British regional policy needs more government

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I found this week’s Bagehot column in the Economist interesting. It complains that Westminster is brain-dead, but that elsewhere there are signs of innovative thinking. This helps to raise the question of how to address the imbalance of Britain’s (and especially England’s) imbalance towards London. But it betrays some rather stale thinking.

The article itself is lightweight. It shows enthusiasm after a visit to the University of Warwick, and witnessing its projects promoting industrial innovation, and in particular the efforts of Kumar Bhattacharyya to push back against the idea that Britain’s future lies in financial services and not manufacturing. It contains no hard analysis. This is less disappointing for a political column that it was for an article a few months ago about what to do about the developed world’s “left behind places”. Towns and rural areas left behind by changes to the industrial economy. In spite of the promise of its headline, this article had very little to say about solutions. It instead seemed to encourage the further expansion of already thriving urban centres, on the grounds that this would clearly be good for productivity. This was another symptom of the the stale, conventional thinking that dominates the Economist’s journalism.

But the issue is an important one. The gap between London and England’s southeast, and other regions of England, Wales and Northern Ireland is problem for everybody. It is an obvious problem for the struggling regions, from Cornwall to Tyneside. It is also a problem in the prosperous regions, where the cost of housing is exacerbating social divisions. If economic prosperity could be distributed more evenly geographically, then it would be easier to distribute it more evenly between the classes and generations. Scotland, incidentally, is something of an exception, and a revealing one.

This has been obvious for a long time, but efforts by governments to do something about it have at best been only partially successful. Two things have been tried: money, and relocation of government agencies. There have been various initiatives to pump money into the poorer regions, a number of which are under the banner of EU aid. These clearly help, but the beneficiaries too often seem to be large corporations headquartered elsewhere, who simply manage to funnel the money back again. So many English regional towns are dominated by national and international brands at the expense of more local ones. The relocation of government agencies manage to disrupt local labour markets (the jobs tend to be quite well paid and put local businesses under pressure), but a bigger problem is that they fall victim to government efficiency drives which shrink them.

Where the Bagehot article is clearly right is that there needs to be more going on locally in these regions that central largesse. Centres like the Warwick Manufacturing Group clearly help. At the centre of thriving modern economies is brainpower. Universities and research are clearly part of this – as experience in other countries shows. But two points need to be made: political structures are vital, and we need to think about tomorrow’s economy rather than today’s or yesterday’s.

The lack of interest in political structures was a big disappointment in the Economist’s analysis. Political structures clearly affect the way economics is distributed geographically. Countries that are both quite large and politically centralised, like Britain and France, have more uneven economic geography than those that don’t – like Germany and Scandinavia. I think this is for two reasons. One comes from network theory, which I have advanced before. Humans can manage only a couple of hundred connections with other humans efficiently, so at the heart of any organisation, however large, there is a small network of people within it, and people that the organisation does business with. Large organisations simplify management to reflect this, which means concentrating power geographically. When government power concentrates, corporate power tends to concentrate with it, as government has such an important effect of modern business. Superficially this looks efficient – the trap that the Economist falls into, because the concentrated power centres are efficient in themselves – but that is at the cost of hollowing out elsewhere. Scandinavia may not have a centre that compares with London or Paris, but you can hardly say it is not prosperous.

The second, and overlapping, reason that centralisation of government is bad for outlying regions is the sheer dead weight of government decision making. In England most decisions involving significant money find their way back to the Treasury in London. Decisions get stuck in queues, and when they come to be taken, risk aversion prevails unless huge political capital is expended. Human progress generally demands risk-taking. The fairly obvious idea that rail links between northern British towns should be drastically improved is bogged down in Westminster politics. If the north of England was an independent country it would already be finished.

So it is not surprising to see that developed countries with devolved political structures usually have better distributed wealth than ones that don’t. Switzerland, a small country with highly devolved politics reeks comfort and prosperity almost wherever you go. As I have already alluded, it is no accident that Scotland, with its advanced level of political devolution, is the one British region that has been able to push back against the gravitational pull of the southeast. It doesn’t always work. Political devolution allows regional governments to choose incompetence; Welsh devolution has an unconvincing track record. And what of distribution of wealth within regions?

The idea that political devolution needs to be part of any solution is very gradually taking hold in Britain. Most politicians play lip service to it. But there is long way to go to change the political culture. But we also need to think about how the economy is to develop. This is the biggest gap in the Bagehot article. It bangs on about manufacturing. Manufacturing still dominates the way most economists and policy makers think about economics. But we need to move on. Manufacturing is going the way of agriculture. There is only so much stuff we can consume, just as there is only so much food we can eat – and in both cases you can argue that we consume too much already. Consuming more stuff is not what will make our lives better (though it will for an important minority of us). The more productive manufacturing becomes, the less important it will be to the economy as a whole – the paradox outlined by the economist William Baumol.

Before I develop that argument further I must qualify it. Manufacturing is still important. It is changing radically in ways that mean that we should produce more locally, and rely less on global trade. This is partly technological, and partly because the economics of importing from less developed countries changes as they, and especially China, develop. There is plenty of scope for innovation and Britain needs to keep up it. Manufacturing innovation based in Warwick, Sheffield and other places needs to be kept going. But it won’t be enough.

What we need to think about is services. The health economy will grow in relative terms, and not just because of demographics – prolonging life and reducing pain is what people want to spend money on when they get more of it. Public services such from social work to law enforcement also need to grow – or get radically better at solving problems rather than pushing them around the system. And there is care for the elderly. We shouldn’t just be sponsoring research into manufacturing into the regions, but into all these other things and more.

And it will not be lost on my readers that this means more government and not less, which has been the prevailing wisdom of most of the last 40 years. But it needs to devolved and better at its job.

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Can liberals ever match the emotional appeal of populists? Should they?

Boris Johnson, Britain’s Foreign Secretary, understands the new politics. This week he put it about that he wanted to provide the British public with a dividend from Brexit by increasing funding to the NHS to the tune of £100M a week (or £5Bn a year). If the facts don’t suit you, you create new ones; emotion beats dispassionate analysis every time. This is the policy of U.S. President Donald Trump, and it is working very well for him. Is there anything sensible politicians can do about such behaviour?

There are plenty of good reasons to increase funding for the NHS, but a Brexit dividend is not among them. Such a dividend, famously estimated at £350M a week, was one of the most effective slogans of the Leave campaign in the EU referendum in 2016. It had only a slender basis in fact. Britain’s gross contributions to the EU are in that order, but most of the money comes back to Britain, including an unconditional rebate. So even if EU funding to poorer regions like Cornwall and Wales was cut off, along with farming subsidies and other goodies, there would still not be £350M a week of extra funding to go round. And that assumes that the economy, and the taxes funded by it, would not be adversely affected by Brexit. These criticisms were made during the referendum campaign, but the objections only served to publicise the original claim. People believed what they wanted to believe. For many this was the extra £350M a week for the NHS, starting on the day after the referendum result. Most were no doubt more realistic, and simply took the wrangling to mean that something was up, and there would be some kind of dividend.

But, a year and a half on, it is clear that any Brexit dividend will be a long time a-coming, if it ever does. It is not so easy to escape many of those payment obligations (e.g. to fund the pensions of British members of the European Parliament, such as the former Ukip leader Nigel Farage). There will be at least two years of transition in which not much will change, and certainly not the money the UK is paying out to the EU. And then even most Brexit supporters accept that there will be some economic dislocation, even if it does not turn out to harm the economy overall in the longer term.

Mr Johnson is well aware of all this; he is a clever man and very much part of the political class where such discussion is common currency. But the recent success of populist politics means that facts don’t matter any more. So why not just claim a dividend even if one does not exist? And so what if the government overspends a bit? It isn’t clear what adverse consequences would flow, after all. It would also show a government taking the initiative, rather than being trapped by events. A bigger political problem is that the government could announce the extra funding and then nobody actually notice any difference to the NHS. Its problems run deeper than money – such as its loss of EU national staff, and the reduced ability to recruit immigrants. The government already claims it has increased funding by a similar amount, and and the NHS winter crisis seems more dire than for many years. The NHS is an organisational monster than can quite happily eat money to no effect: it would takes greater management skills than Mr Johnson’s to achieve anything noticeable.

You don’t have to be much of a cynic, though, to think that Mr Johnson has no intention that the policy actually be implemented, knowing full well that the government will stamp on it, as it duly has. The whole thing is got up to improve his own chances of taking the top job, before a supposed generation of Tory bright young things pushes his generation out of leadership contention. MPs are rumoured to organising a putsch on Theresa May quite soon. There is a snag to that theory, of course: it might work. If Mr Johnson does indeed become Prime Minister, he would be left with the responsibility of managing the NHS.

Which is where the example of Donald Trump is instructive. Mr Trump was elected on a series of unachievable promises, based on a deep emotional appeal. That he has failed to implement many of these does not seem to bother him: he either pretends that he has, or blames some popular scapegoat group for any lack of progress. And it works. His approval ratings may be dismal by the standards of earlier holders of the office in the first year, but support amongst his base looks rock-solid. Few seem prepared to bet against him making it to the end of his term in 2020 and then being re-elected. He does the new politics of emotional manipulation too well.

Is there anything liberal political types can do? Mostly their attacks on populist politicians backfire.They either make dry intellectual arguments using facts, which are then ignored, or express emotional outrage, which tends to simply wind up the populist supporters even more. Trump supporters doubtless think that calling African and Middle Eastern countries “s**t-holes” is merely talking truth to the liberal elite.

People suggest that liberals should follow either or both of two strategies: to meet the populists half-way to undermine them, or to counter emotional appeals with emotional arguments of their own. The former is happening quite a bit already: it is becoming the centre-right mainstream in Europe. That is what the British Conservatives are trying to do, along with similar parties in other European countries – including Germany’s liberal Free Democrats. And it seems to guide the practice of Emmanuel Macron’s French government. While I would like to say that such strategies are doomed, it looks more like a response to political reality. The problem is that it is impossible to back it up with an emotional appeal that will beat the populists. That appeal is based on closet racism and an attachment to old values that contain the seeds of their own destruction: it is an attack on an important part of liberals’ own base.

Having said that there are two emotional strategies that might work: fear and backlash. For the former it is necessary to find a weakness in the populist position that will make people fear for their security and savings. But that is actually quite quite hard: the Remain campaign in the British referendum conspicuously failed, perhaps because the Conservatives in the campaign pulled their punches for the sake of party unity. Mr Macron did succeed in the final round of the French presidential election, however, when Marine le Pen’s ambiguity towards the Euro suddenly frightened a lot of her potential supporters.

The backlash idea takes the emotional appeal of the populists as the starting point, and stokes up outrage amongst those it attacks. But it is quite hard to appeal beyond a minority – populism’s targets are often chosen with care. Not always: the #MeToo campaign against sexual harassment has real power, feeding off the misogynist attitudes of Mr Trump – that is surely the reason why this campaign is succeeding now where its predecessors over the years have fizzled. Women are not a minority, and you don’t have to be liberal to think that sexual harassment is disgusting.

But both types of emotional appeal suffer a problem in the political sphere. You have to pick up the pieces afterwards. Fighting emotion with emotion leads to either prolonged conflict or depression. In the end society must be healed somehow, and that healing takes place through putting emotions to one side, and understanding what people have in common and using a gradual process of persuasion and confidence building. That is one reason that populists will ultimately fail – and it helps that so many of them, Mr Trump and Mr Johnson included, do not value hard work or competence.

So what is the liberal strategy? They must let the populists burn out and collapse under their own contradictions. And then they must be ready with new ideas that will help society to cohere.

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2018: Trouble is brewing between Germany and Italy and between China and the US

Prediction is a mug’s game; you are more likely to miss something important than demonstrate insight. And yet it is the only good way to put your insights to the test. Science may be mostly about gathering and reviewing evidence, but the true test of its worth is prediction. And so, in line with tradition for this time of year, I feel I must have a go.

When I started to think about it, my feelings about 2018 were anticlimactic. The British political deadlock will continue: there will be no election and no change of PM. The Brexit negotiations will somehow manage to put off the more difficult problems yet again, probably through a transition deal that will look very like staying in the Single Market. The investigation into the Trump’s campaign’s connections to Russia may snare members of his team but not the man himself; he will stay in office. The Democrats may take the House of Representatives, but they won’t manage to retake the Senate. And so on. Things will limp on much as they are now.

But none of that is very brave. It just guessable, keep-your-head-down fare that does not put my understanding of the world under any real stress. And yet proposing something more exciting is a matter of luck, especially if I am confining my predictions to a twelve month period. I need to look at things another way. Where do I see trouble brewing, even if the chances of something breaking in 2018 is less than 50%?

Let’s start with the world financial system. There is something unstable about it, even if it does not look as dangerous as it did in 2007 – it is more like the tech bubble of 2001. Asset prices look too high, largely because there is more saving than than the system is able or willing to convert into productive investment. This applies to the West, where too many assets are piling up in the hands of businesses and rich individuals, while many forms of investment are commercially unattractive to most people. And it applies to China, where there is something not right about the volume of money invested, especially through state owned businesses; a lot of useless assets don’t seem to have been written off.  But what will be the proximate cause of a financial crisis? A Chinese banking breakdown? Inflation breaking out in the US? A panic in the property markets? And when will the crisis strike? Personally I feel that government bonds are a better bet than other asset classes in the medium term, though that would not be the case if inflation got going. But that is more of a threat in America than it is in Europe or Japan.

And there is something not right with the capitalist system. Technology has changed the way it works, and our political systems have not caught up – rather like the mid 19th Century world in which Marx wrote Das Kapital. Most conventional economists really haven’t grasped this or it implications. The answer will be political change, but what? Without answers, political pressures will build up, and not just in the developed world. It is fashionable to suggest that liberal democracy is in danger, but the situation in the autocracies of China, Russia and Turkey, to name but three, don’t actually look any less tractable. But where will the political system crack? Governments have become better at repression. And there is no convincing alternative to sell. Yet.

What of Britain? The Conservatives look to be in deep disarray, but they have a lot of strengths – especially the widespread fear of the alternative, and the substantial funding that could unlock. We need to remember how close Theresa May came to a triumph, with the coherent ideology of Nick Timothy behind her – she might have destroyed Labour’s working class base. Their introversion did for them in the end. Can a new leadership revive their fortunes? I see similar strengths and weaknesses in Labour. Are they peddling new or old wine in their old bottles? I suspect more new than their critics give them credit for, which will make them a much stronger proposition. But there is an introversion too. The leadership is not sharing its thinking about what to do with this country; it just wants disparate people to project their hopes onto their vague pronouncements, so that they can gain power; only then might they share their real thinking with us. Meanwhile, the tensions within British society – the stagnation of the left-behind places, the squeezed funding for public services and benefits – will serve to increase frustration. Something spectacular could break the deadlock. But what and when?

And Europe? This looks like another deadlock. The populist xenophobes may have stalled a bit in 2017, but they are alive and well. It is striking that Poland’s ruling party remains very much in control, in spite of the fact that many Poles do not share their paranoia – their economic policies, which involve widespread cash handouts, are popular, and may not be as disastrous for the economy as many critics suggest. Economics is at the heart of politics – and politics is at the heart of economics. But the biggest threat to European stability comes from Italy, where elections are to be held in 2018. We might well get a strong pushback from that country against the way the Eurozone is run, at a time when German politics is being pushed in the direction of more conservatism on the Euro, and not putting Germany’s savings surplus to constructive work across the zone. That conflict could cause the system to break. But maybe the French can intermediate to give the Italians what they want while making the Germans feel they have won?

In America I see a strange mix of euphoria and anger. The tax reforms passed before Christmas were a big win for the Republicans, and it will give them real momentum. While the Administration, and the tax reforms, are generally unpopular, relentless propaganda from the many rich winners may baffle floating voters for a bit. That could be good for the Republicans in the congressional elections. It is a tall order for the Democrats to take either house, especially the Senate, where Republicans have plenty of opportunity to win back seats lost at Barack Obama’s high point. But the Administration’s malign neglect of the healthcare system could bite back.

Perhaps more significant for the world as a whole is the thought that China and the USA are on a collision course. Donald Trump is itching to start a trade war with China, to reverse what he sees as America being ripped off. China’s ambitions are increasingly global. At the moment the two have come to an uneasy accommodation, with North Korea a joint focus of attention. But this looks unsustainable; China will not stop North Korea from developing nuclear weapons, as only a military intervention of some kind will achieve that, and China surely does not have the appetite for that. But a trade war between China and the USA would be an attack on one of the central economic and political pillars of the early 21st Century world. It would be extremely destabilising economically and politically. China still needs exports to the US to sustain its economy; the US still requires to be bankrolled by Chinese money. This is surely the most likely source of a financial crisis.

And then there is the risk of war. North Korea is determined to develop a genuine nuclear threat to America, and this is a huge provocation. It’s not a happy situation when we seem to be relying on military men to provide the restraint on the President.

So to summarise: the two critical developments to watch are a clash between Germany and Italy over the economic management of the Eurozone, and a clash between the US and China over trade. Either or both could precipitate a global financial crisis resulting in a substantial reduction in asset values and the banking woes that would follow from that. I am cautiously optimistic that the problems of the first of these will be contained; I am not at all optimistic on the second.

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The quiet revolution in Britain’s schools.

I’m going to start 2018 on a hopeful note. I am privileged to be chair of governors at a primary school in Lambeth. This morning I attended the opening session of an INSET (staff training) day for my school’s “cluster” – a collaborative group of schools in the south Brixton area. I was a good note with which to start the year.

The area that the schools serve is a challenging one. Tulse Hill, where the event was held, gets into the headlines for the wrong reasons (recently: a fatal stabbing and hit-and-run death involving several vehicles, none of which stopped). It is dominated by large interwar and postwar housing estates, which are home to a lot of poor people. These are from diverse communities, generally referred to as “minorities”: African, Afro-Caribbean, Pakistani, Portuguese, Latin American, and so on. My school is in the middle of an estate that had the reputation of being one of the worst in the country. Nearly half the children at the schools speak a English as a second language. Nearly a quarter qualify for the pupil premium, a standard of poverty that manages to exclude a lot of struggling families. These challenges continue. Benefits cuts is making housing unaffordable to the poor, who are moving to outer London. They are encouraged by developers who want to demolish the old housing (and any non-housing property they can find) and replace them with modern homes, to be sold to better off people. The area is increasingly devoid of local jobs, services and even shops. The Labour council are enthusiastic partners in this process. So the school rolls are falling and the demographics are changing – though the rolls could bounce back as the housing developments mature. Many families are trying to manage in very challenging circumstances. They live next door to increasing numbers middle class families who are demanding in a different way.

Our meeting was appropriately diverse: the teachers, and a few governors, forming veritable United Nations. The schools themselves are diverse. There is one secondary school, which is an Academy, and four Church of England primaries, three non denominational primaries (including my school), a Muslim primary, and a specialist nursery school. There was a lovely buzz as colleagues, compared notes within and across the schools. Their achievements are astonishing. SATS test results are well above the national average in spite of the challenges (though in line with the rest of the borough – their achievement is not an isolated one). If you read about schools in the papers these days, you hear of pessimism; teachers leaving; budget cuts, and so on. The financial pressures are real enough, with falling rolls local making things worse for most  schools. The positive attitude of leaders and staff in these schools is quite humbling.

What makes the achievements of these schools so impressive is that so many people outside London would consider them to be impossible. I routinely read people who claim that multiculturalism has failed; immigration places impossible challenges on public services; and that austerity has made life impossible. While there is certainly truth to the last of these claims (some services are becoming impossible, compounded by an appallingly designed new policy on nursery funding), but even here I am not finding the despair that I hear so much about elsewhere. Just be clear, I am saying this out of admiration for the positive attitude of management and staff in the face of challenge, not because I think squeezing funding from schools is a good idea. In fact the opposite: these schools have shown themselves to be such good managers of public resources that it seems a good idea to give them more so that they can achieve more.

None of this is new. I have mentioned the remarkable progress of London schools often, and tried to draw political conclusions from it. Instead, I want to talk about something else. There is a common management ethos in this diverse range of schools (shared, incidentally with another nearby school where I am a governor) that deserves much more attention that it will ever get. This was excellently articulated by the keynote speaker at our event, Mary Myatt. It was evident that she was preaching to the converted.

Mary’s mantra is “high challenge; low threat”. She says that the key to success is creating a work environment where people can and do experience high levels of challenge while not feeling threatened. That, of course, applies to the relationship between pupils and staff, as well as to between staff members. She enumerated many aspects of this idea, but one is especially important: inclusivity. Nobody, but nobody is left out. There is no child you cannot help. There is no awkward parent you don’t give a hearing to. There is no negative colleague that you don’t try to persuade. And if you do that, it is amazing what you can achieve with the team you already have. Mary is not shy about using a word that makes this all possible: love. “Professional love” she calls it, because you have to accept the tension of being demanding and compassionate at the same time. This well describes how the two schools I have been involved with have overcome challenge after challenge.

It is striking how different this is from a conventional wisdom that is still very widely held. The most effective way to challenge is to threaten; good performance is achieved by excluding the awkward; hard targets matter more than the stuff that can be waffled; and what has love got to do with it? I find it quite astounding that so many people thought that Donald Trump was an effective manager and were happy to give him a shot at America’s top job. Many people on the left and right seem to think that anger and confrontation is best way of dealing with challenge and opposition. Think of all those trolls, so mch the face of modern dialogue.

A further thought struck me this morning. The leaders who are carrying forward this revolution are predominantly female. Most of the schools where the achievements have been so striking and durable are primaries, and this is a very female dominated workplace – though I have been happy to observe slightly more balance in recent years.

The quality of management of the first school I was involved with, which became Outstanding when I was Chair, and has simply got better since, is I think the best of any organisation public or private that I have been involved with. My current school is on the same journey and its management has made phenomenal strides. It used to be said that excellent management was impossible in the public sector. Many schools are proving that is nonsense. They deserve more attention.

 

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