The stakes are high in the US

Obama's victory is far from certain - and a Romney win would have far reaching effects.

It has been election season in Europe recently. Incumbents of all political colours are feeling the backlash from electorates dissatisfied with stagnant living standards.  Merkozy has been replaced by the more frosty Merkollande; in German Lande and British local government voters have given the national incumbents a kicking and in Greece the up-coming rerun of the inconclusive recent ballot could be a defining moment for the eurozone crisis. Yet for all this, the most important election of 2012 may be across the pond, between Barack Obama and Mitt Romney.

As the US, along with much of the developed world, grapple with fundamental questions about which economic and social policies will best secure widely shared increases in prosperity, the outcome of Presidential election could be of profound importance.  Indeed, as Theda Skocpol – Harvard professor and formidable authority on US politics – puts it in IPPR’s new journal, Juncture:

“I think the 2012 election is going to be one of the most riveting, most hard-fought no-holds-barred elections in US political history – and that says something.”

Part of the excitement stems from how close the vote looks set to be.  Any casual observers in Britain who assumed the election would be straightforward for Obama need to think again. Yes Romney has been bruised by having to slug it out in the Republican primaries – and yes the Democrats will attempt to cast him as out of touch (he recently described $374,000 as “not very much” money). But the polls have been tightening recently and the outcome is far from certain. The economy, while growing, does not look set to take off any time soon. And to make matters worse, the benefits of what growth the US economy has experienced seem to be unevenly shared out.  It looks likely that Romney will seek to focus the election almost entirely on the economy in the hope that cold economic winds will blow Obama from power.

The election is also, in the view of Theda Skocpol, a “turning-point election”. As well as shaping up to be closer than you might think, the implications of this election could be felt by Americans for decades to come.

Why so? An Obama win could mean the entrenchment of progressive changes, however modest, in US politics: healthcare reform, a reappraisal of the principle that the wealthiest should contribute more through their taxes and support for state investment in promoting growth. Few expect a radical turn from a President who has become known for his caution more than his boldness. But in time, by defending these important progressive principles and institutions, the electoral base for further Democratic success could be considerably strengthened. Critically these gains could then be fused with and exploit underlying demographic changes which will see the emergence of a younger and more diverse electorate, potentially giving the Democrats a big long-term opportunity to shape US politics. As Skocpol puts it, a second term for Obama, would “allow a transition to incorporating younger people and a more racially diverse electorate to blow winds into a centre-left Democratic party.”

In contrast, were Romney to win the White House – carried there by the current old, white Republican base and more centrist voters dissatisfied with slow economic growth – he could destroy the institutions and policies which provide the bedrock for Democratic Party support, before looking to reform the Republication Party and broaden its electoral appeal. In the words of Skocpol:

“… there are forces on the right who understand that they are close to their last chance – to use an American football analogy, it’s in the final two minutes and they have got to get that ball down the field and score a touchdown. They understand the importance of this election much better than the befuddled people on my side. They understand that if they can destroy or eviscerate healthcare reform, if they can change Social Security and Medicare for future generations then they can turn afterwards to making an appeal to the growing Latino population and to the younger generation around somewhat more free-market principles. After this election they’ll have to change – they’ll have to give up some of their ‘dead-endism’ over their opposition to gay marriage for example. Republican elites already understand that. But by winning they could very well buy themselves five to 10 years to make this shift, because they’ll be associated with whatever economic recovery occurs and they will have destroyed policies that could have built political identities and coalitions which they understand would have been a threat.”

For many Democrats – and progressives around the world – Obama’s victory in 2008 pulled at the heart strings. But four years on, the optimism of “yes we can” will be hard – perhaps impossible – to revive. Yet 2012 looks set to be a more important election to win – with long-lasting and fundamental implications.

Guy Lodge and Will Paxton are the joint editors of Juncture, IPPR's new journal of centre-left thinking, the first edition of which is out this week. See www.ippr.org/juncture for full details.

Photograph: Getty Images

Guy Lodge and Will Paxton are the joint editors of Juncture, IPPR's new journal of centre-left thinking.

Ralph Orlowski / Getty
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Labour's investment bank plan could help fix our damaging financial system

The UK should learn from the success of a similar project in Germany.

Labour’s election manifesto has proved controversial, with the Tories and the right-wing media claiming it would take us back to the 1970s. But it contains at least one excellent idea which is certainly not out-dated and which would in fact help to address a key problem in our post-financial-crisis world.

Even setting aside the damage wrought by the 2008 crash, it’s clear the UK’s financial sector is not serving the real economy. The New Economics Foundation recently revealed that fewer than 10% of the total stock of UK bank loans are to non-financial and non-real estate businesses. The majority of their lending goes to other financial sector firms, insurance and pension funds, consumer finance, and commercial real estate.

Labour’s proposed UK Investment Bank would be a welcome antidote to a financial system that is too often damaging or simply useless. There are many successful examples of public development banks in the world’s fastest-growing economies, such as China and Korea. However, the UK can look closer to home for a suitable model: the KfW in Germany (not exactly a country known for ‘disastrous socialist policies’). With assets of over 500bn, the KfW is the world’s largest state-owned development bank when its size is measured as a percentage of GDP, and it is an institution from which the UK can draw much-needed lessons if it wishes to create a financial system more beneficial to the real economy.

Where does the money come from? Although KfW’s initial paid-up capital stems purely from public sources, it currently funds itself mainly through borrowing cheaply on the international capital markets with a federal government guarantee,  AA+ rating, and safe haven status for its public securities. With its own high ratings, the UK could easily follow this model, allowing its bank to borrow very cheaply. These activities would not add to the long-run public debt either: by definition an investment bank would invest in projects that would stimulate growth.

Aside from the obviously countercyclical role KfW played during the financial crisis, ramping up total business volume by over 40 per cent between 2007 and 2011 while UK banks became risk averse and caused a credit crunch, it also plays an important part in financing key sectors of the real economy that would otherwise have trouble accessing funds. This includes investment in research and innovation, and special programs for SMEs. Thanks to KfW, as well as an extensive network of regional and savings banks, fewer German SMEs report access to finance as a major problem than in comparator Euro area countries.

The Conservatives have talked a great deal about the need to rebalance the UK economy towards manufacturing. However, a real industrial policy needs more than just empty rhetoric: it needs finance. The KfW has historically played an important role in promoting German manufacturing, both at home and abroad, and to this day continues to provide finance to encourage the export of high-value-added German products

KfW works by on-lending most of its funds through the private banking system. This means that far from being the equivalent of a nationalisation, a public development bank can coexist without competing with the rest of the financial system. Like the UK, Germany has its share of large investment banks, some of which have caused massive instabilities. It is important to note that the establishment of a public bank would not have a negative effect on existing private banks, because in the short term, the UK will remain heavily dependent on financial services.

The main problem with Labour’s proposal is therefore not that too much of the financial sector will be publicly owned, but too little. Its proposed lending volume of £250bn over 10 years is small compared to the KfW’s total financing commitments of  750 billion over the past 10 years. Although the proposal is better than nothing, in order to be effective a public development bank will need to have sufficient scale.

Finally, although Brexit might make it marginally easier to establish the UK Investment Bank, because the country would no longer be constrained by EU State Aid Rules or the Maastricht criteria, it is worth remembering that KfW’s sizeable range of activities is perfectly legal under current EU rules.

So Europe cannot be blamed for holding back UK financial sector reform to date - the problem is simply a lack of political will in the current government. And with even key architects of 1980s financial liberalisation, such as the IMF and the economist Jeffrey Sachs, rethinking the role of the financial sector, isn’t it time Britain did the same?

Dr Natalya Naqvi is a research fellow at University College and the Blavatnik School of Government, University of Oxford, where she focuses on the role of the state and the financial sector in economic development

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