Labour’s future: A tale of two political economies

It is an indictment that in 2015, as it looks ahead to 2020, Labour is still trying to make sense of the events of 2007. Our leadership election looks set to be cautious and predictable – a phoney war which fails to address the intellectual challenges before us. Failing to address these now will lead Labour further into an electoral cul-de-sac which may take a generation to emerge from.

The country has passed a damning verdict on Labour, starkly demonstrating that our project was neither majoritarian nor mainstream. Now, Britain’s centre-left is facing a crisis of its political economy.

The many challenges we face include the social and cultural forces of Scottish and English nationalisms but we focus this essay on political economy, arguing that to make ourselves relevant again we must unite two strands of thought on the centre-left. At present, these two strands fail to understand one another. On their own, each has proved insufficient in responding to the shockwaves resulting from the global financial crash.

The first strand of thought understands the crash happened, but has learnt incomplete lessons from it. The second strand seems to barely have realised that the crash even took place. Only marrying these two strands of thought will create a viable centre-left project which can win again.

The first strand: the post-crash market

‎We begin with the first strand of thought. Its core political premise is that the centre-ground from which elections are won gravitated to the left in the aftermath of the crash. Global banking failures and subsequent state action to avert catastrophe confirmed that markets fail and that the state is the ultimate guarantor of our country’s material interests.

The market failures which facilitated the crash in 2007 have also long prevented an equitable distribution of economic growth. They exist in labour, such that the wages do not rise with workers’ productivity; in finance, prompting excessive concentrations of risk and the pursuit of short-term profit rather than long-term value; and energy, meaning anti-competitive prices for consumers while profits soar for an oligopoly of producers; to name but a few. They result from unfair and unregulated concentrations of power, which require intervention to correct. They underline that there is a reasonable distinction between responsible and irresponsible business, whether in the treatment of workers, consumers or the tax code.

The crucial argument in favour of this post-crash economic model is that in an age of fiscal constraint the state is less able to raise living standards through tax and transfer policy, making it fundamental for alternative policies to build an economy where workers can equitably share in its prosperity.

However, on its own, over the last few years, the first strand of thought proved limited due to three failures.

First, it did not seem to understand that building a more responsible market economy required the support of business. It is a distinct irony that over the last five years the Labour party had a vision of business which saw it as an engine of not just growth but also social equity in a modern industrialised economy at a time when the state’s capacity to deliver equity is severely diminished, yet it used rhetoric which at times demonised business rather than emphasised its central role in its outlook. Furthermore, no parameters or guiding principles for increased market intervention were communicated, making this approach appear ad hoc and potentially limitless.

Second, it was unable to demonstrate that its concern with rising living standards was a majoritarian project. Again, it is ironic that the first strand’s insight was based on the evidence of a fatal flaw in New Labour’s economic model – over many years of unadulterated economic growth, few people got pay rises. Again, however, rhetoric suggested that we were concerned only with the bottom 10 per cent. Policy levers are easier to pull for the bottom decile, hence more robust minimum wages and ending exploitative zero hours contracts. However, the challenge remains to make a concern over living standards relevant to those higher up the income distribution through both rhetoric and policy substance.

Finally, and most importantly, it ignores failures of the state. In the last five years we argued that the state must pursue a counter-cyclical fiscal policy to support the economy in recessions, without a sufficiently robust acceptance of the need to run surpluses in recoveries. Herein lies a fatal contradiction. For all its rejection of New Labour’s economic model, the first strand is unable to accept the straightforward view that New Labour should not have run a deficit on the eve of the crash – no matter how small. Thus we failed to adequately engage with the fiscal policy choices which were inevitable in the last parliament.

This intellectual failure was politically fatal because sound public finances are the first and most basic test of competence for a party that aspires to govern. Very often, the first strand’s fiscal argument was reduced to tactical feints, which were necessary, but fundamentally undermined by our tone on public spending which spoke louder than any individual smattering of prudence. This was all in spite of the fact that if Labour were in government now it would be cutting the deficit year on year. We had a budget responsibility lock on the first page of our manifesto, a commitment which was economically prudent by not tying our hands and prioritising capital spending, and not a single unfunded pledge in our programme. But the problem was that this had followed four years of condemning spending cuts. Speaking of the need for tough decisions but taking none sowed seeds of deep distrust. The scale of the verdict is all the more damning when one considers that our opponents broke every promise to clear the deficit over the last five years, announced billions in unfunded pledges and proposed the deepest spending cuts in history to meet a plan that lacked any economic credibility.

In an age of constrained public finances, fiscal responsibility will remain the single component of any political programme which will determine for voters whether we can deliver on the rest of that programme. Millions of people went into polling booths wanting a higher minimum wage, an end to zero hours contracts, an energy price freeze and more spending on the NHS. They did not vote Labour because they did not trust us to deliver them. Not being trusted on spending means not being trusted on anything.

The second strand: the post-crash state

We move to the second strand of thought. Its central insight is that the state must reform. It sees that New Labour entered the financial crisis in a weaker fiscal position than it should have and we should pursue future surpluses as insurance against future economic shocks, without compromising spending on public services and investment. Taxes should remain low, including for higher earners given the risk of alienating business and enterprise.

The welfare state is the modern centre-left’s single greatest achievement, yet its future is under threat from a crisis of legitimacy amongst a sceptical public. Its reform needs to be focused on those who can work being required to work and tackling long-term drivers of high spending, while empathising with how aspects of the system can undermine the public’s sense of fairness. This strand recognises that concerns over public spending drives contention over access to the welfare state, just as they do the impact of inward migration on public services and welfare.

This strand believes that public services should be run in the interests of their consumers and not their producers, and we should be steadfast in reforming them to ensure as much. It sees its challenge to reform public services when there is less spent on them by tackling social problems at root cause through joined up and, where possible, localised structures.

However, on its own the second strand will also not succeed as a political project due to three failures.

First, it might accept the premise that New Labour entered the crisis in a weaker fiscal position than it should have, but it fails to ask why. In failing to do so, it misses the fundamental point that New Labour had an economic model which necessitated increased borrowing. Whenever tax revenues fell short, borrowing was the only answer on how to fund a £15bn system of transfers which subsidised an economy in which wages did not keep pace with productivity, among other items. Of course, the system was a policy success given the record numbers of children it lifted out of poverty. However, the flaw remains today that, in the absence of such a system, there is little left to lift children out of poverty.

Second, there is an inconsistency. The logic of tackling concentrations of power in the state so that public services are run in the interest of the consumer is not applied to concentrations of power in markets. As David Miliband has written, “In truth the Third Way discussions of the 1990s were too weak in addressing issues of economic power, in the workplace and elsewhere. There seemed to be sufficient common ground to facilitate win-win solutions. But the stagnation of wages, among other matters, has shown that this perception was optimistic at best. Economic empowerment needs a harder edge.” This harder edge means a policy approach which addresses problems in markets like energy, finance and low-wage labour. It requires robust and, at times, what could be seen as heavy-handed intervention.

Finally, having no rounded critique of markets in the aftermath of the crash means this strand has little to offer by way of raising living standards in an age of fiscal constraint. It is all the more limited given its unwillingness to countenance higher taxation for high earners, whether on assets or earnings. It limits the project to the reform of public services – a noble goal yet not sufficient. It will never be able to provide answers beyond this without understanding how and why 2007 happened and how it changed the lay of the land.

A new political economy

There may exist a post-crash centre-ground from which Labour can win again. But it can only be reached if both these two political economies fuse and resolve their respective intellectual inconsistencies and presentational failures.

As long as these two political economies remain distinct, Labour will be confined to where it has been since the crash. Fiscal rectitude on the centre-left will never succeed if its advocates do not accept that there can be a role for the state in correcting market failures that entrench inequalities.  On the other hand, a commitment to a reformed state, particularly through fiscal responsibility, is the political pre-condition for a tough economic reform agenda.

So what needs to done?

First, the acknowledgement that we live in an age of fiscal constraint must be coupled with an intellectual and political acceptance of it and the policy decisions this in turn requires. Our future fiscal prudence must be reflected in every sinew of our body language. This is the most fundamental building block of a new project.

Second, while the reform of public services is unquestionably essential, there can be no going back to an agenda that does not place equal emphasis on economic reform. A modern centre-left party must be concerned with raising the living standards of the majority, not just those at the bottom of the income distribution. This means accepting that concentrations of power which harm consumers must not be tolerated in the market as well as in the state.

Third, delivering an agenda which raises living standards depends on the state working in partnership with business, ensuring that business acts responsibly through cooperation not demonisation, and where the case for interventions is clearly defined to correct failures, while just as crucially, creating the conditions for business growth and innovation.

This could form the basis of a majoritarian agenda for Labour, appealing to those we failed to attract in May and must do in 2020, whether those groups who swung to the Conservatives or those who deserted us for smaller parties, all of whose electoral priorities included an improved NHS, economic growth, cost of living and public spending.

Several decades ago, the Third Way fused the support for markets with an effective state. The end of that political project came in 2007 and in its aftermath when both markets had been proven to fail and the state was forced into a retreat. Today, Labour’s leadership contenders stand at the foothills of the project that can replace it. The centre-left needs a new political programme which prioritises reform of both market and state, rather than reform of one and tolerance of the other’s failings.

The writers worked as advisers to Labour politicians in the last parliament. They are anonymous and write in a personal capacity.