A False Dichotomy
Nothing better illustrates Labour’s current malaise than the reported difficulty the leadership group is having in agreeing on a strategy for an election that is now only a few months away.
Some, we are told, including most of the “New” Labour veterans, favour a direct pitch for middle-class support, with plentiful assurances that the Party’s leaders come themselves from “comfortable” backgrounds. Others recommend a focus on Labour’s “core vote” in a belated attempt to re-assert the Party’s traditional values and priorities.
Neither group seems to doubt that this is an unavoidable dichotomy. Just as the Blair/Brown schism is seen as essentially unbridgeable, so this dispute seems to reveal a deep fault-line in the Party’s thinking. After thirteen years in government, and nearer sixteen years with the current leadership group, it is surprising that this is the best that can be done.
It is hard, after all, to see that either strategy offers much prospect of electoral success. First, the notion that “we are all middle-class now” is hardly new. It has been the leit-motiv of New Labour since its inception. If the aim is to re-enthuse the voters, the strategy seems to lack a certain sense of excitement or breath of fresh air. “Vote for us and we’ll go on doing what is perceived to have failed” is not much of a rallying cry.
It also commits the cardinal sin in political strategising of allowing one’s opponents to frame the debate. The American specialist in cognitive science and linguistics, George Lakoff, is clear that to adopt the opponent’s language is to concede the debate. In a contest as to which party is more likely to put middle-class lifestyles, privileges, and values ahead of anything else, especially off the back of recession, there will only be one winner.
There is not much better to be said for the rival strategy. Labour’s “core vote” is now a sadly wasted asset – one of the consequences of ignoring it for the past sixteen years. It is unlikely to be revived by a quick and short-lived about-face by Labour’s spin doctors. And it is in any case a defensive strategy designed only to limit losses – a strategy that, by abandoning a large part of the battlefield to the enemy, necessarily concedes defeat in advance.
If Labour cannot do better than this, they deserve to lose. The inevitable burden of cumulative disappointments after thirteen year of government, to say nothing of egregious errors like the Iraq War and a recession engendered by a sustained obeisance to the City, will not be overcome if Labour’s much-touted strategists do not come up with something more intelligent and imaginative – and more optimistic.
The perceived dichotomy in electoral strategy must be rejected as a chimera. There is no success for Labour in either restricting itself to the “core vote” or in ignoring it by manifestly adopting other priorities. Labour strategy has always required a successful effort to persuade a sizeable slice of the more affluent that they will be better off, both materially and in other ways, under a government that accepts as one of its priorities that it should look after the less advantaged.
The argument should be that both the economy and society will function better if everyone has a chance to make a positive contribution. Excellent public services will produce a better educated, better housed and healthier workforce, better able to take the jobs that full employment will make available. Running the economy in the interests of the whole workforce, and not just City fat cats, will boost output and productivity and increase the resources that can be invested in our economic future. Investing in new skills and technology, and in the development of new products and markets, will in turn lay the foundations for an inclusive prosperity in which all can share.
An economy run like this would produce a stronger and better integrated society, no longer riven by division, no longer weakened by a disadvantaged underclass that increasingly sees the only way out being achieved through crime, drugs, gambling and prostitution. Even the most purblind defender of middle-class privilege might be persuaded to recognise the benefits of living in a healthier and more inclusive society.
A message like this might sound impossibly idealistic, but would this necessarily be a bad thing? To set a course that at least aims at something better is more constructive, more likely to enthuse, than constantly triangulating for supposed electoral advantage. Labour should not, in other words, allow itself to be forced to choose between its “core vote” and middle-class support. The two are perfectly compatible, and to act with that conviction offers Labour’s best hope for the forthcoming election.
Bryan Gould
19 January 2010
This article was published in the online Guardian on 20 January.
Learning the Lessons
As the world-wide recession seems to be bottoming out, one question is being asked with increasing frequency and urgency. Have we learnt the lessons so that it will not happen again?
The answer – at least in the US and the UK – is not a reassuring one. As the hard-pressed taxpayer, already burdened with the threat to homes and livelihoods, is left to pick up the bill for market failure – a bill in the billions which will not be paid for years, not to say decades – those whose recklessness and greed caused the crisis have already returned to the bad old ways.
We see the same outrageous bonuses, the same disregard for prudence, the same confidence that the price of failure will always be paid by someone else. It is almost as though the publicly financed bail-out has provided the fat cats with a renewed belief in their own infallibility, by convincing them that they will always be protected because they are too big and too important to be allowed to fail.
In New Zealand, where the financial sector is too small to exhibit these attitudes, we have nevertheless seen our own somewhat paradoxical response to market failure. It might have been thought that, in an economy where public finances had been unusually well and prudently managed over recent years, the public sector would be the last place that would be required to bear the brunt of recessionary retraction.
In other countries (notably Australia), and in line with the revival around the world of Keynesian insights into how to respond to recession, the public sector has been seen – not as the problem – but as an important part of the solution. We, however, seem to have become obsessed with the size of the government deficit, which is still relatively low in historical and international terms, with the result that the salami slicer has been applied with very little discrimination across the whole range of public spending.
No one can cavil at an increased drive to ensure value for money in public spending. The suspicion must remain, however, that the recession has been a not unwelcome excuse to rein back the public sector on ideological rather than economic grounds.
There is, however, a more significant respect in which we seem to have decided not to apply the lessons we should have learned. We should not forget that we have been in recession since the end of 2007 – long before the financial crisis broke. That home-grown downturn was the direct consequence of the policy directions we had been following for 25 years having finally run into the buffers.
Inflation then was still enough of a worry to lead the Governor of the Reserve Bank to keep interest rates at an internationally very high level. That in turn, through pushing up the exchange rate, had destroyed the competitiveness of our industries, created a current account in serious imbalance, increased our need to borrow to finance the gap between what we earned and what we spent, pushed up the exchange rate and stoked inflation still further as “hot” money flowed in to take advantage of the high interest rates, and so on round an increasingly vicious circle.
As we contemplate the post-recession scenario, those fundamental problems are no nearer solution. Indeed, some are a good deal worse; the overvalued dollar is destroying our productive economy with every day that passes. Our only response to these pressing problems seems to be that “there is nothing we can do.”
But there are things we can do. We could acknowledge that the strategy of defining macro-economic policy in exclusively monetary terms, and of directing the whole force of that policy to the single goal of controlling inflation, using a single instrument in the hands of a single unelected official, has failed – both as an effective way of controlling inflation, and in terms of its disastrous impact on our overall economic performance.
If we want to do better, and in particular, if we want to raise our poor productivity levels, we have to do things differently. If we go on with the same policy prescriptions as we have applied for the last 25 years, we will get the same disappointing results as we have endured over the last 25 years.
What is needed is a fundamental shift in perspective. It would mean, in line with the revival of Keynesian thinking, re-defining macro-economic policy so as to include the whole range of fiscal as well as monetary measures. It would mean setting the goals of macro policy (including interest and exchange rates) in terms, not of inflation, but of competitiveness, as the Singaporeans do. It would mean, rather than clobbering the whole economy with a poorly focused counter-inflation strategy, continuing the battle against inflation with specific micro measures directed at defined inflationary pressures, such as excessive bank lending and the favourable tax treatment of housing, and encouraging saving by strengthening the incentives to save.
It probably won’t happen. It is amazing that an orthodoxy that has been so thoroughly discredited by experience still has such a hold on official thinking. The government might be encouraged, however, to undertake an “agonising re-appraisal” by the thought that a change of tack might produce a better outcome, not least for their own pet preoccupation. Nothing, after all, would do more to get the government deficit down in a hurry than a newly buoyant economy.
Bryan Gould
26 September 2009
This article was published in the New Zealnd Herald on 1 October.
Who Controls The Banks?
The recession may not yet have reached its mid-way point, but already the lessons that seemed so stark in the immediate aftermath of the financial meltdown are receding fast. The way out of recession is apparently being directed by traffic lights and signposts controlled by worryingly familiar faces.
Foremost amongst these phoenix-like revivals are the banks. Just months after they were rightly seen as basket cases – their irresponsibility and greed the primary causes of the recession and their very survival requiring billions of pounds of handouts from the hard-pressed taxpayer – they are back in the box seat, not only apparently immune from reform or regulation, but again paying out huge bonuses, and their unchanged role accepted as essential to economic recovery.
According to their own pronouncements, the least surprised at any of this are the banks themselves. Are their affairs not directed by the most brilliant operators who can only be attracted by huge salaries, bonuses, fees and commissions? Is our economic future not totally dependent on their freedom to make as much money as they can for themselves and their shareholders? Is the recession not itself proof that the banking function is not only too important to be allowed to fail but is in the end best left to those who know what they are doing?
Some of these claims can be summarily dismissed as laughable examples of special pleading. A plumber or bus driver who proved himself so incompetent at what he was employed to do that he flooded the house or crashed the bus could not claim that he was uniquely qualified for a supremely demanding occupation, but would be out of a job. Bankers who destroy the financial system should be similarly judged.
And our supposed dependence on the City’s earnings is – far from being a reason for re-instating the status quo ante – a striking warning against allowing this dangerous situation to arise again. Among the many lessons we should not forget is that City earnings not only go to a tiny fraction of society but require support from an economic policy which – by giving priority to those who manipulate existing wealth over those who invest in and create new wealth – is guaranteed to destroy other kinds of economic activity, particularly in the real, as opposed to financial, economy. Those who have lost jobs in manufacturing, for example, have literally paid for the bonuses “earned” by City fat cats.
Perhaps the most surprising of the claims made is that the banking function is of central importance to the whole economy but should at the same time remain in the hands of a private oligopoly – and an oligopoly that is entitled to put its own interests ahead of the general interest. Even more surprisingly, after all that we have recently experienced, this argument seems to have been accepted without demur by the government that spent our billions on rescuing the banks.
It has always been a mystery that the banking function – which in macro-economic terms means essentially the creation of credit and therefore of money – should have been allowed to develop in private hands. The banks have avoided scrutiny on this issue, first by (improbably) denying that they create money, secondly by arguing that the function is in any case so important to the economy that it would be too dangerous to disturb it and finally by maintaining that only they have the expertise to discharge the function anyway – and all this at a time when the prevailing orthodoxy is that the most important factor in economic management is the rate of growth in the money supply, so that the banks’ central role in the creation of credit – the most important single factor in the excessive growth in the money supply – has an additional and unmistakeable macro-economic impact.
What the recession has demonstrated is that none of these defences can stand. The first stage of the financial crisis was largely one of liquidity and arose because the banks’ (supposedly non-existent) ability to create credit was brought to a halt. This required government intervention on a massive scale – so much for the argument that the bankers’ role should not be disturbed – and this in turn showed that it was not the bankers’ expertise (which was manifestly in very short supply) but government resources that underpinned the banking function.
So, if the public has an intense interest in the proper discharge of the banking function, and the last-resort guarantor is the public purse from which billions of our money have been spent, why are we content to allow the private oligopoly to proceed on its merry way and to decide in their own interests issues that matter to all of us and that should be placed under democratic control? Why would we not consider some form of public ownership (we have, after all, paid many times over for banks that were virtually worthless) or, at the very least, a degree of effective regulation to ensure that the public interest was protected and that the banking function served that interest rather than private greed?
The prize is, after all, a banking system that serves the wider economy and not just itself. Our failure (or refusal) to see this shows just how deeply ingrained is our frame of reference, and how much at risk we remain from a repetition of past errors.
Bryan Gould
10 August 2009
Sin and the City
Twenty three years ago, the City was excitedly awaiting the Big Bang – the moment which would usher in a new era of self-regulation of the financial services industry. I had a grandstand view of the impending arrival. The legislation to prepare for the Big Bang was called the Financial Services Bill, and I spent several intense weeks leading for the Opposition as the Bill was taken through its Standing Committee stage.
Mrs Thatcher’s government, in line with its free-market philosophy, was very clear that the City could in essence be trusted to regulate itself. They resisted all attempts to give the regulators some teeth. The next few years of what some called self-regulation but which was in reality a free-for-all saw a huge expansion in financial services, in the size of the institutions providing them, in the sums of money involved, and in the rewards “earned” by those who worked in the City.
For those of us who argued at the time that the “free” market was not infallible, and (in line with Keynes, who had warned that financial markets were peculiarly prone to excess) that the City would require substantial regulation, subsequent events have come as no surprise. Even we, however, could not have foreseen the size of the money-go-round, spinning ever faster, that produced outrageous fortunes for a few and, eventually, crash and ruin for many.
Nor could we imagine that it would be a New Labour government that would become the most enthusiastic cheerleaders for the new lords of the universe. So dazzled were Ministers by the riches generated in the City that they did not think to enquire as to how many of those they claimed to represent actually benefited from the new wealth – wealth largely gouged out of the pockets of the rest of us.
The current revulsion at City excesses – the inflated bonuses, commissions, salaries and perks – is understandable; so, too, the anger at the growing evidence that nothing has changed and that those responsible for the mess will be paid mega-bucks for (allegedly) cleaning it up.
But the reaction to the greed and irresponsibility of the financial free-for-all, while natural, is a diversion from the real point. The reason for the government’s continuing genuflection to the City is that, after 23 years of unregulated City operations, and a growing reliance on financial services to keep the economy moving forward, the collapse of the City means that there is nothing much left.
The game is given away in the Chancellor’s statement this week on his plans for future regulation of financial services. His constant references to the importance of the City to our economy should be seen, not as an endorsement of the course followed over the last 23 years, but as a confession of failure. It is an admission of how far governmental indulgence of City excesses has distorted our economy and how big has been the price that the rest of us have had to pay for the rewards that City operators have milked from that same economy.
The real damage suffered as a consequence of the City’s domination of our economy is not to be measured, in other words, only in terms of the current crash and financial meltdown. The weight given to the City’s interests over a long period has seriously distorted our economic performance – and the more successful the City seemed, the more important its earnings to our national accounts, the more other parts of the economy were allowed to wither away.
The problem is not a new one; it was Winston Churchill who, as Chancellor of the Exchequer, remarked in 1925, “I would rather see Finance less proud and Industry more content.” An excessive attachment to the interests of those who hold and manipulate existing assets, at the expense of those who want to create new wealth, is – after all – a characteristic of mature economies which have substantial assets to protect – and we have been a mature economy for 150 years.
But the era of self-regulation and the demands of the global market meant that this policy bias became magnified many times over. Economic policy as a whole was tailored over this period to serve the City’s interests – so consistently, and over such a long time, that it was no longer recognised as abnormal. There was, we were assured “no alternative”; the global market meant that if the City were not given free rein, others would muscle in on their territory.
So, monetary policy was given centre stage. The policy itself was handed over to bankers, so that it was no longer subject to scrutiny and Ministers were no longer accountable for it, but so that it could be decided for a limited purpose that – arguably – primarily served the purposes of one part only of the wider economy.
Macro-economic policy was largely abandoned. Keynes was dismissed and forgotten. Interest rates were pressed into service to maintain the value of the currency and to underpin financial assets that might otherwise have been regarded as of dubious value. Little or no attention was paid to the competitiveness of the rest of the British economy, so that any thought of following an exchange rate policy that would stimulate exports, employment and investment simply never occurred to our policy-makers; manufacturing in particular was allowed to continue its relentless decline. Most of our economic eggs were placed in the financial services basket and only City operators had access to the golden eggs amongst them.
That is why the global crisis has hit the United Kingdom harder than anywhere else. The financial meltdown has meant that we have nothing much else to fall back on. And that is why the government has gone back – cap in hand – to the authors of the great misfortune, to ask them to dig us out of the hole. There is no better hole to find.
Millions will pay the price of the financial collapse with their jobs, homes and taxes. But many more – and over a much longer period – will suffer in ways that they do not even recognise as a result of the policy priority given to City fat cats whose primary focus remains their own privilege rather than the British economy. Whether through indifference or cowardice, our politicians seem intent on perpetuating a 23 year-old error.
Bryan Gould
6 July 2009
This article was published in the online Guardian on 9 July