In the year 2000, almost all western countries had either social democratic governments or they were run by coalitions with large social democratic components. Now, this is true of hardly a single country in the West. What has gone wrong?
In my book Left Behind published this week I argue that there are three main reasons for the eclipse of social democracy. The most important is that moderate left-wing governments have been relatively poor at running the economies for which they have been responsible. Second, most people have had stagnant real wages at a time when ruling elites are widely perceived as having got richer. Third, the failure of redistributive policies has added fuel to the fire while, at the same time, the cultural gap between middle-class supporters of social democratic values and working-class voters has steadily widened.
Not only did social democratic governments in many cases, including that of the UK, preside over the run-up to the 2008 crash and were in control when it actually happened, but they did little to produce a speedy recovery, if they were still in charge, nor articulate a persuasive case for alternative policies, if they were in opposition. Many went along with right-of-centre austerity policies promising, given the chance to do so, that they would be administered less harshly. Trapped by commitments to fighting inflation – keeping it down to 2% per annum – as the main economic target, they were unable to argue for the kind of radical changes in economic policy which might have made a big difference.
The result has been the slow growth that has dogged the whole of the western world since the crash. Keeping inflation at or close to 2% involves deflationary policies which keep the exchange rate too high for industry to be able to compete, discourages investment, promotes deindustrialisation, generates large balance of payments deficits, entails large-scale government borrowing and stokes asset inflation that disproportionately benefits the rich. By tolerating these conditions, social democrats have lost more and more ground, particularly to either those with increasingly radical left-of-centre policies or populist parties with more nativist and protectionist agendas. Neither look very likely to achieve working majorities.
Stagnant incomes might have been offset at least in part by more effective redistributive policies, but these proved impossible to achieve on the scale required. In fact, in the UK, median incomes have increased, post-tax and benefits, by nearly 1% per annum over the past decade, but this has not been enough to deal with the ever-increasing difference between the prosperity of London and the rest of the country. In 2017, gross value added per head of the population in London was £49k. In Wales and the North East it was barely £20k – a disparity of well over 50%.
Although many people – mainly in London – have benefited from globalisation and the UK’s impressive supremacy in financial services, many have not. The gap in life experiences between those who live in London and those who live elsewhere has widened significantly. The disintegration of UK manufacturing – down from just under one-third of GDP as late as 1970 to less than 10% now – has left swathes of the country without enough to sell to the rest of the world to pay their way. Some three-quarters of the UK is running at a deficit of 10% or more, dependent on transfers from London to stop living standards collapsing, causing resentment and incomprehension on both sides as the outlook between those who have done well out of globalisation and those who have suffered from it steadily widens.
What is to be done? The conclusion I draw is that the major priority is to get the economy to grow faster and to narrow the gap between London and the regions. This can only be done, in my view, by a fair measure of reindustrialisation, driven by types of investment clustered around mechanisation, technology and power which generate the most increases in output per hour. It is manufacturing which drives rising productivity and higher living standards much more than services where productivity increases are much more difficult to secure. To achieve this change, however, we will have to alter incentives to make it much more profitable to invest in light industry. For this to happen we need a major change in our macroeconomic and exchange rate policies, to make manufacturing in the UK economy much more internationally competitive.
Is there any appetite at the moment for a radical change in policies along these lines? No yet, but the message from my book is that the consequence will be more years of very slow growth and widening economic, social and political divisions. Now, instead, maybe it is time to think of faster economic growth being much more important than obsessing about inflation at 2% a year.