The choice facing the voters in this election is clear – between more failed austerity or a Labour party advancing an economic agenda that is right for the UK. To understand why Labour is right, we first need to look back to the 1980s.
Under Ronald Reagan in the United States and Margaret Thatcher in the UK, there was a rewriting of the basic rules of capitalism. These two governments changed the rules governing labour bargaining, weakening trade unions; and they weakened anti-trust enforcement, allowing more monopolies to be created. In our economy today we can see industries with one or two or three firms with market power. This gives them the power to raise prices – and as they raise prices, people’s incomes fall, in terms of what they can buy.
Changes to how our corporations are governed have allowed chief executives to take a larger and larger fraction of the corporate pie, leaving less and less to be reinvested in the company, and less to pay to workers. Monetary policy has been conducted with a focus on inflation rather than on employment.
Austerity has not only damaged the European economies, including the UK, but actually threatens future growth
Over three decades later, it is clear that the rules were rewritten in ways that slowed our economy. These changes encourage financialisation, with firms chasing only profits; and they promote short-termism, with companies unwilling to invest over the longer term. Both contribute to this slowdown. And as the economy has grown more slowly, it has been divided more unequally.
The set of ideas that came to dominate has been called neoliberalism. By boosting inequality and a dependency on finance, the ideas of neoliberalism fed directly into the crash of 2008. The ideas have now been shown to be wrong, to have failed for over a third of a century. It’s time for us to think about alternatives.
Put simply, there needs to be an appropriate balance between government and market. When an economy is weak, as it has been in recent years, there is a need for governments to invest in people, technology and infrastructure. This not only grows the economy today, but also in the future.
Instead, since the crash, many governments have turned to austerity. Across Europe, and in Britain, they have tried frantically to cut their spending, allegedly to repay debts run up as a result of the crisis.
The idea that government debt is a particular burden has a kind of intuitive appeal. The former Conservative chancellor George Osborne would talk about “maxing out the credit card”, so governments would have to balance the books, and couldn’t borrow. But an economy is different from a family. In an economy, when the government spends more and invests in the economy, that money circulates, and recirculates again and again. So not only does it create jobs once: the investment creates jobs multiple times.
The result of that is that the economy grows by a multiple of the initial spending, and public finances turn out to be stronger: as the economy grows, fiscal revenues increase, and demands for the government to pay unemployment benefits, or fund social programmes to help the poor and needy, go down. As tax revenues go up as a result of growth, and as these expenditures decrease, the government’s fiscal position strengthens.
Austerity has the opposite impact. The evidence on this point is very clear. Austerity has not only damaged the European economies, including the UK, but actually threatens future growth. For instance, when you have young people not learning, or in jobs inappropriate to their skills, they’re not increasing their human capital in the way they could be. Without that human capital, future economic growth will be lower than it could have been. It is remarkable that there are still governments, including here in the UK, that still believe in austerity.
Paul Krugman: The austerity delusion
There is a need for a break with the past. With neoliberalism discredited and austerity failed, we need to rewrite the rules of the economy once again. But this time in the right way. We need rules that focus on long-term economic growth, and the only kind of sustainable prosperity is shared prosperity.
Even if you have to borrow, if the value of your investments – in people, in technology, in infrastructure – increases, then the economy is in a stronger position for the future. Focusing only on the debt side of the balance sheet misses this, and damages the economy.
There’s a long list of investments that governments could and should be making. There is strengthening infrastructure, such as transport and communications; there is investment in education; there is investment in families, particularly putting measures in place that free women from having to make the choice between raising a family and work. If that is done, it increases the labour supply. And that is not only better for society – it’s better for the economy.
In this election, it is Labour that is advocating the kind of economic plan that is right for the UK. I’ve been impressed with how the party proposes to finance its plans: it’s not on the basis of “magic money”, but on carefully thought-out proposals based on taxing those at the top and ensuring that corporations pay what they should. The evidence shows that these actions will not slow down growth but will help strengthen the UK economy.