What is the meaning of Theresa May’s wobble?

Last night 22 people were killed in Manchester Arena in a terrorist attack. The attack was on people attending a concert popular with young girls, and many children were victims. I am in shock , like most of my countrymen. As ever, we have few facts, but the news media must make these go a long way, as they endlessly recite the same reports, along with vacuous speculation, to the exclusion of all else. Nobody is thinking about the election. For anybody that wants a little relief from the awfulness of the news, and the emptiness of news coverage, I offer the following. I had mostly written this article on yesterday’s political events already, and so I decided to finish it and publish anyway. But I expect most readers will not be very interested, as we cannot stop thinking about those families caught up in last night’s horror.

At first I thought it was a sign of strength. The Conservative manifesto launched last week was everything Labour’s was not. It challenged the party’s supporters, and suggested that the Conservatives had the toughness to take on difficult decisions, where Labour were behaving like Father Christmas. It confronted some of the more difficult questions facing our society with something a bit more substantive than empty slogans and goodies all round. But then yesterday the Tory leader, Theresa May, backtracked. It was a very clear wobble. What are we to make of it?

The proximate cause of the wobble seemed to be a sharp narrowing of the gap between the two big parties in the opinion polls after the Conservative manifesto launch – Labour moved up into the low thirties while the Tories dipped from the upper-forties to the mid-forties. Labour (echoed by the Lib Dems) were trying to make hay from the Conservative manifesto. There were quite a few items they picked up on, including cuts to school lunches, and the softening of the policy on annual increases to the state pensions. But the main fury was devoted to the proposed policy on paying for social care.

The plan was to make people liable for the full cost of nursing care if, for example they suffered from dementia, down to the last £100,000 of personal wealth, and including the value of people’s homes – though the idea is that the home would not have to be sold before death. Two things upset people. The policy wonks in particular were alarmed at the lack of a cap to these costs after which the state would pay (the current policy has a cap set at £72,000). This meant that there was no attempt to spread the risk, which might allow an insurance market to be established. Relatives faced the prospect of massive inheritances disappearing in the event that their loved ones suffer a slow departure rather than sudden death. But the critics mainly focused on forcing people to sell their houses. Suddenly previously leftish politicians discovered the sacred right of people to pass their wealth on to their children. The Lib Dems’ Tim Farron has been spitting fury.

More reflective types, including me, thought that there was something in the government proposal. The money has to be found from somewhere, and assets at death look easily the best place. We might like the idea of spreading the risk (e.g. by increasing inheritance taxes on everybody), but there is little evidence that the public has the stomach for that. This proposal exposes rich people the most, and at least confronts the issue honestly. Never mind. Tories were branded as the nasty party, preying on people’s inheritances.

I think Mrs May night have weathered this storm except that she had not developed the policy in consultation with her own side. The manifesto was imposed on the party by a tiny band of trusted confidantes – Mrs May does not do open consultation. Conservative ranks were visible fraying. So the wobble. Mrs May said that the proposals would be put out to consultation, and that there would be a cap after all. And that means significant costs being picked up by the state, to be paid for in some unspecified way.

What are the implications of this? The central theme of the Conservative campaign has been competence. This has been damaged a bit, but not in a way that enhances the standing of the opposition parties. These are still intent on hoovering up a protest vote, rather than setting out a credible programme for government.

As a Lib Dem I know what this means. My party has made the harvesting protest votes a core skill; the trouble was that support evaporated as soon as people thought they might take a share in power. And it was even worse when the party actually did so in 2010 as it could not meet so many conflcting expectations. Labour might have been testing the same self-destructive dynamic if their attacks on the Tory manifesto had gained traction.

There are, in fact, much more worrying aspects to Conservative policy. First is the drive to reduce immigration. The weapon of choice is to add to the burden of red tape on businesses. Those business people who supported Brexit so that it would reduce bureaucracy are going to get a rude awakening. Second is a refocusing of funding for early years education and support. The neediest families will suffer the most from changes to schools and local authority funding. The longer term consequences of this are likely to be dreadful. Britain’s lower crime rates are in large measure due to a reduction in rates of youth crime. This is surely related to increased levels of early years intervention put in place by the Labour government before 2010, and now being dismantled at an accelerating pace. And then there is a move to increase the number of secondary schools selecting children on an academic basis. When the main challenge to the system is to raise the educational attainment of the less academic, this looks like a costly distraction.

But however harmful these policies look, together with an alarming vagueness from Mrs May on the biggest job her government faces, negotiating exit from the European Union, would we trust a Labour-led government? Though the party has adopted the Blairite slogan “for the many, not the few” their policies nevertheless add up to a massive concentration of power to an elite in central government, whose competence is open to question. It looks distinctly Venezuelan.

But the Manchester attack puts all this on hold. Campaigning will be suspended, perhaps until the weekend, as we all take in the shock of what has just occurred. This will act as a bit of a reset button. When politics resumes, it will not be in the same place as before. But speculation on its impact at the moment serves no useful purpose.

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The real questions behind the politics of tax and spend

Warning: this is a longer read for those interested in achieving a deeper understanding of political choices, especially here in Britain. I write it to release some my internal tensions after a tough few weeks helping to organise my party’s general election campaign, while tackling questions posed by tightening school budgets.

The politics of tax and spend is close to the heart of Britain’s general election campaign. And yet the quality of economic commentary is very shallow. Here is my attempt at something deeper.

Running government finances is not like running a household budget. The primary constraint on a household budget is money, which can be treated as a fixed resource, and can be stored for use at a future date (so long as inflation is not a major factor). But looking at an economy as a whole, money is just an economic tool, a means to an end. Hoarding it is pointless. Money is tactics, not strategy.

So to look at matters strategically we need to take money out of the picture, and ask what it is that we are trying to achieve. A higher level of public services? More private consumption? More investment for the future? All of these things are constrained by real resources. By which we mainly mean people. If we want to increase the level of consumption or investment, more people need to be put to work, or the same number of people need to work harder or more productively. The latter may also be a function of capital assets, but capital assets are created by people working in earlier periods and forgoing consumption.

So, if you want to expand public services, the question arises as to where the extra resources are to come from. If you are hiring 10,000 extra policemen, those individuals may be doing nothing now, in which case the economy as whole expands costlessly. Or they may be doing important jobs elsewhere, in which case the recruitment will potentially reduce the production levels of their previous employers. And what if you simply raise the level of pay for the same work? Or increase the level of a cash benefit. That is a way of raising the levels of consumption for those targeted individuals. Who is to produce those extra things they are to consume?

And so we come to a central question of fact, which is discussed surprising little. The left claim that there is plenty of spare capacity in the economy, so if we expand the consumption of the disadvantaged, or the reach of public services, the economy as a whole will respond by utilising those spare resources, and nobody is disadvantaged. This idea goes by the term “Keynesianism”. It is more likely to be true in a recession than at the height of a boom. The right thinks that spare capacity is not so easily manipulated, and such expansion will usually come at the cost of private consumption, whether that is intended or not. And in Britain, when employment is at record levels, and we are still net importers of goods, this is not so easily dismissed. Some on the left counter with the hope that any reduced consumption will be by the rich, of luxury goods.

But many more thoughtful observers think that there is still spare capacity in the economy. They point to low levels of pay and productivity in many places. If there was more pressure from the demand side of the economy, then private sector produces might sharpen up and become more productive. And if the extra public resources were directed well, into investment, then that will help expand future capacity too. The likelihood of these outcomes depends a lot on the tactics.

But before considering the tactics – the details of taxation and monetary policy – we need to reflect that modern, developed economies are quite open. We can import resources from abroad. And we can import workers. For certain advantaged economies, like the USA, a high level of net imports is completely sustainable. And there are economies out there (Germany, for example) that are happy to be net exporters, for their own tactical reasons. But for others a prolonged period of net imports, especially if not used to create productive assets, can lead to a financial crisis and the seizing up of the economy. Where the UK stands between these two poles really is unclear; the country has been a net importer for most of recent history, and financially stable for most of that period too. But there will be a level of net imports that is unsustainable; and a financial crisis can take many years to build, as we found in 2008.

It is worth touching on the issue of immigration. What if the extra workers needed for expanded public services could themselves be imported, either directly or to substitute for home recruits?  These workers will create demands of their own, but it is one way of squaring the circle. Indeed in the mid noughties, when the Labour government undertook a significant expansion of the public sector, this was one of the ways they were able to sustain it, using workers from the new entrants to the EU from central and eastern Europe. That Labour leaders are now saying that this influx was a serious mistake is a piece of hypocrisy; they love to take credit for the expansion of public resources at the same time.

It is worth trying to establish these basic rules on strategy – but it is not hard to see the strategy that public leaders converge on, from left and right. It is to expand public services and benefits (such as pensions and hardship relief) while taking up slack in the country’s productive capacity, or expanding that capacity through higher productivity.  And so we turn to the tactics. If the tactics of expanding the public sector go wrong, there is a more or less disorderly reduction in the levels of consumption by the general public in order to make room.

We need to understand what we mean by this. In the conventional view of economists this about one thing above all: inflation. Most economists like the idea of a little bit of inflation (I don’t agree, but because I think inflation erodes trust in public institutions rather than its effect on short-term incentives, the obsession of most economists). But inflation can quickly become unhealthy, so that an increasing amount of effort is placed in managing money rather than valuable production, and it clogs the process of exchange, which is the foundation of a healthy economy. Inflation occurs when demand outstrips supply. Its effect in this context is either to undermine the attempt to expand the public sector, by eroding real wages or the real value of the benefits, or by reducing public consumption as real incomes are reduced. The so-called neo-Keynesian consensus of the 1990s and early 2000s built an entire edifice on this idea – using a targeted rate of inflation as the primary way of determining whether an economy was in balance. The idea still stalks the conventional wisdom.

But that was dealing with yesterday’s problem. Neo-Keynesianism was built in response to the 1970s phenomenon of stagflation, when the old-fashioned “Keynesian” model broke down (quotation marks because though Maynard Keynes’s fingerprints are on this old conventional wisdom, such a flexible mind would surely have moved on as the facts changed). But what emerged in the 1980s and 1990s was different. It was changed by two things – a shift in the balance of power in the political economy towards employers, and away from employees and unions; and the process of globalisation. Globalisation, we must understand, is a combination of more advanced production and communication technologies, and the opening up of new Asian economies into the global trading system, starting with Japan and moving by way of South Korea and Taiwan to the giants of India and China. This has broken down the previous relationships between demand, supply and price.

First, it has broken the link between prices and pay. It used to be easy to identify a single rate of inflation that, give or take, would apply to both prices and wages. At first this seemed to work in workers’ favour. Cheap imports from Asia held price inflation in check, but workers’ pay kept ahead. But since the crash in 2008 this has flipped. Rises in prices (often from those same Asian imports) are not reflected in pay levels. It makes no sense to talk of a single level of inflation, and to use consumer price inflation as a lone yardstick of economic health. And the second change is that other ways that excess demand can be satisfied have been made easier. It is easier to import goods and services either directly, by buying from foreign firms, or indirectly by domestic firms outsourcing production. We are still trying to understand what the impacts of these changes are. But excess demand is likely to lead to two things: fat profits by businesses as they are able to increase their prices while holding wages down, and an increasing trade deficit. It is also means that the risks of excessive inflation are much lower, as it quickly feeds into lower real incomes and dampening demand.

At this point we need to think about money. This, too, has changed dramatically, as technology has moved us away from physical currency to a much more flexible system of paying for things. The idea of “money supply” as being a physical thing that needs managing as such is increasingly old-hat – another nail in the coffin of neo-Keynesianism. Instead, policymakers need to think about interest rates, exchange rates and controls of the physical transfer of capital (in this case money balances not required for consumption) within economies (banking controls) and between them (exchange controls). If this goes wrong, people lose confidence in the means of exchange, and the economy rapidly melts down – as we can see happening now in Venezuela. This is what spooked so many governments in 2008 and 2009 when they launched into a series of panicky bail-outs of banks.

And so in this brief overview (that is already much longer than my usual posts) we at last come to where most of the political conversation starts: taxation and public debt. Looked at through the eyes of an economist (money is not a thing in itself, remember) the main purpose of tax is the regulate demand so that we have an orderly economy. Not enough tax, and the financial system becomes unstable, with or without inflation. Too much tax and it is a self-inflicted wound – living standards are lower than they need to be. Tax has other important functions too, of course. It is a means of wealth redistribution (and too skewed a distribution of wealth leads to a poorly functioning economy), and managing incentives. Whether an economy needs more or less tax at any given point depends on a wide variety of factors, of which the size of public spending is only one. This has led to a lot of tension between economists and politicians, especially in the austerity years from 2010. Politicians insist on talking as if public accounts were like household accounts; economists (or many of them) say this is self-harm. Actually a lot of the  argument is at cross purposes. What the politicians do, and what they said were different things. Oddly enough, I suspect that politicians were in fact thinking long term, and trying to rebalance the economy, while economists were obsessing about the moment – a reversal of the usual characterisation.

And what of public debt? This again is not all it seems. Many governments, including the US, the UK and most spectacularly, Japan, have asked their central banks to quietly buy up government debt. This acts to in effect cancel it. The world has not ended, as some conservative commentators have suggested it would. What is going on? The central bankers are reacting to an unbalanced financial system. For one reason or another there is too much hoarding of money, by business organisations and rich individuals. This hoarding is sucking demand out of the economy. And it is also creating excess demand for short-term financial instruments. Governments are taking advantage of this by satisfying this excess demand by buying back longer term debt. They hope that in the process they will restore some of the lost demand by encouraging more genuine capital investment, as opposed to a continuing financial merry-go-round. There is little evidence for this working, though.

This makes it an extremely easy time for governments to finance budget deficits and investment – at least tactically. And that is why calls for more public investment at a time of high national debt only outrages conservative politicians and their allies. But the strategic question remains. As real resources are mobilised towards these ends, what will the impact be? There may indeed be spare capacity to be utilised, but that actually be what happens?

To me the key point to arise from this is that managing public finances is a matter of competence and discipline. The left may well be right that in the short term that we can expand the public sector with few real risks, even without raising taxes by much. But that could turn bad very quickly. Do they have the competence to appreciate when that moment arrives, and the discipline to act?

This is where the Labour government of the mid-noughties fell down. They expanded the public sector, while holding, or even cutting, taxes on mainstream income and consumption (as opposed to capital transactions). They secured growth with low inflation (those cheap Asian imports helped a lot), but not based on genuine productivity (supposed advances in productivity were in sectors such as finance where it turned out to be chimerical). Rapid immigration helped sustain this, but it created tensions, especially in working class communities. And they failed to grasp that the extent of the financial boom, which generated a lot of short-term tax revenue, was creating systemic risk. As a result the financial crisis was a rout for the UK, unlike the relative calm of better-managed economies such as Canada or even France.

And yet there is no sign that either wing of the Labour Party has learnt from this. They want to stoke up demand but have no understanding of when enough will be enough. The Conservatives have many faults (and their idea of eliminating the budget deficit is plain nutty), but to my mind they show a greater grasp of the strategic risks, and the need for discipline and competence (as do my own Liberal Democrats, come to that – indeed Vince Cable showed more awareness of the dangers in the mid-noughties than any other leading politician).

But quite apart from party differences, I feel that there is a deeper need to reform the process of governance so that these risks are managed more securely. There is a slo a need to reform the workings of the economy so that extra demand for goods and services does not simply end up in fat profits and foreign jobs. Alas there is little talk from any of the parties of how this is to be done.

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Labour’s dead cat bounce

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In my weekly survey of Britain’s general election, it does not look to have been a bad week for Labour. Their poll rating has hardened from the lower twenties to the upper twenties, and the leak of their manifesto moved the election agenda away from “strong and stable”, the Tory slogan, to policy choices.  Can Labour claw back further? I think not.

I hold fast to my predictions of last week that the Tories will achieve about 400 seats to Labour’s 170 or so. The Conservative vote is holding up well; the Lib Dem challenge is in the doldrums; and Tory prospects in Scotland look positive.

Labour in fact have done little to address their fundamental weakness – their lack of credibility. Take the manifesto. The final version is published today, with a lot of the media attention focused on the costings and how spending commitments are to be funded. Unlike the news media, I don’t like to use this medium to speculate, when those speculations can be turned to facts in a very short time. But it is clear is that this manifesto will be unchallenging. The leaks showed a lot of popular policies but very few new ideas. Labour spinners referred to it as “radical”. In only one sense could that said to be true: their idea is to raise levels of public spending substantially, and also taxes on businesses and people with higher incomes (I nearly wrote “the wealthy”, but actually that isn’t true – I am wealthy in the Labour conception, but have little to fear from their ideas of higher taxes). And, indeed, the whole enterprise is a challenge to the public policy consensus that the left likes to refer to as “neoliberalism”.

But this is radicalism by default. What we have heard so far of Labour’s promises is “no lobbyist left behind” policy formation. Every Labour supporting interest group seems to have come forward with their wishes, and these have been granted. When challenged about how this is to be paid for, and the answer comes: “somebody else”. There seems to have no serious question of choosing or prioritising. This is in stark contrast to Tony Blair and Gordon Brown in 1997, before Labour’s greatest ever electoral triumph. They had decided to hold to Conservative spending plans, and had spent most of the previous year or two saying “no”, while confining themselves to a quite limited and focused set of promises.

And that gets to the heart of the matter. Messrs Blair and Brown were not opponents of public spending. Indeed they oversaw a massive expansion of the public sector in their three terms. But they understood the need to appear to be credible managers in order to win public trust first. The public don’t like entrusting politicians with spending decisions if they can’t say “no” to their friends from time to time.

There is, in fact, quite an interesting debate to be had about what scope there is to increase public spending, and what sorts of taxes are needed to support this – and even the extent to which it has to be backed by direct tax funding. And since I believe that public spending must be expanded (if only from the logic of the late, great economist William Baumol who died recently), it is a discussion I really want to engage in. But Labour’s manifesto is not the right place to begin that debate. That would give it too much credit for coherence. Effective management is always about making choices between things that you want to do – Labour’s leadership shows no inclination to confront that truth.

So what explains Labour’s slight bounce? I have not seen much evidence to explain it, so I’m back to speculation. I suspect that it reflects weakness. Labour-inclined voters don’t have any sense that Labour will actually win, so they have little to lose by voting for them. They are open to be swayed by their local candidate, or the general principle of disliking the Tories.

This factor should help the Lib Dems too. The perception that the 2015 election was a close one was a disaster for them, as the Conservative national campaign were able to promote fears that they might let Labour in by the back door. This is still a problem that Lib Dem strategists have done little to address – and I have my doubts whether they will ever have the courage to do so. But that is a problem for another day. And yet Lib Dem poll rating are at best stuck, and may be slipping. The surge of new members when the election was announced has slowed to a trickle. What the party lacks is enough compelling reasons for voters to support it. They have one: an expression of anger at the result of the last year’s referendum on Europe. That plays well here in Wandsworth in London, where I’m expecting the party to do quite well. But only about 20% of the electorate at large now want to reverse the result of the referendum. Other Remainers are trying to move on, and are in the depression stage of grief over the result, or perhaps even acceptance. This leaves too small a pool of voters to fish in and win the seats the party needs to.

The Lib Dems next message that “we are the opposition”, based on the shambles of Jeremy Corbyn’s leadership, has some traction, but it is not enough in itself. It is yet another variation on the theme of “vote for us because we are not one of the other two” which is superficially attractive (and seems to play well in focus groups, given how popular it has been amongst the party’s professionals) but doesn’t get enough people across the line in the end. It may yet gain traction. If Labour do succeed in getting more people to think about Conservative policies (and their manifesto was successful in doing that), and if they are unable to maintain discipline themselves, then who knows? But I fear that the election has come a bit too early in the party’s revival for strong electoral results – though it will be a useful learning experience. I would urge all Lib Dem supporters who want to help to go to one of the small number of target seats.

In my Facebook bubble, I see growing support for anti-Conservative tactical voting. I place little credence in this. It is not clear what all this for. It may limit the Tory majority a bit, but that will change little. There is no credible coalition of anti-Tory parties. If there ever is one, it needs to be put in place long before an election with an agreed platform. Labour show no interest; they observe how the Conservatives have absorbed Ukip voters by crushing the smaller party, and they want to carry out their own version of that manoeuvre. And the critical task is to persuade people who want to vote Conservative to vote for somebody else – and talk of a “progressive alliance” does not help here at all.

And so I conclude that Labour’s relatively good week is what City traders used to call “dead cat bounce” – the sort of bounce you get when you hit rock bottom. There is no game-changing happening.

 

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Must democratically-run political parties be lousy at elections?

Three weeks after Theresa May announced a snap General Election in the UK, the Conservative dominance shows no sign of abating. Mrs May looks as if she will achieve a majority for her party of between 150 to 200, with over 400 seats, compared to about 150 for Labour.  Tory success is primarily a product of Labour failure. That poses some challenging questions for how you run a political party.

That prediction of Conservative success is somewhat higher than many are making. It reflects two things. First the Conservatives have stamped on Ukip and picked up the lion’s share of their votes, taking their overall vote share up to about 45% or more, their best since the 1990s, and presenting all the opposition parties with a formidable challenge. The second thing is an analysis by Alistair Meeks of politicalbetting.com, which shows particular difficulties for Labour in a swathe of seats that voted Leave in the EU referendum. Meanwhile the Lib Dems have lost some of their early momentum, and my prediction for them of 20 seats counts as optimistic in the current betting market.

Part of the Tory success is the result of ruthless competence in the art of electioneering, led by their strategist Lynton Crosby. A compelling national message, based on Mrs May’s personal brand, is crushing all before it. Labour is chaotic and confused by comparison, and the Lib Dems’ lack of media weight is telling. Rage over Brexit appears to have limited appeal – though an attempt by the Lib Dems to broaden the message into NHS funding is a valiant attempt to broaden out. The Lib Dems’ best hope is to exploit the inevitability of a Tory landslide, concerns about Tory policy and Labour’s hopelessness into a vote for an alternative. That may yet happen.

For now I am interested in something else. Labour is clearly the principal author of its own demise, after they elected a clearly inadequate leader in Jeremy Corbyn. This immediately punctured their chances; the party then fluffed the EU referendum, letting Leave win by a narrow margin. That gave Mrs May her chance to put the boot in. But how did Labour get into this mess? The answer is “democracy”. The party opened up its methods of choosing its leader, and then its policy making processes. This led to record numbers of people joining the party, and taking part in selecting their leader. Contrast this with the Conservatives. Mrs May won selection by systematically destroying each of her opponents before the party’s weak democratic procedures could get involved at all. Meanwhile the process of creating Tory policy is completely dictatorial.

Which leads to a thought: internal party democracy is toxic for political parties’ electoral success. Labour’s troubles started with their selection of Ed Miliband as leader in 2010, in the most open selection process until then. Mr Miliband was responsible for a series of catastrophic misjudgements, including the further opening up of the party’s leadership selection process. Mr Miliband looked inwards for salvation; he thought he could win simply by picking up Lib Dem voters disillusioned with the coalition government, and by stoking up his political base. This had the virtue of avoiding hard choices within Labour’s ranks, and of rallying behind the left’s supposedly superior “values”. These are the sorts of mistakes that leaders make when they think that appealing to their own supporters is more important than challenging political opponents. Mr Corbyn is repeating this strategy in a ghastly death-spiral.

We might also reflect that something similar is happening in France. The two established political parties, the Socialists and the Republicans, opened up their leadership selection processes, and were then both knocked out of the race for president by one party leader who challenged her own party to make it more electorally appealing, and another who simply created a new political party in his own image. Internal party democracy is not real democracy at all. It is about building up appeal amongst the like-minded, and not about appealing to the sceptics. Labour may have involved record numbers of people in its processes, but they are numbered in hundreds of thousands, and not millions.

It is worth casting a glance over to the USA at this point. Their internal party politics is clearly highly democratic, and challengers to the system from outside the established parties fail to get going. But they have a state-sponsored system of primaries not tied to party membership that brings in millions of people who aren’t necessarily loyal to the parties’ core values. Donald Trump succeeded by involving formerly Democratic working class voters.

This poses an interesting challenge to the Liberal Democrats, my political party. Time an again I hear activists praising its democratic processes, and asking for these processes to be given even more say over policy. This, of course, helps draw in new members and keep them. As a member of this political party you aren’t just treated as cannon fodder, as you are in the Tories, but you are given a say. And as the party struggles to build a core vote, it naturally tends to look inward, or at least towards the like-minded.

But to succeed the party has to broaden its appeal to beyond the like-minded to voters who are sceptical of the party, and will never be very loyal to it. As the party tries to hold and win seats in a general election, it is getting a taste of how hard this is. Still, the party is what it is. The members and activists will have to take on the challenge of broadening the party’s appeal themselves, and choose leaders and policies that will fulfil that aim. Since inclusivity is one of the core liberal values that the party treasures, that might help. What the party must avoid is the trap that Labour members have fallen into: the feeling that like-minded people are natural majority, and that elections can be won by motivating this group rather than challenging it.

That’s for the future. Meanwhile the catastrophe that is engulfing the Labour Party should be  warning to all political activists.

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Diane Abbott’s troubles show all that is wrong with the British election

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Another week passes in Britain’s election campaign and the Conservative Prime Minister Theresa May’s grip tightens. The more Labour tries to seize the initiative, the better it looks for her. Diane Abbott’s intervention yesterday simply proves the point. And yet she was trying to raise a subject people should be talking about more.

Ms Abbott is Labour’s shadow home secretary, and was the first black woman MP when she was first elected in 1987. But she has also become a bit of a figure of fun on the British political scene; this has racist and misogynist undertones which I deeply dislike. So I want to be very careful in what I say. Yesterday morning she introduced Labour’s topic for today, which was the idea that the party, if elected, would recruit 10,000 more policemen to act as “bobbies on the beat”. This was an attempt to move the debate on to specific issues of policy.

Now the call to have more bobbies on the beat is one of the traditional cries in British politics, and it has been around since bobbies on the beat were invented in the 19th Century. Everybody wants more visible policing from these reassuring community figures; it’s like calling for more nurses. So Labour’s first problem was the sheer banality of the proposal, and the fact that it looked like a silly election pledge and not a thought through policy. It is said that you can’t overestimate the intelligence of the public, but this looked like a valiant attempt. Then the costing fell apart under close examination. Meanwhile Labour promised to raise the money from reversing Conservative plans to reduces taxes on capital gains. This, of course, plays exactly to the Conservative economic narrative that any increase in the level of public service must be paid for by increased taxation – an idea designed to undermine Labour’s complaints about austerity policies.

This last was the initial source of challenge. The Tories quickly claimed that Labour had spent the same money several times over. This was the main focus when Ms Abbott was interviewed on BBC Radio 4’s Today programme. She did not defend herself confidently, but she got through. The whole policy still came through as a bit of election nonsense. Ms Abbott fell apart later in another radio interview, when she got into a complete muddle over the numbers. At this point it did not sound as if she had any grip on what the actual policy was. That became the story. Her party leader, Jeremy Corbyn, then defended her with what amounted to a shrug.

The Conservative election message is a simple one: the election is about competence, pure and simple. It is not about what the government will actually do – which will not stop them claiming public endorsement of a series of policies that will barely get mentioned. Labour’s dismal performance yesterday, from a badly designed policy announcement, to Ms Abbott’s lack of grip, and finally with Mr Corbyn’s apparent unconcern, could not have gone better for the Tories if they had scripted it.

And yet Labour were raising an important question. It seems to a lot of people that government cuts to services and benefits are eroding the very fabric of society. This includes the police, where community policing has been decimated. True, this may not have much immediate impact on crime levels – but community policing is about gathering intelligence, and making sure that the various components of public service join up. It is about solving problems before they become problems. So far it is not clear how much police cuts have impacted on levels of crime (recent rises in reported crime, which Labour used as justification for their intervention, look as if they are more to do with reporting methods). But Londoners have been alarmed about a sharp uptick in knife murders in the last few weeks. This could have been the basis of a much sharper attack on the government.

This is not actually about bobbies on the beat. In London it is not so much the vaunted bobbies being cut, as community support officers. It is also about cuts to youth facilities, mental health services and other interventions to prevent young people drifting into a life of crime (including early years interventions). The government seems unconcerned. They talk about helping “just about managing” citizens, and lifting an elite of poorer children into the middle class through selective schooling. The former idea has merit, but not at the expense of those who aren’t managing at all. The latter idea is trying to solve the wrong problem, and making things worse in the process. Labour is right to move the conversation on to these issues, and to challenge the Conservatives hard. But they are criminally ineffective.

All of which makes me very gloomy. Part of me actually wants Labour to be crushed in this election, following the way they behaved towards Liberal Democrats when they were in coalition. Labour stands for a certain complacent and tribal way of politics that we could all do without. But without them the Conservatives are being offered a blank cheque. And the signs are that they will not use that opportunity wisely.

My main hope is that the Liberal Democrats can grow up fast to fill the vacant space. That seems a better bet than the creation of a new political movement. They will need to broaden out their narrative from anger over Brexit to defending and reforming public services. They also need a way to challenge the Conservative economic narrative. Their leader needs to be less of the energetic campaigner and more a statesman in waiting.

Can Labour pull itself back? It has before, but it seems to lack the quality of politician who can do the job. They are set to replace the incompetent with the mediocre. If a route back could be found for David Miliband or, perhaps, Ed Balls, that would be another matter.

And maybe, as FT columnist Jana Ganesh says, we are paying the price for public indifference to politics, which is leaving the field open to people who are obsessive, but without the vision and grounding from which true leadership must be built. Perhaps things have to get worse before they get better. That is not good outlook for Great Britain.

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A progressive alliance would help the Tories not hurt them

Last week, I was still in shock from Theresa May’s announcement of a British General Election three years early on 8 June, and I predicted that the Conservatives would end up much where they had started. A few other Lib Dems were coming to similar conclusions (see this from Richard Morris)  But I closed with the thought that I might have underestimated Theresa May. A week later I think I did.

The campaign is taking shape. The Conservatives are dusting down their campaign from 2015 – portraying themselves up a stable government against a “coalition of chaos”. This message is being repeated relentlessly with discipline. Mrs May looks good at discipline. While the principal opposition party is Labour, this line of attack must surely resonate with the public. No government led by Labour in its current state can be anything other than chaotic. And all the other parties (bar the now irrelevant Ukip) have ruled out working with the Conservatives.

The Tories are making headway on three fronts. Firstly they have won back their direct defections to Ukip. Douglas Carswell, the Tory MP who defected to Ukip, has given up the ghost. Mrs May’s support for Brexit and turn against social and economic liberalism has satisfied them. This victory may look good in the polls but matters least where the Tories need it most: in the marginal seats. They had done a good job of squeezing Ukip there in 2015.

The second area of Tory success is picking up votes from Labour, even from Labour’s low point in 2015. A lot of these seem to be coming via Ukip. After former Labour voters rejected the party to support Ukip, they are ready to switch to the Conservatives this time – especially under Mrs May. And it isn’t hard for the BBC to find people in their vox pops who have defected directly from Labour ro the Tories. She has accomplished a significant detoxification of the Tory brand for older, working class voters at least. This will help the party make headway against Labour in England, and Wales (where local polls show the Tories with an unprecedented 10% lead over Labour). All this gives the Tories a high poll share in the mid 40s in the country as a whole, and the prospect of winning many seats from Labour.

The third area of Tory success is that the party is gaining ground in Scotland. It is now firmly established as the second party after the SNP, whose poll share is coming off the boil from its high point in 2015. It could be that the SNP’s policy of advocating for a second referendum on independence will push unionists in the direction of the Tories, allowing them to pick up many more seats than I thought (perhaps as many as 10). After the cataclysm of the 2015 election, who can say that there will not be some very sharp movements in some seats?

What to make of Labour? Their leader, Jeremy Corbyn, looks to be in good form – confidently pitching to bands of his supporters as he did in the Labour leadership election. Even in 2017 a hard left campaign can develop momentum, as has just been shown in France by Jean-Luc Mélenchon, somebody whose political attitudes look quite close to Mr Corbyn’s. Still, he only achieved 20%, and the other left-wing candidate, Benoît Hamon, the official Socialist, failed to reach 7%. Mr Hamon was also a left-winger, and put forward a radical policy agenda, but was regarded as an irrelevance by the public. That looks closer to Mr Corbyn. Perhaps Mr Corbyn will attract a sympathy vote; perhaps local MPs can rely on a personal vote. But all this reminds me of the clutching at straws indulged in by Liberal Democrats before their disaster of 2015. The party is disorganised and disunited; Mr Corbyn’s spokespeople are very much a B team, if that. The Tories are content to let Labour make all the running in the media they want to  because, they are making the case to vote Tory better than the Tories themselves.The party is out of fashion and demoralised.  A rout looks a distinct possibility.

And the Lib Dems? They are in good heart. New members continue to flow in (my local party has grown by over 20% in a week).  They are getting plenty of media coverage after a period of being ignored. And they are well led. This week’s Economist said no less than three times in three separate articles that the party is suffering from weak leadership under Tim Farron, while otherwise being quite encouraging for the party. They offered no evidence for this assertion: so what can they mean? Tim is not highly regarded at Westminster; he has not made much impact on the public – his approval rating is negative. But as a party member I have seen somebody who understands campaigning much better than his predecessor, and has pushed through some very well-judged changes. First was preparing the party for a snap election last summer, by ensuring that all constituencies had selected candidates. Second was forcing through changes to selection procedures to ensure that more women and ethnic minority candidates would be selected in target seats. This will be critical to any rebranding of the party. He did take a little longer than he should have done to rule out a coalition with the Conservatives, after ruling out one with Labour – but he got there quickly enough. And now he is talking up the idea of the party being a the real opposition – so as to undermine efforts by the Tories to talk of a “coalition of chaos” – and move it on to not offering the Tories a blank cheque.

So the Lib Dems have momentum. And yet they have a mountain to climb. Taking back the seats that they lost last time to Labour and the Conservatives will be hard work. The new MPs are well entrenched – and the sheer scale of the Conservative popularity under Mrs May makes it an uphill battle. At every general election since 1997 the Lib Dems have failed to live up to my hopes and expectations. I am trying to keep them under control this time.

Furthermore some Lib Dems are being distracted by notions of an anti-Tory “progressive” alliance, by doing deals with Greens and Labour, up to the point of even withdrawing candidates. The Greens in particular are talking up the idea. While there may be virtue in some local arrangements (covering Brighton and Lewes perhaps?), and especially local non-aggression pacts, this looks like a very bad idea.

The main electoral task for the Lib Dems is to detach some of the 30% or so of Conservative voters (15% of the electorate) who think Brexit is a mistake. Being part of an alliance, especially with Labour, will make this task much harder and indeed plays right into the hands of the Conservatives’ “coalition of chaos” mantra.  Labour and the Greens are making no serious attempt to challenge for these voters – and yet any anti-Tory coalition is doomed without them. The first problem for the progressive alliance is that the Tories are too damn popular. The second problem is that any alliance is not credible as anything more than a temporary electoral arrangement.

Unlike some Lib Dems, I am not against electoral alliances in principle – indeed it may be the only way to beat the current electoral system. But any such alliance needs to have clear, agreed objectives, and momentum. Labour are so far away from agreeing to such an alliance (to many of them, Labour IS the progressive alliance) that there is hardly any point in talking about it. Labour still dreams of recreating on the left what Mrs May has achieved on the right.

Until and unless Labour sorts it self out, rids itself of the hard left, and starts to embrace the compromises required to win back voters from the Tories, the best hope for progressives is that the Lib Dems surpass Labour and can build an electoral alliance from a position of strength.

 

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Don’t underestimate Theresa May – but the Lib Dems will play a critical role in this election

Today Theresa May announced her intention to hold a General Election in Britain on 8 June. She is certain to get her way, notwithstanding the Fixed Term Parliament Act. Personally I’m not happy – this is an unwelcome distraction from other things I need to do – and my post on mental health has been swamped. Unable to concentrate on much else, I’m going to post again.

The first thing that strikes me is that British politics is littered with people that have underestimated our Prime Minister. This election was an almost total surprise. Rumours had circulated earlier in the year of a a General Election, but faded when it was clear it would not be on the first Thursday in May, which has now become the traditional date for elections in Britain. (A practice established by John Major in 1992, and only broken in 2001 because of an outbreak of foot and mouth disease. But before that Margaret Thatcher preferred June elections, a parallel that will no doubt please Mrs May). This surprise shows how tight a ship she runs compared to her ill-fated Labour predecessor Gordon Brown, whose career had otherwise had some striking parallels. Mr Brown’s reputation was destroyed because he let speculation about an early election get out of hand, and then lost his nerve.

The second striking thing is how unusual it is for us to have a snap election in the UK. Until now Prime Ministers have waited until the fourth or fifth year of parliament’s term. The date has been widely known well in advance (though in the case of the four year terms favoured by Tony Blair and Mrs Thatcher, not for certain), allowing for a lot of pre planning. We have to go back to 1974 for one like this one, unless you count 1979, when the Callaghan government was brought down by a vote of no confidence less than six months before its term had run. And even the 1974 parallels aren’t that strong. This is uncharted territory. The parties will be fighting with much less pre-planning. The campaign could be much more chaotic than the carefully choreographed ones we have been used to.

Politically the election is dominated by the weakness of the Labour Party. Already demolished by the SNP in Scotland, it shows no signs of recovery there, and looks very vulnerable everywhere else. Its opinion poll ratings are very low – about half the Conservative vote. I have not seen any analysis of what this means in terms of the party’s vulnerability in particular seats. It has a large number of very safe seats, so it might well hang on in lots of places, while doing catastrophically in Middle England.  The party has two huge problems. The first is that the political agenda is clearly on Brexit, where its message is weak – it will not be rewarded for reflecting the confusion that much of the voting public has on the topic. Much as it would like to move the debate on to austerity, where cuts are now looking quite alarming in places, this looks like a doomed enterprise. And that is because of their second major problem: a spectacularly inept leader in Jeremy Corbyn. By itself this ineptitude is not fatal – after all he has done well in Labour’s internal elections – but the public don’t see him as a prime minister in waiting. Time an again that has proved a fatal handicap at election time. Without that credibility Labour can’t change the agenda.

So the Conservatives are looking confident. It seems that their key electoral message is that Britain needs a strong government right now, regardless off what that government actually plans to do. But the messaging will not have been exhaustively tested, so we don’t know how this will actually play. It seems clear that they will be able to beat off any threat from Ukip, but they may find it harder to manage the Lib Dems.

The Lib Dems are in a very interesting position. Most people considered them wiped out after the last general election in 2015, when they were punished for having been in coalition with the Conservatives. But the Brexit referendum result has energised the party. It has now reliably retrieved third place in the opinion polls (though still only half of even Labour’s disastrous score), and its membership is booming. It has a clear position on Brexit. The Tory strategy in 2015 was mainly to destroy their coalition allies – on the principle that you should always go for the weakest opponent first. That meant they won many more seats from them than they did from Labour. But holding those seats could be tricky, since the messages that worked so well in 2015, which relied on a strong Labour threat, lack punch now -and the Tories are unlikely to have the same organisational strength, since this is a snap election.

So the Lib Dems could make a big comeback. Big enough to stop the Conservatives from getting a majority? Almost nobody would suggest that. The closer the party gets to achieving that aim, the more powerful the Conservative message about strong government will become. But after the last year we have started to expect the unexpected. The Tories will make little headway in Scotland (even though they now outpoll Labour there). They may find that taking many seats from Labour means going deep into their strongholds. Their high poll rating could simply mean piling up votes in seats they have already won.

So, much as I find this election personally unwelcome, it will be an interesting one to watch. My hunch is that the Conservatives will end the election in much the same place that they started it – but with fewer Labour seats and more Lib Dem ones on the opposition benches. But am I making the fatal sin of underestimating Theresa May?

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Mental health is about everybody

I want to agree with the Guardian’s Suzanne Moore in her recent article The lesson of Prince Harry’s grief? We need mental health services for all. And mostly I do. But I think she’s missed the most important thing about mental health.

The context of this article is in the headline. It Prince Harry’s recent interview in which he talked frankly about how he failed to deal with the grief caused by his mother’s death for a decade or more. He was bottling it all up with a stiff upper lip, with dire consequences for his life. He then sought help, and now feels able to talk about it. I applaud Prince Harry’s intervention. It is part of a general process of talking about mental health to make it less of a taboo topic. He is doing this in the best possible way: by sharing his experiences and not ramming any particular view down our throats. Mental health is one of the critical issues of our time and we need to talk about it more, and we need to be able to share more. But, alas, keeping the topic repressed for so long has left its legacy of muddled attitudes – even among the most liberal minded.

Ms Moore starts with a condemnation of the Royal Family’s lack of emotional intelligence at the time of Princess Diana’s death. In particular she feels that her two sons should not have been made to walk behind the coffin. She noticed that almost nobody showed personal warmth towards the pair during the service – so keen were they to show proper dignity and decorum. I think she’s only half right there. Some open warmth towards the boys during the service by their near relatives would certainly have been in order. But dignity and decorum have a useful purpose too. That long walk behind the coffin was not wrong in itself – it just needed to be balanced by something more intimate and informal.

Still, that isn’t the main problem I have with the article. This came as I read this:

Harry has rightly been praised for talking personally and thus destigmatising mental health issues. This is no doubt excellent. The normalising of mental health problems, which it is estimated will affect a quarter of us at one time or another, is necessary, but so too is funding. Mental health services are in a very poor state and it is almost impossible to get help. Many people in Harry’s situation would not get access to counselling and would be offered antidepressants and possibly a short course of cognitive behavioural therapy, as this is considered most cost-effective. In acute cases, people in a state of severe breakdown are now forced to go to hospitals far from their homes because there are no beds to be found nearby. This is a real crisis, and it is more visible by the day on our streets.

Yes, mental health services are neglected and need to be given a higher priority. But this will not work unless we start to think about mental health differently. Ms Moore’s article perpetuates the idea that dealing with mental health is about dealing with mental illness – depression, anxiety and so forth, and that this illnesses only affect a minority of us (even if it is as high as one in four). But mental health “problems” affect everybody. If you don’t suffer from depression and anxiety in some form regularly you are not healthy at all. It is how you manage it that is the thing – and it is something we all need to learn. And as we learn how to manage our emotions and anxieties better – and learn how to help our friends, relatives and neighbours, then fewer people will be left with the unmanageable symptoms that we call “mental illness”. And when we do suffer from those symptoms, society as a whole will be better able to deal with it.

And here’s the thing: the real problem is pretending that everything is OK when it is not – and this comes through from Prince Harry’s interview. We all know that a bit of anguish is normal. We also know, intuitively, that continually talking about our own emotions is self-indulgent and can undermine relationships with others. We also know that seeking professional help is a drastic step that you only take after other avenues have been exhausted – and is as likely to be a method for avoiding deeper issues as it is for confronting them. So it is the most natural thing in the world to weather our own problems, and then to assume that we are coping with them rather than bottling them up. But equally thinking that all you need to do when you feel down is to pop a pill to make you happy, then you are in even more trouble.

It is actually very hard. So the temptation is to try make the whole thing the exclusive domain of experts, whom we consult as required. And by trying to divert Prince Harry’s intervention into a call for more funding for experts, Ms Moore falls straight into this trap. But mental health isn’t just for experts, it is for everybody. We all need to be able to sense issues in those around us, and have an idea of what is going to help – and, of course, learn how to be more honest with ourselves, and have ideas about how we handle our own problems, beyond externalising it to a professional.

Which is why the first response to the issues raised by Prince Harry is not to rush out and boost mental health services – it is to tackle school curriculums. Above all it is at school that we learn excessive stiff upper lip (incidentally I feel strongly that stiff upper lips have their place – but that is another story). Great advances have been made here, but often in spite of government initiatives instead of because of them. The government’s recent recognition of personal, social and health education (PSHE ) is a welcome change from the bizarre antics of the previous Education Secretary Michael Gove – who dismissed such stuff as a distraction form proper academic education. This incidentally recognises something very important – that there is a strong social dimension to managing mental health.

Mental health is a positive and it is for everybody. By talking about it only when it goes wrong, and talking about the negative, we can make things worse, not better. That is what I take away from Prince Harry’s welcome intervention.

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Where is the light for towns like Wakefield?

Last week I spent a few days in Wakefield, a small city to the east of Leeds in West Yorkshire. The economic fortunes of such small towns in Britain is one of the big issues in British public policy. I am still searching for the answers.

Wakefield goes back at least to that era which Britons refer to as the Dark Ages – after the Romans left and England was subject to invasion successively by Anglo-Saxons and Danes. The Normans proceeded to raze it to the ground in the Harrying of the North, after William the Conqueror took over in 1066. But its geographical location, at an important crossing of the River Calder, a navigable waterway, ensured its future. The Normans built two castles there. It prospered as a port serving the wool and tanning trades. This economic success continued into the industrial revolution, when its river connections were boosted by canals. It flourished as an agricultural trading centre. It diversified into textiles, coal (mined nearby) and glass, and became an important administrative centre. Its grand church (the tallest spire in Yorkshire) became a cathedral with its own bishop in 1888, and City status soon followed.

Alas this has fallen apart. The coal, glass and textiles industries were wiped out in the 1980s, usually blamed on the policies of Margaret Thatcher, but in fact the result of changes to technology, assisted by globalisation. It lost its bishop in 2014. The town looks rather sad today. There are plentiful vacant spaces used as car parks. Empty shops scar its streets. Benefits are claimed by about 18% of the population, compared to the English average of 13.5%. Unemployment is higher than average, though, according to the claimant count (4.3%), far from catastrophic. There are few immigrants living there – a sure sign of a weak economy (though our hotel cleaners were east European). We could buy about ten houses of the same size from the current value of our London home. Let’s not overdo this. It it did not appear to be a disaster area. It was easy to find nice places to eat in the town centre. But our hotel (part of a characterless budget chain) was the only central one we could find. There were other hotels on the outskirts: a bleak land of dual carriageways, roundabouts, retail parks and industrial estates, dominated by national chains, doing things as cheaply as possible, and sending the surplus elsewhere.

Quite a bit has been spent on redevelopment. The town centre has a smart shopping mall (albeit with quite a few empty shops), and the central square looks newly revamped. The cathedral has been very tastefully restored and modernised, with some lovely new furnishings, and is an uplifting space. Above all there is the Hepworth, which was why we visited. This is a modern gallery that celebrates Barbara Hepworth, the sculptor and artist, who was born and brought up in Wakefield. This is a lovely building on the town’s otherwise derelict riverside – and a world-class gallery, taking advantage of many years of collecting by its unprepossessing but imaginative predecessor, the Wakefield Art Gallery (converted from terraced houses) – and the generosity of local artists like Hepworth and Henry Moore, who was born and brought up in nearby Castleford. The dedication to art does not end there. A few miles from the town there is the Yorkshire Sculpture Park (YSP) – an outstanding collection of sculpture and other art, in the setting of an old country park – and another reason for our visit.

But how far can you regenerate a town on art? There did not appear to be many jobs in it. No flourishing urban environment has developed around the Hepworth in the manner of London’s South Bank, in spite of its riverside location. The same can be said for the YSP, which barely keeps a couple of snack bars going, in spite of its many visitors – though a posh hotel and conference centre is under development. The nearby motorway service area on the M1 motorway may do more business than both of these facilities put together.

So Wakefield has achieved a sort of economic mediocrity. There are jobs, and not just in the usual services, but it is not prospering. One clear weakness is the lack of a university (unlike nearby Leeds, and even Huddersfield, another smaller town nearby). Education should be at the heart of a modern economy. There is a decent further education college – but this is a neglected sector in Britain’s education system, starved by government austerity even as schools and universities have prospered.

The town must aspire to better. The weakness of such towns drives much of the foul political mood in not just Britain. People there feel left behind and neglected by metropolitan types who promise much and deliver little (or so it appears to their residents). New jobs tend to be poor quality; capital sends its rewards to the big metropolises or to offshore tax havens. Surely there is untapped human capital here? How can local networks be revived to counter the giant national and global networks that will otherwise suck these places dry? Too many economists are sinking into pessimism. A recent article in the Economist compared the fate of less-skilled humans to that of horses, which became obsolete a century ago. Is the weakness of such centres an inevitable consequence of the march of automation and an obsession with productivity?

I’m not convinced. I see too many jobs that need doing that are being neglected – in education, health, social care and local services generally – and in the world’s large but hollow corporations and state agencies, who pass the buck rather than solve problems. The liberal market economy, so favoured by the conventional wisdom of the 1990s and 2000s is failing – just as the publicly directed command economy has failed before it. But what to do? Local currencies perhaps? This approach is favoured by new economy thinkers like David Boyle – and regular commenter to this blog Peter Martin. Perhaps it is worth a try, but I suspect that political power structures must be altered first. It is no accident that countries with a highly devolved political culture, like Switzerland and Germany, are faring better than centralised polities like Britain and France. Though that is not enough – as the fortunes of the highly devolved United States shows. You need a strong social safety net too.

If I was trying to make something of Wakefield, I would start with its further education college. It has failed in a bid to acquire university status – but Britain needs world-class technical training for less academic young people and adults. Surely building on neglected human capital must be a large part of any solution? But that needs a strong state to provide up front payment and carry risk – and the state is weakening.

So a larger state, but not one dominated by giant agencies with Key Performance Indicators and lacklustre management; local democracy that does not turn into cronyism and mediocrity; thriving businesses that recycle their surpluses locally rather than send them elsewhere. A big challenge, but the future of  liberalism depends on it.

 

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Productivity statistics expose deep weaknesses in theoretical economics

I hadn’t intended to post for another couple of weeks, but this article in the Financial Times is too good to miss. It tackles one of the central issues in modern economic debate: why productivity growth is so slow. Productivity lies at the heart of the conventional view of public policy – and yet it is very poorly understood. This article sheds light on what is happening in the UK – and it should give politicians and economists pause.

Productivity is in principle a very simple idea. It is the amount produced by a unit of labour in a unit of time – the number of widgets per person per hour, for example. This immediately conjures up a clear mental picture of a factory producing cars, say. Count the number of cars produced, and the number of hours of labour required and it is easy-peasy, surely? Alas in a modern economy  it is a much more difficult idea. What if your car factory is producing both Ford Fiestas and Mondeos, and switches to the smaller car? Has productivity gone up if more are produced? And how do you distinguish product enhancement from inflation?  And then there are problems treating capital outputs and inputs, research and development, and so on. In the end the productivity measured across an economy is a bit of a balancing figure, as we accountants would call it – or a bit of a dustbin – what’s left when you’ve taken everything else out. It is just a number relationship without a coherent meaning in its own right. It is not like the concepts that physical scientists are used to dealing with – such as the temperature and pressure of a gas. Macroeconomics is heterogeneous, to say nothing of being subject to capricious social forces that tend to corrupt all attempts at measurement.

Now, what is the productivity puzzle? It is that productivity growth, as measured by macroeconomic statisticians, has slowed markedly since 2008, when the financial crash caused a dislocation in measured income. This applies to all developed economies, but to the British economy most of all – UK productivity growth, according to the article, fell from 1.6% per annum before 2008 to just 0.3% after. This has profound implications, since in the long term productivity growth is what drives income per head, alongside the average hours people work (influenced strongly by workforce participation – such as how many women are in paid employment). And this drives tax revenues, from which public services are funded. Since we assume that quality of life is mainly driven by income, and that public services can constantly be enhanced by extra spending (apart from occasional periods of “austerity”), this has profound implications. Prior to 2008 most economists assumed that productivity growth of 1-2% pa was a law of nature and  main driver of “trend growth”, which could be baked into economic models. The corollary was that weak growth since 2008, and the failure of GDP to catch up with the pre 2008 trend-line, was a failure in macroeconomic policy.

But given the dustbin nature of the productivity statistics, it is very hard to drill down into them to find out just where the problem is – though that there is a problem of some sort is clear. This is licence for all manner of people to project their speculations into a fact-free zone. Mostly these are based on the intuitively obvious idea that the changes to the productivity figures represent trends in the efficiency of workers. Recently Bank of England bigwig Andrew Haldane moaned that the problem was that efficiency was stuck in a rut, especially in a swathe of mediocre firms. He based this on sectoral analysis which showed that the productivity had stagnated across all sectors – with economic growth mainly attributed to rises in employment, not efficiency.

The FT article, authored by Chris Giles and Gemma Tetlow, challenge that. A close examination of the numbers shows that the crash in productivity growth arises from changes in a small number of economic sectors, accounting for just 11% of income. These are banking, telecoms, electricity and gas, management consultancy, and legal and accounting services. Actually Mr Haldane’s and Mr Giles/Ms Tetlow’s analysis can be reconciled. Mr Haldane was taking a general view across the economy since 2008, where productivity growth is now very limited. The FT writers are looking at the transition from before and after 2008. The curious point is why productivity growth was so high in that small number of industries before 2008 – and the realisation that this is what was driving so much of the figures for productivity growth before that date.

And that leaves this blogger asking whether that pre-crash productivity growth – and by implication the pre-crash trend rate of overall economic growth – was in any sense real, other than statistically. In banking we know that in 2008 massive state resources were required to keep the industry alive, and that since then the industry has been much better controlled. This suggests that “productivity” would more correctly be described as “recklessness”. And in each of the other industries you can point to factors that demonstrate that growth was not simply incremental improvements in efficiency. For example in electricity and gas productivity was based on high inputs of fossil fuels and nuclear energy – and the switch away from these destructive sources of power has caused a decline in measured productivity. And how on earth do you assess the output of management consultancy, and accountancy and legal services? The transition may simply be from high margins in boom economy conditions to higher scrutiny when times were harder – or to put it another way, what was supposedly economic growth prior to 2008 was in fact concealed inflation.

All this supports the narrative that I have been promoting for quite a few years about the transition from growth to austerity. This is that the supposed growth of the economy of the early to mid noughties in the UK was down to excess demand, of which reckless fiscal policy was a part  – though you might alternatively argue that it was reckless borrowing by the private sector that the government turned a blind eye to. It also suggests that the lacklustre economic performance of the UK economy since 2008 reflects a lot more than just weak demand management: it is chickens coming home to roost.

This takes me to two very important conclusions. The first is that we have to be very careful about the recommendations of macroeconomists – and the eco-system of commentators and policy types that use macroeconomics as their starting point. The bandying about of aggregate statistics is all very well – but the aggregates hide as well as reveal – and we need to base economic prescriptions on the complexities of the real economy. That is hard, but necessary.

The second point is that overall productivity is indeed stuck in a rut, and has been since well before 2008. It must reflect structural issues in real economy – and not simply laziness amongst mediocre firms or poor macroeconomic management. There is no shortage of potential culprits: demographics; the nature of modern technology; the temporary nature of gains from trade with Asian economies. The world may still be becoming a better place – but because of things that are not captured in GDP, and hence productivity statistics. The problem for public policy is that tax revenues are largely driven by GDP (which is why it is an important statistic) – so we can’t expect an ever increasing flow of tax revenue to fund public services. In the long run we must either reduce the demand for public services (healthier people, fewer crimes, less skewed income distribution, etc.), raise taxes, or compromise what level of services and benefits we think that a civilised state should provide.

And that is a completely new way of thinking about public policy. The political right have grasped this (for the wrong reasons, perhaps) – but the left has not.

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