A Plan C to revive our faltering economyOriginal
18 Sep 2011
Prateek Buch from the Social Liberal Forum argues for a mix of reforms that rescue our economy from the doldrums in the short-term without propping up the rotten structures that lead us into crisis.
Summer 2011 has seen a debt-laden Greece bailed out once again by its neighbours, traders circling above Spanish and Italian bonds, and the American debt-ceiling crises. Although largely self-inflicted, when added to stock market volatility not seen since the dark days of Lehmann Brothers’ collapse it added to a sense of real crisis across advanced economies.
This drama played out while the financial world, where much of the trouble originated, remains largely unreformed. Unwilling to wean itself off the crack-cocaine highs of short-term gain, claiming spectacular rewards that most people recognise as grossly unfair, the industry passes off the depressing lows of failed gambles onto the public's shoulders.
In rhetoric at least the Coalition government remains resolute; reduce the budget deficit mainly by cutting public spending, ensure loose monetary policy – Plan A, if you like – and Britain will be secure from the ignominy of having its debt downgraded. Chancellor George Osborne MP even prescribes similar medicine for other nations navigating choppy economic waters, but at home serious concerns remain. Even a cursory glance at a number of economic indicators, from GDP growth to retail sales and inflation, suggests that the veneer of stability over the British economy masks a rotten core.
Business Secretary Vince Cable often describes the 2007/8 crash as a heart attack; recent data is more reminiscent of chronic heart failure, a deficiency in pumping money and jobs, the lifeblood of economic vibrancy, around the nation's vital organs.
Thus a new economic settlement is needed to encourage growth in the medium term and to ensure that the proceeds of growth accumulate more fairly than in recent years when ‘trickle-down’ economics has clearly failed. What are the values on which the new economic era should be based, and how might these broad principles translate into policy?
Labour's Plan B has to date failed to acknowledge quite how culpable yesterday's policies make them for today's woes. A dependence on the revenue from unsustainable speculation in the City and debt-fuelled consumer spending to fund public spending, combined with a failure to foster investment in the real economy, contributed to both the deficit and the paucity of escape routes from the concurrent recession. Ed Balls and Alistair Darling have made arguments for a slightly extended timetable for deficit reduction, with precious little indication of how cuts under Labour would differ in nature rather than speed. The IPPR have previously suggested a ‘deficit-averaging approach,’ which would, if delivered with appropriate political leadership, help retain market confidence in long-term fiscal discipline and be more sensitive to the negative effects rapid deficit reduction may have on growth, investment and levels of employment, and as such should be seriously considered.
The Coalition concedes the need for policy to encourage economic growth alongside spending cuts, although the Chancellor’s Plan for Growth focuses on profit-friendly tax measures and boosting exports that are unlikely to promote either growth or investment in the face of stalling domestic and global demand.
My call for a Plan C, focussing on sustainable, equitable and investment-driven growth, was given a flattering and unexpected endorsement at June's Social Liberal Forum Conference. Vince Cable acknowledged in his speech that deficit reduction was necessary but not sufficient to foster a real recovery. To stay on message Vince called this approach Plan A+, which as well as classic supply-side reforms (deregulation, extensive lending from banks to businesses and loose monetary policy), emphasises boosts to the demand-side such as green investment, a focus on manufacturing and apprenticeships. In essence, policies along the lines of those discussed in the IPPR pamphlet 'Going for Growth.'
Vince's friend and fellow Parliamentarian Lord Robert Skidelsky, and The Guardian's Julian Glover, have expanded on the theme. They see the need to go beyond the textbook economic theory of expansionary fiscal contraction and implement a Plan A+/C (I'll stick to my nomenclature). But since the Chancellor appears fixated on Plan A – which as the IMF's new Chief Mme Lagarde pointed out risks 'stalling the global recovery' – it appears it's up to progressives to supply the route to growth.
I believe that a Plan C based on the social liberal economics of Hobhouse, Keynes, Amartya Sen and Will Hutton will help address three key areas: the short-term need to keep people in work; the mid-term need to rebalance the economy; and hard-wiring sustainability and fairness into the economy in the long run. Hutton in particular spoke with great passion of the need for a new economic paradigm at the SLF conference and has expanded on this call in his Observer column. There's also much to be learned from behavioural economics, as well as more orthodox thinkers such as Joseph Schmpeter that social liberals might not be so comfortable with.
Plan A's reliance on balanced budgets and slimmed-down government fails to account for the dampening of aggregate demand, and more importantly of confidence, in the face of uncertainty. Aside from the straightforward Keynesian consequences of lower demand, a perverse impact of Osborneomics appears to be investors' reluctance to support the real economy, preferring to lie low in the safety of government bonds. Record private-sector surpluses indicate a dearth of viable investment opportunities and risk deflation, so we need policies that unlock this capital – beyond the tired reversion to Quantitative Easing – implemented in a way that 'crowds in' private investment and helps create jobs.
So Plan C, Part One, should expand on the thinking behind the government's Enterprise Zones, which it is claimed will create thousands of jobs. To date these Zones are designed to encourage business development through reduced regulation and taxation. To be truly effective, and to avoid the risk of the Zones providing only a transient boost to deprived areas, the government needs to recognise that a successful economy is a joint venture between public and private spheres – not by replicating the PPP/PFI fiasco, but in the way that Korean economist Ha-Joon Chang describes. Perhaps the State-owned Enterprises (SOEs) Chang advocates would be hard to swallow for British free-market zealots, but if both exposure to risk and potential for returns on investment are fairly constituted, the Enterprise Zones could house a new breed of stakeholder-driven corporations that revive investment in our chronically underfunded infrastructure and ensure that the fruits of said investment don't just accrue to the few. Focussing investment on green technology would also help foster the transition to a low-carbon economy, which allied to the Green Investment Bank should form a central plank of public policy.
Part Two of Plan C should rebalance the economy through radical reform of financial services – not to put bankers back in their box, but because we recognise the centrality of a healthy and transparent sector to real growth and prosperity. The Social Liberal Forum successfully argued for tougher action on banks and bonuses at its Spring conference, and the Independent Vickers Commission on banking has proposed far-reaching reform that means the effective separation of retail and investment banking as well as making banks easier to resolve in case they fail. In responding to Vickers the Government should make further bold reforms to the financial services sector including (this is a non-exhaustive list): creating an ecosystem of varied, local financial institutions that are connected to the businesses they're investing in; regional stock exchanges to bring capital closer to where it's being put to use; more direct investment between companies, learning from Germany's model; and investment vehicles more attuned to the long-term stability of a firm. Financial transaction taxes may also form part of Plan C, but only if they can be implemented without their costs being passed onto pension funds and other investors The Liberal Democrat proposal to give away shares in currently nationalised banks is admirable and liberal – but instead of dispersing 100% of the shares in this way we should use some to fund a National Investment Bank along the lines of Lord Skidelsky's proposal. Crucially, we need to retain democratic oversight and sovereignty over our economies, which are both under threat from unaccountable and self-interested credit ratings agencies. Nothing short of a complete overhaul, including publicly funded ratings and greater transparency, will suffice.
Lastly, Plan C Part Three must review the rotten corporate governance and welfare structures that have spawned disproportionate rewards for the few whilst eroding security and wages for the many. Gone are the days – where they ever existed – when companies were loyal to workers from apprenticeships right through to senior posts. Ordinary workers feel the chill winds of market forces in the form of stagnant wages in an insecure globalised labour market. There might be no one-stop solution, but rather a basket of policies that may help. As well as an enhanced but less adversarial role for unions, we need more industrial democracy that ranges from employee representation on remuneration committees to giving a real voice to workers in the direction a company goes in, not just in mutuals but in all corporations. This democratisation of the workplace could be achieved through changes in corporate governance, which are currently being considered by Vince Cable’s Department of Business, Skills and Innovation. Such a move would engender fairness intrinsically in the workplace, redistributing both income and power before the tax system even gets involved. These policies are worthy because they're fairer, but they're also likely to enhance ordinary consumers' purchasing power and stimulate growth through spending.
Austrian economist Joseph Schumpeter described capitalism's waves of 'creative destruction.' The centre-right claims this validates laissez faire policy, but for me these periodic fluctuations warrant policies that shield ordinary people from the worst consequences of capitalism. Many European countries embody this through a welfare state based on the principles of 'flexicurity,' recognising that if labour is to be flexible then losing one's job shouldn't mean being put on the scrapheap and losing one's home and family life too. With an emphasis on training and employee security, welfare reform needs to aim to foster full employment. Flexicurity can help secure this aim.
All in all, Plan C should be a mix of reforms that rescue our economy from the doldrums in the short-term without propping up the rotten structures that lead us there, and it should focus on sustainable long-term prosperity without condemning the current generation to misery. Bold, progressive and focussed on enhancing the capability and liberty of ordinary people, we should back Plan C as the way to a fairer political economy.
Dr Prateek Buch is an executive member of the Social Liberal Forum.