We need a UK Constitutional Convention and a Federal government

What happens when your normal existence comes under threat? We seem to alternate between two extremes. One is paranoia. We see this now with Jihadi extremists, where many Britons see the threat of terrorism everywhere, and are happy to vastly expand the surveillance powers of the state so that any plot can be intercepted before execution. I remember a similar paranoia over Soviet Communism in my youth, in the 1970s. But the more common response is denial. We keep going with our ordinary daily lives without thinking about it, dismissing the threat with half-baked arguments that don’t stand up to scrutiny. We see that with the threat posed by rampant global carbon emissions.

Perhaps to the  English the possibility that the United Kingdom breaks up, with Scotland ploughing its own furrow, does not have the sort of existential quality of global meltdown, communist takeover or even terrorist attack. That may be so, but we underestimate its significance at our peril. If nothing else, if the Scots vote Yes in their referendum in September, the negotiations over separation will dominate the political agenda for at least four years. The Union is so deeply embedded into our governance that separating the countries will have a host of unforeseen complications. And the complications that are clearly visible are bad enough: membership of the EU and NATO; Britain’s nuclear weapons; managing the currency; spitting the national debt; splitting oil revenues; and so on. Our governing classes will scarcely have time to do anything else, while the publics on both sides of the border will be inflamed by populists claiming that their country is getting the rough end of the deal. And at the end of it all England will be dominate nonsense of a country that can’t convincingly even lay claim to its traditional names of “United Kingdom” or “Great Britain”. It will be left with a tangle of Imperial era commitments, from membership of the UN Security Council, to responsibility for the Falkland Islands, without the joint enterprise of Scotland and the other British nations that brought these about. The loss of international prestige would be incalculable. It is often said that the loss of Ireland was the first step in the break up of Britain’s empire – the point at which Britain’s sense of confidence and authority fatally started to ebb away. The departure of Scotland would end aspirations to be even a second-rank world power, and no doubt poison the country’s politics for generations to come.

And yet the British establishment is taking this threat very calmly. People talk about the referendum here in England, but with little sense of its implications. And when conversation moves to next year’s General Election, the impact of the referendum on our politics is quickly forgotten. The half-baked argument used to dismiss such thoughts is that a Yes vote looks unlikely. But the Yes campaign has all the momentum. The No campaign depends on narrow, conservative arguments, put forward by second-rank politicians. Even if the Noes win, the threat of breakup remains. Supporters of the Union, on both sides of the border, need to recover the initiative. There is no more important issue in British politics.

Let us try to understand were the threat is coming from. It started in the 1970s as North Sea oil was discovered, and gave the Scots a sense that their country could be economically prosperous, even as industrial decline blighted it, along the rest of the UK outside the southern counties of England. The establishment response was Devolution: the setting up of a separate Scots parliament, to which progressively more power has been given. This may have delayed the crisis, but it has not solved it. In devolved Scottish politics the Nationalists field their best politicians against those of the unionist parties of second and third rank. An ambitious Scots politician who belongs to the Labour, Liberal Democrat or Conservative parties seeks to get elected to the Westminster parliament to make his or (less commonly) her career there. Here they happily take a hand in running England’s affairs. Gradually the Nationalists have come to dominate local politics in Scotland.  Meanwhile at Westminster one of two situations occurs: a Conservative led government is elected that the Scots did not vote for, or a Labour government which does not have a majority of English MPs. This inflames politics, especially north of the border when there is a Conservative government.

At the heart of the problem is the way in which the ruling Westminster elite sees itself. The British Parliament, with especial reference to the House of Commons, is sovereign. It secures the consent of the people at General Elections, but in between times its authority should be unchallenged. It is an evolution of the medieval and Renaissance idea that kings should be absolute rulers. Our elite becomes troubled when authority seeps away to institutions such as the European Union under treaty obligations. But it would rather not think about the idea that Parliament itself lacks the popular consent that its sovereign status implies. The Scots challenge this legitimacy openly, but increasing other British people feel it too, even if they articulate it less well.

There is an obvious solution: federalism. In a federal structure sovereignty is shared between the different levels of government. The higher levels are not self-evidently more “sovereign” than lower ones. The best known example is, of course, the United States of America. There the states are not the artificial creations of the national government, only allowed to do what the national government says. In theory it is the opposite, though in practice it is a jockeying match, arbitrated by a written constitution and the Supreme Court.

In Britain this means that you would have a federal, UK government, with a number of state governments below it. What would those states be? Scotland, Wales and Northern Ireland, obviously. But what about England? Many people, when first considering the problem, want to establish a series of new regional states in England, of approximately the same size as Scotland, in population terms. But this really doesn’t fly. That is not how the English view themselves; such localised identities could emerge in time. The great conurbations of London, Manchester, Birmingham, Leeds, Liverpool, Newcastle, Sheffield and Bristol show some signs of developing such identities. But what of the rest? Cornwall, though rather small in size, has a sharp (and non-English) identity and has a strong claim for statehood. But elsewhere it means drawing arbitrary boundaries which, even if they follow ancient identities like Wessex, Mercia or Northumbria, really won’t work. That is not how modern England is.

The English state would have to be England itself, with maybe only Cornwall separate. That presents some big problems of its own, of course, but I think these are more soluble than muddling on as we currently are. I will only say that the critical thing is for the seats Federal and English parliaments should be located in different cities. Only then will the separation between the two be properly credible.

There are two main ways in which such a system might be implemented. The best is for the current British Parliament to become the new English Parliament, with a new Federal Assembly located outside London, operating within a new, written Federal Constitution. But such a step is too revolutionary for our country, that likes to evolve its constitution in small steps. I suspect the number of minor legal complications that would follow would be almost as bad as those that would flow from a Scottish breakaway. I would still vote for it if offered the chance – but grumpy as the British electorate is, I don’t think they are in such a revolutionary mood.

So the other way forward is for the British Parliament to downsize and become the new Federal legislature. The House of Lords might be replaced by a Senate with members appointed by the state legislatures (which would need to incorporate sub-state governments in the case of England, perhaps). A new English parliament and English First Minister would be established, located outside London. The whole thing would be constitutionally protected by a British Bill of Rights, which might, for good measure, establish the limits of European authority, in the way that Germany’s Basic Law does. That is revolutionary enough. But I can’t see any middle way between this and the current muddle.

And how to implement such a radical proposal? The first step must be to call a Constitutional Convention in the wake of the Scottish referendum result if there is the expected No result. And perhaps even if there is a Yes and a backlash as the difficulties emerge (although if that happens, only the first of my two solutions would be viable). That is what English politicians should be calling for.

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Rethinking Liberalism 6: reinventing the state

So far in my series of essays my conclusions have been quite conventional, if a little left of centre. We need to keep capitalism in a mixed economy; the state will need to get bigger to cope with the demographic challenge; we will have to tax the rich more as middle incomes are squeezed. There’s nothing here that would upset the denizens of Whitehall unduly, notwithstanding the economic liberal tendencies of some. But I think we are badly let down by our system of government. It will have to change radically – and yet the complacency of the Westminster elite is overwhelming. Liberals must rally to challenge it.

Unfortunately one of the best examples of this establishment complacency comes from our own Liberal Democrats. Back in the 1990s I was inspired by anti-establishment rhetoric from our then leader, Paddy Ashdown. The whole system was rotten, he said; we were the outsiders and only we could change it. Then, in 1997 the party arrived as a serious force in Westminster politics.  But, somehow, under the leaderships of Charles Kennedy and Nick Clegg (or the brief leadership of Ming Campbell, come to that) this radicalism came to be toned down. In spite of some radical language from both of these leaders, policy was more about trimming the Westminster policy agenda here and there without counting too much controversy. Ideas, such as a local income tax, which might have meant a decisive break from the Westminster-centred way of the world, were quietly buried. By the time Lib Dems took up cabinet jobs in the current coalition, they looked very comfortable in their new Westminster ministries, with the possible exception of Vince cable, the industry minister.

And the public could sense this. My heating engineer, classic old-school lower middle-class, told me that the Lib Dems had sacrificed their principles to get their hands on the prestige of power. Mr Clegg looked as if he was enjoying themselves too much. This feels very unfair, of course. There was a national crisis in 2010, and the compromises of coalition were needed for the country’s sake. And the Liberal Democrats have stopped the Conservatives doing a lot of silly things, like cutting Inheritance Tax. But there’s a grain of truth in the accusation; what about the promise to really shake-up British politics? It’s not clear that senior Lib Dems ever wanted to do more than change the standard Westminster priorities a bit, by pushing education and redistribution up the agenda and making the odd stand on behalf of civil liberties, unless real heat got applied. If there has been any reinventing of government, it is mainly Tory ideas that are driving it. And they are about keeping the basic Westminster architecture in place, but diversifying the delivery (more private contractors and Quangos in place of top-down state hierarchies). The attempt to devolve more power to democratically accountable local bodies has been a particular disappointment. Each step forward is accompanied by at least one step back. The malign orthodoxy of the Treasury, with its insistence on a highly centralised model of power, remains unchallenged by key Liberal Democrats – or so it appears.

Why does this matter? Firstly because the pressures caused by the demographic shift have only started. I have already written about pensions. Health costs will rise too as the ratio of older people increases. And then economic growth will continue to stagnate, for a variety of reasons, including the increasing number of people entering retirement, but for other reasons too. Meanwhile the twin (and related) economic deficits of government finances and trade are unsustainable in the long run. The government has to tax more and spend less. It has to become much more efficient and effective.

The country’s direction of travel is not encouraging. Government cuts have been very painful, and the public is tiring of them. Endless privatisations are affecting the quality of service. The fiscal deficit creeps down, but it is still very large, and he trade deficit is getting worse. This shows that the underlying economy remains weak, and that growth is hardly more sustainable than it was under the last Labour government. No sooner does the economy grow, than does Sterling appreciate to undermine all the rebalancing. Meanwhile the country is sleepwalking into the breakup of the United Kingdom (even if Scotland votes No in September) and exit from the European Union, as political dissatisfaction with the status quo grows. Pulling all the usual levers of power in Westminster seems to be doing not much good.

What have liberals to say about this advancing gloom? The first point is that we want people to have as much power as possible over their own lives. That means we dislike people being dependent on the state. It is here that we differ from the socialist left, who don’t mind if the public has a permanent client relationship to state agencies, as this creates a political constituency both amongst the dependents and the employees who serve them. Liberals should recognise that in a modern society the state must play a very big role – but we also need to push back on dependency. The state should fix problems so that demand for state services reduces.

The second point is that we believe that as far as possible state structures should be fully and democratically accountable to the people they serve. The state does not devolve power to citizens, but citizens delegate power to the various levels of government. This too is difficult in the modern world. Many problems are complex and must be solved at a national and international level – and the further up power is delegated, the weaker accountability becomes.

Have we delegated too much power to transnational bodies like the European Union and the World Trade Organisation – with the threat of more as part of a transatlantic trade deal? I don’t think so – these structures merely recognise the transnational nature of problems and the need to agree international standards and laws. Countries that opt out of these structures don’t seem conspicuously better off as a result. Is Australia, for example, really a better and happier place than Britain? Its recent economic success is as much down to the luck of geography and natural resources as anything else. Does having to dig up vast amounts of prime farmland to get at the coal beneath, while poisoning the great natural wonder of the Barrier Reef, really look like freedom?

No. I think the main problem is that we have delegated too much power to Westminster, and that the Westminster elite is protecting itself rather than solving the countries’ problems. It has created a series of administrative silos that perpetuate problems rather than solving them. To tackle this we need to do three things.

  1. Establish a federal system for United Kingdom, by creating a new English parliament and English government, based outside London, and taking to itself the same set of administrative responsibilities as the Scottish government has.
  2. Radically reform the way public services are commissioned to ensure that solving problems for their clients becomes their prime driving force. This will entail a radically increased role for locally accountable agencies.
  3. Reform the country’s tax system to follow this radical redistribution of responsibilities so that every level of government controls more of its own revenues – alongside a system of transfers to ensure a fair distribution of resources.

Each of these three depends on the others. Federalism is required to break up Westminster complacency; public services will only be properly remodelled if it is not controlled from Westminster; power cannot be decentralised unless tax is decentralised too. I will pick up each of these themes in future essays.

 

 

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Rethinking Liberalism 5: pensions and the state

In my previous essay I concluded that we had no choice but to tax the wealthy more, and this was the most divisive issue in current British politics. The reason for this is that state commitments on pensions and the health service, and potential commitments on social care, would force the state to expand, and for taxes to rise. The hollowing out of the economic middle meant that the wealthy would have to take up an increased share of the burden. But what are liberals to think about these state commitments? It is easy to see why socialists favour them, but less clear for liberals.

At the recent CentreForum seminar on the Orange Book, more than one speaker referred to the coalition government’s commitment to a “triple lock” on the state pension as being disastrous and illiberal. This guarantees that the state pension will rise by the higher of consumer prices, earnings or 2.5%. So as the proportion of older people grows the cost of this promise will mount. The same demographic trend means that we cannot look to economic growth to camouflage the policy’s generosity. And yet pensions are something that people should be able to sort out for themselves through saving over their lifetimes. Relying on the state just fosters dependency – and it can only be funded by increasing the tax burden, largely on people who will not directly benefit. If liberalism is about fostering self-sufficiency and independence, this is surely a step in the wrong direction?

A similar logic applies to health care for the elderly. In Britain it is widely assumed that this will remain free and funded by the taxpayer. As the population ages the overall cost rises. Greater efficiency in the state spend can only get you so far. Social care for the elderly is a similar issue, except that this is only a universal benefit in Scotland – though there it was enthusiastically supported by the Liberal Democrats.

The answer to this puzzle comes in two familiar guises: the need for a safety net, and market failure. A safety net allows people who succumb to bad luck to get back on their feet. I am sure that highly sophisticated arguments can be made in their defence, but to most people it is simply being part of a civilised society. Once families and social solidarity could have taken most of the strain, but the demands of economic efficiency have broken these institutions down; so economic efficiency, and the taxes they can generate, should provide the solution.

The safety net idea isn’t entirely satisfactory when providing for old age, however. The capacity to earn at this stage in our lives is limited, so it is rather more than a just a temporary helping hand. However, it still means that your life can’t be entirely ruined by bad luck. But everybody is entitled to the state pension, not just those down on their luck. The triple lock may be required to keep the state pension for the destitute at an acceptable level, but should it apply to everybody?

What lies at the heart of the problem is a market failure. Start with an obvious problem. If pensions are means tested, then the incentive to save is destroyed until you get past an amount that gives you a reasonable pension. Let’s use some numbers to get this into perspective. The new basic state pension will be about £7,500 per annum in today’s money. To get an annuity of this amount, indexed to RPI (admittedly a mathematically flawed measure of inflation that tends to distort upwards) would cost in the region of £220,000 for somebody of 65, the current pension age. For a forty year working life, with zero real investment returns (I’m coming to that), that £220,000 takes a saving of £5,500 per year, which is over 20% of the average rate of pay (£26,500) before tax. Average savings rates are, of course, much less than that (typically 5-10% of household income).

But surely people can earn more than o% real return on their assets? Actually most people can’t. There are two problems. First is that investment returns are very low at the moment. Central bank interest rates are less than inflation (negative in real terms). All other returns take their cue from that. The prospects for higher interest rates are bleak; that’s they way the world economy is. There are too many savings chasing too few investment opportunities. To break this stranglehold you need a combination of three things: low transaction costs of investment, an ability to take greater investment risk by spreading it, and access what economists call economic rents – income that is not earned through adding wealth to society, but by exploiting an “unfair” advantage. These advantages are usually only available to the better off. For the first two you need a decent sized starting portfolio (over £1 million, say). For the last you need some kind of economic privilege. While the economy was expanding, and before the demographic crunch, you could, in fact achieve these ends by owning your own house. Rising house prices are a form of economic rent, earned by the ownership of land, which is in limited supply. That covers an awful lot of people, but these are now a privileged elite: it is getting harder to join them.

Can’t people band together to get a better return? That is what an old-fashion final salary pension scheme used to do. Administrative costs were low (because you the calculation of entitlements is simple), and investment costs and average risk was low because there was single, large investment pot. Unfortunately such collective schemes are another victim of the drive to ever greater economic efficiency, which destroys the large and relatively stable employers who are needed to sponsor such schemes. Collective action means the state.

The state is the only institution that can take effective collective action. And, with private sector investment opportunities in such short supply, increasingly the state has access to the best investment opportunities too (consider much infrastructure investment). And they have the chance to tax those economic rents. That is the central logic behind the new triple locked state pension. A basic minimum, which the public has every incentive to improve through private saving, which will, unfortunately, rarely add up to a great deal more.

Meanwhile, the various distortions of tax and regulation that inhibit private savings can be gradually dismantled. The government has started by dismantling the rules compelling people with pension plans having to buy annuities. Personally I would start to dismantle income tax relief on pension contributions, increasingly of benefit only to a wealthy elite, and which comes with a dense thicket of rules to prevent abuse. That is a formidable political challenge, though, and can only be achieved in small stages.

Because efficient long-term savings are not accessible to the vast majority of people, especially those without access to property assets, the state must intervene to fill the gap. That makes the economic liberal dream of a low-tax society an impossibility – the alternative is mass destitution, or a needs based system that will be economically less efficient. And if you add health costs and social care into the picture, the problem gets bigger.

The state must get bigger. The question is how to do this in the most liberal way?

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Britian’s police: unprofessional conduct

Carol HowardFor once the BBC News’s editorial priority seemed to be spot on. Top story on the 7am Radio 4 news was an astonishing case of discrimination involving a black police officer, Carol Howard. Amongst other things, it showed that the Metropolitan Police were systematically manipulating evidence. Alas by 1pm the story had dropped right out of the bulletin. Instead the channel carried a story about a potential paedophilia scandal in the 1980s, based on some very thin evidence. But this story should not be allowed to drop from our attention. Indeed it raises many questions that should be very worrying both for Londoners and the whole country.

Ms Howard joined the Met’s elite Diplomatic Protection Group in 2012. She was quickly victimised by her boss, Acting Inspector Dave Kelly. Mr Kelly appears to have assumed that Ms Howard’s behaviour was dishonest, and instead of handling this in a professional manner, he is accused of hounding her with unreasonable complaints, and he then become “hostile and aggressive” when she invoked a grievance complaint. Ms Howard then went on to bring a complaint of sex and race discrimination. The tribunal hearing this complaint asked to see a report on the original grievance complaint – but the Met’s management edited out all references to discrimination, saying that they were not relevant to the tribunal. They then claimed such deletions were a matter of policy to protect the Force.

The tribunal found in favour of Ms Howard, and was understandably very critical of the Met. All the Met has done so far is to offer this very weak statement:

We are aware of the decision of the tribunal. We are disappointed at the tribunal’s finding in favour of PC Howard.

The tribunal’s decision will now to be given full and careful consideration. We will review the findings, take legal advice and take forward any learning or actions as appropriate.

In other words: zero leadership, but we’ll ask our lawyers how to fiddle with our procedures. They are clearly hoping the story will go away. To judge by the speed with which the BBC has dropped the story, their hopes appear to be well-founded. It is now up to our politicians to on their case. This is one area were the London Assembly can really show its worth. Here’s hoping.

But evidently no major politician has seen fit to take the case on so far – perhaps the reluctance has something to do with the rise of Ukip, and the backlash against political correctness, by older white males in particular. If so our politicians will be letting the majority of people in London down – of all ethnic groups.

Here are the questions I would like to ask:

  1. How is it, 30 years after Lord Scarman first identified problems in the police, that this kind of behaviour seems to be tolerated by middle management in the police force?
  2. There seems pretty good evidence that Mr Kelly’s conduct was unprofessional as well as discriminatory. He has brought the service into disrepute. Has any action been taken by the Met against this officer?
  3. How was it that an attempt was made to manipulate the evidence from the grievance complaint. Is it legal? Is any disciplinary action warranted against any officer? Or should a more senior officer take responsibility for unethical conduct?
  4. Have such deletions affected other complaints? Have they affected statistics produced to the public about the number and resolution of complaints of discrimination?

And then there are the wider issues. The Police are a public service, funded by us as taxpayers. A quid pro quo is that they should be accountable, with a culture of public disclosure and truthfulness. Instead they seem to have a defensive culture, where the public seem to be treated as the enemy, and openness as a threat. Furthermore, proper professional standards seem to be lacking, and the application of discipline highly selective. If officers are unprofessional, they should fear the reaction of their own superiors; instead these superiors seem to rally round. After each scandal, I hear that police morale has been hit, and I hope that this is at last evidence that they have got past of the denial stage of the grieving process for their old ways. But I may be underestimating their resilience.

I am going to leave the last word to Ruwan Uderwerage-Perera, a former policeman and now a Liberal Democrat councillor. Here is what he said in a Facebook post earlier today (quoted with his permission) (and please allow for the informality of that medium):

“The ‘Canteen Culture’” states Prof PAJ Waddington (himself a former police officer) “is often portrayed as a pervasive, malign and potent influence on the behaviour of officers. The grounds for this portrayal are, however, insubstantial and appear to rely more upon the condemnatory potential of the concept than its explanatory power.”

As a former officer myself I believe this aggressive and macho sub-culture that further stamps the belief of ‘them & us’ between the police and the policed is not only still very much alive and well, but has proven resilient to the three plus decades of criticism since is existence was acknowledged by the police service following the Scarman Report of 1981.

The ‘Canteen Culture’ as a result of its very existence is exclusionary and as such Women, BME and Gay (sworn) Officers (for support staff and PCSOs and the like are never fully accepted) either have to acquiesce to the egotistical, male dominated, heavy drinking, womanising and otherwise hedonistic culture which is supported by the ‘work hard, play hard’ mythology or they are cast aside and will be subjected to further abuse.

I add ‘further abuse’, for even perceived membership of the group means that if one is different e.g not white male and straight then one will be the butt of the so called humour anyway, but at least the victim is ‘one of us’ for the time being.

In my opinion the continuance of this sub-culture holds back the service from becoming a professional body, and means that the service will remain believing that it is not part of society, but somehow is on some ‘crusade’ to save society from itself.

Update: 3 July 10.40am

As I hoped, some traction is being made by London Assembly members on this issue, pressing London’s Mayor, Boris Johnson. Mr Johnson, to his credit, does seem to be taking the matter a bit more seriously than the Met’s senior management. He has said he will review 34 other cases.

According to yesterday’s Standard, the Met have denied that the deletions were a matter of policy. That always did sound like a bit of a middle management excuse to me. Also Ms Howard’s lawyers have called for a public enquiry. I don’t agree with that. What is needed is proper accountability, up to the Chief Constable. A public enquiry will merely drape the matter in more evasion, obfuscation over evidence, legalese, and lost time. The answer starts with leadership, and if no leadership is forthcoming from the incumbents, we need new leaders. Quickly.

And just to be clear. This story is about London’s Metropolitan Police. But the problems uncovered are typical other British police forces.

 

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Rethinking Liberalism 4: taxing the wealthy

There is a growing view that”inequality is one of the main problems confronting the modern world. This is quite a change. Distribution of income or wealth (or indeed the difference between the two) was not a major concern in the previously dominant neoclassical economic world view. But now that the benefits of growth in the developed world go almost exclusively to a tiny elite, while median incomes stagnate, this view has become complacent. And the work of the French economist Thomas Piketty has drawn attention to the potential power of the very wealthy. This presents a major challenge for liberals.

The problem is that liberals should have no particular problem with inequality of income and wealth in their own right. We believe in individual responsibility and free choices. We have unequal economic outcomes because people want and choose different things. So what? In fact inequality is cover for a series of issues which liberals should care about. Today I am writing about one of them: the wealthy elite.

The problem is known colloquially as the “1%”, because a disproportionate share of developed world income is going to the top 1% (or 10%; or 0.1% depending on how you want to present the figures). Rather than providing evidence for this assertion, and how it specifically might apply to Britain (perhaps less than in some countries), I will take it as a given, and look at some of the issues of principle that it uncovers.

Why does it matter? To some it is a simple matter of social justice. Inequality is one thing, but the justification for these extremes is another. There is more than a suspicion that the lucky few are winning because of unfair advantages, rather than just ordinary luck and talent. But regardless of this is a further problem. This wealthy elite has the chance to consolidate its advantages with political influence, so as to rig the economy in its favour. The growing influence of big money in politics, and the enormous lobby industry in places like Washington DC, points in this direction. There is an economic problem too: excess wealth is deadweight. The wealthy do not consume as high a proportion of their income as poorer people. And only a small proportion of their savings get channelled into constructive investment  (paying people to build things) rather than various forms of speculation in pre-existing assets.

Why is the problem growing? It seems to be a case of a weakening middle. In other words it is not a question of rising poverty, but a hollowing out of the middle class. It is easy to see the culprits: technologies that automate medium-skilled jobs, and globalisation that weakens local bargaining power. Thus we have the problem: the economy becomes more productive, but the benefits do not go to most workers. Can this trend be reversed? That is a central challenge for progressive policymakers, and it is a question I will return to.

But if we take the trend as a given, which I fear we must, then what can be done about it? The answer is clear: redistribution via taxation, public services and transfers. This issue divides politics like no other. On the right, we have “economic liberals”, who think that lower taxes and smaller government will unleash economic growth that will benefit all of society. On the right we have what I will call progressives (not all liberal), who appreciate that with today’s skewed power structures such growth will only benefit an elite, and will in any case be undermined by the deadweight effect of excessive wealth. Like most Liberals, I am in the progressive camp here.

Apart from the deep flaws in the economic liberal logic, progressive thinkers can see something else. The state has no choice but to grow. We have signed up to a society which seeks to (more or less) guarantee minimum levels of access to health care and old-age pensions.  The aging of developed world populations will increase the burden of these. And much of the investment needed to keep a modern economy growing, from education to roads and bridges, requires some level of state support. Meanwhile the ability of the middle classes to fund their own needs through savings is under pressure – both because their own incomes are not keeping pace with inflation, and because returns on saving are diminishing, a little appreciated aspect of the “hollowing out” process – with the exception of those able to own property in prosperous parts of the country.

So this comes back a stark truth. Taxes on the rich must rise. This serves to recycle wealth that would otherwise drop out of productive economic flows, and it helps fund the basics the state has to provide. So how to do this? There are broadly three directions: income, assets and capital gains.

Until now, most of the argument has been over income taxes, and in particular the best top rate of tax. When I started my first accountancy job in 1976, the top rate of tax was 83%, which rose to 98% for investment income. Conventional wisdom turned against the wisdom of such high rates. They dropped to 60% and then to 40% in the UK, before rising to 50% in 2010, and then being clipped to 45%. Economists are less sure about the wisdom of cutting such high rates. They did think that cutting tax rates would mean that rates of pay (for the elite) would fall, as it was cheaper to provide the same net salary. In fact the opposite has happened. This seems to point to senior salaries being more about power politics than market forces. Companies paid their executives more because they could; they did not do so when tax rates were high, because they did not like to see so much of the extra money disappearing in tax.

I can see no harm in reinstituting the 50% top rate of tax, though experience suggests that this won’t bring in a huge amount of extra revenue. Such high rates create a tax avoidance industry. There is a problem with very high rates of income tax though: they tend to entrench a wealthy elite, because they make it more difficult for outsiders to join them. The way to become wealthy becomes to to inherit rather than earn. This was the rather interesting conclusion of a quite wonderful contemporary study of the British tax system of the 1970s by Mervyn King and John Kay – which was recommended as a model piece of economic writing 30 years later by the UCL Economics department.

So should we not look at taxing wealth? This is the recommendation of Mr Piketty, who worries that the rate of return on the elite’s assets is too high, and entrenches their dominance. Such a tax would probably be about 1 or 2% per annum – which may not sound much, but is enough to dent annual returns significantly. Such a tax exists in the Netherlands, hardly as basket-case economy. A variation on this general idea is just to tax land – an idea (Land Value Tax) that has an ancient history in the Liberal movement. I personally have a difficulty with taxing a theoretical value of an asset, rather than a realised one – given that the reliability of asset valuations is weakening. But I have to admit the idea is growing on me, especially the land-only version.

A further way of taxing assets is at death. This is theoretically very sound, but too easy to avoid in practice. The rates here can be very high. In order to make this more watertight such taxes should no doubt be applied to large gifts as well. This used to be the case in the UK. But taxing legacies and gifts seems to attract a particular political opprobrium, and we have to tread carefully.

Finally we should mention capital gains: where assets and incomes meet. These are the commonest loopholes in tax systems. Aligning such taxes with income tax seems the best way of dealing with this. But this may undermine the case for an asset tax: the Netherlands does not tax capital gains.

But in discussing such details we must not miss two big and interrelated issues. The first is that our elites tend to be globally mobile. Taxing them will require growing levels of transnational cooperation. And indeed the need to tax such mobile elites puts greater importance on such transnational cooperation. The EU’s tax dimension should grow. Such bodies as the G20 need to focus on the matter too. It is not particularly surprising that so many rich businessmen are in favour of the UK leaving the European Union.

Which brings me to the second issue: politics. The rich seem to be of an economically liberal mindset (which is actually a recent development, as this article in the New Yorker observes). They increasing fund political movements with an economically liberal agenda. This is already poisoning the politics of the USA. It will make taxing the wealthy harder. But not impossible. If the public understands that the alternative is to cut basic pension and health systems the economic liberals will lose. But whereas we used to think that politics in the developed world was getting dull, this growing clash of economic interests will inject real conflict into it. Class war is back.

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The Orange Book 10 years on: is this the way to reclaim liberalism?

Orange book conferenceToday I attended a conference organised by CentreForum to mark the tenth anniversary of its publication of The Orange Book. Viewed in hindsight, the Orange Book was an important political event, that did much to set the tone of the following decade. But does its version of liberalism have what it takes to drive political ideas in the next ten years? On today’s form the answer to that question is no.

The Orange Book was edited by David Laws, currently education minister, and briefly in the Coalition cabinet; other contributors were Vince Cable, Chris Huhne, Ed Davey and Nick Clegg – who are or were all members of the Coalition cabinet, along with a number of other people who became ministers – an event that none would have foreseen at the time. While it took on a broad definition of liberalism, it was its espousal of economic liberalism that caught attention. It was not favoured by the Liberal Democrats’ then management, as a General Election beckoned in 2005. But after Nick Clegg took on the party leadership it came to define the party’s official policy line. It can plausibly claim to frame the guiding principles of the Coalition government itself, and not just the Liberal Democrat element. To the book’s supporters this was a victory of a coherent political philosophy over the mushy protest politics and left-wing opportunism that preceded it. To its opponents the Orange Book’s success was the triumph of a “neoliberal” elite over the party’s core values.

The conference consisted of two panel sessions, with three speakers each, in the morning, a keynote speech by David Laws at midday, with a response by economics journalist Anatole Kaletsky, with a final panel session after lunch.

The first panel consisted of Mark Littlewood, currently of the Institute of Economic Affairs (IEA), a right-wing think tank, but also a former Lib Dem functionary; Tim Montgomerie, a Conservative agitator who founded ConservativeHome; and Vicky Pryce, formerly a government economist and Lib Dem member.

Mr Littlewood led with a lightweight defence of economic liberalism: a formula of smaller government and lower taxes, which, he claimed would lead to stronger economic growth, whose benefits he did not bother to spell out. He felt that the country’s governing philosophy was still social democracy, and that economic liberalism had not been given a true opportunity to show what it could do.

Mr Montgomerie was much more interesting. He pointed out that economic liberals needed to confront two issues which threatened to undermine their system. The first was “social capital”, the family and community structures and the value system without which a liberal economy could not flourish. The second was inequality, of which the most important aspect was the division between those who owned their own houses and those that didn’t. His take on both, and especially the first, had a conservative slant – but the challenge was good. He made the excellent point that the best way of reducing the size of government was reducing demand for it, through a stronger society. This is a point that few in the political elite grasp: the objective of most public services is to reduce demand for them – one reason that they have less to learn from the private sector than may think.

I found Ms Pryce rather less memorable. She made a call for stronger leadership and coherence in government. Our current system was too subject the a “do something” culture, responding to whatever the Daily Mail happened to be beefing about, with individual ministers acting without reference to each other.

The second panel session was meant to focus on public services. It consisted of Paul Marshall, who founded CentreForum and effectively funded the Orange Book; Greg Clark MP, a Conservative minister in the Cabinet Office; and Norman Lamb MP, the Lib Dem Health minister. They never really got to grips with the issue public services, confining themselves to generalities.

Mr Marshall is a hedge fund manager, who also founded ARK, a chain that runs Academy schools. He showed himself to be an economic liberal extremist, which he claimed was necessary for social liberal ends. He promoted the myth (as did Mr Clark) that it was the government’s policy of supporting independent academies that had caused a substantial advance in school standards, especially in London. This is a rather annoying rewrite of history: credit for London schools lies mainly lies is forcing proper accountability on local authorities and established schools, as well a degree of state assistance and support. For Mr Marshall education pointed the way for other services, such as health – that advances could be made through using a diversity of providers. He was right, however, in his passionate denunciation of the complacency within the educational establishment.

Mr Clark proved an interesting speaker. His big idea was decentralisation from Whitehall, on which he claimed a lot of progress had been made with the City Deals that he had worked on with Mr Clegg. Unlike some, he clearly understood the implications of this: that it meant breaking away from the idea that everything had to be done the same way across the country. He did not refer to the Coalition Communities’ Secretary, Eric Pickles, who recently decided to regulate the way in which local governments managed their parking enforcement.

Mr Lamb broadly agreed with this, but seemed a bit wearied by the political difficulties of executing reforms. He felt that our highly centralised government was the wrong way of going about public policy, as the many failures of the NHS had demonstrated.

Mr Laws offered a rather complacent speech, celebrating the success of the Orange Book, while barely acknowledging the challenges to it, such as rising inequality. Mr Kaletsky’s was much more interesting. He understood that the world had changed and that conventional liberal economics was not up to the task. Fiscal policy had to be restored as a policy instrument alongside monetary policy; inequality was not just a matter of social justice but economic efficiency; government would have to both to take up less expenditure and extend its regulatory reach; public pensions and the health service would have to be curbed. While I find this analysis is flawed, it at least challenged the complacency.

In the afternoon the final session had James Cameron, Chairman of Climate Change Capital, Maajid Nawaz, co-founder of Quilliam, and Jeremy Browne MP, a former Lib Dem minister, notorious for his robust economic liberal views. This session raised the issue of sticking to liberal values in an international context. Mr Nawaz said that liberals had to emphasise the global nature of liberal values, and not soften them for cross-cultural sensitivities. Liberals should appeal to individual members of ethnic minority groups, and not approach them via their paternalistic community leaders. Mr Browne put to much emphasis on global competition for my taste – but he did make the point that the Lib Dems were potentially missing an appeal to a younger generation who were both economically and socially liberal. While all speakers emphasised that challenges were increasingly international, and the cross-cultural nature of liberal values, none made the obvious progression that liberals should organise themselves internationally, rather than being stuck on national lines.

Overall impressions? To me this conference showed that the Orange Bookers are nearly out of road in the Liberal Democrats. All the most challenging speakers came from outside the party. The world, and Britain in particular, faces major challenges. The rich are taking too big a slice of the economy, which is slowly throttling overall growth. Everybody else is finding life increasingly precarious. Meanwhile the demographic challenge is threatening to overwhelm what taxpayer funded services can provide and climate catastrophe beckons. These developments are not the result of too large a government and an excess of social democratic policies. They result, at least in part, from the application economic liberalism. The Lib Dems will either sink back into the mushy world of protest politics that it inhabited in 2005, or develop challenging new ideas to confront the problems of now. The Orange Bookers seem to be doing neither, and are in danger of irrelevance.

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Rethinking Liberalism 3: defeating intolerance

In my first two essays in this series about rethinking Liberalism, I kept to my comfort zone of economics. I concluded that we need to retain capitalism as part of a mixed economy, but that we need to develop the language of economics so that policymakers become less obsessed with crude productivity and growth. Now I want to step back and look at what troubles me most about our society, both in Britain and elsewhere: rising public intolerance.

In my personal bubble, as a white middle class citizen of British heritage, here in a smart inner London district, it is easy to ignore the problem, or even to deny that much of one exists. It just isn’t visible directly. My neighbours are easy-going. The parents and staff that I meet at the local primary school where I am a governor are very positive about taking a tolerant society forward, notwithstanding its ethnic and social mix. I witness easy interactions between people of different ethnic and national groups everywhere. This is all much better than in my youth.

But venture beyond this and things soon get darker. Take this cry of pain from Asian Lib Dem activist Kavya Kaushik, on the relentless hostility and rudeness she has encountered while canvassing for the party, directed not just at Asians, but East Europeans. This is consistent with what other ethnic minority writers have said; things are getting worse not better. Ukip has done well by tapping into this angst, especially in working class communities. Britain First, an intolerant Facebook grouping, keeps coming up on my newsfeed, and has nearly half a million “likes”. Jewish groups are under increasing fear of attack, exemplified by recent murders at a Jewish museum in Belgium. A recent opinion poll found a growing proportion of people admitting that they had racist views, although the Economist has tried to talk this down.

This phenomenon seems typical of the white working class. But it would be a mistake to think that it is only prevalent there. One of the nastiest media outlets is the very middle class and female-oriented Daily Mail. On a local forum this morning it was a nice middle class woman that drew a connection between a local rubbish dumping scam and the arrival of travellers locally (something that I am sure is baseless, judging by the person that tried it on us).

First a note of caution. I have been careful to use the word “intolerance” as being the primary issue, not “racism”. Intolerant comments are typically introduced by the expression, “I’m not racist but…”. Ukip, and the mainstream newspapers who also promote intolerance, are careful to avoid outright racism, without complete success in the case of Ukip. The flashpoints are cultural (Muslim dress code, for example) or over the impact of immigration on the availability of housing and jobs and the take-up of state benefits. And the intolerance is itself multi-ethnic. Some of the things that I have read an Islamic writer say on state primary education are totally inexcusable (“worse than a toilet, because at least after the toilet you can wash your hands…”). On being challenged by me, incidentally, this writer quoted the Daily Mail. But it all boils down to the same thing – and talking about racism obscures rather than clarifies the problem. And anyway ethnic intolerance is leading to intolerance of anybody who is different, such as benefit claimants, the upper or lower classes, gays and so on, and an orgy of scapegoating,  of politicians, bankers and anybody else you don’t know personally.

There is an optimistic way to view this. It is like the anger stage in the seven phases of grief – just a phase that society must get through on the way to becoming more tolerant – and the product of temporary economic tensions. But behind that optimistic view there lurks a nightmare. In the 18th Century the Enlightenment ushered in period of rising tolerance, and especially the integration of Jews to mainstream society. But from the middle of the 19th Century there was a backlash. And this backlash was no temporary phase. It grew and grew until it burst out into mass murder and destruction with the Nazis.

What lies behind the current rise in intolerance? There are two big phenomena, at least here in Britain. The first what I might call a Muslim backlash. This is a complex thing; it is mostly a peaceful but angry battle between conservative Muslims and the rest of society over things like mosques and dress codes. But it also inspires terrorists – and since the 9/11 attack in New York, these have been elevated by our security services to being the greatest security threat the country faces. This backlash generates its own backlash. The second thing is the mass immigration of East European workers since the end of the Cold War, and especially the entry of former Communist Bloc countries to the European Union. This has visibly disrupted job and housing markets.

But I think there is an even more important driver: the insecurities generated by the world’s headlong process of globalisation and technological advance, of which both of these are aspects. People are stirred by events in far-away places (such as Iraq and Israel); jobs are made less secure by the rise of developing world industries and automation; people are more inclined to change their country of residence for better economic prospects or a more conducive climate. This creates both physical and cultural insecurity, as well as economic advances. This is not unlike the situation that persisted in the 19th Century, which fuelled intolerance then.

So what should liberals do? Many mainstream politicians, Labour and Conservative alike, are seeking a middle path. They accept that immigration is a problem; they want to push minority groups to integrate better into the mainstream way of life. This includes promoting “British Values” in schools, which include “tolerance”, as  away of promoting universal human values while at the same time nodding to the intolerant appeal to Britishness (see Britain First).

I don’t think this is working. It just encourages intolerant attitudes. “We spoke up by voting Ukip,” they might say “and now at last they are listening. Let me speak some more.” The more politicians talk about immigration as being a problem, the more members of the public think it is OK to be intolerant. That may not be logical, but it does seem to be the way things work. And as for “British values”, the trap is obvious. What the public thinks this means (“no foreign cultures here like Islam”) is different from what the politicians think (“Accept Muslims as being fully British”). It’s all a bit “I’m not racist but…”.

Instead liberal, and Liberal, politicians should concentrate on three things: challenging intolerant attitudes, without the buts; developing broad-based community education; tackling the insecurities.

First is challenging intolerance. This means taking on people who say that immigration is destroying society, that Muslim communities are a threat, that benefit claimants are scroungers, and so on. This is more difficult than it sounds. Most mainstream politicians say the words, but destroy them with a “but”. “This society could not survive without immigration, but it has disrupted communities,” for example. Instead politicians should try and divert the blame for the society’s stresses onto economic insecurity following technological and global development.

Next is community education. Schools, especially primary schools, should be celebrated as places where different communities meet. Pupils should be taught about different religions, world regions and so on. Of course Britain’s own special story must be taught as part of this, but not in such a way as to promote narrow nationalism. And the school curriculum should embrace wide life-skills, such as dealing with people who disagree with you, and taking responsibility for you own fate, rather than always trying to blame somebody else. This is not rocket science. Many of our schools are already doing this. But it is difficult to see how this is compatible with the government’s programme of fragmentation of school management, driven by parental choice – and focus on narrow skills such as literacy and numeracy.

Finally we must tackle the insecurity that drives intolerance. This brings me back to economics, and I will develop my ideas on this in future essays. But in essence I think we need to look for stronger local economies, with stronger local governance – to balance the global dimension with a local one, at the expense of our current national focus.

 

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Can the European Parliament address the EU’s democratic deficit?

As I have often remarked on this blog, the European Union plays the tortoise in Aesop’s fable to the United States’ hare. The EU’s forward motion is imperceptible and it is easy to make fun of it, compared to the easy strides made by its American counterpart. And yet when reviewed over the long term, progress is dramatic. At the moment we are witnessing an ugly row in the EU about who should be the President of the European Commission. This follows a rather dramatic election to the European Parliament (EP) in which Eurosceptic and populist parties made big advances, not least here in the United Kingdom. But these apparently discouraging could mask a major advance by the parliament.

At the centre of this drama is the problem referred to as the EU’s democratic deficit. A large proportion of the member states’ laws (to say nothing of most European non-members likes Switzerland and Norway) are now derived from the EU’s federal institutions. These are led by the Commission. These laws, and the Commission itself, do not seem to be subject to the same standard of democratic challenge and accountability that people have come to expect in a democratic polity. EU laws are presented as impositions from outside from an unaccountable bureaucracy. Two EU institutions are meant to provide democratic legitimacy. Firstly there is the European Council, consisting of the heads of government of all member states. This works mainly by a system of qualified majority voting, so that laws can only be approved with substantial inter-state coalitions. Some areas require unanimity. There are two problems. First, its attention span is necessarily short, so there is a limit to the extent of any detailed scrutiny – though this is improved by delegation to more junior  ministerial meetings. A bigger problem is that the public perceive their deliberations to be wheeler-dealing: an unseemly process of stitching voters up. Prime Ministers do not have their voting records at the Council examined in the way that US Senators do, and they easily pass decisions off as not being theirs.

The second institution meant to provide democratic legitimacy is, of course, the EP. European federalists see this institution to be the forerunner of an active federal parliament, like the US House of Representatives. So far it has been a disappointment. Elections have drawn a low turnout; there is little awareness among voters about what it does; voting is dominated by national politics. There is no “European polity” that forms the basis of its legitimacy, where there plainly is an American one for the House of Representatives.

European federalists have sought to address this problem by making the EP matter more. First it was given greater legislative power; its importance has risen to such an extent that its members are now subject to extensive lobbying by commercial and other interest groups – but the public has barely noticed. Who cares about the finer points of intellectual property or bank regulation, after all? Their next idea was to give it a bigger say in the selection of the President of the Commission – the nearest thing the EU has to a Prime Minister. Their idea was that each of the transnational political groups into which MEPs are organised would select a leading candidate, referred to by the German word Spitzenkandidat. The Spitzenkandidat of the largest party would be nominated to be President. This is the way Germany picks its Chancellor, and also the way Britain picks its Prime Minister. The winner of this process turned out to be Jean-Claude Juncker, the former Prime Minister of Luxembourg.

Here in Britain this process has been observed with a mixture of contempt and disdain by the political elite. It is nonsense to suggest that voters were picking one the Spitzenkandidaten when they were voting, they say. Mr Juncker’s nomination has no democratic foundation. And besides we don’t like him. One British journalist claims that this is no better a way of running the Commission, than monetary union was for running Europe’s economy, following the British elite’s view that the Euro has been a disaster (gently skating over their own country’s own troubles outside the Euro zone). David Cameron has led the charge to dismiss this process and pick somebody else, who would be more “reform-minded”. He has at least tacit support from other party leaders here, and in a few other EU countries. But this stand is looking increasingly costly, expending Mr Cameron’s diminishing stock of political capital within the EU. He has been out-manoeuvred, and it is likely that Mr Juncker will get the job.

Much of the criticism emerging from British commentators is true. Mr Juncker does not inspire confidence as the man to take the EU forward to something that will function better. The EP does not represent the will of a European polity. The battle of the Spitzenkandidaten never took off in the election debates. But they have missed two important points.

The first is that this years’ EP elections were a major political event, right across the union. Turnout remained low, but it was actually up on the previous election in 2009. The combination of it being seen as an election whose consequences are relatively weightless, and the use of proportional representation, have made the outcome unpredictable and dramatic. The rise of populist political parties has enlivened the election, and have given electors a voice that they would have been otherwise denied. This invites a crisis of confidence in the EU, but, paradoxically, it gives the EP a greater degree of legitimacy. The election results in the UK were described as a political earthquake. No longer are the elections a sleep-inducing irrelevance, but they have become an important test of the political temperature. Some of the consequences are ugly; mainstream politicians are pandering to the populists, allowing racism to make a comeback. But it puts the EP on the political map.

The second point that British critics miss is that the argument over Spitzenkandidaten is not about the present; it is about the future. The current candidate may have no democratic legitimacy, but in order for future ones acquire that legitimacy it is necessary for us to behave as if they did. This is not about the election in 2014, but the one in 2019. The tortoise beats the hare because he focuses relentlessly on the ultimate goal, while the hare is distracted by the issues of the moment.

Should we applaud this turn of events? The EP has taken a great step forward. There may be no sign of a European polity yet, but each of the national delegations has greater democratic legitimacy with their own national polities. That is a clear step along the path. Does the EP provide the answer to Europe’s democratic deficit? Or should it be abolished? Abolition is not an option for now. And the EP may provide part of the answer.

But we should remember one thing. In order to judge the success of the EU and its institutions we must look over the long term. While currency union has endured almost unbearable stress, it is much too early to write it off as a failure. As the EU stumbles forward into unmapped ground, the same must be said for the European Parliament.

 

 

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Rethinking Liberalism 2: economics

The discipline of economics pervades all reflection on public policy. This is only right, as it is this discipline that tries to reconcile supply and demand for resources, and present a rational framework for choices. But it can be pernicious. It can frame the policy debate in the wrong way. As we refresh liberal policy ideas so as to put sustainability and human needs at the heart of public affairs, this is becoming a major problem. Liberals must challenge many tenets of conventional thinking.

First of all, let me say what I’m not going to talk about. There has been much heated debate on the value of austerity policies in tackling the recent economic crisis. I have read some liberals who say that “Keynesianism” is a core liberal belief, something given added resonance by the fact the Maynard Keynes was a Liberal. These tended not to be professional economists, who are careful not to label their beliefs with the name a of a dead economist, however inspirational. And it is based on a misunderstanding that Keynesian policies implied free public expenditure at all times, rather than being a temporary measure in response to a short term crisis. The problem that I have with economics applies as much to conventional, liberal “Keynesian” economists, such as Paul Krugman, as it does to the neoclassical ideologues – though the liberals are the more pragmatic, and the more likely to support changes to the conventions of the discipline. Having said which, I am sure Keynes would have recognised the value of what I am trying to say.

The problem that I want to deal with lies at the boundary of what professionals call “positive” economics, which refers to the factual or “scientific” side, and “normative” economics, which deals with policy recommendations, and where personal value judgements play a role. Much normative economics is presented as if it positive. Policy makers have taken simplifying assumptions used in positive economics, and used them as the basis of concealed value judgements.

I need to get more specific. These are the sorts of things I mean:

  • Economic growth is good for a society and should be an objective of public policy.
  • High productivity, the key to economic growth, is therefore a critical policy objective.
  • Free trade promotes economic welfare and drives economic growth forward, and should therefore be maximised.
  • The more people consume the better off they are, and the healthier an economy is, provided that spending does not outreach income.

I could keep going. The issue is not that these assumptions are wrong – they have served policy makers well – it is that life is not as simple as that, and we should always question them before using them in the decision-making process. And increasingly they are taking us in the wrong direction.

To be fair, economics does not stand still. I did not put on that list that aggregated income is the critical measure of success, and how it is distributed is of secondary importance. Economists (some of them at least) are at last seeing through that idea, which had been universally accepted. Also a worship of open market mechanisms for allocating resources is coming under question. And indeed, you can have perfectly sensible conversations with professional economists in which it is clear that they understand the limitations of their discipline. But when they get back to their desks and analyse policy options, the same old things keep coming up.

The result is that policymakers are trying to push the economy in a direction that it does not want to go. Growth remains obstinately slow, distribution becomes more skewed, public services struggle for funding. We worship highly centralised, “efficient” and specialised models of business and public services that are failing to meet human needs. And we are heading in slow motion for an environmental disaster.

Economics needs to adapt to the modern world. To do so it must start to take on board ways of thinking. Consider the following, none of which are particularly wacky in terms of economic theory, but all of which undermine the conventional wisdom of public policy making.

  1. Wealth must circulate for a healthy economy. This is the main idea of George Cooper’s book Money, Blood and Revolution. If wealth is accumulated by a rich elite, it drains the life out of an economy because they don’t spend it, or don’t spend it efficiently. They save too much, and the bulk of their saving goes into unproductive assets and speculation, and not enough into productive investment. Worse, they use their accumulated wealth to skew the workings of society in their favour. This presents an economic argument for progressive taxation and the taxation of wealth – as well for trying other interventions which distort the way incomes are set.
  2. Consumption should be optimised, not maximised. Once basic human needs are met, the utility of consumption rapidly diminishes, and often gets tangled in a zero-sum game of status competition. This challenges the idea that economic growth is the be-all and end-all, as well as bringing distributional issues to the fore.
  3. Don’t confuse the acquisition of wealth with its realisation. This is a related point. The conventional wisdom, based on the gods of maximising consumption and productivity, is that we should go out in the world and work as hard as possible for the common good. But what if somebody wants to work less and consume less? Or if she prefers to consume less goods, but which are made in a less “efficient” way (organic vegetables, say rather than mass farmed ones, for example). Provided that she does not consume more than she produces, does this really matter? What is the point of piling up wealth if we can’t use it in the way that we want? Economists frown on organic vegetables as they reduce productivity, but the ability to choose such low productivity goods is a sign of a wealthy society. They are confusing the creation of wealth with its realisation. This suggests that the more developed a society becomes, the less worried it should be about productivity and income growth.
  4. Trade is a means to an end, not an end in itself. No human activity has done more to banish poverty than trade. Yes we should celebrate it, and yes protectionism usually ends badly. But there comes a point when its uses diminish. Trade between the developed world and China had economic benefits when China had a pool of very unproductive agricultural labourers who could be used to make cheap industrial goods. But these benefits diminish as China catches up, and as this happens, it is more than likely that the volume of trade (and its benefits to the developed world) will diminish. That’s economics. Don’t panic. The party was fun while it lasted. Globalisation remains key in the world of information and ideas. Trade of physical things remains is important to helping undeveloped countries to develop (though the locus of that trade is likely to be mainly with middle income countries rather than developed ones, as these bulk larger). But trade of physical things over huge distances is not so important for the sustained progress of developed economies.

Liberals should believe that an economy should develop based on free human choices, long term sustainability and a degree of human solidarity which diminishes with distance. Increasingly human preferences, technology and world development will take us away from the mass-produced, high productivity, high consumption, global trading society that policy makers favour, guided by economic conventional wisdom. It isn’t what people want (free human choices), it isn’t sustainable (carbon emissions and world resources) and it is less needed for human solidarity (developing countries are increasingly able to look after themselves, while the need for more localised solidarity grows). The discipline of economics needs to catch up.

 

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Birmingham exposes the hollow heart of Conservative education policy

Britain is ill-served by its news media. There has been a growing kerfuffle about Muslim-dominated schools in Birmingham. The issues dominating this in media coverage are the extremism of some Muslims, and the explosive relations between the Education Secretary, Michael Gove, and the Home Secretary, Theresa May, which they assume is all to do with Mrs May’s leadership ambitions. This wantonly ignorant coverage is not only damaging community relations, but it failed to shine any light on the failure of the coalition’s Conservative-led education policy. This matters because this policy has been given nearly a free run in the media, and supported by papers, such as The Economist, that really should know better.

We must start with Mr Gove, who has been in post since the government was formed in 2010, and is one of the Conservatives’ big hitters. A journalist by profession, he has strong views on both education and extremism, which he has not hesitated to put into practice. Liberal Democrats have moderated some of his more extreme positions, but many suspect that the Lib Dem leadership (in contrast to its activists) sympathises with a lot of what Mr Gove is trying to do. Instead they have concentrated on their own pet policy, the Pupil Premium.

At the heart of Mr Gove’s policy is the idea that education should be run as a quasi-market, driven by parental choice, and without the need for much in the way of government direction – rather in the way the private sector does. Schools are being progressively pushed into being “Academies” independent of local authority control, and new Academies, “Free Schools”, are being established without much of the obstructive bureaucracy that would have strangled many of them at birth under the previous regime. These Academies were not subject to the National Curriculum, though they were subject to inspection by Ofsted, the schools inspectorate, which focuses on a narrow set of core subjects (literacy and numeracy – with “behaviour” thrown in to satisfy conservative prejudices). The idea was that bad schools would fail to attract pupils, and so they would end up being closed, or management changed. Competition would impose discipline on the schools, and the whole thing would be more democratic because parental choice would not be intermediated by busybody officials, elected and otherwise.

Two other themes ran alongside this. One was the idea that existing education was not based enough on factual learning, with too much emphasis on wishy-washy “skills” and mushy “values”. Mr Gove recalled the curriculum of old-fashioned private schools and selective state grammar schools, which educated most off Britain’s elite. A second was a distrust of educational experts and officials, who Mr Gove took to referring to as “The Blob”, who watered down and undermined the reform process. The “Blob” was progressively dismantled.

In this mix we should mention faith schools. The Birmingham row does not involve faith schools directly, which has led a number of, excessively defensive, faith school supporters to claim that they are a irrelevant. But they are heavily bound up in the consequences of the row. Faith schools were not a strong element of Mr Gove’s ideas. They were rather an enthusiasm of the previous Labour government, who, it must be added, started the whole process of setting up independent Academies. Britain’s state schools have always included those run by religious foundations, in particular the Church of England in (rather obviously) England. These were joined by Catholic schools. Under Labour these were extended to Jewish, Muslim, Sikh, Hindu and no doubt other foundations. The Labour Prime Minister, Tony Blair (a Catholic convert) had the idea that such faith schools gave children a solid moral grounding. Labour generally found that it helped their clientalist relationship with ethnic minority communities. These schools have been given a great deal of freedom to run themselves along their chosen lines. So long as you keep giving us good test scores and exam results, the suggestion was, we don’t care how you do it.

Finally in this background exposition, I need to mention Muslim extremism. Terrorist groups have successfully recruited a number of young British Muslims, and they have carried out a number of acts of violence both in this country and abroad, in such places as Syria. It is considered my many to be the biggest security threat the country faces. These extremists have very conservative instincts, such as believing in the veiling of women, but they tend to be converts and not very conversant with the actual teachings of Islam. Their extremism is fuelled by a general feeling of rejection and alienation.

In the public eye however, these young extremists have become tangled up with the conservative views of many Pakistani and Bangladeshi communities. These are horrified by what they see as the laxity of Western moral values, and do not want their children to be corrupted by them. They share many of the conservative instincts of their extremist co-religionists, along with an acute sense of injustice over the treatment of Muslims abroad, especially in Israel and Afghanistan; but there the similarity breaks down. Terrorism plays no part in their outlook, and certainly not in a domestic UK context – they may view Palestinian suicide bombers more sympathetically. But the extremists hover at the fringes of these communities, and that leaves the British state with a very tricky problem. They need intelligence from the established minority communities, and so to maintain good relations with them. But they are quite unsympathetic to many of their beliefs.

Into this delicate situation wade opportunistic journalists and careless politicians, Mr Gove among them. To them there is a direct line between the terrorist threat and conservative religious values. Most of the white community assume this to be the case, and happily lap up this message. Almost no politicians attempt to put a more realistic public gloss on this.

And so when allegations emerged that conservative Muslims had taken over a number of state schools in Birmingham (as part of a “Trojan Horse” plot), Mr Gove assumed that terrorism was at the heart of it, and so did most of the public. He steamed into a delicate situation, upsetting community relations and the Home Office, responsible for policing. The schools had been rated highly by Ofsted, who had focused on academic achievement, which was strong. The inspectors were sent in again with a different agenda, found evidence of  a conservative religious agenda, and, with a bit of ingenuity, ways in which these breached requirements of state-funded schools. The schools are in the process of being transferred to new management.

But the problems have only just begun:

  1. What has been alleged is that school governors, recruited from the local community, took the schools over and forced them into a conservative religious agenda. The school populations were almost entirely drawn from the local Muslim communities. But this is surely what school governors are supposed to do? They set the direction, ethos and strategy of the school. Their actions appear to have been perfectly popular with parents (though not staff). And though not faith schools, the widespread political support for faith schools would not have suggested to them that what they were doing was a bad thing. They were simply picking up the ball tossed by Westminster politicians and running with it.
  2. The actual alleged abuses are not so black and white. Segregation of the sexes? We still have 100% segregated schools. Allowing tradition Muslim dress? A lot of perfectly respectable schools do that already – and that is surely right. The same goes for making provision for prayer, which after all can be open to all faiths. A culture of intimidation? sounds a bit like my English private school education. And surely school management has a right to make the changes it wants, and this always leads to such allegations. The were, predictably, no demonstrable links to terrorist extremism.
  3. We are now told that Mr Gove wants “British Values” to be taught at all schools. Not only is defining this a minefield, but it is a step away from the “fact-based” principles that he had been so fond of espousing. And how will “real” faith schools, and not just Muslim ones, end up if judged to the same standards as those used in the second wave of Birmingham Ofsted inspections?
  4. Sorting out this mess is going to take a lot of work. Schools can’t in fact be left just to get on with it. They are going to need help, guidance and correction from an intermediate level of officialdom. A newly recreated Blob, in fact.

And so we find that parents are free to choose, provided they conform Mr Gove’s own version of political correctness. It is very easy to understand how the local Muslim community (and no so local ones) feel victimised – judged by double standards from a society that has lost its moral compass.

The government’s reforms are barking up the wrong tree. Here in London we have an outstanding example of how seemingly hopeless schools in deprived areas can be turned round. This did not need the creation of Academies; the existing local authority structures were up to the task. What it is did need was strong and credible leadership. Politicians can lead from on high, but ultimately this leadership has to come from experts who live and breath schools. The country was lucky enough to have plenty of these. But they have been side-lined and pensioned off.

Coalition policy is hollow at its heart, and the last four years have been largely wasted. Even Labour could do a better job than this.

 

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