Post-Covid New Deal Can Restore Economic Hope in 2022 | Larry Elliott


VSChristmas 1941 was dark. Japan attacked Pearl Harbor earlier this month and its armies were advancing across the Pacific. Hitler’s advance in the Soviet Union had brought the Wehrmacht to the gates of Moscow. Britain had grown used to the short rations and long nights of the Blitz. Optimism for the coming year was lacking.

Yet by the end of 1942 the mood had changed. The Germans get bogged down in Stalingrad and are driven back to North Africa. America, mobilizing all its economic power, had turned the tide in the Pacific. The publication of the Beveridge Report in December 1942 came at the right time: as confidence grew not only that World War II would be won, but that it would be a catalyst to build back better.

Like 1941, 2021 ended on a negative note. The Omicron variant of the coronavirus has been shown to be highly transmissible, shaking consumer confidence and prompting governments to reimpose restrictions on economic activity. The standard of living – although significantly higher than eight decades ago – is eroded by rising inflation. Even without tougher official restrictions, the coming months will be characterized by weak growth, pressured incomes and higher taxes. Clearly, a return to confinements as severe as those of last winter would only make matters worse.

Things are expected to improve as 2022 progresses. The first evidence is that the Omicron poses less of a health threat than the Delta variant and that more people will be protected by booster vaccines. But that is not really the problem. By the end of 1942, it was evident not only that the war would eventually be won, but that solutions were found to the problems of the years leading up to the war in the 1930s: mass unemployment, financial crises, breakdown in cooperation. international and entrenched poverty.

It would be an exaggeration to say that the same applies now, partly because governments are trying to rebuild better on the cheap and partly because the rich and powerful at the top of the pile want things to stay pretty much. the same as they are.

This, as Kevin Gallagher and Richard Kozul-Wright point out 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 a few times. years earlier in the early 1930s and Franklin D Roosevelt’s New Deal. They say that the plan put forward by the US president after the Wall Street crash and the Great Depression was a real “build back better” program.

As World War II approached its final stages, the construction of a new international economic system at Bretton Woods in 1944 – the New Hampshire conference that gave birth to the International Monetary Fund and the World Bank – was the attempt to Washington to internationalize the New Accord.

Above all, big finance was noticeable by its absence from Bretton Woods and it was no coincidence that Wall Street was still on the wrong track after exploding the economy in the late 1920s.

Gallagher and Kozul-Wright note: “The New Deal agenda not only abandoned the gold standard, but also broke with the broader liberal international agenda by attacking the financial elite both at home and abroad. stranger, and opened the door to an alternate supporting narrative. an activist public policy agenda.

The contrast with today is striking. It has been barely a decade since the blatant behavior of poorly regulated banks brought the world economy to the brink of a second Great Depression, but the wealth, power and influence of capital have hardly been touched since then. Big finance wasn’t invited to Bretton Woods, but it crawled all over the place at last month’s Cop26 climate change conference in Glasgow.

So, what lessons can we learn from the original New Deal that could reconstruct better than a sound sample? First, Roosevelt legislated to change the balance of power between labor and capital. The Wagner Act of 1935 gave employees the right to organize unions, while the Glass-Steagall Act of 1933 separated investments from commercial banks. The last quarter of the 20th century saw the opposite: restrictions on unions, more power for finance.

Second, governments on both sides of the Atlantic have raised taxes on the rich rather than imposing on workers the cost of reducing the public debt accumulated as a result of depression and war. Roosevelt’s Revenue Act of 1935 was very progressive and levied an income tax rate of 75% on those who made more than $ 1 million a year. Clement Attlee’s government in the UK has demonstrated its preference for taxing unearned income rather than earned income by increasing inheritance tax (the precursor of inheritance tax).

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As Andrew Percy of the Institute for Global Prosperity at University College London shows in a recent article, similar choices could be made today. Percy proposed a single tax system in which income tax and national insurance are merged and in which passive income (such as gains from a stock market investment) are taxed at the same rate as income. That 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 worker on £ 18,000 a year, it calculates. it, and 88% of all taxpayers would. pay less.

The final piece of the New Deal puzzle was the system of capital controls which made it harder for the rich to move their wealth overseas, reduced the risk of financial crises, and allowed countries to pursue full policies. job without being swept away by the streams of hot money. .

There are those who say that reintroducing restrictions on capital is 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 chain people, they can chain money.