By Jonny Ross-Tatam.
It has often been said of the late 20th and early 21st centuries that while the Right won the economic battles the Left won the cultural and social battles. Tony Blair, Gordon Brown and the ‘New Labour’ project did little to reverse the free market economics introduced by Thatcher, adopting a ‘light touch’ approach to financial regulation. The Conservatives, on the other hand, have yet to shake off their reputation as the ‘nasty party’, despite David Cameron’s attempts to detoxify the Party image with social liberalism and environmentalism. The extent of the Right’s victory in the economic sphere is such that the public are twice as likely to prefer Osborne to Balls as Chancellor, despite anaemic growth and an austerity policy that has caused economic contraction rather than expansion.
Progressives have often resisted the trickle-down argument on the basis that it is unfair and damaging to social cohesion. These are legitimate arguments, but progressives must now denounce it on the basis that it is economically wrong. As Nick Hanauer and Eric Liu point out in their book ‘The Gardens of Democracy’, jobs and growth are created not by a wealthy few but a thriving majority. Hanauer, a venture capitalist himself, says that his success is rooted in the wealth of his customers rather than himself. It is they who provide the demand for his supply of goods. Simply put, if people have less disposable income then they have less money to spend and invest in the economy. While the very wealthiest are more likely to save in a difficult economic climate, the rest of us are more likely to spend.
Hanauer and Liu use the example of Henry Ford, the owner of the Ford car company, as a smart thinking capitalist. In 1914 he increased the wages of his workers to the unheard of rate of 5$ a day, not to be generous but to be smart. He knew that by paying his workers well they would be able to buy the new Model T’s and become good customers. This is often referred to as the ‘virtuous cycle of growth’: well-paid workers generating consumer demand that in turn promotes business expansion and job creation. It was this form of economics which oversaw the greatest period of growth in U.S history, from 1945-73. It was also a time of relatively high income tax rates.
This is the argument progressives must use when resisting trickle-down economics and high inequality. It is not just wrong it is stupid. It is easier to be wealthy in a wealthy society or as Hanauer and Liu put it, ‘we are all better off when we are all better off’. Take the example of Sweden, one of the least unequal countries in the developed world with a burgeoning economic growth rate, and compare it with Britain. A report by the PSE (Poverty and Social Exclusion) shows that 50% of Britains are ‘financially insecure’ whereby they have minimal disposable income to spend. That is 50% of the population who are unable to contribute and invest in our economy. Such a waste of resources is surely to our detriment. This strangled consumer demand is a key reason behind our stuttering economic performance.
We must also change our rhetoric when denouncing tax evasion. At the moment, the common line seems to be that it is morally indefensible for rich corporations like Apple or Google to be avoiding tax whilst the rest of us have to. This was the line Ed Miliband took when he called on Google to ‘do the right thing’. Fair comment, but the problem with this approach is that it makes taxes seem like a chore when they are an investment. A better line to use is that Google and Apple directly benefit from paying their taxes. They benefit from an educated workforce that can advance their product and technology, they benefit from our infrastructure (our roads, railways and broadband) and they benefit from being close to our consumers. Corporations have never situated themselves in the U.K because of our tax code, but because of all the other benefits which taxes provide. This is also the angle Labour should take on the Coalition’s cut in the top rate of income tax, not simply the moral objections.
Ed Miliband and Labour have started to adopt this alternative to trickle-down economics. A recovery ‘made by the many’ was a catchphrase in their recent local election video. Barack Obama was also keen to stress his vision for a recovery based on growth from the ‘middle-out’ in his 2012 election campaign. Both are essentially demanding the same thing, but it would be politically toxic for Labour, with its history in the Trade Union movement, to focus on the middle-class.
A majoritarian view of economic growth needs to be the driving force of progressive politics. It now needs to be engrained in the grassroots and the popular imagination. It is only on the offensive that we can win the economic argument.
Jonny Ross-Tatam is a Young Fabians Member.