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It’s not the 90s any more

Summary:
Sir Keir Starmer wants to party like it’s 1999. That seems to be his motive for seeking the advice of Peter Mandelson. There is, however, a big problem with this. It’s not the 1990s any more. There have been huge socio-economic changes since then, which require very different policy responses. One of these is that the economy is now stagnating. In the 20 years to May 1997 labour productivity grew by an average of 2.3 per cent. In the 12 years before the pandemic, however, it grew by only 0.2 per cent per year. Back in the 90s, therefore, it was reasonable to believe that the economy would grow well if governments could only provide the right framework such as stable macroeconomic policy. Today, though, we know that whilst policy stability might be necessary, it is not sufficient.

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Sir Keir Starmer wants to party like it’s 1999. That seems to be his motive for seeking the advice of Peter Mandelson. There is, however, a big problem with this. It’s not the 1990s any more. There have been huge socio-economic changes since then, which require very different policy responses.

One of these is that the economy is now stagnating. In the 20 years to May 1997 labour productivity grew by an average of 2.3 per cent. In the 12 years before the pandemic, however, it grew by only 0.2 per cent per year. Back in the 90s, therefore, it was reasonable to believe that the economy would grow well if governments could only provide the right framework such as stable macroeconomic policy. Today, though, we know that whilst policy stability might be necessary, it is not sufficient. Capitalism has lost its dynamism. That requires a different – perhaps more activist – policy response. Prince

A big reason for this stagnation is, of course, the legacy of the financial crisis. Which itself shows another reason to need to break with 1990s thinking. In his 1996 book The Blair Revolution, Mandelson wrote of the need for “firm macroeconomic policies to avoid any repetition of boom and bust”. “By far the most important thing” he wrote “is to get macroeconomic policy right.” But we now know that macro policy is not enough to avoid recessions and their aftermath. The banking crisis taught us that the economy is not naturally stable, thrown into recession only by policy error. Instead, crises arise from private sector decisions which cannot be fully corrected by good policy. Mandelson’s claim that “our understanding of economics has greatly advanced in this century, and in theory enables economic fluctuations to be damped and corrected” now reads as simple-minded hubris.

Our long stagnation requires another change in thinking from the 90s. “New Labour emphasizes macroeconomic stability” wrote Mandelson “because of principled objections to high inflation and the economic and social havoc it wreaks.”

Today, though, we have the opposite problem. Inflation is too low. A rise in it might actually be a good thing as it would allow us to escape the zero(ish) bound on interest rates. Mandelson wrote of the need for a “tight new discipline” in fiscal policy. That might have made sense in an inflation-prone economy where real interest rates were over 4%. But when economies are stagnant and real rates minus 2%? Not so much.

Stagnation also overturns 1990s ideas about inequality. Although Mandelson has disowned his famous remark about being "intensely relaxed about people getting filthy rich as long as they pay their taxes", I’m not sure he appreciates just how wrong it was. A decade and a half of stagnation shows us that inequality is not a minor issue ameliorable by tweaks to the tax system. Instead, it’s plausible that inequality is a big cause of slow growth. It concentrates power within companies into the hands of reckless Stalinists like Fred Goodwin; it incentivizes rent-seeking; it generates perverse incentives; reduces trust, innovation and investment; and so on.

Growth-enhancing policies thus require much more egalitarian actions than we thought in the 90s, therefore.

And the inequality that matters now is very different from that of the 90s. Back then, leftists such as Will Hutton spoke of the 30-30-40 society: “30 per cent disadvantaged and marginalised; 30 per cent insecure; 40 per cent privileged.” Today, though, what matters is the wealth and power of the top 1%, or 0.1%. New Labour was largely oblivious to this: in hindsight, one of Gordon Brown’s great failings was his undue deference to bank bosses.

Because the economics has changed since the 90s, so too has the politics. I mean this in two big ways.

One is that the growing wealth of the mega-rich has increased their power over politics. In the 90s, the main opposition to Labour was founded upon businesses’ fears of higher taxes and bad macroeconomic management. The party could then assuage such concerns easily. Today, though, it faces opposition from eccentric billionaires stoking up culture wars. It’s less obvious what to do about this.

Secondly, our long stagnation has strengthened illiberal populist sentiment – just as Ben Friedman predicted. In the 90s and 00s the Tories lost elections massively by “banging on about Europe”. Things have changed since. In the 90s, voters chose technocrats over cranks. They no longer do so. Which gives Labour a dilemma: how far to accommodate itself to populism, and how far to resist it?

In all these ways, the 90s is utterly irrelevant today. What worked then will not work now. Few centrists, however, seem to grasp this. One of their defining features, indeed, is a complete innocence of economic realities and a vacuum where ideas should be.

Which brings us to a paradox. One of the great achievements of Tony Blair was to realize that social democracy had to reinvent itself for the new times of the 1990s. His epigones, however, don’t appreciate that Labour now needs another reinvention for different times, and don’t give John McDonnell credit enough for grasping this fact. The thing about modernizations, though, is that you have to keep doing them.

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