Peter Mandelson and Roger Liddle have just written the unofficial New Labour manifesto for the next election. It is more coherent and less conformist than he had feared. But the book does not develop a political economy of stakeholding and it lacks the bite of the US Democrats' latest plansby Will Hutton / March 20, 1996 / Leave a comment
For all of this century the search has been on for a model of economic and social organisation offering an alternative to the brutalities of laissez-faire capitalism and the inefficiencies of central planning. For the British left, failure at four successive elections, combined with the implosion of scientific socialism and the triumph of market individualism, has made the quest more urgent. Comfortable leadership in opinion polls can be anaesthetising, but in its bones Labour still knows that power depends on elaborating a viable and attractive conception of social capitalism-that elusive “middle way.”
It is in this context that Peter Mandelson’s and Roger Liddle’s The Blair Revolution should be read. The book is so clearly bound up with both men’s political ambitions that it is almost impossible to disentangle its seriousness of intent from its publishing status as a mini-political event. None the less it is a book cast firmly in the “middle way” tradition-the modern stakeholder variant-and for all its flaws it deserves serious engagement.
Mandelson is so well known as Blair’s alter ego, now entrusted with the party’s election campaign committee, that the co-authored book will have to bear intense scrutiny. There is not only a Labour party suspicious of his influence and right wing inclinations, but also there is an army of Tory apparatchiks and civil service mandarins who will be quarrying every nook and cranny for political ammunition and clues to Labour’s intentions in government. (Shadow cabinet jealousies have been accommodated with obsequious plaudits all round.)
Indeed, the writers appear so wary of the weight of interest from detractors and supporters alike that the style is often irritatingly guarded-larded in the conditional tense and anxious to present options rather than hard proposals. The radical ideas foreshadowed in press leaks, from arguing for a formal coalition with the Liberal Democrats to abolishing universal child benefit, have been eschewed to minimise further ruptures within the party-although traces remain in the floating of no-strike agreements in the public sector and the notion that local funding for education could be substantially boosted. Yet the Labour party can be reassured: the book only rarely accommodates neo-conservatism, and in parts it is authentically and originally left of centre.
As might be expected, much of the analysis closely follows the framework set out in Tony Blair’s speeches since becoming Labour leader (indeed, Blair is the hero of the account to a degree he might find embarrassing). The personalised pictures of what is wrong with contemporary Britain, which begin many chapters, sit oddly with the detailed policy ideas that follow-although the format works well in the final chapter of the book, highlighting what is at stake if the current drift of policy continues. But this attempt at accessibility is unlikely to attract many ordinary voters into ploughing through the book’s 274 pages. This is a book for policy wonks.
It is not solely a revisiting of familiar themes. The chapter on how New Labour will have to organise itself in government is particularly well thought through; and these two pro-Europeans stick to their guns in a solid survey of European policy. The twosome also occasionally chance their arm, floating some interesting policy initiatives. The idea of a ?5,000 dowry to underpin the early years of marriage is attractive, and cleverly finesses the public spending implications; so is the idea of public schools forming partnerships with local state schools to educate the disadvantaged. All this is neatly linked into their wider conception of promoting a stakeholder economy and society.
So far, so good. But the book lacks a clear political economy of contemporary capitalism to help bind together the institutional reforms and policy initiatives into a coherent whole. You may recoil from the horrors of laissez-faire simplicities, but they are based on a clear view of how the market economy works; equally, socialism as a credo is propped up by the clear view that private capital is necessarily exploitative of labour-and therefore the commanding heights of the economy must be in public ownership. Mandelson and Liddle want no truck with either tradition; but it is not enough to cherry-pick from the best of both-arguing for a marriage of the dynamism of capitalism with the social inclusion of socialism-unless you can underpin it with a distinctive political economic philosophy. Without that, you are left with a political patchwork quilt which can be easily unpicked. In fairness, this is not their problem alone; it has dogged the social-democratic left since the 1960s. The lack of a robust political economy of market regulation was exposed by the supply-side attack of the 1970s with its stress on market flexibility and management prerogative. Keynesians battled with monetarists at the macro-level, but at the level of the company they were defenceless because they shared the same orthodox assumptions. Stakeholder political economy has at last given the centre left the confidence to take on the free market right on its home ground-the private company.
But it is not sufficient to use stakeholder insights to understand the institutional failings of British corporate life. A centre left political strategy worthy of the name must challenge the operation of British market capitalism in its present form. Mandelson and Liddle are reluctant to do this. Both men deplore rising inequality and insecurity; indeed, their concern for the lot of ordinary men and women does them credit. But the volatility and under-investment which has created the problems they wish to solve can be dealt with, they claim, by wiser macro-economic management. Markets and companies should be allowed to get on with being dynamic-albeit with some prodding towards long-termism. A government which follows these precepts can create a stakeholder economy and society.
Would that it were so easy. Much of the time the authors do seem to be aware that the very operation of British capitalism is at the heart of the problems which concern them-but their policy response is inadequate. They do not like the doctrine enshrined in British company law that companies must maximise shareholder value. But in a capital market where equity is largely owned by pension funds and insurance companies which are necessarily concerned with short term share performance, corporate short-termism and under-investment is endemic. While saying that the doctrine needs to be confronted head on, they singularly fail to do just that. Compared with the recent document produced by the US Democratic Task Force-I have a leaked version on my desk as I write-on developing the “responsible corporation” and “responsible investment fund”-R-Corps and R-Funds-Mandelson and Liddle are caution itself.
The task force document serves as a useful benchmark to judge The Blair Revolution. Appointed by the Democrats’ leader in the Senate, Tom Daschle, to explore new economic policy avenues, Senator Jeff Bingaman and his team find much common ground with Mandelson and Liddle. They observe many of the same phenomena: falling real wages for unskilled men; low levels of innovation and R & D; an increasing hire and fire approach to employment; growing reliance on low wages as a competitive tool; poor education and training for most workers, and so on.
But rather than merely describe the problem, and then go on to propose some limited and essentially statist schemes to staunch the wounds, as Mandelson and Liddle do, the task force is prepared to grasp some nettles. The task force’s idea is to encourage the formation of a new form of socially responsible corporation and investment fund. The US Democrats see that the nexus of demanding institutional shareholders, unconstrained companies fixated with maximising short term profits, weakly regulated labour markets and poor levels of public provision of education and training are at the root of the problem. If you cannot redress these processes by tilting the balance of power towards labour by expansionary macro-economic policy-because of domestic or global restraints-then the only way forward is to find ways of changing the dynamics of the market system itself. Companies and the capital markets must change their destructive behaviour.
A new framework of company law would offer tax and regulatory incentives for a new breed of US corporation-the R-Corps. These would invest and train more; offer stock ownership, health and pension plans to their workforces; recognise unions and offer 90 days notice of redundancy; respect the environment and be headquartered in countries which offer a minimum wage and ban child labour.
The task force does not stop there. Concerned that the churning of company securities and growth of takeovers is discouraging long term corporate decision making and imposing high hurdle rates for new investment, the document proposes a raft of tax and regulatory measures to stabilise company ownership patterns, improve the monitoring of company managements by shareholders, reduce dividend pay-outs and share buy-backs, and encourage more real investment. The most eye-catching proposal is a new 0.6 per cent transactions tax to be levied on every share purchase by every kind of investor, reclaimable in tranches after the stock has been held for more than two years. The aim is to produce more stable and committed ownership patterns.
The Democrats claim that the US has the highest hurdle rates for new investment and the shortest time horizons in the world, and that investment is held back thereby. Wrong. They are certainly significantly higher than in Germany, Japan and the Asian tigers-but they are lower than in the UK. If in some respects our problems are more severe, Mandelson and Liddle have far less ambitious solutions. They are prepared to advocate limits on takeovers, more powerful non-executive directors, more disclosure of pension fund activity and a new private bank specialising in providing medium term loan finance to small and medium sized companies-but beyond that useful start they go no further. Beside the task force’s recommendations, this is tame stuff.
Mandelson-Liddle would no doubt argue that their minimalist stakeholder reforms represent the limits of political acceptability. But radical economic change requires something bolder. Look at the way the British privatised utilities have shrunk their core labour forces and reduced investment to boost short term profitability and the share price. This is just one example of the way the British system of corporate governance interacts with the structure of the capital markets to produce malign results; the wave of conglomeration in the media industry is another; the de-mutualisation of the building society movement yet another. The list goes on.
The growing academic literature which supports a more critical position is scarcely explored. A simple excursion into game theory shows that the essentially antagonistic relations between shareholders and managers, fostered by stock markets, produces poor results. The best outcome for companies, in any industry that will ensure long term growth, is to adopt a high investment/low dividend distribution policy-but with uncommitted institutional shareholders always prepared to sell out to a takeover bidder, there is an incentive for one firm to adopt a high dividend/low investment strategy, boost its share price and so become the predator. Once any one firm “defects” from the best strategy for all, every other firm has to follow suit, for fear that if it sticks to a low dividend pay-out/high investment strategy it will be taken over.
Mandelson and Liddle recognise that it is structural features of the British system which generate low investment, but prefer to take refuge in the City argument that the prime cause is not structural or institutional-it lies in Britain’s baleful record of volatile inflation. It is this, they argue, that makes institutional investors hungry for dividends and company managements hooked on high financial targets. If Britain could have a long period of low inflationary growth, the problem would dissolve.
Plainly inflation is part of the story-but it cannot explain everything. Why, for example, is financial behaviour so short term in the US, where inflation has been lower and less volatile-and the Federal Reserve has pursued the stability-oriented policy for which Mandelson and Liddle yearn? Britain’s bias to short-termism and under-investment predates the volatile 1970s and 1980s; City preoccupations were similar even when inflation was lower. Moreover, the 1990s seem to correspond closely to the stability prescription: underlying inflation has averaged 4.4 per cent and it has fallen more or less continuously since its peak in 1990. Yet companies continue to look for 20 per cent annual rates of return on new investment. Do they fear that inflation will jump as it did in the 1970s-or because in 1995, with nearly 10 per cent of the value of quoted companies falling to hostile takeovers, firms have never felt more vulnerable about their prospects for retaining independence? The case for the prosecution rests.
Running the economy to choke off inflation may, in any case, have the effect of choking off everything else too, leaving the country in a low growth, low investment, low skills, low wage equilibrium. Mandelson and Liddle insist that they are in favour of a growth target; they invoke the late Professor James Meade’s little gem of a book on full employment in support of their position for marrying inflation and growth targets. But Meade was no believer in the economics of the hairshirt; at a seminar last October, just two months before his death, he took me aside to back the advocacy of expansionary fiscal and monetary policies (as well as the radical version of the stakeholder argument). Meade mocked the current inflation target, and saw no reason why public borrowing could not be significantly higher if it were to finance investment.
This book goes some way to meet the ambitions of the expansionists, but the general tenor is that so long as the public sector remains disciplined, the private sector will spontaneously generate growth, with low inflation delivering higher investment. There are no concessions to loosening the rules in order to allow more public borrowing for investment or public/private partnerships, or exploring Meade-type reforms of wage bargaining to allow higher growth without inflation.
The buoyancy of the economy will be central to New Labour’s chances of financing programmes to promote social inclusion and lower long term unemployment. Here, at least, Mandelson and Liddle stand square behind the idea of a universal welfare state, while backing some interesting innovations to promote more savings for retirement; the introduction of individual “learning accounts” to support lifetime retraining; and some original ideas to reduce crime-notably, young people who have established a criminal record should have adult mentors. Reinvigorating the welfare state finds the authors at their most confident and persuasive.
Yet the debate about the affordability and financing of the system is hardly touched on. If the state pension is not to wither into insignificance, if the NHS is to meet the demands of an ageing population, if the financial crisis in the education system is to be alleviated, public sector pay parities with the private sector restored, and even the limited initiatives proposed by Mandelson and Liddle funded-and all this before we mention raising investment in the infrastructure or improving welfare standards-there will have to be some extension to the tax base. The idea that everything can be funded from growth and savings is implausible even if their economic growth plans were more persuasive.
The book calls for a fair tax system, but concrete proposals are conspicuous by their absence. There is a commitment to beef up inheritance tax to finance the new family dowry; Gordon Brown’s utility tax is backed and evasion is to be stamped on; but beyond that silence reigns. This is an unnatural silence, as Roger Liddle was well known in his former incarnation as a Liberal Democrat advocating higher taxation to fund improved public services; having rejoined Labour, he is no longer so eloquent.
We all know why; taxation has helped to lose Labour three of the last four elections, and it has no intention of losing a fifth on the same issue. Yet this represents a bind. By international standards British taxation as a proportion of GDP is low, and it is clear that even the most parsimonious of middle-of-the-road governments would want to relieve the current pressure on public services by raising taxes. There should be no increase in the taxation on ordinary workers, which is high by international standards, but there is scope to raise the tax yield on the corporate sector in general and North Sea oil operators in particular-and the yield from inheritance and capital gains tax is astonishingly low. By saying nothing, Labour does not allay suspicions of its intentions-and it risks boxing itself into a corner, so that any tax increase, once in government, will be denounced as betrayal. On the other hand, if it says something it can be certain its plans will be deliberately traduced. An agonising choice: this book offers no clues as to how it will be resolved.
On constitutional reform, it is reassuring that such an influential New Labour politician as Peter Mandelson is committed to the programme of decentralisation, devolution and open government to which the party is formally wedded. The authors also draw an explicit parallel between political and economic stakeholding. More interesting, the book seems sympathetic to proportional representation while stopping short of full advocacy-a nuance of difference from Blair’s position of scepticism.
Yet the chapter on what New Labour must do in government has an uncomfortably centralist tone which qualifies the (hitherto impeccably democratic) credentials these writers have paraded. An axis of No. 10, the cabinet office and the treasury must drive the machinery of government forward, we are told, so that the centre can animate every corner of the Whitehall machine. And if we are in any doubt about the centralising ambitions of New Labour, Mandelson and Liddle suggest that Prime Minister Blair continue the Thatcher habit of governing through ad hoc bilateral meetings rather than the formal machinery (no prizes for guessing who plans to attend as many ad hoc meetings as possible).
None the less, the advice about how a Blair government can make its programme work is sound, and based on a thorough understanding of how the machinery works. The pair cannot quite make up their minds whether New Labour can trust a civil service where for 17 years promotion has depended on being a Conservative partisan, but where the old public service ethos still runs deep; on the whole they are prepared to grant the benefit of doubt, while recognising that there may be value in having one or two sacrificial lambs pour encourager les autres.
Yet this is not merely generosity. There is a tendency throughout the book to apply the stakeholder principles of rights and obligations less than even-handedly. There will be rigorous assertion of the obligations of offenders, the young unemployed, and public sector workers, to the wider community-and rightly so; but British business and finance will feel the force of obligation more lightly. For them, obligations will be voluntary and introduced by negotiation; rights will largely remain unqualified. Top civil servants will be forgiven their complicity in the last 17 years, but Labour’s long suffering trade union allies will be kept at arms’ length. This lack of equity, along with timidity over economic policy, may appease the powers that be, but risks undermining the whole New Labour project.
In sum, this is a solid political and economic programme which binds both the centre and the left into a common endeavour. The book excludes formal pacts with Liberal Democrats even while accepting the argument for case-by-case co-operation. Many of the ideas here are still something of a rationalisation of where Labour is after a decade of policy revisions; and given how much the party is likely to slip towards convention once in office, it would have been heartening if it could have aimed higher in opposition. But here is evidence that New Labour is developing its own stakeholder policy framework-however timid. And there is little doubt that Mandelson’s and Liddle’s ideas would leave Britain a better place than they found it-much better than another five years of current policies. For that, at least, we should be grateful.