Progress

John Major once waxed lyrical about Britain as a ‘country of long shadows on cricket grounds, warm beer, invincible green suburbs, dog lovers and … old maids bicycling to Holy Communion through the morning mist.’

While the then prime minister’s sentimentality was roundly ridiculed, wanting to turn the clock back to an idealised past is par for the course for conservatives. What, though, are we to make of ostensibly progressive voices such as Jon Cruddas and Jonathan Rutherford clinging on to a romanticised Olde England, albeit a grittier one of community-owned ports and ancient fish markets? ‘Labour’s future in England is conservative’, they declare. Really?

On one thing, the need for financial reform, Cruddas and Rutherford are right. As I argue in Aftershock: Reshaping the World Economy After the Crisis, our bloated banks need to be broken up. Britain’s financial sector is a government-subsidised racket that makes monopoly profits in good times, gets bailed out in bad, crowds out productive industries, destabilises our economy and subverts our politics. Just because the government taxes away some of those monopoly returns doesn’t mean that the UK benefits from being fleeced by the financial sector.

Unfortunately, the rest of Cruddas’s and Rutherford’s often incoherent argument is wrongheaded. They defame New Labour by lumping it together with Enoch Powell, ‘the prophet of the Thatcher revolution’, while also accusing it of destroying the party’s English working-class roots by abandoning the country to immigration and multiculturalism – the very things Powell hated. So were New Labour and Enoch Powell intellectual soulmates or mortal enemies? They can’t be both. And when the two authors call for Labour to ‘confront and turn the page on what Powell started’, their prescription sounds a lot like watered down Powellism: Labour, they argue, should ‘fight for an England which belongs to the English just as they belong to the land’. Nick Griffin would no doubt agree.

Their analysis of last year’s election defeat is also confused. The notion that Labour lost because it was New Labour is bizarre. Tony Blair assembled a broad coalition of voters that delivered three election victories. While the Iraq war did a lot of damage in 2005, New Labour still won. What changed between 2005 and 2010? Gordon Brown proved to be a disastrous prime minister. The man who boasted that he had abolished boom and bust presided over the worst recession since the 1930s – a global crisis, yes, but one which this champion of the lightly regulated City did nothing to prevent. And while people weren’t convinced by Cameron’s Conservatives, they were mightily sick of 13 long years of Labour rule.

Yes, of course Labour needs to reconnect with those white working-class voters who feel it does not address their concerns about housing, jobs and public services. Labour’s biggest failure in office was housing: cheering on the property bubble while not building enough social housing. Affordable housing should be at the centre of the next manifesto: a tax on land values, for instance, would encourage the private sector to redevelop brownfield sites and help pay for a new generation of affordable homes. Labour can improve on its good record on jobs with a Danish-style commitment to lifelong learning and employability, combined with a generous but tough welfare system that provides a hand-up rather than a hand-out. Increased investment in transport – another area where Labour failed to deliver – would help spread growth and opportunity. Last but not least, a genuine commitment to good education for everyone, especially the poorest – not a piffling pupil premium carved out of a shrinking education budget – is essential. We can learn from Finland, whose schools are rated the best in the world. All this could help break the vicious cycle of deprivation that is scandalous in a rich country like ours, while also stimulating growth.

It would be a terrible mistake, though, to wrongly blame our economic and social problems on Britain’s openness to the rest of the world. Trade with China, foreign investment and Polish workers all boost growth and create jobs. Now, more than ever, if we are to break out of our unhealthy reliance on debt-fuelled consumption, housing and finance, our future prosperity depends on exporting to China, investment from India, educating foreign students and a diverse workforce that generates new ideas and businesses. And an open economy also needs to be flexible – otherwise we could end up like Spain, with a 20 per cent unemployment rate and 40 per cent of young people out of work. There is nothing progressive about a rigid labour market that ossifies the economy and excludes outsiders.

In any case, Labour cannot win again solely by appealing to a dwindling band of white working-class English voters. It also needs to win back middle-class voters, those of immigrant descent, and Scottish and Welsh voters for whom talk of ‘forever England’ holds little appeal. Labour needs to be about tomorrow’s Britain – which, like today’s, will be wonderfully diverse.

In our age of easyJet, Facebook, curry and kebabs, American TV shows and foreign news, Greenpeace and other global campaigns, national boundaries are blurring, while people within Britain are also freer to express their differences since the liberating 1960s. Is that such a bad thing?

While Cruddas and Rutherford fret about ‘what in our differences do we hold in common?’, the answer is simple: we live in the same country, vote in the same elections, accept the rule of the majority while protecting the rights of minorities, use the NHS, watch the BBC, speak English, and share aspirations for a richer, fairer and more secure future.

Our diversity too can unite us. Since modern Britain is inescapably diverse, any definition of shared identity that fails to recognise this inevitably excludes some members of society and thus divides it. Londoners treasure the city’s diversity as a key part of its identity. We all celebrate diversity in national football teams – is it such a stretch to apply this more widely? Our diversity ought to be a source of strength, not of weakness, a reason to belong not an excuse to exclude. We should embrace it rather than seek to deny it.

Tony Blair once said that ‘we’re at our best when at our boldest’.
Gordon Brown is – finally – heeding that advice. His plan to shore up
Britain’s banking system is our best hope of pacifying the financial
panic, getting credit flowing through the economy again and avoiding a
1930s-style depression. No wonder it is being copied across the world.

The need for massive state intervention in the banking system is
regrettable. But exceptional times call for exceptional measures.
Britain – and the world – is suffering a full-on financial heart
attack. Unless the financial arteries of the economy are unclogged
soon, huge job losses, bankruptcies, repossessions and a sharp fall in
living standards beckon.

The government must do whatever it takes – including, if necessary,
fully nationalising Britain’s banks for a while – to rescue the economy
from financial oblivion. Once the immediate crisis has passed, better
and tougher financial regulation should be a priority. But while the
glaring failings of global finance clearly need fixing, should the rest
of the economic rulebook be torn up too?

Many on the left think so. Ken Livingstone, the Guardian’s Seumas
Milne and others argue that the government should turn its back on
market economics. Since capitalism seems to be collapsing under the
weight of its internal contradictions, they believe, the government
should finish it off and regulate left, right and centre. More measured
voices, such as the TUC’s Brendan Barber, favour a ragbag of measures
such as curbs on boardroom salaries and a new industrial policy.

But the priority now is tackling the crisis and averting a
depression; everything else is a dangerous diversion. If struggling
businesses that have just had their overdraft cut fear that they are
about to be clobbered with higher taxes and more red tape, investment
and jobs will suffer. The last thing a heart attack victim needs is to
have a healthy leg amputated.

The government’s bank rescue
plan needs to be accompanied by measures to support the economy, not
shackle it. The Bank of England should continue to cut interest rates,
soon. Even though inflation is well above the target rate of two per
cent, it is set to fall sharply as oil prices tank. Collapsing demand
means that the real threat now is deflation, not inflation.

Some argue that the Bank of England’s independence should be
compromised. But that would be a mistake. Even the perception of
political meddling in setting interest rates would add to financial
uncertainty, undermine the credibility of monetary policy and raise the
cost of government borrowing. As we learnt to our cost in the 1970s and
the late 1980s, letting inflation rip does not lead to a sustained
improvement in unemployment and economic growth; quite the reverse.

But once the crisis has passed, the government should reform the
setting of monetary policy. The Bank of England’s target measure of
inflation should be amended to include housing costs. Its mandate
should also be broadened so that it takes more account of asset prices.
This would allow the Bank to raise interest rates to prevent bubbles
getting out of hand – and thus avert future busts.

Faced with the threat of a depression, the government must not be
hamstrung by its fiscal rules. Rightly, the government plans to borrow
huge sums to finance the rescue of the banking system. It is well
placed to do so since government debt as a share of GDP is low. This
need not increase the national debt in the long term: Sweden’s
government turned a profit on its investment when it rescued its banks
in the early 1990s. The government must also be ready to boost demand
with tax cuts and spending increases if the recession turns really
nasty. Fiscal tightening will certainly be needed – but only once the
economy is recovering.

The bigger question, though, is whether, once the immediate crisis
has passed, economic policy in areas other than finance needs to be
revised. Leftwing populists have been quick to bury what they describe
as the era of ‘unfettered markets’, but an economy where the government
takes around 40 per cent of national income in tax, pays for and
provides essential services such as healthcare and education, and
regulates everything from employment rights to credit-card contracts,
can scarcely be described as one where the state has shrivelled and
markets have free rein. So the issue is not whether the financial
crisis sounds the death-knell for the free market, but whether it tips
the balance towards greater state intervention.

That question is in fact two: first, does the crisis in financial
markets suggest that competitive markets more generally do not work as
well as we previously thought?; and second, will the crisis shift
public opinion towards supporting a bigger role for the state? My
answer to the first question is no; and while the answer to the second
question is still unclear, people do not appear to be hankering to turn
the clock back to the 1970s – notwithstanding the success of the TV
series Life on Mars.

As I wrote in 2002 in my first book, Open World: The Truth about
Globalisation: ‘Financial markets are unlike other markets. They are
inherently unstable. They are prone to Manias, Panics, and Crashes …
Why? Because they involve bets on an unknown and unknowable future.’
Product markets are very different: the market for cars or baked beans
is not prone to destabilising speculation – and even if people did
start gambling on the price of baked beans, its impact on jobs and the
economy would be limited. The temporary part-nationalisation of
Britain’s banks does not call for increased intervention elsewhere.
Royal Bank of Scotland may have come unstuck, but Tesco continues to
deliver the goods.

Faced with a nasty recession partly caused by reckless lending in
the US, the temptation to blame outsiders for our woes will grow. But
we shouldn’t throw the baby out with the bathwater. Britain benefits
hugely from its openness to foreign products, ideas and people. The low
prices in ASDA and Primark are only possible thanks to free trade, and
commerce with China will provide many of the jobs of the future. Recent
migrants from eastern Europe have filled vital jobs and revitalised the
economy through their dynamism. Beggar-thy-neighbour protectionism made
the Great Depression much worse; we would be crazy to repeat the same
mistake.

Britain’s flexible labour markets will be a key strength in the
tough times ahead. They allow the economy to adapt rapidly to change,
helping to redeploy workers from shrinking industries to growing ones
and keeping unemployment down. Combined with measures to make work pay,
help people find jobs, and equip them with the skills they need, New
Labour’s labour-market policies stand us in good stead. We should not
be trying to protect yesterday’s jobs at the expense of tomorrow’s.

While tax rises will probably be needed in the medium term to pay
for the costs of the crisis and an unexpectedly deep recession, support
for higher taxes is hardly likely to be an election winner. Taxes must
also remain low enough to support opportunity and enterprise. If
working hard and starting a business is not rewarding enough, economic
growth will suffer – and with it the ability to invest in public
services. And unless public services continue to be reformed, with
choice driving up standards and giving people what they want, voters
are likely to feel their money is being wasted.

With Labour so far behind in the polls, the only chance of recovery
depends on rescuing the economy from the worst crisis since the 1930s.
Brown has come into his own in the past month, while the Conservatives,
who are unconvincing critics of City practices, are flailing. But
lurching to the left in the mistaken belief that markets no longer work
and that voters are crying out for bigger government would be a huge
mistake.