Yesterday Alistair Darling announced short term tax-cuts, including the reduction of VAT to 15%, worth some £20 billion in his pre-budget report. He announced to the Commons that by 2010 the country will be in a record £118 billion of public debt. Darling has been accused of being overly optimistic by making the assumption that this recession will be shorter than those in previous decades; he is counting on growth resuming by 2010.
These government measures are a response to the global financial crisis which has provoked a major rethink in the way that economies worldwide are regulated. The G20 summit this month saw the coming together of countries that produce some 90% of the world’s wealth in an attempt to give the world economy a ‘fiscal boost’. The summit has been criticised for the vagueness of its outcomes but despite this there has been a clear message that lack of economic regulation, of some kind or the other, has been the cause of our current troubles.
Following the summit George W Bush announced his views on the solution: “the best way to solve the problem is economic growth, and the surest path to this growth, is free-market capitalism.”
Rightly or wrongly, this “free-market capitalism” is the very thing that most people are blaming for the crisis in the first place. Poor financial regulation has led to what has become known as the ‘sub-prime’ lending movement in the US, with bankers being allowed to sell off bad debts as attractive-looking investment packages. In the UK our currency has been overvalued and credit has been allowed to reach unsustainable levels. We are now, according to the Tories, paying the price for the so called ‘champagne years’.
The response has been to take steps back towards our post-war financial system. We have already seen the nationalisation of Northern Rock and the promise of long-term taxes rises despite temporary cuts. “The idea of credit went way too far; we definitely need to take one or two steps back towards our former economic system. It is now just a question of how many steps back we need to take in order to work for everybody’s benefit and not just the banker’s bonus” commented the University of York’s Professor P. Spencer.
Opinion is divided on the extent to which our economic regulation must be revised. Journalist Steven G Brant described the $85 dollar bailout of AIG as signalling the “death of capitalism”, a phrase that has become commonplace in the world media.
Despite the fact that in some circles capitalism’s obituary seems already to have been written, it seems unlikely that we will see a drastically more “left-wing” system of economic governance in the long term. The assumption tends to be that capitalism is synonymous with lack of regulation rather than the principle that markets should be as free as possible to allow for competition. What capitalists generally agree on is that in order to be ‘free’ the market needs to be regulated such that trade is honest, Monopolies do not emerge, and welfare is provided for those who can not compete. What we have seen is the failure of under-regulation, not necessarily the failure of capitalism.
Spencer is hopeful that we can find a compromise. “If we can’t find a hybrid system that works to our benefit then we may have to go back to that post-war banking system. However, I’m much more optimistic that we can find a happy medium that does work […] If people had a dose of what the alternative was like then they would be clamoring for the capitalists and the bankers back.”