The resurgent left

Millennial socialism

A new kind of left-wing doctrine is emerging. It is not the answer to capitalism’s problems

AFTER THE collapse of the Soviet Union in 1991, the 20th century’s ideological contest seemed over. Capitalism had won and socialism became a byword for economic failure and political oppression. It limped on in fringe meetings, failing states and the turgid liturgy of the Chinese Communist Party. Today, 30 years on, socialism is back in fashion. In America Alexandria Ocasio-Cortez, a newly elected congresswoman who calls herself a democratic socialist, has become a sensation even as the growing field of Democratic presidential candidates for 2020 veers left. In Britain Jeremy Corbyn, the hardline leader of the Labour Party, could yet win the keys to 10 Downing Street.

Socialism is storming back because it has formed an incisive critique of what has gone wrong in Western societies. Whereas politicians on the right have all too often given up the battle of ideas and retreated towards chauvinism and nostalgia, the left has focused on inequality, the environment, and how to vest power in citizens rather than elites. Yet, although the reborn left gets some things right, its pessimism about the modern world goes too far. Its policies suffer from naivety about budgets, bureaucracies and businesses.

Socialism’s renewed vitality is remarkable. In the 1990s left-leaning parties shifted to the centre. As leaders of Britain and America, Tony Blair and Bill Clinton claimed to have found a “third way”, an accommodation between state and market. “This is my socialism,” Mr Blair declared in 1994 while abolishing Labour’s commitment to the state ownership of firms. Nobody was fooled, especially not socialists.

The left today sees the third way as a dead end. Many of the new socialists are millennials. Some 51% of Americans aged 18-29 have a positive view of socialism, says Gallup. In the primaries in 2016 more young folk voted for Bernie Sanders than for Hillary Clinton and Donald Trump combined. Almost a third of French voters under 24 in the presidential election in 2017 voted for the hard-left candidate. But millennial socialists do not have to be young. Many of Mr Corbyn’s keenest fans are as old as he is.

Not all millennial socialist goals are especially radical. In America one policy is universal health care, which is normal elsewhere in the rich world, and desirable. Radicals on the left say they want to preserve the advantages of the market economy. And in both Europe and America the left is a broad, fluid coalition, as movements with a ferment of ideas usually are.

Nonetheless there are common themes. The millennial socialists think that inequality has spiralled out of control and that the economy is rigged in favour of vested interests. They believe that the public yearns for income and power to be redistributed by the state to balance the scales. They think that myopia and lobbying have led governments to ignore the increasing likelihood of climate catastrophe. And they believe that the hierarchies which govern society and the economy—regulators, bureaucracies and companies—no longer serve the interests of ordinary folk and must be “democratised”.

Some of this is beyond dispute, including the curse of lobbying and neglect of the environment. Inequality in the West has indeed soared over the past 40 years. In America the average income of the top 1% has risen by 242%, about six times the rise for middle-earners. But the new new left also gets important bits of its diagnosis wrong, and most of its prescriptions, too.

Start with the diagnosis. It is wrong to think that inequality must go on rising inexorably. American income inequality fell between 2005 and 2015, after adjusting for taxes and transfers. Median household income rose by 10% in real terms in the three years to 2017. A common refrain is that jobs are precarious. But in 2017 there were 97 traditional full-time employees for every 100 Americans aged 25-54, compared with only 89 in 2005. The biggest source of precariousness is not a lack of steady jobs but the economic risk of another downturn.

Millennial socialists also misdiagnose public opinion. They are right that people feel they have lost control over their lives and that opportunities have shrivelled. The public also resents inequality. Taxes on the rich are more popular than taxes on everybody. Nonetheless there is not a widespread desire for radical redistribution. Americans’ support for redistribution is no higher than it was in 1990, and the country recently elected a billionaire promising corporate-tax cuts. By some measures Britons are more relaxed about the rich than Americans are.

If the left’s diagnosis is too pessimistic, the real problem lies with its prescriptions, which are profligate and politically dangerous. Take fiscal policy. Some on the left peddle the myth that vast expansions of government services can be paid for primarily by higher taxes on the rich. In reality, as populations age it will be hard to maintain existing services without raising taxes on middle-earners. Ms Ocasio-Cortez has floated a tax rate of 70% on the highest incomes, but one plausible estimate puts the extra revenue at just $12bn, or 0.3% of the total tax take. Some radicals go further, supporting “modern monetary theory” which says that governments can borrow freely to fund new spending while keeping interest rates low. Even if governments have recently been able to borrow more than many policymakers expected, the notion that unlimited borrowing does not eventually catch up with an economy is a form of quackery.

A mistrust of markets leads millennial socialists to the wrong conclusions about the environment, too. They reject revenue-neutral carbon taxes as the single best way to stimulate private-sector innovation and combat climate change. They prefer central planning and massive public spending on green energy.

The millennial socialist vision of a “democratised” economy spreads regulatory power around rather than concentrating it. That holds some appeal to localists like this newspaper, but localism needs transparency and accountability, not the easily manipulated committees favoured by the British left. If England’s water utilities were renationalised as Mr Corbyn intends, they would be unlikely to be shining examples of local democracy. In America, too, local control often leads to capture. Witness the power of licensing boards to lock outsiders out of jobs or of Nimbys to stop housing developments. Bureaucracy at any level provides opportunities for special interests to capture influence. The purest delegation of power is to individuals in a free market.

The urge to democratise extends to business. The millennial left want more workers on boards and, in Labour’s case, to seize shares in companies and hand them to workers. Countries such as Germany have a tradition of employee participation. But the socialists’ urge for greater control of the firm is rooted in a suspicion of the remote forces unleashed by globalisation. Empowering workers to resist change would ossify the economy. Less dynamism is the opposite of what is needed for the revival of economic opportunity.

Rather than shield firms and jobs from change, the state should ensure markets are efficient and that workers, not jobs, are the focus of policy. Rather than obsess about redistribution, governments would do better to reduce rent-seeking, improve education and boost competition. Climate change can be fought with a mix of market instruments and public investment. Millennial socialism has a refreshing willingness to challenge the status quo. But like the socialism of old, it suffers from a faith in the incorruptibility of collective action and an unwarranted suspicion of individual vim. Liberals should oppose it.

Warnings over leveraged loans are not mere fear-mongering

New dangers emerging in the credit markets should not be dismissed

The editorial board

© FT montage

Anyone sounding a warning about high debt levels in 2019 is sure to be accused of paranoia.

Giving too much weight to a recent extreme event, while neglecting the larger picture, is a common and costly investing mistake. The crisis of 10 years ago was the most extreme event of most market participants’ lifetimes. It is therefore natural that many are waiting for that bit of history to repeat itself, seeing highly contagious, debt-driven asset-price collapses around every corner.

But, as the old joke has it, even if you are paranoid, it still might be that everyone is out to get you. As the Financial Times’ Debt Machine series has shown, worries that there are new dangers building in the credit markets cannot be dismissed as mere fear-mongering.

It not just that a weighty list of institutions have lately cautioned about leveraged loans — those loans extended to already indebted or low-rated companies. The US Federal Reserve, the Bank of England, the IMF, the Bank of International Settlements have all offered red flags. Behind these warnings are hard facts about the growth and sheer size of this market, and adjacent ones.

The amount of outstanding leveraged loans has doubled from its peak before the financial crisis to almost $1.2tn. For a third of the loans issued last year, borrowers’ debt exceeded six times cash flow — the risk threshold the US Treasury proposed five years ago. Four-fifths of the market is now “covenant light,” meaning that lender protections have been largely ripped out of contracts. Higher leverage and frail covenants are now pervasive even in the formerly conservative (and still illiquid) European loans market.

Pile on top of all this debt another market that has doubled in the last decade, where non-bank lenders such as private equity funds and special investment vehicles place debt directly with companies. The $700bn “private debt” market has seen loan yields collapse in the last few years, not because credit quality is getting better, but because investor demand has increased. Finally, new online lending platforms are now a significant source of credit to small businesses, filling in for banks, which have pulled back. But there is poor visibility into how fast this form of debt is growing, and regulation is light.

It is folly to suggest a fixed threshold beyond which debt becomes unsustainable, or to try to predict the timing of debt cycles. We know only that debt cannot grow faster than its host economy indefinitely, and that debt accumulation driven more by demand from investors than demand from borrowers is particularly unstable.

The endgame, on standard models, comes when debt goes to support uneconomic projects, borrowers miss payments, spooked lenders pull back, and suddenly even borrowers with sound investments to make, find credit scarce.

There is a debate about whether the increase in corporate debt in the last decade has funded much investment at all, or just added leverage to balance sheets through share buybacks or private-equity buyouts. To the degree the current credit expansion has been investment-light, investment is unlikely to collapse if credit contracts.

Even if that is so, however, when high debt collides with a slowing economy or inflation, corporate balance sheets will have to be restructured and investors will take losses, with potentially serious follow-on effects for the economy. At the very least, as one loan investor recently put it, “the credit market is likely to have high dispersion of returns.” In layman’s terms: less sophisticated investors are going to get stung. The US economy may not be nearing a downturn, but that changes the timing of the pain, not its severity.

Playing Chicken with Europe

The philosopher Bertrand Russell believed the Cold War nuclear standoff resembled a high-risk game played by "youthful degenerates." British Prime Minister Therea May is playing a similar game, and if her Brexit brinkmanship goes wrong, the victim would be Britain.

Chris Patten  

theresa may jean claude juncker

LONDON – The game of chicken is simple to describe but dangerous to play. Based on evolutionary game theory, it was sometimes used to describe nuclear brinkmanship during the Cold War.

Bertrand Russell, the great British philosopher and campaigner against nuclear weapons, reminded us that the game is usually played between what he called “youthful degenerates.” The players drive cars toward each other at high speed from opposite directions; the first driver to swerve away from a head-on collision – or, in some variants, to jump from the driver’s seat before it reaches a cliff edge – is the “chicken.” Russell believed this to be a description of the putative statesmanship of the nuclear powers in the Cold War. One miscalculation, one failure to swerve, and the result could be Armageddon: hundreds of millions of deaths, flattened cities, the end of civilization.

A less perilous version of chicken is being played by Theresa May, the obstinate vicar’s daughter who is the United Kingdom’s prime minister. If her diplomacy does not swerve soon, the victim will be Britain’s economy and wellbeing.

The deal May has negotiated for the UK’s withdrawal from the European Union would leave the country poorer (according to some of her own ministers) and less influential, but at least not faced with a lethal crash. May’s exit deal is just that: it would not settle Britain’s future relationship with Europe. What will trade relations look like? How will the UK safeguard its scientific research base and world-class universities? How will its economic agreements with other countries be managed?

Years of argument with the 27 EU member states about those issues lie ahead. But at least we could avoid leaving the EU with no deal, limiting the immediate shock of departure at the price of a long and vexatious transition period.

The trouble, of course, is that in January Britain’s House of Commons rejected May’s deal by a margin of more than 200 votes – the biggest defeat suffered by any British government in living memory. There were three main objections to the Accord.

Some believed that no deal could possibly be as good as canceling Brexit and remaining in the EU – an idea that many in this group wanted to test in a second referendum. Others reckoned that too little was clear about the future relationship with Britain’s closest neighbors. And still others – the English nationalists on the right wing of the Conservative Party – objected to the arrangements made to deal with the land border between Northern Ireland and the Republic of Ireland.

The issue of the Irish border – a practical symbol of the potentially violent destructiveness of Ireland’s identity politics – raises questions of security as well as commerce. May herself regards the issue as closely related to the continued integrity and vitality of the 1998 Good Friday Agreement, which ended the communal violence in Northern Ireland. No one wants to risk a return to the Troubles.

The economic and commercial issue raised by the Irish border is simple. A major reason Britain refused to join the European Economic Community in the 1950s and 1960s was its desire for free-trade agreements with European countries. They wanted a customs union, with an external tariff to protect member countries against imports from elsewhere. Without this, how could a farmer in the Benelux countries or France be sure that lamb imported from Britain had come from there and not originally from, say, New Zealand?

There is nowhere in the world where two countries or groups of countries with different trade and regulatory regimes exist side by side without a hard border between them. Moreover, there is no technology anywhere that allows a border to be managed without some way of stopping and checking the goods that cross it. This is a fundamental issue for the EU, which must safeguard the coherence and integrity of the single market.

The May deal provides a so-called backstop to deal with the border issue until Britain, far in the future, concludes a comprehensive trading agreement with Europe. Until then, Britain would remain in the EU customs union. This should cause no problems, because the idea that we can run a successful trade policy on our own is proving to be – as predicted – illusory.

But May’s right-wing opponents argue that the backstop would keep the UK in the customs union forever, and she refuses to face them down. So May is trying to negotiate some form of legally binding agreement with the EU to guarantee an end date to the backstop. But a backstop with no back would be like an insurance policy that pays off whenever Britain decides to stop paying the premium.

So what exactly is the game of chicken? First, May eyeballs her critics in Parliament and in effect threatens to run the issue down to the wire on March 29, when the UK is due to leave the EU, with or without a deal. No swerve here would lead to a devastating crash for Britain, which no prime minister should be prepared to contemplate. But May refuses to allow a vote in Parliament to rule out a “no deal” Brexit or to postpone the departure date to give the UK more negotiating time.

The other opponents in May’s game of chicken are the 27 EU members. They don’t want a crash, but nor do they want to dump the Republic of Ireland or sabotage their own single market.

If this brinkmanship goes wrong, the victim would be Britain – its economy, jobs, trade, and international reputation. I assume that the EU fears massive disruption as well, but thinks that May is bluffing. How could a democratic leader be so irresponsible as to appease a cabal of right-wing nationalists whose reliability and trustworthiness are in any case suspect?

On the other hand, to adapt a quote by the English writer Saki, we know that our political leaders are wedded to reason and truth, but, like other married couples, they sometimes live apart. Meanwhile, the vehicles pick up speed, the distance between them shortens, and no one has yet swerved.

Chris Patten, the last British governor of Hong Kong and a former EU commissioner for external affairs, is Chancellor of the University of Oxford.