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From neo-liberalism to ‘neo-nationalisation’ – for now

Labour have responded to the economic crisis. Once dissected, their response is shown up for the politically expedient sticking plaster that it is. On a more fundamental level, we are entering the beginning of a profound economic and political tumult: in a few short months neo-liberalism has transmogrified into neo-nationalisation. But how will things work out beyond that?

Austerity deferred, not avoided

In late November the Chancellor delivered his pre-budget report, the Labour government’s first systematic response to the economic crisis. Whereas in Ireland the state is responding to the downturn, and the reduction in tax revenues that will come with it, with austerity measures such as cuts in public spending and tax increases, Labour is ostensibly taking a different tack. Instead, Labour is aiming to take some of the edge off the impending recession by giving the economy a fiscal boost. The headline measures include a 2.5% cut in VAT from 17.5% to 15%, effective immediately and lasting until the end of 2009; a bringing forward of £2.5bn worth of capital expenditure and an increase in child benefit and from 2010-11; a £60 payment to every pensioner, and a deferral of a planned increase in vehicle excise duty. The package is worth £20bn and Labour hopes that it will lead to the economy shrinking by 0.75% in 2009, rather than 1.25%.

This fiscal stimulus is to be financed by an increase in government borrowing, reaching a record level of £118bn in 2009, with the national debt reaching 57% of national income in 2012-13, far surpassing Gordon Brown’s previous self-imposed ‘prudent’ limit of 40% and going over £1tr for the first time. This, in turn, will have to be paid back with tax rises and a squeeze in public spending from 2011 onwards, by which time the economy will supposedly be in recovery (and, coincidentally enough, after the next general election). Measures announced (so far) include an increase in income tax from 40% to 45% for those earning over £150,000, a 0.5% increase in national insurance contributions for both employers and employees, and a reduction in planned increases to public spending from 1.9% to 1.2%.

Within more hopeful (some might say naive or servile) circles, this package is predictably being feted as a return to the Old Labour values of social justice and redistribution. A more forensic analysis leads to a somewhat different conclusion. Take the cut in VAT, worth around £12.5bn (link). If this £12.5bn was instead distributed to every one of the approximately 40 million adults in the country in the form of an equivalent cash hand-out, it would amount to approximately £312 each. However, as it is being distributed in the form of a 2.5% VAT cut, it means that someone has to spend roughly £12,500 before VAT on affected goods in order to see £312 of benefit (this amounted to £14,688 including VAT prior to the cut, £14,375 now). This excludes VAT-exempt goods such as housing costs or food, and goods where the cut isn’t going to apply such as fuel, alcohol and cigarettes. Thus the VAT cut will disproportionately benefit those spending £14,375 a year over and above housing costs, food and fuel: the more they spend, the more they gain. Those who spend less than £14,375 on affected goods (such as those who have to spend the bulk of their income on staple goods and essentials) gain less from the cut than they would from a flat £312 hand-out: the less they spend, the less they gain. The VAT cut is disproportionately weighted in favour of those with higher disposable incomes. As for the higher income taxes on the rich, the estimated £2bn this will bring in pales beside the £35bn that will have to be pared back from planned public spending after 2011, and this will hurt those furthest down the ladder most of all. As Philip Stevens of the Financial Times said: “Mr Darling’s proposal to increase the top rate of income tax is rich in political symbolism but hardly relevant in economic terms. The extra sums raised would be only a small fraction of the necessary huge increase in the overall tax burden” (italics added). To sweeten the pill for UK plc, Alistair Darling gave in to a long standing demand of British business by exempting their foreign profits from UK taxation (link) and it should be noted that the CBI broadly approved of the report (link).

Furthermore, the success of Labour’s plan depends upon the Treasury’s somewhat optimistic predictions about the length and depth of this recession being accurate: as the Guardian’s Larry Elliott has put it, Labour are banking on the recession being ‘V-shaped’ – a short, sharp downturn followed by a sharp recovery and a prompt return to something like business as usual. While the Treasury publicly estimates that the economy will shrink by 1.7% peak-to-trough, the CBI are predicting a contraction of 2.5% (matching that of the recession of the early ‘90s) with unemployment hitting 2.9m by mid 2010. If the recession is any worse than the Treasury predicts then this will deepen the public debt yet further, leading to even sharper cuts in spending and more general, meaningful tax rises than a trifling, symbolic one on the very rich. At heart, Labour’s plan (which comes nothing close to what Obama has planned in the US) is no more than a cynical electoral ploy, intended to put off the worst consequences of the economic meltdown until after the next general election: it is not a package designed to avoid austerity, but merely to defer it.

Re-adjustment, not recession

There is no good reason for assuming the recession will be ‘v-shaped’. At every stage, mainstream commentators and neo-liberal apologists -including the Bank of England- have consistently underestimated the scale of the unfolding crisis: the direst predictions have been regularly surpassed, and then some. One economist who has famously read the situation with a degree of accuracy is Nouriel Roubini of New York University, who predicted the meltdown at an IMF gathering in 2006 and was mockingly nicknamed ‘Dr. Doom’ for his prescience. Summing up the world situation on 11 November this year, he wrote that “The prospect of a short and shallow 6-8 months V-shaped recession is out of the window; a U-shaped 18-24 months recession is now a certainty and the probability of a worse multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009 the recovery could be so weak because of the impairment of the financial system and of the credit mechanism (i.e. a growth rate of 1-1.5% for a while well below the potential of 2.5-2.75%) that it may feel like a recession even if the economy is technically out of the recession…  output will sharply contract in the Eurozone, UK and the rest of Europe, in Canada, Japan, and Australia/New Zealand… the flow of macro, earnings and financial news will significantly surprise (as during the last few weeks) on the downside with significant further risks to financial markets” (link).

This latter prediction is being handsomely borne out: such is the scale of bad economic news that it is sometimes hard to keep up. Since Roubini’s summary, the world’s largest bank, Citigroup, has been effectively nationalised by the US government in order to prevent it from going under, and the big three Detroit car manufacturers Ford, Chrysler and General Motors are staring down the barrel of a similar gun. Such a scenario would have been almost unthinkable just three months ago, now it is almost routine (to this we can add the bail-out that what’s left of the UK car industry wants, plus Toyota recording their first operating loss in 70 years). On one day alone (1 December), it emerged that UK manufacturing orders fell at record pace in November; mortgage approvals in October had fallen 63% year on year; sub-prime specialists/ vultures London Scottish Bank went into administration causing the government to guarantee all its savings, exceeding the new £50,000 limit; Aston Martin and HSBC announced hundreds of job losses in the UK each, and the FTSE 100 fell 5%. Meanwhile, the Financial Times reports that derivatives traders are betting hundreds of millions of pounds on UK house prices falling 45-50% from peak-to-trough (we’re currently down 16%, link), while interest rates are as low as they have ever been in the 314-year history of the Bank of England, and will go lower in January (they’ve already hit zero in the US). The IMF is now predicting that the world’s developed economies will collectively shrink in 2009 for the first time in the post-World War II period, and the Lib Dems economics spokesman Vince Cable -the only domestic politician to have shown much in the way of analytical competence throughout the crisis- has said “we are now in a wartime economy”.

And yet Labour still act, in public at least, as if the world economy will simply be able to shrug off a trauma of this scale with no great long-term after-effects. Rather than asking how long the recession will last and how bad will it get, perhaps it would be better to ask: is it even appropriate to refer to this as merely a recession, or a downturn? Or, is something more fundamental taking place? This would seem to be a conclusion that the Financial Times’ Martin Wolf is moving toward, judging by his response to the report: “The economy is being forced through a structural shift – from soaring household borrowing, a booming housing market, a bloated financial sector and rapidly growing public spending, towards higher savings and current account surpluses. The UK has enjoyed the fat years. Now come as many as seven lean ones … The era of soaring borrowing and the associated boom in finance is over… Even if the government does get away with its heroic gamble, the longer-term path of the economy must be quite different from that of recent years. Do the government or the British people understand the implications of such a shift? I doubt it.” (link).

So rather than a recession, what we’re looking at is a re-adjustment, the end of a certain type of capitalist accumulation which has come to dominate in recent years. We’ve seen the de-industrialisation of Britain (partly economic and organic; partly political and deliberate, as a means of weakening the working class) and a turn towards financialisation, with financial and property speculation (and cheap access to credit for consumers) replacing manufacturing as a major means of growth. Now, we’re looking at de-financialisation. But, and this touches on a question posed by the IWCA a couple of months ago that still remains unanswered (link), if “soaring household borrowing, a booming housing market, a bloated financial sector and rapidly growing public spending” (Labour’s public spending programmes, which have always largely been a means of transferring control over public funds and public institutions over to private capital via the PFI initiative, will take a major hit when austerity kicks in after 2011) are no longer available as sources of economic growth, what exactly is going to replace them? And if that question cannot be answered, what then is there to prevent a longer-term ‘L-shaped’ recession, or in Vince Cable’s words, “a scenario where we don’t fully recover, like the Japanese economy – we could have a long protracted bumping along the bottom”?

Another oft-repeated Labour claim is that Britain is better placed than others to withstand the coming turbulence. This claim is trashed by neutral observers such as the EU and the OECD, who have both reported that the recession will hit Britain harder than comparable developed economies (link and link). Given that the British economy, along with the US, is the most thoroughly de-regulated and neo-liberalised in the developed world, this makes perfect sense: the economy is contracting as a result of the financial and property bubbles bursting, and as the British economy was unusually dependent on those bubbles, the contraction here will be particularly great. Moreover, this is something Labour, and particularly Gordon Brown, bear direct responsibility for. Brown has overseen the development of the domestic economy since 1997. He has had ample time to make the country less dependent upon the financial sector. He could have put some controls on the Square Mile; he could have acted to protect and revivify domestic manufacturing; he could have taken some of the air out of the property bubble by increasing the supply of cheap, rented accommodation, for instance by halting and reversing the sell-off and degradation of council housing. He could have made a stand against neo-liberalism in all sorts of ways, and he never did it. In eleven and a half years Brown has shown precisely whose side he is on: that of capital.

The end of neo-liberalism

However, while treating Labour’s pre-budget package with the contempt it deserves, it would be erroneous not to acknowledge its ‘political symbolism’. The fact that the top rate of income tax has risen for the first time since 1974 does indicate that we are in new territory, that we are looking at some kind of paradigm shift, as does the conclusion of a recent London Assembly business forum that “Clearly London’s financial services industry is contracting. We heard about other areas of London’s economy that could be promoted to help its recovery. For example, manufacturing and particularly industries related to the ‘green’ economy” (link).  Purely on the principle of ‘know your enemy’ it needs to be acknowledged that, while capital has been utterly triumphant over labour and the wider working class during the past thirty years, it has now suffered a major setback. Neo-liberalism, in concert with the financial deregulation that goes with it, has always been beset by financial crises worldwide. That such a crisis has now struck in the core countries, and on such a staggering, irreparable scale, makes this the most important political event since the collapse of the Berlin Wall, far outstripping 9/11 in its historical importance. Francis Fukuyama, who declared the fall of the Berlin Wall as ‘the end of history’, has conceded, with a heavy heart, that “the Wall Street meltdown marks the end of the Reagan era” (link). The ‘structural shift’ that Martin Wolf has recognised prefigures, in political terms, the end of neo-liberalism. The three defining features of neo-liberalism are financial deregulation, privatisation (the decentralisation of economic decision-making power away from the state toward capital) and capital liberalisation. The first two are already going into reverse, while capital flows have effectively seized up of their own accord: the private sector in the developed world is no longer willing to lend or borrow among itself, it is only states that are now considered trustworthy. Global trade volumes are expected to shrink in 2009 for the first time since 1982, and both the Financial Times and the Economist are speculating about nations resorting to protectionism and autarky, bringing down the global liberal trading order (link and link). Just as the end of the Keynesian era was signified by the US taking the dollar off the gold standard in 1971, so the present crisis denotes the end of the neo-liberal era.

As neo-liberalism recedes, so will the political, social, moral and cultural norms associated with it. One such norm was the supposed transcendence of class divisions, exemplified by John Prescott’s claim that “we’re all middle class now”. Neo-liberalism held out the promise that every sovereign individual could -and should- become part of the shareholding, property owning democracy and attain middle-class status, provided they had the gumption. “Class”, Margaret Thatcher informed us, was “a Communist concept. It groups people as bundles, and sets them against one another”. The working class was no more: there were simply those individuals who had managed to get on board, and the underclass who had not. It was always a spurious breakdown (social mobility has declined, not improved, as a result of neo-liberalism, and it is markedly lower in the most neo-liberalised countries such as the UK and the US than in the relatively more social democratic ones), but now whatever truth there was to that picture is being swept away, as the property-owning dream turns into a nightmare. Access to the middle class is now being denied even to those who have played by the rules, and those who bought into the myth the most are now being kicked out of the club with the greatest urgency (“re-proleterianised”, if you will). The near-future, the next few years, will determine what will replace neo-liberalism. That depends entirely upon the balance of political forces, and how these elements jump will play a not insignificant role.

Neo-liberalism triumphed in the first place because its anti-working class, anti-democratic architects had been planning for it from the 1930s onwards. When Keynesianism collapsed in the 1970s -as the neo-liberals had predicted- they had a ready-made alternative to offer, starting in Chile, then Britain, then increasingly worldwide. The right spent decades preparing the ground for neo-liberalism’s triumph. The old left will not triumph now, because it has not done likewise: as the old collaborator himself, Milton Friedman, put it: “you never have real changes unless you have a time of crisis. And when you have a time of crisis what happens depends on what ideas are floating around, and what ideas have been developed, and thought through, and are made effective”. So, what are the runners and riders this time around? We are going to see, purely as a matter of necessity, an increased role for the state in managing the commanding heights of the economy. The key political question will be: how much of a role will the public play? Currently, the public, while picking up all the bills, is exercising no control. Genuinely democratic control of the economy is not currently an ideological contender: it is the job now of pro-working class elements to do the intellectual and political work to make it so. Some reversion to some kind of social democracy is not impossible, but it would be unlikely to last long. Social democracy was only ever a temporary compromise between labour and capital, and an inflationary, unsustainable one at that. Further, capital understood this at least as well as labour did, if not more so (it was from capital that the greater impulse to destroy social democracy came). For capital, it is neo-liberalism or bust, and now neo-liberalism has gone bust. Any return to social democracy now would be retrograde, reactionary and even less stable and satisfactory than last time.

An alternative to this would simply to be to retain the status quo in the longer term, with the state propping up capital with public funds while the public stays on the sidelines (as the economics editor of the Telegraph has said of the status quo: “This is not Old Labour – it is new nationalisation, or, for those on the other side of the Atlantic, neo-nationalisation” [link]). Will the public tolerate this, particularly given the widespread economic hardship that unemployment and repossession are about to bring? The public may begin to ask why, if the financial system, the car industry and whatever else ends up getting bailed out, are so important that they had to be rescued with public funds, should they remain under private/ state control? The public is about to be repoliticised whether it likes it or not, and keeping it excluded from the management of the economy would necessitate a further increase of the democratic deficit, or even a resort to authoritarianism (Frank Field, the man who thinks the unthinkable for Labour, is already pondering the possibility of a government of national unity [link]). The other possibility is a turn toward radicalism, and with economic democracy a dim and distant prospect and state socialism a discredited relic, this today means one thing: Euro-nationalism. Unlike the left, the far right genuinely do have something to build on, in France, Italy and Austria. Domestically, the BNP, following the French model, has momentum, far outstripping the dead, conservative left, who have -or had- the resources to match them, but not the new ideas. In times of economic crisis the middle classes jump right, not left. The working class, as ever, are up for grabs. If progressives don’t win their allegiance, the far right will. The end of neo-liberalism means that the political game is on again. Those who are serious about these matters are now required to step up to the plate.

3 Responses to “From neo-liberalism to ‘neo-nationalisation’ – for now”

  1. Charlie Marks Says:

    Good analysis regarding economics. Very interesting, and I think correct. The reference to “middle class” as discrete from working class always troubles me however. But then I suppose my alternative isn’t any clearer: “In times of economic crisis the intermediate strata jump right, not left.”

    The fact that we’ve taken out this huge loan to rescue the economy will be making a lot of people wonder why, if we’re paying for it, we don’t have democratic control over it. And that’s where arguments for economic democracy come in.

  2. huejack Says:

    Excellent analysis. The most interesting observation, utterly ignored by the mainstream pundits, is the likely social and thus political impact of neo-liberalism’s failure: the general public are going to be ‘re-politicised’ whether they like it or not.
    Another vital by-product of the crisis is that large sections of the populace who were encouraged to consider themselves middle class, will have to re-evaluate their own status. Painful especially for those who bought into the notion ‘that you are what you own’. As the article concludes the BNP are the likely beneficaries – in the short term. After that for the first time in 30 years everything is up for grabs.

  3. Napier Says:

    I’m not sure if the public will be re-politicised. They will however cast their vote for political parties with high profile and charismatic leaders who peddle populist policies that touch their hearts and minds.

    Any political outfit based around ideology, or small grassroots up movements are likely to be ignored.

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