Financial reform: a Keynesian agenda.
| Author | Weldon, Duncan |
| Position | Essays - Company overview |
As the various candidates for the Labour leadership begin to dissect the record of the previous government, the time is ripe for a reconsideration of economic policy. One area that is surely in need of reconsideration, after the crisis of 2008-09, is the relationship between government, the financial markets, and the real economy. In no other area of policy was the acceptance of the Thatcherite settlement more total--and the consequences, when they came, were especially serious.
The leadership contest is offering signs of progress and fresh thinking. Ed Balls has admitted that 'light touch regulation' was a mistake; Ed Miliband has spoken of the need for more mutually owned, and possibly state-owned, banking; and David Miliband has openly talked of New Labour not drawing enough of a distinction between industrial and financial capital. Whoever the next leader is, some form of financial reform will be central to their economic agenda.
Between 1997 and 2008 New Labour conceded much economic ground to the right. Guided by the perceived ghosts of Labour governments past, fiscal policy was constrained by 'golden rules' and monetary policy outsourced to technocrats with a remit of keeping inflation low. Whereas Labour made great strides in improving public services, and achieved more than is commonly recognised in terms of reducing inequality (or at least alleviating its increase), to all intents and purposes it ceased to have a distinct macro-economic policy. As Anthony Giddens, one of the prime intellectual influences behind New Labour, writes:
The era of Keynesian demand management, linked to state direction of economic enterprise, was over. A different relationship of government to business had to be established, recognising the key role of enterprise in wealth creation and the limits of state power. No country, however large and powerful, could control that marketplace: hence the 'prawn cocktail offensive' that Labour launched to woo the support of the City. (Giddens, 2010) In the aftermath of the great crash, it should be painfully clear that the era of boundless belief in the abilities of unfettered free markets to deliver socially acceptable outcomes is over. Now is the time for Labour to challenge the post-Thatcherite economic settlement, in particular over the role and size of the financial sector. This article will argue that, in making its peace with financial capitalism, New Labour went too far; that the growth model it relied upon was always unsustainable; and that only through direct state action to reform the financial sector can a sustainable, socially democratic economy be created.
The Labour Party has been here before. In the aftermath of the defeat of 1931 the Party embarked on a process of analysis and review led by Hugh Dalton, and arrived in office in 1945 with a workable and radical programme of financial sector reform. The 1944 Labour Party paper Finance and Full Employment resonates today:
Blame for unemployment lies more with finance than with industry. Mass unemployment is never the fault of the worker; often it is not the fault of the employers. All widespread trade depressions in modern times have financial causes; successive inflation and deflation, obstinate adherence to the gold standard, reckless speculation, and over investment in particular industries ... Finance must be the servant, and the intelligent servant, of the community and productive industry; not their stupid master. (Labour Party, 1944) This policy, I argue, was far more 'Keynesian' than later policies that have evoked his name. There are important lessons to be learned today both from the work conducted by party policy committees and others in the 1930s, and from the experience of Labour in government during the last great challenge to finance capital in 1945-47.
A Keynesian moment?
The great recession of 2008-2009 marked the return of macro-economic debate to British politics after an absence of nearly twenty years.
After the perceived debacle of the 1992 Shadow Budget, Labour fought the 1997 election on an explicit commitment to maintain the Conservatives' spending plans for the first two years of the Parliament. In 2001 and 2005 the then government's economic case rested on the endless repetition of statistics--the lowest inflation and interest rates since the 1960s, the longest period of unbroken economic growth since records began, and so on--and the Brownite 'investment versus cuts' dividing line, with every Conservative call for a cut in tax transformed into x number of teachers, police officers or nurses. In neat symmetry with Labour in the mid-1990s, one of David Cameron's first acts on becoming Tory leader in the mid-2000s was a pledge to match Labour's spending plans, a pledge seen at the time as vital to the 'detoxification' of the Conservative brand.
The most severe economic downturn since the war changed all of this. At the PreBudget Report (PBR) in late 2008 the government embarked on its fiscal stimulus, bringing forward investment spending and cutting VAT. Cameron and Osborne responded by renouncing Labour's spending plans and openly advocating cuts. Despite a wobble in the polls in early 2010, attributed to Osborne's talk of an 'age of austerity', the broad outlines of the 2010 campaigns were in place at the time of the 2008 PBR: Labour advocated government action to stimulate the economy, whilst Conservatives argued for immediate cuts in public spending and the prioritisation of deficit reduction.
Much popular commentary over the past two years has focused on New Labour rediscovering Keynes in the face of global economic turmoil. This notion can be challenged on three separate grounds.
First, it is questionable quite how 'Keynesian' previous Labour governments have actually been. The 1929-1931, 1964-70 and 1974-79 Labour governments all responded to international financial problems by reigning in public spending and tightening fiscal policy. Despite the popular myth of spendthrift Labour administrations, the historical evidence for this charge is thin (1). Second, the extent of New Labour's conversion to 'Keynesianism' can be questioned. The fiscal stimulus of 2008 was, by international standards, small. The total package equated to around 1.5 per cent of GDP compared to 5.9 per cent in the USA, or 3.4 per cent in supposedly austere Germany. And, although the issue of cutting public spending in 2010 was much debated during the general election campaign, New Labour fully intended to beginning cutting in 2011 (2).
More significantly, the term 'Keynesian' is open to interpretation. To most laypeople, and indeed many economists, Keynesianism is synonymous with managing demand by running budget deficits...
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