Since the dawn of the 20th century, Britain’s social settlement has been recast four times: Edwardian New Liberals laid the welfare state’s foundations; Beveridge and Attlee built on them after the Blitz; the Thatcherites knocked out a few pillars; finally, New Labour’s third way crew redecorated again. Sadly, the cheery new wallpaper began to peel after the financial crisis. Many citizens were sorely exposed by the time the pandemic hit, and as the country emerges dazed and blinking from the disruption, the sense is growing that our shelters against adversity must be overhauled yet again. But how?
History suggests that, as the director of the London School of Economics, Minouche Shafik should be an influential voice in this discussion. Previous welfare state blueprints have had LSE fingerprints all over them. Beatrice Webb co-founded the university before becoming an influential force on the royal commission on the Poor Law in the days of the People’s Budget. A few years before the wartime coalition plucked him out of his ivory tower, Beveridge had been a long-term director of the LSE. The godfather of the neoliberal turn, Friedrich von Hayek, spent two decades at the same institution, during which he produced his most influential work, The Road to Serfdom. New Labour intellectual Anthony Giddens, author of The Third Way, was yet another LSE director.
After she arrived at the LSE in 2017, Shafik launched a “Beveridge 2.0” research programme. This suggests she has hopes of encouraging something more substantial than more third-way-style tweaks. Namely, as put in the strapline of her new book What We Owe Each Other, an enduring “new social contract.” So where is she coming from? How does she understand the moment we’re in? And what’s on her menu for reform?
Window of opportunity
A few moments of chatting to the charming Shafik are enough to realise she is cut from very different cloth to Beveridge. He was a reliably opinionated and occasionally cranky figure, but also a man who—as Shafik tells us—was ultimately influential because he “made a nuisance of himself in Whitehall.” It is hard to imagine Shafik being any kind of nuisance, and difficult to get her to say anything disobliging about anyone: she is a very diplomatic technocrat.
And yet it would be a mistake to write her off as someone who plays it safe—her whole career suggests precisely the opposite, and her new book makes a few brave arguments. Look at her CV and you see a tendency to move towards sites of economic and political controversy—to “put myself in harm’s way,” as she explains to us.
Born in 1962 in Egypt, Shafik later went on to study in the US, where she spent much of the 1980s. Through the years of the so-called “third world debt crisis” she was at the US Agency for International Development based in Egypt and Senegal. She passed the rest of the Washington Consensus era at the World Bank. Despite regular detours into academia, she shot up through the ranks. As she turned 30, she joined the Bank’s eastern Europe desk in the early years of economic “shock therapy.” She turned to working on the boundaries of the state and the market, just before those questions came to the fore in the east Asian economic crisis. Then came what she calls “the ‘Make Poverty History’ moment,” with leaders like Tony Blair and even George W Bush showing a new interest in aid. In 2008, Shafik moved to London to become permanent secretary of the UK’s Department for International Development, then the world’s fastest-growing development ministry.
She found this the most rewarding spell of her career. “It was a very exciting time,” she tells us. When asked about the problem of corruption in the aid industry and the danger of western neo-imperialism, she replies with steadfast insistence that development can and often has been done well. “I remember the day in the office,” she says, when “Ghana moved over the poverty line,” where it became “a middle-income country and actually lifted the majority of its population out of extreme poverty,” and how she and her colleagues celebrated: “Oh my God, this is fantastic!” But just three years later she hopped on again, this time to the IMF—at the height of the Eurozone crisis, which she helped to manage—and then in 2014 moved to the Bank of England, before finally landing at the LSE.
In May, Dominic Cummings dominated the news with his contemptuous account of how most of his former colleagues in government had handled the pandemic. Shafik looks back on the turmoil at the places she has worked in the opposite spirit. She never blames individuals, and makes much allowance for the things that weren’t known at the time. The austerity endured by the Greeks after 2010 might have been awful, she suggests, but we can’t forget the complexity of running the euro, nor that Athens was getting nowhere in raising revenue for itself. Similarly, she argues that the principal culprit for Russia’s economic and social collapse in the 1990s was mere haste in making the transition from communism to capitalism, a move that “no one had tried before.”
Shafik’s experience of turbulence has fuelled her new interest in rebooting the political economy, and breaking with the mindset of the institutions in which she has spent her life. She has, after all, repeatedly seen technocratic ambition run up against big political crises, and also seen moments—like Make Poverty History—where a change in the political air has reset the boundaries of the possible. So does she really think this pandemic could enable a British New Deal?
“The window of opportunity is open,” Shafik says. History, she argues, shows three things are required before such chances can be seized: first, “a great crisis” that engenders the all-important “willingness to experiment; second, determined leadership which”—like that of Beveridge or Roosevelt—“is prepared to strike out in a direction”; third, a consensus, which is typically only formed “after stiff resistance.”
All that sounds optimistic, but Shafik concedes to one nagging doubt: “are we too fractured” to forge that consensus? Some worry that the forced atomisation of lockdown may have lessened our appetite for collective solutions. Shafik dares to disagree, pointing to a pre- and post-pandemic polling study covering 24 countries, which showed that through the crisis people have indeed “become more afraid,” but also clearer about what they value: “equality, social solidarity, community, freedom.” You don’t, in other words, know what you’ve got till it’s gone: “being isolated, deprived of human contact, makes you aware of how interdependent we are.”
The terms
So if this is a moment to rewrite society’s contract, what should be the terms? The thrust is summed up in five words: “we owe each other more.” In other words, we must turn the tide back towards a more collectivist approach, where more risks are pooled, more investments co-ordinated and, perhaps, more obligations asked.
It is a big argument and eloquently written, although a lot of individual proposals are either familiar or vague. This is no doubt because Shafik is attempting to inform debates worldwide. The vastly different starting points in different countries preclude a crisp manifesto. To take one example, the economic rationale for extensive state involvement in healthcare still needs to be set out in the US and much of the developing world—but far less so in the UK, with its popular NHS.
Still, there are some eye-catching individual ideas. Shafik argues we could replace university subsidies, which are concentrated on the (often relatively privileged) groups who stay in education longest, with a universal flat-rate endowment for lifetime learning. This would become available on coming of age, and could be spent at a vocational or academic institution, as and when it suits. And while her emphasis on the importance of training—or, in economic parlance, “human capital”—has long been part of the conventional wisdom, several other of her arguments are newly urgent. For example, it is increasingly plain how important it is to support women in work, not just for society but for the economy too. The dangers of employment descending into unreliable shift work have become starker since the gig economy took shape. And it is also time to co-ordinate a green industrial transition.
Moreover, there are signs that on issues ranging from employment to homeownership, the old are cleaning up at the expense of the young. Shafik guides us through the crucial question of inter-generational accounting with entertaining tales about marshmallows (and children’s patience), jam (from Alice in Wonderland), and the relative merits of building swimming pools as opposed to preserving lakes. She sees opportunity in a grand bargain in which older workers are asked to accept they must toil for longer in return for greater security in what will still be, by historical standards, long retirements.
“Her ‘what works’ ethos traces back to childhood, when she witnessed the messy consequences of her grandfather’s factory being nationalised”
The immediate question for some readers will be whether Shafik’s emerging contract is a deal of the left or right—but she doesn’t see it in those terms. While she has supped from the well of both the most progressive economics at the University of Massachusetts Amherst—in a department, she says, where discussion would sometimes slide into Marxian sociology—as well as the most free market “rational expectation” models of the 1980s, she is determined not to allow herself to be placed “into an ideological box.” This is only partly about the pragmatics of persuasion in a polarised age: “because I’m very aware that once I get into one box, everyone in all the other boxes stops listening.”
More fundamentally, she eschews left and right because she is a “what works” technocrat. Her preferred way of doing things involves “really smart experts” coming up with “four or five policies” for politicians to choose between. Only politicians have the mandate to “channel the values and choices of society,” but as soon as they go beyond committing to, say, boosting growth or curbing unemployment, and instead get hung up on how to achieve their goals in a particular way, they are often “wrong.”
This “what works” inclination predates her long career. As a child, her grandfather’s chemical factory was nationalised by Gamal Abdel Nasser’s Egyptian nationalist regime. What did she take from that experience? “On the one hand, I had huge sympathy for the inequality” that the state takeover “was trying to address. On the other hand, I saw the disastrous consequences.” The state had taken over but the factory “had nobody to run it,” so her grandfather had “to go back and work for his own company because there was no state capacity.” In this case what grates for Shafik is “seeing really good intentions” that “went wrong,” unless “you really thought things through carefully.”
Shafik is also mindful of the need for social contracts to go with the grain of local traditions and institutions. You can’t march into a society and serve up a box of policies without regard for the culture; she sees many different ways of brokering similar outcomes, putting relatively more or less weight on the role of the family, business or government depending on context. But there is a caveat. After decades of comparing national data on everything from life expectancy to self-reported happiness, there is one country that never ceases to impress her: “if you want the one sentence version of my book, that would be ‘do it like Denmark.’”
The fourth way?
Suddenly, the political economy begins to sound less technocratic, and more like full-blooded social democracy. Because as well as a labour market that balances dynamism and protection—a mix known as “flexicurity”—and an overwhelmingly public healthcare system, Denmark has about the highest tax-to-GDP ratio in the world—topping the 2019 OECD table at 46.3 per cent.
Shafik adds characteristic caution, suggesting that 45 or 50 per cent is likely the limit of what voters will wear, and stressing the importance of proactive industrial and education policies that can “equalise the distribution of opportunities” over the “retroactive redistribution of income.” There is much more to this new social contract than tax-and-spend—corporate responsibility, cross-sector partnerships and so on—but if the Danish exemplar tells us anything, it is that higher tax-and-spend is one indispensable element.
Indeed, on tax, Shafik courageously breaks from the orthodoxies of the pre-crash years. She suggests a smartly designed wealth tax of 2 to 3 per cent annually could “increase efficiency, promote growth and reduce inequality all at once.” She calls for a shift away from taxing payrolls and towards taxing profits. And she demands close international co-operation to crack down on corporate tax dodging, with minimum rates and a right for every state to levy on activity within its borders. All this is quite a break from her predecessor Giddens who, at the height of the third way, cited the failure of a US tax on luxury boats as a cautionary tale about taxes in general, barely pausing to consider that yachts were more mobile than alternative tax bases.
“Shafik rejects a return to austerity. She is not fearful about inflation and excited about investing to grow”
She remains very much in tune with the Clinton-Blair embrace of “evidence” and disavowal of dogma. But she is emphatic that the “light-touch” financial regulation ended up not only tanking the economy but also sinking their whole political project, in which—with hindsight—she now detects a fundamental flaw. The third way philosophy was: “let the economy rip, and then compensate the losers. There were two problems. First, the losers were never compensated adequately. Secondly, who wants to be a loser?”
The third wayers did, she says, understand that unleashing market forces would create losers as well as winners. Indeed, the “trade-adjusted programme” that Washington came up with to help American communities that lost production jobs to Mexico after the Nafta trade deal was smartly designed, she argues, with “all the right elements—relocation programmes, retraining grants, subsidies to wages so they could transition to new jobs—on paper, a perfect programme.” But in practice, it was underfunded and tangled in strictures that made it almost impossible to claim the money: workers had, somehow, to prove that their individual job had been displaced. In a similarly grudging mood, Britain made mistakes with its migration impact funds, and so blew the chance to soothe public anxieties about globalisation. The old political class in both countries soon paid the price for their penny-pinching in the form of Brexit and President Trump.
Another big break with the third way concerns fiscal policy. Although their era was one of lower public debt, Clinton the leader and Giddens the guru encouraged talk of progressive fiscal conservatism. That ugly oxymoron was little more than an electoral strategy—a way of creating distance from the spendthrift image of the old left. But it made it harder to challenge the right’s demands for retrenchment in the 2010s. By contrast, when it comes to dealing with “the bills of Covid-19,” Shafik rejects a return to austerity; any tightening will have to come through tax. She is “not too fearful” about some of the debt being whittled away by inflation, and is positively excited about exploiting low interest rates to finance public investment and R&D, which can grow the economy and so make debt weigh less heavily.
In her intellectual journey, Shafik has proceeded with too much diplomatic aplomb to make enemies. But despite having spent her career at the heart of the economic establishment, her new book both reflects and encourages the fading of many its old certainties. Battered by recession, austerity and now disease, society must construct robust shelters against life’s many storms.
“What We Owe Each Other” by Minouche Shafik is out with Bodley Head
