New Labour and the Destuction of Social Democracy

New Labour and the Destuction of Social Democracy

Labour wasn’t always a modern, business-friendly party committed to fiscal prudence.

When the official results of the last national election in the United Kingdom were announced in bright spring sunshine on May 2, 1997, it seemed that the long night of Conservative Party rule was finally at an end. Tony Blair’s Labour Party had celebrated one of the largest landslides of the century with a majority of 178 seats, and the Tories had been reduced to a comparatively small opposition faction. Almost eighteen years of continuous Conservative government had inflicted serious economic instability and massive social devastation on the country. Years of severe underfunding had ravaged the health and educational systems, as well as blighting the public transportation networks of the major cities, particularly in London. The sustained attack that Prime Minister Margaret Thatcher had waged against welfare programs and public pensions sharply increased the level of poverty. Strict monetarist policies had produced high interest and exchange rates over a good part of the 1980s. These policies played a major role in de-industrializing the British economy and reducing exports, while promoting short-term speculation in financial and property markets as the new focus of the economy. The labor unions had been reduced from their once (in some cases, excessively) powerful role in collective bargaining to largely ineffective organizations that could do little more than lament the forced march to unregulated and increasingly temporary labor markets. Britain had achieved one of the highest levels in the West for disparity of income distribution between the top and bottom of its income scale. Privatization of publicly owned services and assets had become an ideological obsession pursued as a good in itself, often without regard to economic or social consequences.¹ It was, then, with high expectations of reconstruction and reinvestment that Blair’s supporters greeted his new government.

In the year before the election, Blair imposed a new centrist direction upon the Labour Party. He broke its association with militant unionism and repackaged it as a modern, business-friendly party committed to fiscal prudence and moderate reform. To emphasize the depth of the change, he described it as the New Labour Party and characterized his policy orientation as the “third way,” which he situated between the interventionism of traditional social democracy and the radical free market view of neo-conservatism. He sought the backing of the right-wing tabloid press and cultivated the support of Rupert Murdoch, one of its most powerful financial figures. Many of Labour’s supporters interpreted these moves as necessary concessions to an electorate and a business community that had been frightened in previous elections by Labour’s pro-union past, as well as by successful anti-Labour campaigns mounted by the popular press. They expected him to return to a recognizable version of Labour’s classic agenda after his convincing electoral victory.

In fact, the notion that Blair’s re-tooling of the party was a short-term election tactic was false. His government has exhibited a remarkable degree of continuity with its Conservative predecessors in most areas of economic and social policy in its first three years of office.

In its initial two years in power, New Labour adhered to the stringent fiscal constraints of the previous government, led by John Major. In fact, it even underspent its allocated budgets in several ministries, achieving the lowest rate of public sector investment (0.8 percent of gross domestic product [GDP]) for any UK administration in more than thirty years.² The result was the continued deterioration of public services, most notably in the National Health Service (NHS), education, and transportation. Blair and Gordon Brown, the chancellor of the exchequer (minister of finance), justified this policy as necessary to reduce a large deficit that they had inherited from the Conservatives. They were also eager to establish their credibility as a party of prudent management with the financial markets and the banks in the City of London.

In his July 2000 Comprehensive Spending Review (CSR), Brown provided a very substantial increase in government spending over the next four years (a total of forty-three billion British pounds), much of it directed to the NHS and education. This move was, in part, a response to widespread criticism of Labour’s failure to reinvest in the public sector and to the serious decline in the government’s popularity in the months leading up to the CSR announcement. Although this increase in funds is a welcome development, it is important to recognize that its net effect will be to restore government spending to the general level that it had reached in 1993 under the previous Conservative government (approximately 39 percent of GDP). This can be seen clearly in the education budget, which had fallen in the first three years of New Labour from 5.5 percent of GDP in 1993 (UNESCO statistics) to 4.6 percent in 1999. It is now projected to reach 5.4 percent in 2004 (the latter two figures from “Mr. Brown’s Bold Boost,” the Guardian, July 19, 2000). The increase will still leave the United Kingdom at the low end of the 1996 European Union (EU) average (excluding the UK) of 5.5 percent of GDP devoted to education (UNESCO). Similarly, government spending on health declined from 5.8 percent of GDP in 1993 to 5.6 percent in 1999 (UK National Office of Statistics). The planned increase in NHS funding will bring health expenditure to 7.6 percent of GDP by 2003-2004, but this will still fall short of the current EU average of between 8 percent and 8.6 percent (source: Labour Party headquarters, London). New Labour’s strategy has been to freeze public spending in real terms and build up a large budget surplus (fifteen billion British pounds for 1999-2000) during the first three years of its government and then to provide large injections of funding to return to the previous levels of public expenditure in preparation for the next election. There is no evidence to suggest that this represents a long-term commitment to a significant expansion in public spending on services and poverty relief beyond that observed under the Conservatives.

In addition to tight spending, the government has maintained comparatively high interest rates (an average of approximately 6 percent over the past three years, twice that in the European Monetary Union [EMU] zone) by strictly enforcing a low rate of inflation (2.5 percent). As a consequence, the pound has soared in value relative to the constituent currencies of the Euro, rising 22 percent against the German mark in the past three years. These developments have generated conditions not at all dissimilar to those that prevailed in the late 1980s under Thatcher. The United Kingdom is experiencing a second round of de-industrialization in which factories in the north and the midlands face serious cutbacks or closure because of their inability to compete with lower-cost products from continental Europe. Manufacturing is falling below 25 percent of GDP, and Britain’s exports are declining steeply while the countries of the EMU zone are in the midst of an export-led recovery. On the other hand, as in the late eighties, the high pound and investment tax incentives have produced a boom in the financial and property markets in London and the southeast. Regional disparity in wealth and employment have continued to grow.

New Labour’s monetarist fervor is not simply the expression of caution on the part of a leadership traumatized by eighteen years of opposition. It is part of a well-worked-out view of politics and the economy that defines Blair’s version of the third way. This view is clearly revealed in the zeal with which the government continues to pursue privatization of public services in the face of widespread opposition and in the absence of any clear economic motivation for these transfers. John Prescott, the deputy prime minister responsible for transport, has been promoting partial privatization of the national air traffic control system and of the London subway system or Underground. If his plans are implemented, Britain will be one of the only countries in the world to entrust these components of its transportation framework to companies whose function is to earn profits for their shareholders.

The privatization of Britain’s railways under the Conservatives has generally been recognized as a disaster. It produced a patchwork of companies that control different parts of the network in a thoroughly inefficient way. Passenger service is poor, fares are the highest in Europe, and safety standards have been compromised through lack of investment. The train companies and Railtrack, the agency responsible for maintaining tracks and stations, have focused on shareholder returns rather than modernizing the system. During the election campaign, Blair promised to introduce more effective public regulation of the railway. Despite two serious rail accidents since 1997 and a continuing decline in the level of service, no substantive steps have been taken to change the regulatory regime in order to deal with these problems. Other large-scale privatizations under the Conservatives, such as the selloff of the water companies and major utilities, have yielded at best questionable improvements in service. They have invariably been accompanied by large increases in user costs and enormous windfall profits for shareholders and managers. As a result, there is considerable popular skepticism concerning the wisdom of privatizing public services.

In the case of the London Underground, opposition to the government’s privatization plan was a significant factor in Ken Livingstone’s victory in the London mayoral election. After Blair effectively blocked his selection as the Labour candidate, Livingstone ran as an independent and won with support across the political spectrum. His wide electoral base is remarkable given his radical past as a member of the Labour left. Livingstone presented his campaign as, in large part, a referendum on the future of the Underground. He proposed a municipal public bond issue to finance modernization of the system, which would remain entirely under public control. This program is modeled on the procedure used to rebuild the New York City subway in the 1980s. It has been endorsed by a variety of financial analysts, including Susan Kramer, the banker who ran against Livingstone as the Liberal Democrat candidate for mayor. One of the main advantages of a bond issue is that the city would be able to finance reconstruction at a considerably lower cost of borrowing than a private company, which does not have access to the low-cost loans available to government. Blair and Prescott have indicated their determination to pursue their partial privatization program despite the election result.

New Labour’s fascination with Conservative ideas is not limited to the economic domain. Jack Straw, the home secretary, has surpassed his Tory predecessor, Michael Howard, in the authoritarian measures that he has adopted to restrict the entry of refugees into the country. His continued assault on asylum seekers seems to be designed largely for internal political effect. It has little to do with the number of refugees actually in the country, since Britain has experienced smaller overall growth in its refugee population and hosts fewer refugees than most other major European countries.³

Straw is also attempting to gut a promised freedom of information bill by incorporating wide discretionary powers for government officials that would permit them to avoid disclosure of material in a large variety of areas. This sort of stance on immigrants and civil liberties is aimed at securing New Labour’s reputation as a tough-minded party, free of liberal sentimentality.

Blair’s third way is essentially an exercise in kinder, gentler neoconservative politics packaged as a progressive agenda for a reconstructed “left.” It is, moreover, a particularly extreme instance of a tendency that has been embraced with varying degrees of enthusiasm by many social democratic parties in the West, including those in Germany, France, and Holland.

One of the main factors driving this trend is the view that the rapid growth of global financial markets and free trade are generating competitive pressures that render interventionist economic policies and a large public service sector unsustainable. Indeed, the rhetoric of globalization hangs heavy over New Labour. It is frequently invoked as something analogous to a force of nature over which we have little, if any, control.⁴ New Labour’s guiding assumption seems to be that the best an enlightened government can do is to ease the transition into a brave new era by seeking to improve its people’s capacity to compete in the emerging global marketplace and by creating optimal conditions for private investment. The nature of the new market and the demands that it imposes are non-negotiable.

There is no doubt that the expansion of global markets has had a profound impact on the world’s economies, particularly in the West. The rise of foreign direct investment (FDI), the amount of foreign investment flowing into and out of a country as a percentage of its GDP, provides a measure of this process. Maiko Mikaye and Stephen Thomsen indicate in their article “Recent Trends in Foreign Direct Investment” (Financial Market Trends73, June 1999) that the combined inflow and outflow of FDI as an average for countries of the Organization for Economic Cooperation and Development (OECD) increased from 1 percent of GDP in 1981 to approximately 7 percent in 1998. They also point out that the United States and the United Kingdom absorbed over half of the FDI inflow for the OECD in 1998, with foreign investment doubling in the United States and increasing by 72 percent in the United Kingdom in this year. Much of this investment consisted of trans-Atlantic mergers and acquisitions where companies bought up businesses across national boundaries in Europe and the United States. Britain was the largest recipient of American investment in Europe in 1998, receiving 45 percent of its European FDI. As Mikaye and Thomsen observe, globalization is driven, in part, by a cycle in which “policy reform and technological change bring greater competition at a global level, which in turn drives firms to expand abroad and to invest in newer technologies. Governments in turn respond by trying to increase their attractiveness to foreign direct investors through further liberalization and reform.”

Liberalization and reform involve increasing the profitability of investment through deregulation of the labor market and lowering business taxes. New Labour has followed its Conservative predecessors down this route. Gordon Brown further reduced capital gains and corporation taxes in his last budget, giving Britain one of the lowest rates of business tax in the world. These moves continue the process of shifting an increasing amount of the tax burden to wage earners.⁵ In this situation, significantly improving public services would require increasing taxes on middle-income earners. As this becomes increasingly difficult in political terms, New Labour, like many other governments in a similar position, has opted to reduce the public sector.

Traditional social democracy assumes a Keynsian view of markets. It regards them as artifacts shaped by social and political factors, as well as by purely economic forces. It seeks to harness the creative power of the market to generate wealth in a way that maximizes social well-being and political democracy. Unconstrained free markets cannot achieve these objectives because they invariably produce a highly unequal distribution of wealth and power. The Keynesian model counteracts these market failures by means of regulation, public provision of services that would not be universally accessible if run for profit, and redistribution of wealth through the tax system. In addition, organized labor provides a balance to the power of capital to determine wages and working conditions. New Labour regards the emerging global economy as intrinsically determined by classic free market principles, which render Keynesian policies untenable. The instruments that social democratic governments used to direct national market economies so successfully in the postwar era are increasingly ineffective when applied to business interests that can quickly relocate investment within a seamless international market.

In fact, global markets are not a force of nature but the result of free trade agreements and multilateral arrangements for liberalizing investment. Governments negotiate these agreements and enter into them in order to promote particular interests. At present, corporate business concerns and free market theorists play the central role in shaping the structure of free trade and liberalized financial markets. It does not seem to have occurred to New Labour (or to many social democratic leaders) that the only viable strategy for social democratic renewal is to seek to transpose the Keynesian model from the national context to the emerging global economy. To do so it is necessary to develop cooperative international institutions through which like-minded social democratic governments can impose the sorts of constraints required to avoid the social and environmental damage caused by the juggernaut of unrestrained global markets. Such an international neo-Keynesian approach would aim to put into effect international currency controls to prevent the sort of unbridled speculation that undermined East Asian, Russian, and Latin American economies in 1998. It would attempt to control corporate tax evasion by establishing an international tax regime that required businesses to bear a reasonable part of the tax burden in any market in which they made profits, and it would favor long-term investment in order to discourage the rapid destabilizing flow of “hot money” seeking quick returns. Effective environmental protection and fair labor laws would be essential components of this program.

The European Union would seem to offer a natural forum from which to pursue a neo-Keynesian approach to globalization. It has built up a substantial regulatory regime and a rich network of social and human rights legislation as the framework for controlling a large free trade zone in which goods, services, and labor move across national boundaries. The Conservatives have promoted a virulently anti-EU stance precisely because of their opposition to the constraints that the EU imposes on labor markets and investment. Although Blair has avoided the rhetoric of Euro skepticism, he has kept the EU at a safe distance. By pursuing monetarist policies and allowing the pound to rise sharply in value, he has effectively ruled out Britain’s entry into the EMU for the foreseeable future. Rather than attempting to cooperate with the leaders of social democratic governments on the continent in order to devise a new global strategy for reform, he has lectured them repeatedly on the need to adopt the New Labour model as the route to competitiveness.

Unfortunately, most other social democratic parties have also not dealt with globalization. They have abandoned their traditional role as the agency of social constraint on the market and, like New Labour, they have become instead the impresarios of “modernization.” The business of resisting the new economy has been left to the disparate extra-parliamentary opposition that demonstrated at the World Trade Organization talks in Seattle and at the meeting of the World Bank in Washington. The groups that make up this opposition understand the severe economic and ecological dislocations that the new economy is producing. However, they have no coherent proposal for dealing with them. The simple-minded protectionist alternatives that they frequently suggest are in no way viable. Expansion of trade is a necessary condition for creating the new wealth needed to alleviate poverty and promote development both in the third world and in the West. But if global markets are not subjected to democratic political control, then they will be a source of increasing instability, rising inequality, and continuing environmental destruction. The future of the social democratic project depends upon the capacity of the democratic left to redefine it in international terms in order to provide a serious political response to these challenges. The vapid rhetoric of the third way and the modified neoconservatism of New Labour are costly distractions from this task.

Shalom Lappin is professor of computational linguistics in the Department of Computer Science at King’s College, London.

1 See Will Hutton, The State We’re In (Vintage, 1996) for a detailed description of this period of Tory government.
2 Larry Elliott, “Sky’s the Limit,” citing UK Treasury statistics, the Guardian (May 10, 2000).
3 According to statistics provided by the United Nations High Commissioner for Refugees, the number of recognized refugees in Britain in 1998 was 116,000; in France, 140,200; in Germany, 949,200; in Sweden, 178,800; and in the Netherlands, 131,800.
4 See, for example, Anthony Giddens, The Third Way (Cambridge: Polity Press, 1998), and The Reith Lectures (BBC, 1999) where globalization is portrayed as the inevitable consequence of unstoppable technological innovation.
5 See George Monbiot, “The mobile economy,” the Guardian (March 23, 2000)