Right now one would be forgiven for thinking that nothing apart from Britain’s membership of the EU will worry the heads of our legislators for years to come. The Conservative Party has disappeared in a storm of in-fighting, perhaps never to be seen again, in its present form at least. But some from the opposite benches have kept quiet, busying themselves with something of a side project.
Shadow Chancellor John McDonnell used Labour’s State of the Economy conference on May 21st to announce the progress made during all of this brainstorming. His speech concluded a series of lectures this year entitled “The New Economics”, delivered by well-regarded left wing economists in conjunction with the Labour Party. Although the results are unclear, few should question the need for a re-evaluation of the consensus in Westminster.
Start with the simple observation that despite all the bombast, several economic issues of singular importance will persist no matter the result on 23rd June. Though employment is high, many people still suffer from unstable work; real wage growth remains mysteriously listless, matching feeble productivity in the UK; escalating levels of inequality between the richest and the rest are sapping the life out of the British economy. These problems need technical, well-designed solutions, but the Treasury is producing little light on such matters (though, via the EU campaign, enough heat to plug Britain’s looming energy gap).
Consider further the scandalous headlines Britain woke up to one Monday morning this April. The leak of the Panama Papers was possibly the most desperate news story of 2016, but was received like a glum inevitability. Most of us felt we already knew that corruption and tax dodging were everywhere. But inspect the numbers for a moment. A governmental estimate puts the cost to the UK of income tax evasion at £16 billion a year. That is significantly larger than the foreign aid budget (so reviled by the right-wing press), at £11 billion. The total tax gap – what wasn’t paid out of what HMRC calculate is due – is £34 billion. Our annual defence budget is £45 billion.
And then there’s the inequality issue. In Danny Dorling’s book Inequality and the 1% – a purposeful march through the gallery of economic unfairness – the Oxford professor repeatedly points to the 15% of all UK earnings taken by the top 1% of individuals. At the same time cuts were taking £19 billion a year out of the economy. In the autumn of 2013, 120,000 children were relying on food banks.
This is why Mr McDonnell quotes Joseph Stiglitz in calling to “rewrite the rules” of the economy. Even the canniest players can’t beat the game when the system is rigged in the first place. Unless, of course, you’re canny and it’s rigged in your favour.
It is not just Brits who have licence to feel cheated. The figure for the share taken by the 1% in the US was 20% in 2014. To touch lightly on the epic drama across the Atlantic (by now mired somewhere in its third or fourth act), if Donald Trump stands any chance of winning the United States presidency, it will be because of untempered ill-will against the problems I describe here. Hilary Clinton is the very definition of a political insider, and is in trouble because of it. Anxious observers point to Mr Trump’s billions: surely this inherited tycoon can’t play the ‘crooked economy’ card? And yet, in the eyes of many, those who benefit from a rigged system can seem somehow less vile than those who rigged to their hearts’ content, and got away with it to boot.
There is much to be feared in this sort of politics. The most terrible moments in modern political history have occurred when ordinary people making justified complaints have found no honest, reasonable solutions offered to them by those in charge: only lies and false promises.
So Labour’s re-branding is sorely needed, to offer just those solutions. The party has a woeful reputation when it comes to economic governance. An Ipsos MORI poll in February asked who would “make the most capable Chancellor” and showed George Osborne leading his Shadow counterpart by 17%. That is greater than any lead he enjoyed over Ed Balls. Yet the Beckett report on Labour’s electoral defeat last May noted that the party “decided not to concentrate on countering the myth of ‘Labour’s crash’”. Ed Miliband tried to fight the Tories on their own terms. Conversely, the Green Party fought the 2015 election on the (un)happy grounds that they were the only anti-austerity party of the bunch, and received plentiful media attention for it.
Even as Labour tries to define a new path, it is mocked for going back to the old, in spite of cries of protest from Mr McDonnell and his team. Annie Huddart at the PR firm Blue Rubicon, writing about the Queen’s Speech on May 18th, is fairly representative of the received wisdom:
With a Labour opposition that looks set to continue fighting the politics of the 1980s, the Conservative leadership’s search for an alternative ideological agenda has led to the obvious need for reform of public services and markets, matched by a visible commitment to social justice.
As well as her apparently low threshold for what counts as ‘visible commitment’, Mrs Huddart here performs the sacred rites of what is sometimes called the ‘Third Way’. This starts with the idea that New Labour represented the emergence of a keenly profitable type of politics mixing the best of the free market and state social protection. But some modern acolytes thereby imply that any leftist platform detracting from the Blairite view must be going backwards – to ‘the politics of the 80s’. By extension, society never changes past the modern era of the 2000s, and the Third Way remains the superior compromise. Given the trends and statistics we see today, I beg to differ. The economics of social democracy has simply not worked in the way we had hoped it would. Understanding why that is so would require space far beyond what I am trying to say here.
New challenges abound: the digital economy; tighter credit markets; interest rates stuck at the zero lower bound; a tremendously stubborn property bubble. The New Economics must look to solve this very 21st century set of ailments.
Moreover, even on pure fiscal policy grounds macroeconomists are far from united over Tory policy, in particular the Charter for Budgetary Responsibility. This legislation mandates a fiscal surplus “in normal times”. In a December 2015 survey of experts by the Centre for Macroeconomics, almost half of respondents disagreed that it “is helpful in underpinning the credibility of fiscal policy” (with 40% agreeing). The Institute for Fiscal Studies expressed doubts in February over the fiscal mandate, concerned by its inflexibility and the cost of big tax rises or spending cuts at sudden notice to ensure it is met.
The International Monetary Fund, long-time proponent of fiscal consolidation, noted in 2012 that “the [fiscal] multipliers used in generating growth forecasts have been systematically too low.” That means that austerity has hurt more than its advocates thought it would. Answers to worries over public debt are called for that don’t suffer from full-blown austerity fever. As such, Labour is now promoting its own fiscal rule. This allows for much-needed governmental investment, while staving off the temptation to allow ballooning deficits driven by social spending (Paul Mason explains the theory here).
Nonetheless, during Prime Minister’s Questions earlier this year, Mr Osborne lampooned Labour’s new advisory team as akin to Chairman Mao and Mickey Mouse. These cheap jibes seem to work, and Labour remains speared with little credibility in the eyes of millions of voters.
We have had roughly the same narrative of economic governance in the UK for the past four or five years. It is extremely tiring and absolutely no good for the health of the British economy. The new toolkit might yet buck the trend. It will have to cooperate with centrists – as even Jon Lansman, chair of Momentum and veteran of the Left, admits, “if you don’t take the mainstream of the Labour Party with you, you’re going to lose.” But the need for innovative policy is urgent. Let us see if Mr McDonnell can prove the detractors wrong, and save further damage in the meantime.