Without a fairer, greener and more equal economy, the next crisis will be worse
This is what I said to today’s Beyond Crisis conference organised by the TUC:
My argument today is pretty straightforward: there can be no going back to business as usual. Unless we build an economy that is fairer, greener and more equal, the next crisis we face will surely be even worse.
The status quo is not, cannot, and must not be an option: we need change that is progressive, radical and sweeping. But before I set out our economic vision for the long term, I want to say a few words about where we are now.
And the short answer, unfortunately, is in a mess. With the UK still in recession, uniquely among the G7, with unemployment at almost 2.5 million, and with businesses and households reining in their spending, we are clearly a long way from any meaningful recovery.
Now the TUC applauds a lot of what the Government has done to limit the impact of the global economic crisis. From the rescue of the banks to the fiscal stimulus, the action taken by ministers helped stop a recession from becoming a depression – food for thought for those who mistakenly claim the crisis was the result of big government.
But despite this, our opponents on the right have captured the public debate about where we go next. The talk is not of nurturing recovery, nor of avoiding mass unemployment, but of paying down our deficit as soon as possible.
Yes, in the long term, Britain’s public debt is unsustainable and will have to come down before the gilt markets go on strike – but in the here and now, it is a distraction from the critical economic challenges we face.
Let me be clear about this. Public spending is the only motor of growth currently available to us. Swingeing cuts would increase the risk of Britain suffering a Japanese-style lost decade, would mean the unwelcome prospect of a jobless recovery, and would lead to the emergence of a so-called Zombie economy.
Not quite dead – but not exactly alive and kicking either. And the consequences would be devastating.
Not just the inevitable increase in long-term unemployment, nor just the loss to the private sector of so much government business, but the huge long-term costs – a lost generation of young people, a rise in social disorder and a sapping of confidence within Britain. This country would be set back years, if not decades.
The best way to repair our national balance sheet is not to go for quick wins now, but to lay the foundations for stability and growth for a generation ahead.
So today I call on everyone on the progressive centre-left to fight back – to expose what a ‘slash and burn’ approach to public spending would really mean in practice.
And as we campaign against the simplistic prescriptions of our political opponents, I want us to win an even bigger intellectual battle – to set out a genuinely progressive vision for Britain’s economic future.
Showing how, in the post-crash age, we can combine competitiveness with compassion, efficiency with environmentalism, and financial success with fairness for all.
With neo-liberal arguments discredited by last year’s crash – the biggest case of market failure in human history – we now have a unique opportunity to forge a new ideological settlement.
I believe there are three great priorities we must push for in the months and years ahead.
First, we’ve got to show how our economy can become greener.
The good news is there is an emerging consensus among progressives about the importance of moving to low-carbon growth, whether it’s through clean energy, electric vehicles, high-speed rail or a massive programme of home insulation.
As Germany and other countries have shown, it is possible to square the circle between job creation, competitiveness, and the fight against global warming.
And here in the UK we are beginning to get the right policy framework in place, not least the Government’s low-carbon industrial strategy and commitment to emerging technologies such as clean coal.
In the long run, this will help us re-balance an economy that has become dangerously lop-sided – over-dependent on financial services and London and the South East – helping us revitalise manufacturing, regenerate the regions and renew our infrastructure.
But here’s the rub. While we’ve made a compelling case for a Green New Deal, we’ve yet to answer the $64,000 question – how we pay for it.
Making the transition to a dynamic, competitive, low-carbon economy won’t be cheap; and if we are to convince the public of the need for radical change, we have to show how, as a society, we will foot the bill.
That’s why we need to explore all the options on the table – from green bonds to a dedicated not-for-profit green bank.
And this really takes me neatly onto what must be our second key priority – creating a new kind of financial system. One that works for us, not for itself.
That is more stable, more responsible and more responsive to the needs of the real economy.
It was systemic failings within the financial system that caused last year’s meltdown, and without systemic reform, history will inevitably repeat itself.
For three decades, the neo-liberal propaganda machine told us the road to economic success was to set finance free, to liberalise capital flows and deregulate the markets, to give the so-called masters of the universe the freedom to work their magic.
Well, a year ago this approach took us all to the edge of an abyss, a catastrophic economic nuclear winter.
Rather than leading to more efficient economies, it spread contagion and risk around the world in a way unimaginable just a generation ago.
So the case for fundamental, sweeping change is utterly compelling. Not just reform of the banks to curtail reckless risk-taking and obscene, sometimes taxpayer subsidised, bonuses. Nor just reform of the so-called shadow banking system, such as hedge funds, alongside greater oversight of the derivatives markets.
But a new focus on making finance pay its way, so that the industry meets its obligations to taxpayers and communities, repaying the huge debts it has bequeathed us, rather than floating free from the rest of society.
And I believe the issue of tax is absolutely key. That means clamping down on the tax avoidance that costs the Exchequer £25 billion a year, much of it emanating from the financial world. That means ending the scam that allows leading players in hedge funds and private equity to classify their earnings as capital gains rather than income.
And – above all – that means exploring the potential for an international transaction tax. With Gordon Brown joining Adair Turner in calling for such a measure, alongside key figures such as Angela Merkel, Nicolas Sarkozy and Paul Volcker – former chairman of the Federal Reserve, and a member of President Obama’s economic recovery advisory board – there is now real momentum for change.
And the case for such a tax – implemented globally to prevent footloose multinationals from moving offshore – is overwhelming. A 0.05 per cent tax on UK financial trades alone could raise as much as £100 billion a year – and would act as a brake on excessive risk taking and speculative transfers of funds.
And even if international agreement proved impossible, the TUC believes a transaction tax could be implemented domestically. For example a 0.05 per cent tax on instant sterling transfers between UK financial institutions could net £30 billion a year. The logic is clear for all to see.
The finance industry takes a small hit – a levy of one twentieth of one per cent – but helps repay the massive debts that the Government has incurred fighting the financial crisis.
Yes, there will be an inevitable backlash from powerful vested interests in the City – backed by a lobbying and PR machine of almost limitless resources. But I urge the Government to resist these siren voices, to make a decisive break from the failed orthodoxies of the past, and to focus on what will work in a new and very different economic age.
And the need for radical thinking takes me onto what must be our third key priority, ensuring growth is driven by wages rather than debt.
One of the consequences of letting capital rip over the past 30 years has been a significant squeeze in wages right across the developed world. This is not just an underlying cause of the catastrophic build up of household debt in both the United States and Britain, but also a key driver of the sub-prime mortgages and dodgy loans that have wreaked such havoc in the financial system.
The headline figures surely speak for themselves. Here in the UK, the share of our GDP accounted for by wages was 65 per cent in 1975 – today it is just 53 per cent.
The top one per cent of Britons now account for three times as much of our national wealth as the entire bottom half. And household debt has now reached a record total of £1.4 trillion.
While the super-rich and professional elite have prospered, those in the middle and at the bottom have suffered badly. And the upshot?
Britain has effectively become a low wage, high debt society of turbo-charged inequality and diminished social mobility. It’s only by getting to grips with this reality – perhaps the most pernicious legacy of neo-liberalism – that we will be able to lay the foundations of our future prosperity.
And where better to start than by setting up a High Pay Commission to look at the growth of wage differentials in the economy, to hold businesses to account for unacceptable reward practice at the top, and to expose bonus schemes that encourage reckless speculation and short-termism?
But we need to go even further than this, by developing a real policy focus on the ordinary wage earner. Recognising that higher wages – and a more even distribution of incomes – can help prevent deflation in the short term and boost demand in the long term.
Recognising that the balance of power within the employment relationship – for so long tilted in favour of the employer – urgently needs recalibrating. And recognising that unions have a key role to play in levelling the playing field – and that an intelligent engagement between government, business and unions needs to become part of the political mainstream.
As President Obama put it earlier this year: I do not view the labour movement as part of the problem, but as part of the solution – when workers are prospering, they buy products that make businesses prosper.
And it’s this fundamental connection – between the prosperity of working people and the health of the wider economy – that surely needs to be re-established.
I believe an economy driven by wages rather than debt, by ordinary workers rather than the super-rich, by spending power rather than trickledown, is an inherently better and more stable economy.
So there you have it – a simple, straightforward vision of a more progressive British economy.
Greener – as we focus on the low-carbon industries, jobs and markets of the future.
Fairer – as we seek to make finance work in the wider economic and social interest.
And more equal – as we concentrate on raising the wages of ordinary working people.
“Now I’m not naïve enough to think that this represents a fail-safe route map out of our current economic predicament. But I believe that by focusing on these progressive causes, by showing that they are an essential pre-condition for sustainable growth, by proving there can be no return to business or bonuses as usual, we can lay the foundations for genuine economic renewal in Britain.
“It won’t be easy. Advancing change of this magnitude rarely is. But let none of us lose sight of the potential prize on offer.
“A British economy that helps us win the battle against climate change.
“A British economy that delivers prosperity and opportunity for all.
“And a British economy that transforms our society for the better.”