The financial crisis has forced governments to re-examine the roles of the state and market. Assumptions have been tested and governments have made interventions that would have been unthinkable several years ago – buying stakes in banks (in some cases nationalising them) underwriting risk and injecting capital into money markets.
In Britain the divide between the parties has revolved around different perceptions of the role of government in response to the crisis. New Labour has been clear that when the system is in crisis, the state must intervene. It was right that when we were faced with financial chaos,the government should do what it can to stabilise the system, by taking stakes in banks or underwriting risk. The alternative would have seen parts of the financial system collapse leading to lost savings or credit for businesses running dry.
The political right has been more reluctant and hesitant about intervention, sometimes supporting it as a necessary evil, at other times saying the recession must run its course, or after initial support quickly denouncing government action as a failure.
Part of this is the normal ebb and flow of party politics. But beneath the party wrangling there is a key difference. New Labour is more pragmatic than Old Labour about who should deliver services, but it still sees a greater role for the state than the right. It believes that when markets are faced with such a fundamental breakdown as has been evident in the past few years, it is right that the state act to stop a complete financial collapse and then to try to get the system moving again.
Crucially – and this is a point in danger of being misunderstood on the left – New Labour did not intervene in the banks to replace markets, but to make them work. Market failure forced the intervention. It was the right thing to do but its purpose was not to end markets or destroy enterprise; it was to stop savings being destroyed, stop credit drying up and prevent the downturn from doing more damage.
This is a crucial debate now as some seize on the degree of market intervention shown in the past couple of years to justify a wider shift in public policy. “You have nationalised the banks so why have private investment or choice and competition elsewhere” goes the cry. Unless we get this right, the left could make serious mistakes.
It would be wrong to remove the focus in public services from outcomes and benefits for the public and shift it back to how services are produced. It would be a mistake to retreat from an agenda of choice in publicly funded health and education, when advances in these fields have given those without wealth some of the power hitherto only enjoyed by those able to pay, either directly or indirectly by buying property near the best schools. We should build on these changes to empower people further in health, education or the policing of their streets.
Similarly, the sums spent on bank intervention cannot be a signal for a free for all where limits on public spending no longer matter. This government rightly decided to spend more on renewing the public realm we inherited in 1997 and the public understand that spending goes up during a recession. But because we have intervened in the banking sector it does not mean government can suddenly say yes to every cause that comes knocking on our door.
Getting this debate about state and market right is critical. New Labour is correct to assert the role of the state when the market fails. It is an important difference between us and the right. But Labour, new and old, would be wrong to draw the lesson that the state should either give up its long term public spending discipline or abandon an agenda of choice and empowerment in other fields.
The financial crisis raises the issue of the role of the state in a fundamental way. We have to ask what intervention is for and what we want to see emerge from a recession. That means a state that delivers a better balanced economy than the one we had before the recession. It means a state that enables markets to work better and where rewards are for genuine success, not for recklessness with other people’s money. It also means a state that is firmly on the side of the consumer, where government empowers those with less money in order to spread opportunity. After all, what is more pertinent at the next election than a serious discussion of what, in today’s times, the state is for?
This article was first published today by the Financial Times
But there is also a fundamental question about how we got into this mess and what we do in the future. And its not just about regulation, I don’t want to sound like I’m parrotting Will Hutton here, but the problem with the free market approach is that it has a fundamental flaw and that it is too focused on the short term. Also what are the implications for other areas of policy, it seems like housing and energy are two sectors where the government has relied on the market to deliver and how succesful this has been is open to question.
So its not just a question of acting after the markets have collapsed but trying to put a framework inplace that delivers what is required, ie; a stable financial system, a housing policy that builds enough homes and an energy market that will deliver the required levels of renewable energy and domestic energy efficiency needed.
The debate about the extent of government intervention is, without doubt, a vital one. But isn’t there a to be made here between different areas of government action? The first area discussed above is the regulation of our financial services industry. This, clearly, raises difficult questions: should the government be able to limit bankers’ bonuses? To what extent should regulation of complex financial instruments be at a domestic, European or global level? Second, and closely related, is governing the economy. Overlapping, as these two areas inevitably are, these should be distinct in policy terms. Fiscal policy – managing the national debt – setting a minimum wage – re-invigorating industry – are all relevant to financial regulation, but have much wider importance to how our economy performs. Third – and again related – are the policy areas which might be broadly termed “public services”. These areas again pose their own questions in terms of how resources are allocated – and how they are best deployed. It is, even in these very broad terms, clumsy to conclude that a free market system should be applied – or not – across the board or that a government needs to take a heavy hand (or a “light touch”) in each area. The insufficiencies in housing policy and the inadequacies of financial regulation both need to be addressed – but surely not in the same way.