So who do you think is to blame for the financial crisis? Ever-darker Red Ed made it clear what he thought – it was business. Particularly those which had the “wrong values”. Part of his new deal for Britain was a pledge to punish businesses that politicians decide are asset strippers, while rewarding those that politicians decide are wealth creators (as well as those that politicians decide are doing well on training). His aides briefed journalists that private equity firms were among those that would get hit with a tax bombshell, while explaining that it was all a response to the failure of “neo-liberalism”. This is such muddle-headed back-to-the-1970s political opportunism that it is difficult to know where to start. What did private equity firms have to do with the sub-prime mortgage lending, excessive public spending by the UK government, the failure of Greeks to pay their taxes, or the collapse of the euro? Suffice to say that Tony Blair’s aides said the former prime minister would be sinking his head in his hands in frustration.
But there is an underlying point here, and it is one illustrated wonderfully by my 6 year old twins. They can play by themselves in their bedroom and break a toy, and then insist that it was all the fault of a parent who was sitting downstairs. Refusing to accept blame and responsibility is a deeply ingrained human instinct, and it can be a dangerous one if governments indulge. Wrong-head diagnosis can lead to a wrong-headed cure that makes things worse.
Politicians might blame businesses for the economic crisis, but what if it wasn’t actually the fault of businesses – but the fault of politicians? What if this wasn’t a failure of neo-liberalism, but a failure of democracy? And what if Ed, by trying to make political capital by scapegoating businesses, and promising to pick winners among British companies, is not part of the solution – but part of the problem?
Obviously, there are many underlying causes of the economic crisis. There are many problems with businesses – in particular the banking sector – that have contributed to it. Some banks took on excessive risks their senior management didn’t understand, and collapsed requiring massive government bailouts. That shouldn’t have happened; clearly we need – and are getting – new regulation aimed at stopping that happening again.
But many of the other causes of the crisis were the result of failures of government. Matthew Parris in Saturday’s Times highlighted one fundamental problem, which is that we in the West – the UK, Europe and America – have been living massively beyond our means, building up government and private debt over years, with a bloated state and standard of living that was unaffordable. The debt-bubble exploded, but that wasn’t because markets weren’t working, but rather because they were working. As Parris said, what we are witnessing is a market correction that forces the West to live within its means. For left wing politicians to blame businesses for their own inability to control their spending is a bit like people with massive debt problems blaming the banks. The fact that governments – whether British, Greek or American – can’t level with their electorates and say that we need to live within our means is the fault of politics, not of markets.
Another cause of the crisis is the sub-prime mortgage bubble in the US, which was the result of politicians – particularly President Bill Clinton – trying to win electoral support by forcing mortgage companies to lend to homeowners who weren’t credit worthy. The only failure of business was not to stand up to the political meddling; the responsibility lay with politicians, not businesses.
As we all know, the euro too was a politically-driven project. European leaders had a dream of monetary union, and they imposed it on Europe in defiance of economic reality. The crisis of the euro, which has been brought about because of its internal contradictions, is not the fault of businesses, but of politicians. The fact that the Greek government lied about its debts to get into the euro, failed to balance its books afterwards, and failed either to wean Greeks off their unaffordable pensions or improve their tax compliance was not a failure of markets, but of democracy.
So it is perfectly possible to make the case that it was politicians that are to blame for this crisis, not businesses. The common theme – from sub-prime lending, to excessive government spending, to monetary union – is that we should be very worried about governments trying to buck the markets. To believe the cause is primarily a failure of markets rather than politics is to draw the wrong conclusion, leading to the wrong solution. Which is what is so worrying about Ed’s big idea. He wants politicians to decide which businesses thrive and which ones don’t. This isn’t a cure, but more of the disease. It’s like giving someone more arsenic in an attempt to cure them of arsenic poisoning.
In contrast, George Osborne has been trying to buck the trend. With his deficit reduction strategy he has been trying to level with voters that we all need to live within our means. He has been trying to correct not market failure, but political failure. If we want to avoid economic crises in the future, we need more of that, and less of Red Ed’s wrong-headed opportunism.