Right and Wrong New Labour

Gordon Brown’s poignant departure from 10 Downing Street on the evening of May 11 brought to mind Enoch Powell’s dictum that all political lives except those cut off prematurely end in failure. “Only those who have held the office of prime minister can understand the full weight of its responsibilities and its great capacity for good,” Brown said outside the cramped Georgian row house he had occupied for almost three years. “I have been privileged to learn much about the very best in human nature and a fair amount too about its frailties, including my own.” The note of self-deprecation represented a rare glimpse of the private Brown, as did the parading before the cameras of his two young sons, John (six) and Fraser (three), whom, since succeeding Tony Blair in June 2007, he had kept out of the public eye.

Behind Brown’s image as a dour technocrat lurks a complex, volatile, almost Shakespearian figure. A political activist since his days at Edinburgh University, he spent more than thirty years climbing to the top of Westminster’s greasy pole, only to slither down it in agonizingly short order. After a short honeymoon period in 2007, he had to endure slumping poll ratings, constant gossip about his possible replacement, and even questions about his sanity.

Brown has a famously bad temper, which, as the British journalist Andrew Rawnsley revealed in a book published in March,¹ he was apt to direct at his Downing Street staff. Suggestions that Brown might be losing it were nothing new. In 1998, during one of his early feuds with Blair, somebody in the Blair camp—widely believed to be Alastair Campbell, Blair’s spokesman—told a reporter that Brown was “psychologically flawed.” Through the years, his enemies in the party, many of whom appear to have served as sources for Rawnsley, kept up a whispering campaign about his mental state. In the spring of 2007, when Blair was preparing to resign as prime minister and let Brown take over, Frank Field, a veteran Labour MP, went to Downing Street and pleaded with him to stay. “You can’t go yet,” Field reportedly said. “You can’t let Mrs. Rochester out of the attic.” According to Rawnsley’s account, Blair roared with laughter.

That was the right attitude. Brown isn’t a madman: he is a passionate, brooding Scot, who is aware of his own shortcomings. Touring a college in his constituency a couple of days after resigning, he said: “I was actually thinking of coming in today and applying for the course on communication skills.” One on one, Brown can be gracious and warm, displaying a passion for poetry and history. After graduating in the early 1970s, he wrote a doctoral thesis on the early history of the Scottish Labour Party, taught politics at Glasgow College of Technology, and did a stint in television journalism. Shortly after he became Chancellor of the Exchequer, I encountered him at a cocktail party hosted by Tina Brown, the former editor of The New Yorker. When I told him I was writing for the magazine about economics and politics, a wistful look came over his face. That sounded like his ideal job, he said.

Looking back, it is easy to say that Brown wasn’t cut out for the very highest rungs of politics, but that isn’t wholly accurate. Together with Blair, he formed one of the most successful partnerships in the history of British politics. The “New Labour” project they launched in the early 1990s conquered the party and then the country. In public, Blair was the senior figure; privately, they regarded each other as equals, and not without reason. Blair was the front man; Brown was the strategist and theoretician. As chancellor from 1997 to 2007, he oversaw a period of economic stability and prosperity without parallel in recent British history, establishing himself as an international figure. On becoming prime minister in 2007, he dealt adroitly with terrorist attacks, floods, an outbreak of foot-and-mouth disease, and the collapse of Northern Rock bank. For several months, opinion polls showed him to be very popular.

Three things brought Brown down: the financial crisis of 2007–2008 and subsequent Great Recession, which made a mockery of his claim to have abolished the boom–bust cycle that had plagued the British economy for decades; the House of Commons expenses scandal, which undermined public support for politicians of all parties, but particularly incumbents; and his own cautious nature, which prevented him from calling a snap election in the fall of 2007. Rather than seeking an electoral mandate when his no-nonsense attitude still presented a refreshing change from Blair—“Not flash, just Gordon” was the advertising slogan his handlers came up with—he waited until the last possible moment.

During the final week of the campaign, he finally found his voice as the defender of public services and tax increases on bankers. “As you fight for fairness, you will always find in me a friend, a partner and a brother,” he told one cheering audience. Labour ended up doing a bit better than expected, gaining 29 percent of the vote and holding on to most of its traditional strongholds in northern England, Scotland, and Wales. It even won some marginal seats in the Midlands and south that it had been widely expected to lose, such as Edgbaston, Oxford East, Luton South, and Barking. Evidently, the electorate remained suspicious of David Cameron’s airbrushed Tories, giving them no more than 36 percent of the vote and forcing them to seek the support of the Liberal Democrats, who got a disappointing 23 percent.

Some commentators, on the left and the right, now dismiss Blair and Brown as flim-flam merchants—media-savvy purveyors of Thatcherism-Lite. That isn’t fair. New Labour not only rescued old Labour from two decades of failure; it redefined the parameters under which all three major British parties operate. David Cameron understands this. Back in 2005, shortly after taking over as leader of the Conservatives, he told a group of newspaper executives that he was “the heir to Blair.” Five years on, there was little in the Conservatives’ election platform that deviated from the tenets of New Labour. Mrs. Thatcher famously opined that there was no such thing as society, just self-seeking individuals; Cameron adopted the term “Big Society” as his campaign slogan and promised to protect the National Health Service from any budget cuts. After being tagged as the “nasty party” for more than a decade, it was the Conservatives’ endorsement of a more communitarian vision that made them electable.

The first precept of New Labour was an acceptance that state socialism had failed and that the market economy was here to stay. To make this explicit, in 1994–1995 Blair and Brown insisted on changing the old “Clause Four” in the Labour Party constitution, which had committed the party to “common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each industry or service.” By the early 1990s, Labour’s support of public ownership was largely sentimental: few of its supporters really believed that the government should renationalize British Telecom or British Petroleum, which Mrs. Thatcher had privatized. But rewriting Clause Four signaled to the British public that New Labour really was new. Blair and Brown openly courted business leaders. Peter Mandelson, the third member of the New Labour triumvirate, told an American audience that the party was “intensely relaxed about people getting filthy rich.”

Job two was demonstrating that Labour could manage the economy. Following the unhappy experiences of the Wilson and Callaghan regimes in the 1960s and 1970s, many people still associated the party with profligacy, inflation, currency crises, and industrial unrest. Brown, the son of a Presbyterian minister, was the ideal man to reestablish Labour’s financial credentials. Before the 1997 election, he made a two-year commitment to the Conservative government’s existing budget targets, fending off demands for a rapid boost in spending on education, the National Health Service, and pensions. Immediately after the election, Brown made the Bank of England independent, handing to it the responsibility for setting interest rates that had previously resided in the Treasury.

In the City of London and on Wall Street, Brown’s twin self-denying ordinances earned him instant credibility. Rather than selling off sterling, which they had done under Labour governments in the 1960s and 1970s, international investors poured money into the British currency, causing it to appreciate sharply. Nonetheless, in 1998, when global markets went into a panic following the near collapse of the giant US hedge fund Long-Term Capital Management, many old-time Labour MPs feared the worst. “They were saying, ‘Oh no, another Labour economic crisis,'” a senior Labour adviser recalled for me a year later. The markets quickly calmed down, though, and the British economy continued to expand.

By 2001, when the Labour government put itself up for reelection, it had replaced the struggling Tories as the political representative of modern economic methods. “Labour’s economic record has been very satisfactory,” the nonpartisan National Institute of Economic and Social Research (NIESR)noted in 2005.

Inflation has been low and stable and output growth has also been stable…. By contrast with earlier periods, the public finances have been reasonably well controlled and our current position is better than that in both France and in the United States in this respect.²

But New Labour wasn’t merely a cheerleader for market forces, low inflation, and fiscal prudence. In addition to reconciling the party (and the country) to some basic elements of Mrs. Thatcher’s legacy, Blair and Brown introduced genuinely progressive measures. In their first term, they abolished the right of hereditary peers to sit in the House of Lords, devolved power to Scotland and Wales in response to popular demands, introduced a Freedom of Information Act, and incorporated the European Convention on Human Rights into British law. In a country that lacks a written constitution, these were epochal changes. New Labour was the first British government to include openly gay cabinet ministers, and it abolished the ban on gays serving in the military. The 2004 Civil Partnership Act, while stopping short of legalizing gay marriage, bestowed upon same-sex unions all the legal benefits of marriage.

There are some stains on New Labour’s human rights record, notably in its treatment of terrorism suspects. Following September 11, British intelligence operatives were reportedly complicit in the US torture of al-Qaeda suspects in Afghanistan and elsewhere.³ In a series of terrorism bills, the Blair and Brown governments repeatedly tried to increase the period that terrorism suspects in the UK can be detained without trial. Following a defeat for the government in the House of Lords in October 2008, the limit was kept at twenty-eight days.

Brown’s commitment to orthodox finance also had a progressive rationale. “To buy you the room to do the right thing on social policy and other areas, you have to maintain a reputation for stability and competence,” one of his top aides explained to me in 1999. “Creating a credible policy framework gives you more flexibility. This is a five or ten year project.” From 1999 onward, the Labour government sharply increased spending on the National Health Service, education, and welfare payments to the old and sick. If you walk around a typical British city today, you will encounter numerous new schools, hospitals, and day care centers—all of them government-run. The NHS has 89,000 more nurses and 44,000 more doctors than it did in 1997, and waiting lists to see specialists have been greatly shortened. Every British three- and four- year-old is entitled to fifteen hours of free day care each week, and more young British adults than ever before are attending university. Largely as a result of higher government benefits, poverty among the young and the elderly has fallen sharply since 1997. On the official measure that includes housing costs, the overall rate of poverty fell from 25.3 percent in 1996–1997 to 22.5 percent in 2007–2008. Homelessness fell to a twenty-year low, according to official figures, and, perhaps surprisingly, it continued to fall during the recession of 2008–2009.⁴

These statistics didn’t figure much in the recent election campaign, but they bear inspection. Under New Labour, Britain, with some exceptions, became a fairer, more humane place. Judged by the Gini coefficient, a statistical measure of how widely distributed incomes are, overall inequality is slightly higher today than it was in 1997. Absent New Labour’s policies, however, it would be much higher. Blair and Brown introduced a national minimum wage—it is now £5.93 an hour for workers aged twenty-one or over—and a working families tax credit, which was modeled on the US earned income tax credit. Until recently, when the soaring budget deficit prompted it to introduce a new top rate of 50 percent, New Labour avoided raising marginal tax rates, and actually lowered some of them. But it eliminated tax shelters that favored the rich and gradually raised their overall tax burden. In a recent report, the nonpartisan Institute for Fiscal Studies concluded:

The tax and benefit measures implemented by Labour since 1997 have increased the incomes of poorer households and reduced those of richer ones, largely halting the rapid rise in inequality we saw under the Conservatives.⁵

On the international front, New Labour increased the overseas aid budget and championed the UN Millennium Goals, which committed the international community to halving global poverty within fifteen years. Some people in Washington credit Blair with persuading the Bush administration to follow its lead in supporting the Millennium Goals and boosting US aid to Africa. On becoming prime minister, Brown continued to push an anti-poverty agenda, promising earlier this year to enshrine in legislation the goal of raising the international aid budget to 0.7 percent of GDP, which is the official UN target. It remains to be seen how far the Conservative–Liberal Democrat coalition, which faces great budget challenges, will protect the aid budget.

Speaking outside 10 Downing Street shortly after Brown left on May 11, David Cameron graciously noted: “Compared to a decade ago, this country is more open at home and more compassionate abroad. This is something we should all be grateful for.” So where did New Labour go wrong? One of the answers, obviously, is the war in Iraq, which destroyed Blair’s reputation as a truth-teller. The low point of Labour’s long tenure came in 2003, when the Hutton Inquiry into the suicide of David Kelly, a scientist employed by the Ministry of Defence, brought into full public view Downing Street’s frantic efforts during the run-up to war to exaggerate the threat Iraq posed, and the subsequent tawdry efforts by senior Labour officials to put pressure on Kelly, who had been identified as the source of a BBC report that the government had “sexed up” the evidence on Iraqi weapons of mass destruction. Lord Hutton, a high court judge, cleared the Blair government of any wrongdoing, but its standing with the British public never recovered.

As chancellor, Brown didn’t have much of a role in the Kelly affair, but he has consistently defended the decision to go to war. Earlier this year, appearing before yet another official inquiry into Iraq policy, he vouchsafed that he “never subscribed to what you might call the neo-conservative proposition: that somehow, at the barrel of a gun, overnight, liberty or democracy could be conjured up.” To him, he insisted, the essential point was that Saddam Hussein was flouting UN sanctions and undermining efforts to create a new international order. “These were difficult decisions,” Brown said. “I believe they were the right decisions for the right reasons.”

Even now, with Iraq enjoying a semblance of order, Brown’s argument looks shaky. If fealty to international conventions was the defining issue, surely the UN weapons inspections inside Iraq should have been allowed to proceed. In my view, for which, admittedly, I don’t have conclusive evidence, the main reason New Labour followed the Bush administration into Iraq was a desire to preserve its long-standing relationship with the United States. In the aftermath of September 11, the wounded American bear was determined to strike out, and it expected support from its closest European ally. The famous “Downing Street memo” of July 23, 2002, confirms that the British Foreign Office and intelligence services informed Blair and his senior aides that “Bush wanted to remove Saddam, through military action, justified by the conjunction of terrorism and WMD. But the intelligence and facts were being fixed around the policy.”⁶ In the ensuing months, Blair, with the encouragement of Colin Powell, tried to ensnare the Bush administration in the UN process, but when George W. Bush and Dick Cheney called his bluff he quickly folded his cards and defended the decision to invade.

Seven years later, British troops are still fighting alongside Americans, this time in Afghanistan. Polls show that three quarters of the British public think the conflict is unwinnable. Feel-good arguments about fighting the terrorists on foreign soil rather than at home don’t hold much sway in the UK, where it has long been recognized that the biggest threat comes from domestically grown jihadis. With the “War on Terror” continuing to metastasize in Pakistan, Yemen, and elsewhere, and with the Obama administration stepping up the use of bomb-laden drones to kill suspected terrorists (and, sometimes, innocent civilians), David Cameron and Nick Clegg face the same question that Blair and Brown confronted, but never convincingly answered: In a post–cold war world, how far should Britain subjugate its foreign policy to Washington?

If Tony Blair’s premiership perished on the streets of Baghdad and Basra, Gordon Brown could trace his demise to the City of London and Wall Street. In both cases, hubris also played a role. Blair loved to parade on the international stage, where he received rave notices, and he lost some of his feel for the ordinary voters back home. Brown eventually fell for some of his own hype about how New Labour had transformed the UK economy, casting aside the fiscal hair shirt he had worn during his first years as chancellor. In its second term, New Labour greatly increased expenditure on health, education, and welfare. Total government outlays as a share of GDP went from 36.9 percent in 2000–2001 to 41.1 percent in 2007–2008. Rather than raising income tax rates or sales taxes to pay for this spending spurt, New Labour relied on less visible devices, such as increasing levies on property sales and financing the construction of schools and hospitals by such schemes as, effectively, selling the property on which they stood and leasing it back.

Beginning in 2002–2003, four years of budget surpluses were replaced with deficits of 2 to 3 percent of GDP. At the time, these deficits were considered manageable, but when the economic expansion came to an end a scary picture emerged. In 2008–2009, the budget deficit shot up to 6 percent of GDP, and in 2009–2010, it reached almost 11 percent—a level unprecedented in recent history, and one that placed the UK behind only Greece and Ireland in the European league of fiscal miscreants. (The rise in the UK deficit was actually pretty similar to what happened in the US, where the 2010 deficit was 10.6 percent of GDP.) In just a few years, Britain’s public finances were transformed from a model of prudence into a national embarrassment, which the Tories leaped on with glee. David Cameron labeled Labour a government of “spendaholics”; George Osborne, who is now chancellor, accused it of “fiscal incontinence.”

The budget crisis shouldn’t be exaggerated. Contrary to the claims of some scaremongers, Britain isn’t in any immediate danger of defaulting on its debts. According to the Institute for Fiscal Studies, about half of the current deficit is cyclical—meaning it is a temporary product of the economy operating below capacity, which depresses tax revenues and increases government outlays on unemployment benefits and other items. Still, the fiscal deterioration cannot be ignored—a structural deficit of 5 or 6 percent of GDP is worryingly large—and neither can the irony of the situation. “The charts that are now being used to condemn the Government’s fiscal performance look remarkably like those that it used a decade ago to ridicule the performance of its predecessor,” the economist Sir Alan Budd, who from 1991 to 1997 served as chief economic adviser to the Treasury, said earlier this year.⁷

How did things come to this? Part of the answer is bad luck. Brown can hardly be blamed for failing to anticipate that a collapse in the American housing market would generate an international financial crisis, which, in turn, would plunge the UK economy into its deepest recession since the 1930s. (Between June 2008 and October 2009, GDP shrank by about 6 percent.) The real indictment of Brown is that, in his later years as chancellor, he mistook an old-fashioned real estate and credit boom for sustainable growth, and that he placed too much faith in economic orthodoxies that proved to be mistaken.

When he moved from the Treasury to Downing Street he bequeathed to his successor as chancellor, Alistair Darling, an economy that was acutely vulnerable to shocks from overseas. In the second quarter of 1997, when New Labour came to power, the average cost of a British house was £58,403, according to the Nationwide Building Society. Ten years later, the average house price was £181,810. As the value of their homes increased, people took on more and more debt. Between 2000 and 2007, according to a study by the McKinsey Global Institute, total debt outstanding (public and private) in the UK grew by more than 150 percent.⁸ By 2008, the ratio of total debt to GDP was a stunning 469 percent.

Rather than addressing the country’s rising indebtedness, a blunder for which the Bank of England should share responsibility, New Labour continued to insist that the economy was fundamentally sound. In addition, it failed to regulate the fast-growing financial sector adequately. Although there was no British equivalent of the Gramm-Leach-Bliley Act of 1999, which abolished the last remnants of the Glass-Steagall legislation that separated US commercial banking from investment banking, Brown provided a receptive ear for financiers seeking to chisel away at any remaining restrictions on their activities. Like some of his counterparts in the Democratic Party, he came to accept that financial engineering—for example, the securitization of mortgages—is equivalent to wealth creation, and that financial markets are largely self-regulating.

Rather than seeking to restrain the City of London, Brown acted as its cheerleader, sometimes echoing the views of his good friend Alan Greenspan. It was in 2005, when Brown invited Greenspan over to Scotland to deliver an Adam Smith memorial lecture, that I began to have serious doubts about his judgment. After Greenspan resigned from the Fed in 2006, Her Majesty’s Treasury retained him as an unpaid consultant. “I am delighted that Dr. Greenspan has agreed to be Honorary Adviser,” Brown said in a statement. “His advice on issues relating to global economic change will be much appreciated.”

Ultimately, Brown paid dearly for abandoning Labour’s traditional distrust of free-market economics and unfettered finance. When the inevitable bust came, he and Darling handled the resulting banking crisis adroitly. In September 2007, when Northern Rock was facing the first run on a British deposit-taking institution since the nineteenth century, the Treasury guaranteed all of its deposits, and subsequently expanded the government safety net to other banks. (Hitherto, Britain had lacked a formal system of deposit insurance.) A year later, following the collapse of Lehman Brothers and the bailout of AIG, Britain was the first country to take decisive action to restore confidence in the markets, injecting £37 billion of taxpayers’ money into the Royal Bank of Scotland and Lloyds-TSB.

The British intervention provided a template for similar moves by the US Treasury. In The New York Times, Paul Krugman posed the question: “Has Gordon Brown…saved the world financial system?” The answer may have been yes, but Brown didn’t get much credit from the British public, or from his colleagues in the parliamentary Labour Party. As the recession deepened, there was renewed talk of ousting him as leader. In January of this year, an attempted putsch actually materialized, only to fizzle out almost immediately.

Brown was left to face the voters, and almost certain defeat, which he did resolutely. He admitted to making some mistakes. “In the 1990s, the banks, they all came to us and said, ‘Look, we don’t want to be regulated, we want to be free of regulation,'” he told one interviewer. “All the complaints I was getting from people was, ‘Look you’re regulating them too much.’ And actually the truth is that globally and nationally we should have been regulating them more. So I’ve learnt from that.” His worst moment came when a BBC radio microphone caught him describing an elderly Labour supporter, who had quizzed him about the large number of migrants from Eastern Europe living in the UK, as a “bigoted woman.” His best moment came during the second televised candidates’ debate, when he said: “If it’s all about style and PR, count me out. But if you want someone to make decisions, and with the judgment and a plan for the future, I’m your man.”

The electorate rejected his plea, but New Labour did deliver a better Britain. From carrying through the peace process in Northern Ireland, to setting up elected assemblies in Scotland and Wales, to establishing a legal basis for human rights, it dragged Britain’s ancient constitutional system into the twentieth century, if not the twenty-first.

On economic matters, its record will eventually look better than it does now. What really matters for improving people’s living standards isn’t the size of budget deficits or the level of the stock market but productivity growth. Between 1997 and 2007, productivity grew faster in Britain than it did in Canada, France, Germany, Italy, and Japan. Only the United States outstripped Britain. “Labour has delivered an improvement in Britain’s productivity performance relative to other large economies and this relative improvement has survived the recession,” the NIESR commented in a recent study.⁹

The current financial troubles in Europe point to another important New Labour legacy: the decision, which Brown insisted upon, not to join the euro. If Britain had adopted the European currency a decade ago, which is what some people around Blair were pushing for, it would now be in a much worse position. The retention of the pound sterling gave Britain the opportunity to devalue its way out of its economic slump, and, if necessary, to inflate away its debt problem by printing more money. As members of the euro, countries such as Greece, Spain, and Portugal no longer have these options.

Labour’s serious critics concede that, overall, Britain is in better shape than it was thirteen years ago. Their main criticism is that much of the money that Brown and Blair spent on the public sector was wasted: instead of delivering better services it merely boosted the wages of public employees, such as nurses and teachers. “The prime minister has tended to take the side of producers—especially the public- sector unions,” an article in The Economist recently noted. “He frustrated some of Mr. Blair’s efforts to reform the health service and education and slowed down others once he became prime minister.”¹⁰ There is some truth in this argument. But that doesn’t necessarily mean that Brown’s more gradualist approach was mistaken, or that it was wrong to raise the salaries of nurses, teachers, and university lecturers, many of whom were scandalously underpaid.

David Cameron and Nick Clegg are about to discover that restraining the growth of the public sector is a deep and intractable problem. William Baumol, the NYU economist, pointed out four decades ago that many functions the government fulfills, such as teaching children, curing the sick, and putting on classical music concerts, are labor-intensive activities that don’t lend themselves to rapid productivity growth. Over time, such “goods” inevitably get more expensive relative to most things that the private sector produces, such as food and electrical products. Steps such as encouraging the growth of privately run public schools and allowing for-profit firms to provide some medical services may check the “Baumol disease.” There is no evidence that they cure it.

In the end, political parties have to reach an ethical judgment about what activities the government should carry out and then scrabble about to pay for them. New Labour’s approach, in its early years, was to create a stable economic climate, encourage economic growth, and rely on an expanding tax base to finance better public services and an attack on inequality. Of course, this wasn’t exactly a novel idea: it is pretty much the same formula that Anthony Crosland, the old Labour intellectual, laid out in his 1956 book The Future of Socialism. But there wasn’t anything very new about Mrs. Thatcher’s free-market policies either: most of them harked back to Ricardo, Cobden, and Bright. In politics, novelty is often in the eye of the beholder. Presentation and timing are all.

New Labour was the right movement in the right place at the right juncture. Now that Brown has the time to fulfill his ambition of becoming a writer, perhaps he will tell its full story, placing it in historical context. Given the current political climate in the UK, it is hard to see such a book being a best seller. In decades to come, however, it would be a valuable historical document and also a handy guide for ambitious young politicians—both in telling them what to do and what to avoid.

—May 27, 2010