Soundings

Reviews
A social-democratic sheen on a neoliberal core

Howard Reed

Peter Mandelson's speech to the Work Foundation, Going for growth: building Britain's future economy, January 2010 Lord Mandelson's speech to the Work Foundation in January 2009 (available at www.theworkfoundation.com/) began with a bold claim that the Department for Business, Innovation and Skills (BIS) was breaking with previous New Labour traditions in industrial policy: 'how we create future jobs won't be the same as the past ... other governments are actively investing in their industrial strength. We have to do the same'. This review seeks to establish how, and to what extent, Labour's new industrial strategy differs from its previous approach. The speech begins encouragingly, with the recognition that the present economic slump demands deficit spending to kick-start growth. David Cameron and George Osborne's plans for quick and far-reaching fiscal retrenchment are characterised, correctly, as 'dangerous nonsense'. Mandelson is surely also right to argue - in response to Conservative claims that cutting the deficit would enable lower interest rates which could drive growth - that 'low interest rates in themselves are no guarantee of economic growth ... you also have to have policies that build capabilities and incentives that mobilise investment and create business and employment opportunities'. However, after beginning with these promising insights, 151 the speech then fails to deliver on the details.

A central flaw with the 'new New Labour' approach is that - as ministers have been at pains to point out to the financial markets since the December 2009 pre- Budget report - the fiscal retrenchment that Labour promises by 2013-14, while not as draconian as the Conservative alternative, is still very substantial. Outside of health, education and policing, the PBR estimates imply average cuts of around 15 per cent in each department. It is hard to believe that cuts of this magnitude can be achieved without jeopardising Britain's future productive capacity. Higher education and science spending is an obvious case in point. Mandelson claims that 'a decade of sustained investment by this government has rescued British science from its desperate straits in the 1990s and secured its position of global excellence, second only to the United States'. But it is not clear what empirical evidence this claim is based on; certainly, in terms of the practical application of scientific knowledge, the UK has no room for complacency. UK business R&D spending as a proportion of GDP is only at the EU average, significantly below that of France, Germany, Japan and the US.

Meanwhile, the recent first report of the government-sponsored UK Commission on Employment and Skills predicted that, based on planned spending as of 2009, the UK would be ranked tenth among OECD countries in terms of the proportion of the population with degree-level academic or vocational qualifications. This is above average, but a long way from world-beating performance; and these estimates do not take into account the substantial cuts in higher education spending announced in January 2010. It will be impossible for UK higher education policy to achieve world- leading results if we are not even spending enough to maintain our position in the chasing pack.

The reduction in capital spending implied by the public spending cuts in the years to come also runs the risk of depressing even further business investment - which has already dwindled in the wake of the 'credit crunch'. Banks are, for the most part, failing to lend to businesses which need funds for investment, meaning that once the Bank of England's quantitative easing (QE) programme is withdrawn, UK output growth is likely to be anaemic at best. BIS has announced £150 million of additional public funding for small businesses in the wake of the Rowlands Review of Small and Medium Enterprise (SME) finance, but this is nowhere near enough to maintain investment for innovative small firms at pre-2007 levels, given the collapse in private sector investment in SMEs that has occurred since the 'credit crunch'.1 The outlook for larger-scale 'roll-out' of key new technologies - low carbon infrastructure investment in particular - looks, if anything, even worse. Mandelson states that 'twenty-first century economic growth needs to be built on innovation at the knowledge frontier, addressing new challenges such as climate change and decarbonisation and exploiting new digital and materials technologies'. But - given that private sector business investment is in the doldrums, and the carbon-pricing approach of the EU emissions trading scheme has not so far delivered the financial incentives for investors to devote resources to low-carbon investment on anything like the scale needed - a new approach is badly needed if the UK is to meet its ambitious 2050 target for an 80 per cent reduction in greenhouse gas emissions. The New Economics Foundation's 'Green New Deal' proposes harnessing up to £50 billion per year of new public and private investment to transform the UK into a low carbon economy, initially through an extension of QE, followed by the development of various longer-term financing mechanisms including 'green bonds', and new tax incentives on green saving and investment.2 Devoid of big ideas like this, the government's current low carbon strategy is mostly 'all mouth and no trousers' - and stands correspondingly little chance of effecting the transformational change that is required for the UK economy to decarbonise.

Of course, Britain's over-reliance on a large, unstable and near-terminally reckless financial services sector before the crash puts us at an obvious initial disadvantage compared with many of our competitors. Mandelson does recognise the problems which the finance sector has caused the UK - his observation that 'the financial crisis demonstrated that the long-termist business culture needs to be more firmly established' is probably the understatement of the century so far. But unfortunately, he offers no actual policy proposals to promote long-termism or discourage short- termism. For example, the speech talks disapprovingly about corporate Britain's reliance on debt rather than equity. But the biggest takeover deal since the credit crunch - Kraft's takeover of Cadbury - was, as no less a critic than Warren Buffett has argued, made possible by the provision of a new debt mountain by the banking sector - including the mainly UK state-owned Royal Bank of Scotland. If over- reliance on debt is the problem, why is the UK government allowing its own banks to fuel the fire once again?

In a typical example of the social-democratic sheen on neoliberal core ideas that has characterised much New Labour rhetoric, Mandelson also pays lip service to notions that businesses have a wider social responsibility to parties beyond their shareholders - but doesn't propose actually doing anything to enshrine this responsibility in law. For example, he suggests that 'companies making acquisitions should set out transparently and publicly their long term plans for the assets they propose to acquire ... although these remain commercial decisions, firms or investors should expect to brave the court of public opinion if they are motivated only by short term profit'. But it is clear to anyone who has observed attempts by activists to use 'shareholder power' to hold firms to account for the malign social impacts of their decisions that, in our current variant of capitalism, public opinion is more of a court jester than judge, jury or executioner.

The lack of ambition in BIS's industrial strategy partly stems from the fact that, although the headline pre-2007 message - that the key to the UK's prosperity is to deregulate and indulge big finance as much as possible - has had to be abandoned, as it was simply untenable in the wake of the huge banking sector interventions of late 2008, the rest of the neoliberal consensus still rules largely unchallenged in Whitehall. So, we have Mandelson stating that 'no- one fully understood the risks in the model that destroyed Lehman Bros and crashed the banking system'. In fact, heterodox economists such as Steve Keen and the late Hyman Minsky - as well as economics journalists like Larry Elliott - had catalogued the risks very clearly, but were ignored by the professional mainstream from which Labour ministers take their advice. The claim that 'flexible labour markets' are behind the UK's relatively strong employment performance in this recession compared with the previous recession of the early 1990s doesn't tally with the substantial increase in regulation that took place between then and now.3 The claim that 'enterprise and reward go hand in hand' ignores the fact that bankers like Sir Fred Goodwin were receiving huge remuneration for work that was not just socially valueless, but in fact destructive of value on an almost unimaginable scale. And so on.

In short, Lord Mandelson's speech initially sounds as if it is making a break with New Labour orthodoxy - but closer inspection reveals that few, if any, of the detailed policy implications of a more interventionist approach have been explored or thought through. Currently Labour is a political Frankenstein's monster, with an interventionist head grafted ill-fittingly onto a laissez-faire body. Two and a half years after the collapse of Northern Rock and eighteen months after the nationalisation of much of the UK banking sector, we are entitled to expect a more coherent reassessment of industrial policy than this. Below I outline four key components of what a genuine bottom-up reimagining of business strategy should include if we are to make a clear break from neoliberalism.

The first step would be to move towards creating a genuinely more social and community orientated capitalism. Employee ownership schemes, along the lines of the model used by the John Lewis Partnership, should be tax-incentivised. Stamp duty on UK share transactions should be replaced with an annual levy on UK publicly quoted companies, which would transfer a proportion of their equity capital into a publicly held sovereign wealth fund or similar vehicle. And the government should encourage the development of a social analogue of the private equity sector, which could buy up existing companies and transform them into large-scale social enterprises. Changes to company law to embed wider social responsibility into boardroom decisions are also crucial.

Second, we need measures to unlock and encourage enterprise and creativity not just among a few managers or entrepreneurs but in the private (and public) sector workforces as a whole. The encouragement of mutual ownership and industrial democracy would help here. So would a wider role in British workplaces for trade unions - whose presence has been shown in recent empirical work to be associated with greater take-up of high-performance working practices, but who face widespread opposition from managers schooled in the anti-union rhetoric of Thatcherism. Incentivising union membership through tax breaks (for example a lower rate of corporation tax for unionised firms) might help break this logjam.

Third, the UK should not be cutting public spending on items which are essential to our future economic prospects - such as higher education, science and transport infrastructure. The recent Compass publication In Place of Cuts shows how spending on key areas such as this can be maintained by using a combination of tax increases to bring in around £40 billion per year of extra revenue. Finally, as discussed earlier, policy to decarbonise Britain's economy needs to be much more ambitious - drawing on the work of the New Economics Foundation's Green New Deal group. For example, a large-scale programme of investment in insulation to convert all UK residential dwellings and business premises into a low-carbon buildings would provide a massive stimulus to the nascent low-carbon industrial sector as well as creating employment on a large scale. At the moment, Peter Mandelson's rhetoric shows that he has at least taken the first step - he has digested the top line that we can't go back to the way we did things before 2008 - but he lacks the intellectual or policy apparatus to change direction completely. It is up to progressive researchers and commentators to point out to him that an alternative to neoliberal industrial policy is out there - and that if he and the Government can just look a little harder and abandon their preconceived ideas about what policy should be doing, they can find it.

Notes
1. See my recent research on this: H. Reed, Reinventing Venture Capital, Demos 2010.
2. New Economics Foundation, The Cuts Won't Work, nef, 2009.
3. See, for example, S. Lansley and H. Reed, Deregulate or Bust? TUC, forthcoming.