Michael Meacher describes new roles the state could and should take on in and after the credit crunch

IT IS ironic that the 45 per cent tax rate for 2011 has been hailed as the end of “new” Labour when it is nothing of the kind. It is little more than window-dressing – trivial in effect and three years too late to have much impact. However, what should mark the end of  “new” Labour is the breakdown in its chosen economic model, in the relationship between private markets and the state, and in the power structures by which it imposed neo-liberalism across the economy.

“New” Labour was built on an interconnected network of projects: the promotion of untrammelled markets as the preferred agent of both economic and social policy wherever feasible with the withdrawal of the state into a mere facilitating and weak supervisory role. This was accompanied by the deregulation of whatever business wanted, relentless pressure to privatise public services, and the elevation of financial markets and the City of London as the lynchpin of the economy at the expense of manufacturing. There was a relaxed indifference to ballooning inequality in income and wealth. This model has now been eviscerated by the massive credit contraction – a convulsive recession, even without the energy crunch to come.

It is not retrievable. This is no ordinary recession, but a systemic failure without precedent since the 1930s. Capitalism as managed after the Second World War, which prevailed until the oil-induced hyper-inflation of the 1970s, gave way to a much more unfettered market-driven version in the 1980s on the grounds that the markets always know best. The collapse of this turbo-charged system, with its internal checks and balances so hollowed-out that the increasingly reckless pursuit of ever-greater profits was blinded to the treacherous foundations on which it was built, now poses dramatically the question: what kind of system should replace it?

Clearly, the immediate causes of the breakdown need to be tackled, with a new and radical financial architecture that emphasises security and trust rather than high risk and overweening greed. Investment banks should be legally separated from high street commercial banks (the repeal of the Glass-Seagall Act in the United States in 1999 was a major mistake). The most obscure forms of securitisation – the trading worldwide of complex and arcane financial derivatives – should be banned, and the remainder made subject to approval by a much more robust regulatory organisation replacing the Financial Services Authority. Credit rating agencies should be made statutorily independent of the institutions whose creditworthiness they assess. Amazingly, at present, they are not. And the City mega-bonus culture which has pushed toxic lending into unprecedentedly reckless overdrive should be brought under control by enforceable Bank of England guidelines and by requiring fancy remuneration packages to be sanctioned by a more interventionist regulatory body.

But these are only surface adjustments. Much more important is deep-seated reform of the system dysfunction that created these failures in the first place. That requires a new re-drawing of the balance between the state and private markets and of the power structure spawned as a consequence of the state abandoning too much control to deregulated and unaccountable market forces.

Four new roles for the state are essential if the current crisis is to not to be repeated. One, which has been effectively abandoned over the past three decades, is rebalancing the forces within the state when they threaten to put economic or social stability at risk. In the present crisis, the state was only brought into play at the last minute in an attempt to stave off irretrievable breakdown. Nothing was done at a much earlier stage to hold back a clearly unsustainable credit and housing asset bubble, nor to establish a better balance between finance and industry – between an over-indulged City and a neglected manufacturing industry. Equally, regional policy, recalibrating economic opportunity towards the north away from the overloaded south, was sacrificed to market forces. This simply exacerbated the underlying problem.

A second role, which has previously been given short shrift, is regulation. This is hardly surprising when de-regulation is so integral to the neo-liberal philosophy, but its effects have been highly damaging. A counterpoise to extending market freedoms should be tighter and tougher regulatory supervision. Sadly, the opposite has been encouraged. Notoriously, lax regulation led to the collapse of Northern Rock and a fatal inaction so that banks were not pulled back from risky speculative trading towards their core function of lending to businesses and individuals. Nor were steps taken to reduce transparency and tax in order to arrest the growing shift to offshore operations. Similar weakness has been apparent elsewhere, including with the Competition Commission, Ofcom, Ofgem, the Food Standards Agency and anti-corruption measures.

Third, the neo-liberal interregnum has pointed up the need for a very different kind of state, not as a mere facilitator, but as an interventionist force to protect all sections of society in terms of their security, employment rights and income adequacy. That means changing some of the fundamental dynamics and power relations, not merely tinkering with tax and benefits while virtually uncontrolled market forces are primed to explode inequality. Redistribution may well have a role, but far more important is setting a framework to ensure a broad fairness in income and wealth and to prevent gross inequality getting out of hand in the first place. The market is not a good or fair determinant of pay in either the top and bottom reaches of income distribution. A fair pay commission is needed to secure a fair and consistent rewards system.

Fourth, we need a new role for the state designed in terms of its relationship with the markets. At present, a weak state kow-tows to the markets at every turn. Capitalism is out of control. A strong state is one that holds the ring between contesting interests to secure outcomes that maximise the public welfare. The current system, based on two main parties that share very similar values and operate via secret deals with the main power brokers does nothing of the kind. Rather, it marginalises Parliament, leaves markets rampant until they bring about their own destruction, and disenfranchises huge swaths of the electorate.

There are many different ways in which this new relationship needs to be developed. It should not be over-statist or over-prescriptive, nor in hock to the markets. Banks that are “too large to fail”, but then force governments to bail them out when they do should be broken up. They need smaller, clearer roles and should be subject to the same competitive pressures as everyone else.

In other areas, competition has been seriously weakened by the over-dominant size and influence of the main players. This has to be cut back – drastically, in some cases. In market sectors where operations are highly complex, such as energy and pharmaceuticals, or where outsourcing has led to loss of control through multiple sub-contracting, there is a strong case for a public sector comparator to obtain transparency and prevent complexity becoming a cover for profiteering and other excesses. When the world faces almost simultaneously the triple crunch over financial breakdown, peak oil and climate change, a much more directive role for the state is desperately needed. We cannot afford to wait for the glacial pace of adjustment by the markets.
Michael Meacher is Labour MP for Oldham West and Royton