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The Economist - 3 June 2016

 


The summer of discontent

British politics are being reshaped by the collapse of the neoliberal consensus



'THE Germans have a word for it: Geschichtsmüdigkeit, a weariness of history. The British were weary enough when Theresa May called a surprise general election on April 18th. It is just two years since the country’s previous general election, and less than a year since the divisive referendum that saw it decide to quit the EU; in 2014 a referendum in Scotland also put the future of the United Kingdom to the vote. A monumentally dispiriting campaign has only deepened the weariness. Tedious as it all is, though, history is being made.

Brexit is the obvious reason. Whether it is Theresa May, the Conservative incumbent, who started from a position of strength but has campaigned poorly, or Jeremy Corbyn, the left-wing Labour leader, the winner will be forced to reshape Britain’s place in the world in highly adverse circumstances. The next government will also have to re-examine domestic policies on everything from financial regulation to fisheries as Brussels’ writ comes to its end.

But there is more. For the past 40 years Britain has been dominated by neoliberalism, a creed that sought to adapt some of the tenets of classical 19th-century liberalism to a world in which the role of the state had grown much larger. It emphasised the virtues of rolling back that state through privatisation, deregulation and the reduction of taxes, particularly on the rich; of embracing globalisation, particularly the globalisation of finance; of controlling inflation and balancing budgets; and of allowing creative destruction full rein.

At this election, for the first time since the 1970s, that philosophy has no standard-bearer. Jeremy Corbyn loathed it throughout its ascendancy. Mrs May launched her manifesto by attacking “the privileged few”, denouncing “rip-off energy prices” and proclaiming that “it’s time to remember the good that government can do.” Both Mr Corbyn and Mrs May feel like throwbacks to times before its ascendancy: Mr Corbyn to the militant activism of the 1970s and Mrs May to the constrained if comfortable conformity of the 1950s. But their antediluvian stances resonate. They appear to address problems that neoliberalism allowed to fester, such as inequality and social disintegration - problems which explain, in part, why the country embarked on Brexit in the first place.

In the decades following the second world war, the British political landscape was one of “Butskellism” - a term this newspaper contrived from the names R.A. Butler, a moderate Conservative, and Hugh Gaitskell, a moderate Labourite, two supposedly opposed chancellors who had much in common. Butskellism rested on four pillars: Keynesian demand-management designed to avoid slumps; a welfare state to provide people with a combination of opportunities (through education) and security (through health care and pensions); consensus between politicians, businesses (including many that were owned by the state) and trade unions; and an “industrial strategy” to shape the direction of the economy.

The Butskellite economy grew rapidly (though not as rapidly as America, France or Germany did). The welfare state succeeded in its basic aims - providing free health care and old-age pensions for everybody and free university education for the brightest. But by the 1970s almost half of Britain’s national income was devoted to public spending. Growth slowed; inflation soared. In 1976 Britain became the first advanced country to go to the IMF for a loan. Between the three-day weeks of 1974, when a miners’ strike led to electricity being rationed, and the “winter of discontent” in 1979, when a range of public services were paralysed by industrial action, Butskellism passed over the horizon.

The second post-war landscape was that of neoliberalism. Margaret Thatcher confronted the unions instead of negotiating with them, denounced “industrial strategies” as nonsense and privatised three-quarters of Britain’s state-owned companies. She embraced globalisation, then hardly a word: capital controls were abolished; the “Big Bang” re-established London as the world’s financial centre; and Britain led the reforms that created Europe’s single market.

These reforms were brought at a cost: unemployment topped 3m in the early 1980s (see chart 1) and many smokestack industries were reduced to ruins. But by the late 1980s there was also a palpable sense of a corner turned: the City boomed, entrepreneurs such as Richard Branson thrived, the south-east prospered. Ailing social democracies such as Sweden began to look to Thatcher’s Britain as a model.

Tony Blair and Gordon Brown built a broader programme of liberal modernisation on this landscape. Their “New Labour” pursued constitutional reforms in which Mrs Thatcher had had no interest, made a point of using the proceeds of growth to compensate the losers, and embraced the EU. As Stewart Wood, a former adviser to Gordon Brown, puts it: “One of Margaret Thatcher’s great achievements was to turn a fundamentalist faith in free markets into the hallmark of moderate centrism for the next generation of leaders.”

One generation on, the landscape is changed again. The Conservative manifesto reintroduces ideas that Margaret Thatcher regarded as beyond the pale: price controls for energy markets; more council houses; industrial policy of the sort that free-marketers reflexively denounce as “picking winners”. In 1942 William Beveridge, a liberal academic, committed the government to slaying “five giant evils” in the report that laid the foundations for the post-war welfare state. Mrs May’s manifesto evokes his spirit by referring to “five giant challenges”: the economy, Brexit, social divisions, an ageing society and technological change. “We do not believe in untrammelled free markets,” it claims. “We reject the cult of selfish individualism. We abhor social division, injustice, unfairness and inequality.”


She was the future once - Getty Images


After Butskell, after Blair

Manifestos are limited documents: in 1979 the Conservatives’ manifesto provided hardly an inkling of the revolution to come. But they are still indicative. Nicholas Timothy, Mrs May’s co-chief of staff and the main author of the manifesto, wants to update the party for the age of populism and economic stagnation. So where Mrs Thatcher, a former education secretary, offered opportunity, Mrs May, a former home secretary, offers security. Mrs Thatcher saw aspirational conservatism as a way to appeal to working-class voters. Mrs May’s protective conservatism seeks to expand the party base by shielding the just-about-managing from global markets.

Labour’s manifesto is even more hostile to markets. It wants to take the railways and electricity companies back into public ownership and give power back to the unions. It wants to restore the “basic principles” of the welfare state by abolishing the fees for university students that Mr Blair brought in, scrapping the private-finance initiative with which Mr Brown was much taken and removing all internal markets from the National Health Service (NHS).

The manifesto would have been redder yet in tooth and claw if Mr Corbyn had had his way. The MP for Islington North is arguably the most left-wing leader the party has had. He is certainly more left-wing than Michael Foot, the leader in 1980-83, who never had any truck with Marxism. Mr Corbyn defied his party’s whip 428 times under Mr Blair and Mr Brown, opposing, among other things, private-finance for the NHS, anti-terrorist legislation and the invasion of Iraq. His inner circle is even more hard-line. John McDonnell, his shadow chancellor, is an admirer not only of Marx but also of Lenin and Trotsky.

Abandoned by the two main parties, neoliberalism has no redoubt elsewhere. After years in which it looked as if Britain’s two-party system was fragmenting, things have gone into reverse. The two main parties currently have a combined share of 80% of the polls, compared with just 67% in the 2015 election. The Liberal Democrats have paid for the neoliberal enthusiasm that took them into coalition with David Cameron’s Conservatives in 2010; having boasted 57 MPs then, they now have just eight. They are unlikely to add many on June 8th (see chart 2), despite theirs being the only party promising to try to soften Brexit and to offer the possibility of rejecting it.



Unforced errors

It would be wrong to see only an ideological shift at play here; political misjudgments played a big part in getting Britain to its current impasse. When, having lost the election, Ed Miliband stepped down as Labour leader in 2015, all candidates to succeed him needed nominations from 15% or more of the parliamentary party. Mr Corbyn would not have been able to surmount that barrier had it not been for some centre-right MPs feeling that, though he had no hope of winning, his candidacy would broaden the debate. Margaret Beckett, previously a caretaker leader of the party, said that she nominated him “so that the left would have some representation”.

Given this opportunity, Mr Corbyn won the hearts and votes of a majority of the party’s members as well as of tens of thousands of new “supporters” who, thanks to a rule change Mr Miliband had favoured, were allowed to vote in the leadership election provided they contributed £3 ($4) to party coffers. When his leadership was challenged after the Brexit referendum Mr Corbyn could no longer get even 15% of the party’s MPs to nominate him. But the courts ruled that this did not preclude his running, and he won again. He thus held on to the leadership of his party despite the fact that three-quarters of his colleagues in Parliament think that he is unfit for the job and many leading MPs refuse to serve in his shadow cabinet.

Then there was Mr Cameron’s misjudgment. He believed that he could get the Eurosceptic monkey off his back by proposing a referendum which, if he remained in coalition, he would never be able to call and which, if the Conservatives won a majority in Parliament, he would easily win. The British - and global - establishments were united in favour of Remain (Mrs May was among them, though the effort she put into campaigning for the cause was studiously slight). Eurosceptic ranks were thick with what Mr Cameron described as “swivel-eyed” lunatics.

The campaign proved Mr Cameron’s assessment wrong. Having earlier said he would be happy to leave the EU if it were not reformed, his claims that Britain had to remain rang hollow. Mr Corbyn, who like most of the Labour left has been deeply Eurosceptic in his time, campaigned for Remain with less vigour than any other Labour leader since Michael Foot would have. A group of canny activists led by Douglas Carswell, Daniel Hannan and Dominic Cummings seized control of the Leave campaign and sought to marginalise both UKIP’s Nigel Farage - whose anti-immigrant populism turned many voters off, but whose supporters would vote Leave regardless - and old-school Tory Eurosceptics like John Redwood. Instead they kept the focus on more plausible voices such as those of Boris Johnson and Michael Gove. Mr Hannan argues that, had Downing Street been able to frame the debate as a choice between Mr Cameron and Mr Farage, Mr Cameron would have won at a walk. Instead he lost.

In a way, though, he succeeded in his original aim. The Tories had been split over Europe since the mid-1980s; the division helped topple Mrs Thatcher, hobbled her successor, John Major, and weakened opposition to New Labour. Now the breach is mended: the Eurosceptics won. And this has provided an electoral bonus. Tories who abandoned the party for UKIP can now return - and Labour voters who went for UKIP, or voted Leave in the referendum, seem winnable, too (see chart 3). The Tories have calculated that if they could add 80% of the votes UKIP got in 2015 to their own tally from that year, their working majority in Parliament, currently 17 seats, would be over 100. They have campaigned vigorously in Labour strongholds in the Midlands and the North that voted for Brexit: Mrs May launched her manifesto in the Yorkshire town of Halifax, where 56% voted Leave and Labour’s paliamentary majority is under 1,000.


The darkness drops again

The appearance of Mr Corbyn’s name on Labour’s leadership ballot allowed thousands of angry people to vote for a leader who broke with the past. Mr Cameron’s decision to hold a referendum allowed millions of people to express their frustration with the status quo. And these angry decisions have proved to be mutually reinforcing. Mrs May’s decision to accept the result of the Brexit vote has produced a definitively post-Cameron Conservative party; the only Tory voice of noteraised against her is that of George Osborne, once an impeccably neoliberal chancellor, now the editor of London’s local paper, the Evening Standard. Mr Corbyn’s relatively successful campaign has demonstrated that espousing socialist opinions is not necessarily the kiss of death.

The anger that turned those mistakes into a seismic shift is itself grounded in the failures of neoliberalism. The biggest factor was the 2008 global financial crisis. It hit Britain particularly hard because financial services play an outsized role in the country’s economy, generating 8% of its GDP, and because of its “light touch” regulation. The crisis made Britons significantly poorer: British workers saw their wages (adjusted for inflation) fall by 10% in 2008-14, and are unlikely to see them reach pre-crisis levels until at least 2020. It played havoc with the public finances: faced with large deficits the coalition government chose to cut back on public spending.

The crisis also undermined the public’s faith in their rulers. That faith had already taken some knocks. Mr Blair’s decision to back George Bush in removing Saddam Hussein from power in 2003 ended up doing much to discredit him, especially in the eyes of his own party. The only Labour prime minister ever to win three elections in a row became a pariah in his own country. More parochially, in 2009 the Daily Telegraph revealed that MPs routinely abused their expenses to do up homes that they sold on at a profit, as well as for sundry other ill-judged and absurd outlays such as the renovation of moats and the housing of ducks. Six cabinet ministers resigned, several MPs ended up in prison and the political class was tarnished

But the financial crisis did not just entrench distrust and anger. It also laid bare longer-term problems in the economy. Britain’s flexible labour market has been good at generating jobs. That is one reason the admission of eastern European countries such as Poland to the EU led to a surge in immigrants in the mid-2000s, one that New Labour welcomed; concerns over their presence was one of the factors that delivered a Leave vote at the referendum. But despite the influx, the unemployment rate is one of the lowest in Europe.

If the neoliberal dispensation was good at producing jobs, though, it was no great help in guaranteeing their quality. Almost a million Britons are on “zero-hours” contracts that provide no assured revenue, up from 108,000 in 2004. Britons work longer hours than their French and German counterparts, and, in the south-east, spend more time and more money getting to work. Britain’s productivity (output per hour worked) briefly exceeded the EU-15 average in the early 2000s but now stands at just 90% of the average. The OECD notes that a higher proportion of British 18- to 24-year-olds suffer from low literacy and numeracy than their equivalents in France, Germany, Italy or Spain.

Britain also has the most capital-centric economy of any major country apart from South Korea. Per-person GDP in London is almost two-thirds higher than the national average; it is almost two-and-a-half times higher than in Wales. The house-price-to-earnings ratio in London has risen from seven times average earnings in the early 2000s to 13 times today, so that London vies with New York and Tokyo as the most expensive place to live. The capital is also the most expensive place in the world for startups to rent offices.

It was against this background that immigration came to play its pivotal role in turning significant sections of the British public against globalisation. Immigration is a more emotional subject than other forms of free movement because it involves issues of culture and competition for resources such as school and hospital places. It also divides opinion on class lines: richer Britons are more likely to regard immigration as a good thing; poorer Britons to see them as competitors for jobs and state resources.

That division was made more poisonous by the fact that the elite did very well in the neoliberal years. In 1980 the average CEO of a company on the FTSE All Share index earned 25 times more than the average employee. In 2016 the bosses earned 130 times more. Between 2000 and 2008 the index fell by 30% but the pay for the CEOs running the firms on the index rose by 80%.

Privatisation has fed resentment too. Labour’s promise to re-nationalise the railways, which would have been unthinkable ten years ago, is popular today: thank high fares and private profit. The bits of the public sector that stayed public did pretty well by their overseers, too. Mark Thompson, then the director-general of the BBC, saw his pay soar from £609,000 in 2005-06 to £788,000 the next year and £834,000 the year after that. The average pay of a university vice-chancellor is now more than a quarter of a million pounds. Many British politicians also did very well, and not just through their expenses. Politicians such as Mr Blair, Peter Mandelson and Mr Osborne have made millions by offering advice to banks, making speeches and otherwise transforming themselves from gamekeepers into poachers.

Mr Carswell, who having left first the Conservatives and then UKIP is now retiring from Parliament, goes too far when he says that the problem with today’s neoliberals is that they “are on the side of Davos Man, not the demos”. Successive politicians have made serious attempts to address Britain’s over-centralisation, for example. Mr Blair and Mr Brown allowed Scotland and Wales to vote on devolution. Mr Cameron and Mr Osborne created six powerful regional mayors, including ones for Britain’s second and third cities, Birmingham and Manchester. But this return of control to the people has proved insufficient. Many wanted more, and believed that by voting to leave the EU they would get it, particularly when it came to borders and immigration. In doing so they changed things profoundly. A poor government can be voted out. Misguided plebiscites are not so easily reversed.

Whether that attempt to seize control leads to the creation of a plausible new political landscape, not just the levelling of the old one, depends to some extent on the result of the election. A devastating defeat for Mr Corbyn might allow moderate Labour MPs to reassert control over the party, sparking a centrist revival. A big win for Mrs May might allow her to negotiate a softer Brexit than Eurosceptics like Mr Redwood want to see. But neither is that likely.


Really? - Getty Images


Slouching towards Maidenhead

The main opposition to the left in the Labour Party comes from the old right, led by Tom Watson, Mr Corbyn’s deputy, not from Blairites; the right has contempt for Mr Corbyn because of his havering on the IRA and Hamas and his long history of rebellion, not because he seeks to nationalise industries. Mrs May, neither easy to read nor very resolute, might just as likely use a big victory as proof that she has public support to negotiate the hardest of Brexits. Alternatively, the weakness she has shown in the campaign might yet see her deposed if colleagues decide the negotiations are going in the wrong direction.

Beyond this, there are three reasons for thinking that it will be very hard to fashion a new political landscape either quickly or well. The first is a lack of preparatory spadework. Beveridge published his outline of the welfare state in 1942; Thatcherite think-tanks busied themselves drafting blueprints for privatisation throughout the 1970s. Today’s populist conservatism looks amateurish and improvised: Mr Timothy plunged the Tory campaign into chaos by adding an ill-thought-out measure to oblige elderly people to pay for their social care without putting a cap on the amount that they would spend. Labour’s manifesto is a compromise between what Mr Miliband offered two years ago and what Mr Corbyn wants, with a profusion of specific proposals that seeks to distract from its fundamental flaws.

The second is that the populist wave has broken badly for Britain. In the post-war era, and again in the 1980s, Britain was in the forefront of a worldwide revolution. The Beveridge report was translated into 22 languages (two German copies dropped by the RAF were found in Hitler’s bunker). Mrs Thatcher’s agenda of deregulation and privatisation found imitators across the world: between 1985 and 2000 western European governments sold off some $100bn-worth of state assets.

Today Britain is out on a limb. Donald Trump, the only major figure overseas to have exalted in the Brexit result, is erratic, crisis-prone and toxic. Emmanuel Macron won the French presidency by promising to embrace a Blairite mixture of liberal reforms, including deregulation, and cosmopolitanism. Angela Merkel looks as if she is going to win a fourth term easily. Some Conservatives have argued that Mrs May is taming the populist revolution by co-opting it; in fact, she may end up hostage to a revolution already in retreat.

The third is Brexit itself. Negotiating it is likely to prove all-consuming; policymakers will have no energy left over for serious attempts to tackle problems such as poor productivity growth. And all the while Brexit will be hurting the economy. Even Brexiteers concede that Britain will suffer short-term shocks as it renegotiates its relationship with its single biggest market. Most independent experts predict long-term harm as well. According to the most recent estimates from the Centre for Economic Performance at the London School of Economics, a hard Brexit would reduce GDP per head by 2.6% over ten years, while a softer Swiss- or Norwegian-style Brexit would cut it by 1.3%.

The result is likely to be a partial reprise of the 1970s. Politics will be paralysed - this time by negotiating Brexit rather than fights with unions. The economy will stagnate thanks to a mixture of uncertainty and business flight. Public services will be squeezed. The roiling discontent that produced Brexit will find new targets. In the 1970s, though, Britain edged its way towards solving the problems of its former dispensation. It is much harder to see it doing the same this time round.'