Many people now assume that the Labour government allowed the financial markets to function without regulatory interference as a result of a Faustian pact. But this is simplistic and ignores the enormous amount that Blair and Brown achieved economically
There is an emerging consensus that New Labour did too little to reform the model of capitalism that it inherited from Thatcherism: that is why it all ended in tears. There was, it is argued, an implicit pact in which markets would be allowed to function without regulatory interference, particularly the financial sector and the banks, provided they generated sufficient revenue to fund investment in Britain’s public services.
Of course, there is some truth in the claim that given 13 years in office, a healthy majority and, until 2008, generally stable global economic conditions, Labour could have done more on the economy. But this should not obscure the fact that an enormous amount was achieved. To assume that New Labour’s chosen policy agenda was the result purely of a lack of political will, or worse, a ‘Faustian pact’ with the financial markets, suggests that Labour could somehow have run the economy very differently if only it had the inclination to be radical and bold. And that is simply not the case.
The truth is that New Labour did attempt to create a new capitalist model. This was a mixture of stakeholderism—in the sense of trying to increase long-termism, boost investment and so on—and of Clintonomics, which was characterised more by a focus on skills and education, as well as competition and innovation. Different terms were also used, like the infamous ‘post neo-classical endogenous growth theory’ that pointed towards believing that purposeful action could lead to improvements in growth rates.
This was not setting out to try to create a totally different economy. Nor did it attempt to throw out all the tools of what some call the ‘Washington consensus’ – privatisation, deregulation, free trade, fiscal discipline, shareholder value and so on. But the aim was to change the context in which capitalism – its firms and economic agents – operated through a whole nexus of policy shifts that in aggregate altered the incentives on markets and stopped the race to the bottom as a profit-making strategy. So if a dramatic shift towards the German model was not undertaken, there were numerous more modest moves towards the same goal.
First were important alterations to the external environment faced by firms – like the radical strengthening of competition policy. Others measures, like a great deal of the re-regulation of the labour market and the minimum wage, had social aims at their core but were clearly understood as altering the profit-maximising strategies of firms.
There was also an attempt to start influencing market pricing to capture externalities, especially environmental externalities. This included the first real green tax in the Climate Change Levy, landfill levies, aggregate taxes and changes to the structure of car taxation.
The second category of attempts to modify British capitalism was altering how firms accessed labour and capital. The focus on skills was crucial. In the early days Individual Learning Accounts were successful and very popular. Unfortunately, the scheme was bedevilled by poor design which allowed a small percentage of providers who were playing the system to discredit it. A second bold attempt to tackle the issue was the ‘Train to Gain’ scheme along with major increases in higher education participation and step changes in the number of apprenticeships available.
Linked here there was heavy investment in the physical and more intangible infrastructure on which firms depend. Thus, emphasis was placed on improving public services and ‘public’ infrastructure ranging from schools and universities, where science in particular, was transformed in the Labour years, to areas like Broadband and information technology, rail and roads. Regulation of the privatised utilities was also reformed.
The phrase ‘industrial policy’ was not a term frequently used as it smacked too much of a return to the old ‘picking winners’ approach. But moves of this kind were undertaken – like the support to the car industry given via Regional Selective Assistance and to the aerospace sector though Launch Aid. Tax credits for research and development (R&D) were a major and important change; investment allowances were also used, and the general drift of Labour policy was towards this type of ‘guided’ approach to ‘good’ investment rather than the classic free-market focus on reducing corporation tax generally.
Government tried to work to boost manufacturing – there were, for instance, innumerable publications, strategies and summits on the topic, which had been absent from the previous Tory years even if in some ways the Labour government was not quite sure what to do, faced with a long underlying trend of a shift away from manufacturing.
Regional policy moved decisively away from the ‘get on your bike’ approach of the Thatcher years or the garden festival/enterprise zone approach of Heseltinian activism, with the regional development agencies (RDAs) representing a major attempt to locate centres of industrial policy closer to the firms that needed help.
Finance for industry was tackled from the time of Peter Mandelson’s Knowledge Economy White Paper in 1998, with major steps to build up venture capital, start-up support and encourage university spin-offs.
Third were attempts to alter how firms operated, and how they interacted with their shareholders and other stakeholders. Shareholders were given a bigger role in determining the remuneration of executives – arguably one of the key levers to influence firm behaviour. Over time, pension trustees were given new duties to make them a bit more open and accountable. A potentially big intervention that never fully delivered was a major review of company law set up by the first DTI Secretary of State, Margaret Beckett.
Added to this were a number of reforms to make welfare policy more of a trampoline than a safety net. Tax credits made work more rewarding, as was the minimum wage. The number of families facing marginal deduction rates (MDRs) in excess of 70 per cent more than halved. A version of a more active, European-style labour market policy was introduced via the New Deal for Young People.
Some will say this set of policies was not ambitious enough but that may be to underestimate the set of plausible options available to Labour in the period. Perhaps more to the point are the critiques which say that while these measures could have been transformational, in too many cases successive Labour ministers pulled back from the more difficult and radical versions of them, or did not see them fully through, and so weakened the impact overall. Labour did not make all the right calls, nor was it brave enough on certain public policy issues.
Some of this was consequence of an acute sense of trying to keep business on board and more-or-less behind a Labour government. The bluff of the CBI and organised businesses was probably called less often than it should have been.
The biggest failure, clearly in retrospect, concerned the excessive growth of financial services either via the growing size and power of investment banks, equity funds, mergers carried out to manipulate short-term financial advantage or the excessive degree of credit and leverage individuals and firms took on. It is no excuse but there was a failure, shared by many on the left and the right both here and abroad, to comprehend the scale of the transformation underway in the financial sector, the potential risks attached to many of the new products and transactions that were devised and the degree to which moral hazard really was affecting risk taking.
The bubble eventually burst with significant consequences for the rest of the economy. Through vigorous action, Labour mitigated the worst of those consequences – something that coalition policies are busily reversing. But it would be wrong to dismiss economic performance before the crash. There was real productivity growth and real jobs were created for many people.
As social democrats operating in a world where options are significantly constrained – from mobile capital to tax-resistant voters – Labour will always have to make tough choices. Those constraints will not go away. Indeed, the pace of growth in China, Brazil and India means they will tighten. And despite popular anger at bankers, it does not appear that the electorate have emerged from the ‘crisis’ radicalised in their attitudes towards government and the economy.
The Labour record over 13 years was a sound one for social democrats in the modern world. Trashing that record is not going to persuade voters to support Labour again. What matters now is to build on the experiences of 1997-2010 by reflecting openly and critically about what worked in policy terms, and what did not. That is the serious task for Labour now.
This post is based on a chapter written by Dan Corry in the new book Reassessing New Labour: Market, State and Society under Blair and Brown, edited by Patrick Diamond & Michael Kenny (Wiley, 2011)
