The parallels between the present crisis and the 1930s are growing. Summing up the steep falls in financial markets, last Saturday’s Financial Times said, “All this is consistent with the fear that the world is heading for a true depression, that will at least bear comparison with that of the 1930s.”
It also reported that 80,000 jobs had been cut around the world in the preceding five days.
But the same issue also carried the headline, “The deeper the crisis, the higher the Brown ‘bounce’”. The political weather has changed dramatically in Britain.
A couple of months ago Gordon Brown was on the ropes. Last week, the Tories’ opinion poll lead had been cut to three percentage points and there was speculation that there would be a general election in April or June.
Critically, Brown has succeeded in forcing the Tories onto the defensive. This week Alistair Darling announced a package centred on cutting VAT.
It will be financed by higher government borrowing now and by – in the future – a largely symbolic rise in the top rate of income tax and much nastier tax rises and spending cuts for the rest of us.
The aim is to try and forestall economic collapse by maintaining demand for goods and services.
David Cameron and George Osborne have responded by denouncing a government “borrowing binge” and reviving the Tory slogan in the 1992 general election – “Labour’s tax bombshell”. This is a retreat onto hard Thatcherite terrain.
Faced with the collapse of British manufacturing industry, Margaret Thatcher and her chancellor Geoffrey Howe raised taxes and cut public spending in their 1981 budget in order to reduce government borrowing – the opposite of what Brown and Darling are now doing.
Cameron and Osborne have now committed themselves to following in Thatcher’s and Howe’s footsteps by cutting government spending. What’s interesting is how isolated they are.
All the major bosses’ organisations – including the hard right Institute of Directors – are backing Brown and Darling, saying that it’s right to borrow in order to stave off economic slump.
The Financial Times columnist Samuel Brittan, one of the inventors of monetarism, defended the Tory 1981 budget. Now he’s backing Brown, blandly replying to those who ask where the money will come from, “The short answer is: the Bank of England printing works in Debden.”
The fact that free-marketeers such as Brittan and his fellow Financial Times columnist Martin Wolf are in favour of flooding the economy with money is a sign of how worried they are. But the moves in opposite directions by Labour and the Tories reflect political calculations.
Cameron is gambling that the next general election won’t come till 2010, when voters will punish Labour for the severity of the recession.
Brown hopes that pumping state money into the banking system and voters’ pockets now will sufficiently dampen the effects of the crisis to give him a fighting chance of winning the election.
Either could turn out to be right. Mainstream British politics has become very volatile because it is dominated by two parties whose social bases have drastically shrunk, competing for the votes of the millions they have disillusioned.
But there is one important qualification about Brown’s shift in economic strategy. It is best described as a combination of Keynesianism on the macro level and neoliberalism on the micro level.
In other words, New Labour may be willing to increase government borrowing in order to stimulate the economy.
But the detail of their policies hasn’t really changed – hence more welfare-to-work for single parents and disabled people, more “efficiency” savings in public services, the partial reversal of the increase in student grants.
One way of resisting the crisis is to focus on this contradiction. The easiest way to boost demand is to put money into the pockets of the poor, who can’t afford not to spend it. We need to challenge a government that gives with one hand and takes away with the other.