July 19, 1998.
In his contribution to the first Nexus debate on the so-called 'third way', Gerald Holtham made an important distinction between two wings of the New Labour coalition which he termed the 'radical centre' and the 'new centre-left'. The radical centre is committed to 'inclusion', but not to any robust conception of economic equality. In this sense, it represents a break with the social democratic tradition. By contrast, the new centre-left does retain the traditional social democratic commitment to equality, though it is cognizant of the political and economic constraints which stand in the way of rapid progress in an egalitarian direction.
My aim in this contribution is to set out in very general terms what I take to be the main elements of an economic strategy for the new centre-left. I shall proceed as follows. Firstly, I shall describe four core ideas which I think do or should inform new centre-left economic strategy. Secondly, I shall outline some of the main policy instruments by which social democratic governments might implement these core strategic ideas. Thirdly, and finally, I shall raise some criticisms and queries about these strategic ideas and policy instruments. I should emphasize that there is nothing terribly original about my characterization of the new centre-left's economic strategy. I will simply try to pull together various ideas and proposals from recent left/centre-left literature, and to some extent from extant government policy, and show how we can fit them together in a more or less coherent fashion. But, to borrow a phrase from Michael Jacobs (Nexus conference, July 3), I shall mix 'interpretation' with a bit of 'interpolation': I shall selectively emphasize particular ideas, or elaborate them in particular ways, that I think are particularly important and attractive.
When one reviews recent left literature (e.g., the final report of the Commission on Social Justice, 1994, Layard, 1997) and extant government practice, one can identify at least four core strategic ideas regarding economic and social policy. These core strategic ideas are not novel. Arguably, they have always been central to social democratic best practice, though the character of their implementation must differ over time and place. These core strategic ideas may be listed as follows:
(A) STABILITY/SUPPLY-SIDE ORIENTATION.
(B) MINIMUM MARKET STANDARDS.
(C) ASSET-BASED EGALITARIANISM.
(D) SOCIAL INSURANCE TO COPE WITH BRUTE LUCK CONTINGENCIES.
Macroeconomic policy should take as its primary objective stability of real output growth at a stable and tolerably low rate of inflation. Contrary to what some participants in recent Nexus discussion have asserted, this does not imply a repudiation of 'Keynesianism'. Circumstances can arise in which so-called Keynesian policies are appropriate for the desired kind of stability. But what are eschewed are demand-led 'dashes for growth'. The claim is that such 'dashes' - Barber and Lawson booms - do not succeed in raising the long-term growth rate, or in reducing equilibrium unemployment. But, it is claimed, they do create an environment of uncertainty that may discourage investment (so harming long-run growth), and they inevitably call forth corresponding recessions which increase unemployment (not just in the short term, but over the long-term due to 'discouraged worker' and other 'hysteresis' effects). Macroeconomic policy should focus on keeping output growth at or close to the rate corresponding to the equilibrium rate of unemployment, and the government should then focus on the supply-side of the economy to reduce equilibrium unemployment and improve long-term growth performance. Key elements of the supply-side strategy are the enforcement of minimum market standards and asset-based egalitarianism (see below).
The state has a responsibility to define and enforce a range of minimum market standards - for example, in relation to conditions of work, terms of employment, and minimum wages. Defining and enforcing such standards satisfies certain intuitive notions of equity and decency. But it also has an efficiency-rationale insofar as it pressures firms to eschew reductively cost-based competitive strategies and to adopt quality-based strategies which depend on having a more broadly and highly skilled workforce. By making firms more 'skill hungry' in this way, it helps push the economy onto a different growth path than that which would obtain in the absence of state enforced minimum market standards. In the present global economy, this skill-centered growth path is likely to be more stable and secure than the alternative path which consists in taking low skills and productivity as a given and then competing through ongoing downward adjustments of working conditions and wages. (The links between skills and growth are still imperfectly understood, but recent research suggests that there is such a link: economies with higher skilled workforces grow faster than other economies at similar levels of income (Layard, 1997, p.29). Recent research has also suggested and/or revealed some relationships that might help explain this link: interdependencies between skills and investment in physical capital; between skills and innovation; between skills and export performance; and between the level and distribution of skills and the rate of equilibrium unemployment. For a helpful review, see the essays in Booth and Snower, eds., 1996.)
Of course, one can introduce minimum market standards that are so demanding they simply cannot be met without sacrificing profitability and, ultimately, employment. A delicate balance has to be struck. In addition, if minimum market standards help make firms skill hungry, something must be done to ensure their resulting hunger can be satisfied. This is the link between the enforcement of minimum market standards and the third core strategic idea: asset-based egalitarianism.
The basic idea is that the market will produce more egalitarian outcomes if individuals enter the market with more equal endowments of assets, such as land, capital, skills, and jobs. Social democratic governments should therefore seek to shift the background distribution of these assets in a more egalitarian direction (Freeman and Rogers, 1997).
There is a tradition of left-wing thinking which has always emphasized the empowerment of individuals within the marketplace as the route to equality, rather than simple reliance on ameliorative transfers to the disadvantaged. Empowerment brings a valuable sense of independence and dignity. And asset-based egalitarianism has always been central to the thinking of those working in this empowerment-oriented egalitarian tradition. English artisan radicals of the late 18th and early 19th centuries like Thomas Paine, Thomas Spence, and John Therwell; Pierre-Joseph Proudhon and his fellow 'republican socialists' in mid 19th century France; late 19th century American Populists and artisans gathered in the Knights of Labor; turn-of-the-century Catholic 'Distributivists' like Hilaire Belloc; turn-of-the-century 'new Liberals' like J.A. Hobson and Leonard Hobhouse; mid-century 'Revisionist' social democrats like Tony Crosland; and contemporary 'liberal socialists' like James Meade, all put forward strategies of economic and social reform centering on asset-based egalitarianism. Recurring themes in these writers are the redistribution of rights in land, easier access to working capital, and a widening and levelling up of access to education and training. In contemporary circumstances, there is understandably a particular emphasis on education and training - understandable because relative demand shifts away from unskilled to skilled labour appear to have been a major factor behind the widening inequality in pre-tax incomes in advanced capitalist countries like Britain and the US in recent years (Freeman and Katz, 1994).
Even against a background of greater equality of opportunity in the marketplace, however, individuals can end up very badly off and significantly worse off than others through no fault of their own as a result of events over which they have little or no control - e.g., poor health, handicaps, unemployment. A social democratic society will pool risks of this kind across the whole population through social insurance, so protecting individuals against the possible effects on income and well-being of bad brute luck. Wholesale privatization of insurance functions in these areas is to be generally eschewed because private insurance will not cover all brute luck contingencies equitably (if at all). Universalism in public provision is also to be presumptively preferred to selectivism, as selectivism may lead to an impoverished 'lemon socialism': the state may be left picking up the tab for the problem cases which the private sector finds it unprofitable to handle, and may have to do so on the basis of low tax revenues as low-risk citizens refuse to vote funds for public services from which they expect to derive little or no personal benefit. As far as things like poor health and unemployment are concerned, the idea of social insurance is relatively (though these days not wholly) uncontroversial on the left. However, poor health, unemployment, and the like, are by no means the only forms of bad brute luck against which a community committed to social democratic values should organize social insurance. Also important is insurance against having a poor endowment of earnings potential (Dworkin, 1981). Even against a background of high and equal educational opportunity, some people will enter the market with relatively poor earnings prospects simply because of poor genetic endowments. They are likely, in consequence, to end up badly off through no fault of their own. To protect people against this eventuality the state must undertake to transfer resources from the more talented to the less talented. In practice, this is likely to entail significant ongoing taxation and redistribution of earned incomes. Thus, while asset-based egalitarianism may reduce the need for 'old-fashioned' redistribution, it will by no means eliminate it. Redistribution of earnings must remain a central component of social democratic strategy. It should be seen as integral to the state's social insurance function.
These, then, are four core ideas which in my view ought to stand at the center of any contemporary social democratic economic strategy. (I will float a fifth idea - 'soft corporatism' - in due course.) These very general ideas can be put into effect through a range of more specific policy instruments. These might include (in no particular order):
In accordance with the strategic emphasis on asset-based egalitarianism, equity and efficiency objectives might be advanced by endowing each citizen as of right with a 'basic capital' grant. This need not be a simple cash lump-sum, but could take the form of credits which could be used for specific purposes like education, training, or establishing a new business (Haveman, 1988, White, 1991). Although the present Labour government is not proposing exactly this, it is considering a number of ideas which point in effectively the same direction. These include proposals for 'Individual Learning Accounts' (ILAs) (Commission on Social Justice, 1994, ongoing work at IPPR) and so-called 'stakeholder pensions' (Field, 1996). Some kind of universal housing grant might be added to this list (though obviously one would need to think about how any such grant would impact on the housing market).
Imagine a society in which each person reaching maturity has a sizeable ILA; a sizeable universal housing grant; and the state has created the appropriate regulatory and tax framework for a generous second pension. We could then begin to speak of something like a 'citizen's portfolio': a basic portfolio of opportunity-enhancing assets which each citizen would enjoy as of right, created and partially financed by public action. (See Mulgan and Leadbeater, 1997).
Unions have a potentially positive role to play in execution of an economic strategy like that described above. How?
(i) They can help enforce minimum market standards. (ii) They can act as 'human capital agencies' for their members, organizing the provision of education and training, educating members on the importance of skill-upgrading, pressuring employers to adopt quality-oriented product market strategies and invest in skills.
(iii) They can help administer the social insurance system, e.g., can help administer welfare-to work programs or, perhaps, compulsory second pensions.
(a) 'Socialist privatization'. Social democrats should not regard privatization of public assets as necessarily a right-wing policy instrument. It all depends on what you use this instrument for. If the state sells assets to the private sector and then uses the funds to finance new public sector investments - rather than, say, fresh tax cuts - then we have what might be called 'socialist privatization'. Socialist privatization is not about running down public sector assets as a whole or for its own sake; rather, it is about shifting the composition of the public sector's assets portfolio so that it is better geared to meeting socialist/social democratic objectives. (b) 'Reinventing government'. In administering an economic strategy based on the four core ideas set out above, the state will be heavily involved in organizing and financing the provision of various goods, such as health-care and education. But the state should take care to ensure that public monies are efficiently spent. To this end, the state should make full use of devices like internal markets, competitive tendering, performance related pay, and so on. Such ideas are, of course, currently very fashionable, and they may not live up to all expectations. But that is no reason not to proceed with them on an open-minded basis. They may help to empower citizens who rely on public services, to produce gains in efficiency, and in these ways help build trust in government's capacity to guarantee access to high quality, value-for-money services.
Old-style 'nationalization' is largely discredited. Instead of owning and running specific industries on the old model of nationalization, however, the state can hold a portfolio of shares spread across the economy as a whole. It need not manage the portfolio directly (indeed, probably should not), but can delegate its management to some private sector agency. The state would receive an annual dividend on its share holdings and could then use these funds to help finance public services and/or to finance things like a system of basic capital grants. In his influential model of an egalitarian market economy, 'agathotopia', the economist James Meade imagined the state owning around 50% of the community's capital stock in this way (see Meade, 1989), and using the dividend to finance an unconditional basic income for all. The idea has recently been revived by Gerald Holtham of the IPPR (Holtham, 1995) as a way of reducing social democratic reliance on income taxes for financing public services. The journalist Sam Brittan also proposed using North Sea Oil revenues to establish a fund of this sort in the early 1980s (Brittan, 1983). The SDP-Liberal Alliance discussed the community fund idea in the 1980s, and it was also floated in Paddy Ashdown's book, Citizens' Britain (Ashdown, 1989). Where would the initial resources to establish such a fund come from? Alas, we can no longer rely on revenues from North Sea Oil. In principle, one could engage in socialist privatization of the kind described above but, in the British case, there is now little left to privatize for this purpose. Alternatively, as Gerald Holtham proposes, one could use the funds from a revitalized inheritance tax to get the fund community started. Another possibility - though one that does not sound politically realistic at the moment - would be compulsory capital dilution (simply require firms to issue new shares to the government).
This is obviously something of a flagship policy at the moment. WTW, as exemplified in the Labour government's 'new Deal' program, offers a way of recasting the state's role as insurer against the bad brute luck of unemployment. There are clear complementarities with the strategic idea of asset-based egalitarianism if WTW schemes encourage the unemployed to develop their skills. Lurking in the background of WTW, moreover, is the idea that the state should offer a conditional guarantee of last-resort employment to unemployed citizens. This 'right to work' can be seen as another part of the 'citizen's portfolio' described in (A).
Linked with welfare-to-work is the payment of subsidies to those on low earnings (a way
of 'making work pay'. This represents one way of handling the income inequalities produced
by recent shifts in the relative demand for skilled and unskilled labour without
jeopardizing the employment opportunities of less skilled workers. One model here, now
familiar to British policy-makers, is the US Earned Income Tax Credit (Ellwood, 1988).
Another model might be the 'participation income' proposed by Tony Atkinson (Atkinson,
1996). Under the participation income, benefits are not as narrowly targeted on low-paid
workers, and this has its advantages and disadvantages. This list of policy instruments is
obviously not exhaustive. A fuller exposition would have to say something about
environmental taxation; the possible role of works councils in helping to enforce minimum
market standards; the possible role of a citizens' service scheme in building a greater
sense of civic solidarity to underpin the social democratic project (see McCormick, 1994);
and the possible role of citizens' juries in elaborating health-care entitlements and
democratizing the governance of other parts of the social insurance state.
In concluding, I now want to raise a few criticisms and queries about the foregoing account of social democratic strategy.
Firstly, it might be argued that there is at least one core strategic idea missing from the list presented above. I shall refer to this as 'soft corporatism'.
We are used to hearing people talk about the 'death' of corporatism. Many people on the left these days, including trade unionists, frequently feel the need to clarify their remarks about unions and the labour market with words like: 'Of course, I am not advocating a return to corporatism...' However, while few of us would want a return to 1970s-style British (bogus) corporatism, it is quite wrong to assume that corporatist arrangements in general have no useful role to play in economic management.
Frank Vandenbroucke made this point in his contribution to the first Nexus Third Way debate. He referred us, in particular, to the Dutch case. Since the early 1980s, the Dutch have developed a new form of corporatism, what one might call 'soft' or 'indicative' corporatism. As I understand the Dutch system, national peak associations of labour and capital consult annually and agree on general norms for wage growth. These norms are then taken as the basis for sectoral negotiations between unions and employers. Finally, the state retains the right to extend agreements on wages between unions and employers to all workers in a particular sector. This system produced a significant degree of wage moderation from the mid-1980s and into the 1990s, and this wage moderation has been one important factor behind the recent Dutch success in job creation. (See Hemerijck and van Kersbergen, 1997, for a description of the Dutch system.)
Is there something here that British social democrats can and should learn from? Should we, as Richard Layard has argued (Layard, 1997), encourage peak associations of capital and labour to consult at the national level on wages? Could this conceivably produce greater wage moderation with positive repercussions for employment growth and rates of unemployment?
One of the main challenges facing contemporary social democrats is how to deal with the distributional consequences of relative demand shifts between skilled and unskilled labour. Responding to this challenge, social democrats typically make two policy suggestions: (i) boost the skills of those who lack them; (ii) subsidize the earnings of those doing low-skilled jobs. The problem is that (i) and (ii) are in tension with each other. If the community mitigates skill-based inequalities in earnings through generous in-work benefits of one kind or another, it thereby reduces the material incentive to acquire skills. I can think of no easy way around this problem. Arguably, it underscores the importance of creating a culture of learning and skills acquisition, in which citizens see the ongoing development of their skills as a civic responsibility and/or as an intrinsic good in itself.
A final worry is that the economic strategy described in (2) and (3) above is fundamentally illiberal. It supposes that citizens will all be absorbed into conventional forms of economic participation and will orient their lives around such participation. The strategy is inattentive to groups like travellers who aspire to a way of life in which conventional paid employment is less central. I think this is a genuine and legitimate cause of concern. Liberal-minded social democrats need to think about the interests of travellers and others can be acknowledged and integrated into proposals for combatting disadvantage. The challenge is to work out how travellers and others can be empowered to go their own way without at the same time being given an unjust 'free-ride' on the efforts of their fellow citizens.
References
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Brittan, Samuel, The Role and Limits of Government, Minneapolis, University of Minnesota Press, 1983.
Commission on Social Justice, Social Justice:Strategies for National Renewal, London, IPPR, 1994.
Dworkin, Ronald, 'What is Equality? Part 2: Equality of Resources', Philosophy and Public Affairs, 1981.
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