The Times They Are A-Changin’: Everything Ends at Some Point Part 1 

 

“Of our elaborate plans, the end
Of everything that stands, the end” 

 

Inequality has been a regular focus of this column, and, in my opinion, it is one of the defining factors that continues to shape our political landscape. 

 

Given this, I decided to devote a double edition solely to this subject, in order to demonstrate how and why the political situation has changed so dramatically, resulting in, what I have always referred to as “the politics of the 1930s”. Something I covered in “Have We Returned to the 1930s?” 

Post WW2, the UK became a much more equal nation. The data available shows that the share of income going to the top 10% of the population fell over the 40 years to 1979, from 34.6% in 1938 to 21% in 1979, while the share going to the bottom 10% rose slightly. 

Since 1979 this process of narrowing inequality has reversed sharply. As shown in the graph below, inequality rose considerably over the 1980s, reaching a peak in 1990. Since 2010, income shares have been relatively unchanged. 

 

 

 

In 2010, while the top 10% received 31% of all income, the bottom 10% received just 1%. In terms of wealth, in 2010 (the latest year for which data is available), 45% of all wealth in the UK was held by the richest 10%. The poorest 10% held only 1%. 

One of the issues this concentration of wealth has highlighted is how those at the top can use this to garner political influence, which enables them to influence policies to protect their interests, often at the expense of  public services.  

This has eroded trust in democratic institutions, leading to lower-income groups losing faith in mainstream parties. 

The net result of this is that C. 66% of Britons believe the uber rich have too much influence on politics.  

If we are to blame Thatcherism and neoliberal policies, it is important to define what they were.  

 

‘66% of Britons believe the uber rich have too much influence on politics’

 

The baseline was free-markets; accepting that markets know best and can be self-regulating; that government is inherently incompetent, captive to special interests, and an intrusion on the efficiency of the market; that in distributive terms, market outcomes are basically deserved; and that redistribution creates perverse incentives by punishing the economy’s winners and rewarding its losers.  

This is how the concept of small government came into being; government should get out of the market’s way. 

Within this stricture was the acceptance that traditional heavy industry such as Steel, Coal and Shipbuilding were inefficient, lossmaking and therefore allowed to fail. As a part of this process union influence was greatly curbed. 

Tax, especially for high-earners was cut, and to further encourage entrepreneurs regulation was slashed, and nationalised  industries privatised. 

The idea being that encouraging the private sector would boost, innovation, efficiency and, by encouraging investment, offer improved services. 

Home ownership was prioritised, and promoted by right-to-buy, with council homes sold off at deep discounts of up to 80%. 

The next question is, how did these policies stoke the fires of inequality? 

The free-markets concept that allowed “inefficient” industry to fail, saw the country depleted of heavy industry, which had been the mainstay of the towns and regions involved. Not only did this create structural unemployment, it left whole areas bereft of opportunity. Effectively deindustrialisation created ghost towns with the residents being “left-behind.” 

As part of this process, trade union influence was greatly reduced. Whilst, their influence had become too great and too politically motivated, this reduction impinged on both workers rights and their ability to negotiate their wage demands. 

 

‘deindustrialisation created ghost towns with the residents being “left-behind.”’

 

Thatcherism interpreted the neoliberal core principle of free-markets to privatise nationalised industries, a policy that highlights the inequality how neoliberalism has enabled the few to get very rich at the expense of the majority. The best, or worst example of this, is the water industry.  

In 1989, when UK water companies were privatised they had  with zero debt, by 2023 they had accumulated >£60 billion of debt, rising to around £72 billion when accounting for all liabilities. This high leverage, driven by borrowing for dividends and infrastructure, faces crisis due to rising interest rates and poor investment.  

The main driver for this wildly excessive debt was dividend payments to shareholder, which between 1990-2023 amounted to some £53 billion.  

As a result, the cash-strapped have underinvested in infrastructure, providing water that is often not fit for purposes and polluting our river and coastlines.  

The poor consumer is left with a totally inadequate service, often dangerous, whilst C.one-third of their bills are squandered servicing debt and paying dividends. 

Home ownership, whilst initially a success, peaked in the early 2000s before falling, with current rates similar to those two decades ago.  

Whilst demand had, if anything increased, supply was falling as the council homes sold off were not replaced. Instead we left this to the markets, meaning private housebuilders. This supply/demand imbalance let to house-price inflation consistently outstripping incomes.  

As a result, affordability, especially for first-time-buyers was greatly impacted. The stats endorse this; in the 1980s/90s, one in three 16- to 24-year-olds owned their home, compared to one in 10 today.      

‘in the 1980s/90s, one in three 16- to 24-year-olds owned their home, compared to one in 10 today’

 

This has created “generation rent”, with older people, who have benefitted from the house price inflation that has turned property isn’t an investment class, as their landlords.  

Neoliberalism survived Thatcher and Reagan, with even moderate liberals becoming a convert to the belief that social objectives can be achieved by harnessing the power of markets. The labour governments from 1997-2010 slowed but did not reverse the slide to neoliberal policy and doctrine. The same was true of Democratic administrations in the US. 

Neoliberalism was supposed to encourage businesses to invest and entrepreneurs, unburdening them with regulation, and shrink the state to fund tax cuts that would enable businesses to flourish. This would create wealth at top, which would “trickle down” into workers pockets. Only, it didn’t; it stopped at the top with the rich getting richer and the poor getting poorer. 

If we accept that ground-zero was 1979-80 when Messrs Thatcher and Reagan were elected, then its death knell should have been the GFC. 

The GFC has come to be seen as the direct consequence of decades of neoliberal policies; the, deregulation of financial markets, the promotion of market self-regulation, and the prioritisation of financialisation,  

The initial success of free-markets, deregulation, coupled with deindustrialisation saw the financialiation of both economies, with the sector becoming largely detached from the real economy, leading to “fictitious wealth” creation and a focus on short-term gains over long-term stability. 

Alongside this there was the myth that markets are self-correcting (a core tenet of neoliberalism), which  removed the need for government oversight, allowing the finance industry to develop at a pace that far exceeded regulatory capacity. 

‘it stopped at the top with the rich getting richer and the poor getting poorer’

 

Along with deregulation, the Federal Reserve’s low-interest-rate policy after 2001 was another contributing causes.  

Neoliberalism can be viewed as a “reactionary” ideology that, while promising growth, led to extreme volatility, all of which encouraged the behaviours that triggered the GFC 

Neoliberalism’s basis if self-regulation was a reversal of the post-WWII Keynesian consensus, which emphasized financial stability and strong regulations. 

This deregulation, which started in the 1980s, dismantled the regulatory frameworks established after the Great Depression, leading to excessive risk-taking and the ultimate collapse of the subprime mortgage market. One of the major financial deregulations was the repeal of Glass-Steagall in the US, which allowed banks to engage in high-risk activities, such as bundling, securitising, and trading opaque mortgage-backed securities. 

 

‘allowed banks to engage in high-risk activities, such as bundling, securitising, and trading opaque mortgage-backed securities’

 

The majority of these opaque securities contained subprime mortgages funded by predatory lenders, that were, in most instances,  far in excess of the capabilities of the borrowers. 

The banks were helped in securitising these loans, by the over-the-counter derivative market in instruments  such as credit default, which led to risks being hidden throughout the global system. 

Ultimately, the GFC was a structural crisis of the neoliberal mode of development, demonstrating that the deregulation of financial markets made the entire global system vulnerable.  

It is estimated that the net result of this deregulation to the US economy alone was > $15 trillion. 

In the UK the cost are estimated as £141 billion in bank bailouts, with peak financial exposure exceeding £1 trillion. Long-term impacts include a ~11% reduction in GDP below pre-crisis trends, a doubled national debt (74% of GDP), and long-term austerity measures, with total economic losses estimated up to £1.8 trillion over 20 years due to a “finance curse.” 

The Institute for Fiscal Studies estimate that GDP per head is today nearly £11,000 lower than it would have been had pre-crisis trends continued. 

Post the GFC, UK GDP growth slowed from an annual average of 3.0% between 1993 and 2007 to 1.5% between 2009 and 2023.  

By early-2009 central banks were in full rescue mode; the BoE cut interest rates to a then-historic low of 0.5% and began quantitative easing (QE) to boost lending and shore up the economy.  

The Conservative government of 2010 imposed rigid austerity aimed at reducing the budget deficit  leading to six-figure public sector job losses, while the private sector enjoyed strong jobs growth. 

In 2011, household, financial, and business debts stood at 420% of GDP, we were the world’s most indebted country. 

 

‘In 2011, household, financial, and business debts stood at 420% of GDP, we were the world’s most indebted country’

 

Labour productivity growth slowed from an annual average of 1.9% between 1993 and 2008 to 0.4% between 2008 and 2023, the lowest levels since the 1820s, with any growth attributed to a fall in working hours. Output per hour worked was 18% below the average for the rest of the G7. Real wage growth was the worst since the 1860s, and the Governor of the Bank of England described it as a lost decade. Wages fell by 10% in real terms in the eight years to 2016, whilst they grew across the OECD by an average of 6.7%. 

QE pumped huge amounts of liquidity into the system which, when coupled with historically low interest rates created an enormous asset bubble, especially in the housing market, which was exclusively to the benefit of rentiers.  

Following the success of Vote Leave in the 2016 EU referendum, the BoE cut interest rates to a new historic low of 0.25% for just over a year, and increased the amount of QE since the start of the GFC to £435bn.  

One of the few growth areas in this period was poverty. 

The Tories austerity policy, saw unprecedented spending cuts of C. 4% real terms cut in public service spending between 2010 and 2019, even as the economy and population grew. 

One devastating change to benefits was the implementation of the 2-child benefit cap which pushed hundreds of thousands of families into poverty 

Child poverty increased by roughly 700,000–730,000 children, reaching 4.3 million (30-31% of all children) by 2022/23. Notably, 71% of these children, 3 million in total, lived in working households. 

Worse still C2.7m children lived in what was described as “deep poverty”, defined as below 50% of median income in 2021/22, an increase of 500,000 since 2010/11. 

 

‘Child poverty increased by roughly 700,000–730,000 children, reaching 4.3 million (30-31% of all children) by 2022/23. Notably, 71% of these children, 3 million in total, lived in working households’

 

Tax and benefit reforms between 2010 and 2019 increased in-work poverty by 1.9 percentage points, reversing previous progress. While the poorest households saw some income growth, it was often offset by rising housing and living costs. For many, their real wages didn’t exceed pre-GFC levels for over 10-yrs.  

Post-the GFC there was a gaping political and economic void. What should have been clear was that the laissez faire, self-regulated policies in vogue since 1979 had failed the majority. In effect, capitalism weas no longer serving the masses. 

This should have been the opportune moment for parties of the left, such as Labour to step-forward with alternatives, highlighting the deficiencies and showing the masses that traditional parties could still solve their problems. 

Instead, it was hard-right politicians with their concept of the “establishment” that stepped into the void. Their message was simple; mainstream parties were not delivering, the system is rigged and politicians weren’t improving their lives.  

There is some truth in this, as issues such as low real wages and housing affordability continue to go unaddressed, meaning that policy rarely addresses the needs of the poorest 10% of households. 

As a summary, inequality caused voters to disengage; E.G., only 60% of the eligible voted in the 2024 election. 

What is often overlooked is the fact that inequality is continually creeping up the social scale. The expected elements of a decent middle-class life are becoming elusive; reliable jobs and careers, adequate pensions, secure medical care, affordable housing, and education that doesn’t require a lifetime of debt.  

The end result has been a breakdown in Social Cohesion, with weaker community resilience increasing division, and reduces willingness to act for the public good.  

 

‘The expected elements of a decent middle-class life are becoming elusive; reliable jobs and careers, adequate pensions, secure medical care, affordable housing, and education that doesn’t require a lifetime of debt’

 

This has led to a generation of voters who feel disenfranchised and let down by both parties, and  looking to more radical solutions. As a result, we are seeing the end of traditional two-party politics, as both Labour and Conservatives continue to lose touch with their traditional voters 

An example of this radicalisation is the success of the hard-right Reform party, whose popularity is being driven by the overall polarisation of voters creating and unlikely voter coalitions, as shown below: 

 

 

The Tories, the traditional party of the right, have lost ground to Reform led by the instigator of Brexit, Nigel Fagage. 

Farage and Reform offer a hybrid solution; a mix of Thatcherism, with a dash of old Labour. Slashing taxes and partially re-nationalising water, more manufacturing as well as plans to “bring crypto in from the cold”. “It’s a mush of right and left economics, trying to glue together his disparate base”. 

When, in the title, I say “here” what am I referring to? 

As, I hope, the above demonstrates, policies inspired by neoliberalism led to the GFC, and the economic downturn that followed. The policies of central bankers in the UK, and US of ultra-low interest rates and QE created a plethora of cheap money that created bubbles in many financial markets, almost exclusively to the benefit of rentiers. 

In the UK, this was further exacerbated by austerity that made the poor poorer.  

 

‘policies inspired by neoliberalism led to the GFC, and the economic downturn that followed’

 

They were, in effect, being “left behind”; financially they were well behind rentiers, whilst the progressive politics of the noughties isolated them culturally. 

Far-right populists were quick to exploit this, with polices that were socially conservative, that offered easy solutions, and scapegoats such as immigrants and the EU.  

The predecessor of Reform Farage’s first party, the United Kingdom Independence Party (UKIP), who, despite only ever winning one Westminster seat, were largely instrumental in Brexit. Their unprecedented success signalled the beginning of a new era in our politics. 

UKIP was founded as a single-issue, Eurosceptic party. However, following the election of Farage as party leader in 2006, the party utilised growing anti-immigration sentiment in the UK and successfully fused its core policy on Europe and the more salient issue of immigration. 

At the same, the Tories, under David Cameron, were moving in the opposite direction, towards more centrist policies, leaving much of the working-class electorate feeling marginalized and alienated. This allowed UKIP to successfully adopt a right-wing populist narrative, portraying themselves as a ‘“common sense party that champions the interests of ordinary people”. This was to prove popular with the voters who were disillusioned with the ‘big three’ and who didn’t align with the emerging centrist consensus. 

The Tories were the most exposed to voters defecting to UKIP, and the party feared that this loss of would cost them an overall majority at the 2015 general election. With UKIP continually capitalising on the Eurozone and migrant crises, Cameron was desperate to curb this growing electoral threat from UKIP, and he pledged to hold a referendum on EU membership if the Conservatives won the 2015 General Election.  

When the UK voted to leave the EU on 23rd June 2016, Farage described the event as ‘independence day’. 

Whilst UKIP lost their way post the referendum, with Farage resigning as leader, he remained engaged and was a constant menace whose political relevance far outweighed his position. To counter this, the Tories continued to adopt right-wing populist rhetoric as they attempted to recover the dissatisfied voters lost to UKIP. 

To summarise where this left both the UK and US, we can say that virtually every one of the neoliberal policies has failed.  

 

‘Their real legacy is of an economy that is vastly more unequal, economic growth is slower and more chaotic than during the era of managed capitalism’

 

They did deliver in one way as enterprise has been richly rewarded, taxes cut, and regulation reduced or privatised. Their real legacy is of an economy that is vastly more unequal, economic growth is slower and more chaotic than during the era of managed capitalism.  

Deregulation has produced not salutary competition, but market concentration.  

Economic power has resulted in feedback loops of political power, in which elites make rules that bolster further concentration. 

Next time, we will consider today’s politics as we continue to consider the costs of the past 47-yrs. 

 

“The blue bus is calling us
Driver, where you taking us?” 

 

 

 

This week its another two-parter as I consider neoliberalism, and how it led to the GFC, and the mess that ensued.

Much is familiar, but I haven’t presented in such a one-off fashion before.

Next time, we will consider the legacy of all this. The return to the politics of the 1930s.

The dominant figure here is Trump. Whether we like it or not, he will be viewed as the dominant figure of the post-GFC world. His presence looms large, and will likely change events for years to come.

We can at least say, we live in interesting times!

Lyrically, we start and finish with “The End” by The Doors. Its apocalyptic nature says it all!

 

@coldwarsteve

 

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

Click on the link to see all Brexit Bulletins: