Economy class: finding a narrative

Without a coherent narrative on the economy, Labour’s new leader has no chance of returning the party to power. This, rather than Britain’s place in the world, reform of the NHS, or rethinking immigration, has to be at the core of the next Labour project. We live in an era during which economic inequalities in income and wealth have increased tremendously. The original “new left” view of the economy, first fashioned by Clintonistas such as Robert Reich, argued that we could all benefit from globalisation—provided we improved education so we could all earn our keep. It is fashionable to claim that this approach has failed (see Gavin Kelly and Nick Pearce in Prospect September 2010), but it has not. What failed was its implementation—and patience.

New Labour got some things right. The left does have to embrace globalisation. The biggest beneficiaries of cheap goods from China are the poor, for whom low prices for clothing, toys, electronic goods and so on matter enormously.

But new Labour failed to deliver a good education for those from disadvantaged backgrounds. If your parents are poor, there is every chance your education has left you in a job that qualifies you and your family for tax credits. If the left is serious about reducing inequality, it must be tough on its causes. And that means, as I argued in last month’s column, tackling schools. Labour should be ashamed that a Tory-Lib Dem coalition is delivering on a pupil premium even in a terrible fiscal situation.

Second, we need to be patient. Today, 45 per cent of people go to university but only 30 per cent of the labour force has a degree. Since adult education rarely transforms people’s incomes, creating the perfect education system tomorrow would still mean an unequal society for a generation, because so many adults have already been failed by the system. If we get education right, things can only get better, but will do so only slowly.

Britain is also characterised by huge inequalities in wealth. This reflects not only inequalities in income but the rise in house prices. In the first five years of my married life, we made more money from the rise in value of our small two-bedroomed house in west London than we did from decent careers. Rising house prices left the poor—and the young—slipping further behind. That Britain had its worst-ever bout of house-price inflation under Labour is another reason for it to feel ashamed.

The solution is not to build many more council houses—we cannot afford that, and it creates a divided society. It is to build more market houses. It really is economics for dummies: when you increase supply, prices fall. Labour needs to say explicitly that it favours lower house prices, particularly in the southeast. If prices fall 2 per cent a year in nominal terms, no one with a repayment mortgage ends up with negative equity, and yet housing affordability would improve by 20 per cent over a parliament, and by 44 per cent if a future Labour government survives as long as the previous one. That will improve opportunity hugely, and is exactly what a party of the many should be aiming for.

Finally, the left needs to get real about government finances. From 1997-99 Gordon Brown stuck to Tory spending plans, declaring that this was prudence with a purpose. He turned out to have no purpose in mind except to splurge later, leaving government finances ill-equipped to cope with the downturn. Labour should be ashamed not of spending so much over the last two years—that was sensible—but of spending so much and saving so little in the good times. Vince Cable consistently advocated a tighter macroeconomic position in those years. The irony is that, had the Liberal Democrats been in office then, government finances would be in a better position now, giving us more room to spare the poorest from the cuts. Labour needs to rediscover “prudence with a purpose”—where the purpose is to have enough in the bank to protect the poor in the next recession.

This is a programme for a successful left-wing government. Talk about preventing the financial sector causing another recession needs to stop, because recessions happen from time to time, and you need to be prepared. Nor does it make sense to talk of higher taxes on the super rich—there aren’t enough of them, and equipping the poor to earn a decent living is a much better strategy than forcing ever more people into the complex and demeaning world of means-tested benefits. And the left must remember that there are no short cuts. Minimum wages can help, but £7.85, the London living wage, is not a living wage for anyone with a family, and most of any gain is taken back by lower tax credits.

The route to prosperity for all is not easy, but it is straightforward. Educate people properly first time round. Do not make things in Britain more costly than necessary. And support those who lose out, through bad choices or bad luck.