All posts by Matthew

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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The Troubled Families Programme shows the way forward for public services

I was interest to read about the British Government’s Troubled Families Programme (TFP) in last week’s Economist. Now I don’t find the Economist particularly reliable on British social policy – their coverage of education has shaken my faith in the paper, with its uncritical adoption of rightwing wonkery. So I thought I had better get an alternative view. That proved a bit more difficult than I imagined, since the programme attracts little public attention. I did come across one piece in the Guardian, though, from last November. This turned out not to have a great deal to say. Nevertheless, I think that the TFP is an exciting idea that is a potential model for future social policy – unlike so many of the government’s other ideas.

The TFP was set up by the Coalition government in 2011 in response to the riots that year, which set off one of our ruling elite’s bouts of moral panic about the lower orders. The programme targets the families that are creating the most problems for public services, initially 120,000, and appoints a key worker, who then works with the family to put them on the path to solving their problems. The key workers bring in other public services as required. The programme was extended to 400,000 families in 2014.

David Cameron, the Prime Minister, has lent his personal imprimatur to the programme, and claimed a virtually 100% success in “turning around” these families. This claim is examined by the Guardian, which unsurprisingly finds it wanting. Success is judged by rather unconvincing criteria, and includes families knocked off the list because they were found to not to be as “troubled” as first thought. Perhaps it is too early to judge the programme, as one of the Guardian’s contacts suggests, but that looks equally dubious. To me the programme is simply commonsense. No doubt there are many ways in which it can be improved, but we are better off seeing this as a glass half full than half empty – because its approach runs counter to so much of current government practice.

The problem with the normal approach to public services is that it compartmentalises them: social work, probation, police, mental health, housing, employment and so on. But the most persistent problems involve people that have multiple problems that feed off each other. Mental health, joblessness, housing, drug abuse, criminality is a common trail of destruction, for example. This leads to the classic paradox of public services (and many other dysfunctional organisations), where everybody is working hard and doing their job well, but the overall result is underperformance and failure – and constant demand for more “resources” as social policy types like to call taxpayer funding. Solving the complex problems that lie at the heart of so much demand for public services requires looking at the person at the heart of it and supplying leadership. This tackles two of the most difficult aspects at once – the lack of confidence or chaotic nature of the people involved, and the need to coordinate and access a multiplicity of services. That is what the TFP does. It intermediates the public services with a human professional who can adapt their actions to the circumstances – and provide personal coaching. That key worker may be the first person in public service that the troubled individuals have talked to who is interested in them as people, rather than through the narrow scope of their role.

This is interesting, because it takes public services in the opposite direction to most attempts to “reform” them, since Labour’s Tony Blair suggested that public services should learn from the private sector in the late 1990s. What followed were many attempts to make services more streamlined, and to intermediate them through dumbed down interfaces with low-skilled staff and workflow systems, which are quite unable to deal with human complexity. It turns out that the private sector gets by by avoiding the difficult cases and telling them to go somewhere else.  It also doesn’t like actually soving people’s problems – it want them to keep coming back for more. There is still much that the public sector can learn from the private – but not nearly as much as Mr Blair and his Conservative emulators think. The public sector needs operating models of its own – and the key worker idea is one. There is another around building self-helping communities, but that’s a story for another day.

And, to be fair, criticism of the TFP is limited. A lot is directed against Mr Cameron’s rhetoric, which talks about addressing the “twisted moral code” of troubled families. In fact it turns out that most troubled families do not engage in crime. But this is about creating political cover for the idea to readers of the right wing press – a bit like covering community cohesion initiatives with the label “British Values”. Nonsense, perhaps, but politicians of the left should learn from it in order to broaden public support for their ideas.

Then there is the old leftist trope that such policies address the symptoms of trouble, and not the root causes, such as inequality, injustice and many other of the abstract nouns beloved of the left. But this line of criticism is simply designed to provide cover for mediocre public services. It underestimates what humans are capable of given the right motivation and support.

In our world of polarised politics, this sort of criticism from the left is as close to praise as a Tory government will get. In fact there are two more substantive criticisms. The first is the rather obvious one: the government is pulling in opposite directions. The TFP may be a good idea, but it needs access to decent public services to do its job, and these are being run down  – especially local council social services and mental health facilities, both of which are critical in this context.

The second criticism is that TFP is subject to the government’s payment by results (PBR) policy, another signature idea from Mr Cameron. This means that the work is farmed out to non-government agencies, who are paid bonuses depending on their success rates. Using outside agencies is not necessarily a bad idea in itself, though anathema to the left. But PBR leads to two problems. First is that by subjecting the payments to risk, they will drive away many potential agencies, including smaller social enterprises, which are usually the most innovative. Instead they draw in a list of larger organisations, who tend to hollow out rather than add much value. They are able to do this because of the  second problem, which is that defining success criteria leads to arbitrary targets that can be gamed. It is the same regime of false incentives as the discredited target culture, beloved of Mr Cameron’s predecessor, Labour’s Gordon Brown.

In my mind this is the wrong way round. Key workers should be at the heart of the publicly managed service that commissions services from elsewhere: public, private or third sector, depending on how they meet client needs. This “care management” model has been very successful in social work, for example – although few councils now use it, with the pressure on short term costs leading to them to replace qualified staff with cheaper personnel with narrower remits. (Disclosure: my wife is one of the few remaining care managers, in adult social work).

But credit where it is due. Mr Cameron has hit on an idea that has real mileage: a people-centred approach to public services. This idea must be built on.

 

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The economy is for Labour what tuition fees is for the Lib Dems

If there is something that unites British Labour Party people, from rightist Blairites, to Brownites, through to the leftist Corbynistas, it is that the Labour government of 1997 to 2010 should not be held responsible for the financial crash of 2008/09, and the terrible state of government finances that followed. They are made indignant by Conservatives (and Liberal Democrats) who go on about how Labour is to blame for the financial mess the government left the country in in 2010, when the budget deficit had ballooned to over 10% of GDP. But the public finds the Tory line more convincing. And if Labour are to throw off this albatross, it will have to move on from its air of injured innocence.

There are two dimensions to this question. The first is a question of fact, or purports to be: how much responsibility did the Labour government actually have for what went wrong in the economy? The second is what is going on in people’s heads when they think of Labour and the economy, and how the party might address it.

On the first question, Labour have quite a few sympathisers outside the party. And certainly the direct line of attack made by Tories is not all it seems. The Tory narrative is that Labour went on a spending splurge in the boom years, which then  proved completely unsustainable, leaving their successors  choice but to implement austerity policies. Defenders of Labour’s record point out that there was no big government deficit before the crash. It was a relatively modest 2.5% or so in 2006 and 2007, and not regarded as irresponsible at the time. Nobody foresaw the financial turmoil, which originated in American sub-prime mortgage markets.

The Labour defence against this charge is mostly true. But not quite. Gordon Brown, as Chancellor (he became Prime Minister in 2008), claimed to operate government expenditure on a “golden rule” which meant no net borrowing over the economic cycle. But he had taken to moving the goalposts rather than applying the rule strictly. Had he followed his own rules as originally intended, there may not have been a deficit as the economy turned in 2007. But that only accounts for 2% of the problem. There was another 5% that came from somewhere else, allowing for a normal cyclical swing of 3%, and which cannot be blamed on Labour profligacy.

If you take a wider view, however, Labour’s defence becomes more difficult. British government finances were worse affected than other major industrial countries, from France to the USA, and much worse than some, like Canada. There are broadly two reasons for this. The first is that Britain had a bigger financial crisis, because it had a bigger banking sector, especially in international banking, and so was more affected by its collapse. The second is that tax revenues fell unusually sharply in Britain. Both aspects have government fingerprints on them.

Take banking. Labour lauded the rise of the international banks, and celebrated Britain’s “light-touch” regulation that helped bring this about. They gave RBS’s Fred Goodwin a knighthood for no other reason than that he had expanded his bank, recklessly as it turned out – there were none of the usual good charitable works to point to as supporting a general aura of public-spiritedness, as is customary in such matters. Meanwhile, Britain’s success as an international banking hub helped drive Sterling up and manufacturing exporters out of business. Mr Brown tried to wriggle out of responsibility by suggesting that he wasn’t responsible for banking regulation under Britain’s tripartite system of financial regulation (between the Treasury, the FSA and the Bank of England). This is pretty damning, because this system was of his own design, and it was clear that overall responsibility for making sure the system was working lay with the Treasury. It couldn’t be anywhere else.

Then on taxes, Mr Brown engineered a switch from taxes on income, and Income Tax in particular, to an array of other taxes, like stamp duty, that turned out to be about milking financial bubbles. At the time, his reduction of the basic rate of income tax to 20% was lauded as a triumph. This proved a colossal misjudgement, as it has proved politically impossible to raise income taxes, even in supposed more left-leaning Scotland.

On top of this, a broader claim can be made. The world financial crisis was not some storm that happened somewhere else with unfortunate consequences for Britain. Britain was the world’s leading international centre of finance; Britain’s bankers were at the heart of it, Two of Britain’s big banks, RBS and HBoS, collapsed, not helped a Britain’s own reckless mortgage lending, which also affected smaller banks, like Northern Rock and Bradford & Bingley. These banks had all adopted highly risky business models, whose main assumption was that global banking markets would be stable. Sitting on top of one of the most prestigious finance ministries in the world, and trumpeting his own reputation as a financial manager, Mr Brown and his acolytes can’t really escape the charge of incompetence for not appreciating these risks. And these risks were plan to some, including his Lib Dem shadow, Vince Cable, whose warnings were pooh-poohed.

Labourites are on stronger ground when they suggest that, once the crisis emerged, their government handled it well. It wasn’t pretty (amongst innocent victims of the government’s shoot-first approach were Icelandic banks and Britain’s own Lloyd’s bank), but largely stands up to scrutiny. Another argument is over whether the Tory/Lib Dem coalition that took power in 2010 was too tight with its austerity policies, compared to how Labour would have handled the same situation. Many independent commentators agree with at least the first part of that proposition, though I don’t.

So, I don’t think Labour were quite as innocent as they claim, even if much of the direct criticism is misplaced. But, in politics, such arguments actually count for little. A more important question is how the public perceives things. This is where Labour’s real problem lies. What the public sees is a classic hubris to nemesis story, which is one of the oldest storylines in humanity, and takes some rebutting. Labour’s problem is their boastfulness before the crisis. Labour appealed to voters because a Labour government meant “no more boom and bust”, unlike with the Tories. And then one of the biggest busts in history happened.

And there is trust issue here. Labour’s position is a bit like that of the Lib Dems over tuition fees. The Lib Dems vowed not to vote for an increase in student tuition fees before the election, and yet later that year they supported the trebling of fees. Many Lib Dems will give you a convincing intellectual explanation as to how this not nearly as bad as it sounds, and that anyway there was little they could do in coalition. But this cuts no ice with the public, because of the way the party presented their policies before the election.

Labour are onto an equally losing wicket if they try convincing the public that the economic crash of 2008/09 was not their responsibility. Ed Miliband, their leader at the last election, was quite right not to even try. Besides, the alternative argument that Labour were the hapless victim of world events hardly counters the public’s perception of the post-Brown leadership (Mr Miliband and his successor Jeremy Corbyn) of being nice but ineffectual. The usual advice for when you are in a whole is to stop digging. The idea that if the party had come out fighting, public perception would be swayed, is pure nonsense.

The only way forward is for Labour to acknowledge their responsibility, and put forward hard economic policies that show they are capable of taking tough decisions if in power. And that means they have to stop banging on about austerity and get tough with some of their own supporters. For now, though, there is no chance of that.

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Core voters are always shafted. Politics is made in the centre. Bad news for Lib Dems

Democracy and idealism do not sit well together. Idealists have the motivation to form political parties and keep them going. But in order to win power the party must bring on board people and, policies, that the idealists disagree with, in order to win round those less committed to politics. And these floating voters come to matter more to the party’s managers than the the idealists. Because the idealists have nowhere else to go.

In Britain, the latest challenge to this process comes from Britain’s Labour Party; in America the Republicans seem to be doing something similar. This all seems to be part of the great cycle of politics. A party’s core supporters, those that are ideologically committed, get fed up with being taken for granted and rebel. They struggle to accept that a majority of voters disagree with them – following a natural human bias that most people think as we do. They may also be enticed by the idea that they can win by accident – through their opponents’ mistakes. Sometimes such ideological parties do win an election that way – it has just happened in Poland, for example. It rarely ends well.

I know more about the Labour phenomenon than the Republican one. Labour members elected the ideological Jeremy Corbyn after the party’s general election failure last year. These members remain as fervent as ever, and indeed new members have flocked in. This burst of enthusiasm has convinced them that they have started a new and better form of politics. As they see it, the compromises used to chase the centre ground, as uncommitted voters are usually referred to, have disillusioned people with politics. Now Labour will create a sharper narrative that will go down a storm with the electorate. They equate their own disillusionment with the compromises of their party with the widespread political apathy of the population at large.

But is this is an illusion. This week Britain’s polling organisations published a report into why they called the 2015 election wrongly. They overestimated Labour support and underestimated the Conservatives’. They found this was mainly because their samples were biased towards Labour. And that was because they were biased towards the politically committed, who were much easier to reach. This is a vulnerability of the quota sampling technique that the pollsters use. The less committed, or more apathetic, voters were much more likely to vote Tory.

This leaves more thoughtful Labourites with two headaches. The first is that current polls show the Labour vote holding up compared to  the general election – so that electing Mr Corbyn at least hasn’t made things worse. But if the polling bias remains (and it seems to be, based on how the samples remember they voted in 2015), then in fact the Tory lead has grown. The second headache is that the army of the apathetic non-voters is more sympathetic to the Tories than many suppose.

Which leads to an inevitable conclusion. In order for Labour to win an election they need to convert people who voted Conservative last time, or who did not vote, but lean to the Conservatives. In other words, Labour must appeal to the centre ground.

Such thoughts cut no ice with Labour’s new members. When pushed they even suggest that winning is not that important. That leaves Labour in a terrible position, and the Conservatives thinking that they have the next election in the bag. Some hope that the European referendum will split the Tories. But the prospect of whacking Labour really hard if they hold together is the best possible incentive to hold the party together.

Labour’s prospects against the SNP in Scotland are no better; the SNP have cornered the middle ground in Scotland as masterfully as the Conservatives in England, while still retaining  a substantial core vote. This conjuring trick will eventually come apart – but an ideological Labour Party will not be the instrument of the SNP’s demise.

Meanwhile, sitting on the sidelines are the Lib Dems. A number of people have suggested to me that Labour’s woes present the party with a golden opportunity. But the political dynamics or the core and centre are not working the party’s favour.

The party thought that the usual rules of politics would apply to them when they went into coalition with the Conservatives in 2010. They shafted their core voters, but surely they had nowhere else to go? And meanwhile the party’s record in government would appeal to the centre ground. But a large part of what the Lib Dems thought was their core vote felt they did have an alternative: Labour. That weakened the party, and weakness is a big turn-off for centrist voters. The Conservative campaign exploited this ruthlessly, and the result was catastrophe, as the Lib Dem vote fell by two thirds, and their political clout even further.

So, somehow, the Lib Dems need to rebuild their core vote. The place to look is amongst Labour inclined voters who do not buy Labour’s new sense of direction. But the party also needs to win votes back centrist voters from the Conservatives if they are to win the all-important parliamentary seats. And that means the party must show distance from the Labour Party. So how does the party face the prospect of another coalition with the Conservatives? If they rule it out, they will lose the middle ground by giving tacit support to the ideological Labour Party. If they don’t, those Labour inclined “core” voters will think that the party has learned nothing from the coalition debacle, and leave the party alone.

This may not matter too much to the party at the next election, especially if it looks as if the Tories will win handsomely. There will be no danger of a coalition, so that awkward question can be ducked. The Lib Dems might be able to make a modest recovery based on local strength. But the strategic dilemma remains.

Probably the best thing for the party is to recognise that it is essentially of the left, and rule out any future coalition with the Conservatives. That will help the party rebuild its core. It then needs to apply thought to under what conditions it could work with Labour. But it will have to be a very different Labour Party from the one emerging under Mr Corbyn’s leadership.

Which would leave the middle ground in British politics to the Conservatives and the SNP. Which in turn means that political power will rest with them.  A grim prospect indeed.

 

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2016 is nothing like 2008, but there’s trouble ahead for the world economy

In my New Year post I did not write much about finance, but made some rather throwaway comments that the economy could take a turn for the worse in 2016.  Having just read Martin Wolf’s rather sanguine piece in the FT, I hadn’t quite understood that my views were in line with conventional wisdom in the financial markets – and this not at all a position I like to be in. But pessimism is in, and reflected by lower share prices worldwide. This has filtered through to left wing commentators, like Will Hutton, who gleefully want to show that “austerity” or “neoliberalism” is leading to a repeat of the 2008 crash (though Mr Hutton is too good a writer to use those particular totems). This is definitely company I don’t want to keep. Time to dig a bit deeper.

It helps to think back to what happened in the last turndown, the crash of 2008 – as this is foremost on people’s minds. At the start of 2008 the banking system was in deep trouble, although on the surface things were quite calm, if gently sinking. “Holed below the waterline” was the description that I used at the time – alas I was not publicly blogging until three years later, or my reputation might have been made. Trust was breaking down because the banks were dealing a lot with each other, or off-balance sheet offshoots, rather than with the public or businesses. And things were starting to go wrong, beginning with US sub-prime mortgages. The huge tangle of interbank transactions and derivatives meant that nobody knew how the losses would play out or where – so everybody was tainted. Things kept superficially calm until quite late in 2008, when Lehman Brothers collapsed, threatening a chain reaction that would have brought much of the world’s banking system to a screeching halt. Since the banking system is at the centre of everyday life in developed economies the result could have been catastrophic.

That catastrophe was largely avoided, but only because governments bailed banks out to keep the whole system afloat. Even then the damage to the non-banking economy was severe, and government finances, especially here in the UK, were ruined. What was so alarming about the whole episode was that a fairly routine downturn in the business cycle infected part of the US mortgage market, which then completely disproportionately went on threaten the whole system. Defenders of Britain’s Labour government still can’t believe it was anything to do with them – though in fact ten years of complacent economic management had left the country highly vulnerable to such a chain reaction.

Why are people worried now? Well one thing that helped the ameliorate the disaster in 2008 was that emerging markets, especially China, were less badly affected, and in China’s case, government stimulus helped keep things afloat. Now that side of things is unravelling. The Chinese economy is slowing, and in the process it is undermining world markets for commodities such as oil, which presents the threat of widespread damage in the developing world. The Chinese situation arises partly because the country has hit an awkward point in the evolution of its development, and partly because their stimulus package after 2008 was largely wasted and bad debts are threatening its banking system. Indeed the whole soundness of China’s growth strategy is coming into question (its second, state-directed phase , rather than Deng Xiaoping’s original liberalisation from 1978).

This is serious, and no mistake. The role China has played in the world economy in the last quarter century is hard to exaggerate. What is happening there is much bigger than the US subprime crisis that was at the heart of the 2008 debacle. But it doesn’t have the same destabilising features that caused such a fierce chain reaction – which were in plain view as 2008 started. China is not at the heart of a cat’s cradle of complex derivatives sitting in off-balance sheet funds, with almost every international bank taking part. And the huge power of the Chinese state, and the depth of its financial reserves, means that the country’s financial system will collapse slowly rather than suddenly. The western banking system is a much soberer thing than it was in 2008 too, even if many left wing commentators would have you believe that nothing has changed. For these reasons 2016 does not look like 2008. A meltdown, or near meltdown, does not look likely.

But there could be a slower moving form of trouble. Secular stagnation, the affliction of the world economy I referred to recently, is here to stay. Western economies will slow. Worse things may be in store in the developing world. Share prices may well fall badly – many markets have been overpriced for some time.

And in Britain? In my New Year post I suggested that 2016 might be the year the economy here started to turn sour. That comment wasn’t based on any deep thinking. Britain is unusually dependent on the international economy, as is evident from persistent trade and current account deficits, and a value for Sterling that is hard to justify based on its “real” economy. So, with things going awry in the world economy, Britain might be vulnerable. The Pound could come under pressure; foreign investors could desert London’s property market causing a chain reaction; or a downturn in the City’s finance sector could do the same thing. On the other hand, capital flight from the developing world could benefit London in particular, allowing the country to weather the storm. Some left wing commentators have been trying to stoke alarm about the level of personal debt – but that doesn’t stand up to close scrutiny. Neither should we pay much heed to Labour’s economic adviser, David Blanchflower, who on the radio this morning suggested that Britain was less ready to deal with a crisis than in 2008, because interest rates were already rock bottom. That vastly inflates the effects of interest rate policy on crisis management. David Cameron’s and George Osborne’s luck could hold. I struggle to understand the alarmism on the political left – it will merely undermine its already shaky reputation for economic grasp.

it seems to me that 2016 will be the start of a good old-fashioned cyclical downturn for the world economy, with no more than the usual localised financial crises. Personally I think this will morph into a period of more prolonged secular stagnation that will put paid to economists’ lazy assumption that 1-2% rates of growth are a law of nature.

And that should pose some very challenging questions for the art of economics. But that’s a topic for another day. Meanwhile government bonds are a better bet than shares; cash is not a bad bet either; don’t mortgage up to your eyeballs in property; and interest rates aren’t going up.

 

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The Oregon protest shows how different America is from Europe

What if a group of armed citizens seized a bird reserve in the Lake District and proclaimed their right to cut down trees and graze cattle on public land for free? It is actually unthinkable, on so many levels. And yet this is more or less what has happened as a militia group led by Ammon Bundy seized the Malheur National Wildlife Refuge in Oregon on 2 January. They’re still there, as the law enforcement agencies deal with them gently, letting pressure from local residents undermine the occupiers’ resolve. Such incidents are rare in the US, but not unthinkable, and that reveals a lot about the difference between our nations.

Of course Oregon is not like the Lake District. In the US West the Federal government owns huge tracts of land, and regulates, and charges for, its use by farmers and loggers and many others. In our National Parks the government places onerous regulations on private landowners. But that is even worse, probably, from the point of view of the Oregon protesters. They are building their case on an American idea that citizens should be self-sufficient, and that government agencies are violation of basic rights and freedoms.

That idea, of course, comes from America’s frontier history. Back in the 19th Century, and earlier, the settlers mostly did have to be self sufficient. The whole appeal of film dramas such as Westerns builds on this.  These frontiers have only formed a minority of the American nation, of course, and yet they command a special place in the American soul, for those of European (i.e. white) heritage. We may imagine how those of native American or African, and even Hispanic heritage work on a different version of how America came to be what it is. The European settlers came out to America to be free of oppressive governments. It is hardly a coincidence that movements like the Oregon protestors are white, and tend to have racist tinge.

Descendents of the Europeans who stayed behind have an utterly different outlook – though that racist tinge is there too, overlaid by an often intense nationalism, which has been subsumed by American nationalism in their descendents. For us government is part of our everyday lives. For some it represents the democratic will of the people; for others it a perhaps regrettable necessity. But we crave the order governments create, and feel that such things as welfare safety nets are part of what it means to be civilised.

And this is as true of the English as it is of their French and German cousins. Some English like to think that they are culturally apart from the rest of Europe (a delusion that their Scots compatriots in Britain tend not to share). We hear talk about common law and Anglo Saxon freedoms. And it is true that the English and British are different in many ways from other Europeans. But then so are the French, the Germans, the Danes, the Spanish, the Czechs, and so on. The idea that the British are uniquely different is a misconception. And a huge amount of history and culture binds us together as Europeans, and separates us from the United States in particular. Our attitude to the role of the state demonstrates that more clearly than anything else. Remember that many Americans feel that free ownership of military weapons is a fundamental right, and a vital protection. Europeans think that’s nuts.

That gulf between Europe and the US is clearly seen in US politics. Republican politicians only have point to Europe or Canada (which follows many European attitudes) to scare their supporters. To them these places are self evidently awful places to live in. Which puzzles, Europeans and Canadians profoundly. What is so wrong which lower levels of poverty, better health outcomes, longer holidays, and a lower chance of dying a violent death? We (and they) just don’t get it.

But two notes of caution for Europeans. First is that the US is not monolithic. I have already pointed out that many Americans do not share this anti-state vision – and the proportion of non-whites in the country is rising. That, perhaps, explains much of the violent polarisation in the country’s politics at present. Most Americans think that the Oregon protestors are crazies; that includes most people who live near Malheur. It’s always a good rule to avoid national generalisations; that is as true of Americans as it is of anybody else.

The second note of caution is that there is a positive side to this American idea of self-sufficiency, alongside its delusional aspect. It makes Americans more entrepreneurial and innovative. Americans can rightly point to their extraordinarily strong economic performance. And I think it helps to question what state agencies do and what they are for – though, I should add, I don’t think that US government agencies are any less inefficient than European ones.  Closer scrutiny does not necessarily lead to improved performance.

But personally, I am very comfortable in my European skin, much as I admire so much about America. And those Oregon protestors sum it up why quite nicely.

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The Trade Union Bill – the unions are the authors of their own destruction

The House of Lords considered the Government’s Trade Union Bill yesterday. It briefly made the headlines because a report was released suggesting that the Labour Party would lose £6 million in annual funding as a result. Coverage was quickly buried by news of David Bowie’s death. At least we shouldn’t accuse the Conservatives of orchestrating that.

Because they didn’t need to. There has been little public interest in this legislation, which has been quietly making its way through the legislative process since last July. That is remarkable because it is politically tendentious, and could change the political balance profoundly. Instead of fighting this legislation tooth and nail, the Labour Party is focusing its energy on making up its mind about Britain’s nuclear deterrent. This is yet another example, if one was needed, of how Labour is now suffering from political insanity.

What does the Bill try to do? Those headlines were about changing how trade unions carry out political funding. At the moment the unions have political funds which its members can opt out of, but usually don’t. The government wants to change this to opting in, which it is thought that many fewer will do, given how few trade unionists actually vote Labour. The other main change is to make it harder for unions to take strike action by requiring a minimum turnout of 50% for a strike ballot, and the support of 40% of registered members in the public sector.

At first pass neither of these proposals looks unreasonable. The opt out rule on political funding creates a corporate influence by the unions on the Labour Party that undermines democracy. Labour gets the lion’s share of its funding this way, and the their influence on the party is growing – they gave decisive logistical and moral support to Jeremy Corbyn’s leadership campaign, for example. Unions play a vital role in our society in balancing the unhealthy inequality of power in employment relationships, not least in the public sector. But politically they are conservative. This is illustrated by their support for Britain’s nuclear deterrent. This not based on any arguments of high principle, but by the short term influence of any policy change on jobs. Just about any reform designed to make the economy or the public sector more efficient will be opposed by the union bosses for purely short-term reasons. The opt in principle would (probably) reduce the amount of money they deploy, as well as making union bosses more accountable for their political views. Politics should be about people, and not intermediated by corporate interests.

So what’s wrong? The reform is unbalanced. Trade unions are not the only malign corporate interest around – businesses also provide parties with funding, and especially the Conservatives. This is unhealthy too, though thankfully things are not as out of hand in Britain as they are in the United States. But it does help counter the malign political influence of the unions. This not just a question of allowing the Conservatives to oppose Labour. Labour itself was more politically balanced and electorally appealing when it took a higher proportion of corporate donations, under Tony Blair. Whacking union donations without some kind of equivalent reform of other corporate donations is simply a partisan attack on Labour that will probably do more harm than good. Labour certainly has a good case to make to the public on this.

There is something similar going on strike ballots.  It is not unreasonable to ask for a substantial mandate for such action, rather than let a minority of activists decide things. If the union case for strike action is a strong one, they will get the support, as has been shown repeatedly. The problem is that the government refuses to modernise the way strike ballots are carried out. This has to be by post, which is not only expensive, but it gets swamped by junk mail, leading to low response rates. Most organisations that cary out mass ballots now do so electronically, or at least supplement the post with online. There are risks, of course, but they are manageable.  Allowing unions to do this would be a completely reasonable quid-pro-quo; refusing to consider it is an attack on workers’ rights.

If I were a trade unionist, this shocking state of affairs would give me pause for thought. Because the unions themselves have helped bring this situation about. Firstly, their conservative influence on the Labour Party has helped make them less electable. In 2010 they were decisive in making sure that Ed Miliband got selected as leader. And their hysterical opposition to austerity prevented Labour from developing a coherent and electorally convincing economic policy. Secondly their tribal attack on the Liberal Democrats for having the temerity to form coalition with the Conservatives helped weaken a vital bulwark against Tory hegemony. If Labour voters had rallied to the Lib Dems in the South West, things might have turned out differently.

And the end result is that Labour, as it turns out, is more interested in other things than union rights. Meanwhile the unions have no other friends across the political spectrum. The SNP have shown more interest in the fate of English foxes than union rights. How hard should Lib Dems fight their corner when the unions done so little for them?

Of course no real trade union leader will come anywhere close to such reflections. They still think that the Tories are the spawn of Satan who must be excluded at all costs, and that austerity, understood to include any initiative to make the public sector efficient, is based on lies – and that the public will be convinced of both these things if only they were proclaimed loudly enough.

For liberals the attitude is clear – it is to welcome the government’s reforms, but to fight for others to curb the malign influence of big (and not so big) businesses on political funding, and to allow trade union democracy to be modernised. It is hard to shed tears for such political dinosaurs as Britain’s current union leaders.

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