After four decades, the economic consensus is crumbling. What can politicians do next?
Theresa May’s speech to the Conservative party conference in early October seemed to mark a clear turn in economic policy. It was condemned by the right-wing Institute of Economic Affairs as “an alarming attack on free markets” and by the Adam Smith Institute as “the opposite of pragmatic”. The Institute of Directors felt compelled to point out that “business leaders are not pantomime villains”.
Here was the Conservative Party, the historic party of British capitalism, picking a fight with British capitalism. The agenda of recent years – City-friendly, in thrall to fiscal tightening, with an active monetary policy – is being challenged, in rhetoric at least. The prospect of a “hard Brexit”, with potentially terrible consequences for jobs and living standards, is causing great concern in the world of business.
More fundamentally, the whole political and economic settlement of the past 40 years is potentially under threat. As the new Chancellor, Philip Hammond, told Bloomberg TV on 6 October: “We have a problem – and it’s not just a British problem, it’s a developed-world problem – in keeping our populations engaged and supportive of our market capitalism, our economic model.”
Students of recent history would generally agree that the economic model of Western democracies changed fundamentally from the 1970s onwards. The crises of that decade gave way to a great shift in the balance of power towards capital and away from labour. The rules of the game were rewritten to favour a rhetoric of free markets and small states, and the reality was corporate power and wealth inequality.
For some, this created opportunities. For others, it led to decline or even post-industrial devastation. On balance, there were enough winners, over successive decades, to tilt parliamentary democracies towards acceptance of the new order. Social-democratic parties accepted the new economic rules, even if they insisted on smoothing off the rougher edges.
It is becoming clear that neoliberalism – as these rules have become known – has run its course and cannot deliver the rising living standards that were supposed to be the hallmark of modern economies.
Since the global financial crisis in 2008, ultra-loose monetary policy has been needed across the developed economies. In the UK in particular, stagnant wages for the lower-paid sectors have been supported by in-work benefits, whose costs to the Exchequer have been rising.
Now, the political and financial limits of this course are being reached. The Brexit vote sounded a death knell for our economic and political settlement of the past few decades. On the left, the temptation for some may be to celebrate. After all, we have called insistently for more public investment and economic intervention, alongside policies such as worker representation in boardrooms and clamping down on tax avoidance.
The change in rhetoric by the government has been portrayed as “Conservative tanks on Labour lawns”. But this cliché gets it wrong: it is when your opponents start using your arguments that you know you are winning – as Margaret Thatcher recognised when she claimed New Labour as her greatest achievement.
The breach between the Conservatives and capital does not necessarily herald an improvement in the fortunes of the left. If it is replaced instead by an inward-looking, xenophobic autarky, prepared to sacrifice the living standards of its citizens in the desire to please the most virulent anti-immigrant tendencies of the right, the organised left and the people we exist to represent will be worse off, as will all those who favour a free and open society. If Ukip wins, we lose.
It is only 18 months since David Cameron’s re-election as prime minister. So how has this shift in thinking come about so quickly? Central bankers are understandably reluctant to concede that they are running out of tools to support the economy, but many others have been prepared to say it for them. With interest rates across the West at record lows, some of the brightest minds have been discussing ideas that would have been deemed cranky a generation ago: “helicopter money”, negative interest rates and digital currencies.
The obvious alternative – expansionary fiscal policy – has been out of political favour. But the challenges we face are far greater than those which could be addressed by government spending, even ignoring any Budget constraint. Countries that have undertaken less austerity face many of the same problems as we do.
Over the decade since the global financial crisis, living standards for most people have barely recovered. In the UK, real hourly wages have declined by more than 10 per cent since 2007. Precarious jobs and zero-hours contracts have become the norm in huge sectors of our labour market.
The system of tax credits and other in-work benefits has helped cushion the blow for many. But if wages are not rising, increased spending on tax credits needs to be paid for from tax revenues: Osborne’s attempted tax-credit cuts last autumn were a warning sign. This in turn will require levels of growth not seen since the crash. The same could be said for our NHS, which is facing an urgent funding crisis, as are many other public services.
As the labour market has hollowed out, with a few well-paid jobs at the top, overwhelmed by large numbers of poorly paid, insecure jobs at the bottom, our tax base has narrowed. There are limits to asking those who have experienced falling real wages to pay more, and the global super-rich have found it all too easy to treat taxes as an optional extra.
But responding to the politics of the recent past is not a viable option. We must acknowledge that the model that New Labour relied on to fund public spending increases is broken.
Wolfgang Münchau wrote recently in the Financial Times about the decline of European social-democratic parties, partly as a result of their failure to offer alternatives. It could be added that the assumptions that they were built on for 20 years are crumbling.
We do not have the option of relying on steady growth, driven by services and, in particular, finance. One of the sharpest shifts within the productivity figures is how the financial sector has gone from being a key contributor to productivity growth to a drag on it since the crisis.
At the same time, a nostalgic return to the postwar consensus is similarly impossible. Infrastructure rebuilding, the remnants of the British empire, a dramatically different political context and rapidly rising productivity drove wage and tax increases that transformed our society, thanks to the Attlee and Wilson governments.
Now, trend productivity is lower in the UK than in most G7 countries. According to researchers at the Bank of England and elsewhere, underlying growth has been in decline for some time: at least since the start of the 2000s, well before the crash. By some measures, it has been in slow decline since the 1960s. Government investment can – and should – help address this, but state investment cannot compensate fully for sluggish private investment demand.
The underlying reasons are uncertain. Talk of “secular stagnation” has come back into fashion, thanks to the US economist Larry Summers. This is where increased savings and a decreased desire for investment drive “neutral” real interest rates to impossibly low levels.
Politicians who correctly identify the problems often miss the target by placing the blame on central banks. Research from the Bank of England and the Federal Reserve Bank of San Francisco suggests that global real interest rates haven’t just been low since the financial crisis, but have declined significantly over decades, and are likely to remain low thanks to factors such as demographic change.
If true, this poses significant challenges for an economic model that has increasingly relied on monetary policy for macroeconomic stability. It also puts into context the complaints of politicians who seek to blame central bankers for the consequences of low interest rates, while refusing to take responsibility with fiscal policy.
There are several potential explanations for the long-term difficulties we face. The economist Robert Gordon of Northwestern University has written about “the end of growth”, as the stream of productivity-enhancing innovations of the past century and a half – world-changing inventions such as the internal combustion engine, better plumbing, the internet – dries up. Alternatively or additionally, the IMF has recently pointed to the overhang of debt that built up after the global financial crisis. This has refused to come down, a situation not helped by persistently low inflation. Janet Yellen, the chair of the board of governors at the Federal Reserve, recently hinted at the possibility that insufficient demand could harm potential supply-side growth.
Beyond the mainstream, post-Keynesians have spoken of the need for wage-led growth: one of the contradictions of resurgent capital has been to push down the purchasing power of the working population, limiting the scope for consumption growth. Meanwhile, Marxian economists blame the increasing role of capital in production for persistently low rates of profit in the real economy, resulting in lower investment and slower growth.
What can politicians do, if economists can’t agree what the problem is? I have said that we need to offer answers soon, and I tentatively suggest that these need to be in three areas.
The increasing automation of jobs, reduced dependence on carbon fuels, artificial intelligence and the so-called gig economy have provoked understandable anger among many workers whose jobs are under threat. More generally, concerns about the effect on the labour market are widespread: either threatening mass unemployment or a significant shift towards low-productivity, low-paid jobs.
This need not be the case. In a society where the benefits of technological advancement are shared, productivity gains can be made to work for the benefit of all. It requires original thinking – one possibility is a universal basic income – to suggest how we can make a society with less demand for medium-skilled labour become wealthier and less polarised.
Future automation is likely to hit service-sector jobs, while the fusion of digital technology with manufacturing in the “fourth industrial revolution” is creating new demand for highly skilled labour. This will demand a major policy response if we are to harness the potential of this.
Second, if we are to meet the needs of those who need health care, pensions and social security, we will need to find ways to tax wealth more effectively. Not just because it is fairer than taxing labour, but because our tax base has shrunk. And as more of the economy now goes to capital owners, taxing a fair share of this is essential to affording the public services that we want.
Finally, none of this is sustainable in the long term unless we change the ownership of this capital. Through new forms of democratic and small-scale ownership, such as employee-owned firms, and by sharing the ownership of society’s assets more broadly, we can reduce the need for redistributive intervention, while increasing society’s power to choose the future direction of our economy and address the urgent demands of climate change.
These issues are confronting left-wing political parties across the West. In the UK, we are now at a crossroads. We cannot afford to let out a sigh of relief at the end of Osbornomics. There is no guarantee that what comes next will not be worse.
We cannot allow our politics to degenerate into a fight between an inward-looking, regressive xenophobia and the failed economic liberalism of recent history.
Nearly 40 years on from Eric Hobsbawm’s warnings about the future of the labour movement, we have the opportunity to put an end to neoliberalism with a modern, inspiring, collective economic alternative. If we don’t offer a credible alternative, someone else will, and the results will be ugly.
Of course our immediate priority is to hold the government to account during the negotiations over Brexit, but at the same time we must be looking ahead to rethink how our economy works. I want the Labour Party to be at the centre of that, and I want as many people to be part of that conversation as possible: through our policymaking structures and at our forthcoming public national and regional economic conferences.
To coin a phrase: change must come. But what type of change, and for whose benefit, is up to us to determine.
The New Statesman, 03 November 2016