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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