In a strict sense, the government's economic policies are not a gamble – a gamble has some probability of success. These had only the remotest chance of succeeding, unless you accept the risible story that the alternative 12 months ago was national bankruptcy. Or if you accept that any price is worth paying to avoid credit agencies pronouncing a downgrade of the creditworthiness of British public debt. Instead, it is now obvious that we are living through one of the great economic misjudgments of modern times.
The UK recovery is incredibly weak – whether measured against our past or against the experience of other countries. The National Institute of Economic and Social Research's current economic forecasts make very sober reading. It will not be until 2013 that output in Britain will return to the levels of 2008. The US and most of Europe will have completed their recoveries well before then.
This is even lengthier than in the early 1930s. But at least compensation for that came in strong economic growth from the mid-1930s onward, buoyed by a combination of new technologies and companies exploiting the growth in demand behind the tariff wall created to protect goods produced within the British empire. Companies such as ICI, Thorn, Hoover, Morris, EMI and de Havilland all created the underpinnings of a dynamic new industrial economy, helped along by the activist hand of government. There is no such prospect in this decade.
Britain today is disfigured by a dysfunctional financial system, massive personal debt, vast amounts of capacity in industries predicated on the flourishing of a now non-existent consumer boom and tightly squeezed living standards. Roger Bootle, the managing director of Capital Economics, has predicted that the severity and duration of the squeeze on British living standards will be the greatest since the Great Depression of the 1870s. The refusal of late Victorian governments to respond innovatively to mitigate capitalism's cruelties and instabilities helped incubate and sustain the cultural hostility that still lives on in parts of the Labour party and trade union movement.
The coalition partners can blame some of Britain's plight on Labour's economic mismanagement, although George Osborne spent most of the early period of his shadow chancellorship criticising Gordon Brown and Ed Balls for not doing more to deregulate the City. None the less, when Brown left the Treasury he bequeathed a structural deficit of some 4% of GDP to his successors – quite a feat. The recession induced by the fall-out from the financial bubble, which his approach to big finance had helped create, would double it. Still, there were choices last May about how to handle the legacy of private debt, gross misallocation of productive capacity, financial fragility and the need to eliminate the structural public deficit. They were not made.
If the Lib Dems had been true to the great social liberal thinkers – Green, Hobhouse, Beveridge and Keynes – who together forged the "new liberal" or "social liberal" approach to managing capitalism that challenged Victorian orthodoxies, they could never have signed the coalition agreement. Instead, they committed themselves to eliminate the structural deficit in a mere four years, along with a host of Tory policies towards business and society rooted in late-Victorian ideas. Yes, there were commitments on banking and constitutional reform, along with tax policy and the pupil premium, which could genuinely be seen as social liberal, but they would be buried by the larger Conservative agenda.
The big story is of politics driven by ideas that are wrong – public debt phobia, the belief that market economies are like corks with a natural capacity to bounce back which is only inhibited by the action of the state, and that people should help themselves, whatever the brutal and unfair distribution of risk and opportunity. This may be solidly supported in the Tory shires and suburbs where people believe themselves the beneficiaries of the current order, but elsewhere these propositions are viewed with deep suspicion. Hence the collapse of the Lib Dem vote across the country on Thursday. And Labour is no nearer than it was to articulating a liberal social-democratic position, which leaves it performing nowhere near as well as it should be – and losing spectacularly in Scotland to Alex Salmond who has made this tradition his own, reaping rich rewards.
To propose cutting the budget deficit by between 1.5 and 2.0% a year for four years after the near collapse of British banks with private debt levels exceeding three times national output offends every first principle of economics. Cut public demand while private demand is under pressure and economies stagnate. Capital investment in the public sector will be running ?30bn a year below the levels of 2010-11 and this in a country where the infrastructure is already chronically weak. One estimate from business service group E and Y suggests that Britain needs to invest cumulatively ?450bn over the next 15 years if it is to meet is climate change objectives; only ?70bn is planned, leaving a shortfall of ?370bn.
In these terms, the coalition members' chatter about not leaving huge public debts to our children or Britain "maxing out on its credit card" is unadulterated rubbish. While this can be expected of parts (but not all) of the Conservative party, better could be expected from the party that is the heir to Keynes. I would expect my children to congratulate us on borrowing at today's interest rates to invest in the infrastructure that will make the country more prosperous and global warming less likely and accelerate a recovery that is so stuttering, especially as public debt levels in Britain have been higher for 200 of the last 250 years.
Britain needs an investment and innovation revolution driven by a good capitalism animated by the desire to generate genuine wealth, a far cry from what we have. The flotation of commodity trader Glencore for ?29bn, making billionaires many times over of its directors, is a signal to every budding entrepreneur in Britain about where to direct his or her energies – not towards production or innovation in the real economy.
We live in a world framed by the two Bobs – Bob Diamond, making ?9m for running Barclays Bank, and Bob Crow threatening to bring London to its knees with strikes on the underground over the alleged unfair dismissal of two of his members. Both exhibit a wild disproportionality and lack of responsibility towards society, but although there is a liberal left tradition that would allow a capable politician to assail both in the name of a good capitalism and open society it is left in the shadows.
Progressive Britain needs to rediscover these arguments fast. Labour must find a more certain voice about what it is for and why; if the Lib Dems cannot champion policies within the same tradition, then they must withdraw from government. Orange book liberals have provided cover for a first-order economic mistake and their party is paying a terrible price. The Conservatives should face the consequences of their misjudgments alone.
An article from guardian.co.uk © Guardian News and Media Limited 2011