on the green belt. Of course developers would love to get the go ahead to do that, but would they build genuinely "affordable" homes? Not on your life. To do that would not be, in planning language "viable" (i.e. they wouldn't make enough profit). Remember that most houses are built by private developers (or, more accurately, for them) and they are keen to get as much return as possible. There's a reason so many off-plan foreign bought apartments spring up in London, and it's not to provide cheap housing for generation rent. All that would happen is new executive 3 -4 bedroom homes for commuters -some of whom would move out from the suburbs they are in now, but they would be expecting a suitable profit from the sale, so not affordable for those who most need homes. We don't need more semi-detached or detached houses with gardens, garages and the need to have a car. But that is all the private developers want to build under the system we have.

The system is designed with houses as an investment vehicle, rather than as homes for those who lack them. That requires some serious reform, not of planning (after all, new houses are a small % of all housing, so have minimal influence on overall prices, or availability) but of who builds, what is built and why. Housing for people to live in, not to accumulate unearned wealth, located near jobs and services, and with flexible ways of purchasing or renting. Flats, dense terrace type houses, but following the best models that can be found across the country. If Labour pursue that, taking notice of those councils who are making efforts to provide truly affordable housing, and building' on those lessons to roll out proven solutions across the country, then change for the better might happen. If they just further rig the system in favour of developers by tweaking planning to open up some prime land (watch land prices rise in those places), prices will continue to escalate, and the crisis deepen.

Anonymous said...

@Blissex He literally used the word "aspiration", it's only 5 paragraphs into that article.


'House prices need to fall in relation to people’s incomes, Keir Starmer has said'

If there's any real intention at all to even try to look like they're serious about this, then it must be as close to saying the unsayable as we have heard from any Establishment-approved politician in a very long time. Wean the country off its property bubble...?! Say it ain't so! That cow has been untouchable for nearly 3 decades!

But nobody honestly believes that incomes are going to rise faster than both house prices AND inflation, so he can't be talking about anything other than house prices falling quite sharply in real terms. I.e. letting the air out of the property bubble.

To do that gradually would certainly be a very sensible "aspiration", since the only thing more catastrophic to the current owner class than an end to endlessly inflating property values, would be for the bubble to actually pop. But even aiming to let it down gradually is sure to raise the ire of all the short-termists among a set of very entrenched parasitic interests.

Aimit Palemglad said...

The bubble will pop eventually, because bubbles do. They can't grow for ever. Ultimately the finance system that fuels the bubble will collapse under the multi-pronged attack of climate change, energy cost of energy increase, and social instability driven by the rising unaffordability of essentials (housing, energy and food) helped by the further unbalancing effect of wealth concentrating into fewer and fewer hands. The only real uncertainty is when this will start to become apparent. Once that happens, it will snowball very quickly.

Blissex said...

«letting the air out of the property bubble. To do that gradually would certainly be a very sensible "aspiration", since the only thing more catastrophic to the current owner class than an end to endlessly inflating property values, would be for the bubble to actually pop»

There are *two* main owner classes: the people who matter more, old-big money, who are making immense fortunes and salting them away in offshore tax havens, and who would be not displeased by a property market collapse at some point: they have significant buffers of non-property wealth, and they could then buy back for real cheap all the properties they have sold at stupendous profit; and the people who still matter but less, their new-smaller money supporters, who are counting on property for their pensions so they can in the meanwhile spend all their income on a better living standard, relying on renters and buyers to save for them, and would be ruined by a collapse.

«But even aiming to let it down gradually is sure to raise the ire of all the short-termists»

There are plenty of short termists, a lot of the 50-60 year olds I know in southern England think that a property collapse is inevitable, they just pray for it to happen after they have retired, sold their £2m 3-bed semis to some younger sucker, and retired in luxury in Spain or Greece (or Dubai), and screw-everybody-else. I also know many already retired people still in England, very dependent on remortgaging, who have the same expectation, and pray that the collapse happens after they die, and screw-everybody-else.

Some guy said that religion is the opium of the masses, and the english religion is property worship (actually more generally incumbency worship, but incumbency in property is currently the best).

As short termism, a quote from a blogger, from June 2016, that illustrates several things:

Friend: How did you vote then, Dad?
Dad: I voted Out.
Friend: Dad! Why did you do that? The economy will crash! It’ll cause chaos!
Dad: That won’t bother me hen, I’m retired.
Friend: But it’ll affect me! What about me?
Dad: (Long silence).

Blissex said...

«(after all, new houses are a small % of all housing, so have minimal influence on overall prices, or availability)»

Actually that is very different from the reality I see: the property market is highly illiquid, only a tiny percentage of properties is traded every year, and pricing for the whole stock is determined by that tiny percentage. Therefore even small changes in demand or in supply can have a large impact on property prices.

That this happens is one of the "secret" ingredients of thatcherism: when a house in a block is sold fr £2m, then suddenly all houses in that block have a valuation of £2m, and for example the owners can remortgage them based on that valuation. So there is an debt-collateral spiral:

* a small extra supply of cheap debt and thus demand enables a much bigger increase in property valuations that are collateral for that debt;

* that increase in valuation increases the valuation of all similar properties, even if not on the market, and that increased valuation of collateral "supports" a further increase in debt.

This is one of the best descriptions I have yet found of english politics:
“Certainly, we overstretched ourselves when we bought our lovely period home for £419,000 in 2002. But with mortgage companies practically throwing loans at us in a rising property market, we slept soundly at night, smug in the knowledge the house was making us money. [...] The valuer had barely been in the house for five minutes yet we were able to borrow a further £80,000. [...] We were lulled into a false sense of security about our wealth. Whenever we overspent we just remortgaged without comprehending the consequences of taking yet more equity out of the property. [...] By the beginning of 2008 we had remortgaged three times, taking out a staggering £500,000 loan on a house that wasn’t worth much more. Our interest-only mortgage payments had soared to nearly £3,000 a month.”

Blissex said...

«Housing for people to live in, not to accumulate unearned wealth»

But that is COMMUNISM! :-)

«located near jobs and services»

That's exactly the vice-versa: jobs and services should be located near housing.

There is plenty of spare housing in the UK but in area with few "good jobs" and that's why there is spare housing there.

The policy of the governments of the past 40 years has been to spend colossal amounts of public money to attract or bailout businesses to areas already congested and with already high property prices, to attract more jobs and therefore more renters and buyers and upgraders to those areas, to ensure that the core constituents of Conservatives, new Labour, LibDems can extract as large a share as possible of the wages and salaries of those so attracted.

Put another way, people don't usually move to some place like Slough or Dockland "just because" and then jobs and services follow them, but vice-versa.
«Crossrail, the new east-west rail line running through London, has been given a £350m government bailout to ensure it does not fall further behind schedule. The £15.4bn train line was due to open next month but has run into trouble over delays to signalling and station completion and will not open until autumn next year»
«One of the expectations of any major transport upgrade is that the value of homes and offices nearby will rise — but the rise in value caused by the Elizabeth line has surprised researchers. A report back in 2012 predicted that Crossrail, as it was known then, would generate around £5.5 billion in additional value for residential and commercial property values. A review of what’s happened since has nearly doubled that prediction, and by 2021, the uplift in property value could be as much as £10.6 billion, soaring to £20.1 billion by 2026.»

That's why levelling-up was always going to remain "jam tomorrow": if it succeeded, than availability of "good jobs" in places like Teesside with low property prices would trigger many people to move from the south-East to Teesside, or to stop emigrating from Teesside to the south-East, and the property market in the south-East would collapse, because it relies on ever increasing flow of buyers and renters to increase pressure on the existing properties there.