THERE is a new, fascinating argument in British politics, one which will frame the debate for a long time to come. If Ed Miliband is to be believed, the demand for cheap credit prior to the crash was “because wages weren’t keeping up with the pressures on families: too many were forced to borrow to finance their living standards.” It’s a statement with huge implications.
Miliband has adopted a distorted and simplistic version of the influential thesis contained in Raghuram Rajan’s book Fault Lines, which argues that growing income inequality and limited increases in American median incomes during the past 25 years has created a political demand for redistribution. The reaction by politicians of all parties was to promote higher home ownership via cheap and easy credit, including subprime mortgages. The latter were the direct result of the Community Reinvestment Act and support given by government-controlled institutions, led by Fannie Mae and Freddie Mac. The Fed’s easy money policies can also be understood through this prism: the authorities were trying to help the poor, a wonderful aim, by providing them with cheap credit – but this just triggered a destructive bubble. The real reasons for weak income growth were not tackled. Cheap credit was used as a supposedly free substitute for tough policies.
Rajan is a distinguished academic; his book full of insights. The same cannot be said of Miliband’s argument, which glosses over the state’s role in promoting the crisis. He claimed instead the problem was “the richest at the top doing well, and the majority struggling to keep up,” neatly linking high inflation to class warfare. His attempt to justify over-borrowing and to abolish what is left of the doctrine of personal responsibility when it comes to debt was equally populist. If the public thinks it is getting poorer because the rich are getting richer, Britain will be back to the 1970s intellectually and culturally – and the way will be open for an even more dramatic move to the left. It’s a clever strategy.
Yet Labour was in power for all but the last 10 months of the past 14 years and thus bears a large share of the blame for the UK’s lack of social mobility. The current decline in living standards is being caused by inflation and thus in part by Labour’s monetary arrangements, by global forces and – in the case of VAT – an attempt to plug Gordon Brown’s budget deficit. Short-term problems are being conflated with long-term ones. Low wage growth, if it really existed, had many causes, not least bad education and low productivity. We urgently need policies that promote economic growth, wealth-creation, productivity and meritocracy, and to give members of the struggling, hard-working classes the tools to improve their lives and earn more. This is vitally important. Truly radical policies are needed – not yet more of the cheap populism on offer from Miliband.
CITY A.M.’S AWARDS ARE BACK
I am delighted to announce that nominations are now open for City A.M.’s annual awards celebrating London’s financial and business community and its most successful firms and individuals. The headline sponsor is Saxo Bank; entries will be open until 4 May; the awards night will be 21 September. Visit www.CityAMAwards.com for details, how to nominate candidates, how to attend and how to sponsor categories. It will be a great night; don’t miss out.
Follow me on Twitter: @allisterheath