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A post-Covid New Deal can restore economic hope in 2022 | Larry Elliott


Christmas 1941 was grim. Japan had attacked Pearl Harbor earlier in the month and its armies were advancing across the Pacific. Hitler’s advance into the Soviet Union had taken the Wehrmacht to the gates of Moscow. Britain had become used to short rations and long nights of the Blitz. Optimism for the year ahead was in short supply.

Yet by the end of 1942 the mood had changed. The Germans were bogged down at Stalingrad and being pushed back in North Africa. America, mobilising its full economic power, had turned the tide in the Pacific. The publication of the Beveridge report in December 1942 came at just the right time: when confidence was growing not just that the second world war would be won but that it would be a catalyst for building back better.

Like 1941, 2021 has ended on a low note. The Omicron coronavirus variant has proved to be highly transmissible, dampening consumer confidence and prompting governments to reimpose restrictions on economic activity. Living standards – while substantially higher than eight decades ago – are being eroded by rising inflation. Even without tougher official curbs, the next few months are going to be characterised by weak growth, squeezed incomes and higher taxes. Clearly, a return to lockdowns as severe as those of last winter would make matters worse.

Things are likely to improve as 2022 wears on. The early evidence is that Omicron poses less of a health threat than the Delta variant and more people will be protected by booster vaccines. That, though, is not really the issue. By the end of 1942, it was obvious not just that the war would eventually be won but that solutions were being found for the problems of the years leading up to the war during the 1930s: mass unemployment, financial crises, a breakdown in international cooperation and entrenched poverty.

It would be a stretch to say the same applies now, in part because governments are trying to build back better on the cheap and in part because the rich and powerful at the top of the pile are keen for things to stay pretty much the same as they are.

This, as Kevin Gallagher and Richard Kozul-Wright make clear in their book, The Case for a New Bretton Woods (Polity books), is a key difference between today’s world and that of the 1940s. The roots go back some years earlier to the start of the 1930s and Franklin D Roosevelt’s New Deal. They say the plan drawn up by the US president after the Wall Street Crash and the Great Depression was a genuine build back better” programme.

As the second world war was approaching its final stages, the construction of a new international economic system at Bretton Woods in 1944 – the conference in New Hampshire that gave birth to the International Monetary Fund and the World Bank – was Washington’s attempt to internationalise the New Deal.

Crucially, big finance was noticeable by its absence at Bretton Woods and this was no accident because Wall Street was still on the naughty step after blowing up the economy in the late 1920s.

Gallagher and Kozul-Wright note: “The New Deal programme not only abandoned the gold standard, but also broke with the wider liberal international agenda by taking on the financial elite both at home and abroad, and opened the door to an alternative narrative in support of an activist public policy agenda.”

The contrast with today is stark. It is barely a decade since the egregious behaviour of poorly regulated banks brought the global economy to the brink of a second Great Depression, yet the wealth, power and influence of capital has barely been touched in the years since. Big finance was not invited to Bretton Woods, but it was crawling all over last month’s Cop26 climate change conference in Glasgow.

So what lessons can be learned from the original New Deal that would make build back better more than a soundbite? First, Roosevelt legislated to alter the balance of power between labour and capital. The Wagner Act of 1935 gave employees the right to organise trade unions, while the Glass-Steagall Act of 1933 separated investment from commercial banks. The final quarter of the 20th century saw the opposite: curbs on trade unions, more power for finance.

Second, governments on both sides of the Atlantic raised taxes on the rich rather than burden working people with the cost of bringing down the public debt accumulated as a result of the depression and the war. Roosevelt’s Revenue Act of 1935 was steeply progressive and levied a top rate of income tax of 75% on those earning more than $1m a year. The Clement Attlee government in the UK demonstrated its preference for taxing unearned rather than earned income by whacking up estate duty (the forerunner of inheritance tax).

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As Andrew Percy of University College London’s Institute for Global Prosperity shows in a recent paper, similar choices could be made today. Percy has proposed a single tax system in which income tax and national insurance are merged and in which passive incomes (such as gains from investing in the stock market) are taxed at the same rate as incomes. It would mean a tax cut of over £1,000 a year for a typical factory worker on £24,000 a year, or £10 a week for the typical social care worker on £18,000 a year, he calculates, and 88% of all taxpayers would be paying less.

The final piece of the New Deal jigsaw was the system of capital controls that made it harder for the rich to shift their wealth offshore, reduced the risk of financial crises and allowed countries to pursue full employment policies without being blown off course by hot money flows.

There are those who say reintroducing curbs on capital are inconceivable in the 21st century. Yet two years ago it was inconceivable that modern democracies would keep their populations under house arrest. If governments can shackle people they can shackle money.



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