The Legacy of the Crash

by Terrence Casey

  As Lord Mandelson explained his approach, ‘We are focusing on cross-cutting technologies and Britain’s capability to test and develop innovative products.’ The concept of market failure was extended beyond what a rigorous economic analysis would imply: ‘We have focused on doing only what the market alone won’t – usually because the benefits cannot be captured by a single company.’ The intention was to invest in national capabilities, not national champions. Thus, ‘As far as capital for industrial innovation is concerned, we see the role of government as making sure smart investments get made, not turning itself into an investment bank.’ (Mandelson, 2009).

  Mandelson freely admitted in his autobiography that this approach involved ‘a stronger role for government than I had envisaged in my 1998 Competitiveness White Paper’ (Mandelson, 2010, p. 457). What he had in mind ‘was a broader, strategic industrial activism.’ (ibid., p. 456). This was ‘Not the old Labour practice of “picking winners”, which had ended up more often than not with the losers picking government. Not a renewed government role in owning, or running, businesses, or using protectionist tariffs to skew the rules of open international competition’ (ibid.). Nevertheless, Tony Blair had to be reassured that ‘this was about making markets work better, not replacing them’ (ibid., p. 457). Mandelson’s approach is very similar to what Gamble (2010a) describes as the ‘social investment model’ as distinct from the ‘Anglo Saxon’ (or Anglo-American) model entailing strategic investment in economic competitiveness, including human capital, the research base and infrastructure.

  Mandelson argued that Britain ‘could learn from France in the way it invested in or rescued French high-tech companies, allowing them to flourish in new markets.’ (Financial Times, 15 January 2010). In March 2010 he made a pilgrimage across the Channel to discuss state interventionism with French business leaders. He reported that ‘We have something to learn from continental practice without falling into the pitfalls of second-guessing business.’ He made it clear that ‘we are not talking about public ownership nor are we talking about centralised planning of business’. But he took the view that France was better ‘at setting strategic goals and objectives’. Britain was quite good at setting up a regulatory system, ‘but we have always assumed the supply side would take care of itself’ (Financial Times, 14 March 2010).

  There were limits to the shift in policy. As Gordon Brown explained, ‘We don’t want to be picking winners, which is so often picking losers’ (quoted in Parker, 2010). The initiatives taken by the Labour government fell far short of the Trades Union Congress (TUC) calls for a £5 billion French-style fund to make strategic long-term investments in manufacturing companies. Lord Mandelson set up a £950 million strategic investment fund which was dwarfed by President Sarkozy’s €20 billion (£17.7 billion) fund which also took minority stakes in companies rather than giving grants or loans.

  In many ways the British response also paled in comparison with what was done in the US. There ‘President Obama set up a US Treasury Automotive Task Force with a very wide membership which has undertaken a rapid restructuring on the US automotive sector including, of course, huge state aid, nationalisation, Chapter 11 bankruptcies and rationalisations of Chrysler and GM, the Fiat/Chrysler merger and the closure of many factories and dealerships. The reaction in Europe was far less coherent’ (Wilks, 2009, p. 281). President Obama found $60 billion for Chrysler and General Motors out of a global total of around $100 billion of aid, leading to critics of the administration to complain of the arrival of ‘Government Motors’. However, restructuring was required and the effective removal of the head of GM led Wilks to argue that ‘the limits of industrial intervention appear to have been redefined’ (ibid., p. 280).

  The Coalition government’s policy

  Coalition government policy was necessarily driven by the priority accorded to tackling the structural budget deficit. This meant cuts in the budget of the business department on top of the initial £836 million of ‘efficiency savings’ initially identified by Business Secretary Vince Cable. However, the notion of ‘rebalancing’ the economy, ‘less financial engineering and more real engineering’, as Lord Mandelson (2010, p. 456) had defined it, was not abandoned. It was referred to by the Chancellor in his Budget speech in terms of the balance between the financial and the manufacturing sectors, and it was referred to by Vince Cable in terms of wealth being spread around the regions. What was not clear was what policy instruments would be available to achieve these objectives.

  What Vince Cable did make clear was that direct grants would be given to individual companies only in exceptional circumstances, focusing instead of creating a better climate for business through lower taxes and promoting training. ‘We’re moving away out of an emergency time, and support will come in more indirect ways’, Vince Cable explained. ‘Not in direct support for companies – we don’t have the funding to do that, and it isn’t good policy anyway’ (Financial Times, 29 June 2010). The government made it clear that it was unwilling to fight other countries in a ‘subsidy war’ (Financial Times, 1 July 2010).

  The government did agree that a £21 million grant to Nissan to produce its Leaf electric car in the North East would go ahead. Nissan put some pressure on the government, pointing out that other governments, notably Spain, were willing to offer support (Financial Times, 10 June 2010). The government also confirmed a Labour government pledge for £360 million of guarantees for a £415 million European Investment Bank loan to Ford to support £1.5 billion of investment in low-carbon ‘Eco-boost’ engines and other new technologies in the UK. The government seemed reluctant, however, to lend support to GM’s plans to produce the Ampera at Ellesmere Port on Merseyside. The government proceeded with plans for a green investment bank but it is expected to receive only a small amount of public funding with most of its money being raised in the private sector. The limitations of the bank became a source of tension between the coalition parties.

  However, the government did not proceed with a loan to Sheffield Forgemasters to enable it to expand into the nuclear sector. This proved to be politically contentious as the government gave as one reason for its decision that the directors were not prepared to dilute their shareholdings, but this subsequently appeared not to be the case. The more general question the government no doubt asked was why, if the project was a viable one, it could not proceed with a commercial loan.

  Assessment and future trends

  It is difficult to disentangle the effects of the policies of the two administrations from the structural situations of the two economies. For all its problems, the US remains the leading world economy. Many individual American states, not just California, have GDPs larger than significant developed countries. The American economy remains an engine house of innovation, particularly in advanced technologies. It enjoys a large internal market that delivers economies of scale. The dollar is not going to disappear as the world’s reserve currency any time soon. All this means that the US has a greater capacity to recover quickly from the recession than the UK. Its international position means that it can be relaxed about what is in fact a much more serious and chronic budget deficit.

  A central question for the UK remains how far its private sector is dependent on contracts from the public sector. If there is a substantial dependence, recovery will be difficult. There are clearly particular challenges for the construction industry where much work depends on public sector contracts, although the Cameron government has continued to issue controversial Private Finance Initiative (PFI) contracts, and where house building has been slowed down by the lack of availability of mortgage finance. There are, however, some indications of a recovery in manufacturing and some success in boosting exports to emerging countries. What is less clear is whether the Cameron government has a coherent growth strategy covering such areas as skill formation, transport infrastructure and research and development. However, the liberal Anglo-American model does not encourage it to think in those terms and indeed its own terminolo
gy emphasizes boosting enterprise with a revival of Mrs Thatcher’s enterprise zones.

  Moran (2009) is more skeptical than other authors about the existence of an Anglo-American model. He notes ‘some striking differences in political patterns that might make us doubt whether we are looking at a single model of capitalist democracy’ (Moran, 2009, p. xii). Moran comes to the conclusion that in Britain a system that was once very different from the US has been transformed, not by any process of ‘Americanization’ but through the growing influence of the EU and the breakdown of the pre-democratic regime. The British system ‘is now shaped more than in the past by legal regulations, it now involves more formal relations between regulators and regulated than in the past, and it is now more often characterised by an adversarial, punitive approach to enforcement than in the past’ (ibid., p. 170). However, in both systems ‘democratic politics is under great pressure from business power’ (ibid., p. 171).

  The two systems are very similar in the structural displacement of the financial sector in economic and political terms (although work in progress by Moran suggests that its contribution to the economy whether in terms of employment or tax revenues is often overstated). As Gamble (2010b, p. 10) observes, ‘The power of the financial sector was indirect and structural rather than direct. Bankers had few political allies and little political trust, but their main advantage was that governments recognised the vital importance of a successful financial sector to economic performance, did not have an alternative growth model and so were wary of introducing reforms that could permanently damage the ability of the financial sector to recover.’ Although reforms have been introduced in both countries, an acid test will be whether the investment and retail functions of banks are separated in Britain. The Chancellor has indicated support for the recommendation in principle of the Vickers Commission to ring-fence investment and retail functions of banks, but the devil will be in the detail.

  In Britain there is a recurrent dirigiste temptation in the sense of looking to French models in times of crisis which has no American equivalent: Canada is seen either as an irrelevant comparison or an example of what to avoid. This chapter has also noted variation over time as well as variation between countries. British policy became much more interventionist between 1945 and 1979 regardless of which party was in office. Moves in a more interventionist direction in the US were more spasmodic and more hesitant and the economic and political establishment never succumbed wholeheartedly to Keynesian orthodoxy, as proclaimed by the self-appointed disciples of Keynes in the way that it did in Britain.

  In practice, however, both countries, but especially the US, gave substantial assistance to their auto industries in the midst of the GFC because the economic and political costs of not doing so were seen to be too high. The auto industry has a central role in both economies with a substantial ‘multiplier’ effect. For Mandelson (2010, p. 455), a key consideration was that the car industry was ‘on its knees’. In this sense the ‘new’ industrial policy was very similar to the old one with its emphasis on Fordist mass production.

  The extent to which the Anglo-American model is an imagined space is illustrated by the case of BP (British Petroleum). In many ways it is a prototypical Anglo-American company: shareholdings in Britain are only one percentage point ahead of American Depositary Receipts held in the US and its main market is in the US. Yet criticism in the US following the Gulf oil spill centered on the notion that it was a British company and much of the political rhetoric seemed to be driven by American nationalism. The appointment of an American chief executive was seen as an attempt to assuage American political opinion.

  Perhaps the main function of the model is to provide a target for those who seek to assign blame for the GFC to a deficient Anglo-Saxon approach to the economy. It does not imply a unity of approach. As is evident from the policies of the Obama administration and Cameron government, there are important differences, and British membership of the EU is a factor of increasing importance in shaping relevant policies in the UK. Contrary to predictions in the immediate aftermath of the GFC, liberal capitalism has not disappeared. In many ways one can expect a reversion to ‘business as usual’ and the restoration of the Anglo-American model as a frame for policy. However, deficient economic performance and growing electoral concerns may produce ‘ad hoc’ initiatives from the Cameron government which mimic those of the Obama administration at the height of the crisis.

  References

  Casey, T. (2009) ‘Mapping Stability and Change in Advanced Capitalisms’, Comparative European Politics, 7, 255–78.

  Chester, N. (1975) The Nationalisation of British Industry, 1945–51 (London: HMSO).

  Chick, M. (2010) ‘Network Utilities: Technological Development, Market Structure and Forms of Ownership’, in D. Coen, W. Grant and G. Wilson (eds), The Oxford Handbook of Business and Government (Oxford: Oxford University Press), pp. 684–702.

  Coffey, T., and C. Thornley (2009) Globalization and Varieties of Capitalism (Basingstoke: Palgrave Macmillan).

  Davenport-Hines, R.P.T. (1984) Dudley Docker: The Life and Times of a Trade Warrior (Cambridge: Cambridge University Press).

  Dell, E. (2000) A Strange Eventful History: Democratic Socialism in Britain (London: HarperCollins).

  Eichengreen, B. (2007) The European Economy since 1945 (Princeton: Princeton University Press).

  Gamble, A. (2003) Between Europe and America: the Future of British Politics (Basingstoke: Palgrave Macmillan).

  Gamble, A. (2010a) ‘The 2010 Spending Review: Implications for the State and its Reach’, British Academy Forum, London, 30 July.

  Gamble, A. (2010b) ‘The Political Consequences of the Crash’, Political Studies Review, 8, 3–14.

  Gibbs, C. (2009) ‘Decline in Manufacturing Greater under Labour than with Thatcher’, Financial Times, 3 December 2009.

  Giddens, A. (2000) The Third Way and its Critics (Cambridge: Polity Press).

  Grant, W. (ed.) (1995) Industrial Policy (Cheltenham: Edward Elgar).

  Grant, W. (2010) ‘Environmental and Food Safety Policy’, in D. Coen, W. Grant and G. Wilson (eds), The Oxford Handbook of Business and Government (Oxford: Oxford University Press), pp. 663–83.

  Hall, P. (1989) ‘Introduction’, in P. Hall (ed.), The Political Power of Economic Ideas (Princeton: Princeton University Press), pp. 1–26.

  Kirby, M., and M.B. Rose (1991) ‘Productivity and Competitive Failure: British Government Policy and Industry, 1914–19’, in G. Jones and M.W. Kirby (eds), Competitiveness and the State: Government and Business in Twentieth-Century Britain (Manchester: Manchester University Press), pp. 20–39.

  Leruez, E. (1975), Economic Planning and Politics in Britain (Oxford: Martin Robertson).

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  Mandelson, P. (2009) ‘Best “Industrial Policy” Britain has Developed’, Financial Times, 30 July 2009.

  Mandelson, P. (2010) The Third Man: Life at the Heart of New Labour (London: Harper Press).

  Moran, M. (2009) Business, Politics and Society: An Anglo-American Comparison (Oxford: Oxford University Press).

  Parker, G. (2010) ‘Endorsing the French Model’, Financial Times, 21 January.

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  3

  Capitalism, Crisis, and a Zombie Named TINA

  Terrence Casey

  The financial crash that hit in September 2008 was more than a downturn in the business cycle. It was a ‘crisis of capitalism – a much rarer event, potentially giving rise to new politics, policies, and even the reorganization of capitalist economies’ (Gamble, 2009a, p. 7). This chapter explores the implications of this crisis for the politi
cal economies of America and Britain. Has this crisis of capitalism led to a fundamental transformation of Anglo-American capitalism? After a brief tour of the Anglo-American model of capitalism, the causes of the crisis and the major policy responses of both states are reviewed. Surprisingly, the neoliberal growth model has (so far) largely survived this crisis intact. More than anything else, the liberal model seems set to survive because no viable alternative growth model has been advanced by a political coalition with realistic electoral prospects.

  Anglo-American capitalism before the crash

  Both the US and UK are characterized as ideal-typical ‘liberal market economies’ (Hall and Soskice, 2001). The ‘neoliberal revolutions’ of Margaret Thatcher and Ronald Reagan included the deregulation of product, labor, and capital markets; the privatization of state-owned industries and the outsourcing of public services; fiscal retrenchment, reducing overall state spending and slicing marginal tax rates to increase private investment; and a general belief in the self-regulation of markets. Neoliberal reformers were, for the most part, successful on all of these fronts, with their gains consolidated by the ostensibly left-wing governments of Bill Clinton and Tony Blair in the 1990s. The one draw was state spending, which, after shrinking for two decades, was basically the same in 2007 as in 1980 (see Figure 3.1). Despite the commonalities, differences between Britain and America abound (see Moran, 2009). Britain has a unitary system with power concentrated in the core executive. Powers are separated (and shared) in the US between the executive, legislature, and judiciary, all of whom are involved in economic regulation, and the federal system allows states to exercise independent fiscal and regulatory policies. Division provides more direct openings to organized interests in the US, although the structural influence of business, especially of the City, weighs heavily on British policy-making. Organized labor has declined substantially in Britain since the 1970s, yet unions remain even weaker in the US. The exceptions in both states are public sector unions, which remain significant political forces. The greatest differences come in public policy. Social democracy never gained a beachhead in America. The British state does more – and is expected to do more – for its citizens. Nowhere is this more vividly illustrated than in health care. The National Health Service (NHS) is so sacrosanct that the Conservatives were compelled to protect it in their budget-cutting 2010 manifesto. In America even the inclusion of a ‘public option’ in the Obama administration’s health care legislation was considered beyond the pale.