Barring a miracle, the Tories will lose the next election, but this does not mean that Labour will have won unless it challenges Tory ‘handbag economics’. Handbag economics sees the market as the source of all money and wealth. Voters are constantly reminded that public funding is ‘the tax-payer’s money’, implying that only the private tax-payer creates the money to fund public spending.
The public sector is likened to a housewife dependent on the allowance in ‘her’ handbag. As it is assumed that there is never enough money to meet the state’s needs, expenditure has to be limited to what the market can afford. Those calling for increased spending are derided as believing in magic money trees.
States, like households must live within their means, they must ‘balance the books’. Deficits and debt must be avoided, together with the temptation to ‘print money’, which is seen as inevitably leading to (hyper) inflation. In contrast to the profligate public household that ‘wastes’ the taxpayer’s money, the market is presented as a beacon of efficiency.
In the UK the aim of eliminating public debt led to ten years of austerity that inflicted deep cuts in major public services. Downward pressure on public sector pay eventually resulted in mass strike action when compounded by a surge of inflation in 2022/3.
Instead of challenging handbag economics, Labour plays into Tory hands by attempting to prove that all its proposed expenditure is ‘fully costed’ – that is, it can all be traced back to the market.
The trap for Labour
The trap for Labour is the claim that the market can only afford to fund the public sector if it is has permanently low taxes and freedom from regulation. This leaves ‘growth’ as the only means of accessing private wealth for public benefit and the discredited claim that prosperity will eventually ‘trickle down’ from the few to the many. Apart from possible ecological damage from growth in production and consumption, it is not clear how society benefits from increased financial speculation or the number of billionaires.
Labour can avoid this trap by challenging the assumptions of handbag economics. Public spending is not a drain on the market, nor is it inflationary, as it does not directly affect market prices. Quite the opposite, the public sector can provide vital support to the private sector in the face of widespread market failure.
Clear evidence of the fragility of the ‘free’ market was the near collapse and state rescue of the banking and financial sector in 2007/8. However, this did not dampen the dependence of the UK economy on financial speculation and the ‘greed is good’ mantra. The financial sector continued to generate sky-high earnings while the rest of the economy faced austerity and debt. Housing was treated as a speculative asset, while many people could not get a foot on the housing ladder.
Gross inequalities saw a swelling elite of super-rich while increasing poverty saw the growth of food banks, insecure work, gig economies, devastated public sectors, degraded environments, declining life expectancy and left behind communities. Often this led to political volatility and populism.
Resurgence of the public economy
The financial crash of 2007/8 and the pandemic of 2020/21 clearly demonstrated the importance of the economic power of the public sector. Governments and central banks created trillions of new money to secure the banking and financial sector in 2007/8. Even more publicly generated money was needed to furlough the wider economy during the pandemic of 2020/21.
Most recently, the unsoundness of private finance has once again been revealed by the failure of two US banks and the state rescue of Credit Suisse. Also, the state has had to intervene when the energy sector was hit by a surge in inflation. Under massive public pressure, action was taken to mitigate devastating price increases in the energy market which saw typical household bills rising by 54%. The government stepped in with a price guarantee that saved the average household around £2,000 a year.
The alternative to handbag economics is to see money as a publicly administered resource
Price rises more generally, and evidence of ‘greedflation’, are raising further questions about the efficacy of the market. Energy and other privatisations of previously publicly owned sectors such as water and the railways also show that private profit does not guarantee public benefit, in fact quite the opposite.
However Labour is not able to build on increasing popularity for public ownership because it has no answer to the key question: ‘where’s the money to come from?
The public source of new money to rescue, banks, the economy and major industries has been obscured by being presented as a technical exercise in ‘quantitative easing’ by central banks. Similarly, government deficit spending during the pandemic was described as ‘borrowing’ from private money markets, whereas much of this money was owed to the central banks, which are effectively part of the state.
The alternative to handbag economics is to see money as a publicly administered resource. Labour need not be defensive about public spending for the public good. If money can be created by the state to rescue the private sector, money can be created to fund green investment or meet calls for increased public spending to relieve poverty in the face of the cost of living crisis.
Reclaiming the public sector
There is a positive story to tell about the contribution of publicly generated money and the public economy. States are not like households. They have independent economic resources, particularly the public generation of money, on which the market is becoming increasingly dependent. Before the emergence of the neoliberal ideology of a big market and small public economy, a mixed economy was widely accepted.
Labour needs to reassert the importance of a vibrant public economy and point to the constant failures of a low tax, unregulated market. This requires a new approach to public funding, which sees it as making a major contribution to the wealth and wellbeing (wellth) of society.