Never waste a good crunch

Dora Longo Bahia. Revolutions (calendar project), 2016 Acrylic, water-based pen and watercolor on paper (12 pieces). 23 x 30.5 cm each
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By MARIANA MAZZUCATO*

Twelve years ago, the financial crisis offered a rare opportunity to change capitalism, but it was wasted. Now, another crisis presents another possibility for renewal.

After the 2008 financial crisis, governments around the world pumped more than $3 trillion into the financial system. The aim was to unfreeze the credit markets and get the global economy working again. But instead of supporting the real economy – the part that involves the production of real goods and services – the bulk of the aid ended up in the financial sector. Governments bailed out the big investment banks that directly contributed to the crisis, and when the economy got going again, it was these companies that reaped the rewards of the recovery. Taxpayers, in turn, are left with a global economy that is as bankrupt, inequitable and carbon intensive as ever. “Never waste a good crisis,” goes a popular policy-making maxim. But that's exactly what happened.

Now, as countries are recovering from the Covid-19 pandemic and resulting lockdowns, they must avoid making the same mistake. In the months after the virus emerged, governments stepped in to address the concomitant health and economic crises, rolling out stimulus packages to protect jobs, issuing rules to slow the spread of the disease, and investing in the research and development of treatments and vaccines. These rescue efforts are needed. But it is not enough for governments to simply step in as spenders of last resort when markets fail or crises occur. They must actively shape markets to deliver the kind of long-term results that benefit everyone.

The world missed the opportunity to do this in 2008, but fate gave it another chance. As countries emerge from the current crisis, they can do more than spur economic growth; they can guide the direction of that growth to build a better economy. Rather than offering unqualified assistance to corporations, they may condition their bailouts on policies that protect the public interest and address social problems. They can demand that Covid-19 vaccines that receive public support become universally accessible. They can refuse to rescue companies that don't control their carbon emissions or stop hiding their profits in tax havens.

For too long, governments have socialized the risks but privatized the rewards: the public has paid the price for cleaning up the mess, but the benefits of those cleanups have largely accrued to companies and their investors. In times of need, many companies are quick to ask the government for help, but in good times, they demand that the government step aside. The Covid-19 crisis presents an opportunity to redress this imbalance through a new style of doing business that forces rescued companies to act more in the public interest and allows taxpayers to share in the benefits of successes traditionally credited only to the private sector. But if governments focus only on ending the immediate pain without rewriting the rules of the game, the economic growth that follows the crisis will be neither inclusive nor sustainable. Nor will it serve companies interested in long-term growth opportunities. The intervention will have been a waste and the missed opportunity will only fuel a new crisis.

The rot in the system

Advanced economies had been suffering from major structural flaws long before the emergence of Covid-19. On the one hand, the financial system finances itself, thus eroding the basis of long-term growth. The bulk of financial sector profits are reinvested in finance – banking, insurance and real estate – rather than being used for productive purposes such as infrastructure or innovation. Just ten per cent of all UK bank lending, for example, backs non-financial companies, with the remainder going to real estate and financial assets. In advanced economies, home loans constituted about 35% of all bank loans in 1970; by 2007, it had risen to around 60%. The current structure of finance thus feeds a system driven by debt and speculative bubbles that, when they burst, lead banks and others to beg for government bailouts.

Another problem is that many large companies neglect long-term investments in favor of short-term gains. Obsessed with quarterly returns and stock prices, CEOs and corporate boards reward shareholders with share buybacks, increasing the value of the remaining shares and therefore the stock options that are part of executive compensation packages. In the last decade, companies Fortune 500 repurchased more than $3 trillion of their own stock. These buybacks come at the expense of investments in wages, worker training, and research and development.

Then there is the hollowing out of government capacity. Only after an explicit market failure do governments usually intervene, and the policies they propose come too late. When the state is seen not as a partner in value creation but only as a fixer, public funds are dwindled. Social programs, education and health are underfunded.

These failures added to megacrises, both economic and planetary. The financial crisis was largely caused by excess credit flowing into the real estate and finance sectors, inflating asset bubbles and household debt rather than supporting the real economy and generating sustainable growth. Meanwhile, the lack of long-term investment in green energy has accelerated global warming, to the point where the UN Intergovernmental Panel on Climate Change has warned that the world has just ten years to avoid its irreversible effects.

However, the US government subsidizes fossil fuel companies by an estimated $20 billion a year, primarily through preferential tax breaks. EU subsidies total around $65 billion a year. At best, policymakers trying to deal with climate change are considering incentives such as carbon taxes and official lists of which investments are considered “green”. They stopped issuing the kind of mandatory regulations needed to avert disasters by 2030.

The Covid-19 crisis has only made all these problems worse. Right now, the world's attention is focused on surviving the immediate health crisis, not preventing the coming climate crisis or the next financial crisis. Lockdowns have devastated people working in the dangerous “gig economy” [gig economy]. Many of them don't have savings or the regular employee benefits—namely, health care and sick leave—needed to ride out the storm. Corporate debt, a major cause of the previous financial crisis, is only rising as companies borrow heavily to cope with collapsing demand. And many companies' obsession with pleasing their shareholders' short-term interests has left them without a long-term strategy for weathering the crisis.

The pandemic has also revealed just how lopsided the relationship between the public and private sectors has become. In the United States, the National Institutes of Health (NIH - National Institutes of Health) invests about $40 billion a year in medical research and has been a major funder of research and development of COVID-19 treatments and vaccines. But pharmaceutical companies are under no obligation to make end products accessible to Americans whose tax dollars are subsidizing them in the first place. California-based Gilead developed its Covid-19 treatment drug, remdesivir, with $70,5 million in federal government support. In June, the company announced the price it would charge Americans for a treatment package: $3120.

It was a typical operation of the Big Pharma [the big pharmaceutical companies]. One study analyzed the 210 drugs approved by the Food and Drug Administration [federal government agency that regulates drugs and food] in the U.S. from 2010 to 2016 and found that “NIH funding contributed to all of them.” Yet drug prices in the US are the highest in the world. Pharmaceutical companies also act against the public interest by abusing the patent process. To avoid competition, they register patents that are very broad and difficult to license. Some of them are very far along in the development process, allowing companies to privatize not just the fruits of the research, but the very tools to conduct it.

Equally bad deals were made with the Big Tech [big tech companies]. In many ways, Silicon Valley is a product of the US government's investments in developing high-risk technologies. A National Science Foundation funded the research behind the search algorithm that made Google famous. The US Navy has done the same with the GPS technology that Uber depends on. And the Defense Advanced Research Projects Agency, part of the Pentagon, supported the development of the Internet, technology touch screen, Siri, and all the other important iPhone components.

Taxpayers took risks when they invested in these technologies, but most tech companies that benefited have failed to pay their fair share of taxes. So they have the audacity to fight regulations that protect the public's privacy rights. And while many have pointed to the power of artificial intelligence and other technologies being developed in Silicon Valley, a closer look shows that, in these cases too, it was high-risk public investments that laid the groundwork. Without government action, the gains from these investments could once again flow largely into private hands. Publicly funded technology needs to be better managed by the state – and, in some cases, owned by the state – to ensure that the public benefits from its own investments.

As the mass closures of schools during the pandemic made clear, only a few students have access to the technology needed for homeschooling, a disparity that only increases inequality. Internet access should be a right, not a privilege.

rethinking the value

All this suggests that the relationship between the public and private sectors is broken. To fix it, it is first necessary to address an underlying problem with economic theory: the field has got the concept of value wrong. Modern economists understand value to be interchangeable with price. Such a view would be anathema to earlier theorists such as François Quesnay, Adam Smith and Karl Marx, who saw products as having an intrinsic value related to the dynamics of production, a value that was not necessarily related to their price.

The contemporary concept of value has enormous implications for the way economies are structured. It affects how organizations are managed, how activities are accounted for, how sectors are prioritized, how government is viewed, and how national wealth is measured. The value of public education, for example, does not figure in a country's GDP because it is free, but the cost of teachers' salaries does. It is natural, then, that so many people talk about public “expenditure” rather than public “investment”. This logic also explains why then Goldman Sachs CEO Lloyd Blankfein could claim in 2009, just a year after his company received a $10 billion bailout, that its workers were “among the most productive in the world”. After all, if value is price, and if Goldman Sachs' income per employee is among the highest in the world, then clearly its workers must be among the most productive in the world.

Changing the status quo requires finding a new answer to the question: What is value? Here, it is essential to recognize the investments and creativity provided by a wide range of actors across the economy – not just businesses, but also workers and public institutions. For too long, people acted as if the private sector was the main driver of innovation and value creation and therefore entitled to the resulting profits. But this is simply not true. Pharmaceutical drugs, the Internet, nanotechnology, nuclear energy, renewable energy – all were developed with an enormous amount of investment and risk-taking by governments, on the backs of countless workers and thanks to public infrastructure and institutions. Incorporating the contribution of this collective effort would make it easier to ensure that all efforts are properly remunerated and that the economic rewards of innovation are distributed more equitably. The path to a more symbiotic partnership between public and private institutions begins with the recognition that value is created collectively.

bad rescues

In addition to rethinking value, societies need to prioritize the long-term interests of stakeholders over the short-term interests of shareholders. In the current crisis, this should mean developing a “popular vaccine” against COVID-19, accessible to everyone on the planet. The drug innovation process must be governed in a way that fosters collaboration and solidarity among countries, both during the research and development phase and when it comes to distributing the vaccine. Patents must be shared between universities, government laboratories and private companies, allowing knowledge, data and technology to flow freely around the world. Without these steps, a Covid-19 vaccine risks becoming an expensive product sold by a monopoly, a luxury good that only the richest countries and citizens can afford.

More generally, countries should also frame public investments less as grants and more as attempts to shape the market to the benefit of the public, which means attaching constraints to government assistance. During the pandemic, these conditions should promote three specific goals. First, maintain employment to protect business productivity and household income security. Second, improving working conditions by providing adequate security, decent wages, sufficient levels of sick pay and more voice in decision-making. Third, promote long-term missions such as reducing carbon emissions and applying the benefits of digitization to public services, from transport to health.

The main US response to Covid-19 – the CARES Act (Coronavirus Aid, Relief and Economic Security), passed by Congress in March – illustrates these points in reverse. Instead of implementing effective payroll supports, as most other advanced countries have done, the United States has offered enhanced temporary unemployment insurance. This choice led to the layoff of more than 30 million workers, making the United States have one of the highest rates of pandemic-related unemployment in the developed world. As the government has provided trillions of dollars in direct and indirect support to large corporations without significant strings attached, many companies have been left free to take measures that could spread the virus, such as denying their employees paid sick leave and operating unsafe workplaces.

The CARES Act also established the Payroll Protection Program [Paycheck protection program, PPP], under which companies received loans that would be forgiven if employees were kept on the payroll. But the PPP ended up serving more as a massive cash donation to corporate treasuries than an effective method of saving jobs. Any small business, not just needy ones, could receive a loan, and Congress quickly loosened the rules on how much a business had to spend on payroll for the loan to be forgiven. As a result, the program had little effect in reducing unemployment. An MIT team concluded that the PPP distributed $500 billion in loans but saved only 2,3 million jobs in about six months. Assuming most loans are eventually forgiven, the program's annual cost comes to about $500 per job. During the summer, both PPP and expanded unemployment benefits ended, and the US unemployment rate still exceeded ten percent.

Congress has so far authorized more than $3 trillion in pandemic response spending, and the Federal Reserve [U.S. Central Bank] injected an additional $4 trillion or more into the economy – together amounting to more than 30 percent of US GDP. However, this vast spending has achieved nothing in terms of addressing urgent and long-term issues, from climate change to inequality. When Senator Elizabeth Warren, Democrat of Massachusetts, proposed attaching conditions to bailouts — to ensure higher wages and greater decision-making power for workers and to restrict dividends, share buybacks and executive bonuses — she didn't get the votes.

The purpose of government intervention was to prevent the collapse of the labor market and keep companies as productive organizations – essentially, to act as an insurer against catastrophic risk. But this approach cannot impoverish government, nor must the funds finance destructive business strategies. In the event of insolvencies, the government may consider demanding equity positions in the companies it is bailing out, as happened in 2008 when the US Treasury took over stakes in General Motors and other distressed companies. And when bailing out companies, the government must impose conditions that prohibit all kinds of bad behavior: handing out premature bonuses to CEOs, issuing excessive dividends, carrying out share buybacks, taking on unnecessary debt, diverting profits to tax havens, engaging in troublesome political lobbying. They should also stop companies from raising prices, especially for Covid-19 treatments and vaccines.

Other countries show what an adequate response to the crisis looks like. When Denmark offered to pay 75 percent of companies' payroll costs at the start of the pandemic, it did so on the condition that companies could not make layoffs for economic reasons. The Danish government also refused to bail out companies registered in tax havens and banned the use of relief funds for dividends and share buybacks. In Austria and France, airlines were saved on condition that they reduce their carbon footprint.

The British government, on the other hand, gave easyJet access to more than $750 million in liquidity in April, even though the airline paid nearly $230 million in dividends to shareholders a month earlier. The UK has refused to set conditions for bailing out easyJet and other struggling companies in the name of market neutrality, the idea that it is not the government's job to tell private companies how to spend their money. But a bailout can never be neutral: by definition, a bailout involves the government's choice to spare one company, rather than another, from disaster. Without strings attached, government assistance runs the risk of subsidizing bad business practices, from environmentally unsustainable business models to the use of tax havens. The UK bailout scheme, under which the government paid up to 80 percent of the wages of laid-off employees, should, at a minimum, have been conditional on workers not being sacked once the program ended. But it was not.

The Venture Capitalist Mindset

The state cannot just invest; must create the right agreement. To do that, you need to start thinking in what I've called the “entrepreneurial state” – making sure that when you invest, you're not just reducing the risk of failure, but also getting a share of the success. One way to do this is to take an equity stake in the deals you close.

Consider the case of solar company Solyndra, which received a $535 million guaranteed loan from the US Department of Energy before going bankrupt in 2011 and becoming a conservative symbol for the government's inability to pick winners. Around the same time, the Department of Energy granted a $465 million guaranteed loan to Tesla, which went on to experience explosive growth. Taxpayers paid for Solyndra's failure, but they were never rewarded for Tesla's success. No self-respecting venture capitalist would structure investments this way. Worse, the Department of Energy structured Tesla's loan so that it would receive three million shares of the company if Tesla defaulted on the loan, an arrangement designed not to leave taxpayers empty-handed. But why would the government want a stake in a bankrupt company? A smarter strategy would have been to do the opposite and ask Tesla to pay back three million shares if it could repay the loan. If the government had done that, it would have made tens of billions of dollars as Tesla's stock price rose over the course of the loan — money that could have covered the cost of Solyndra's bankruptcy with plenty left over for the next round of investment.

But the point is not to worry only about the monetary reward of public investments. The government must also set strong conditions for its partnerships to ensure that they serve the public interest. Drugs developed with government help must be priced to take this investment into account. The patents that the government issues must be restricted and easily licensed, so as to encourage innovation, promote entrepreneurship and discourage rent seeking.

Governments also need to consider how to use the returns on their investments to promote more equitable income distribution. It's not about socialism; it is about understanding the source of capitalist profits. The current crisis has led to renewed discussions of a universal basic income, in which all citizens receive regular equal pay from the government, regardless of whether they work. The idea behind this policy is good, but the narrative would be problematic. Since a universal basic income is seen as a handout, it perpetuates the false notion that the private sector is the sole creator, not a co-creator, of wealth in the economy and that the public sector is just a toll collector, sucking up the profits and sharing them as charity.

A better alternative is a citizen dividend. Under this policy, the government takes a percentage of the wealth created from its investments, puts that money into a fund, and then shares the fund's proceeds with the people. The idea is to directly reward citizens with a share of the wealth they have created. Alaska, for example, has distributed oil revenues to residents through annual dividends from its Permanent Fund since 1982. Norway does something similar with its Government Pension Fund. California, home to some of the richest companies in the world, might consider doing something similar. When Cupertino, Calif.-based Apple opened a subsidiary in Reno, Nevada, to take advantage of that state's zero percent corporate tax rate, California lost a huge amount of tax revenue. Not only should these tax tricks be blocked, but California should also fight back by creating a state endowment fund, which would offer a way beyond taxation to directly capture a share of the value created by technology and the companies it has fostered.

The citizen dividend allows the proceeds from co-created wealth to be shared with the larger community – whether this wealth comes from natural resources that are part of the common good or from a process, such as public investments in medicines or digital technologies, that involved a collective effort. This policy should not replace the proper functioning of the tax system. Nor should the State use the lack of such funds as an excuse for not financing essential public goods. But a public fund can change the narrative by explicitly recognizing the public contribution to wealth creation – key in the political power play between forces.

Purpose-driven economics

When the public and private sectors come together in pursuit of a common mission, they can do extraordinary things. That's how the United States got to the moon and back in 1969. For eight years, NASA and private companies from sectors as varied as aerospace, textiles and electronics collaborated on the Apollo program, investing and innovating together. Through daring and experimentation, they achieved what President John F. Kennedy called "the riskiest, most dangerous, and greatest adventure man has ever embarked on." The issue was not to commercialize certain technologies or even to drive economic growth; was to do something together.

More than 50 years later, in the midst of a global pandemic, the world has the chance to attempt an even more ambitious lunar move: the creation of a better economy. Such an economy would be more inclusive and sustainable. It would emit less carbon, create less inequality, build modern public transport, provide digital access for all and offer universal healthcare. More immediately, it would make a Covid-19 vaccine available to everyone. Creating that kind of economy will require a kind of public-private collaboration that hasn't been seen in decades.

Some who talk about recovery from the pandemic cite a compelling goal: a return to normality. But that's the wrong target; the normal is broken. Rather, the aim should be, as many have put it, “to rebuild better”. Twelve years ago, the financial crisis offered a rare opportunity to change capitalism, but it was wasted. Now, another crisis presents another possibility for renewal. This time, the world cannot afford to waste it.

*Mariana Mazzucato is professor of economics at the University of Sussex (USA). She is the author, among other books, of the entrepreneurial state (Company of Letters).

Translation: Artur Araujo protocols for website ObservaBR.

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