In: Uncategorized17 Sep 2012
This Perspective column was first published in today’s edition of Fund Strategy.
Politicians strive to create buzzwords for what they regard as unique concepts. The Labour leader has commandeered the term ‘predistribution’, which is just another cover-up for vacuity.
Ed Miliband has managed one singular achievement since becoming the leader of the Labour party in September 2010. He associated himself with a term, the “squeezed middle”, that was declared the Oxford English Dictionary’s word of the year in 2011.
The accomplishment is particularly remarkable because it is not even a word and Miliband did not coin it. Yet by repeating it in enough speeches he became associated with a catchphrase that captured the widespread sense of being caught between two extremes. Many people feel that they are trapped between super-rich bankers and an undeserving underclass.
Miliband’s next attempt at a buzzword, the idea of “responsible capitalism”, was less successful (see my cover story of April 16, 2012). No doubt almost everyone dislikes “irresponsibility” but there was nothing distinctive about the concept. Virtually every politician agrees that there is no alternative to the market economy but its excesses need to be curbed.
Now Miliband is promoting a new term as his Big Idea: “predistribution”. Although at first sight it is not promising – simply putting a “p” in front of an idea Labour is often associated with – it turns out to be worth interrogating. Indeed, it relates to several themes I have discussed in recent columns.
Miliband raised the idea at a conference on “the quest for growth” organised by Policy Network, a centre-left thinktank. In his speech, he argued that:
“Predistribution is about saying: We cannot allow ourselves to be stuck with permanently being a low-wage economy. It is neither just, nor does it enable us to pay our way in the world. Our aim must be to transform our economy so it is a much higher skill, higher wage economy.”
Miliband then went on to suggest that “Redistribution offers a top-up to their wages, predistribution seeks to offer more”. In other words he did not just want to offer transfer payments but also to “build a better economy when there is less money around”.
He then went on to raise many ideas that have long featured in Labour’s agenda: reforming the banking system, promoting a national investment bank, encouraging a green economy, promoting skills and launching a review of short-termism. He also favoured an industrial policy which sounded strongly like protectionism: “government departments working together, including through procurement, to support British business.”
Not only were the policies well worn but the idea of predistribution itself was taken from an American academic. Indeed the man who coined the term, Jacob Hacker of Yale, was also a speaker at the Policy Network conference. He is also the co-author of a book, Winner-Take-All Politics (Simon & Schuster 2010), which is influential among America’s Democrats.
Back in May 2011 Hacker argued in an essay on the Policy Network website that “pre-distribution” (he prefers the term hyphenated ) has transformed American politics:
“When we think of government’s effects on inequality, we think of redistribution – government taxes and transfers that take from some and give to others. Yet many of the most important changes have been in what might be called “pre-distribution” – the way in which the market distributes its rewards in the first place. Policies governing financial markets, the rights of unions and the pay of top executives have all shifted in favour of those at the top, especially the financial and non-financial executives who make up about six in ten of the richest 0.1% of Americans.”
Yet when Hacker’s premises are examined more closely they fall apart. Take in particular his claim about how America has changed since the 1970s: “This is not a story of stagnant productivity or general economic malaise. It is a story of the decoupling of aggregate productivity and most workers’ wages”.
The first part of his argument is untrue. In many respects the story of the American economy since the 1970s is precisely one of stagnant productivity and general economic malaise. See, for example, the figures on productivity growth from Robert Gordon, one of America’s leading experts on economic growth.
Growth was substantially lower in the period 1972-1996 than the earlier period. Note also that such figures grow geometrically. So a difference of one percentage point per year can become a huge chasm when extrapolated over decades.
It should also be borne in mind that the apparent productivity surge from 1996-2007 is likely to prove illusory over the longer term. Economic contraction since 2007 will bring the average growth rate down substantially. It is also likely that the apparent surge will prove to be at least partly to do with the artificial credit boom.
As I argued last week, again drawing on Gordon’s work, innovation has also slowed sharply. The reason there is so much obsession with the internet and smartphones is precisely that innovation in the vast bulk of the economy is minimal.
Poor economic performance and low innovation also gives some inkling into the speculative that Miliband so loves attacking. Rather than it being a case of simply errant behaviour by banks it seems like it is inversely correlated with productivity growth. When the economy is growing strongly there is a stronger temptation to play the markets. Causation runs in the opposite direction assumed by Miliband with his claim that speculation is to blame for economic lethargy.
As I have previously argued, the growth of finance also helps explain the widening of inequality. It is overwhelmingly the rich who hold financial assets so they benefit disproportionately when there is a bubble.
There is also a reasonable case that Hacker overstates the stagnation of median incomes in America. He leans heavily on figures that I questioned in an earlier column.
Despite his knack for catchphrases, much of what Miliband and his colleagues argue is vacuous. To the extent their premises are clear they are also found wanting.
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