There is a Better Way: A New Economic Agenda for Labour / Edition 2

by John Grieve Smith

Overview

In this critical account of New Labour's economic and welfare policies in their first two terms in office, John Grieve Smith suggests that, far from pursuing any radical new agenda, they have been actively consolidating the Thatcherite Revolution. If Labour is to offer a genuine alternative to the Tories, and achieve its long standing objective of a fairer society, radical developments in policy are needed. John Grieve Smith discusses the policies needed to ensure expansion and full employment here and in the rest of the European Union. He examines the whittling away of pensions and other social security benefits, and the growing reliance on means testing, together with the need for higher and more progressive taxation if the quality of health and education services is to be improved.

Product Details

ISBN-13:	9781843311539
Publisher:	Anthem Press
Publication date:	01/30/2005
Series:	Anthem Politics and International Relations Series
Edition description:	Second Edition
Pages:	152
Product dimensions:	6.10(w) x 9.20(h) x 1.00(d)

About the Author

John Grieve Smith is a Cambridge economist with wide experience of government and history. He has worked in the Cabinet Office, the Treasury, as an Under-Secretary in the Department of Economic Affairs and then as Director of Planning in the British Steel Corporation. He is a fellow of Robinson College, Cambridge.

Read an Excerpt

There is a Better Way

A New Economic Agenda

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By John Grieve Smith

Wimbledon Publishing Company

Copyright © 2004 John Grieve Smith
All rights reserved.
ISBN: 978-1-84331-153-9

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CHAPTER 1

THE NEW ORTHODOXY

I do not know which makes a man more conservative – to know nothing but the present, or nothing but the past.

John Maynard Keynes

1. INTRODUCTION

Despite their day-to-day tactical infighting, New Labour and the Conservatives now share much the same basic political assumptions and economic philosophy. Instead of overturning the Thatcherite revolution of the 1980s, which initially they so bitterly opposed, New Labour have spent their time in office consolidating it, and seem set to continue the process in their second term. Many of their policies, and much of their rhetoric, now reflect what might be termed the 'Thatcherite consensus', rather than any new 'Third Way' — indeed we do not hear much about the Third Way anymore. But whereas the previous post-war consensus, which Mrs Thatcher and her allies overthrew, was essentially left of centre and consistent with Labour's basic beliefs, the current consensus is firmly on the right of the political spectrum, and at odds with the achievement of a fairer society, which has always been a common objective among the many strands of opinion within the Labour movement. The neo-liberal economic philosophy on which it is based is in many respects a reversion to the pre-Keynesian ethos of the inter-war era, and provides no answers to the problems of today's unstable global economy — any more than it did in the 1920s and 1930s.

Under Tony Blair and Gordon Brown, New Labour's response to the election defeats of the 1980s and 1990s was a striking case of 'throwing out the baby with the bathwater'. They went to extraordinary lengths to disown their predecessors' policies — often subscribing to the most inaccurate and misleading versions of history in doing so. In power, their deference to the rich and powerful, the fact that they are so much more sensitive to the interests of finance than those of industry, and their patronizing and authoritarian approach to the unemployed and others on benefit are all indications of a seismic shift to the right. One consequence is that many former Labour supporters, and people who would otherwise be active in the Labour Party, now feel disenfranchised. It is time to reexamine the neo-liberal economic assumptions underlying the current consensus and establish a more effective policy approach designed to ensure a better and fairer society not just in this country, but throughout the European Union and in the global economy as a whole — policies which will give us greater control over our economic destiny, and not leave us subject to the vagaries of financial markets and dominated by the ethos of financial institutions.

Full employment

The touchstone of economic policy in the post-war period has been Governments' attitudes to full employment. The maintenance of full employment is not merely about the number of people who can get jobs (important though that is), but also about the fundamental nature of society and the balance of power within it. In the post-war era when jobs were plentiful and new employees hard to get, workers, and the trade unions that represent them, were in a relatively powerful position. Governments listened to the unions. Managers had to pay attention to the views of their staff. Society was more egalitarian. The deliberate abandonment of full employment in the 1980s under Mrs Thatcher weakened the power of labour — as it was intended to do, not merely to slow down the rate of inflation, but to 'put the unions in their place'. It became fashionable to talk about 'the right to manage', rather than 'management by consent'. Inequalities in rewards which would have been unacceptable in earlier years became the norm. State provision of social security, health and education, which were basic to the standard of living of the ordinary citizen, were regarded as less important than reducing the levels of taxation on the well-to-do. There was a revolution in society with which we are still living today.

At first the Labour Party was bitterly opposed to the new approach, but in time it came to accept the new Thatcherite orthodoxy. Neil Kinnock deliberately excluded full employment from Labour's objectives, and by the time of his Mais Lecture in 1995, Tony Blair was talking about 'a new economic consensus'. New Labour's adherence to the New Orthodoxy has not only affected their economic policies, domestic and international, but also their approach to policy over a much wider field, including regional policy, welfare reform, income distribution, transport, education and health. The new philosophy, fashionable as it may be, not only conflicts with the fundamental objectives — or what should be the fundamental objectives — of any left of centre government; but the circumstances which led to its introduction no longer exist. Inflation is no longer the main danger facing the world economy. Neo-liberal economic policies offer no solutions to the problems of maintaining stability in an international economy increasingly subject to the vagaries of global financial markets.

In some respects Tony Blair and Gordon Brown have not adopted the policies needed to achieve it. Instead they have embraced the New Orthodoxy even more enthusiastically than their Conservative predecessors. This was exemplified by the way in which the new Chancellor announced the granting of independence to the Bank of England to fix interest rates within days of the 1997 election. This was later accompanied by statements that budgetary policy (i.e. changes in taxation or public expenditure) would no longer be used as an instrument of demand management. Although this might appear a purely technical matter, it is in fact one of major political significance. Taken at its face value, it means that what should be one of the major responsibilities of any democratic government, control over the level of demand for goods and services and hence the level of employment (in other words, people's jobs), had been passed over to a group of technicians — the Monetary Policy Committee. The alleged justification for this move is that politicians are too concerned with short-term electoral considerations to be trusted with such important decisions for the long-term health of the economy as monetary policy. But if this applies to monetary policy, why not to other major aspects of policy — public expenditure or defence, for example?

The underlying reason for the now fashionable view that monetary policy should not be under the control of democratic governments is the potential conflict between the objectives of keeping down inflation and maintaining a high level of employment. Central bankers tend to be much less concerned about unemployment than the politicians, and hence if the threat of inflation is the overriding concern demand management is regarded as safer in their hands. This approach is reflected in the Government's remit to the Bank, which sets them an inflation target with no mention of other objectives such as a high level of output and employment, or stable and competitive exchange rates. In the eurozone the European Central Bank has a similarly limited remit, couched solely in terms of inflation, despite the persistently high levels of unemployment in the major countries in the zone.

The implicit assumption that inflation is the overriding problem, rather than the maintenance of full employment, reflects the abandonment of the post-war Keynesian consensus by the 1979 Thatcher Government. Although ostensibly a response to the sharp rise in inflation in the 1970s, the Thatcherite revolution reflected a deep change in political values and objectives. To understand the emergence of today's consensus, it is necessary to look back at the evolution of economic policy over the whole post-war period.

2. THE EVOLUTION OF POST-WAR POLICY

The postwar consensus

Policy in the years immediately after World War II was dominated by a cross-party determination not to go back to the mass unemployment which had blighted so many lives in the inter-war years. Wartime experience had shown that full employment was possible if there was a high enough demand for labour; it made it plain that inter-war unemployment had reflected a shortage of jobs, not the unwillingness or inability of people to work. Maynard Keynes's thesis in his 1936 classic The General Theory that mass unemployment was due to inadequate demand for goods and services had gained widespread credence. Keynes's position in the Treasury during the war, together with the influx of like-minded economists, in particular James Meade in the Economic Section of the Cabinet Secretariat, meant that his views were a major influence in the preparation of the 1944 White Paper on Employment Policy which encapsulated the Coalition Government's commitment to post-war full employment.

The 1944 White Paper

The White Paper recognized that in the immediate aftermath of war the problem was unlikely to be any shortage of demand, but rather 'to secure with a limited labour force an adequate production of goods needed to improve our standard of living and increase our exports'. But once the period of transition to a peacetime economy was over, they had to resolve the 'long-term problems connected with the maintenance of an adequate and steady volume of employment which eluded solution before the war'. Keynes had pinpointed fluctuations in investment as a major source of instability in total demand, and the White Paper reflected this emphasis. It accepted that 'Monetary Policy alone, however, will not be sufficient to defeat the inherent instability of capital expenditure. High interest rates are more effective in preventing excessive investment in periods of prosperity than are low interest rates in encouraging investment in periods of depression' — something of which Governments might well take note today. The answer lay in the use of public investment as 'an instrument of employment policy', not merely keeping it stable, but bringing public sector schemes forward or holding them back to offset fluctuations in private investment.

This represented a victory for Keynes and those in the Liberal and Labour Parties who had advocated investment in public works as a remedy for unemployment in the 1920s and 1930s—an idea that pre-dated Keynes's development of any formal theory of demand. Indeed as early as 1917, a policy resolution proposed by J.R. Clynes and passed at the 1917 Labour Party conference stated that:

the Government can, if it chooses, arrange the public works, and the orders of the National Departments and Local Authorities in such a way as to maintain the aggregate demand for labour in the whole Kingdom (including that of capitalist employers) approximately at a uniform level for year to year; and it is therefore the first duty of the Government to prevent any considerable or widespread fluctuations in the total numbers employed in times of good or bad trade.

But throughout the inter-war period any proposals to combat unemployment by increasing government borrowing for public works ran up against the orthodox 'Treasury view', that to do so would only be at the expense of a similar amount of private investment. This was clearly not the case when resources were underused and bankers were prepared to make available the necessary finance.

Reflecting disagreements in the Treasury, the White Paper was exceedingly cautious about the use of changes in taxation to stimulate or damp down consumer demand. It did, however, give an airing to James Meade's scheme to vary national insurance contributions for this purpose — a proposal which had the practical merit that contributions were levied on a weekly basis and could be varied at any time during the financial year; whereas income tax was levied on an annual basis and could only be varied at Budget time.

Beveridge and full employment

In the same year as the White Paper, William Beveridge published his own report Full Employment in a Free Society as a sequel to the Beveridge Report on Social Insurance. Beveridge went further than the White Paper and proposed a more radical approach to the stabilization of private investment, with a National Investment Board encouraging and controlling investment. He also argued for the extension of the public sector of industry so as to bring monopolies under control and increase the scope for stabilizing investment. This was part of the case for Labour's nationalization proposals in 1945. Conversely when the reaction against the Keynesian consensus took hold, one of the arguments adduced by the right was to identify demand management to achieve full employment with the existence of a large state sector.

Controlling demand

The extent, if any, to which it is appropriate to use the various instruments of variations in interest rates, public investment, current government expenditure or taxation as means of controlling demand has been a continuing subject of discussion and controversy throughout the post-war period. But until 1997, all post-war governments relied heavily on changes in tax rates and all forms of public expenditure, even when monetarism was the official creed. Indeed, in the early post-war years no use was made of variations in interest rates. They were kept as low as possible to minimize the cost of servicing the wartime debt. The first Chancellor in the 1945 Labour government, Hugh Dalton, followed a 'cheap money policy' which resulted in bank rates remaining frozen at their 1939 level of 2 per cent until Rab Butler, the new Tory Chancellor, raised them to 2 ½ per cent in November 1951, and then to 4 per cent in the following March. Thereafter monetary policy became more active, but only as an adjunct to fiscal policy until the monetarist revolution in the 1980s.

In the immediate post-war years (as I know from my own experience in Whitehall in the early 1950s), the influence of the Keynesian economists in and around the Treasury was directed to using budgetary policy to curb the high level of pent-up demand and thus make possible the gradual dismantling of wartime controls and rationing. There is no substance to the myth, strangely perpetuated by New Labour, that full employment was maintained by pumping up demand and running large budget deficits. There was no need. Only in a small minority of cases did Chancellors have to introduce deliberately expansionary budgets to meet the threat of rising unemployment: Butler in 1953 and Heathcoat Amory in 1959 (both Tory Chancellors). The initial stimulus of post-war reconstruction, and confidence that full employment would be maintained ensured that the economy generated its own momentum.

Inflation in the 1970s

Beveridge foresaw the fact that the strengthened bargaining power of labour under full employment could cause inflationary problems: 'There is a real danger that sectional wage bargaining, pursued without regard to its effects upon prices, may lead to a vicious spiral of inflation, with money wages chasing prices and without any gain in real wages for the working class as a whole.' This problem was successfully tackled in the first 25 years or so after the war by a series of ad hoc prices and incomes policies. In what Michael Stewart has described as the 'Jekyll and Hyde years', the party in opposition routinely criticized the measures adopted by the government of the time and then found itself forced to take similar measures when it was in office. But no permanent machinery to ensure that wage increases were consistent with keeping inflation in check was ever established. Nevertheless from 1946 to 1979 UK inflation averaged 3.6 per cent a year despite the 1950 commodity price boom and the Korean War, while unemployment remained below 3 per cent throughout. It was the inflationary pressure resulting from the boom in primary product prices in the early 1970s and the succeeding oil crises that set in motion the forces that led to the break-up of the post-war economic settlement.

(Continues...)

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Table of Contents

Prefaces, Acknowledgements; 1. The New Orthodoxy: 1. Introduction; 2. Evolution of Post-War Policy; 3. The New Orthodoxy; 4. New Labour in Power; 5. Restoring Full Employment; 2. A Fairer Society: 1. Social Injustice; 2. The Balance of Power; 3. Industry and Social Partnership; 4. The Public Sector; 5. Paying for Public Services; 3. The Welfare State: 1. The Growth of Means-Testing; 2. New Labour's Inheritance; 3. Welfare Reform; 4. The Demographic Time Bomb; 5. Time to Take Stock; 4. The Future of the EU: 1. Further Integration; 2. Managing Demand; 3. Taxes and Public Expenditure; 4. The Labour Market, 5. A European Federation?; 6. Rethinking European Policy; 7. A New ERM; 5. Reforming the Global Financial System: 1. The Threat of Instability; 2. Improving Financial Regulation; 3. The Flow of Capital to Developing Countries; 4. The Role of Taxation; 5. Managing Exchange Rates; 6. The Future of International Economic Institutions; 6. A New Economic Agenda: 1. Breaking the Thatcherite Mould; 2. Towards a Fairer Society; 3. Rebuilding the Welfare State; 4. Making European Integration Work; 5. Taming Global Finace; 6. A Better Way; Index

Editorial Reviews

'An outstanding critique of New Labour's economic and social policies.' —William Keegan, Economics Editor and Associate Editor, 'The Observer'

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