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Jacob Hacker: Miliband’s not talking about “predistribution” but he has embraced my big idea

The US academic behind the concept on how Labour's manifesto reflects a new economic philosophy.

I’m an American academic who’s mostly written about US public policy. Yet back in 2012, my work was mentioned by not one but two major British political figures. The first was Ed Miliband, who spoke approvingly of an idea I had discussed called “predistribution.” Miliband praised the idea as an alternative to New Labour’s hands-off approach to markets, which used tax revenues from an expanding financial sector to help those left behind.  To Miliband, the goal in the wake of the financial crisis was not just to redistribute after the fact, but to encourage better market outcomes from the start – “to transform our economy so it is a much higher skill, much higher wage economy.”

The other British political figure to mention my work was a little less friendly. During PMQs, David Cameron joked that the Labour leader had a “new guru,” a “Mr J Hacker.” That was funny (although I had to Google “Yes, Prime Minister” to fully appreciate the joke). But then the Prime Minister said, “Mr. J Hacker’s recommendation is that we spend an extra £200bn and borrow an extra £200bn in this Parliament.” Humor provides license to stretch the truth, but this was a lie. I had never written about the British budget, much less given recommendations to anyone about taxing and spending. But it was a revealing lie, for it underscored the central deception at the heart of the current government’s approach to the economy.

Britain faces two great challenges. The first is the long-term slowdown of productivity growth that has gone hand-in-hand with the economy’s excessive financialisation over recent decades. The second is the growing gap between those at the top and the rest of British workers, whose jobs have become less secure while their pay has stagnated.

The coalition now in power has mostly ignored both problem, choosing instead to focus on the phantom menace of a national credit default. (No rich country with its own currency has ever defaulted on its debt.) That in turn has resulted in a strange paradox: austerity has slowed growth so much that austerity has failed to produce big budget savings. Economically, Britain has suffered through a modern form of blood-letting: painful treatment that has mostly weakened the patient.  It’s a good thing the coalition has stopped drawing so much blood, but tragic so much had to be spilled.

The British media have mostly played along with this shell game, reporting on the political struggle as if the central issue was the budget deficit rather than growth and inequality. More important, journalists have reported hardly at all on the huge gap between the coalition government’s initial promises and the present reality. The deficit was supposed to be gone by now. Today, it continues well into the foreseeable future, constraining what any new government can do.  The economy is now recovering, but Britain’s economic record since the downturn has been much worse than the United States’ – worse even than the British recovery from the Great Depression. By any measure, this is not an inspiring result.

As a political scientist, I know bad deeds often go unpunished in electoral politics. Voters pay the most attention to economic trends just before the vote, and they’re generally not so great at the counterfactual thinking needed to compare those trends with alternatives that might have played out under different leadership. To make that comparison harder, continental Europe has gone even farther down the austerity road, so relatively speaking Britain looks pretty good. And, of course, this election promises to be one of the most unsettled in British history. The rise of the SNP has pulled Scottish anti-austerity voters from Labour (and will immensely complicate the formation of a government after the election). For all these reason, the poor record of the governing party – or Labour’s competing economic vision – probably won’t be decisive on 7 May.

But the fact remains that one of the two major British political figures who commented on “predistribution” back in 2012 will be the next prime minister. As the election looms, it is high time we looked beyond the personalities and gaffes and asked: Does the Labour Party have a new economic philosophy? More important, in the event Labour forms the next government, will that philosophy work?

 

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The first time I spoke of predistribution was at a conference in Oslo in 2011. Miliband, less than a year into his tenure as Labour leader, was in attendance. Later, we met at an academic seminar in Oxford; the exchange continued over subsequent conversations in London. To him and others, I emphasised that it was the idea, not the label, that mattered. The idea, which draws on my joint work with fellow political scientist Paul Pierson, is that government has an enormous, inevitable influence on how well markets work and who they help and hurt – even before it sends out a single check. The message of post-1970s economic debates is that government mostly just redistributes the autonomously generated rewards of growth. The main lesson of history, however, is that government is vital to the advance of innovation and productivity and to the translation of these economic gains into social gains. Through the rules for the markets it enforces and the public investments in skills, technologies, and infrastructure that it makes, government helps us grow richer, healthier, and better educated. It doesn’t just slice the pie up; it makes the pie bigger.

Consider the two biggest transformations of the twentieth century: the roughly doubling of life expectancy and the more than fourfold increase in GDP per capita in rich nations.  These were not zero-sum changes that redistributed a fixed pot. They were positive-sum changes that, over time, made almost everyone better off. And they were directly tied up with government policy. Most of the public health and medical breakthroughs that revolutionised our lives (and which even cautious estimates suggest are worth much more than the increases in income we have enjoyed) can be credited to the regulatory and investment power of the state. To cite just a few examples, public health efforts in the early twentieth century, the development of antibiotics and vaccines, the successful campaign to reduce tobacco consumption, the spread of publicly guaranteed insurance, the major breakthroughs in cancer care, the reduction in air and water pollution, and most of the major medical technologies of our day, including breakthrough prescription drugs – all began with public research and funding. Indeed, in the case of the initial quartet of examples, government directly engineered huge efforts to catalyse changes in the organisation of societies and health care systems that allowed us to live longer and with less disability than ever before.

Similarly, most of the major innovations that drove the skyrocketing of economic productivity over this same period emerged out of public research and funding. Markets are brilliant at allocating goods and drawing on existing knowledge to meet consumer demand. But they notoriously under-invest in the basic infrastructure of prosperity, both physical and intellectual. Public education remains the greatest government investment ever made. Public roads, communications and transportation networks, and energy infrastructure are close behind. Even the twentieth century’s technological revolution, which propelled quantum leaps in productivity, relied heavily on government impetus. The computer and internet, for example, trace their origins to massive public investments in R&D (much of it defense-related) made by the United States and Europe during and after World War II. As University of Sussex economist Marian Mazzucato has persuasively argued, even the ubiquitous iPhone owes most of its major elements (including that friendly voice that asks you to repeat what you said) to government research and funding. 

The need for government to play this catalysing role has not faded in the twenty-first century. Far from it: Complex knowledge economies are more interdependent and more reliant on investments in skills and technologies – and more prone to short-sighted private action – than ever.  If the public foundations of twentieth-century prosperity included electrification, modern transportation and communication networks, and the municipal infrastructure that enabled cities to become healthy hubs for innovation and advancement, the twenty-first century list must expand to include the infrastructure for advanced digital communication, newer and more efficient forms of mass transit, and platforms for a green-energy economy, such as smart electric grids. These sorts of vital investments will not happen without government taking the lead, and they are extraordinarily attractive today, given low interest rates and a backlog of needs.

Does Labour have such an investment strategy?  The party’s 2015 manifesto is encouraging. It calls for greater investment in a “world-class infrastructure” and both college and vocational education. It calls for greater investments in early education through expanded child care for pre-school children and wraparound care at schools for those in primary education. It vows to set up a National Infrastructure Commission to determine goals and encourage their achievement in an efficient, non-partisan fashion.  An underlying growth strategy emerges, one built on higher wages, better infrastructure, greener energy, and digital technology. For example, one promise is to ensure all of the country has high-speed broadband by the end of the next parliament.

But the proof of the pudding is in the eating. Is the rhetoric backed by the commitment of government dollar? Here the differences between the two parties could not be more stark, but so too is the lingering effect of austerity. Having failed to meet prior deficit-reduction targets, the Tories have loosened up in the short term and doubled down in the long term. Their goal is to create a substantial budget surplus within five years, which would imply reducing public spending to a share of GDP not seen since before World War II. This goal will require sharply reducing public investments, as well as virtually every other sort of public spending. Indeed, the Institute for Fiscal Studies (IFS) estimates that it implies total, inflation-adjusted cuts of 40 percent to so-called unprotected departments (that is, everything besides health, schools, and overseas aid).

By contrast, Labour leaders have left themselves more room to shift spending toward productive investment. For starters, they have focused on the structural deficit, excluding public investment (whose long-term returns, decades of research shows, greatly exceed initial commitments). The goal is balance the current account, which would require relatively modest cuts. Moreover, the cabining off of investment spending means that, in principle, true capital investments should not be in budgetary conflict with other priorities. Nonetheless, these investment commitments could be more robust if the budget situation had not so deteriorated relative to expectations since 2010.

Still, Labour has embraced a central pillar of predistribution: public investment in physical and human capital that make society richer. Given Britain’s slow productivity growth, paltry R&D spending, and subpar infrastructure, this is a major positive step toward a more innovative, digitally connected, and green British economy.

 

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If contemporary political leaders have been too quick to discount the value of public investment, they have also been too slow to recognize the dangers of private speculation. Certainly, New Labour in Britain and New Democrats in the United States were complicit in the deregulation of the financial sector that contributed to the recent financial crisis, and certainly Labour has paid a heavy price for the resulting economic crisis that both major parties failed to foresee or forestall.

Since the crisis, however, there has been a much clearer contrast between right and left in both nations. Conservatives are mostly quiet about the need for continuing reform, implying that the problem mainly concerns the “culture” of finance, rather than distorted policies and rigged markets. And they have been much more sympathetic to the self-interested claims of big financial actors. By contrast, progressive leaders – and Miliband is no exception – have called for greater attention to the distorted incentives that allow financial actors to impose huge risks on all of society while reaping huge rewards themselves. If there is anything that defines the breach between today’s Labour Party and that of the Blair/Brown era, it is the recognition that something went seriously awry at the top of the income pyramid during the speculative boom of the 1990s and 2000s.

The United States and Britain, the most financialised economies in the world, suffer from a common problem of “profits without prosperity” – there has been economic growth, but little of it is going into long-term investment or workers’ paychecks.  In fact, the growing share of the economy consumed by finance in both nations has been mostly a double negative. It has pulled money and talent from more productive sectors while imposing enormous costs and risks on everyone but favored insiders. What economists call “rent-seeking” – the generation of excess returns for privileged players through the exercise of market power, political influence, or both – does not just occur when special interests wheedle special deals from the government. Far more common, it reflects the passivity of government in the face of major distortions of the market that benefit a favored few at the expense of most everyone else. Nowhere has this been more true than in the financial sector.

Moreover, the negative effects on corporate behavior are not just limited to the financial sector itself. Managers outside the financial sector have focused more and more on immediate shareholder returns rather than long-term growth, as well as on fostering favorable policies that allow them to profit at society’s expense.  This has been the greatest cost of the run-up of incomes at the very top so characteristic of the United States and Britain. Experts who worry about this trend do not think that great fortunes are inherently bad. Our concern is that they are tied up with market developments that are bad for everyone else, and that they lead to imbalances in political power that make it hard to address those market distortions. Again, nowhere has this been more true than the financial sector.

For that reason, perhaps the most promising aspect of Labour’s new philosophy is its invocation of “an economy based on mutual obligations.” What that means remains vague, but two concrete initiatives suggest an ambition to shift how the financial and corporate world works in fundamental ways. The first is a set of measures designed to reduce the focus on short-term movement in stock prices, including proposals to encourage institutional investors to focus on long-term performance of companies they invest in and changes in takeover rules to increase the sway of long-term investors and strengthen the now-largely-toothless “public interest” test (a change recently advocated by takeover experts Aeron Davis, David Offenbach, Richard Stevens, and Nick Grant). 

The second set of measures – in many ways more far-reaching – would make it harder for executives to receive large pay packages absent strong performance or without worker say. These reforms include mandatory disclosure of votes on executive pay by investment and pension fund managers and, most sweeping of all, mandatory employee representation on pay-setting committees. These are ambitious ideas that could address the very real problems of short-termism and self-dealing that have hurt the economy, fed inequality, and increased financial risk.

 

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Investment takes time to pay off. The natural question, therefore, is whether Labour can create jobs and expand productivity in the near term – and, no less important, ensure that those taking these jobs receive a decent share of the productivity gains their work helps enable. Viewed as a problem of predistribution, the question is whether Labour can foster fulfilling, well paid, and socially valuable jobs for as many citizens as possible. Supplements to wages can be valuable, but workers want a job and opportunities for upward mobility more than a public check. Moreover, redistribution can breed resentment, especially in an age of greater cynicism about government effectiveness. Taxation and redistribution are cornerstones of progressive governance, but they cannot do the work on their own.

Instead, the core policy tool must be macroeconomic policies that ensure tight labor markets. That means substantial public investment in job-creating projects necessary for long-term growth and overall spending policies that are mindful of the demonstrated negative effects of austerity on jobs and incomes. As just discussed, it also means rules and levies that reduce the risks of financial instability. Ensuring high levels of workforce participation also requires active policies to help people enter the workforce and change jobs,  to develop new skills, to take their benefits from job to job, and to balance work and the care of children and elders.

Thankfully, the Labour manifesto is comparatively strong in all these areas. The roughly £50bn difference in implied spending cuts documented by the IFS represents the largest fiscal gap between the parties in modern history – and a fateful difference. Hippocrates’ Oath says, “First, do no harm.” Everything that has happened in Europe over the last half-decade has suggested the substantial harm of steep spending cuts. Moving carefully to balance the books is, by itself, a pro-jobs program.

Less noticed, Labour has called for a range of efforts squarely targeted at increased workforce participation. Most notably, it has pledged to increased by two-thirds (from 15 to 25 hours per week) the number of hours of free child care for working families – a proven strategy for increasing workforce participation of parents, especially mothers – and it has singled out vocational education as a major area of investment.

Most of the commentators who have paid attention to Labour’s programme have asked, rightly, whether it will bring up wages enough to deal with the strains facing ordinary workers. But there is another side to the “wage squeeze” – high prices. Almost completely missed, the Labour proposals contain a number that are mostly about lowering the “rents” that privileged market actors receive so that the paychecks of workers go farther.

Literally so, in the case of housing – the biggest cost for most consumers, and a cost that has skyrocketed in Britain as affordable housing has virtually disappeared. Against this backdrop, Labour’s emphasis on building new homes that workers can afford and encouraging longer-term tenancy arrangements for renters are welcome, if still somewhat undeveloped. More specific and unusual, the Labour manifesto makes the case that energy, water, and transport costs all can be brought down.  These are all classic mixed markets combining public and private investment, in which government has a vital role to play as a countervailing power on behalf of consumers. And alongside the reforms of finance and corporate governance, they signal at least a partial embrace of the central idea of predistribution – that government authority can be used to reduce economic strains by improving how markets work, rather than just redistributing income or providing benefits.

Behind all these priorities lurks a difficult question: whether predistribution of the sort I have discussed is even possible given the decline of labor unions. Empowering ordinary workers within the workplace and democratic politics is central to making markets work for most workers. Yet we live in a post-labor world, in which wage increases are not going to naturally track productivity gains because of workers’ bargaining power. If wages are to rise steadily again, a broader range of strategies will be required, including minimum wages, high labor standards, and the promotion of creative alternatives to unions. So far, Labour’s statements have emphasized a higher minimum wage and the elimination of the most exploitative labor practices, such as zero-hour contracts. Yet there has been a notable lack of serious discussion of the alternative to unions that could provide some degree of representation for workers. In the United States, a vibrant debate is taking place about work councils, social movement unionism, and other new organisational forms loosely group under the label “alt.labor.” With trade union membership down sharply over the last generation,  Labour leaders would be well served to expand the conversation, too.

 

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Elections are contests of personalities, but also contests of ideas. They are big multi-player games that are fun to watch, but also tests of competing governing philosophies that have enormous consequences for how societies evolve over time. It would be too much to expect commentators and voters to put aside entirely their favored prejudices and petty fascinations. But it is not too much to ask that the most reflective among them step back and assess the bigger terrain.

Five years ago, I experienced my proverbial 15 minutes of fame on an unexpected side of Atlantic. “Predistribution” has mostly disappeared from the lexicon of British politicians – and thankfully so. But the idea hasn’t, mostly because the challenge of how to restore well-functioning markets in rich democracies amid growing inequality and persistent insecurity remains so pressing.  Labour has embraced that challenge, and if a crazy election, well-timed burst of pre-election growth, and less-than-charismatic leader mean its program lies fallow, that will be a loss for Britain’s economy as well as for our idealised vision of elections. If Labour could successfully pursue the ideas its leaders have laid out on paper, Britain would move much farther in addressing low productivity and high inequality than it would otherwise. The Prime Minister had a good laugh at “Mr. J. Hacker,” but the British economy would be better off if he had paid attention to what I was actually saying.