The End of Neo-Liberalism

How quickly the TUC and party conference season comes around. This year rather than a knee jerk response to the threat of recession we need some deep reflection on economic policy. Be in no doubt the world has changed the neo-liberal boom is over.

Our Olympic performance shows that talent is essential for success but only long term investment can guarantee it. Economically we can only sustain our standard of living with high levels of investment. Now made difficult by the credit crunch and how we used that wave of cheap investment.

Recent economic prosperity was underpinned by historically low global prices for the key economic inputs of capital, energy and labour and deregulation and liberalisation enabled us to easily import them.

Western banks recycled surpluses generated from East Asia’s export of manufactures and from the oil and gas exporting countries. For a while they had more capital than they knew what to do with. The Bank of England reports, mangers invested in such complex financial instruments they still do not know what they have done with it! Sadly here this inflow of cheap capital was not invested in crucial infrastructure and productive capacity but was squandered on private equity and PFI schemes that added little to our capital stock or was used to subsidise current consumption.

UK fiscal policy drove a large proportion of this capital into new retail capacity to take advantage of cheap imports and into housing. Not to produce more houses, despite record prices we have had record low levels of construction, but driving house price inflation. Despite conventional wisdom high house prices do not equal wealth. Houses are not businesses, they do not innovate, generate new products, undertake R&D or train people, whilst they may once have been a store of value they do not create it.

This capital was cheap but not free - now it is payback time - the price is record trade deficits, massive public and private debt levels and a weakening pound. Now we need to generate domestic capital a tough task from a generation with no savings culture.

The energy story is a similar. When it was cheap we privatised our energy infrastructure, now it is more expensive we seem surprised that private firms pursue profits rather than the national interest. Our laiseez faire energy policy puts us at the mercy of global energy markets.

We must increase the output of domestic energy requiring capital but global firms take a global view why should they invest when they are making plenty selling us the imported stuff? We now have an underdeveloped energy infrastructure which needs investment across the piece, from renewables, new nuclear stations, new gas storage systems and replacement generating capacity.

Government intervention is vital, but a one off windfall tax is not enough, given the current structure of the industry it will only be paid by yet lower investment. Now sustained investment can only come from the public sector.

The third factor has been our inability to increase the productivity of the UK workforce. Our GDP has grown not by increasing the output per person, requiring higher investment in technology and skills; but by getting a higher proportion of people into work and by getting them to work longer.

This has been further sustained by the flow of low cost, highly motivated and well educated labour from Eastern Europe and from more women working. Now the pressure for higher labour market participation rates is looking desperate with attacks on lone parents and those on disability benefits.

With recession looming, the Poles are going home and the ones that stay are demanding decent pay and conditions. We will have to re-examine our education and training systems as we are forced to depend on home grown skilled Labour - meaning an end to long hours without training or companies having a free ride on skills.

It must be clear now that we can no longer postpone the development of a high investment, high technology, high skills economy. Currently we are not productive enough to import all our inputs. Now our financial services sector has shown the world that it is no better managed than our domestic car industry was.

The NICE decade is over we need the policies to get us saving, to get us developing our own energy supplies, and for us to have a high skills, high productivity economy.

That is the program we need to hear this conference season otherwise the sacrifices currently being made in living standards by Britain’s, workers will be for nothing. We will be letting David Cameron’s Tories off the hook we know they do not have the answers to these problems but does Labour?