News and Blog
by David Purdy
Interviewed in a recent television documentary, Paul Tucker, Deputy-Governor of the Bank of England, condemned a system in which banks amass profits during a boom, but are bailed out by taxpayers when they go bust, as a “flaw at the heart of capitalism”.1 His views about how to remove this flaw were not recorded, but it is more likely that he was finding fault with the kind of capitalism that has evolved in Britain and the US than that he was criticising capitalism as such.
The distinction between genus and species is central to what follows. Since the collapse of state socialist alternatives to capitalism, the very idea of a post-capitalist civilisation has been banished to the realms of speculation and theory. For practical purposes, we now take it for granted that the only issue worth discussing is what form of capitalism is best or will prevail. Indeed prior to the financial crash of 2007-8, it was widely believed that even this question was on the way to being settled as the Anglo-American, neo-liberal model of capitalism appeared to outperform its rivals. After 1990 Japan sank into protracted stagnation and although the EU escaped from the doldrums of the 1980s and embarked on three major projects – completing the “single market”, building monetary union and absorbing the former Soviet bloc states of Eastern Europe – it signally failed to resolve its internal crisis of popular legitimacy and governance, and far from stemming the neo-liberal tide, got caught up in it.
In the immediate aftermath of the crash, from the autumn of 2008 to the summer of 2009, there was a brief window of opportunity for radical economic reform. The opportunity was lost. Temporarily thrown off balance, the political and business elite were hardly going to embrace the state-capitalist models of development favoured by the world’s rising powers – China, India, Russia and Brazil – and in Europe (though not in the US) they soon rallied behind the banner of fiscal conservatism, spreading alarm about the state of the public finances and setting out to restore “business as usual” by dint of fiscal retrenchment. This is a high-risk strategy at a time when recovery from recession is far from assured and little has been done either to reform global finance or to tackle imbalances in international trade and capital flows, but in the absence of a systemic alternative to the neo-liberal model that combines intellectual cogency with political appeal, our rulers evidently judge the risk worth taking. In that sense, what has transpired over the past three years is a crisis in neo-liberal capitalism, not a crisis of neo-liberal capitalism.
With the decision of the Liberal Democrats and Conservatives to form a coalition, the realignment of British politics has begun. We now know that in the course of the inter-party talks that followed the election of a hung parliament, Clegg and Cameron (or Nick and Dave, as they wish to be known) considered and rejected the option of a “confidence and supply” arrangement whereby the Lib Dems would support a minority Tory government on confidence motions and finance bills, but would not join the government on the basis of a comprehensive and jointly agreed policy programme. Any such deal would have been an uncertain and short-lived affair, soon to be followed by another election with the attendant risk of provoking panic in the financial markets. Instead, the adoption of the name “Liberal-Conservative”, the carefully crafted composition of the new government and its early policy announcements signal a clear intention to serve a full, five-year parliamentary term, to make a serious effort to tackle Britain’s economic crisis and, in the process, to break the mould of British politics.
The coalition has four policy priorities:
- to repair the country’s battered public finances by instituting a phased programme of fiscal retrenchment, starting this year and heavily weighted towards public spending cuts rather than increases in taxation, as envisaged in the Conservative election manifesto, with the aim of reducing the UK’s record budget deficit by more than would happen if the government relied solely on economic growth to boost tax receipts and reduce social security outlays;
- to mitigate the impact of fiscal austerity on low and middle income taxpayers by raising the standard personal income tax threshold to £10,000, as proposed in the Lib-Dem election manifesto, while ditching the Tory pledge to raise the threshold for inheritance tax to £1 million, retaining the outgoing government’s plan to raise employees’ national insurance contributions next year, but rescinding the planned rise in employers’ contributions (the so-called “jobs tax”);
- to break up and restructure the banks and to install a new system of financial regulation, a task to be shared between Vince Cable, whose reputation as a financial sage will now be put to the test, and George Osborne, Chancellor of the Exchequer, who will be in overall charge; and
- to reform key aspects of Britain’s dysfunctional and discredited political system, a substantial task for which Nick Clegg has assumed responsibility, in addition to his symbolic role as Deputy Prime Minister.
Taken together, these measures add up to a bold plan for tackling the twin crises that engulfed and finally brought down Gordon Brown’s government. When the US housing bubble burst in early 2007, the global financial system began to seize up. By autumn 2008, several major banks had become insolvent and Britain, along with most other developed capitalist economies, was plunged into a deep recession from which it has only just emerged. Though culpably slow to appreciate the gravity of the crisis, the government eventually took decisive action to rescue the banks and avert a re-run of the Great Depression. That it received little credit for this achievement is partly because there is a difference between staving off disaster and stimulating recovery, partly because of the success of the Tories in converting what began as a crisis of capitalism into a crisis of public finance, and partly because the economic downturn coincided with the eruption of a full-scale crisis of legitimacy.