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The return of the state

Vacancy at the Economy Inn by SeeMidTN.com (aka Brent), licensed under Creative Commons Attribution 2.0 Generic, file at http://www.flickr.com/photos/brent_nashville/166218527/sizes/m/in/photostream/For 34 years private markets have held sway, with the corollary that the State was inefficient and bureaucratic and should accept its role to get out of the way. Since that Thatcherite-engineered change of culture after 1979 the UK has undergone a major recession in each decade – in 1980-83, then again in 1990-93, and then in 2008-09 the biggest financial crash since 1931 and the longest recession since 1873.

Both the frequency and severity of financial collapse has accelerated. The growth of average real incomes per head fell by a third from 2.4 per cent a year during 1950-80 to just 1.7 per cent a year in 1980-2010. Britain’s manufacturing base was decimated by the abandonment of state oversight of the nation’s strategic economic assets in favour of sell-offs, mainly to foreigners, on grounds that the market knows best. As a result the balance of payments in traded goods plummeted from near parity in the early 1980s to a whopping, and utterly unsustainable, £100bn a year deficit in each of the last three years.

Above all, the banks, which at their peak contributed £25bn a year to the Exchequer in corporation tax, ended up costing the country (taxpayers) £68bn in direct bailouts and indirectly hundreds of billions more in soaring national debt generated by special liquidity provision, loan guarantees and asset protection schemes. And even that excludes further dozens of billions in lost revenues to the Exchequer resulting from the deep recession caused by the banking crash, let alone the incalculable losses in tax revenues caused by the banks running amok in industrial-scale tax avoidance. Altogether the central lesson of the last half century is that out-of-control private markets have proved, on every economic and social count, an unprecedented failure.

At the same time the role of the state, played down at best or ritually vilified at worst, has proved uniquely salutary when all else has failed. Only state intervention on a massive scale prevented a global financial crash from turning into 1930s redux, and in the prolonged recession that has followed only colossal state support has kept the UK economy from sinking into the depths of deflation.

Successive tranches of quantitative easing (electronic printing of money to keep long-term interest rates low and prop up demand) to the tune of £375bn have been accompanied by ultra-low interest rates, the State underwriting of risk, and active measures to direct credit where it is needed – ironically all Keynesian policies of State intervention which have saved the British economy from Osborne’s unnecessary austerity in the teeth of his forlorn insistence that private markets alone should dominate.

But the worm is now finally turning. More and more people are now realising that there can be no sustainable recovery without a more balanced, proportionate, rational and mutually dependent relationship between state and markets. Fleshing that out in theory and practice is a central objective for 2014-15.

8 Comments

  1. terry sullivan says:

    brown engineered bank collapse in uk–he like others thought he knew best–but compounded the problems by bailing out the banks when they should have been left to fail–same with northern rock

  2. Dave Roberts says:

    Trouble is that takes the savings of the small savers many of whom are Labour voters.

  3. swatantra says:

    The state has never gone away, or will ever go away. It’ll be there to pick up the pieces when privatisation and capitalism has failed. And we saw that in 2007. Brown’s decisive action with QEII, saved the investers and savers from a terminal run on the Banks. it was the Bankers to blame not politicians, and we still haven’t demonised them enough, and punished them enough.

    1. terry sullivan says:

      rod is correct

  4. Rod says:

    swatantra: “we still haven’t demonised them [the bankers] enough, and punished them enough.”

    Politicians provide the regulatory framework within which bankers work – it’s your criminally negligent New Labour politicians who deserve to be punished.

  5. swatantra says:

    The regulatory framework was intended to control and regulate the financial system. But the Bankers and their lawyers proved a lot smarter, as usual, and skirted around it. Labour has an inherent suspicion of big business and Bankers and money makers in general.

  6. treborc says:

    Go for it Swat somebody might believe you sadly not me mate.

  7. Rod says:

    swatantra: “Labour has an inherent suspicion of big business and Bankers and money makers in general.”

    Yet your multi-millionaire Labour politician Peter Mandelson (now Baron Mandelson of Foy) claimed the Labour government was “intensely relaxed about people getting filthy rich”.

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