Rabo: Pelosi's Stunning Proposal "Shows How Bad Things Are Right Now Out There"

Submitted by Michael Every of Rabobank

It was another risk-off day in Asia with stocks generally down and oil prices most decidedly so. WTI was trading at USD10.89 at the time of writing when it started the year at around USD60, and Brent at USD18.89 when it began around USD64. Such is the real damage still being done by the virus regardless of New Zealand tentatively going back to work.

Work should be on our minds today. Bloomberg reports a Chinese brokerage published, and then retracted, a report saying that the national unemployment rate was now 20.5%, over three times what the official measure says, which is 5.9%. This was seen as the result of a collapse in services and small businesses, and certainly fits the pattern unfolding elsewhere absent highly-regulated labour markets. The US will likely have seen a cumulative 30 million jobless claims this week in just over a month a half; and Thailand is talking about 7 to 10 million unemployed in a country with a population a fifth of the size and a traditional (accurate) unemployment rate of around 1%. Meanwhile Singapore, who a while back was being held up as a supreme example to us all on virus-fighting, has seen its biannual MAS Macroeconomic Review expect job losses and wage cuts “which will bear the brunt of the labour market adjustment in the near term.” Won’t that be good for consumption and oil demand!

Back in the US(SR) we also had another remarkable political development – with no bleach involved. House Speaker Pelosi, who recently made a video to show how tough it is being under lockdown at home with a USD24,000 fridge packed with ice-cream, yesterday said the following on the next US stimulus package: “Let’s see what works, what is operational and what needs attention…Others have suggested a minimum income, a guaranteed income for people. Is that worthy of attention now? Perhaps so.

In short, in the same week we get a slew of key central bank meetings from banks who are already at zero or below, and on the same day the Bloomberg market chat is talking about who in Asia is doing outright debt monetisation vs. massive QE, and who globally will have to do yield curve control too, the US Overton window is perhaps moving towards Universal Basic Income (UBI). THAT, along with oil, shows how bad things are right now out there.

Of course, we are already seeing the previously unthinkable become reality - the UK government paying private-sector wages, for example. So there are lots of seemingly crazy ideas like ‘green eggs’ being served up already. Yet now we are perhaps to see the Speen-HAM-land to go with it.

Why, beyond an abiding love of Dr Seuss, do I say this? First, because as just noted it is a sign of how terrible things are that this idea is emerging at all: it’s a desperately bearish indicator. Second, because, for those who haven’t heard this spiel before, Polanyi in ‘The Great Transformation’ details how we have already tried this policy and it is terrible: it’s a desperately bearish indicator if introduced. Which perhaps one can no longer rule out by chanting:

“I do not like green eggs and ham, ‘cos I am a Republican

I will not back them in the House; I do not wish them for my spouse

I will NOT vote green eggs and ham!”

Polanyi details the social devastation created in the UK by the ending of feudalism and the introduction of a market economy, free labour market, and industrialisation. In doing so, the poor lost access to common land which had for centuries provided shelter and food; there was official consternation that more and more paupers were suddenly appearing in towns and villages across the country; few could make the connection as to why it was happening in the face of so much progress. (A hat-tip to Henry George there, for those who notice.) In order to maintain social order and save the young market economy, as well as to salve Christendom’s conscience, the Speenhamland legislation was introduced in 1795. This provided “subsidies in aid of wages”, which was tied to the cost of a loaf of bread. Specifically, it meant that a family would get the equivalent of four loaves of bread a week regardless of whether they worked or not. In today’s far wealthier US economy we might argue this would be the equivalent of USD250 a week – though that is a purely arbitrary figure of course. Surely this is bullish for markets?

Yet in a raw capitalist economy the outcome was a disaster. Market wages started to move downwards because employers could see that the state was subsidizing them and the worker would not starve. The most productive workers saw their wages cut regardless of how well they performed, and pay rates levelled off not far above the subsidy level that the state was already paying out. That was not a problem for the employers, of course, but they were worried by the subsequent collapse in productivity, as the laziest workers also knew they were going to get a minimum income regardless of how little work they did. In short, Speenhamland failed everyone, and it was repealed in 1834.

Look around you at the vestiges of the prevailing pre-Covid political-economy with its meagre real wage gains for most workers, cheer-leading of income-slashing ‘disruption’, subsistence ‘gig’ jobs, and widespread sluggish productivity growth; add in massive unemployment due to Covid; splash a dash of ‘Singapore’-style wage cuts; throw in central banks now making UBI politically possible; and consider that the alternative recipe is a radical combination of high state investment and industrial policy and re-regulation that will have to mean further deglobalisation. Do all that and say we won’t be trying to serve the same Green Eggs and Speenhamland once again – and all choking on it as a result. Bullish this is not.

“Do you like green eggs and Speenhamland?

I do not like them Uncle-Sam-I-am.

I would not like them here or there; I would not like them anywhere.

I do NOT like green eggs and Speenhamland.”