The new economics: 5 new issues should we be worrying about

Last week I identified five issues we don’t need to worry so much about in modern economics. Symmetry demands that I balance this with five issues that we should be worrying about more.

That’s much harder because there are a lot more than five things that are very important. So I need to thin down the list. First I have excluded things that people are already very preoccupied with, such as inequality and poverty. They may be important, but I want to show how thinking needs to change. Besides I suspect that the solutions to many such issues will be indirect rather than arising from pulling them apart directly. I thought hard about whether to include environmental sustainability, or greenhouse gas emissions in particular, as this would be a really good place to start modern economic policy. But that isn’t new, and many economists are already wrestling with it. What I can say is that moving away from a focus on increasing production and consumption is part of making this problem easier to solve.

And I have also exclude issues too nebulous to approach systematically. This includes the topic of human wellbeing. We absolutely need to be thinking about wellbeing, and break out of the thinking that we can use measures of income or expenditure as a proxy. But trying to construct alternative measures and focusing on them instead is the wrong way to deal with this.

Anyway here’s my five:

1. Private debt

This isn’t exactly a new issue, though economists have often struggled to know what to do with debt. I remember in pre-crash days (and even afterwards) people suggesting that macro-economists could ignore debt levels since all debt cancelled out – one person’s debt is another’s asset.  In fact debt was always at the heart of monetary policy, which has been at the heart of macroeconomic management since the 1980s.

This was when the idea of regulating aggregate demand (and the business cycle) through public fiscal policy and public debt, often referred to as “Keynesianism”, went out of fashion. Instead, the theory went, you could do something similar by manipulating interest rates. A lower interest rate would encourage people to bring forward investment plans and raise demand when the economy was running slack. Likewise, if inflation looked like an issue raising the rate could rein in demand. Although this clearly meant using private debt to regulate aggregate demand, economists were very shy about saying so. They kept on talking about the money supply instead, clinging to a picture of people using banknotes to settle all their transactions, whose supply was regulated by printing presses.

It was not until the crash of 2008-2009 that serious doubts were raised about this in the economic mainstream. In fact interest rates are a very imperfect way of managing aggregate demand, and high levels of private debt create financial instability. The crash itself was more complex than that – a lot of the problem was financial institutions lending to each other to generate fees and bonuses. Low interest rates were only part of toxic mix. But most mainstream economists still seem to think that private debt is a good way to regulate demand, provided banks are sufficiently regulated.

An alternative view of debt, put forward by heterodox economists such as David Graeber (if I can call an anthropologist that), is that it is the root of all evil – an instrument whose sole purpose is to dehumanise and enslave. This idea is not without merit, but a modern economy has come to rely on debt to carry out three things in particular which are more constructive. The first is to allow businesses to invest in capital projects which in turn make the economy more productive. A second, sometimes overlooked, is to provide working capital as a lubricant that keeps the wheels of a complex economy in motion; most business to business transactions are on credit. And thirdly it allows private individuals to buy assets by spreading payment over their useful life. Debt also helps private individuals deal with temporary cash flow problems, though this can lead to serious social problems with loan sharks, and I don’t think this role is an important part of a functioning economy.

But, in the developed world at least, debt is mostly used for other things than these three, and in particular it is used to support speculation, and to generate income for middle men (aka “financial engineering”). Lending to private individuals to support property purchases spills into this economically useless territory. Some suggest that easy money is creating more demand for residential property more than society really needs.

In short, private debt has a useful role to play in the economy, but at current levels it is a source of financial instability and tends to exacerbate inequality. Policymakers need to start distinguishing between useful and dangerous debt, and clamp down on the latter. Alas they show little interest in doing so.

2. Low pay

One of the features of  modern economies is the spread of low paid or insecure jobs. Economists have traditionally been pretty relaxed about this. They assume that it is a temporary problem that will rectify itself quickly, and it must be the fault of a poorly functioning labour market. But it seems to be a big problem is in the less regulated labour markets (such as the USA and Britain); the more regulated markets tend to have high unemployment instead. It is one of the driving forces behind the suspicion of immigration, and the feeling by working class people of being let down by the elite. Technological change seems to be making this worse.

But the traditional economists are right up to a point. Solving the problem is not about throwing away market economics, such as creating lots of high paid but useless jobs in the public sector, or arbitrarily high minimum wages. These would create more problems that they solve. Neither am I convinced by the fashionable idea of topping up low-paid workers income with a universal basic income. The point is to find ways of giving ordinary workers more power. Such power comes from one thing: a shortage of workers compared to the opportunities available.

The public sector surely has a role in this. An expanded public sector with meaningful and skilled jobs (teachers, nurses,social workers) may well be part of it, but the public sector does need a bit of rethinking before we can turn it into an instrument of economic engineering. I am intrigued by ideas of job guarantees to take surplus workers out of the market – though I can see many ways this could go wrong. Should lifelong liberals accept that managing immigration flows is a part of it? Maybe, but allowing workers opportunities to work in other countries may be part of the solution too. The truth is I’m pretty short of answers, but the point is that we need to be looking at ways of tilting the job market in favour of the disadvantaged, without creating either mass unemployment or pointless jobs.

3. Economic clustering

Economists have long noticed that successful businesses tend to cluster together geographically, creating a pattern of a small number of prosperous islands amid a general sea of poverty and disappointment. In Britain this is a very serious problem, and we are not alone. Various attempts have been made to address this, including regional subsidies, pushing public service institutions out to struggling regions, creating deregulated freeports, and so on. They almost always disappoint. The extra money pumped into the poor regions flows straight back to the rich ones. Meanwhile the poorer areas become hotbeds of disillusion and discontent.

Economists don’t seem to be very interested in solving this problem, to judge by the articles I read in The Economist. These largely take the line that clustering improves productivity and should be encouraged. We should concrete over the green spaces in prosperous areas areas, and build more homes there – while bulldozing the empty homes elsewhere.

But what I can’t help noticing is that the problem is worse in some places than in others. France and Britain, for example, but not nearly so much in Germany, extending into Austria and Switzerland, or in Scandinavia. The big difference between these healthier regions and neighbouring Britain and France is political structures, both now and historically. Greater Germany, if I may call it that, and Scandinavia, have much more decentralised political structures, going back through history. Centres of political power attract economic clusters. We need to understand that better. By reorganising our politics we may alleviate the problem. And maybe technology will one day start to undermine the current successful clusters.

4. Intellectual property

In the new economy intellectual property, such as copyrights, patents and so forth are becoming much more important. Unfortunately, the idea that such property rights over ideas is a something innate and sacred is being accepted lazily by politicians, quietly egged on by business vested interests who like to pretend they are fighting for impoverished artists and inventors. This needs some serious pushback, because intellectual property rights are being used by the rich and powerful to oppress the rest of us. It is also used by multinational businesses to manipulate profits into low tax jurisdictions.

Intellectual property rights do have a socially useful purpose – to help reward and stimulate creativity.  But they should only be as strong as necessary. I’m intrigued by the idea that intellectual property costs should not be tax-deductible (I think similarly for loan interest…). Doubtless this is too extreme to work, but there may be intermediate ideas better prospects. And what about making intellectual property non-transferable? That would stop patent trolls, an activity that no social merit at all.

4. Effective public services

This sounds obvious, but I am really struck by how few economists understand how different public services are from private ones, and how they must often be managed in a completely different way. It is no wonder that they are so badly managed. On the one hand public services have been managed without any incentives to be efficient, and becoming useless, conservative bureaucracies who have lost touch with their purpose. This is why so many of us with memories of the 1970s and 1980s are so suspicious of calls on the left to re-nationalise railways and energy services. On the other hand, if you run public services like private businesses they lose touch with their purpose in a different way. They try to avoid or pass on the difficult cases, or try to turn them into lucrative repeat business instead of solving problems; they hollow out key performance indicators so they become a meaningless game; they soon learn to manage their political masters rather than their customers.

But highly effective public service can be done (London’s primary schools for example, though the current government is trying its best to undermine and destroy their achievements). Ultimately we need to understand that public services are about solving complex problems using skilled professionals that engage with their users as human beings. Creating institutions that can do that, and identifying the more from the less effective ones, is something that should be engaging economists and policymakers much more.

Conclusion

I have gone on enough. But I hope I have shown why I think that fresh thinking is needed as our society moves through its next phase of economic development.

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Lib Dem English Council: why didn’t the turkeys vote for Christmas?

Warning: this post is about the internal workings of the British Liberal Democrats. To anybody not a party member this will be of no interest, unless you want to draw some general ideas on how, or how not, to manage a political party.

Yesterday the Liberal Democrat English Council (EC) rejected a motion to implement a new constitution for the Liberal Democrats English Party, which, among other things, would have abolished the EC. I am a member of the EC and voted against the proposed new constitution. This deserves some explanation..

What is the EC? It is a group of representatives from across the party in England. Each regional party is entitled to a number of representatives based on the size of its membership. These are supposedly elected by the members of the regions, but in fact there a generally fewer volunteers than places, so it is mostly self-selected. The gathering amounts to fewer than 100 people (about 70 on this occasion), meeting twice a year in London (by the choice of its members a few years ago) for a 5 hour session. Its job is to take reports from, and put questions to, the officers of the English party, and to approve the administrative rules by which the party runs itself. It does not deal with matters of public policy because there is no English Parliament. Another party body, the overarching Federal Party, through various directly elected committees, a twice annual conference and an executive arm of paid employees, handles English policy issues.

Why have an English Party at all? The party has Scottish and Welsh “State” parties, following a long tradition in the party and its Liberal forerunner of supporting devolution to these nations (and before that to Ireland, a much more divisive issue in its time). When that devolution happened, with Scottish and Welsh parliaments, autonomous organisations in the two nations made even more sense – these entities could take on serious policy issues too.  But that left an England-shaped hole in the party’s set-up, just as it does in the British constitution. The party, when it put together its constitution in the late 1980s, filled it with two levels of organisation: regional parties and the English party. The regional boundaries largely followed the arbitrary administrative concoctions the UK government used, which also became constituencies in the European Parliament. These convene twice-yearly conferences and elect executive committees. There is little policy work to do; only in London is there any kind of regional devolution to bodies that follow these regional boundaries. New “city regions” are emerging, but not in the sort of tidy way that can be used to carve up the country as a whole. The regions are of equivalent population size to Wales and Scotland (with London region being bigger, though more compact, than Scotland).

So why not give these English regions to the status of State Parties? Firstly because the Scottish and Welsh parties take great offence to the idea that English regions might have a similar status to their nations. Also because the administrative infrastructure required to keep regions on top of their responsibilities would be quite high. The Lib Dems cannot afford much in the way of professional administration staff, while the regulatory burden, from the Electoral Commission and data protection in particular, gets ever greater. And so we have the English State Party, which does things like set rules for candidate selection and disciplinary processes, and represents the English organisation in Federal Committees alongside the Scottish and Welsh parties.

And so how to ensure appropriate scrutiny of English Party officers, and represent English regions and local parties in big decisions? The regions and the Federal Party were already holding conferences twice a year, and besides such conferences often do a poor job in that sort of technical function. What is needed is something more like a local government scrutiny committee. The EC was the solution hit upon.

This leaves the party with an administrative structure that few members understand. The English party structure (and the English regions) are useless as a vehicle for promoting a serious political career, and so are left to backroom types with skills in administration but not salesmanship and explaining themselves. Every so often these structures come under criticism for being opaque and unaccountable. Following the calamity of the 2015 General Election, it was decided to review the whole thing, following an extensive consultation exercise with members. This job fell on the usual worthy suspects who did their best.

What was the aim of the review? Beyond being an expression of angst, this was never very clear. We had the usual sweet nothings about having something simpler and clearer which would allow activists to spend more time on campaigning. The proposal was to abolish the EC and its executive and replace them with committees composed mainly of regional officers, and an annual or twice-annual annual conference open to all members lasting about an hour, held in close proximity to the Federal Conference. This amounted to a gutting of the English Party and its powers being taken over by the Federal Party and the regions.

How did this look to EC members like me? It looked as if its sole purpose was to abolish the EC as an end in itself rather than to achieve any wider goal. It was very hard to see how the regions would be empowered as a result, and easy to see how the officers of the Federal Party would be. The ability of the committees and the new conference to act as scrutineers looked laughable compared to the admittedly flawed EC. So lots of people spoke against the proposal; people from further-flung regional parties (in the north and west) sounded particularly aggrieved – even those who had been part of the consultation process. The new constitution’s supporters offered no serious arguments in support of it, beyond it being a bit embarrassing if the thing was voted down. The motion needed a two-thirds majority, and it failed even to get a majority. No effort had been made in advance to sell the new constitution, or wheel in respected names to support it, or indeed to provide any supporting speakers beyond the proposer and seconder. It was a study in political ineptitude.

In that it was pretty typical of the Lib Dem English party. Nobody important in the party takes it seriously, and so it is left to hard-working but worthy types, with limited political skill. This is surely an inevitability. I personally think that the current constitution is the least bad of the options in the circumstances, and that a proper case had not been made for the new one. With constitutions it is best to be conservative, and weight towards the status quo. If that leaves the structure messy and opaque, we might reflect that in politics only dictatorships are clear and tidy.

Which does not mean that things can’t be improved. The disciplinary processes in particular need some careful thought. The working of the party as a whole could do with rethinking. But I don’t think the intermediate structures are a major part of the problem. It is dealing with the weaknesses of many struggling local parties in an unforgiving regulatory environment; and it is trying to improve the accountability of the Federal Party, while still giving it some room for manoeuvre. The former problem is the more urgent. The Federal structures have been overhauled recently, and it is too early to write them off.

Meanwhile learn this. If you want the turkeys to vote for Christmas, you had best give them a good reason.

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The new economics: five things to worry less about

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Reading Adair Turner’s lecture on the implications of robotics on the economy has been an inspiration. Following my blog last week, I want to develop the thinking to try and get a better focus for liberal policymakers.

The first point to make is that although the current kerfuffle is around the advance of machine learning and artificial intelligence, this only builds on trends that became important in the 1970s. This was when the previous spurt of growth, based on a huge expansion of consumer goods and services, was coming to an end, in the developed world at least. This I have called the the Age of Light Industry. It featured a virtuous circle of increasing consumption and the creation of middle-ranking blue and white collar jobs. Economists lazily assumed that this was the natural flow of technological progress. It broke down partly because consumption started to reach saturation (few people need two fridges), and partly because technological development became more about making businesses efficient than developing new products for consumers.

And we should not assume that advancing technology automatically makes things better for the majority. Lord Turner drew on the example of the first industrial revolution (the Age of Textiles in my schema), when technological improvements drove up productivity in agriculture and the textiles industry, destroying a lot of artisanal jobs. These jobs were replaced by lower paid and less skilled jobs, such as low-skill factory hands, or domestic servants for the newly enriched farmers and factory owners. The result was widespread destitution. Lord Turner shows sympathy for the Luddites, who are these days usually vilified, who tried to fight this trend. This was in the later 18th to earlier 19th century, and it wasn’t until the later part of the 19th century that things started to get better for the working classes. This was in part because demand for factory jobs rose with the development of heavy industries (railways, mines, steel, ships, armaments, and so on). But it also arose because of political reforms, and an adjustment by political leaders about how economics had changed: for example the realisation that social security for the masses was affordable.

We need these things now: political reform, and a waking up to the new realities of economics. One way to make this point is to consider the things, central to mainstream economic policy making, that we don’t need to worry so much about. Here are 5.

1. Average productivity

I don’t need to say much more on this after my post on Lord Turner’s lecture. Improving productivity matters for individual businesses and public agencies. But we can’t expect statistics on the economy as a whole to tell us anything very useful, because new jobs are beiong created in low productivity services (think personal care) or in arms races that don’t add anything overall (cyber crime; designer goods; ever bigger yachts; hi-tech weaponry).  Unfortunately this means that growth rates in the money economy are liable to be slow, which poses questions for how to fund public services and social safety nets.

2. The national debt

Two features of the new economy should change the way we think about public debt. First is that businesses generally need less capital, as more value comes from intellectual property than capital equipment. You can see this by looking at the modern giant firms: Google, Apple, Facebook and so on – and compare them with the old ones – GE, IBM, General Motors, etc. That reduces the need for business capital. Also the new economy is concentrating surplus wealth amongst a minority, who will inevitably want to save and invest much of their earnings. So the savings go up and investment opportunities go down. As Maynard Keynes would have told you, this is a recipe for recession. But government debt can fill the gap. Instead of putting their money into businesses, or fuelling property bubbles, the rich can buy government bonds instead. And while the need for business investment falls, the same can’t be said for public investment – there is still plenty of call for that (schools, railways, and so on). Developed world governments are finding it comparatively easy to sustain a much higher level of debt than they previously did. Japan has led the way, as with so many aspects of the new economy. National debt there is now over 200% of GDP, when the conventional wisdom quite recently was that 90% was a practical limit. And the budget deficit is 4.7%, compared to a growth rate of 1.1%, so it’s still going the wrong way, with barely a murmur from anybody.

Of course this leads to an important question, to which there remains no clear answer. When is there too much national debt? And how big a budget deficit is sustainable? Roughly speaking, when a country has to borrow in a currency other than its own, it is likely to hit trouble. Japan still doesn’t; it helps that it does not need much foreign currency because it runs a current account surplus. Britain does not have that luxury, but the government still has no need to borrow in foreign currency.

This is important because governments can expand their own currency supply (unless they are in the Eurozone, another story), which gives them a useful lever in managing their debt. Clearly there are limits to how much it is wise to use this power – but those limits are not as severe as people thought..

And it makes little sense to drive down levels of government debt, which some conservative politicians like to do, or did before the era of Trump. There is much kerfuffle about it being irresponsible to let future generations pay for our current profligacy – but future generations will have access to highly productive technologies.

3. The dependency ratio (aka the demographic time bomb)

There is much worry that a higher proportion of older workers and retirees will drag down a future economy. Some suggest steps to increase the birth rate to counter this; it is also offered as a reason to allow high levels of immigration. But, as Lord Turner points out, if the new technology is destroying good jobs and creating poor ones, there is something to be said for fewer workers and a higher dependency ratio. Besides, it is not hard for people to retire later if that’s what the economy needs.

4. Global trade

Even before Donald Trump decided to inflict his ideas about international trade on the world, the volume of world trade was in decline. People fret about this because expanding global trade was an important source of economic growth in the 1990s and early 2000s. But things have changed. As China’s economy matures, it has less need to produce cheap exports. This is not particularly good news for developed economies, who are having to replace those cheap imports with something a bit more costly, but that is a temporary problem.

Longer term, increased automation will reduce the relative value and volume of traded goods. Traded goods are among the first things to be subject to automation. And as production gets more efficient, their value as a proportion of the total economy declines (this is the Baumol effect, a favourite of mine). So trade will be less important.

Technology develop will also reduce the need to trade in the first place. It will become easier to produce things closer to home, since cheap labour will be much less of a factor, and intellectual property is more mobile than a skilled workforce. I also have a hunch that much new technology will reduce economies of scale, making one-offs cheaper (think about 3-D printing), which undermines a nother reason for trade.

Mr Trump’s trade wars are still an act of self-harm. But, a bit like his reckless approach to the US national debt, he has the forces of history on his side – a big difference between now and the 1920s.

5.Inflation

Since the 1970s economists have been obsessed with inflation. The idea was that if demand across an economy outstripped sustainable supply, inflation would result – so it was a critical indicator that things were in balance. This developed into the idea of an ideal Goldilocks rate, not too high and no too low, as a central ingredient of sound economic management. It became the key, sometimes only, target for central banks’ monetary policy.

In fact the forces that determine prices and inflation are more complex than this, and new developments are taking it further from this idea. There are other ways for excess demand to play out, such as property bubbles and other forms of financial instability. One explanation for the financial crash of 2007/2008 was that excess demand, especially in both the US and the UK, had been allowed to develop, taking the world financial system to breaking point. With theirs eyes fixed on a stable inflation rate, most economists failed to see the crisis developing.

This is important, because if I am right about point 1 on national debt, there will be a temptation for governments to stoke up aggregate demand. They might think that this is perfectly sustainable if inflation remains low – but something else is likely to go wrong instead. Meanwhile an obsession with central bank inflation targets is wasted energy. Interestingly enough, the best example of this is again Japan. There the issue is that inflation is below target. But no matter what policymakers do, the effect on the rate of inflation is minimal.

Conclusion

So productivity, national debt (and budget deficits), the dependency ratio, global trade volumes and inflation don’t matter as they used to. That’s quite a change. What what should we be worrying about instead? I will return to that.

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Brexit: is Mrs May winning the end game?

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There are less than nine months to go before the United Kingdom is scheduled to leave the European Union on 29 March 2019. For many Britons this is a welcome step in the fight back against liberal elites. Others, like me, feel sick at the thought of it. In the middle of all this is the UK Conservative government led by Theresa May. How is she coping? Better than most people give her credit for.

Mrs May is not the ablest among our political leaders, who are not an especially able bunch. The so-called Windrush scandal shows this, when perfectly legal and established residents of this country were harassed and even deported because of gaps in their paperwork. This has her fingerprints all over it, from her time as Home Secretary. She failed to see that this was where her policy of a “hostile environment” for illegal immigrants would lead, in spite of being warned. Without an established system for proving identity, rejected as an intrusion of Anglo-Saxon traditions, proving that you are legally here, and thus whether or not the authorities should be hostile to you, was always going to be the problem.

So for something of the complexity of Brexit, Mrs May does not look well equipped. Her start showed the same sort of lack of imagination that led to the Windrush scandal. She set three clear parameters, “red lines”, for Brexit. Control of immigration; no payments into the EU budget; no jurisdiction of the European court. That seemed quite common-sense, given that all three issues played a prominent part in the referendum campaign. But the whole system of seamless trading with the EU depends on arbitration by the European Court; the EU (as do many countries, in particular India) sees immigration and trade as being closely linked; and the lubrication to make complex deals work is money. Mrs May’s red lines were leading to a very hard Brexit, whereby the UK’s relationship with its main trading partners would be put on the same level as, for example, the United States.

For many supporters of Brexit, especially among the political and business elite, that was the whole point of it. For them the EU is a completely misconceived exercise, and by placing it at arms length it would give the country greater freedom to engage with the rest of the world. But there are at least two major problems. The first is just how disruptive such a change would be. There is not just the question of tariffs being imposed on goods that passed over the border, but regulatory compliance, country of origin rules, and value added tax would all have to be administered there, until some sort of alternative infrastructure, not subject to the European Court, was devised. Without it a massive snarl-up would develop at borders, with motorways clogged by waiting traffic, quickly leading to supply shortages, empty shop shelves and job lay-offs. Of course this would all resolve itself in time. But the disruption could go on for a long time and wreak damage that would take years to fix. And, a bit like the financial crash of 2008, it could be very hard to get back to where the country was before.

The second major problem is Northern Ireland. The Good Friday agreement that established relations between the province’s two main communities depended on quite a bit of fudge based on the fact that both the UK and Ireland are EU members. The most powerful symbol of this is an open border. The Irish government, and the Catholic community in the North, insist that this open border should continue after the break. How on Earth is that compatible with a hard Brexit? That this should be such a big issue drives Brexiteers mad: it looks completely disproportionate. But that Ireland should loom so large in British politics, and cause such inconvenient disruption, will surprise nobody familiar with the last five centuries of British history. After deeply flawed attempts by the British to control and colonise Ireland, the island has repeatedly come back to haunt British politics. If the Irish Brexit problem isn’t solved properly there is a big risk of communal violence of some sort. Much as most Britons would like to abandon Northern Ireland, that just can’t be done.

Mrs May takes both problems seriously. They are, of course, being used by Remainers to undermine confidence in the whole project. But that doesn’t stop them being real. Her strategy has been to keep talking hard Brexit, while gradually softening her stance. That means some form of regulatory alignment and coordination of customs arrangements, adding up to some form of customs union, together with compromises on the European Court and the mutual rights of citizens. It is easy to despise this as “kicking the can down the road”, but she is slowly outmanoeuvring both advocates of a hard Brexit, and closet Remainers who want to collapse the whole project.

The latter group, the Remainers, are now pretty much beaten. Though the idea of a further referendum (not a repeat one, you understand) is gaining hold among the public at large, together with doubts about Brexit itself, it is in Parliament that things matter. But the Remain side need enough Conservative rebels to stand their ground. They haven’t. The government scored a decisive victory in recent votes which attempted to give parliament more of a say over the process. One problem is that most of these rebels need to stay in the closet, and not admit that they want to destroy Brexit. A second is that they do not wish to force a chaotic election which might let the Labour Party into power. Meanwhile, the Labour leadership will not press the government to the point of a further referendum, still less breaking off Brexit.

Mrs May’s next problem will be to face down hardline Brexiteers who reject her compromises. There are at least fifty Conservative MPs who fall into this camp. But this group is being steadily outmanoeuvred. Passionate as they are, they have been unable to offer any practical solutions to the issues of transitional disruption of the economy, nor of Ireland. This group has always been backseat drivers, full of lots of clever theories about why things will be all OK, or somebody else’s fault, and who think you negotiate complex intergovernmental deals in the same way that you negotiate a house purchase. There is no convincing rival plan. They seem to want to storm out of negotiations with the EU, daring them to let a “no-deal” happen, but without a viable alternative deal in mind. This lack of practicality means that they are becoming politically isolated. Dare Mrs May face them down?

What can the Conservative hardliners do? The have enough MPs to force a confidence vote in Mrs May, which would then trigger a leadership election. But surely Mrs May has the grudging support of enough MPs to win any such vote if it was called – which would then protect her from further challenges for 12 months. They could resign the Conservative whip, depriving the government of its majority. But if Labour then put forward a vote of no confidence in the government, would the rebels let Mrs May’s government fall? That would either provoke a chaotic General Election, or some kind of transitional accommodation between Labour and the Conservatives to get through the last months of the Brexit negotiations. It is hard to see how either would be to the hardliners’ advantage.

So, a bit like the closet Remainers, I think the attempted rebellion by the hardline Brexiteers will fizzle. That will leave Mrs May to strike the sort of fudged and muddled deal with the EU, arrived at in the last minute, which is what most international negotiation usually ends up with. There will surely be some nasty disruption as Britain’s exit comes about, but not as bad as it might have been. Which would be quite a result for Theresa May.

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Adair Turner: the advance of robotics changes economics

Expounding my views on economics can be a lonely business. Though they are based on nothing more than conventional economic theory, few commentators even acknowledge the line of thought. Not long ago the FT columnist Martin Wolf wrote an article on a favourite topic of mine, the productivity “puzzle”, which went through a series of potential explanations without mentioning the Baumol effect at all. I pointed this out in the comments, but this was doubtless futile. Then the cavalry came. Adair Turner gave a lecture in Washington DC last April, which only recently seems to have been published, and which picked up many of the themes that I have been banging on about, not least about productivity and Baumol. This time Mr Wolf had to take notice, and he published a column on it without venturing to disagree. Perhaps the view will start to break out into the mainstream.

The lecture was entitled Capitalism in the age of robots: work, income and wealth in the 21st Century. It goes much further than I have, explains the logic more rigorously, and follows through more thoroughly on important implications. Though I have long known that Mr Turner has being saying similar things, I feel vindicated.

He starts with the possibility that robotics could replace pretty much all of what we now consider to be work, and asks what the implications of this are. This is a clever angle, since the rapid advance of robotics and artificial intelligence, following the development of machine learning, is giving a lot of people pause. In reality the phenomena he describes first become important more than 40 years ago, when such ideas on robotics were just science fiction (notably Arthur C Clarke’s 2001: a Space Odyssey).  This was when what I have called the Age of Light Industry started to run out of steam, even as it has continued to dominate the way people thought about economics. It’s worth describing the five sections of the lecture.

When, not if

In this Mr Turner makes the case that the complete automation of work is really just a matter of time. This is a popular view amongst techie types, though I am sceptical. The advance of intelligent machines runs in spurts of incredible speed, between periods of very little progress. In 2001 Clarke expected what is sometimes called “general AI” to be developed by, well, 2001. It remains a distant dream. The trouble is that developers persist in thinking that the human brain is analogous to a computer, programmed by an intelligent mind. That’s a bit ironic, since they are mostly ardent atheists, but they haven’t grasped the difference between evolution and design. The advance of machine learning only came when that understanding was modified; but machine learning has limits. It may take a long time before technologists make the next breakthrough.

But any disagreement I have with Mr Turner is of little importance because I with him agree about three things. Firstly that robotics will transform the world of work in the next generation and more. Secondly that it will affect some areas of work more, or more quickly, than others. And thirdly even if robots are able to do things, we may not want them to.

Explaining the Solow paradox

The Solow paradox arises from the great economist Robert Solow’s comment that “you can see the computer age everywhere but the productivity statistics”. That was in 1987, but it’s even truer now – it is the productivity puzzle. Why is it that, with the pace technology development as fast as ever, increases in average productivity are slowing down? Mr Turner points to three things.

The first is my old friend the Baumol effect, from a paper by William Baumol in 1967. Workers released from areas of high productivity tend to move into jobs with lower productivity, or a lower rate of productivity improvement, which will neutralise the effect of the original productivity advance on average statistics. So if a farmer doubles productivity, he might sack half his farm workers and employ domestic servants instead. This is a well-trodden trail for readers of this blog, but Mr Turner explains it in more detail than I have ever attempted. It is clearly true in the area of robotics which of itself it creates few jobs.

The second thing is something that I have only hinted at, and which I find interesting. As we get wealthier, we spend more on “zero-sum” activities – activities that may advance individual interests, but not society overall. Cyber crime and the security industry that counters it is an example. The search for status goods, such as high fashion is another. These activities drive arms races between rival players, including the literal arms race of deadly weapons. Not mentioned by Mr Turner you could add extracting and burning fossil fuels to the list.

The expansion of zero-sum activities creates a couple of problems. First is how do you measure measure productivity of something where the output is often negative? The answer, for statisticians, comes from the monetary income generated – which is circular: you can’t tell the difference between inflation and productivity. A second problem is that it means measured economic income, such as GDP, becomes increasingly detached from human wellbeing. What is the point of getting a higher monetary income if it simply disappears in higher property costs (land is a classic zero-sum game), security and badges of status? This is not far from the point I have made that the most dynamic bits of the British economy before the financial crash were in finance and professional services, which are (mainly) classic zero-sum activities. Discounting this and you find that “real” growth was lacklustre long before austerity kicked in.

The third reason for the Solow paradox is that a lot of the benefit to new technology is non-monetary, and doesn’t reach the economic statistics. We are living longer, for example. This is an argument often used by people on the right to suggest that things are much better than they look, and that we should not worry about stagnant or reducing incomes among the majority. This is not a debate that I have ever got into. Mr Turner acknowledges its validity, but not the conclusion that those on the right draw from it.

Meaningless measures in the hi-tech hi-touch economy

This is an attack on standard economic measures, notably GDP and productivity. Economists have always acknowledged the weaknesses of GDP as a general measure of whether an economy is delivering what people need – but those weaknesses are growing to the point of absurdity. Well, not quite. GDP (and especially the nominal measure which doesn’t try to adjust for inflation) is a useful measure for the management of money in the economy. But we cannot assume that if GDP per head is growing that so are people’s wellbeing. Likewise wellbeing may advance while GDP is stagnant.

This is an old idea. Mr Turner develops it by following through the thought experiment of what happens when most work is automated. Measured economic activity then most arises from what economists call “rents” – returns on asset such as land and intellectual property.

Developed economies: average is over

Where this is leading is to an increased gap between a lucky minority of people who are well off, and a growing body of people stuck on very low incomes. The middle ground is disappearing. Notwithstanding some on the right who shrug this off, this is a major problem. And mostly we are looking for solutions in the wrong places.

The problem will not be solved by educating everybody to a high standard so that they all have the skills to programme robots, though improving education is surely a good idea anyway. Inequality does not have its root in a skills gap, but in the nature of work. Education will simply turn into another arms race for the small number of well-paid jobs. Neither is a focus on improving productivity going to help. This simply replaces middle income jobs with lower paid ones. Meanwhile we worry about things, like the increasing proportion of elderly people, that probably won’t be such a problem after all.

But in developed countries, and many middle income ones, like China, the problem should be soluble. The economy will have the capacity to produce a good standard of living for everybody. Mr Turner suggests a number of policy responses:

  • Income support such as universal basic income. He sees the logic but is sceptical.
  • Offsetting the concentration of income, wealth and rents. Assets and higher incomes need to be taxed more. Intellectual property rights need to moderated, rather than strengthened, as now.
  • High quality urban development. To enhance areas that would otherwise be left behind.
  • Adequate wages and status for caring services. This will require some form of political intervention.
  • Celebrating craft skills.
  • Increased leisure.
  • Education for life and citizenship – breaking free from the idea of education for productivity.

Developing economies – the old ladder destroyed

The prospect for low-income countries, especially in sub-Saharan Africa, does not look good, though. The development ladder used by Asian economies from Japan to China to join the ranks of the better off, is being knocked away. There will be no demand for cheap manufactured exports, as richer countries will do more for themselves. This is a serious global problem which will require a change in development thinking. It will be important to slow population growth.

Implications for economic theory

Mr Turner concludes by pointing out that all this makes much conventional economic theory obsolete. It is too focused on maximising income to improve wellbeing. It is based on a series of idealised assumptions, such as the non-existence of zero-sum activities, whose usefulness is vanishing. Higher levels of income do not necessarily mean that wellbeing is improving.

This is easily said, but few have taken on the implications. In Britain Conservatives still talk of the virtues of an open market economy to produce a better standard of living for all. Meanwhile Labour focuses on capital investment and productivity. This is yesterday’s economics.

But more people are calling for a rethink. What Adair Turner does so well is to use conventional economic logic to show why conventional economics doesn’t work any more, and that we need fresh approaches. That’s what this blogger is trying to do in his own, much smaller way.

 

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Tax or efficiency: making sense of the politics of the NHS

Featured on Liberal Democrat Voice

Radio 4’s Moral Maze on the NHS yesterday didn’t start well. The first witness raged at the institution’s inefficiency and how people were using its supposed moral integrity to justify it. Tens of thousands were dying as a result, he said. His interlocutors provided no real challenge. I switched off. This is symptomatic of the very poor quality of political debate about the NHS here in Britain. I don’t suppose debate in other countries about healthcare is any better.

There are two things that are not well understood about the NHS. People on the right fail to appreciate that the NHS’s inefficiency is a function of the complexity of healthcare, and not its “socialised” funding model. People on the left fail appreciate that the effective state monopoly of healthcare means that we get less of it than people really want.

It was the first point that the Moral Maze‘s witness was running foul of. The only evidence he quoted was that private hospitals in the UK spend much less on administration and management than NHS ones. But these private hospitals only offer a narrow range of services to a select few clients, and so are much simpler to run. International surveys consistently show that the NHS is less wasteful of funding than pretty much any other nations’ system. These systems have the complexity of operating insurance records and administering claims; they do not prevent expenditure on ineffective treatments or wasteful breakdowns of communication between different parts of the system.

I know something about how this happens. Apart from being an accountant, the core of my professional career has been as a general manager whose mission was been to manage systems as efficiently as possible. In that role I have been responsible for some pretty dramatic improvements in productivity. At one point I even looked for a career in the NHS, though nobody in the service was prepared to take the risk of taking on somebody without a track record in health services, or at any rate not without the kind of hard-nosed bullying persona that many in the NHS seem to think is what effective management is about. I have thought quite a bit about how you might make the service more efficient.

That there is monstrous waste is not in doubt. As a patient you spend a lot of your time waiting around, and then repeating yourself to the myriad different people you are handed on to. A lot of the NHS is in fact very efficient; the problem is fitting the various bits together so that the right treatment is delivered to the patient at the right time. And that’s before the question of how to ensure that less people need healthcare services in the first place.

This failure to get things to fit together is a familiar problem. Understanding this was at the very heart of what I tried to do as a manager. My technique was quite simple in principle: to make processes as simple as possible, and focus them on what the customer needs. A simple idea that was quite revolutionary in the 1990s, when it was usually labelled as “business process re-engineering” (or BPR).  It went against a production line approach borrowed from manufacturing, where workers would specialise in a single task. The technique required fewer specialists and more generalists. Or, to put it another way, it required workers to specialise on the customer that they were serving, and not in a particular functional skill.This usually entailed not just the retraining of workers, but a redesign of information technology.

BPR is now largely played out in the world of commercial services, with automation and artificial intelligence taking over. But the BPR revolution never really got going in healthcare. No doubt this was partly down to the vested interests of those that worked there. But I have to realise that there is a much deeper reason. The complexity of health services requires the use of specialists to a much greater degree than in pretty much any other activity that I can think of (another notoriously inefficient sector, defence systems, is comparable). Healthcare is crying out for patient-centred treatments, and yet this is very hard to do efficiently because you need to involve so many specialists. The field is riddled with what economists call “information asymmetries” which undermine all attempts to put consumers in charge using market mechanisms.

Which is why nobody does it well. And why trying to restructure the NHS to make it more efficient is always likely to fail. The Coalition government’s attempt to do so by putting general practitioners in charge is generally regarded as a costly failure. The current trend in the NHS towards “integration” is a bit more promising, but pitfalls abound. Trying to bring market mechanisms into play helps solve some problems but creates others.

But if this line of criticism of the NHS – that it is inefficient because it lacks market mechanisms – is misplaced, it obscures a more valid critique. It is that the NHS restrains the level of health spending, meaning that people get less healthcare than they want. If you could wave away the information asymmetries with a magic wand, and find a way of allowing poorer people to meet their basic needs, how much healthcare would we buy in a market ststem? Lots. Healthcare promises longer life and less pain. It is an unmatched consumer proposition. Everybody wants more of it. Britain tends to spend less on healthcare as a proportion of its income than other high income countries. And much less than the most unrestrained healthcare market: the United States.

One example gives a good illustration. A number of very expensive tailored cancer treatments have been developed by pharmaceutical companies. These don’t prolong life by very much, or at any rate there is no convincing base of evidence base of this. So the NHS often bans them; the money will secure greater benefits if it is spent on other people. But if you are the cancer sufferer that could benefit, and you have the money, you might want to have it anyway. The NHS does not allow you to pay extra (co-payments in the jargon), because it is deemed morally wrong that a patient “in the next bed” with the same condition does not have the same treatment. In principle you could transfer to a non-NHS facility in the UK or elsewhere. But this is usually impractical, and brings with it additional costs. This is such a difficult problem that politicians try to camouflage it with special slush funds. But this is just an extreme example of a more general problem. Lots of us would happily pay a bit extra to get better treatment.

The obvious solution is to ramp up overall spending on the NHS to the sort of level that a perfect market system would lead to. But that means much higher taxes, and the evidence that people are willing to pay that much is weak, to say the least. Most people say they are happy to pay a bit more tax for a better NHS, but this willingness melts away when you start raising the amount. The problem is that there is  no personal link between the taxes you pay and what you get. It always seems as if the money is benefiting somebody else.

This, of course, is precisely the dilemma that the current government is stuck in. It has announced plans to increase NHS funding but it is unclear about how it is to be paid for. The Labour Party are little better. They hope a lot more tax revenue will be available from rich companies and businesses; but they also want to end “austerity” in many other parts of public services, limiting the amount available for health.

What’s the solution? I think taxes should go up. I also think we need to find acceptable ways of allowing people to spend more of their own money on healthcare within the NHS system. And we shouldn’t just give up on the idea that healthcare should be delivered much more efficiently. As regular readers of this blog will know, I think that means more localised management and more integration with other public services, and a stronger focus on the needs of users. Alas I hear very little of such ideas in the cacophony that is the political debate on the NHS.

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Italian populists will find it easier to complain than to govern

Well one of my 2018 New Year predictions is bearing fruit. I predicted that the big issue in 2018 for the EU would be Italy, and its push back on how the Euro is run. Just how this will play out is very hard to judge, but it is now centre stage. Most of the coverage centres on threats by Italy’s Five Star Movement (M5S) and the Northern League to take Italy out of the Euro. But the politics of that is much trickier than many give credit for.

It is, of course, too easy for liberals like me to sneer as the disparate group of politicians we refer to as “populists”. The popular frustration they play on is real enough, and liberals are very reluctant to engage with it. We seek for ways round it and dismiss it. But for all the weakness of established political movements, populism does represent a threat to European (and American) society. What populists aim to do is stoke up a sense of grievance and victimhood to secure power for themselves, which they then proceed to use to for the purposes of self-enrichment and cronyism. Nobody should be surprised that a movement built on resentment at elitism and cronyism should, in practice, be much worse than the system it is replacing. Donald Trump made hay from Hillary Clinton’s minor lapses in data security, and talked of “draining the swamp” in Washington. And yet the new governing elite plays fast and loose with security and thinks nothing of placing its own friends and relatives in positions of influence. Its supporters don’t seem to mind.

The populist system in Europe is most advanced in Hungary, where under Victor Orban’s Fidesz a crony state is becoming deeply entrenched. It is worth noting that when Fidesz first emerged from the post-Communist gloom it seemed fresh, modern and innovative. It has been corrupted by power. But Hungary does have some advantages. First it can claim subsidies from the European Union because of its relative lack of development. Second it has its own currency, so it is not beholden to the system of Euro governance. But note a key element of the system: it requires EU subsidies to keep going, and anti-EU resentment is one of its key themes. Staying within the system while complaining about it ever more loudly is Fidesz’s central political strategy.

The Italian populists are embarking on a similar strategy. I am perhaps being a little harsh on M5S. Its hatred of the old establishment cronyism is genuine and it does seem to want to move to something better. It refused to deal with Silvio Berlusconi, one of the pioneers of populist cronyism, for example – though its more cynical Northern League allies had long been associated with him. And yet Italy’s economic predicament makes something like the classic populist trajectory almost inevitable.

The central issue for Italy is the Euro. Both M5S and the League make this a central complaint. They complain that the Euro’s budget rules are too tight and prevent sensible fiscal policies from being implemented that might help lift Italy’s dismal economic growth rate. Plenty of economists from across the world agree with them. How much substance there is to these complaints is a complex topic for another time (my answer: yes some, but nearly as much as many make out). The real question for populists is just how serious about this do they want to be. Do they want to make genuine, credible threats to leave the Euro? The answer is surely not.

It is, in fact, institutionally and practically very hard to leave the Euro once you are in it. For all its extreme problems, Greece never seriously contemplated it. But there is a political problem too, which, for example, cost Marine Le Pen in France dear when she seemed to be on the threshold of power. That problem revolves around two things: interest rates and savings. One of the main reasons Italy joined the Euro was to reduce interest rates, especially on government debt. It should be remembered that, contrary to the populist narrative, Italy was not bullied and cajoled into joining the Euro by the Germans. The Germans never wanted them in, but Italy made it in thanks to both some fairly hefty austerity economics and diplomatic skill. This proved very successful. If Italy left the Euro, the country would surely have to raise interest rates on its debts and government finance, including a looser fiscal policy, would in fact be much harder. That is exactly why Italy joined the Euro and the basic dynamics haven’t changed. And this would not be some future prospect (like the dire predictions made about the British economy after Brexit), but would be immediately apparent should the prospect of Italy leaving the Euro look real. The rise in Italian government bond prices after the populist victory at the polls shows this.

The economics may not be quite as simple as I have made it sound. The Italian economy, for all its weakness, is roughly in balance on trade, which makes looser fiscal policy and monetary policy much easier – but that was true before. The real problem is that successive Italian governments have been unwilling to take on the economic reforms that might make the economy more productive, and a looser fiscal policy more sustainable. It is a popular misconception on the left that “Keynesian” loose fiscal policy can drive growth and pay for itself. That is only true of there is spare productive capacity, such as in a recession, or if productivity reforms form part of the government programme. In fact the left usually see “Keynesian” policy as an alternative to “neoliberal” reforms rather than a complement to them. I have written often that neoliberal reforms are played out – but that is not true of Italy, which used the gains made from joining the Euro to put off the evil day. The populist movement draws much of its strength from resistance to such reforms when they were belatedly embarked on by the Socialist government of Matteo Renzi – so embarking on a reform programme looks out of the question.

Still, politically, the interest rate problem is not the most serious. That is that leaving the euro would be seen as a threat to many Italians to the value of their savings. Economists talk about currency as a means to an end – a sort lubricant to help achieve real economic gains through higher levels of investment and consumption. Money means nothing in itself. But most people outside the elites have a different view. To them money is a sacred promise made by the government to the people that they can save now to spend later. Politicians forget that at their peril. If Italian savers start to think that threats to leave the Euro are serious, they will see a threat to their savings and support will drain away from M5S and the League faster than most people think is possible.

And so the populists need to maintain that balance: whinging about victimisation within the Euro straitjacket, while making no serious attempt to leave the system. This sort of have-your-cake-and-eat-it politics is, as it were, bread and butter to populist politicians. But it will surely be harder inside the Euro than out.

This is doubtless behind the Italian President Sergio Matterella’s rejection of the coalition’s proposed finance minister. What looked like a clumsy denial of democracy could in the longer term be part of a challenge to the populist parties to put up or shut up about the Euro. That could pay dividends if only the established political parties to put up a credible alternative government.

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Secular stagnation: the curse that still haunts developed economies

Featured on Liberal Democrat Voice

The financial crash of ten years ago was something of a paradox for conventional economists. It took most of them by surprise, and dented their reputation. And yet economists became more important than ever to the running of our world. But now, to listen to most of them, the equivocation is over. We’re back to normal, as the global economy looks in much better shape. This looks complacent.

The crash was a double shock to economists. The first was how it happened at all, when most economies seemed to be purring on at a relatively steady rate of growth (often referred to as the trend rate), which seemed to relate to growing productivity, and which most economists, driving through the rear-view mirror, assumed to be a law of nature. The second shock was that developed world economies, especially the British one, were so slow to recover. Economists  simply assumed that with a bit of stimulus, economies would not just return to trend growth, but make up for lost ground too. I don’t think any advanced economy has done this – and in Britain we lag far behind. In the years after the crash an expression was coined, or rather resurrected, to describe this second problem: secular stagnation.

The person whose name is most attached to this is Lawrence Summers, who had been prominent in the Clinton administration. By it he meant that economies could only achieve growth by extraordinary and unsustainable efforts to stimulate it. And, as Mr Summers recently pointed out in the FT, you cannot say that it has disappeared. Growth has returned, but the measures required to produce it are unsustainable. What he is referring to is the extraordinarily low interest rates prevailing in the developed world.

This has been going on for so long that we have become accustomed to it. But what do negative real interest rates mean? They mean that in order to use up available savings we have to create investments that have little or no financial return. Now that is at the margin, not on average, but even so it does not suggest an economy that is at all healthy. If investments don’t produce a return, productivity will not advance, and growth will not be sustained. And in particular we will accumulate debt that cannot be paid off. Or not without inflation which destroys the accumulated wealth of the middle classes. And sure enough, many economists are warning us about mounting debt levels. In due course this will lead to a financial crisis.

Why are we in this situation? And what can we do? There are many speculations as to why, and most commentators, including me, tend to gravitate towards the one that suits their overarching narrative. Many blame a skewed distribution of income for creating a surplus of savings that cannot be used properly. Others say that modern businesses don’t need so much traditional capital (Google doesn’t need to issue debt or share capital to keep its investments going). Then there is the gradual ageing of the population reducing the size of the workforce. Others blame the wrong sort of stimulus – if only government spending hadn’t been cut back (“austerity”), we’d have bounced back in no time. My favourite is the Baumol effect which suggests that we are in a transition towards industries, like healthcare, that are less financially productive, though still improve human wellbeing. Whatever it is (and it could be all at once) it’s a problem because it is dragging down the potential growth rate.

And what can we do? People often talk of unconventional policies, but what are they? The most interesting idea is  to run up bigger government budget deficits. Piling up government debt is much safer than piling up private debt, as we are doing now. Why? Because governments can finance that debt by a process that is usually referred to as creating money, and the burden can be shared more equitably.

But piling up debt and creating money often ends in tears. The best current example of that is Argentina, with rampant inflation and impatient foreign creditors. The problem for Argentina is that its monetary system has been mismanaged for so long that much borrowing, public and private, has to be in foreign currency, which the central bank cannot create. But there is an opposite example. Japan has been piling up public debt for decades, and the central bank has been buying up debt, with few apparent ill-effects.

So how do you know whether you are Japan or Argentina (and no doubt Argentina looked like Japan once)? The first, obvious, difference is that Argentina has had a current account deficit for some time, while Japan has generally been in surplus. That means that Argentina is importing more than it exports and requires financing by foreigners – who are less likely to be happy to take payment in domestic currency. Current account deficits usually flow from budget deficits – though not always, as the recent crisis in Spain showed. That would be a bad sign for countries like Britain that also have a current account deficit. But Britain’s standing in international markets looks a lot more like Japan’s than Argentina’s. The government has no trouble in borrowing in sterling, and the same goes for most British businesses.

So why are we in Britain so worried about budget deficits and debt? One explanation is that we have been persuaded into this view by malign political forces who use the analogy of household financial management to make their case. But there are deeper worries. The first is how do you tell when you have gone far enough with budget deficits and need to stop? The traditional economists’ answer is when inflation starts to take hold. But it might be too late by then, and anyway it is not so clear that in a modern, globalised economy inflation works in quite the way economists think. You know it is too latewhen there is a rush of people trying to change domestic currency into foreign, creating a panic and to people, including the government, having to borrow in foreign currency. That can happen without inflation.

The problem behind that is the politics of it. Opening up the possibility of more government spending is a huge boost to the power of central government politicians, who do not have strong incentives to apply the brakes when they need to – any more than those bankers did before the crash of 2008. It is too easy to believe your own hubris. I think this happened to the Labour government in the mid 2000s when the government should have started to tighten spending but decided not to. This didn’t cause the financial crisis, but made it harder than it should have been to manage. Even now, though, it is impossible to get anybody on the political left to accept that. It’s the one thing that unites Jeremy Corbyn with Tony Blair.

Still, we should be able to find ways increasing government borrowing that helps stimulate demand more sustainably. Building public housing is one idea. Other infrastructure policies should help (but not all of them). There’s also a case for taking a longer view on some public spending, like education , community policing, mental health services and public health that heads off future trouble. But not building more navy frigates or, even, hospitals. We might need these, but they need to be securely funded by current taxes. The trick politically is to create a system of checks and balances that lets you invest productively and not let central government managers run away unchecked.

Behind this lies an important but rarely acknowledged idea. It is that, in the 2010s and onwards, public investment is often more productive than private investment. And that, I think, is one of the causes of secular stagnation. So in the developed world we need more public investment, and that we can afford to borrow much more to pay for it than most people think. And we need less private investment, much of which is wasted on asset recycling schemes that will end in tears. It may well take another financial crisis before we start to realise this.

 

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Life in the tunnel. Being a Liberal Democrat

Featured on Liberal Democrat Voice

I just want to ask: when will the party face up to the fact that whatever it is doing isn’t working even in the slightest?

This was from Lib Dem blogger Nick Tyrone before the recent local elections, after a London opinion poll showed weak figures for the Liberal Democrats. The party’s appeal to Remain voters had pretty much failed, he thought, with the party lagging even the Conservatives in this group, never mind Labour.

Then came last week’s local election results. If you are going to take a cold, hard look at them in the round, they were nothing to shout about. They were perfectly consistent with that poll. In equivalent vote share they even marked a slight fall from the rather dismal 2017. And yet. Look at the London results (as a Londoner, I have an excuse for being London-centred – though my story works just as well outside it). The two most spectacular results for any party on the night were the Lib Dem gain of 25 seats from in Richmond, and 21 seats in Kingston, mostly at the expense of a Tory party that collapsed to a rump in both boroughs. And at last the party started to win seats from Labour, gaining seven in Haringey, for example. And the party had its Wandsworth moment too, fending off a sustained and confident campaign by Conservatives in the one borough it controlled in Sutton. Minds aren’t swayed by dry statistics but by stories – stories that show what is possible. In London, and across the country, the Lib Dems had plenty of good stories to encourage them. That made them a much better set of results than the party has had for a long time, even in 2017 when the equivalent poll share was higher.

Not that you would have guessed this from the media coverage. Even in its later coverage (when the Kingston result was known, giving resonance to the Richmond story) the BBC chose to highlight the relative failure of Labour in Wandsworth to the spectacular écrasement of the Conservatives in two neighbouring boroughs, which went unmentioned. Why were the non-events in Wandsworth and Westminster more important? Because, apparently, they are a “flagship” boroughs. Actually I think the Wandsworth result is an important story, but this prioritisation is an interesting window into the current journalist mindset, even at the politically balanced BBC. This may not be bias; it may just be a bid to cover up the humiliation of the editorial team of not getting the story right in advance, and sending its big guns to the wrong places. News is made on expectations, not real events.

Which, I think, is the issue at the heart of Nick Tyrone’s critique. Whatever the party does, nobody in the media, mainstream or otherwise, is listening. The only stories that are of interest are the sorts of stories that Ukip still manages to pick up: ones that point to the parties final, humiliating death spiral. I don’t think it is fair to blame that on the party’s leadership or messaging.

Life as a Liberal Democrat supporter is like being in a long, dark tunnel. Things are miserable; nobody can see you; and too often any small flickers of light vanish, rather than grow into that light at the end. But last week’s small chink of light just could be what we hope it is.

The point is this: the problem isn’t the message, it is getting people to listen to it in the first place. It is nearly hopeless achieving this through the media. It is just possible that a moment of genius or massive good luck suddenly does the job. But waiting for such a moment does not amount to a strategy. The other way to get noticed is to go out and talk to people directly – through door-to-door canvassing and attractive literature pushed through letterboxes, and with videos promoted through paid-for advertising. This is inevitably very localised, and it tends to happen in the run-up to elections, when people have a good reason to take notice. The good news is that when the party was able to do this, it, by and large, raised its share of the vote. And sometime spectacularly – in Remain-voting Richmond and South Cambs, in Leave-voting Kingston-upon-Hull, and in the somewhere-in-between Kingston-upon-Thames. That suggests that Nick Tyrone is wrong. What the party is doing is working at least a bit more than the slightest.

And the hope is that if the party keeps going, the general public, and the media that follows it, will start to notice. Even now, the BBC must start to question its policy of giving the party so little coverage compared to Ukip, which has now virtually ceased to exist.

But why soldier on in the cold, dark place, where hope is but fleeting? Because we believe in our liberal message. That humanity is more important than the nations and religions that divide it. That all humankind benefits when we listen to different points of view with respect. And that we should look at facts and evidence rather than let our prejudices run riot. No other party is doing that as much as the Liberal Democrats in British politics. It is worth pushing on through the tunnel.

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Complacency undoes Labour in Wandsworth

The Conservatives in Wandsworth know the price of everything and the value of nothing.

That isn’t a quote from this year’s council elections in Wandsworth, where Labour gained 7 seats, but fell 5 short of what they needed to take control of the council. It comes from Labour’s final week literature in their campaign in 1990, when they also expected to take control. To me it sums up Labour’s complacency in both failed campaigns. Elections are won with grit, no waffly ideals.

Labour’s spin machine are desperately back-peddling, to say that they never really expected to win control this time, and that the advance shows that things are slowly moving their way. That is nonsense. They had the Conservatives on the ropes and, to mix metaphors, they threw them a lifeline. The results were very close in a number of wards. A more effective campaign would have secured control for Labour. And what a victory that would have been! The Tories, weakened by Brexit in a strong Remain borough, could have imploded without the business of running the council to hold them together. Resourceful and resilient, they may well punish Labour, who have their own internal issues, when the next meeting with the voters happens.

This year I often thought back to 1990, which was a few years after I moved back into the borough of my birth. Then Labour only needed a net gain of one seat after making gains in the previous elections in 1986. The Conservatives were doing badly in national polls. It should have been easy. But reading that leaflet I immediately understood that Labour wasn’t up to the job. And so it proved: the result was a catastrophic loss of 17 seats, including that of their leader. This was a massive propaganda victory for the Conservatives, who used it to deflect attention from bad results elsewhere in the country. Old Labour hands have not forgotten this; winning back the council this year would have been a powerful signal of Labour’s rise.

And there was every reason to think that it was possible. Labour did very well in the borough in last year’s general election, without even trying very hard. They picked up Battersea, and came close to picking up Putney too, to add to Tooting which they already held. Recent council by-elections, in which Labour did well, confirmed this trend. In 2014, the previous elections, Labour had shocked the Conservatives by making strong advances. The EU referendum then dealt a body-blow to the local Conservatives which give Labour the chance to do something special.

What made the Tories so resilient in 1990 and able to hold off the challenge this time? In 1990 the party was in peak form, with a number of very capable and clever leaders, who had seized control of the borough from Labour in 1978. They adopted strong financial management, when most local Labour politicians didn’t think this mattered, while being remarkably alive to middle class sensitivities on things like recycling. They oozed competence where Labour resorted to waffle. An efficient, but low profile, local propaganda machine got this gritty message out to voters, many of whom had benefited under the then Conservative government’s right-to-buy legislation for council housing. This year things were much more propitious for Labour. The Conservatives have lost their shine; they are often complacent and out of touch; their new leaders are not of the calibre of the old ones. They have lost a lot of members. Meanwhile Labour (thanks to Gordon Brown) have addressed some of their reputation for financial incompetence, and they had more help from members than they knew what to do with.

So what happened? The Tories stuck to the same old gritty message about competence. No matter that this is less true than it has ever been – local Labour are firmly in the Sadiq Khan, centrist, competent wing of the party. And the council’s once-vaunted efficiency is now nothing special. Changes to the law under which council tax operates means that differences between boroughs are completely down to decades-old historical legacy, and tell you nothing about how things are likely to change in the future. But the Tories were able to plant doubts about Labour to which Labour had no convincing answer.

But Labour could surely have won. After their success in 2014, I remember thinking that the party needed to focus hard on what it needed to do to take control in 2018. The five wards they already held looked secure. They needed to win the five seats they didn’t have in the three split wards, and seven more seats from other wards. That meant a minimum of three more wards, four to be on the safe side. That was a big ask, but the reward was surely big enough to warrant a serious effort, starting in 2014. This should have meant identifying which four wards they needed to target straightaway.

But there was nothing. Residents of wards which the party eventually targeted heard practically nothing from the party until this year. Candidates weren’t in place before this. When it came, the campaign was almost completely generic, with nothing more than a few photos geared to the locality in which they fighting. Candidates did not have time to meet enough of the electorate and build trust – and didn’t really try. To them it seemed that controlling the council as a whole was what mattered, not looking after their ward. A personal vote of one or two hundred built up over two years or more would have made all the difference. and it would have been the best possible counter to the doubts that the Conservatives were trying to spread.

A lot of the same criticisms can be levelled at my own party, the Liberal Democrats. The party was too late to put in place its candidates and get out and about meeting the electorate. Too much of the literature was generic, making too much of issues like Brexit which, in the end, did not motivate voters much. We had an excuse. Though the party was in quite good shape in 2010, the coalition trough nearly destroyed it. The party made a dramatic recovery following the 2015 election and especially after the 2016 referendum, but trying to turn this new energy into an effective political force proved too much. The party made a lot of progress in the campaign, but too late have much impact.

All of which points to a disturbing aspect of modern politics. The parties are too interested in talking to themselves about their own political concerns, and not enough in meeting voters and solving their problems. There seems to be an idea that politics is about condemning abstract nouns like “austerity”, and putting “radical” ideas in front of the electorate and being swept to power in a tide of enthusiasm. Labour has succumbed to this. The Lib Dems are not immune.

But the Wandsworth election contained one shining rebuke to this politics of the abstract. The highest number of votes won by any candidate was by the independent Malcolm Grimston. Back in the 1980s I remember Mr Grimston as an obnoxious, fat young Tory (though the fatness should not be held against him, it was very much part of his persona). I have watched as he turned into somebody else entirely. He lost weight and became a gracious, polite politician who listened to people. We worked hard for his local electors, who came to know and respect him. After the 2014 elections he became so fed up with the arrogant Tory regime in Wandsworth that he defected. And he triumphed. Meanwhile another Tory councillor defected at about the same time. But he was much more of an abstract modern politician; he chose to adopt the label of the new Renew Party. But vacuous promises were no substitute for the graft of getting to know and help your local area. He had the ignominy of being beaten by a Lib Dem who did not campaign at all in the ward.

There is a lesson there that I hope local Lib Dems can learn. I suspect the current Labour Party would find it all too difficult. I wouldn’t have minded if Labour had won in Wandsworth, but they did not deserve to.

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