In his final blog as Director of the Mile End Institute, Patrick Diamond reflects on the Mais Lecture that Rachel Reeves gave last month and explores what it tells us how Keir Starmer and Reeves will seek to forge a new political and economic settlement for the 2030s if the Labour Party wins the forthcoming general election.
In last month’s much heralded Mais Lecture, Rachel Reeves elaborated what the Left in Britain has for so long palpably lacked: a nuanced critique of New Labour’s post-1997 economic achievements. Reeves’ address was not a restatement of theoretical doctrine, but a compelling disquisition on the political and economic strategy of the last Labour government and the pathway to be followed by an incoming Starmer administration.
Reeves’ starting point was to acknowledge the Blair-Brown government’s relative success in securing ‘a decade of sustained economic growth, stability, and rising household incomes. Average household disposable income rose by 40 percent. Two million children and three million pensioners were lifted from poverty. Public services were revitalised’. Not only did the Labour governments provide ‘stable politics alongside a stable economic environment’, according to Reeves, New Labour developed a robust intellectual framework painstakingly hammered out in opposition by Brown’s team. The then Chancellor’s key insight was that: ‘Growth required on the one hand macroeconomic stability, and on the other supply side policies to enhance human capital and spur innovation’. In adopting that approach, Brown was able to disrupt the conventional narrative that Labour could not be trusted to manage British macro-economic policy.
Throughout the period, Brown exerted unprecedented influence over the conduct of economic and social policy. The then Chancellor’s outlook had not surprisingly been shaped by the painful and traumatic process of modernising the party after four consecutive defeats. As he saw it, the overwhelming imperative was to prevent the economy becoming a political Achilles’ heel for Labour, demonstrating that the party was no longer a threat to voters’ livelihoods having adopted a model of ‘prudent’ economic management that could win the trust of both financial markets and voters. Brown and his Chief Economic Adviser, Ed Balls, forged close links with US policymakers, particularly Robert Rubin and Larry Summers, who served in President Clinton’s Council of Economic Advisers and the US Treasury.
President Clinton’s team advised the Labour leadership that macro-economic stability should be the lynchpin of their strategy, rather than resorting to demand-side interventionism and ‘old-fashioned’ industrial policy. Brown rejected the argument that Labour should commit explicitly to the post-war objective of full employment. Central bank independence was held to be fundamental, as it allegedly helped secure lower interest rates and low inflation. Summers and Rubin believed that governments could influence the growth rate of the economy not through short-term manipulation of aggregate demand, but by the pursuit of micro-economic supply-side reform. The Clinton administration took the decision to focus on paying down the federal government deficit rather than fulfilling the commitment to invest in ‘social’ infrastructure, human capital and education under the 1992 presidential election slogan ‘Putting People First’. Robert Reich, Clinton’s Secretary of Labour, complained bitterly that as a result ‘deficit reduction was the only game in town’.
New Keynesian economists depicted the Rubin-Summers intellectual paradigm rather inelegantly as ‘post neo-classical endogenous growth theory’. The phrase made its way into a key lecture by Brown, provoking the then Deputy Prime Minister, Michael Heseltine, to ridicule Labour’s economic policy as ‘not Brown but Balls’. The goal of this theoretical approach was to raise the employment rate while ensuring price stability, bringing down the ‘non-accelerating inflation rate of unemployment’ (NAIRU) by restructuring the labour market and maintaining employment flexibility. The economist James Tobin invented the term ‘NAIRU’, providing an explanation in economic theory for the stagflation that had occurred in the early 1970s when inflation and unemployment simultaneously rose in defiance of the Phillips curve. The emphasis on Keynesian demand management began to subside among policy-makers, compelling the Left to identify a new economic management strategy.
As Shadow Chancellor, Brown sought to address the historical weakness of Labour’s post-war economic record. While recognising that post-war governments were compelled to wrestle with an unenviable inheritance, he believed they resorted to ineffectual programmes of state intervention, public ownership and indicative planning. In opposition, Brown insisted that ‘Old’ Labour’s strategy implied high public spending, big government, an anti-business ethos, hitting the rich – ‘the politics of envy’. He told the Guardian commentator, Hugo Young, that Labour kept losing elections because it was a party obsessed with redistributing wealth, rather than generating growth. Despite criticising the policies of the governments of the 1960s, Brown fundamentally agreed with Harold Wilson: ‘All political history shows that the standing of a government and its ability to hold the confidence of the electorate at a general election depend on the success of its economic policy’.
Yet for much of the period, with the exception of sporadic dialogue with the US Democrats, intellectual debate about economic policy within Labour and the British centre-left was oddly becalmed. Many on the modernising ‘Soft Left’, notably one time deputy leadership contender Bryan Gould, abandoned any hope of influencing New Labour’s agenda in the early 1990s. As a result, there was little discussion of the deficiencies of ‘progressive’ supply-side economics, not least the argument that Labour’s policies actively encouraged an artificially high exchange rate, further weakening the structural base of UK manufacturing industry and exacerbating regional inequality. There was a commitment to the introduction of the National Minimum Wage (NMW), but otherwise Thatcher-era labour market flexibility was retained.
The protracted historical experience of defeat imparted in Labour an entrenched caution, alongside a striking lack of creativity and innovation in economic policymaking. Thrown onto the defensive in the 1970s and 1980s, Labour lacked confidence about intervening in markets. Its politicians were reluctant to contest the growing concentration of capital and wealth that resulted from the Thatcher experiment in popular shareholder capitalism. Blair and Brown were petrified of being perceived as ideologues exploiting industrial policy by ‘picking winners’ to advance the labour and trade union interest. As such, in the New Labour years, industrial policy was widely disparaged. A key member of Brown’s team told Peter Mandelson, then appointed as Secretary of State at the Department of Business, Innovation and Skills (BIS): ‘You know, the economy will work best if markets are free and competitive’.
New Labour’s stance was hardly the impetus for a new progressive dispensation in British political economy. Neither Brown nor Blair anticipated the catastrophic financial collapse that afflicted the world economy in 2007-8. The crisis nonetheless raised fundamental questions about the cumulative impact of New Labour’s timidity. After a decade of apparently robust economic performance, the crash undermined voters’ hard-won trust. Yet it was apparent well before the 2008 crisis that there were structural pathologies in the British economy which New Labour’s approach to economic management had been unable to resolve.
What the current Shadow Chancellor has done in her Mais Lecture is to turn the intellectual page on New Labour, not by crudely disparaging its record or ignoring Labour’s notable achievements, but by providing a cogent and nuanced critique of the limitations of the Blair-Brown government’s record. As Reeves contends in her speech:
The analysis on which [Labour’s approach’s] was built was too narrow. Stability was a necessary, but not a sufficient condition to generate private sector investment. An underregulated financial sector could generate immense wealth but posed profound structural risks too. And globalisation and new technologies could widen as well as diminish inequality, disempower people as much as liberate them, displace as well as create good work. Despite sustained efforts to address our key weaknesses on productivity and regional inequality, they persisted, and so too did the festering gap between large parts of the country and Westminster politics. Most of all, the ‘great moderation’ could not last. And as the global financial crisis unfolded, these weaknesses were exposed.
The strategic advantage that Labour has acquired in the era of Reeves and Starmer is the opportunity to cast aside past defensiveness. The market liberal experiment that dominated the politics of the 1980s and 1990s in the Anglophone world is evidently in retreat. Regardless of the ideological complexion of parties in power, most western countries are now embracing the virtues of interventionist government and activist industrial policy.
The more testing challenge is to identify electorally salient and credible policies that will not only spur economic growth, but directly confront the alarming concentration of wealth and asset ownership that has occurred in almost all advanced capitalist economies over the last forty years, which is increasingly undermining faith in liberal democracy. Action will be required across several domains of public policy:
All in all, this should be an age of innovation and advance in social democratic political economy. Labour in Britain must be thinking less in terms of adapting to a pre-existing intellectual consensus. As Reeves reiterates, the goal is to forge a new political and economic settlement for the 2030s and beyond that can win decisively the battle of ideas in UK politics.
Professor Patrick Diamond is the Executive Director of the Mile End Institute at Queen Mary University of London and a former Head of the Number 10 Policy Unit. His latest book is Labour's Civil Wars, which was co-authored with the late Lord Radice.