Written by: David Clark on 14 February, 2013
Filed under Economy

Growth is certain to return to the British economy in advance of the next election, but there is no reason to think that it will be spectacular or that it will produce the kind of feel-good factor that would make the result a foregone conclusion. The Resolution Foundation predicts that average household incomes are unlikely to return to pre-crash levels until 2023 even if growth resumes at a reasonable pace, meaning that we are less than halfway through a lost decade and a half as far as most people are concerned. Despite the promise that ‘expansionary fiscal contraction’ combined with a bit of rebalancing would restore the economy to rude health, there has been no expansion and precious little rebalancing. Even the fiscal contraction bit is hopelessly off-track.

All of this means that voters are likely to go to the polls in 2015 with the feeling that something remains profoundly wrong with the state of the economy. In conditions of virtual stagnation, the Conservative plan to run an election campaign on the theme ‘the country is back on track – don’t let Labour ruin it’ won’t be enough. The winning party will need an argument that explains long-term economic failure under both Labour and the Conservatives, along with a plausible vision of reform capable of putting things right.

To the extent that the Conservatives think they have an answer to this problem it involves falling back on what they know best – deregulation, cuts and tax giveaways at the top. Despite the Big Society makeover of Cameron’s now abandoned modernisation, the party cannot shake its ideological conviction that more and freer markets are the answer to everything. So how do they explain the failure of the Thatcherite revolution to deliver this market utopia? By insisting that it didn’t go far enough. Like Trotskyists of old who saw Stalin’s Soviet Union as a ‘deformed worker’s state’, the Conservatives maintain that there’s nothing wrong with Britain that can’t be put right with a heavy dose of revolutionary purity.

Explaining the crash and our failure to recover from it is as much a problem for Labour as it is for the Conservatives, and Ed Miliband has given his own answer today. It is one that deserves our close attention for the radicalism of its intent. In summary, he has declared the New Labour growth model dead. This was basically the Thatcherite settlement with a bit of Fabian statism tacked on. It accepted the premise that markets act as wealth mazimisers when they are left to their own devices and government gets out of the way. It even internalised the idea that societies prosper when wealth is allowed to ‘trickle down’ from the top, hence Peter Mandelson’s infamous claim to be “intensely relaxed” about the “filthy rich” and Tony Blair’s general contempt for egalitarianism in principle.

That was the ‘New’ in New Labour. The ‘Labour’ part consisted of skimming from the surplus of a turbo-charged capitalism in order to compensate for its failures through public service investments and a complex system of in-work benefits. But the idea of marrying social justice to laissez-faire came to a sticky end in 2008. Wealth didn’t trickle down, it concentrated at the top. The decline in the share of national wealth going to wage-earners that started under Thatcher became a real-terms drop in incomes from the middle down. In a bid to maintain their lifestyles, people borrowed ever higher amounts against the nominal value of their homes from de-regulated banks that were happy to throw money at them. The principal drivers for growth in the New Labour years were therefore financial services, public spending and rising household debt. The whole thing was a bubble waiting to burst.

The crux of Miliband’s message is that you cannot build a stable and successful economy on the flimsy basis of trickle down. The distortion of wealth distribution in a financialised, de-skilled, de-industrialised economy that seeks competitive advantage through wage depression and a deregulatory race to the bottom leads to weakened consumer demand and dangerous financial imbalances. One of the most telling parts of his speech was his observation that over the last three decades less than 15p of every additional pound of growth has gone to the bottom 50% of the population while 24p has gone to the top 1%. As Miliband argued, “It’s no wonder our economy isn’t growing when people can’t afford to buy the things that British businesses try to sell”.

Recovery must therefore be built from the middle out, not the top down. It requires an active industrial policy to create more and better paying jobs in the middle, changes in corporate governance to shift the focus from short-term profit to long-term success, a national skills strategy with real training and apprenticeships, rolling out the living wage, new measures to clamp down on rip-off lenders and price-gouging utilities, and radical tax reform to put more spending power in the pockets of the majority.

Miliband’s speech is his most compelling step to take his party beyond New Labour yet. But it is also a challenge to the verities of Old Labour as well. A policy of nationalising industries that merely changed the name-plates without altering their basic structure or behaviour did absolutely nothing to advance social justice and left Labour without a serious vision of economic modernisation at a time when it needed one most in the 1970’s. Miliband is rejecting the failed orthodoxies of state planning and laissez faire and returning to the challenge that Old and New Labour both flunked – that of creating a British variant of the social market economy. While the 10p tax announcement is sure to grab the headlines, his most important commitments for me involved tackling the culture of short-termism in British industry and creating new responsibilities for companies to offer training and apprenticeships. Stakeholder economics is firmly back on the agenda.

For the last two years Miliband’s critics have fallen into two camps – those who argue that he doesn’t have a distinct economic vision and those who say that his vision is dangerously radical. The former can now retire into silence while the latter will have to explain why the economic principles that put other countries of northern Europe at the top of the global competitiveness league can only lead to disaster in Britain. This is an important moment and David Cameron’s floundering response to the speech shows that he’s worried. He isn’t equipped to win a living standards election and he knows it.