Tinkering at the margins or wholesale reform? Seminario policy network/IPPR

Pubblicato: 30/01/2014 in Socialismo
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Roger Liddle

In 2010 there existed widespread political consensus in the UK around the need to challenge the non-interventionist neo-liberal assumptions of the previous three decades: recently, with favourable growth figures, this agreement appears to have diminished. Labour needs to make every effort to revive this consensus, and take business with it, on what will be a long and difficult journey in changing Britain’s political economy

The Policy Network/IPPR symposium on the shortcomings of British capitalism comes at a very apposite time. The intensity of debate on Britain’s political economy tends to track the economic cycle. When there is recession, as in the manufacturing collapse of the early 80s, or the implosion of the Lawson boom in the early 1990s, the nation searches desperately for alternative models. As soon as there is recovery, the chattering class consensus in favour of reform evaporates and a false confidence takes hold, fostered naturally by the incumbent government of whatever party, that Britain can boast the most flexible, best performing economy in Europe, if not the developed world.

So why now trouble to ask difficult questions about the sustainability of recovery despite little evidence of the necessary “rebalancing” that the Coalition pledged itself to achieve in 2010? And why spend time in anxious deliberation of whether our political economy needs adjustment and whether it is possible to learn anything valuable from other countries, without falling into the trap of thinking we can adopt wholesale another country’s institutions or political and business culture?

Two articles in last weekend’s UK press elaborated on these themes. Janan Ganesh in Saturday’s Financial Times noted: “If economic events can create an overnight consensus in favour of Rhineland capitalism, then they can disrupt that consensus just as quickly.” He then reminded his readers of the fundamental, and still relevant, virtues of the Thatcherite settlement. “Suddenly the pathologies of the British model look more like advantages… It is often overlooked that the supply side reforms being undertaken at German insistence by the least competitive eurozone economies were completed in Britain a generation ago. What was, in the eyes of the continent, brutal liberalism is now unavoidable common sense for any country aspiring to prosper”. Ganesh’s conclusion is straightforward. Forget trying to adopt someone else’s model. Rather “accept the (by implication, the Thatcherite) fundamentals of your system and make pragmatic adjustments at the margins”.

Will Hutton in Sunday’s Observer accepted that the strength of the current recovery had made even him pause for thought: “what has surprised me is the pace of job growth …. there is a dimension to this recovery that represents a strength in the economy that is under examined and half-understood – a burgeoning network of high growth, innovative, knowledge intensive small or medium sized firms clustered in knowledge towns along the M40, M4 and M3 motorways within 30 miles of Heathrow”. He notes similar effects along the M23 around Gatwick, and the M11 taking in Stansted and Cambridge, and lesser effects around Manchester Airport and North Yorkshire near Leeds airport. Hutton believes that this new “nexus – technology rooted in great universities, innovative start-ups, and small firms with loans collateralised against rising house prices, internationalisation via our great airports, and all keyed into the buying power of locally sited multinational headquarters- is creating a new economy at a startling pace”. This could be said to represent the success of Thatcherite flexibility and openness, combined with the supply side successes of the New Labour years in their fostering of universities, research and the creative economy.

However overall, Hutton believes that outside these “hot-spots”, the economic position is much bleaker. The size of the current account deficit is the harbinger of a lack of sustainability in the recovery and the persistence of more fundamental economic problems. He concludes: “there is certainly a full-throated economic snap-back, but the British economic model still needs wholesale reform”.

More real engineering and less financial engineering

Before the optimism of recovery carries us totally away, it is worth reminding ourselves that, in the wake of the 2008 banking crisis, there was a remarkable political consensus behind the proposition that our political economy model required radical rethinking. Peter Mandelson as Business Secretary had challenged the non-interventionist neo-liberal assumptions of the previous three decades. His call for a bit more real engineering and a bit less financial engineering, encouraged by a more industrial activism on the part of government, struck a chord across the parties and in the business community.

George Osborne loudly proclaimed the object of his economic plan to be a rebalancing of the economy from public and private consumption to investment and exports, to a revival of manufacturing with a “march of the makers” and a correction of regional imbalances (with his support for HS2 a symbol of that commitment). At the same time Ed Miliband demanded a more “responsible capitalism”, making that ambition one of his distinguishing themes from New Labour – alongside his related commitment not to ignore, as New Labour allegedly had done, the growing problem of “inequality at the top”.

Of course in any consensus, there were always nuances of difference, but the following similarities of analysis appeared to be broadly shared.

First while the financial services sector must remain one of the UK’s greatest global competitive strengths, it is also a problem. On the one hand there are the big ‘sector specific’ issues ‒ weak regulation, bad organisational culture and taxpayer exposure to failure ‒ that much public policy effort has gone into addressing. On the other, there is the view that the workings of the City promote a short-termist business outlook throughout the corporate sector, without resolving the systemic market failure in the supply of finance to growing firms. Here action and progress has been much more tentative.

Secondly, British universities are global leaders in education and research. But there are serious weaknesses in innovation and skills, particularly in the supply of high grade apprentices and technicians that knowledge-intensive business needs. The government is to be congratulated on prioritising apprenticeships, but serious questions remain about their quality and whether they meet real employer needs. And when it comes to universities and research, because of ring-fenced spending priorities, the squeeze on future oriented Higher Education and research budgets will intensify, and immigration rules will stifle higher education’s potential to be a huge UK success as an overseas earner.

Thirdly, London’s success as a global city is to be celebrated. But as Vince Cable has put it, it increasingly acts as a “suction pump” draining talent from the rest of the British economy. A decade of regional investment under the previous government did much to transform the look of our provincial cities, but systemic weaknesses in self sustaining private sector-led growth remain to be addressed. The Regional Development Agencies may have had their flaws but the Coalition’s mix of LEPs and “city deals” fails to convince as a substitute when the differential impact of public spending cuts widens regional divides.

Fourthly, while there is little support for a return to the “lame duck” interventionism of the 1970s, the government has a responsibility to take a view of how best it can foster the country’s productive strength: the market cannot be the sole arbiter. The neo-liberal political voices against the very idea of a pro active state are currently weak.

Cross-party consensus on the shortcomings of British capitalism

This all suggests the continuing relevance of a substantive political agenda based round three big themes, on which it should be possible to sustain a cross party consensus and build a long term partnership between government and business:

• Corporate governance reforms to clarify the responsibility of Boards of directors to all stakeholders, not just shareholders; to foster and advantage long term shareholding; and to throw ‘grit in the wheels’ of mergers and takeovers.

• A radical shift to ‘fiscal federalism’ in England with cities able to borrow freely for infrastructure investment on their own account and with control over national budgets for skills, transport and employment fully devolved to city level.

• A re-engineering of Whitehall policy and practice, including how we evaluate public spending, in order to create a ‘developmental state’ in which the national priority would be spending programmes that enhance the country’s growth potential. Also partnerships between national government and business would set agreed long term industrial strategies for key sectors of the economy that would be less vulnerable to ad hoc ministerial intervention, for example in infrastructure, energy and renewables, rail transport or health care: all sectors where the state plays an inescapable role.

Labour’s broader critique

These would all be incremental reforms that would reform some of the weaknesses of the Thatcherite settlement. However Ed Miliband is mounting a broader critique of British market capitalism. By arguing that markets can no longer be relied upon to produce a broadly based prosperity where middle Britain shares fairly in the proceeds of economic growth, he is challenging what have been the working assumptions of at least the last three decades, and possibly the whole post war era.

Along with this, a powerful case is argued that inequality at the top continues to grow with little rational justification in terms of corporate performance or the global market for talent; and that as a society we need to think more deeply about how we structure our economy in order to secure more, better paid jobs and a less unequal distribution of the rewards of growth – the idea of ‘pre-distribution’ that Policy Network helped put on the map by bringing Professor Jacob Hacker to our Progressive Governance conference in Oslo in 2012.

These propositions deserve a fair hearing. Personally I would argue that it could be sound public policy to make the British labour market a little less flexible – for example through a higher minimum wage, a tougher approach to employer abuse of cross border migration, and possibly a return to statutory machinery for determining pay and conditions – and to promote higher level skills and productivity – in the modern version of what Churchill called (when he set up sectoral Wages Boards in the pre-First World War Liberal government) the “sweated trades”. Ironically the perception that Labour is institutionally and financially “in hock” to the trade unions, makes it more difficult to argue dispassionately for new initiatives such as these to help low paid workers.

As for higher taxes, I am no fan of a “50p top rate”: it does encourage avoidance and it is a disincentive to enterprise (though to what extent is debatable). But in the period when any government would have to eliminate the huge structural deficit in the public finances, and welfare cuts are already biting hard into the standard of living of those who have very little, as a temporary measure it is socially fair. Labour however should be bolder in setting out how it would tackle wealth, property and inheritance, the beneficiaries of which, in Joseph Chamberlain’s immortal biblical quote, often “neither toil not do they spin”.

Nor can business judge it unreasonable for Labour to draw attention to flaws in the functioning of particular markets, like retail energy, pay day lending and private pensions. It is the job of politicians to speak for the public, not the private interest.

Keeping business on board

What would however be a mistake for Labour would be to give any credence to the idea that markets, in general and as a matter of course, do not serve the consumer, or that big business is automatically an enemy of the ‘public interest’. Any trade unionist will testify that many big businesses in the private sector have provided far better pay and conditions than their small business competitors and are more responsible public citizens.

Also, although politicians are right to call for more competition where they believe there to be unacceptable monopoly, decisions about the structure of industries should not be made by ministers (unless circumstances are so extreme as there is thought a case for public ownership). One of the important Gordon Brown reforms of the new Labour governments was to take competition and market abuse decisions out of the hands of ministers and leave them to independent regulators. This is an important guarantee to business that arbitrary decisions will not be taken that otherwise will raise the cost of capital or deter future investment. Labour should be assertive in defending its record in this respect.

Changing Britain’s political economy

Labour’s strongest argument should be that the recovery does not appear to be addressing the long standing weaknesses of the British economy. There is little rebalancing. For the most part, we are seeing a classic British consumption and housing led boom. And it will not last, because a trade deficit of the current size is not sustainable in the long term. However the weaknesses in British political economy, that at times all parties have accepted, cannot be addressed in sound bites – and they will take several Parliaments before positive results begin to show. In arguing for fundamental changes, Labour needs to build on the consensus that existed in 2010. It needs to make every effort to take business with it, on what will be a long and difficult journey in changing Britain’s political economy.

Roger Liddle is Chair of Policy Network and a Labour peer

The Policy Network/IPPR conference on “A New Political Economy for Britain” takes place on 30 January.

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