The mixed economy

Dallas Freeway, early 1950s

After the war, in the UK, western Europe, Australia, Canada, and even in the USA (though less so) there was a political and economic consensus that a mixed economy was the way forward.  This meant an economy where some of the means of production (for example, natural monopolies such as the electrical grid or railways) was owned by the government, but the rest remained in private hands.  It also meant government intervention in the labour market and in industry.  It was recognised that free markets work well only where there is substantial competition.  In fiscal policy, it was the universal consensus that governments should increase spending and raise their deficits to keep economic growth going when there was a recession.  (They were also supposed to reduce deficits and spending when growth picked up again, but they often didn't.)  This fiscal philosophy was called Keynesian economics after the economist who advocated it, John Maynard Keynes, who studied the Great Depression in depth to see what could be done to avoid future depressions. Keynes demonstrated that slashing government spending to repay loans only worsened the deficit because it caused the economy to contract, which in turn reduced tax revenue.

At the end of previous wars, economic growth would collapse, as war spending stopped and government debts were repaid.  After the second world war, it was widely expected that this would happen again, especially as economies had only recovered from the Great Depression because of government spending on defence.  The allies came out of the war with government debt to GDP ratios of +-200%. But, with the understanding derived from Keynes's analysis, instead of trying to repay these debts by spending cuts and tax increases, they instead aimed to improve that ratio by increasing GDP. World growth boomed. Governments expanded the electricity grid, using borrowed money. They built social housing and schools and motorways. All with borrowed money. Despite all this borrowing, the ratios of debt to GDP fell steadily. Unemployment remained low, living standards rose, inequality diminished. Hundreds of millions of poor people shared in the prosperity that sustained growth brought, and growth was higher because they shared.  The Keynesian mixed economy worked.

At the end of this era there were problems, especially with rising inflation, and the philosophy of neo-liberalism gained popularity. And in the beginning it seemed to be a solution. But as governments shrank, privatisation expanded, and controls over the private sector (especially the finance sector) were eliminated, not only did inequality start to soar but the system itself became more unstable. Recessions became deeper, and recoveries from those recessions slower, culminating in the GFC (global financial crisis), from which the world has only just started to recover, 9 years later.  Since the GFC, trend growth in developed countries has been lower than before the GFC.  Unemployment has fallen only slowly.  Inequality has become stratospheric.

I think the public dimly senses that neo-liberalism isn't working, but doesn't know why. They vote for Trump/Brexit/AfD/One Neuron because the pollies promise that they "will do something". But politicians have no idea what to do either.

What can we do? For a start, we can start funding infrastructure using borrowed money.  Remember that it was a Republican president, Eisenhower, who built the US interstate highway network with borrowed money funded by a tax on petrol.  It added at least 1% per annum to the growth rate of GDP.  What could we do now?  High-speed rail, urban rail and trams; housing for the poorest; replace coal power stations with wind and solar; new schools and hospitals; a fibre optic broadband network; .... As Eisenhower's interstate highways showed, infrastructure spending adds to demand and employment at the same time as it raises the growth capacity of the economy.

We should start a move towards a UBI (universal basic income, or social wage) to increase the incentive to work and to make it possible for the unemployed to get some work, even part-time work, without impoverishing them.  We could make sure companies and the very wealthy pay their share of tax to fund the things that a civilised society needs, things which can't fairly be funded by private enterprise: hospitals, roads, police, schools and universities.

The Right describe this as "far left" and "radical". It seems to me it's centrist and not very different to what we enjoyed for 30 years after the war, when unemployment was low, inequality was low, and growth was high. And I think ordinary people will enthusiastically embrace these changes.

See also:

Neo-liberalism
What would Keynes do?
The basic income