The opinion polls seem clear enough. In six months Britain will have a Conservative government armed with a mandate to scale back the state with immediate effect and all Labour can do between now and next spring is prevent heavy defeat becoming a wipeout.
While this may prove to be true, it is curious nonetheless. David Cameron has been amazingly successful at shifting the political battle onto his own ground; he has disguised a strategically weak position with tactical elan. Labour has done the opposite; it has allowed a strong strategic position to be nullified by the darts and feints of the opposition.
Let me explain. Cameron’s main argument – that the economic mess we are in is the result of the failing of big government – is the precise opposite of the truth. The reason for the crisis was not that the state was too active, but that it was too passive. For three decades, from the mid-1970s onwards, regulations on finance were relaxed, markets were unshackled, taxes were cut.
Paul Davidson, in his new book The Keynes Solution, puts it this way: “During almost all of the last four decades the public debate over economic policy has been dominated by the belief that if self-interested individuals are permitted to operate in a free market without government interference and regulation, and without worrying about other members of the community, the resulting free market will bring the economy to nirvana.”
Market fundamentalism has been found wanting these past two years. The economics profession has stood aghast as, one by one, its sacred cows – self-correcting markets, rational expectations, efficient markets hypothesis – have been slaughtered. Keynesians (and Marxists, to be fair) haven’t had so much fun in years; far from waiting for the invisible hand to work its magic, governments stepped in to prevent banks from failing, the financial system from imploding and the global economy from collapsing.
Only once in the entire crisis has a government opted for a “nature’s cure”, and when Hank Paulson let Lehman Brothers go to the wall in September last year, he unleashed four weeks of mayhem in the financial markets that only started to abate when governments took stakes in tottering banks in return for capital injections.
Even so, the near-death experience for the banks had an immediate and profound impact on the real economy. Credit lines dried up and confidence collapsed. Output and trade contracted at rates last seen in the 1930s. Policy makers responded by cutting interest rates to historically low levels, loosening fiscal policy and pumping new electronic money into the banking system through quantitative easing. This was not activist macro-economic policy, it was hyper-activist. Credit creation by the state compensated for credit rationing by the banks; spending by the state filled the breach left by the squeeze on private spending.
By the spring there were signs of the policy beginning to work. Output stabilised and financial markets rallied. While there are legitimate doubts – voiced by the IMF among others – as to whether the recovery is for real, the immediate threat of a 1930s-style slump has passed.
Only by the most convoluted reasoning can the crisis of the past two years, and the events that led up it, be described as a failure of big government. On the contrary, it was the deregulation of financial markets championed initially by governments of the right that allowed finance to strip away the prudential controls on its activities.
That’s why Cameron’s position is strategically vulnerable. Making the case for interventionist social democracy has never been easier: the mess was caused by a weak state allowing a free rein to a cadre of irresponsible financiers; only a newly emboldened state could clear the mess up.
It is a mistake to underestimate the opposition leader. There are those on the left who think that because he went to Eton he is, by definition, an upper-class twit. But Eton churns out lots of smart people (Keynes included). The current economic debate is not about the right’s responsibility for the crisis. Nor is it about the opposition’s own uncertain response to it. Instead, it is about which party has the most blood-curdling plans for spending cuts. That’s some achievement.
There’s enough sense in what Cameron says to make it politically potent; hence his cleverness. But it is still a flawed analysis. He is right, certainly, to argue that governments cannot run budget deficits of £175bn a year permanently. He is also right when he says that Britain was running a structural deficit of 2-3% of GDP going into the downturn.
But the deficit is the symptom of an economic problem, not its cause. The bulk of the deficit is accounted for by the contraction in the economy since the start of 2008, which has sharply eroded tax revenues and pushed up the cost of welfare spending. Only a small part of the deficit increase has been caused by discretionary tax and spending decisions by the chancellor, Alistair Darling. If the public finances had been in better shape in 2007, Labour would have been in a position to provide a bigger fiscal boost, but the upshot would have been broadly the same – a deficit this year in excess of 10% of GDP.
If the lion’s share of the deficit was caused by the recession then, logically, the priority now should be to get the economy back on its feet as quickly as possible. Conjuring up the ghost of Stafford Cripps is more likely to hinder this process – by scaring the pants off consumers and small businesses – than it is to help.
Cutting back too soon could drive the economy into a depression, warned David Blanchflower, respected economist and a former member of the Bank of England’s monetary policy committee, in Saturday’s Guardian. “The Tory economic proposals have the potential to push the British economy into a death spiral of decline that would be almost impossible to reverse for a generation,” he wrote.
So what is Labour’s problem? Faced with the most propitious economic circumstances for a party of the centre-left for decades why is it so comprehensively failing to seize the moment? There are plenty of suggestions flying about. Some say it is all about Gordon Brown; the prime minister, it is said, simply does not cut it with the public and has been a liability since the election that never was in the autumn of 2007.
Some say it is a combination of a deep recession and being in power for too long; the electorate is bored with Labour and rising unemployment provides a convenient pretext for changing allegiance. Some put it down to the foreign wars, or the private finance initiative or the fact that the gap between rich and poor is wider than it was in 1997.
While all part of the story, none of these theories is entirely convincing. Labour has handled the crisis well; in the most trying of circumstances, it has got the big decisions right.
The government’s failure has been its inability to use the crisis to articulate a broader critique of market fundamentalism. And the reason for that is that from 1997 to 2007 Labour was complicit in the excesses of the market. It was too weak or too bedazzled to control the City, but not so reticent when it came to plans for DNA testing and ID cards. The supine approach to finance coupled with creeping social authoritarianism explains why Cameron’s attack on the big state resonates.
With anger at the banks still running high, it is still possible to seize the social democratic moment. What’s lacking is an intellectual argument that challenges the orthodoxy of the past three decades. That, though, requires an admission that much of what the government has believed these past 12 years was wrong. As things stand, that looks unlikely.