Why Labour is Failing

Social democracy relies on four levers of power. They no longer work. It's time to take The Sniff Test.

Social Democracy is Dying

“What do you think of Labour?” My driver is a Nepalese immigrant and we’ve been chatting about the downward pressure Uber places on his take home pay. The sudden switch to politics took me aback.

Immigration is central to the Labour narrative. In this, the West is ageing and needs new blood. Immigrants are a new working class, state sponsored and a formative social democratic majority. That means an end to the Tory hold over England and, buttressed by the first-past-the-post electoral system, Labour becomes the natural party of government.

Yet seven months in and Keir Starmer is less popular than Rishi Sunak. His message of growth is indistinguishable from what went before and equally beholden to events beyond his control. That message jars with the party’s core principles of workers’ rights, environmental protections and international co-operation.

David Runciman wonders if this will be the last Labour government. Social democracy is dying, with polls predicting left leaning governments will be ousted in Germany, Australia and Canada this year. That will leave the left in power in only the UK, Spain and Brazil among major democracies. In part this is a backlash against inflation, but Runciman believes social democracy is a 20th century relic. It depends on an alliance between workers and elites, big bureaucracy, big spending and control of communication. These levers of power are broken.

The Birth of Big Government

The modern state was shaped by America’s New Deal. Democrat Franklin D Roosevelt swept to power in 1932 amid the Great Depression. For the next 13 years he laid the foundations of big government and created a blueprint for the post-war Labour party.

Roosevelt issued a record 99 executive orders in his first 100 days in office. Trump is up to 53 as I write and on track for a new record. Much of what he is doing is intended to pare back the behemoth that Roosevelt unleashed.

The New Deal began with a four day bank holiday. This allowed for a special session of Congress to pass the Emergency Banking Act that ended the prevailing panic. Roosevelt’s first 100 days saw 14 more legislative actions, ending Prohibition, launching support for farmers, and creating a series of federal agencies, such as the Federal Emergency Relief Administration and the Federal Deposit Insurance Corporation. Central government seized control of the economy.

Roosevelt continued apace, creating the Securities and Exchange Commission to control stock markets and designing the Federal Communications Commission to regulate the airways in his second year. Social security followed in 1935, along with the renamed Federal Bureau of Investigation and the accelerated expansion of the extensive US prison system.

In total, Roosevelt won four elections, prompting the passing of the 22nd Amendment, which limits presidents to two elected terms. There are fears that Trump wants to repeal this and continue ruling, but his legacy could be more alarming for professional politicians. He might usher in an all-action style, judged without reflection by popular opinion on social media.

Source: FiveThirtyEight

Meanwhile, the UK Labour government cranks the old levers of power, unaware they no longer function.

The Alliance of Workers and Elites

The dominant players in a two-party system are necessarily coalitions of interests. They are bound by opposition to a rival ideology, but rarely in agreement on what to do. Labour is an alliance of union members and academics. One wants higher wages from companies, the other higher taxes. When both were low, this was possible. Today higher wages eat into profits and reduce taxes, while higher taxes push up prices faster than pay cheques.

Big government is ideal in principle and impossible in practice. My beef with the European Union is not what it aspires to be, but what it actually is. By design, government is incompatible with lasting innovation and progress.

This is because laws are a set of rules that govern behaviour. They either lay out or prohibit ways of working. Technology renders rules obsolete, while prohibitions are already being circumvented by the time they are passed. Rules are never enough.

The dream of self-driving cars has existed for decades. It is impossible with the if something, then something else format of standard computer code. No engineer can imagine the full range of driving behaviours and match them with any scenario. That is why artificial intelligence changes the game.

AI allows a model to run simulations in real time and determine the most favourable course of action. This is probabilistic and will not always be right, but is proving much better than human action, or inaction. Human brains use heuristics – rules of thumb – to shortcut decision making. These are the same fight, flight or freeze reactions our ancestors had on the savannah. AI models can analyse many more courses of action and choose the best one.

Rules will never be enough. Whenever they don’t work, more rules are passed and in time these conflict with each other. This is the way that bureaucracy builds to the point where it impacts the state’s ability to deliver. Trump’s promise to cut ten regulations for every new one, recognises this fact.

The State’s Ability to Deliver

Public debt was 20% points higher as a share of output in 2008 compared to 1928. Undeterred, politicians promised to address the financial crisis the only way they know how, by spending more money. The response to the Great Depression was to build much needed infrastructure. This enabled economic recovery and kept the debt in check. In contrast, the last 17 years has been upwards only.

This chart begins with World War II, but that point shows how low government debt was despite the 1930s New Deal spending.

US Federal Government Debt to GDP (source: Office of Management and Budget)

Money and bureaucracy are the two constraints on the UK government. Liz Truss demonstrated this with her bonfire of the sanities and Rachel Reeves is bumping up against similar limitations. Taxes are 89% of government spending with the balance borrowed. Financial markets constrain borrowing when there is no prospect of additional debt being paid back.

Taxes rose from 33% to 36% of national income over the last five years. Most of the increase went towards managing debt and rising welfare obligations. The New Deal and post war years were successful enough that politicians believed their own propaganda. It no longer mattered what they spent money on, only that they spend.

The result is an unsustainable build up of bureaucracy and spending. The US is likely to be the last to feel the wrath of investors because it has the largest capital markets, but is taking action before Britain nonetheless. Academics in government agencies write reports to say all will be okay, but they cannot know.

Economic models are a set of rules used to predict an outcome. As with the engineer trying and failing to write the code for a self-driving car, the model does not reflect the full range of uncertainties. The result is a prediction that says what the author wants it to say, not what will actually happen. For example, no forecasts for UK government spending say when recessions will occur, but they do.

The End of Propaganda

Big government is pervasive enough to be the stuff of nightmares. The Empire in Star Wars is an all powerful galactic government. Orwell’s 1984 is about a totalitarian regime controlling almost every aspect of people’s lives through propaganda. The 21st century reality is that big government is incompetent.

Social media means authorities lose control of the message, as described last week. It is no longer taken for granted that elites have workers’ interests at heart, that bureaucracy works, and that more spending is manageable. When Roosevelt closed the banks and reopened them, little had changed. But the people believed and confidence was restored. Bank bailouts today are seen as hand outs for fat cats and government authority is lost.

What We Want

It took many years for the New Deal to unfold. There was political opposition but continued public support kept it going. There was similar resistance to creating the National Health Service and expanding Social Security in the UK. But the public wanted them and the resistance crumbled.

Trump is trying to reverse the growth of government. It will be harder to persuade today’s politicians to reduce their role than it was to convince conservatives to increase their influence 90 years ago. This is why Trump drafts outsiders and business leaders. This is why he may fail, as the businessmen tire of bureaucracy and return to money making.

Trump’s acid test is whether growth continues with inflation subdued. Forget all the other promises, that is what my Uber driver wants for Britain. That is why he brought his family here and why he is losing faith with Labour.