Winning the economic argument

By Ken Livingstone

Labour’s progress in the polls during the autumn of last year was directly linked to the sense that of the two main parties, Labour was proposing – and carrying out – policies to address the economic crisis, whereas the Tory party had absolutely nothing to say except a retreat into the type of deflationary policies which helped bring about the Great Depression of the 1930s coupled with rhetoric about helping small business but not ordinary people.

They would do as previous Tory governments have done and take no steps to protect people from the economic storms and would make matters much worse by taking an axe to public spending.

Public wariness of the Tories over the autumn was therefore hardly surprising. The complete inertia from the Tory front bench was because their ideology was going up in smoke. In only three months, the economics of Thatcherism and neo-liberalism has disintegrated under the impact of the worst financial crisis since 1929. There is not a single government in an advanced economy which is attempting to meet the present crisis by neo-liberal methods. Neo-liberalism is now confined to fringe monetarists and the British Conservative Party. All major governments are attempting to meet the economic downturn by what they see as Keynesian methods.

Yet the Tories have now started to widen the gap in the polls once more. The consequences of the economic situation are being felt directly and harshly. It’s also because the government’s measures are still not sufficient to deal with what is happening – and they are allocating resources in the wrong places and therefore appear costly.

Cameron therefore hopes to ride to power on the back of popular anger towards the incumbent government even although his own policies would lead to a viciously sharp attack on millions due to economic inaction, reduced investment and deep public spending cuts.

It is possible to win this argument. I strongly want the government to succeed, and the financial crisis to be overcome, but this means that Labour must stop acting on assumptions that significantly underestimate the depth of what is occurring, resulting in huge losses for the taxpayer.

To win, the government must above all maintain investment and protect the living standards of ordinary people. It must use public money wisely, which means meeting these objectives, and not subsidising bank shareholders. It needs to take clear steps to show that it is not the majority of the public who will have to pay the cost of the measures that have to be taken to get us through this.

It should also abandon measures that unnecessarily damage Labour’s support and undermine unity – such as the Post Office privatisation plans.

It gives me zero pleasure to say that Socialist Economic Bulletin has on numerous occasions warned against the potential huge losses for the taxpayer and the public finances constituted by the government scheme announced last autumn to purchase shares in RBS, HBOS, and Lloyds TSB. The financial dimensions of that were made clear the week before last with the announcement of RBS’s likely loss of £28 billion. This led to a collapse of RBS’s share price which today stands at slightly over 20p – a loss of over two thirds.

The losses for the taxpayer of this financial disaster will be many billions of pounds – money that could have been better spent on hospitals, schools, improving Britain’s creaking infrastructure or developing the productive economy. In fact, that is exactly what it should have been spent on. Losses to the taxpayer so far stand at over £8 billion. In short the anger at the bank bailout revealed in the polls has its basis in the losses to the taxpayer.

When RBS and other banks approached the government to purchase shares on 7 October, this plan should have been rejected as opening the government and taxpayer to big losses – it is very probable that in the case of RBS and HBOS their actual value is zero as their liabilities exceed their assets. This estimate is already confirmed by the fact that their market capitalisation is now lower than the money the government injected.

What instead happened is that the riskiest banks asked the government to purchase their shares at inflated prices. By mid-October it was apparent that the government was seriously underestimating the potential for a collapse in the price of bank shares and there was no evidence that these were being bought the bottom of the market. Furthermore no expansion of credit by the banks that received the capital injections has taken place.

This is why I wanted the government to adopt an alternative scheme based on full nationalisation of failing banks rather than purchasing shares in them at inflated prices. Vince Cable has now put forward the same position: ‘The government must bite the bullet on the public ownership and control of the banks to ensure that lending is maintained to sound companies who can keep the economy ticking over in these turbulent times.’

Britain’s nationalised banks should be being used by the government as a core part of anti-cyclical economic plan instead of further private bank bailout schemes with their huge losses for the taxpayer and knock-on negatives for the government with the public.

Certainly there is no evidence to back up the claims of ministers who continue to say that the banks are best left in the commercial sector: on the contrary, look where that has got us. A similar approach to that with RBS and HBOS led to an unnecessary delay in the nationalisation of Northern Rock.

In fact the depth of the problem requires both nationalisation of the banks to expand lending and other radical steps to sustain investment. The government’s recent announcement of a relaxation of rules to allow local councils to borrow to build social rented housing is a step forward. Other more direct methods will be needed, such as direct investment to build affordable housing and including – as Jon Cruddas, Frank Dobson and others have argued – nationalisation of parts of the construction industry, where some firms have seen massive share price collapses. Other radical steps of this kind will be needed in other sectors in order to maintain investment.

Secondly, we will have to persuade the public that they will not pay for the action that is being taken now. Two principles should be adopted: first, that the richest should pay proportionately more so that the burden is not carried by middle and lower income earners; and second, polluters must pay more than those who do not pollute – because we cannot abandon the fight against climate change and because it is the fairest way. The government should retain the lower rate of VAT and the higher rate of income tax, not shelve them later as it has said it plans to do.

(In London we have seen the exactly wrong direction being taken – drivers of the worst polluting gas guzzlers have been protected by the cancellation of a higher congestion charge on drivers of these cars, whilst public transport users have been clobbered with a fare increase and work on new transport projects like extensions to the Croydon Tramlink and the Docklands Light Rail have been halted).

These and other policy issues are posed because the situation is much worse than a mere short, sharp and temporarily unpleasant recession. It is the worst global economic situation since 1929.

Indeed, it raises the question of whether the decline in investment can be halted by indirect, Keynesian, means; whether any of these Keynesian methods will suffice; or whether only a solution that goes beyond Keynes – with state ownership of a sufficiently large sector of the economy to directly reverse the investment decline – will be required if the economic situation continues to deteriorate.