It’s the political economy, stupid!

Colin Hay & Tony Payne  - Directors of SPERI

This is bad politics – and not just because it fails to lance the boil of Labour’s past and not just because it blithely and unnecessarily concedes what sounds like a major Labour error (the admission of which won’t be forgotten in electoral battles to come).  No, it is bad politics primarily because it is bad economics.  For, under capitalism, governments need to respond to the business cycle by running budget deficits and surpluses at different times and in different conditions.  OK, it might be the case that democratically elected politicians typically find it harder to restrain spending and build up surpluses in good times then they do to run deficits in bad times.  But, even from this perspective, the most that Labour should be prepared to concede is that the deficit could in retrospect have been a bit lower in 2007-8, and would certainly have been if it somehow had been able to have prior knowledge of the imminence of a genuinely global financial crash caused by the irresponsibility of under-regulated banks!

In fact, as Robert Skidelsky put it just before the election (and then reiterated in his SPERI Annual Lecture just after the election), the real Labour error from the recent past is that it ‘overestimated the revenue flows it would go on receiving from a flaky financial services sector, whose largely unregulated expansion it had encouraged, and whose inherent instability it had ignored’.  But, as he added, ‘this is a judgement after the event’ (it’s that hindsight thing again, and Skidelsky is honest enough to admit it).  The Conservative opposition did not say this at the time, George Osborne as Shadow Chancellor confirming in September 2007 that a possible Conservative government would not only match the overall spending plans of the Brown government but also increase spending on public services.

In one sense this is all history now.  But the reality is that it still matters – and post-Miliband Labour should deal with the issue strongly by reasserting the core truths (as well as the limitations) of Keynesianism.  A further failure to do so and, even worse, any commitment to a balanced budget at all times (as opposed to balance being achieved over the full business cycle) will tie it irredeemably to the same fallacious logic by which austerity, driven by deficit and debt reduction in double-quick time, is rendered the core test of economic competence.

This should be the easier bit.  What is undoubtedly harder, but still essential, is then to build on this basis a fuller argument about how Labour would in future grow the British economy in a different way to the Conservatives, how it would genuinely rebalance it between sectors and regions, how it would take cognisance of the need to reduce the economy’s reliance on fossil-fuel forms of energy and how it would seek to draw on the benefits of economic success to create a more unified country and society.  It is only by so doing that it might hope to begin to reject, redress and ultimately to reverse the inequality multiplier that has been the consequence of so much British public policy in recent years, and arguably since the 1980s.  These are the key issues which any new Labour narrative must embrace and articulate with determination, persistence and verve.

Here comes the potentially embarrassing bit (although at least we saved it until right at the end of this post).  We’ve had a stab at setting out such a narrative.  We’ve called for the adoption of a new model of capitalism in Britain that we have described as ‘Civic Capitalism’.  It is in essence a model that asks not what we can do for capitalism, but rather what capitalism can do for all of us as citizens with equal rights and expectations.

It offers no panacea; it is no blueprint; and it certainly doesn’t get everything right.  In fact, we know the areas where the argument needs to be strengthened probably better than anyone.  But we do nevertheless think that Britain, as a country and a society, still very much needs to address the question of how to build a better, fairer and more sustainable model of capitalism than the re-heated pre-crisis package that still seems to reign ascendant in Downing Street – and we suggest with genuine modesty that ‘Civic Capitalism’ is at least a place from which to begin that discussion.

As for Labour, if it does not move to enter this debate and work out its own position within it, how else does it think it is going to build a convincing economic story to tell to the British electorate in the period between now and the 2020 general election?