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Update 19: January 2009 - The end of the 'Great Stability' and its consequences for British politics

Update 17.2 (January 2008) briefly examined, as one of the difficulties of the early months of the Brown Premiership, 'the great banking crisis': the collapse, and very expensive rescue, of the Northern Rock bank. But this episode, traumatic though it proved, was merely the first act in an extended drama. 2008 proved an annus terribilis for the British economy (and for economies across the globe.) The expectation is that 2009 will be at least as difficult. This update is not about the causes of the economic catastrophe, argument about which is now raging. It is about the consequences for British politics. However, we need to begin with a summary of the background to the crisis, and with its main economic manifestations.

The fifteen years after 1992 are now increasingly dubbed by historians of the period the years of 'the Great Stability'. They were marked globally by an almost uniquely benign combination of circumstances: by low and stable price inflation, and by historically high and sustained economic growth. The era looks particularly benign viewed through British eyes. In the last great period of sustained prosperity in the economies of the advanced capitalist world - those dubbed the 'thirty glorious years' that ended in the mid 1970s - the United Kingdom shared in the benefits of global growth, but was a poor performer when compared with similar capitalist economies. But the years after the expulsion of the United Kingdom from the European Exchange Rate Mechanism in 1992 were very different. The country's rate of economic growth was above the average for its main European neighbours; the British economy seemed more successful than most its European neighbours in creating jobs and full employment; and inflation - a perennial problem during the 'thirty glorious years' - was stable and low. The UK was often linked with the United States as an example of a deregulated, dynamic anglo-American capitalism that was presented as a superior model to those of other big members of the European Union, like Germany and France.

The 'Great Stability' ended in 2008, with numerous signs of catastrophe. The catalyst was a monumental crisis of the whole banking system in the autumn of that year, a crisis that encompassed most national banking systems. Full scale collapse of the whole financial system was only averted in October by an internationally coordinated set of credit guarantees which in effect meant that the state underwrote the major banks. The booming housing market collapsed, with prices falling rapidly: the recorded figure is presently about 16% below the peak, though the real prices of properties are probably well below that. As consumer confidence collapsed there occurred a wave of bankruptcies in retailing, of which the best known is the disappearance of the Woolworths chain after a century of occupying most British high streets. But the collapse in retail sales also spread to core manufacturing, notably to the car industry. Growth of the whole economy first came to a halt, and then reversed. At the time of writing the economy is contracting; the contraction will continue but at a rate that cannot be accurately forecast. Unemployment in December 2008 was 1.86 million - the highest recorded level for ten years. It is almost inevitable that the psychologically significant barrier of 2 million registered unemployed will be broken early in 2009.

The political consequences of all this were profound. Some were predictable, some less so.

1. It strengthened the role of politicians in economic management. The years of the 'Great Stability' were also years when elected politicians deferred to the judgement of markets, especially of financial markets. (Chapter 8 of Politics and Governance in the UK describes the long term rise of 'non-political' regulation in the UK, and the issue has been explored more fully recently in Flinders, 2008). But the management of the crisis has made politicians central once again. The management of the great banking crisis drew figures like the Prime Minister and the Chancellor of the Exchequer into detailed negotiations with the leading banks. The spread of the crisis to core parts of the manufacturing economy has revived the role of elected politicians in making decisions about support for stricken firms. Impersonal markets are no longer supreme.
2. It nationalised key parts of the British economy, especially in the banking sector. For a quarter century the British state had been deregulating markets and trying, with some success, to privatise its historically acquired holdings (see Politics and Governance in the UK, pp 149-53.) Now in a few short months it acquired sole ownership of two stricken banks (Northern Rock and Bradford and Bingley); it injected £37 billion of capital into three giants (RBS, HBOS and Lloyds) in return for a major shareholding; and it set up a special company, UK Financial Investments Limited, headed by a senior Treasury civil servant, to manage its banking holdings. The 1983 general election manifesto of the Labour Party, usually spoken of with horror by New Labour as the exemplar of radical madness, had proposed bank nationalisation; now New Labour has gone down precisely that road. (Excellent accounts of these events, for anyone contemplating a project on the subject, can be found in House of Commons Treasury Select Committee, 2008 and 2008a.)
3. It challenged central parts of New Labour orthodoxy. As the spate of bank nationalization suggests, the economic crisis was also a crisis for New Labour doctrines. The sheer destructiveness of collapse, and the impact it had on labour and housing markets, forced New Labour away from the anti-interventionist and pro-market policies with which it was associated. Compelled massively to increase the public debt in the effort to stimulate the stricken economy, the government has had to abandon much of its low taxation strategy: a temporary reduction in VAT to stimulate consumer spending is to be paid for in part by increases in personal taxation and even by the introduction of a new top rate of 45% for the very highest earners from 2011. New Labour was once notoriously associated with Peter Mandelson's remark that it was 'intensely relaxed about people getting filthy rich.'; now it has reemerged as a 'tax and spend' party. The return to the Cabinet in October 2008 of Mr (now Lord) Mandelson as an interventionist Secretary of State for Business typified the ideological revolution wrought by the crisis.
4. It broke the post-Thatcherite consensus. 'New Labour' was invented in order to accommodate and match the successes of the Thatcher Administrations of the 1980s. But the success of New Labour itself forced change on the post-Thatcher Conservative Party: after David Cameron's election to the Party leadership the Tories tried to match New Labour in its commitment to a new era of public spending. But the impact of crisis has not only driven Labour back to some traditionally interventionist economic policies. Faced with evidence that the Government's highly activist response to the crisis had partly rescued the dismal public standing of Prime Minister Brown and his Government, the Conservatives have tried to mark out a more distinctive position. The pace of the unfolding crisis means that the new Conservative response is still a work in progress. On November 18th, in the very eye of the storm, when an Opposition might have expected to capitalise on the economic problems, the polls showed that a Conservative polling lead once measured in double digits had shrunk to three points (virtually the margin of error in a sample). Simultaneously, Mr Cameron announced the abandonment of a key Conservative commitment: to match Labour's public spending plans beyond 2010 if the Party is returned to office. We cannot know with certainty what the shape of the new lines of battle about economic policy will be between the parties over the next years, but we can be certain that they will indeed involve new kinds of divisions. The consensus fashioned by a combination of Thatcher economic reforms and Blair electoral magic is at an end.
5. It revived once again questions about the viability of the British state. The final chapter of Politics and Governance in the UK is largely optimistic in tone. It looks back at the threats to the 'break up of Britain' that seemed so real three decades ago, and tries to explain why they were not realised. One of the most important reasons was 'the Great Stability': the onset of the new golden age of capitalist economic growth after 1992. That chapter was drafted less than five years ago, but its optimism now seems to come from a distant age. Over the remainder of the life of the present Brown Administration we will see conducted a vital historical experiment: an attempt to use the power of the British state to retrieve us from dire economic circumstances. If the experiment is successful, Mr Brown and the Labour Party will be beneficiaries; but even more, the authority of the British state will be confirmed. If the experiment fails, not only will Mr Brown suffer. The state will face debt problems of Icelandic proportions. (Iceland became to all intents and purposes bankrupt as a result of the 2008 global crisis.) The currency will collapse and be replaced by the Euro, on highly disadvantageous terms. Control of economic policy will shift even more decisively to European Union institutions like the European Central Bank. The domestic electoral consequences of such a state of affairs are hard to predict - except that we can be certain that they will not be pleasant.

References

Flinders, M. (2008). Delegated Governance in the British State: walking without order. Oxford: Oxford University Press. House of Commons Treasury Committee
     (2008.) The Run on the Rock: volume 1, Report.
     London: the Stationery Office, HC 56-1.
     (2008a) Banking Reform: Report, together with formal minutes, oral and written evidence. London: the Stationery Office, HC 1008.

Both these reports can be downloaded free: go to the House of Commons main web site (www.parliament.uk/commons/) and follow the navigation to select committees.

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