We have a real choice between different economic futures

Image, ‘robot dance’, Steve Jurvetson, some rights reserved.

This election comes during a remarkable period in British economic history. Over the past ten years real wages have suffered a larger decline than in any other advanced country apart from Greece. Mark Carney, Governor of the Bank of England, recently said that Britain is experiencing its “first lost decade since the 1860s”.

Faced with an unprecedented squeeze on living standards, families across the country have resorted to desperate measures. The number of people using food banks in the UK reached 1.2 million in 2015-16 – up from just 26,000 in 2008-09. Unsecured household debt – credit cards, overdrafts and other forms of consumer borrowing such as payday loans – is set to reach record highs.

Years of austerity has pushed public services towards breaking point. A steep decline in funding relative to GDP has left the NHS facing a “humanitarian crisis”, while cuts to school budgets have forced head teachers to axe staff and raise class sizes. Decades of underinvestment has left the UK lagging far behind other advanced economies. British workers are now 22% less productive than workers in the US, 23% less than in France and 27% less than in Germany. Precarious jobs and zero-hours contracts have grown throughout the labour market.

Now, with Brexit on the horizon, things are likely to get worse before they get better. According to the Office for Budget Responsibility, a combination of stagnating wages and cuts to working-age benefits means that real earnings will be lower in 2020 than they were back in 2008. According to the Resolution Foundation, we are on course for the biggest increase in inequality since the days of Margaret Thatcher. Never before has the outlook for living standards been this bleak.

But this period of economic decline is not the result of “natural” forces. It is the result of a faltering political and economic order that has reigned supreme in Britain for four decades. A system which has put blind faith in market forces, and tipped the balance of power towards capital and away from labour. A system which has prioritised London’s status as a global hub for financial services, while leaving other regions to suffer at the hands of industrial decline. A system which has allowed wealth to flow upwards by rewarding value extraction more highly than value creation.

In 2008 this system came crashing down when the poster boy of deregulated market fundamentalism – the financial sector – failed catastrophically, taking the whole economy down with it. But without a clear alternative to take its place, the response was to double down on a broken model.

Nearly ten years on, and the economic recovery has been the slowest on record. In fact, when measured properly, there has been no economic recovery – output per head of population still remains below the pre-crisis trend. Interest rates remain stuck at zero, while the Bank of England has relied on £435 billion of quantitative easing to keep the economy afloat. Despite the upbeat rhetoric from the government and right wing press, the reality is that Britain’s economy remains on life support.

It is within this context that the political upheaval of the past twelve months – both at home and abroad – must be viewed. If an economic model delivers stagnating living standards, rising inequality and growing insecurity, it should not be surprising when citizens revolt.

In different ways, both Theresa May and Jeremy Corbyn are symptoms of this faltering economic model. Despite backing Remain in the EU referendum, Theresa May’s reign as prime minister is a direct product of the Brexit vote. While the reasons for Brexit are complex, evidence shows that geographical distribution of living standards, industrial decline and exposure to austerity played a key role in determining how people voted.

Since becoming prime minister, Theresa May has made a concerted effort to appeal to Brexit voters. Rather than tackle the root cause of genuine fears – a failing economic model – she has played into a toxic narrative which attributes blame to immigrants. In both style and substance, Theresa May’s Conservative party is bearing an increasing resemblance to Nigel Farage’s UKIP: a party hell bent on pursuing a hard Brexit, obsessed with reducing immigration, and nostalgic for archaic remnants of a bygone era – from fox hunting to grammar schools.

But despite the rhetoric of “an economy that works for everyone”, the Conservatives’ manifesto offers nothing new in the way of economic policy. Instead, we are presented with more of the same: more cuts to welfare and public services, lower taxes for corporations and the well-off, slashing “poor and excessive government regulation” and Orwellian rhetoric around a “strong economy”.

Where new polices do appear, their effect is usually to make peoples’ lives worse, not better. The commitment to reduce net immigration to “tens of thousands” is not only steeped in xenophobia, but is an act of gross self-harm. Even the government’s own forecasters say that reducing immigration to the tens of thousands will seriously harm growth and increase government borrowing by up to £30 billion. Combined with scrapping of free school lunches, the means testing of winter fuel allowance and the now famous ‘dementia tax’, the direction of travel is a continuation of the status quo, but slightly worse.

Jeremy Corbyn’s Labour party, meanwhile, embodies the mood of discontent and a hunger for something different. After twenty years of politics dominated by spin, sound bites and triangulation, millions of people viewed Corbyn’s sincerity and honesty as a breath of fresh air. Initially written off by the political and media establishment, his resilience in the face of constant attack has gradually won over sceptics. But it is not personality or persona that is Labour’s secret weapon – it is policy.

Corbyn’s unashamedly social democratic manifesto represents a marked departure from the politics of recent decades, and contains many sensible policies. A new National Investment Bank would provide long-term patient finance to upgrade physical and social infrastructure across the country. Taxes would be increased on the wealthy to pay for struggling public services. Key utilities would be brought back into public ownership, student tuition fees scrapped, corporation tax increased and workers’ rights strengthened.

Unsurprisingly, the right wing press decried that the manifesto would “drag us back to the 1970s”. But none of Labour’s flagship policies are remotely controversial in Germany, which is the most productive and dynamic economy in Europe, or in the Scandinavian countries, which consistently sit at the top of global rankings on socio-economic development. The hysterical response from the media shows just how detached Britain has become from the mainstream of European economic thinking.

Labour’s proposal to double the size of the co-operative sector – supported by the introduction of a “right to own” policy – is a bold and ambitious way to reinvigorate enterprise and democratise ownership of capital. The proposal to break RBS up into a network of local public banks would create the kind of mid-tier banking system that is the lifeblood of Germany’s industrial power. The pledge to utilise the public sector’s £200 billion spending power in procurement to help create good local jobs, protect the environment and reduce inequality could be transformative. The promise to introduce a financial transaction tax would put a break on harmful financial speculation, and help return finance to its rightful place as the servant, not the master, of our economy.

Many commentators have been quick to judge party manifestos on the basis of whether each individual policy measure has been “fully costed”. Journalists get excited about the prospect of tripping up politicians with questions about “where the money will come from”. Unlike the Conservatives, Labour made a noble attempt to the cost their manifesto. But as many economists have already pointed out, obsessing over specific policy “costings” may be good journalism, but it is bad economics. It makes little sense to obsess over whether each item of addition spending is matched to a measure to raise additional revenue, because this is not how government spending actually works.

Moreover, assessing individual policies in isolation overlooks the dynamic interactions which determine the health of the economy. Taken as a whole, Labour’s manifesto would reboot the economy by kick starting the positive feedback loop between investment, productivity, wages and tax revenues. It would also help to rebalance the economy away from London and towards other parts of the UK.

But while Labour’s offering is a welcome step in the right direction, it is no panacea. There are many areas for improvement. Addressing the housing affordability crisis means not only building more homes, but fixing our broken land market. An ageing population and growing intergenerational needs a bolder approach to social care and inheritance. Moving towards a low carbon economy requires a systematic greening of the economy, not just targeted investment. Automation, big data and the changing nature of work demands a more radical rethink of welfare policy, and a more sophisticated debate about ownership in our economy.

The media has failed to engage in this debate, or even acknowledge the scale of the challenges we face. That’s why at openDemocracy we are bringing people together to get to grips with the long running economic crisis unfolding in Britain, and figure out a new economic programme.

Join the conversation, and help us build an economy to meet the challenges of the coming century.

 

 

  • Koppers

    What utter rubbish.

    You only have to read the IFS report on Labour’s to know that Labour’s spending plans would leave this country in debt for a generation or more. Worse still, in the hands of Corbyn & co it would be squandered with absolutely bugger-all to show for the mountain of debt.

    • ANGRY_MODERATE

      Get back to Tory propaganda land. You are totally clueless about economics — like all the Tory wankers.

      • Koppers

        The world is just full of Socialist countries with thriving economies, isn’t it? The politics of envy and bitterness so neatly typified in your post.

        • ANGRY_MODERATE

          The world is full of failed capitalist countries, so what the fuck are you talking about? And nobody is advocating state socialism: this is just your right wing propaganda of fear, just like that useless grey woman called Mayhem and her fear-mongering tactics.

          • Koppers

            Agreed there are plenty of failed capitalist states but, and this is the point, there is not a single – not one – prosperous socialist state.

          • ANGRY_MODERATE

            And of the prosperous capitalist states where the wealth is not confined to a few crooks — e.g. Norway, Germany, Sweden — they usually have policies that are as informed by socialism as by capitalism. Those rich countries that do not, have massive poverty and serious problems — USA and UK in particular.

  • Blissex

    This is how some “One Nation” Conservative MP describes the current economy:

    https://www.theguardian.com/commentisfree/2017/may/14/theresa-may-victory-must-not-get-in-way-clear-ideology#comment-98534689
    47% of the UK population live in areas as productive as the former East Germany. Outside the south-east, the UK has a massive infrastructure deficit: per head, its just 40% of the OECD average.

    That is after 38 years of Conservative/New Labour neoliberalism, the smashing of the unions, the freeing of regulation on finance, etc, which were claimed would give the UK a surge in investment and productivity by unleashing the magical powers of capital and markets.

    But the diagnosis in the article is the usual “dogooderish leftie” one: in particular here:

    «Years of austerity»

    Because there has been short or no austerity in the UK, and there are many signs that government policy is far too “expansionary”: asset prices are booming, immigration is booming, imports are booming, lots of upper income and higher wealth people, especially in the south, are enjoying rising living standards.

    As there has been short or no austerity so far, government intervention in the economy has barely slowed: there has been instead a policy of redistribution upwards, where government intervention has been redirected from “improductive” workers to “wealth creating” property and business rentiers. G Osborne pithily summarized this as:

    A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.

    The neoliberal Economists who call that redistribution “austerity” just want government policy to be even more expansionary to further boost asset prices, as it was in 1997-2007 in the USA, in the UK, and other anglo-american culture countries (plus Spain, Latvia, etc.).

  • Blissex

    While I generally like the article, there are some details that seem to me a bit “optimistic” in the usual traditional way, for example:

    «Taxes would be increased on the wealthy to pay for struggling public services.»

    Increasing taxes on the wealthy does not generate that much revenue; it is good in itself to reduce concentration of power and also simply because state spending and investment enables so much of private wealth accumulation. The state is in effect an implicit silent capital partners in every enterprise.

    «But none of Labour’s flagship policies are remotely controversial in Germany, which is the most productive and dynamic economy in Europe, or in the Scandinavian countries, which consistently sit at the top of global rankings on socio-economic development.»

    But is not a political issue, it is a cultural/anthropological issue: the elites in power in those countries regard the lower classes as co-citizens, not as “bulk headcount” like in the USA or much of England.

    «The proposal to break RBS up into a network of local public banks»

    Breaking up banks and making them into partnerships is a good idea, doing so with RBS would be daft, because it is weak. For best chances of success it is strong banks that should be broken up. And certainly not as a network and not too local: because the real power of large banks is their lobbying power.

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