ED Miliband’s keynote speech on the economy deserves to be seen as a key turning point in social democratic thinking.
New Labour’s economic strategy was built around the idea that growth and economic success depended on allowing markets and the rich to flourish. Tony Blair and Gordon Brown had bought into the idea beloved of the pro-market right that you could have more prosperity or a narrower gap, but not both.
So while Labour made tackling poverty a priority – via the minimum wage and generous tax credits – it downgraded its former commitment to greater equality. Markets, and the City, were allowed to operate with minimal constraints.
It was a strategy that failed. What growth was achieved became increasingly pocketed by the few, driving up inequality. Under Labour, the share of income taken by the top one per cent rose by three percentage points to over 15 per cent. As wages became increasingly squeezed, Britain turned into a low-paid economy, with the commitment to capping poverty involving a soaring bill for the state.
Moreover, the promised economic pay-off from this market and profit-led strategy never materialised. The rich used their political licence not to create more wealth and a bigger pie, but to grab a larger share of it for themselves. As wages fell behind output, debt levels across the working population soared to unsustainable levels. Without this growing dependence on debt, living standards would have plunged and the economy would have faltered well before 2008.
Miliband has acknowledged that New Labour’s economic strategy was badly flawed. He is now committed to a wholly new economic direction, one that accepts that the fruits of growth need to be more evenly shared. This is not just a matter of fairness. “Economic recovery will be made by the many not the few,” declared the Labour leader. In short, the equality/prosperity trade-off theory needs to be buried. Rather, prosperity depends on divvying up the cake more fairly. This is a decisive break with current economic orthodoxy.
It comes with the backing of a growing body of evidence. For the last 30 years, the share of income going to wages in the UK – and most rich economies – has been falling. Across the nations that make up the OECD, the share had fallen by five percentage points since 1990.
This has boosted global profits and personal fortunes at the top. This power shift from labour to capital was meant to unleash a new era of enterprise and faster growth. In fact, in the UK, post-1980, profit-led market capitalism has a poorer record on investment, productivity, growth and unemployment than its more regulated and much maligned predecessor.
For 30 years, much of the developed world has been part of a real life economic experiment. It is one that has led to a mass livelihood crisis for a growing proportion of the workforce. And it ended in tears in the economic crash of 2008, just as the very similar pre-1929 experiment also brought economic implosion.
The historical evidence is now overwhelming – sharing the cake more evenly is associated with improved not lower rates of growth, and less not more turbulence.
Having been told they were deluded, the market’s critics are winning the argument. Fairer and more resilient economies go hand in hand.
Recognising this is one thing, steering economies in the opposite direction is another. The global billionaire class shows no signs of acquiescing in an erosion of its muscle, privileges and wealth. Governments continue to dance largely to the tune of Wall Street and City financiers. Nevertheless, the public, political and intellectual mood is hardening.
As President Obama has put it: “Inequality is the defining issue of our time.” Last month, the head of the IMF, Christine Lagarde, went further: “Excessive inequality is corrosive to growth; it is corrosive to society... the economics profession and the policy community have downplayed inequality for too long.”
To date, such lofty anti-inequality rhetoric has been little more than talk. Indeed, the world’s corporate and financial elite has grown its wealth through the crisis while nearly everybody else has been getting poorer.
Nevertheless the tide could be about to turn. “Capitalism may not have it quite so easy in the next phase,” writes one of Europe’s leading financial strategists, Albert Edwards of Societe Generale. “Labour will fight back to take its proper (normal) share of the national cake, squeezing profits on a secular basis.”