Monday, 14 January 2013

The malaise of the Left

Despite the public outrage about banker's bonuses and pay packages of chief executives, the political Left has not become wildly popular with European voters so far. In Britain, the government is introducing radical reforms of welfare and the (English) health sector, frequently bungles the presentation of its policies and yet, Labour struggles to get more than 8 points ahead in the polls. That's not a winning margin by any count.

In Germany, the radical Left (the former Communist Party) is engaged in a vicious internecine struggle (as Communists always seem to be), reducing its poll numbers down to the critical 5 percent nationally. It risks not entering the Bundestag for the first time in more than 20 years. On the other hand, the German Social Democrats have just managed to appoint as their leading candidate for the September general election somebody who is liked and respected amongst Conservatives but universally disliked by his own party. It has not helped his standing amongst his own comrades that he has a relaxed attitude to making money, or as Harry Enfield said 'loadsofmoney', through well paid lectures and company directorships.

In France, the Socialist Party has won the presidency but the hapless Hollande has managed to drop in popularity faster than the French could say 'solidarity'. His proposal to tax the rich 75% of their annual income has been cancelled by the French constitutional court and he seems to have run out of policy ideas before his ministers have even warmed up the seats of the government benches.

So, what's going wrong with the Left? Why are they struggling to capture people's imagination or their votes?

The answer lies in a fundamental dilemma that goes back all the way to the late 1970s. All Western countries embarked on a large expansion of the welfare state up to that time. In the 1980s demographic changes started to shift the fiscal basis for high state expenditure and some governments started to row back. However, there was still some considerable room for manoeuvre as governments managed to tap new sources of finance in the developing countries through the 1990s and early 2000s. As production facilities moved to the East and South, finance flowed back into the pockets of Western governments through cheap loans. The West was still thought to be a rock for short and long term investment. This allowed Western governments to continue to fund an overstretched and unviable welfare system.

Interventionist government requires plenty of finance and that in turn needs cheap credit. This was, for example, the foundation of Britain's New Labour policies. Welfare expenditure rose from £80 billion in 1998 to more than £200 billion in 2007 in Britain. Labour's Chancellor Gordon Brown confidently (and wrongly) proclaimed the 'end of boom and bust' in a time of seemingly unending plenty.

And then the tsunami hit. Although there were many different reasons for the economy breakdown, the biggest long term problems are the demographic changes in Western countries and the low competitiveness of their economies. Since their welfare systems were financed from capital flows from developing countries that now started to hold on to their money, the foundation of Western finances imploded and left little more than rubble and huge deficits.

It is this complex of reasons that poses a bigger dilemma to the Left than to the Right. The Left needs a time of plenty to fund the expansionist welfare state that we have all come to expect. If Labour does not  stand for more equality through state intervention, what is it for?

The responses of the Left to this crisis have been unimaginative to say the least. French Socialists want to tax more, and British Labour wants to, yes, tax more. The dilemma however is this: the cost increases of health care and welfare (the two largest items in government expenditure) are such that no amount of additional tax revenue can ever catch up with them. The cost dynamics of welfare and health are outstripping tax revenues at a staggering rate. That means tax rises will never again be able to cover state expenditure as it did in the past.

So, if the Left wants to create a more equal society it has to look elsewhere. State intervention through tax credits and additional expenditure wont deliver it anymore.

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