Why isn’t the sovereignty argument for Brexit making traction?

Maslow Hierarchy ofNeeds.svgThank you to Politcal Betting’s Alistair Meeks for giving me the idea of using Maslow’s hierarchy of needs to offer insight to Britain’s referendum on whether to leave the European Union. It poses an interesting conundrum about the campaign for a Leave vote.

Maslow’s hierarchy is old-fashioned psychology, which has no doubt been left behind by practising psychologists long ago.  But it contains enough truth to resonate with political analysts. This hierarchy is presented as a series of layers, usually visually presented as a pyramid. At the bottom are physiological needs (food, shelter, etc.); at the top is “self-actualisation” – the higher needs of confident people. The idea is that while needs are unmet in lower layers of the hierarchy, higher needs will count for little. People won’t worry about safety if they are starving, and so on. The political message is that high-flown arguments about democracy and freedom will not appeal to people unless more basic needs and fears have dealt with.

Mr Meeks puzzles that many Leave campaigners are obsessed with the European Union, and its supposed effects on national sovereignty, and yet the EU hardly registers in lists of important issues identified by ordinary voters. It is trumped by issues such as the economy and immigration, which speak to needs (security and, perhaps, belonging) that are lower down the hierarchy.

But the puzzle doesn’t end there. The Economist’s Bagehot column points out that there is a great educational divide in attitudes to the EU, and uses two nearby cities to illustrate the point. Middle class, well-educated Cambridge is strongly for Remain; working class Peterborough is the opposite. And here’s the puzzle: it is the middle classes, much further into self-actualisation level, to whom the standard Leave argument about sovereignty should appeal. And it seems to be having little or no impact there.

And that is not from lack of exposure. For the last five years people on BBC Radio 4 have been banging on about it, and not just in news programmes. Arch Eurosceptic MP John Redwood presented an Analysis programme on Europe; conservative philosopher Roger Scruton majored on it in one his Sunday morning point of view programmes. And it has been repeated endlessly in the last week, most notably by Conservative cabinet minister Michael Gove, usually reckoned to be a thoughtful type, as well as the more opportunist Boris Johnson, London’s Mayor. And almost no argument has been offered against the idea that the EU is an outrageous assault on British democracy and in effect a foreign dictatorship. Instead responding Europhiles quickly migrate down the Maslow hierarchy and talk about jobs and security, or pick off relatively minor points, such as challenging the figures on Britain’s budget contribution to the EU. And yet for all the apparent one-sidedness of the high intellectual debate, Remain seems to be winning at the top of the Maslow pyramid.

I think that is because there is a massive disconnect between Leave campaigners and members of the general public on the nature of Britain and democracy. Mr Gove paints a picture of a proud history of the British freedom and democracy, against an EU that has achieved little and is stuck in the past. He wants laws made in Britain, by lawmakers the British people can throw out if they don’t like them. But it is all very well for Conservative MPs holding safe parliamentary seats to wax lyrical about British democracy (and to talk aggressively about throwing the blighters out – a very distant prospect I their own personal cases…), and decry the limits that the European treaties place on their exercise of power – but ordinary people, even nice, educated, middle class ones, don’t feel connected to their lawmakers. They distrust their parliamentarians, and aren’t sure that they actually would be “thrown out” if they didn’t like them. Indeed when it comes to elections, the same politicians delight in suggesting to electors that they have no real choice at all – vote for them or for chaos. And don’t waste your vote on Greens, Liberal Democrats or Ukippers. Many voters are persuaded to vote for people they don’t really like or trust, for fear of something worse. It is hardly surprising if people have rather more nuanced views about British democracy than their elected representatives.

This is all reinforced by standard political wisdom. Democracy is not supposed to be elective dictatorship. Hitler’s attack on minorities and opponents was not legitimated by the fact that he had a mandate from an elected parliament. As the Americans appreciated from the start, freedom and democracy is about checks and balances. And there are frighteningly few of these against the British House of Commons, whose majority, these days, is based on the votes of about a quarter of the electorate. The European Union presents one of the few remaining checks, and usually for reasonably sensible things, like protecting the environment, ensuring public procurement isn’t stitched up, or that there are some standards of job protection. These regulations may not be especially loved, but they offer some bastion against our own politicians, especially Conservative ones, who celebrate the freedom of employers to sack people at will, and landlords to do as they please. The EU is not imposing taxes or calling up our young people to serve in a European army. This “dictatorship” has a rather muted impact on our daily lives, it turns out, which well be rather benign in the long run.

There is another problem with the sovereignty argument. What is so special about the British level of polity? Mr Gove is annoyed that French or German politicians have a say over our laws. But don’t Scots voters feel even more strongly about the say of English Conservatives over theirs? Why should London voters have so much say over what goes on in Manchester or Cornwall? Politics is clearly a much more complex business than is being made out. It is interesting to deploy the arguments of Messrs Gove and Johnson to the question of Scottish independence. And to note that to most Scots the EU does not look like an instrument of foreign oppression.

Furthermore, many middle class voters may be rather less than convinced that the rest of Europe is such a bad place that we should have nothing to do with them, or (a longer shot) that the EU has achieved nothing. Things seem to work well enough in France, Germany and Austria – and even in Spain and Italy. The EU’s mission to extend democracy and the rule of law to south and east Europe may not be entirely successful or complete, but surely it is a worthy cause? And surely the most important moments of British history, from Waterloo to the First and Second World Wars show that what happens over the Channel affects us deeply. Europe is where Britain belongs, surely?

This is not to say that there are not many insecurities that the Leave campaign can play on, especially amongst working-class Britons. These, especially including fears over immigration, may yet win them the referendum. But banging on about sovereignty is unlikely to help them much.

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Economics essay 2: why global trade is going into reverse

Now for the second essay on economics that I wrote in 2008. The topic is trade, and it investigates the theory of trade between developed and developing nations. It turns out that standard trade theory, based on comparative advantage, works rather well here. But it contains a prediction that goes largely unremarked. Apart from Paul Samuelson (in 2004) I haven’t seen anybody else raise the point. And yet it does much to explain what is going on in the world now, especially between Britain and China.

The theory of comparative advantage is part of what Americans call “Economics 101”: basic first year economics. It explains how mutual trade can benefit economies even when one is manifestly more efficient than the other. But generally this wonderful piece of logic, made famous two centuries ago by David Ricardo, fails to advance much beyond Economics 101. Modern economists have not found ways of using it to make concrete predictions. Attempts to make the theory more specific, for example by relating it to availability of factors of production (like land, capital, etc.) have come to not much. Instead the idea is used to give a warm glow to the idea of trade being a Good Thing, and the basis of patronising comments to non-economists advocating protectionism, while economists get on with the day job without touching it.

That is a pity, because the theory repays more examination. Its central idea is that gains from trade are based on opportunity costs of the various products in an economy, or comparative advantage – that is how much of one product you have to forgo to produce a given quantity of another. The corollary is that where the differences in opportunity cost are minimal, the gains from trade are likewise minimal. As different economies converge, the less incentive there is to trade.

In fact trade does take place between similar economies, but it is driven by other factors, such as economies of scale, and is quite sensitive to transport costs. But the theory of comparative advantage does explain trade between developed and emerging economies rather well. These economies are self evidently very different from each other, and gains may be made between countries on opposite sides of the globe. But as emerging economies develop; they converge with developed economies. What happens then?

To explore this I created a simple mathematical model. I divided the economy into four sectors: agriculture, where productivity grows, but which is not traded; services, also not traded, but where no productivity changes happen; and two types of goods, high and low tech, which are tradable and where productivity changes at differing rates. I looked at three stages of development. The first, undeveloped stage has a huge and inefficient agriculture sector. In the second, intermediate, stage, low tech manufacturing has got going. In the final developed economy stage, productivity has advanced in all sectors apart from trade, but especially in high tech goods.

I then looked at how trade would work between the developed and undeveloped economy. There was no major impact, but the undeveloped economy would buy all its high tech goods from the developed one, in exchange for low tech goods.  The undeveloped economy’s currency traded at well below purchasing power parity. Next I considered what would happen if the undeveloped economy moved to the intermediate stage. Now trade becomes much more important to both economies; once again the intermediate economy buys all its high tech goods from the developed one, in exchange for low tech goods. But the developed economy imports a high proportion of its low tech goods. Both sides gain substantially.

But what happens as the economies converge further? The trade disappears; the developing economy supplies an increasing proportion of its high tech needs, and exports fewer low tech goods, substituting productivity gains for gains from trade. The developed economy has to supply its own low tech goods again, and loses gains from trade. It is worse off.

All this models what has been happening between Britain and China quite well. Nothing much at first, but as China’s agriculture became more efficient, and so its low tech manufacturing could grow, then trade ballooned, with gains to both sides. This took place in the 1990s and early 2000s. The price of manufactured goods in Britain dropped because of cheap imports, allowing other goods and services, and pay, to grow at a healthy 4% per annum or so, while keeping overall inflation at about 2%; the components of the inflation statistics became very revealing. A lot of the economic growth that took place in Britain in this period was surely driven by this, rather than advancing productivity.

But even in 2008 I could see that the party was coming to an end. Chinese costs were rising; they were moving increasingly into high tech areas. It has become harder for Britain to compete for high tech goods, but easier to repatriate lower tech manufacturing and services. This latter has been good for British jobs, but not for living standards, as what is being repatriated has lower productivity. Volumes of trade have fallen – though it is a complex affair so cause and effect are hard to prove.

Won’t China be replaced by other countries? Japan started the trend after all, to be replaced by the “Asian Tigers” (South Korea, Taiwan, etc.), before China entered the picture. There are emerging economies that are taking up some of the slack – Vietnam and Bangladesh, perhaps. Africa has huge scale. But not only are many of these economies slow to transition to the intermediate stage, with a strong export manufacturing base, but the sheer scale of China changes things. The emerging economies are as likely to trade with China (and India, whose emergence takes a different but parallel path) as they are with the developed world. And perhaps low tech is becoming more high tech too – making it hard for the newly emerging economies to find enough of scale where they have a comparative advantage.

And this is yet another reason why developed economies appear to be stagnating, and why much of the growth that took place before the crash of 2008 was unsustainable. Trade has a reverse gear that is nothing to do with protectionism and ignorance of economic theory. Economic theory predicts it.

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The Metropolitan Police: institutionally stupid?

Some years ago London’s Metropolitan Police were accused of being “institutionally racist” by a learned judge. Recently I was talking to an experienced police officer (not from the Met, as it happens), who took great exception to this accusation. Now I have no strong evidence that the original accusation was fair (nor that it wasn’t), and neither do I feel able to comment on how things stand now on that matter. But it goes with the territory that institutional failings are often invisible to the institution’s members. This came to mind in the latest kerfuffle over the police’s investigation of child sex abuse claims.

The current row centres around accusations of child sex abuse made about Lord Bramall, a distinguished ex-soldier. Lord Bramall claims that the whole matter was bungled, took far longer than the merits of the case warranted, and was conducted without regard for the impact on the accused. Similar claims have been made about other investigations of child sex abuse, and not just by the Met (one by Wiltshire Police on former Prime Minister Edward Heath comes to mind). In response senior police officers seem unable to understand what they are being accused of, and reject the criticism as unfair, beyond the odd minor mistake. Sir Bernard Hogan-Howe, the Met’s Commissioner won’t apologise, because he thinks that doing so would suggest that no investigation should have been carried out. Which his critics have never suggested.

Sir Bernard did muse, however, that perhaps the police’s policy of automatically believing accusers in sex abuse cases might not be quite right. This attracted an attack from Vera Baird, the police and crime commissioner of Northumbria, a lawyer by profession.  She suggested that any departure from a strict policy of believing all accusers would condemn thousands of victims.This entirely misses the point.

The trouble is that the sort of practices complained about by Lord Bramall are hardly restricted to the investigation of sex abuse claims on famous people. They are normal police practice. Plodding investigation (if you are lucky, that is; too often nothing is happening at all as cases never get to the top of the pile before the file is lost); vital clues ignored; complete disregard for the impact of their investigation on the people that are involved in it. In common language, a complete and utter lack of common sense – and instead blind adherence to policies and procedures that prevent context, efficiency and initiative from getting in the way. And this does not just apply to investigations; the police got into a real muddle over crowd management at the G8 summit in London in 2013. They applied “tactics” (a revealing word) that were often totally inappropriate in context, causing distress to thousands of ordinary law-abiding citizens.

But this is how many people like to run large organisations, and how, incidentally, lawyers often advise such organisations be run. The senior officers adopt sheaf-loads of policies and plans, and then tell their underlings to follow them. If something goes wrong, it either arises from a failure of an underling to follow a policy, or else the policy itself is at fault. And, of course, because the policy cannot cater for all circumstances, many failures are tolerated with a shrug, and, are not seen as failures but as just the way the world is. What is not allowed is for junior management to assess a situation, and decide the most appropriate course of action, given the organisation’s overall objectives, disregarding those sheafs of policy documents. Hence Ms Baird’s and Sir Bernard’s spat over police policy on how to treat sex abuse accusations. Neither can stand the thought of discretion and common sense entering police procedure; or rather, the idea that it might do is unthinkable. It is institutional blindness. and institutional stupidity.

Lord Bramall, as former Field Marshal, may well recognise the syndrome. One hundred years ago armies used to be run like this. The senior staff made plans; everybody else had to comply, regardless of context (even the political leaders, in the case of Germany’s Schlieffen Plan in 1914). It proved utterly disastrous as the First World War unfolded, and nowhere more so than in the order-loving German army. The shock was such that the Germans carried out a systematic rethink, so that by the Second World War they had managed to reconcile the need for local initiative and overall command. Evil though their cause was, the German army proved astonishingly effective in that war, except at its very top level of command. Right until the end they seemed to outfight their opponents man for man. Modern armies learnt from this, and local initiative is now a standard part of how the British Army works.

Alas the police have no such initiative-taking, intelligence-using, problem-solving culture, except perhaps in elite units. This seems to affect all British police forces; it just creates most damage in the Met, the country’s biggest, where senior management are most remote from the front line. A living demonstration of the problem can be seen in the recent disastrous merger of Scotland’s police forces, which was much applauded by policy wonks south of the border when it was first proposed.

It is perhaps one good reason why an outsider, from another country or another service, might be a good idea to lead the Met. But the problem is much deeper. Police middle management seem to be of dire quality, being so cossetted in a culture that favours following orders and procedure, and then sticking together under pressure. It will be a tough job making things better.

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Economics essay 1: economic growth will come to an end naturally

Last week I was looking for something I had written a few years ago, and I found two essays that I had written in 2008. I was trying to clarify my thinking on economics, using the device of explaining the discipline to a non-economist. They were meant to be the start of a longer series, but alas the rest of life intruded. I have decided to publish them through this blog, and to try and extend the series.

My blog posts are long enough (over 1,000 words a piece, usually), but they are not long enough to develop thinking properly. And the pressure to get two posts out a week is not conducive to deep thought either, as the rest of my life is proving quite active, even though I am now retired.   These essays are longer (the first just under 2,500 words), and certainly more considered.

Both of the essays developed ideas that I have used in my blogging since. The first is that there is a natural limit to economic growth – which I am now convinced we are reaching. The second looks at trade, and especially that between developed and developing nations – and why this leads to gains that are then reversed in developed economies. A further feature of the essays is that they frame economic ideas in a historical, or evolutionary, context. One thing leads to another and society changes. This is a break from the idea of a static equilibrium that dominates much economic thought. Economists even try to give a static quality to dynamic concepts, like growth and productivity change, by treating them as constants. Sometimes they produce data series of 200 years and more, as if to suggest that nothing really changes.

I wrote the essays just after I finished my degree in Economics at UCL as a mature  student. But it was before the collapse of Lehman Brothers precipitated what we now understand as the Financial Crash, though it had been clear from 2007 that the world’s financial system was teetering on the brink.

I have edited the essays (a job not yet finished for the second one) so as to correct mistakes and clarify language – but I have avoided a rewrite, even though I would write differently now. Partly this is to preserve authenticity; mainly because a rewrite would take much longer. What you read is how I saw things then. I will use the covering blog post to offer any new insights.

So what of the first essay: Wealth, wellbeing and growth? This explores the idea that economic growth might come to a end simply through the freely made choices of the people. This is not a line of thinking that I can remember any modern economist trying to develop, although it was foreshadowed, as so much in modern economics is, by Maynard Keynes.

This idea follows from four observations: that consumption for personal needs will reach saturation; that productivity gains allow increased consumption of things, but cannot change human content, and so make their products less attractive; that leisure holds a compelling attraction to those who can afford it; and that the quest for status is a zero-sum game.

Increasingly we want things that economic growth cannot deliver in greater quantities: land, leisure and fame. Technology change is not necessarily leading to increased productivity, while still delivering things that we want. Wellbeing may advance without growth. Though many in our society clearly need to consume more than they do – we still have poverty – that does not imply that increased consumption for everybody, even as an average, is the way forward people will choose. Economists are quite unready for this.

So what has changed since 2008? The crash may suggest the unsustainability of ever increasing consumption, especially if it fuelled by debt. I hint at this idea without developing it. Since then growth has become a political obsession – so the idea that it might not be considered to be an outright good has even less currency. The Greens have dropped their low growth rhetoric and replaced it with something that is quite ambiguous. The left has chosen “austerity” as top of their most hated abstract nouns, on the grounds that it is an attack on growth, though also on grounds of another abstract idea: “social justice”.

So we have a long way to go before my idea will get any political traction. And yet the idea of secular stagnation, is gaining ground. This is seen as a Bad Thing, of course, but its roots can be traced to as far back as the 1990s.  This is the idea that there is a structural excess of savings over investment in developed economies, which undermines growth – which is only sustained, by ever increasing cycles of debt growth and asset price bubbles. I think the ideas that I am suggesting in the essay are part, even most, of the explanation for secular stagnation.

There are some twists, though. Inequality may be an important factor in the process of saturation of consumption – a growing share of income is going to a rich elite, who are unable to spend it. This may imply that a more efficient distribution of wealth would increase consumption and lead to growth. But only up to a point, surely.

There clearly is a dark side to my idea. Demand for tax-funded services is voracious (hence the anger of some against “austerity”) – but what is to be taxed in a low-growth world? And the addiction of our economies to debt requires growth to feed it; it will not be broken without a lot of social stress.

But that is the way the world is heading – and it is as well that we think the implications through.

 

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The truth about school choice is emerging. It doesn’t raise standards.

I read this article in last week’s Economist. The implications are quite extraordinary for anybody follows the political debate about school provision. One of the central ideas of the right, school choice, is in collapse.

The article concerns school voucher schemes in the USA. In a number of areas vouchers are distributed to poor families, so that they can use them to get places for their children in private schools. The article takes a case study from a large scheme adopted in Louisiana following Hurricane Katrina. One interesting feature for policy wonks was that the vouchers were distributed randomly, which is evidential gold dust. You can compare the children who got vouchers with those that didn’t on a level playing field, as it were.

Voucher schemes are popular with the right, ever since the economist Milton Friedman advocated them back in 1955. Fans included the Economist newspaper. They were also quite popular with the poor families themselves – though, if I remember correctly, researchers felt that was more to do with a sense of empowerment than any educational benefit.

But in this study the children with the vouchers did worse than those allocated to their local state school. even after controlling for other explanations. Meanwhile dramatic improvements have been made in that state system in Louisiana through the use of good old-fashioned state management.

School choice has been a favourite idea of the right, who prefer market-mimicking solutions to state control. This is very much part of a fashion that the left refers to as “neoliberalism”, on this occasion with some accuracy (they have a tendency to apply it to anti-state followers of Ayn Rand, who should be regarded as libertarians rather than liberals). Neoliberals think that state run systems are inefficient because of inadequate or dysfunctional incentives for those running them, while markets are more efficient processors of information. The fashion for school choice caught on in Britain under the last Labour government, promoted by Tony Blair in particular, and then turbocharged in the Conservative-led governments that followed. The British policy was to introduce state sponsored “academies”, free of local authority control, to mimic private schools. Alas it is difficult to see this as anything other than a colossal distraction.

As it happened the Labour government had managed to raise school standards spectacularly, especially in London, through good old-fashioned management before they started messing with academies. Using a system of school inspections (by Ofsted, a state agency) to develop a broader idea of quality than mere test results, the British state has created a system that has delivered substantial improvements. According to last weekend’s Guardian, private schools are worried by the climbing standards of state schools. To be fair some of that may be due to the propaganda buzz around academies.  Certainly they do have something to be said for them as a way of diverting attention from private schools – including tapping into latent demand for state schools that local authorities struggle to recognise.

Right wing think tankers would do well do examine the remarkable success of many British state schools, and try to think about the reasons for their success. Voucher schemes can be quietly dropped.

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@markpack ‘s 20% strategy is not enough. The Liberal Democrats must develop a clear political strategy.

Featured on Liberal Democrat Voice

Mark Pack and David Howarth have published a second version 80-20their 20% Strategy, originally published last summer. In the preface the authors bemoan the lack of controversy over their proposals, which signal that their implications have not been fully internalised. This is exactly what I predicted in my reaction to the document at the time. I stand by my suggestion then that the party must work on a political strategy too.

The document is well worth a read if you haven’t already. If you read the first edition, I’m not sure the second version says much that is different. I must admit that I just skimmed through it. What struck me this time was that there was a bit of a diversity paradox in it. In one sense a core vote strategy is a step away from diversity in order to secure greater cohesion. In principle that is based on a sharper focus on liberal values, but it can easily stray from that. The document suggests that the party concentrate its messaging on more educated people, as they are more likely to be liberal. On the other hand their research suggests that the potential core vote has a great deal of ethnic diversity, which is not reflected in the party’s membership. There is also a bias towards women, which suggests that the male dominance of the party’s upper echelons is an issue too.

That’s a worth a bit more reflection – but I have to admit that I am struggling to think through how to promote diversity in a liberal organisation. Some attempts to promote diversity end up by reinforcing a sense of difference between different groups, and collective victimhood amongst some of them – when it is what we have in common that is most important, and victimhood gets in the way of personal empowerment and agency, which are keys to the liberal vision. A further concern (and not unrelated) is that a “core vote” strategy will too easily become a “middle class comfort zone” strategy. I think the party would benefit from a stronger diversity across social classes – which would help make the party sharper and more politically relevant.

But for now I want to come back to the issue of what I am calling “political strategy”. If the party’s values describe the “What?” and, perhaps, the “Who?”, political strategy addresses the “How?”. And in particular, how the party proposes to advance the liberal policies for which it is fighting. In my piece last summer, I suggested that the party needed to talk about this to create a bit of the controversy that is needed for the party to sharpen its collective thinking.

But in fact it goes deeper than that, because as well as “How?” it addresses “Why?”. In order to attract core supporters it is not enough simply to say things that they agree with. The party needs to explain how support for the party will actually have a positive effect in the Britain’s political system.

It is here that the party is weakest, because its strategy up to 2010 has completely collapsed, unless you think that 5 years as a junior coalition partner in national government every 50 years or so is enough. The party’s strategy had two main elements: to build up strength in local government, and use this to win parliamentary seats. And second to use its parliamentary presence to join coalition governments as a junior partner, and maybe one day as a senior partner. The Conservative strategist Lynton Crosby has exposed the hollowness of this strategy in his 2015 election campaign.

The trouble is that it matters who leads a coalition government. Labour supporters cannot forgive the Lib Dems for being part of a Tory-led government, however much Lib Dems claim that they moderated it. Likewise Tory voters were worried that the Lib Dems might switch sides and support Labour (and the SNP). Mr Crosby showed that that fear trumped all the excellent local knowledge and case work that so many Lib Dem MPs offered. So, it matters whose side are on (or at any rate whose side you are not on), and ultimately national politics trumps local politics.

What to do about this? I think the party has to be public about its preferences between Britain’s two main parties. The obvious way to do this is simply be to spell out its preferences. So the party could (like the SNP, the Greens and Plaid Cymru) rule out a coalition with the Conservatives. Mark and David’s research shows clearly that the potential core vote inclines left rather than right, so that is the way it has to be (much to my personal disappointment). There is an extra complication, in that the current Labour Party is becoming politically toxic amongst the party’s potential supporters. For now it would be necessary to rule out a coalition with them too. But the party can say that this view would change if Labour moves back towards the centre.

An alternative approach would be transactional. The party might make a series of core demands, and insist that it will only enter coalition with parties that sign up to these demands. But the party’s activists are likely to set the bar too high, in which case the party either becomes irrelevant, or it is forced to break its promises. To judge by the way the Lib Dem leader, Tim Farron, handled the vote to intervene in Syria, such a stand would have very little credibility. He set a number of stern conditions for his support, only to bend them to beyond breaking so that he could vote with the government.

A second strategic question the party needs to think about is the idea of electoral pacts. Britain does not have a pluralistic, proportional voting system. Our electoral system is essentially a binary one, and without preferential voting, or run-offs, parties agreeing not to run candidates against each other is the only realistic way of forming alliances. The basis of an alliance might be to change the electoral system itself – although it is far from clear that the British public would support this. Whether or not electoral reform is the subject, any pact needs to have a clearly understood common goal. Electoral pacts do not need to be universal. They can apply to different levels of election (local or national), and to only a limited number of seats. Thus Labour might withdraw candidates in a number of south western marginals, while the Lib Dems do so in Labour ones elsewhere. Such pacts have a long history within the British political system, before dying out in the 1950s (or even early 1960s?).

Preferred coalition partners and electoral pacts: these must be  elements in any future political strategy for the Liberal Democrats. Unlike the 20% Strategy, such ideas would be controversial. Good.

 

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Why do governments follow austerity when orthodox economists advise against it?

It’s by turns annoying and amusing: the way people on the left complain that orthodox economics has gone off the rails, and that we need fresh thinking to inform government policies. Apart from coming up with a lot of age-old tropes that economic models do not mimic real behaviour, or take account of information asymmetries, the main item of evidence is the persistance of austerity policies in the developed world.

But the main critics of austerity turn out to be…. orthodox economists. People like Joe Stiglitz, Paul Krugman and Martin Wolf. And newspapers struggle to find economists to make the case for the defence. The Financial Times often resorts to Niall Ferguson, who is a historian, not an economist, and no match for a Nobel laureate like Mr Krugman. The British Labour party is even roping in economics professors to bolster its economic credibility.

In fact there is a brand of orthodox pro-austerity economists. These are the old “supply-siders” from such institutions as the Chicago Business School, who developed a line of “neoclassical” economics, and rebelled against what was once the Keynesian orthodoxy. This branch of thinking grew out to the economic crisis of the 1970s, but proved utterly useless when the crisis of 2007/08 hit. Neoclassical economists pipe up here and there in America, but are mostly silent, their credibility shot-through. That leaves the field nearly unchallenged for the neo-Keynesians – at least far as the public debate in newspaper columns is concerned, in Britain, anyway.

Which leaves us with a mystery. Why are governments, from Europe to America (though not Japan, interestingly), ignoring the orthodox economists? Two explanations are usually offered by their critics. One is rank incompetence or wilful blindness. The other is a political agenda that austerity plays to, usually involving making the rich richer. Neither explanation stands up to close examination.

I am wary of accusations of incompetence, especially when made about clearly intelligent people, such as most politicians and technocrats involved in government finance. This is something I learnt as a history undergraduate (I studied both science and history in my original undergraduate incarnation, long before my study of economics as a mature student). Such accusations are bandied about freely down the ages, but never stand up to scrutiny. Mostly the wilful blindness comes from the people making the accusation, who cannot entertain the idea that there is a rival point of view to their own. Modern economic policy is no exception.

The political agenda is a bit more plausible. Perhaps governments are in hoc to big business interests and those of the wealthy? But if the last 150 years of history has taught us anything, it is that if poorer members of society are prospering, the rich will prosper also, and be left in peace. This is even more true of big corporate interests than anybody else. It is harder to make money in a stagnant economy. Those malign influences are there in politics, but their effects are altogether more subtle than doing down poor people to help line the pockets of the rich.

Sensing that these explanations don’t work, many on the left build up an idea of “neoliberalism”. This is a philosophy based on the old supply-side or neoclassical economics that may be waning in academic economics, but still holds a grip on the lesser mortals who staff finance ministries and banks, and other parts of the “elite”. But this too is inadequate as an explanation. Certainly it is possible to identify a series of beliefs and biases amongst policymakers that equate to economic liberalism. But they do not explain austerity as a macroeconomic policy. And besides, we need to understand why the hold of these beliefs is so strong. Clearly some on the left think that an outdated economic orthodoxy is to blame. But surely such theoretical constructs cannot by themselves have such a grip on so many intelligent and practical minds?

Instead of a conflict between different types of theory, what is really going on is a conflict between theory and practice. The theoreticians may be gung-ho about fiscal and monetary stimulus, but the people who implement policy are acutely aware of the practical problems and risks. There are three particular practical issues about which the theoreticians are dismissive, but which weigh heavily on the practical types: economic efficiency; public investment; and financial markets.

First take economic efficiency. Pretty much everybody agrees that, ultimately, living standards depend on economic efficiency, or productivity. This piece of orthodoxy could be challenged, but that is not what most on the left mean (traditional Greens being the exception, along with liberal voices in the wilderness like mine) when they call for fresh thinking. They see slow economic growth as a sign of failure as much as any conservative does; and that ultimately is based on productivity. But economic efficiency is hard work politically. Both businesses and workers like to protect their patches with taxes, government agencies and regulations that keep the winds of change at bay. This is especially the case in Europe and Japan. And yet, in order to achieve long-term growth, these vested interested must be tackled, and reforms enacted. This has been shown in countless contexts in both developed and developing world. Mostly reforms have an economically liberal character – but only because this approach genuinely unlocks long-term efficiency.  Far-sighted politicians and officials want to use every possible chance to advance reforms. That includes the pressures created by economic hard times. Theoretical economists might suggest that boom years are the best time to push through reforms, or that reforms can be covered by macroeconomic leniency. Politicians know that the opposite is the case – it too difficult to muster the political imperative in easy times, or if short-term macroeconomic policies take the heat off.

Reform and austerity are not necessarily the same thing, but they almost always are.  This debate, of course, dominates discourse in the Euro zone, where economic hardship is concentrated in less efficient economies. Critics of austerity there offer no way forward for improved efficiency, beyond the hope that public infrastructure investment will deliver the growth they seek.

Which brings us to the difficulties of public investment. To theoretical economists this is the magic bullet. Public investment in infrastructure both yields gains to long-term efficiency, and a short term fiscal stimulus. The economists are exasperated that so few governments seem to follow their advice. And yet public investment is a graveyard of roads to nowhere and white elephants. When the imperative to  invest is political, the choice of project becomes political too. It is very hard to make sensible choices. China was much lauded for its infrastructure investment programme following the crash. This has now turned into a major headache, as so much of the money was wasted on empty cities and useless infrastructure. Something similar happened in Japan in the 1990s. Finance ministry officials are rightly wary.

And then there are the financial markets. If I’ve heard one economist here in Britain suggest that now is a fabulous time for the government to borrow, or even “print”, money, I’ve heard it from a hundred. With so much demand for government bonds in the markets, and inflation looking mortally wounded, just what are you worrying about? But none of these economists work at the sharp end of government finance. If they did, such sanguinity would remind them of the sort of thinking that got the world’s banks into the disaster in the first place: a reckless confidence that markets would behave in future as they do now.

Alas life is much more complicated than that. Grounds for confidence in the financial markets is stronger in some places than others. Japan has a massive export industry that sees to all its foreign currency needs, so that the state can borrow and even print the Yen with reasonable confidence. Which is what it has been doing, in prodigious quantities, for the last two decades, although to little apparent effect. The US is another country that can feel reasonably secure, even though its balance of trade is less benign than Japan’s. The dollar is the world’s de facto reserve currency. The United Kingdom, however, shares neither of these strengths. It needs to draw on overseas institutions and businesses, and its own private sector, in order to finance its significant current account and trade imbalances. This is not a problem that printing the Pound can help with. The state has been extraordinarily adept at handling this risk over the last few decades. But that is because of the conservatism that is currently attracting so much criticism.

To me the theoretical economists, the practical policymakers, and most of their leftist critics are all trapped by an orthodox way of looking at the world through economic aggregate statistics. This means that they are failing to take on the deeper problems that society faces: economic and environmental sustainability, alienation, and the gravitation of wealth to successful people and places. That has very little to do with the politics of austerity. People on the left who call for fresh thinking should be careful what they wish for.

 

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