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With every week that passes, another icon of the economic orthodoxy that reigned supreme for more than two decades comes crashing down. Last week, it was New Labour's commitment not to raise the top rate of tax, as Alistair Darling unveiled the first Keynesian-style expansion programme for more than 30 years and the governor of the Bank of England refused to rule out the "wholesale nationalisation" of the banking system. This week Lord Mandelson himself, the twice resurrected high priest of Blairism, is promising to intervene before breakfast, lunch and dinner to save businesses and industries from the ravages of recession.
Given the scale of the crisis now engulfing both the domestic and global economies, perhaps it should be no surprise that politicians are turning their backs on the failed neoliberalism of the boom years. Political business as usual is certainly not an option. At a time when an expected cut in interest rates today to their lowest level since 1951 seems unlikely to halt the economic slide, yesterday's Queen's speech, with its low-key populism and Blairite lone-parent welfare baiting, seemed almost irrelevant to the main action. Even the banking measures, including revamped regulation and fines for overcharging depositors, felt as if they had more to do with the pre-credit crash world than the perilous present.
That's what makes Mandelson's sudden conversion to industrial policy - anathema under the New Labour ancien regime - all the more emblematic. The new business secretary's commitment to "industrial activism" to support low-carbon, hi-tech manufacturing, spelled out last night in his Hugo Young memorial lecture, is potentially almost as significant a turn as the nationalisation of Northern Rock. This is a politician, after all, who almost embodied corporate "light touch regulation" in his earlier incarnation. But with engineering employers warning of a wave of manufacturing bankruptcies "within days or weeks" without state support and the prospect of three million unemployed by the end of next year, such dogmas have become a luxury.
Naturally the move is dressed up in all-purpose New Labour-speak about "what works" and will undoubtedly be nothing like as ambitious as French president Nicolas Sarkozy's new €20bn state investment fund, complete with public equity stakes in strategic companies and industries. But the direction of travel is clear - and essential if most of what remains of Britain's manufacturing sector is to survive the ravages of the deregulation-fuelled crash.
How deep the recession gripping the real economy now goes will depend first on the speed with which the continuing banking crisis can be overcome. That remains far more crucial than the impact or otherwise of last week's VAT cut. Despite the government's pumping of hundreds of millions of pounds in loans and guarantees into the markets and recapitalising the banks to the tune of £37bn - including major equity stakes in Lloyds TSB, RBS and HBOS - the scale of toxic debt on their balance sheets means banks are still not lending either at the level or the rates necessary to prevent recession turning into slump.
What is clear is that unless the government acts now to direct the banks to lend, the fallout is likely to be disastrous. We know that Darling has made contingency plans for control over lending rates, as well as outright nationalisation. But at every stage of the crisis, ministers have shrunk from anything that might be seen to encroach on the independence of the private bankers whose reckless failure has been at the heart of the meltdown.
Even now, ministers insist on informal pressure and an arm's length relationship with the banks the government itself owns, and hope that modest adjustments to the bailout terms will do the trick. It isn't working. Darling is already speculating about the need for further eye-watering injections of capital. The logic in favour of bringing all the main banks into public ownership as the cheapest and most effective way of ending the squeeze and directing credit into the productive economy is becoming ever stronger as the crisis deepens. It may turn out to be the only way.
The channelling of finance into unproductive and destabilising speculation, linked to a wider financialisation of the US and British economies in particular, has in any case been at the heart of the credit crisis. The banks have driven this process, while productive investment - the job for which they are supposed to mobilise savings - has stagnated. Even if the existing part-nationalisations and bailouts were to succeed, there is no point whatever in restoring the banks' balance sheets so that they can carry on in the destructive way they did before.
As the impact of recession bites deeper in the new year, the pressure for government action to halt job losses and support those hit hardest will, of course, be all the stronger now that people have seen what riches can be conjured up to save the City and Wall Street from their own folly. So far, the government has been propelled forward by events, rather than public pressure. That seems certain to change in the coming months.
As redundancies multiply, calls for a more powerful boost to demand and public investment to kickstart the economy - from cuts in fuel bills to a council housebuilding programme - will grow. And so will the fight over who is going to have to pay for what has already taken place. As was made abundantly clear in last week's pre-budget report, the government is planning to slash the budget deficit with across the board tax rises and spending cuts as the economy recovers. Why, in such circumstances, the super-rich should continue to be allowed to pocket £25bn a year through tax avoidance, and cannot for example be required to pay a minimum rate of 40% - as the TUC argues - as well as the new top rate of 45%, is likely to become the focus of much sharper political conflict.
In the past few months, ministers have made some welcome political leaps, but they have still been able to face both ways, nationalising while continuing to privatise, redistributing while prioritising the interests of the wealthy. That is going to become much more difficult as the recession deepens. The government has started a journey from which there is no way back.
s.milne@guardian.co.uk
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