Can the world's leaders prevent us from sleepwalking into economic meltdown once again?
The taxing problem of how to avoid another financial crisis
This month, 10 years after the financial crash of 2008, the former British prime minister Gordon Brown warned that the world might be “sleepwalking into a new financial crisis”. In so doing, Mr Brown is pointing an implied, yet emphatic finger at the Trump administration’s chaotic style, lack of leadership and its deliberate undermining of international co-operation.
Back in September 2008, I spent a great deal of time in Westminster interviewing British politicians about the crisis. These included the then chancellor of the exchequer, Alistair Darling. Mr Darling, an affable, quietly spoken Scot, remained outwardly calm and reassuring. When I teased him about having the worst job in Britain at a time of such catastrophic financial collapse, he laughed and disagreed. The worst job, he told me, was his previous position as transport secretary, because everyone in Britain blamed him personally for every train, bus or plane that failed to run on time.
Aside from Mr Darling’s enviable ability to keep calm and carry on, many of the lessons of 2008 are still yet to be fully learned. One of them is the fact that history really does repeat itself. In the Great Depression of the 1930s, then US president Franklin Roosevelt recognised that financial markets cannot just be left to themselves. They require regulation. Roosevelt’s New Deal brought in tough banking regulations, which remained firmly in place until the 1990s.
Then, faced with a serious threat to his presidency from the Republican party, Bill Clinton used his 1996 state of the union address to declare that “the era of big government is over”. The Republican-controlled US Congress wanted smaller government, tax cuts and a bonfire of regulations. Accordingly, it repealed key Roosevelt-era banking regulations. Clinton and his New Democrats − and in Britain, the New Labour party of Tony Blair, Mr Brown and Mr Darling − went along with the idea of “light touch” regulation, contributing to the financial bubble that burst in 2008.
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The 2008 economic meltdown produced some very strange politics. In the US, the tax-cutting small-government Texan conservative president George W Bush was mugged by reality and adopted a big government role. He did what Roosevelt or Mr Clinton would have done, bailing out car manufacturers and financial markets to keep the US economy afloat, joining other governments in efforts to provide stability, as countries around the world sprayed taxpayers’ money at the failure of the markets.
One programme, known as quantitative easing, in which a central bank buys up bonds and financial assets in order to increase liquidity and kickstart the economy, was a particular cause of controversy. Economists continue to disagree about quantitative easing and other measures taken during the crisis. But what is clear is that when markets fail − and they do – governments (even “small" ones) have to step in. The question raised by Mr Brown is whether in 2018 they have the intellectual or financial capacity to do so.
In Donald Trump’s America and, to an extent, in the UK, the political mood has changed once more towards low taxes and limited regulation. Mr Trump, in perhaps the only concrete success of his presidency, has cut taxes and is now trying to deregulate everything from financial markets to logging and pollution. In the US and elsewhere, rolling back big government is usually politically popular until − as Mr Bush observed in 2008 − it isn’t. Mr Trump’s trade-war rhetoric and hostile attitude towards international institutions also mean that Mr Brown’ s fears that the world is less prepared to co-operate in a crisis than 10 years ago are completely justified.
All of that brings us to an extremely unpopular question: are we prepared to provide governments with the resources they require to tackle these problems by paying higher taxes? Politicians, even on the left, tend to avoid speaking of tax rises. As the French statesman Jean-Baptiste Colbert once quipped, raising taxes is like plucking feathers from a live goose − the key is to obtain the greatest amount of feathers with the minimum amount of hissing. In 1984, the US Democratic presidential candidate Walter Mondale fell into the trap of honestly saying he would raise taxes. He lost. In 1988, then Republican candidate George HW Bush famously said: “Read my lips. No new taxes.” Mr Bush won − and in 1990 raised taxes anyway.
In the UK, the ruling Conservative party is nominally committed to lower taxes and smaller government, even though there is, among some Conservatives, a quiet recognition that taxes might have to rise. However, it took the intervention of the Archbishop of Canterbury Justin Welby for them to say so openly. The archbishop has publicly stated that there is “something wrong with the tax system” when massive corporations such as Amazon can “leech off the taxpayer” by using their international clout to pay proportionally less in tax than ordinary shops and businesses.
The archbishop and Mr Brown do not need popular votes, so are free to say what they think. A decade after the worst financial crisis of our lifetime, devoid of credible American leadership and with political leaders terrified of a realistic discussion about taxation, the world might indeed be sleepwalking into the next crisis.
Leaders worldwide need to consider how to co-operate when the worst happens. And it will happen, because it always does. They could begin by co-operating to disrupt the massive yet legal tax avoidance schemes employed by many of the world’s largest businesses. After all, many of these organisations are more powerful − and better led − than the governments themselves.
Gavin Esler is a journalist, author and television presenter