Whoever wins the Labour leadership will need to decide what a 21st-century social democracy looks like. The contest has, so far, shed little light on it. Shaped by the need to appeal to the party's electoral college, it has been dominated by tactical admissions about policy mistakes and, perhaps inevitably given the scale of the spending cuts, a retreat to the comfortable terrain of opposition politics. How should the argument be advanced? Historically, social democracy has succeeded when it has achieved two things: first, when it has raised the living standards of the broad mass of the population; and second, when it has complemented this "materialism" with a national popular project, embedded in the cultural aspirations and attachments of the British people. Today, neither of these components is in place. The first and overriding task is the economy. During the election, Labour leaders were clear they didn't want to return to business as usual, but were less sure about what to propose instead. A post-crisis agenda on financial regulation and tackling Britain's bubble economy—with its nexus of housing wealth, personal debt and easy credit—is necessary but not sufficient. The bigger question is what to do about the stagnant living standards of those on low and middle incomes. For many experts, such as the OECD, questioning the overall performance of our labour market is counter-intuitive. Over the past decade, Britain has been praised for pioneering a strategy based on labour market flexibility, a modest though rising minimum wage, tax credits and employer-driven skills policy. Compared to most other countries, it has indeed been a success: Britain's employment rate, which for the quarter ending June 2010 was 70.5 per cent (7.8 per cent unemployment and 23.4 per cent inactivity rate), remains relatively high and the jobs market has performed far better in this recession than other recent downturns. But looked at from the stance of a person on a modest income, things feel less rosy. Although between 1997-2009 living standards rose by 2 per cent a year on average, the Institute for Fiscal Studies notes that this rise consisted of a booming 3 per cent in Labour's first term, and then a steep fall-off. Since 2002-03, median income growth has not surpassed 1.1 per cent. In the US, this phenomena of the "squeezed middle class" is well established. Real incomes of the majority of the country's population have been stagnant for a generation and the wages of American men without a college education have fallen by more than 12 per cent over the past few decades. The uncomfortable truth is that the backbone of Labour (and Democrat) support feels it isn't getting richer. The political consequences of fighting an election campaign following several years of near-static living standards were clear in May, and fuelled concerns on issues such as immigration. There was also a marked regional dimension. Labour performed poorly in key seats in the west and east Midlands, areas that saw the slowest income growth over its years in office and—in contrast to every other region—rises in relative poverty. This poses a direct challenge to the dominant Clinton-Reich-Blair-Brown model of how a market economy can generate rising living standards for the great majority. It goes to the heart of new Labour political economy. Over the past decade, ever-greater numbers of people have embraced the "globalisation bargain," as the government encouraged them to—they worked hard, gained new skills, switched jobs and careers, and accepted flexible working patterns. But many of them failed to see a significant rise in their living standards. The globalisation bargain stopped working for many middle and lower-income people in richer countries. This raises problems for all parties, but something approaching an existential crisis for social democratic politics—a central pillar of which must be to ensure that overall living standards rise. Nor will this problem solve itself. Given the mega-trends of the labour market, including greater polarisation between high and low-wage jobs and declining manufacturing employment, there is little reason to think the same policies will yield different outcomes in the future. Some people will argue that the centre-left should respond by adopting the politics of anti-globalisation. But that is a sure route to irrelevance. And few serious commentators would argue that there is scope for a much more redistributive tax system than the one Labour bequeathed to the coalition (except, perhaps, for wealth taxes and a stronger approach to bankers' bonuses, a major source of the recent rise in income inequality). Nor do tax credits offer a way out—they will remain crucial for millions, but there is no chance of them playing a bigger role than they did in the new Labour years, not least after the coming cuts. So what are the implications of all this? First, greater economic equality will require a fairer distribution of pre-tax income at the workplace—it won't arise from more redistributive tax and benefit polices. The national minimum wage is crucial. Currently just under £6 an hour, it is widely accepted that it has never been increased to a level where it has endangered job creation and there is scope for raising it more aggressively. A higher and steadily rising wage floor will be a start, but can only take us so far. Second, we need to end Whitehall indifference to Britain's lagging sectors and close the productivity gap with their counterparts in other countries. Towards the end of its time in office, Labour was edging towards a greater understanding of how government can better support leading-edge growth sectors. But it never had a corresponding industrial and employment agenda to tackle Britain's low-productivity service sectors—such as catering, care and retail—that account for roughly 25 per cent of GDP, and employ a high proportion of our 10m or so low-paid workers. Many will argue that poor prospects for employees in these sectors is a fact of life in a service-driven economy, and it is true that not all jobs can be highly skilled and highly paid. But it is possible to tackle the long tail of underperforming companies by improving their management and making it worthwhile investing in their workers. Further schools reform to raise education standards, especially for working-class young men, remains vital, but a wider strategy is needed, notably to establish institutions that generate collective employer investment in apprenticeships and training. Such employer associations are long established in Germany and the Netherlands, but some Anglo-Saxon economies like Australia have also succeeded in creating institutions of this kind. Third, the importance of full employment to next-generation social democracy needs to be revisited. High employment rates help to secure a strong and sustainable tax base without increasing tax rates on individuals and companies. In this respect, full employment can provide a key underpinning of the long-term affordability of the welfare state. High employment rates also help reduce inequality. This is because, as the US academic Lane Kenworthy has shown, the quantity of taxation matters as much as its effect in reducing inequality (a point few on the British left have digested) by providing the resources for welfare transfers and public services that offset market inequalities. Moreover, high employment rates also reduce inequality by ensuring a more even distribution of work across households, counteracting the trend in advanced countries with lower employment rates to polarise between dual-earner and workless families. In Britain, our female employment rate—although now at 65 per cent and much higher than in the 1970s—is still too low, particularly for low earners and older women. If more women are enabled to work who want to, inequality between households will be reduced as the earnings of low-income families improve, and child poverty will fall. Finally, the squeeze on living standards is of central importance to the debate that the centre-left needs to have about the future of public services—including where the role of the state needs to be either cut back or expanded. The Blair-Brown era demonstrated the great power of a majoritarian argument: that, as far as possible, everyone should have a stake in reformed and universal public services—particularly schools and hospitals. But the past decade also exposed the limitations of this approach. Once those on middle incomes felt the harsh economic insecurities that had previously only been experienced by those in more precarious parts of the jobs market, their political attachment to Labour crumbled. Income replacement ratios for middle-income families losing their jobs were very low and protection from the risk of mortgage default was limited. And all the while the brutally harsh regime of means-testing access to key services such as care for the elderly persisted in running down family assets; and patchy provision for childcare further dented family incomes and impeded dual-working. With the social wage largely invisible to many families, the new Labour "schools and hospitals" model of social democracy was never going to be enough. In the decade ahead, a new public service argument needs to be directed at supporting families to care for children and the elderly—both essential in their own right, and important to living standards. The case for this is magnified by long-term fiscal pressures on the state. Better childcare is a precondition for improving employment rates and generating higher tax revenues. Meanwhile, spending on the elderly will rise dramatically, either through public or private expenditures, and universal policies for the health and care of older people are likely to prove more efficient, and fairer, given the scale of market failure in these areas. When it comes to dealing with the massive cost of ageing Britain, efficiency and fiscal responsibility demand social democratic solutions. And crucial though all this is, rising living standards on their own will not give rise to the 21st-century social democracy that is needed. The challenge for a new leader is how to reach out beyond economics, break through the overbearing cynicism of the age, and speak in a compelling way to people's hopes for their community and country.
In the 20th century, European social democracy was at its most powerful when it spoke to a clear sense of national purpose and gave expression to the cultural, as well as the political, identity of workers. In this sense, its identity politics lay in articulating the aspirations and culture of the broad mass of voters. It was largely white, mostly male and unashamedly collectivist. In Britain, this endowed the Labour party with a social patriotism for much of the postwar period and helped maintain its affinities to its working-class base. The decline of industrial working-class communities, with the patterns of life and historical memory they sustained, levied a high toll on Labour's self-identity, cutting away the bedrock on which the party's edifice was built. It took the arrival of New Labour to overcome this historical loss—common to parties of the left—and to construct a new mass appeal for the party. Yet new Labour's electoral success masked an inability to reconstruct the political and cultural identity of the left in ways that could give it wider popular purchase and re-found its social patriotism. It was more comfortable with the essential but ultimately insufficient materialism of "earning and owning" than a politics of belonging and contribution. The result was an impressively broad yet shallow coalition of support whose emotional attachment to Labour was highly contingent. Immigration became the talisman for this failure. A shrunken, politically weakened and less cohesive white working class became deeply resentful of immigration in the later years of Labour rule. There is some evidence that increased immigration exerted downward pressure on the wages of low-skilled workers, if not on their job prospects—although the wage effect appears small. But in the context of stagnant living standards, this can easily loom larger than the figures suggest. A scarcity of social housing, particularly in parts of London and the southeast, also generated tension. Yet the visceral source of this anger was cultural: a sense that a way of life was under threat, imperilled by the arrival of large numbers of newcomers, and that claims for esteem, value and recognition were ignored by culturally detached politicians. At no time since the early 1980s did the emotional bond between Labour and its core voters appear weaker. Viewed through this lens, it is easier to appreciate why hostility to immigration spans the social classes. The sense of a national community losing hold over its identity was not confined to those feeling economic threat. None of this is to contend that immigration was decisive for Labour's defeat at the election—it wasn't; but it certainly was a major issue on which the party performed badly, across all voting groups. This poses a serious challenge for social democracy, since increased ethnic diversity is now an irreversible fact of life for advanced western economies. Our fate is to be cosmopolitan—and not just in terms of ethnicity, but also by other markers of diversity such as lifestyle and belief. This is not to argue that diversity ineluctably weakens the solidarity on which welfare states are built. The evidence for that claim is limited—largely drawn from the US, whose small welfare state is in part a function of race politics. But it is undeniable that social democrats are most successful politically when they give voice to a sense of shared community and national pride that then underpins their programmes. This magnifies the task but also locates it in the right place: how to build a more capacious sense of community, endowed with a sense of national purpose and social patriotism? But those Labour politicians who view the problem as one of narrow immigration control are in danger of fighting the last war. Net immigration is falling and is likely to continue to decline. The right policy framework for managing these flows was largely in place when Labour left office—and it can be adjusted and tightened to cope with any increase in immigration from outside the EU, while labour market controls can be put in place for new entrants to the union. The real challenge in fostering a new social patriotism is twofold. First, how much is the centre-left prepared to embrace a conservative impulse to protect valued ways of life and the institutions that sustain them? New Labour's appeal to modernity rendered it apparently indifferent to the decline of powerful symbols of what we value in our communities—the distinctive character of town centres, local pubs and post offices—and this in turn played into a wider sense of cultural dissonance between much of the electorate and a political elite who only seemed interested in talking about change. Some of what is required should come naturally to those on the centre-left: placing proper limits to markets and giving full recognition to the value of neighbourhood and solidarity. But part of the response will mean moving out of the comfort zone. Beyond eco-conservatism, the centre-left hasn't worked out the strands of conservative thinking that should form a core part of its political identity in the 21st century. Only when it finds a sure footing on this territory will it find a way of responding to some of the cultural concerns of the electorate that currently find expression in hostility to immigration. The second challenge is a directly political one: how to develop a social base for progressive politics that can replace the historical role of the industrial working class and sink deeper roots than new Labour? Part of the current vogue for the traditions of the labour movement—the co-operatives, mutuals and political associations of the 19th and early 20th centuries—is that they appear to offer a model of organic unity between politics and community. That is, they efface the cultural gap that now exists between political leaders, their grassroots and the wider electorate. But while community organisation can help bridge this gap, it is no substitute for constructing new alliances and coalitions of support. For this task, social democracy needs a new political sociology and a more grounded understanding of the dynamics of social class than can be gained from polls and focus groups. British social democracy faces choices that will define centre-left politics for a generation. It could focus on defending the public sector, rejecting the politics of pluralism and retreating to its tribal heartlands. The left and right of the Labour party can both offer variants of this choice, united as they are by hostility to electoral reform, a suspicion of liberalism, and a preference for defending partisan positions on the new Labour record, rather than advancing arguments for genuine political renewal. The alternative is to embrace the new political landscape, opening up social democracy to alliances across party lines, deepening its political base and cultural appeal, and refashioning its majoritarian project for an era in which politics will have more purchase on economics. The new social democracy that is waiting to be elaborated is challenging of existing economic institutions rather than just accommodating to market capitalism; credible rather than hopeful on fiscal policy; more not less demanding of the state—unflinchingly on the side of the consumer and citizen; and willing to embark on a new politics of identity and social patriotism instead of relying only on the appeal of materialism. Reformed in these ways, the British centre-left would have a character more recognisable to reforming European social democrats, at once more pluralist and egalitarian. But it would have little chance of success unless tailored to the particularities of a national electorate that is deeply resentful of stagnant living standards; sceptical of collective institutions (save those they know and love like the NHS); and both culturally conservative and socially liberal in new and unpredictable ways. It will need to speak clearly to these concerns. Grounds for optimism are to be found in both the past and the future: on the one hand, in the capacity for serious and sustained revisionism shown by the centre-left during the last century; and on the other, by the enduring relevance of social democratic values and programmes to tackling the vicissitudes of market economies. The potential for a popular progressive politics is as real as ever; the need just as strong.
