All posts by Matthew

4 liberal themes on economics and public services: my contribution to Lib Dem Agenda 2020

Agenda 2020 is the consultation exercise being carried out by the Liberal Democrats to set the framework of policy in the period up to 2020, when we next expect parliamentary elections. At this stage the idea is to keep the thinking at quite a high level. This is always quite hard for political activists. We somehow got onto VAT on tampons in the consultation exercise in Bournemouth. Then again, I’m always saying that political types on the left are too abstract. I haven’t submitted the following contribution yet, but the idea is to be strong on general direction, with only a few pointers on the detail. I’m afraid that it’s still a bit longer than my normal posts.

Economics, public services and wider Liberal Democrat policy

Economics and public services should be at the heart of any political narrative. Too often in the Liberal Democrats both topics have been neglected. The party has opted for a simple middle ground between the Conservatives and Labour. The 2015 General Election was no exception, at least as far as the headlines went. The time has come for a much more robust narrative. Here are some ideas on what this might look like.

The story so far

After 1945 the great Liberal thinkers Maynard Keynes and William Beveridge founded a post war consensus on economic management and public services. This was based on the state taking responsibility for managing the business cycle through fiscal policy, and a greatly expanded set of state services, funded by much higher taxes (compared to pre-war levels), to fulfil a series of new entitlements, designed to ensure that everybody obtained a basic level of wellbeing. These ideas were taken on by the Labour and Conservative Parties, and developed into an overbearing state, which also took over a series of failing businesses, from railways, to steel, to even aero engines.

By the 1970s the state had lost control of its finances and the country was heading for towards economic collapse. Public services had been captured by vested interests, with very little regard for their users. In reaction to this emerged a new conventional wisdom, initiated by Margaret Thatcher and expanded by Tony Blair. This new thinking was again based on liberal principles, and it is often referred to as “neoliberalism”.  The idea was that citizens should be empowered as buyers in a market economy, with the state stepping back to provide only basic services and a basic safety net. Much of the regulation of the business cycle would be taken up by monetary policy, so as to reduce the role of the state. Marginal rates of tax on income were cut, though overall levels of tax increased, if anything.

Probably not coincidentally, this change to public policy was accompanied by dramatic shifts in technology and global trade. Society changed substantially, mostly for the better. Living standards advanced, life expectancy improved, and pollution was cut. But now the country, in common with the rest of the developed world, seems stuck. Most economic growth just benefits a rich elite; businesses hoard excess earnings rather than invest or pay their workers more; property prices escalate. The number of badly paid jobs rises; most younger people are shut out of decent jobs and decent homes. Demand for health and care services grows, while public resources do not keep pace. And prosperity is restricted to a small number better-off areas, especially in the south east of England.

Liberals should worry. Power is being concentrated among a wealthy elite of people connected to big businesses. This trend Is abetted by a highly centralised national government that would rather deal with these large businesses, or else large public agencies like the NHS, than directly with the public. The power of the markets works for many people, but it is failing many more. Many people have inadequate leverage in the markets for jobs and homes in particular, leaving an unequal power balance in both domains. This state of affairs breeds fear and insecurity, which in turn leads to the rise of the political extremes of right and left, which threaten social cohesion.

In the meantime thinking on economic policy has not caught up with these profound changes. Most economists still think of the economy in a highly centralised way, in terms of aggregates across the whole economy, rather than the fate of its component parts. And thinking about productivity is stuck with ideas appropriate to manufacturing industry and economies of scale – and not to the efficient use of the human resources the country actually has to hand, in an economy increasingly dominated by personal services. The left rails against a series of pantomime villains, but resists any serious progressive reform of public services. This old thinking simply concentrates more power and wealth into the hands of a well-connected elite. Public services are dominated by functional silos based on political empires, not people’s actual needs.

We need fresh thinking, and my suggestion is to organise this around four liberal themes.

Liberal theme 1: green growth

Green growth means the advancement of human wellbeing while reducing the consumption of physical resources, especially non-renewable energy. The twin objectives are to ensure that everybody has the chance to live a healthy and fulfilling life in a comfortable environment, while easing the stress on the local and global environment.  There are two aspects to this: developing and implementing technologies that are more environmentally efficient, and breaking the idea that ever increasing consumption is the path to improved wellbeing. This requires a profound change in outlook – though one that is already taking place.

Green growth may or may not entail economic growth as currently measured. That depends on how advanced wellbeing is reflected in the monetary economy. In the short to medium term it entails a substantial level of investment, in more efficient homes, power infrastructure and transport infrastructure, as well as research and development. If properly carried out these investments will entail improved economic growth. Longer term growth requires the harnessing of human resources more effectively. This means a wider distribution of information management and decision making, or:

Liberal theme 2: small is beautiful

Large organisations, be they businesses or government agencies, are one of the main threats to green growth and liberal values. They concentrate power in the hands of the elites that control them, leaving the majority of their employees disempowered, and unable to react most effectively to the world as they find it. The elites are geographically concentrated, leading to geographic concentrations of power and wealth, and the hollowing out of communities elsewhere. This hollowing out leads to a waste of human resources, which must be tapped if green growth is to take root. Furthermore, large commercial organisations have a tendency to hoard surplus earnings (often abroad) rather than invest them, acting as a further drag on the economy.

Of course large organisations also play a vital role in any efficient economy; they are the best organisational form to take on some functions. But these are not as many as often supposed. A liberal government must change the legal and regulatory environment so that it favours large organisations less. This will include reforms to political structures, banking and taxes.

It will also entail a substantial reform of public services:

Liberal theme 3: public services that solve problems

It should be obvious that the main reason that public services are inefficient is that they do not work together to solve people’s problems. Housing, mental health, addiction, crime and poor physical health are very often bound together in one person’s feeding on each other – and yet we persist in trying to deal with each of these issues separately, in separate chains of command all the way to Cabinet. Often the key is making all the relevant services work together in such a way that the user moves to a better way of life, with less call on the public purse. Usually what happens is that the relevant agencies work against each other.

Public services should be organised to meet the needs of people, and solve problems rather than playing pass the parcel. This should be the foremost area for the development of policy, based on best existing practice. There may be a number of possible approaches.  Some of things are clear, however:

  • Changes will be easier to implement if responsibility for public services is more localised and more integrated.
  • Some form of empowered professional intermediary will usually be required to assess the users’s needs, to coordinate the different agencies and, where needed, to negotiate the compliance of the user. Empowerment will mean some form of budgetary control. This means a step back from the current tendency to disempower and de-skill such intermediaries, like social workers and probation officers.
  • Large scale functional outsourcing will usually take services in the wrong direction. Repeated tendering also leads to a dumbing down, a tendency to gloss over more complex issues. The greater use of local social enterprises may well be a better approach in a framework that ensures proper accountability.

Public services should help with some of the most difficult problems relating to poverty; but this has to be in a wider context wealth and income distriubtion. We also need:

Liberal theme 4: redistribution to correct imbalances

A well-ordered, liberal society might not require the redistribution of income and wealth. And liberals dislike redistribution for its own sake – different levels of wealth may simply reflect freely made choices over how to balance accumulating money with other things life has to offer. But in our society imbalances of wealth and income pose a threat. The less well-off are denied the opportunities that should be theirs. Excessive wealth can be used to buy political influence and monopoly power, reducing choices for others. The accumulation of wealth may also lead to excess savings and economic stagnation. Liberals must embrace redistribution, albeit warily.

Redistribution needs to work at two distinct levels: personal and geographical. The wealthy must be taxed on both income and assets (land, in particular), and the worse off must be compensated through access to benefits and rights to state services, especially housing. Children must be a particular focus of redistribution as early years are critical to life chances.

Also funds must be redistributed from wealthy regions and districts to those less well off, to offset the negative network effects of clusters of wealth.

At both levels redistribution arrangements must be designed so as not to create dependency. Those less well-off should be encouraged to improve their lot – but at the same time the level of redistribution must fall as the need for it falls. Systems of redistribution based on universal rights (like the state pension) have their place, but have limits too. Truly liberal systems of redistribution will require careful design.

A policy programme to match

At this stage the idea is to sketch out broad political priorities, and not detailed policy programmes. I do not believe that in most cases a radical departure is needed from adopted Liberal Democrat policy. The high level emphasis will need to be rethought, however.

The main policy implications of taking forward the four liberal themes are:

  1. Political reform, and especially the devolution of power to regions and districts. This is essential to create the right political environment. This may be combined with a new federal settlement for the UK and reform of the House of Lords. Electoral reform is important to ensure a plurality of power – but the priority must be to implement proportional voting systems at local level rather than at Westminster. A further important strand of political reform should be restricting the influence of wealthy individuals and organisations, especially through political donations.
  2. A programme of green investments must be instituted, including high quality social housing.
  3. With public service reform the emphasis should be on bottom-up initiatives – but national funding structures will have to be reviewed to facilitate this.
  4. The tax and benefits system will need to be re-examined. The Lib Dem commitment to increasing personal allowances must be rethought, as it is inefficient as a redistribution policy. Restoring tax credits is a higher priority. Taxation of land in some shape or form makes sense, though we may get no further than reforming Council Tax.
  5. On overall fiscal policy it is best to manage down expectations of additional government spending – though the principle that the government (including local governments) can borrow to invest must be clear.
  6. The banking system must be reformed to allow new, locally-based lenders to come into play. Investment in the “real economy” should be encouraged to create new assets, While avoiding a merry-go-round of existing assets.
  7. The UK should act internationally through the EU to curb tax avoidance, especially by large corporations. Trade agreements and relations with the EU should be viewed through the prism of promoting smaller businesses, and not simply advancing the interests of large multinationals.

Of course there are many more important policies that have a bearing on the economy and public services – not least reducing the level of carbon emissions. But overall such a policy platform should be quite distinctive from the orthodoxies of right and left, and yet fully in tune with modern times.


Corbyn’s moral crusade leaves too many questions unanswered

On Tuesday afternoon I did something for the first time ever. I watched a Labour leader’s conference speech. I had been encouraged by the advance billing that it would not be a long one. It lasted a full hour, so on that count I was disappointed. But what to make of it, and the revolution that has overwhelmed Britain’s Labour Party?

The first point to make is that its delivery was very low-key – which is entirely what we had been led to expect. Jeremy Corbyn wore a jacket and tie, but not a suit; and his tie wasn’t quite done up. His delivery was quite flat, and he often stumbled over his words. He was unable to deliver humour successfully. The speech itself rambled a bit – a bit of a struggle for me to concentrate completely at that time of the afternoon. But this is all very novel, and designed to show an unspun “authentic” politician, who is a nice man to boot. He had a rather lovely knowing look which he delivered from time to time in brief pauses. The contrast with Lib Dem leader Tim Farron’s speech last week, a much sharper and high octane affair, was very striking. Each is playing to their strengths, and not being rammed into uncomfortable poses by expert advisers.

A couple of things about its content are worth noting. He delivered a strong attack on the Conservative government’s economic policy, describing the shallowness of its supposed success. In this he was picking up from Shadow Chancellor John McDonnell’s speech the previous day. Labour is trying to establish a strong economic narrative to rival the government’s – and one that will garner support from respectable, mainstream economists. Unlike Mr McDonnell though, he said nothing about how Labour would deal with the country’s finances. This was all of a piece with his speech – rallying his supporters by stoking up moral outrage, but not trying to challenge them by hinting at hard choices ahead.

A second point is worth noting: he gave a lot of time to international affairs. I don’t think many previous leaders did this. This may be because he has a bit of form associating himself with international campaigns, not all of them entirely respectable. He made it plain he was for upholding human rights and against warmongering. He condemned Saudi Arabia in particular, and opposed military intervention in Syria. He did not, of course, attempt to tackle rather trickier issues, like Israel-Palestine or human rights in Venezuela, where he has a record of supporting its leftist regime. But this internationalist theme is a striking area of common ground with liberals.

For the Labour Party itself, Mr Corbyn said that he wanted to encourage internal debate, and not worry too much about how this is portrayed in hostile media. He made clear his opposition to the Trident nuclear weapons system, without seeking to impose it on the party as a whole. He also called for political debate to be carried out in in an open and civilised way, in a kinder more caring form of politics – not just within the party, but outside the party too. This gave rise to a standing ovation – though it is possible that this was because his audience mistook it for the end of the speech. Judging by a number of people sneaking out towards the end, the Labour delegates were as misled as I was about the length of the speech – and no doubt some had trains to catch. Those of us outside the party, who have witnessed the tribal abuse dealt out by Labour supporters, will believe any such change in style when we see it. One suspects that they can’t see the difference between plain speaking and throwing insults. Indeed the very next day Deputy Leader Tom Watson described the Liberal Democrats as a “useless bunch of lying sellouts”, among other things. So much for that then.

The whole thing made a lot more sense to me after reading Peter Kellner’s article in the New Statesman, actually written before the speech. In it he points out that by tradition Labour presents its cause as a moral crusade (or jihad if you are a Muslim, though I doubt that Labour politician has been brave enough to use that word!) – and not as a class struggle against capitalism. This helps mask the party’s attitudes to capitalism, which vary from outright hostility, through grudging tolerance, to positive enthusiasm. Mr Corbyn’s speech was firmly in this tradition – morality ran right through it. And it did not take a stand against capitalism – indeed he suggested that small and medium sized businesses should have better access to credit, albeit through a nationalised bank.

And it has to be said that the new Labour party does not seem to be playing to the hard left traditions that many of us were familiar with in the 1980s. The emphasis is on members setting policy in a bottom-up, “democratic” process. I put “democratic” in quotation marks, because a self-selected minority using voting procedures to determine their direction is a far cry from democracy – but Lib Dems adopt the same conceit. Nevertheless this is a long way from party activists acting as a revolutionary vanguard, and setting policy as generals choose lines of attack in real wars. I am told this is “democratic socialism”. Of course, this sort of inclusiveness is quite characteristic of the early stages of leftist revolutions – but I think Mr Corbyn genuinely means it. Some of his supporters may not.

The trouble for the rest of us is this. The shopfront may be a moral crusade that is quite attractive, and behind it may be inclusive and open party processes. But so far all this has produced is a blank slate. And with blank slates there is a tendency to project your wishes onto it. Old-left anti-capitalists think the party stands for nationalised industries and intrusive political leadership. Some of the younger recruits surely think it stands for something more liberal. But outsiders do not know what, in actual, concrete terms, the party stands for.

And based on what Mr Corbyn has said of his own beliefs, and what many of his trade union backers have also said – and what both of these have not said – there is every reason to think that what Labour will eventually come to stand for will not be at all liberal. They do not seem to believe in free markets; they are suspicious of the devolution of power; they do not appear to believe in electoral systems that foster plurality rather than polarisation.

And if the moral crusade turns out not to be based on liberal principles, it will merely consolidate power amongst a different, and likely even narrower, political elite. Until Labour moves off its moral high horse and gets its hands dirty, I will withhold judgement, even if I afford them some benefit of the doubt. Meanwhile I am not tempted to move away from a political party whose liberal principles are not up for debate.



Labour changes the meaning of austerity

So far, so good. That’s my verdict of the remaking of Labour under its new leader, Jeremy Corbyn. I’ll say more about the big picture later in the week, after Mr Corbyn’s speech later today. This time I want to focus on economics and the performance of the Shadow Chancellor, John McDonnell, who spoke yesterday.

Like Mr Corbyn, Mr McDonnell is a serial rebel and a political outsider – and he is very much Mr Corbyn’s right hand man. That is why he was given the job of Shadow Chancellor over the much more politically correct Angela Eagle. Both Mr McDonnell and economics are central to the Corbyn project.

The first thing to note is the new regime’s ambition in taking on economics. The previous leader, Ed Miliband, was a bit embarrassed to talk about economic policy. He did not try to defend the previous Labour government’s economic policies, nor seriously criticise them for matter, in spite of the opprobrium being dumped on them by the coalition parties. He was late in developing his own economic proposals, and when these came out, they appeared to be “austerity-lite”, and not seriously challenging the government’s narrative.

Mr McDonnell, on the other hand, wants to take control of the economic narrative. He is enlisting the help of heavyweight economists to both support his own plans, and to undermine the government’s version of events. In this he is capitalising on a remarkable fact. Academic economists have been very critical of government policies and “austerity” generally. Indeed government policy seems to be more based on 200 years of Treasury orthodoxy than modern economic insight. This is an opportunity to undermine the government’s reputation for competence, and make it look ideological.

Labour is still left with the two paradoxes of anti-austerity economics that I referred to in a previous post.  The first is that by opposing austerity Labour will have to make its peace with the global financial markets that it so despises. Mr McDonnell tackled this head-on in his speech, and in an interview with the Guardian newspaper last weekend. He has nominally adopted the government’s trajectory for reducing the UK’s fiscal deficit, with its aim of bringing it into surplus by 2020. With a huge rider: he will exclude borrowing to fund capital investment. Depending on how loosely “investment” is defined, this is perfectly sensible public policy, and not, in fact, very different from Mr Miliband’s. It reduces dependence on international finance – remembering that the Bank of England’s Quantitative Easing policies may come to the government’s aid if the economy takes a turn for the worse.

There is, of course, a problem. It means signing up to austerity as most people understand it. And yet opposition to austerity remains his rallying cry. One of the many weaknesses of the left is its love of abstract nouns, especially as things to oppose – austerity, neoliberalism, inequality, and so on. Ordinary working people don’t understand what they are on about, but the activists work themselves up obsessively – and at the moment austerity is public enemy number one. But Mr McDonnell and Mr Corbyn have an ingenious answer to this: just change the meaning of “austerity”.

To them, the word now applies not to tightening the government’s finances overall, but to cuts and tax rises that might affect low and middle income workers. There will be cuts, said Mr McDonnell, but not to the numbers of policemen, nurses or teachers. Instead the cuts would be to “corporate welfare” – tax breaks to businesses, as well as raising taxes on the rich. He was careful not to be too specific about all this.

There are some pretty solid grounds for scepticism here. Mr Corbyn has brandished the figure of £93 billion for corporate welfare, a figure conjured up by the Guardian. Mostly these are allowances or direct support for investment, exports and research and development – all things Labour will want to encourage. And the small print of the Guardian’s report suggests not that this is low hanging fruit waiting to be plucked, but that it is, to switch metaphors, a rather overgrown hedge that can be trimmed a little. There is reason to doubt how easy it will be to target other measures to raise taxes, or clamp down on avoidance, without collateral damage to the small and medium sized businesses that the economy so needs. This is what undid Francois Hollande’s Socialist government’s attempt to do much the same thing.

But it isn’t nonsense either. Big business, and the pampered elites that run them, are not a benign force these days. They contribute to the hollowing out of much of the economy by destroying middle ranking jobs and sucking the soul out of towns and villages away from the main commercial centres. They also siphon profits out of the economy rather than reinvest them. Labour will do well to be wary of big business, unlike the earlier regimes of Tony Blair and Gordon Brown. But finding policies that will tilt things against big business without damaging the wider economy will not be easy. I think that tax treatments for intellectual property and debt interest are a better place to look than the Guardian’s corporate welfare list. And international cooperation on corporate tax avoidance will help (especially if we can move to unitary taxes, such as the US states apply among themselves).  But such policies will take time.

All this takes us into the territory of my second paradox for anti-austerity economic policy. It calls for more economic growth, and yet bears down on much of the private business that will be needed to generate it. This will be the next challenge for Mr McDonnell and his colleagues. It is fair enough to bear down on many businesses, especially the giants. But Labour also needs to show encouragement and support for more positive businesses, through investing in support infrastructure, improving access to credit for genuine investment, improving public procurement, and through reducing the burden of petty regulation. As yet I see no sign of this – but it is early days.

I remain highly sceptical of the new Labour project. But its leaders have made a competent start, and there is undoubted fresh air. The floor is still theirs.


The Lib Dems start the long journey back

2015-09-23 12.15.44I’m just back from Bournemouth where Britain’s Liberal Democrats have been having their Autumn Conference. This was the first conference after this year’s General Election completed five successive years of rout for the party, and the first under its new leader, Tim Farron. It went as well as the party could have hoped for.

The depth of the party’s defeat in May can barely be described, as it was reduced from 57 seats to just 8. This was most spectacular in the south west of England, which had been the party’s main stronghold, but where the party lost every single seat. The public were fed up with it, which had formed a coalition government with the Conservatives. Both the Conservatives and Labour were more interested in crushing the Lib Dems that in damaging each other, and neither could the party resist the SNP surge in Scotland. Meanwhile, on the ground, in most places, the party had exhausted itself, and could no longer mount the sort of strong grass-roots campaigns that had seen its rise to 63 seats in 2005. What had been a steady decline after this high point turned into a rout after the 2010 election, and the party’s period in coalition. Its base in local councils bled nearly to death; it fared very badly in Scottish Parliament elections in 2011, and a catastrophic near wipeout in the European Parliamentary elections in 2014, before this year’s humiliation. The party has not just suffered a temporary blip; it has been hollowed out.

But something rather strange has happened more recently. After the election the party experienced a surge in its membership – adding 20,000 in four months. My local party went from about 120 in January to nearly 320 now. Some of these new members are returnees, who dropped out in the coalition. But most are drawn from voters, especially younger professionals, drawn to what they understood of the party’s values over the coalition years. These new members signed up in record numbers to attend the conference in Bournemouth, making it one of the most successful ever in terms of membership attendance – though others, from media to advocacy organisations, shunned the party after its loss of influence.

The main task at Bournemouth was to integrate this new blood with the old-timers, and to forge a renewed political movement. These disparate elements need to be inspired with a sense of common purpose and values. This is an inwardly focused business – the party has to sort itself out before it can seriously chase floating voters and win elections. And, my impression was, this went pretty well. The formal business was somewhat insipid, with very little controversial put up for debate. But this no doubt helped forge common purpose. And, of course, there was the training, the fringes and the socialising. The new member I spoke to on my journey home said the experience was inspiring, and much better than she had expected; and that seemed to be the view of others she had talked to.

The new leader played an important part in this. The leader has three big public performances: the rally speech on the first night, a question and answer session, and the closing speech. I saw the first and last of these. The rally speech was a nicely judged affair, where Tim (as I will call him – I will make no pretence of objective distance) showed his flair for public speaking. The effect was rather spoiled for me by an email follow-up that arrived to one of my mail boxes (one where the party’s database didn’t know I was already a member), attacking Labour, accusing them of not being a serious opposition to the Conservatives. This is more of the bubble-talk of which we have had far to much already. Labour are fired up by their hatred of the Conservatives. There are good reasons to think their opposition will fail, but  that failure has not happened yet. The Lib Dems can push Labour to take a stand on liberal issues, claiming to replace it is premature.

But the closing speech was a barnstormer – and the best leader’s speech I have heard for a very long time. It started a little slowly, and I thought it was going to disappoint at first – but that was just pacing. Three things stood out for me. The first was, as Roosevelt said in despair at emulating Churchill’s public speaking: “He rolls his own.” No doubt he was helped by speechwriters, but it sounded authentically his voice, with his characteristic humour and turn of phrase. This helps him sound authentic. The second thing was that the speech was rooted in the concrete. Leftist politicians have a habit of talking about abstract ideas (austerity, neoliberalism, progress, and so on). Tim avoided this; to make his point he concentrated on three issues: housing, refugees and Europe, and rooted these in real experiences, asking his audience to imagine the world from a different perspective. There was thankfully no talk of the abstract “centre ground”, so loved by his predecessor, Nick Clegg. And the third thing about Tim’s speech was its plain rhetorical firepower. He has a full range of gears from light and humorous up to full-blown, earnest passion. That full range was on display.

With the possible exception of Nigel Farage, the Ukip leader (whom I haven’t heard properly), this might make Tim the best public speaker of all the British party leaders. The contrast with Labour’s Jeremy Corbyn is quite striking. Mr Corbyn oozes authenticity, but he hasn’t got the rhetorical range.

So far, then, so good. The party has to do more inward work before it can really start challenging the other parties, though. That is conspicuous on policy. Tim tried attacking Labour for its irresponsible economics. This is pretty weak, until the party can develop its own distinctive economic narrative, that isn’t just a middle line between Labour and Tory. And the party got a glimpse of how hard this policy thing can be with the only controversial policy debate of the conference: on replacing the Trident nuclear weapons system.

On the one hand was offered a values-based line of getting rid of nuclear weapons altogether. On the other, more mainstream politicians, including the leaders of the Scottish and Welsh parties, wanted something a bit more fudged that would interfere less with fishing for floating voters. And the conference voted narrowly for this less inspiring course.

This blogger will try to make a modest contribution to this policy development, and in particular by suggesting ways forward on economic policy,  public service reform and political reform. More on that another time.

But meanwhile, I am encouraged that the party is gathering strength. I do not expect a major political impact on the wider scene for another year at least, though. The Conservatives, Labour and the SNP all have momentum right now, and it will be near impossible for the Liberal Democrats to break in with a distinctive voice. But the moment will come, and I hope the party will be ready when it does.


The political centre beckons for the Lib Dems

You might not think it to listen to them, but few, if any, politicians like the political centre. It is defined by others and inhabited by voters whose loyalty to any particular party is weak. Much more fun to consort with true believers. This is as true of Britain’s Liberal Democrats as it is of anybody else. And yet the party’s fortunes depend on its appeal to centrist voters. Can the party pitch for the political centre, while developing a clear, principled core values? I think it can – but it won’t be easy.

Following the party’s calamitous General Election results in May (which followed five years of calamitous results in local, European, and Scottish and Welsh elections) there was much talk by its activists of abandoning the previous leadership’s obsession with the centre. The whole idea was rubbished, in contrast to the idea of building up a “core” vote. The party now commands about 8% of the UK national vote (the same as in May), which, it is claimed, is lamentably small for a core vote. What is needed is to add to this core by principled campaigning that may not appeal to centrist voters, but will attract voters more likely to stick with the party.

The party’s failure is compared to the relative success of Ukip (who took 13% of the vote) and the Greens (who took 5%) – though the fact that neither of these parties managed more than a single seat in parliament shows weakness rather than strength.

Who are these potential core voters? Blogger Mark Pack and former Cambridge MP David Howarth produced a well-researched paper on this. They suggest the party fishes in a pool of about 30% of people whose outlook is open and tolerant on such issues as immigration. They suggest that the party might attract 20% of the vote that way. These voters tend to be on the left rather than the right. All this sounds quite sensible, and it is, as far as it goes. But the problem is that the party still has to compete for these voters, especially with Labour, the Greens and the SNP. Winning and holding on to such voters is going to be no easy business, even if the party’s credibility hadn’t been shot through by its perceived record in coalition, and by its poor electoral showing.

And a real spanner has been thrown into the works by the Labour Party, with its election as leader of Jeremy Corbyn. Labour, too, is fed up with the centre ground and wants to build on its core vote. And their prospective core overlaps with the one marked out by the Lib Dems. Indeed many Lib Dem activists hanker after the days when the Labour Party, under Tony Blair and Gordon Brown, aimed for the political centre, leaving them a clear run at discontented left-wingers. The party tried to stand out in a series of “principled” campaigns, opposing the Iraq War and abolishing student tuition fees, for example. And votes came, with the party’s best general election result in 2005. Whether this really was a principled stand based on liberal values, or an unprincipled and opportunist pitch for discontented voters, is one the questions the party has to ask itself. There were clear elements of both. But either way, coalition with the Conservatives was about the worst thing the party could have done. (Though I suspect that coalition with Labour would have ended up little better, even if it had been feasible -but through a different dynamic).

But Labour have slammed the door on a repeat of that idea. They are in a much stronger position to fish amongst these voters; they have more resources and, frankly, more credibility. But as that door slams shut, another opens. In the political centre, which the Conservatives are likely to abandon too, given that Labour is not competing for votes there. But capitalising on that opportunity is far from straightforward.

In fact the party will find it hard to bid for the political centre on many issues: Europe, immigration and refugees, reducing carbon emissions, and redistribution through the tax and benefits system, for example. These run close to what most of the party feels is its inner essence. And after all the “core vote” strategy is not dead – it is just that the pool of potential supporters has narrowed. The party needs to expand its core, and then pitch for centrist floating voters at election time.

So where should the party follow a distinctly centre line compared to Labour and the Conservatives? I think the answer is economic policy, public services and political reform.

On economics the party needs to stand for fiscal prudence, and step aside from all the left-wing rage over “austerity”. There’s a bad reason and a good reason for that. The bad reason is that it has public credibility, and fits in the slipstream of right-wing propaganda. This is bad because this credibility has been earned for largely the wrong reasons, leaning heavily on the “fallacy of composition” – that you run a state economy and a household economy in much the same way. The good reason is that demographics, the effects of technology change and changes to the world economy are all reducing the potential size of the money economy, and so the tax base. We have to find a better way to achieve the society we want than splurging public money everywhere. But this doesn’t mean we have to sign up to the Conservatives’ economic liberalism and reduce the size of the state in proportion to the economy as a whole.

Which leads to public services. The watchword has to be getting better value for money through a programme of reform. This may be resisted by workers and managers within the services. It will be resisted by Labour, now the the unions seem to be in control. But the party should not accept slash-and-burn narrowly focused  and outsourcing . What we need is integration of public services so that issues that are related – mental health, crime, housing, work, for example – are handled in a coordinated way around the needs of actual people. Which means, in practice being led by a locally empowered case-workers with the authority to make things happen in all the various agencies. The party’s best brains need to be on this – and establishing local experiments where the party is able to. For what it is worth, this happens to be close to the party’s officially adopted policy.

And thirdly there is political reform. Left and right may talk about reforming the system, but they only want limited changes that would in practice consolidate power for themselves. The party needs to push for more local devolution, proportional representation (with the top priority being local elections), and a federal settlement for the United Kingdom that would , amongst other things, replace the House of Lords. All this would allow a more democratic, pluralistic and effective polity.

When describing these policies, something becomes clear. They are centrist in that they contrast with the stands of right and left. But they are also radical and based solidly on liberal principles. They should both appeal to core voters and provide a platform for appealing to less liberal centrist voters.

But it will be hard. The temptation will be for the party to jump on every leftist bandwagon going, and ending up with nothing coherent.To indulge the politics of protest, and not campaign for real change. Labour have stolen the march on that, and will do it better. Instead the party needs to be about achieving results for real people, not posturing in order to bring in a few extra votes for a short period of time (read David Boyle for more on this idea).

And on that basis the party must defend its record in coalition. It is often said what a mistake it was for Labour not to defend its economic record vigorously at the last election – something the left and Blairite wings of the party agree on. Likewise the Lib Dems can’t ignore such an important part of its recent history as the coalition. The question of future coalitions, and even electoral pacts, will need to be discussed in due course. But the party must be clearer about who it is and what it stands for first. It’s not about power, but what the party wants to achieve.

The party has its main annual conference in Bournemouth starting at the weekend. I am going, and I will be most interested to see how the party is shaping up to the massive challenge that confronts it. My sense so far from talking to the some of the many new, and younger, people that have been drawn to the party in the last year, is that they are more interesting in the constructive, radical centre than they are in the protest politics of the left. I hope that’s true of the wider party.



Political reform is the acid test for Corbyn’s Labour

Jeremy_CorbynBritish politics has suffered a massive earthquake with the election of Jeremy Corbyn as Labour leader. There is a lot of dust; there will be aftershocks. But what can liberals say at this point?

Let us for now take this development at face value. There is an upsurge of public support for Mr Corbyn amongst people desperate an alternative narrative to “austerity”, and for a political party with real left-wing values. Let us say that the half a million or so people who took part in the party’s election process are not mainly London clictivists, but will join Labour’s campaigning by making phone calls, knocking on doors and donating money, from London to Leeds and from Bristol to Glasgow. Let us also say that Labour will not be riven my infighting but will mobilise behind a concerted attack on government policies.

If this happens there will be real momentum  behind Labour. It will take the wind from the sails of the Green Party; Tim Farron, the Liberal Democrats’ new leader will find it very difficult to attract people to his party through returning to left-wing campaigning. Many working class Ukip voters will consider returning to Labour, now that it has rejected the establishment consensus. Labour will start winning by elections against all comers.

All this would throw down the gauntlet to liberals who reject the government’s creed of economic liberalism. If it looks as if this reinvigorated Labour party might make headway against the Conservatives, do liberals support them in the hope that a transfer of power will be good for the country? Or do they think this new movement is fundamentally wrong, and has to be stopped at all costs? There seem to be three groups of issues that could decide this.

The first is Britain’s place in the wider world and defence. At this point it is very unclear what Labour’s new stance will be. Mr Corbyn himself has been associated with some very extreme views, such as that Britain should leave NATO. It’s pretty safe to say, though, that Labour’s policy line will be more moderate than this.  But surely it will oppose just about any foreign military intervention, and the the odds are it will come out against renewal of Britain’s Trident nuclear weapons systems. Not so long ago these views would have been considered so extreme that no respectable politician should entertain them. But now there is a good case to be made. There seems to be little point in such  heavy-duty and expensive nuclear armaments, which will be dependent on US support. There is a respectable case for more limited nuclear weapons, or even complete nuclear disarmament. Likewise foreign military intervention doesn’t seem to be making the world a safer place. They provide no answers to filling the political vacuums that are the real threat to stability. If Labour starts to support leftist regimes that do not support political pluralism, such as those in Cuba or Venezuela, then that will be another matter. But I don’t think Mr Corbyn will be able to take his party to those positions. So liberals may not be given enough reason here to oppose the movement.

The second groups of issues is economics. This is central to Labour’s new appeal, as cn be seen by Mr Corbyn’s appointment of left-winger John McDonnell to the role of Shadow Chancellor. It will define itself through a bitter a bitter opposition to “austerity”. It will oppose this they mean cutbacks to benefits or public services, or raising taxes on anybody but a rich elite. They are also opposed to any serious reform of public services, apart from moves to a model of state-owned command and control organisations, staffed by union members on permanent contracts. Two ideas are offered to make this economically viable. The first is a sort of semi-digested Keynesianism, which suggests that their policies will stimulate demand and so economic growth and, through this, extra tax revenues. The second is that there are vast amounts of extra tax available from taxing the rich more, clamping down on tax avoidance and evasion, and attacking “corporate welfare” – tax breaks and subsidies for businesses.

I have commented on these ideas before. For now all I need to say is that there are two paradoxes at the heart of this economic programme. The first is that, almost by definition, rowing back on austerity means a greater dependence on global financial markets to provide funding – printing money is not a long term strategy. And yet these markets are treated with contempt. The second paradox is that their policies depend on a healthy private sector economy to deliver economic growth and tax revenues, and yet they also want to make life more difficult for the private sector, and encourage businesses to take their investment elsewhere. No left wing government, from Francois Hollande’s Socialists in France to Alexis Tsipras’s Syriza in Greece, has found an answer to these paradoxes. The anti-austerity programmes of the former were sunk by the need to attract private sector investment, and the latter by the need to keep borrowing money from abroad without a clear prospectus for paying that money back.

But, if in the end governments will be forced to their senses by the dictates of markets, perhaps we can tolerate a little short-term economic chaos? We can, after all, be sympathetic with the idea of using the tax system to effect redistribution of wealth. That depends on the third group of issues: political reform.

The Conservatives now control the government because the current political system is weighted in their favour. Liberals favour a more pluralistic system, with greater checks and balances. To achieve this we need political reform in a number of areas. Will Mr Corbyn’s Labour Party support these, or simply offer vague platitudes like his predecessor, Tony Blair? That will be, or should be, the defining issue for liberals. What are these areas?

  1. The first is political finance and the reach of big money. The UK is not anything like as bad as the US – but that country points to the dangers. Laws start to be dictated by corporate vested interests – a particular problem in public services outsourcing, and intellectual property. Mr Corbyn’s Labour Party will surely be much more serious about this than its predecessors.
  2. Next is devolution. This means not just protecting the settlements in Scotland and Wales, but promoting further devolution to English regions and councils – including revenue raising powers, and the coordination of public services. There is reason to be suspicious of Labour intentions here – though since Labour also control England’s major cities, there might be some constructive tension. I have not forgiven Andy Burnham’s scepticism of the devolution of health services to greater Manchester.
  3. Then there is the House of Lords. Will Labour support complete abolition, or replacement by an upper chamber with real powers? Personally I think a new upper chamber should be part of a new constitutional settlement for the UK, taking it to a more federal structure. But a proportionally elected revising chamber would be acceptable. Which brings us to:
  4. Electoral reform. This really is the only way of promoting political pluralism in the long run. We need a system based on some form of proportionality, such as the Single Transferable Vote (used in Northern Ireland, and indeed the Irish Republic) or the Alternative Member system (used for the Scottish and Welsh Parliaments and the London Assembly). We have to be careful here; there is real public scepticism about this. And moving to PR at national elections is a big step. But a firm commitment to PR for local elections is an essential accompaniment to serious progress on devolution.

Will Labour deliver on these? I would be most surprised if we get anything more than a few warm but vague words. For the hard left consolidating political power is the whole point and purpose of politics, and they want to monopolise it. They don’t accept pluralism except as a way of identifying enemies. The can’t accept that empowering the people can mean anything other than conferring the mandate of heaven to their own political elite. There are pluralists in Labour, but on political matters the Blairites and the hard left are remarkably close together. If Jeremy Corbyn strikes out on a different line, then the movement he has started may yet be a worthy revolution.




Information science can help us understand economics

HidalgoI have just finished reading César Hidalgo’s Why Information Grows – the Evolution of Order, from Atoms to Economics. This is a flawed work. But the author is on to something – and something rather important.

Mr Hidalgo’s key insight is that it helps to understand economics as part of the advance of order, or information, against the tide of ever increasing entropy – the advance of disorder that is the central insight of the Second Law of Thermodynamics.

I don’t disagree with the disappointed reviews I have read of this book in The Economist or on Amazon. Some interesting ideas that lead to… nowhere much. His final section, a postscript nominally about acknowledgements, does much to explain how this came about. He describes how the book was written. Apart from Mr Hidalgo’s use of the words “bleed” and “vomit” to describe the process of writing, and his need to describe all the coffee shops where he wrote the book, he tells us how the book evolved. He started to write about economic growth, realised he was onto something much bigger, adapted and …

I have abandoned the book. Any bleeder knows that books are never finished, only abandoned. Yet I hope to have reached a point at which the orphan I produced is mature enough to find a home in most people’s heads.

Alas for most people he has not achieved that maturity – the ideas were to big to catch and consolidate in the time he had. But I am glad that he did “abandon” when he did, rather than keep his insights private for another few years while that extra maturity came about. It has found a home in my head.

The advance of order and information on Planet Earth is the great wonder of our existence. For some it is proof of God, for it can only be the work of an imagination. But for others, who do not believe in such a God, or for whom God works in altogether a different way, this wonder is a puzzle. Mr Hidalgo describes in general terms how such a thing can come about. A system out of equilibrium can generate order from its unravelling; this order can be stored in solid matter as information. We advance because our Sun is in the long process of self-destruction and because our planet has solid matter in which the information can be stored.

This advance of information took place though the formation of life on earth, and on to the civilisation created by humans. Mr Hildalgo’s starting point for the book was his realisation that this is that economic advance (a word I prefer in this context to “growth”, the word he uses) is another facet of this process, and that this insight helps us to understand economics. But his postscript describes how he was overcome by the banality of this observation, and how then strove to describe something altogether bigger.

If he is going to talk about economics, he needs to move beyond his understandable feelings of its banality towards an understanding of what economics is for, and then trying to work with that. He hints at it but leaves no time to develop his thinking properly. He is right that the idea of economic growth is not much in itself. But what economics should be about is advancing the wellbeing of humanity without destroying the planet that it inhabits. And that must be seen in terms of the growth of information, and not, as far too many people see it, as the consumption of energy and the creation of physical artefacts.

Now let’s move on. Mr Hidalgo’s thoughts on economics flow from an appreciation of the critical constraints on the growth of information in human society. This is set by the physical capacity of the human mind to retain and process information. People can organise as teams in order to acheive beyond their personal capacity, but this too has constraints imposed by what organisations and social networks can do. He draws on the insights of the great lawyer-turned-economist Ronald Coase, amongst others, to explain the implications of these constraints. These show why it is so difficult for “developing” economies to catch up with the developed world, for example. It is through understanding how organisations and networks manage and create information that we can understand the direction needed for human advancement.

Interestingly he does not feel the need to discuss whether massive computing power and databases help in this process (or I missed it if he did).  We tend to associate the word “information” with them. But these things are really very limited in their power to think and imagine, and we often confuse information with data. Still, there is an interesting discussion to be had about the role advancing artificial intelligence might play.

Economists often show what is referred to “physics envy”. This is the wish to reduce their discipline to some elegant natural laws which are susceptible to mathematical treatment. And yet, as somebody who has studied physics for real, I wonder at how little comprehension of physics economists generally have. By and large they haven’t got beyond the First Law of Thermodynamics, and systems in equilibrium. And yet physics (and chemistry come to that) only gets at all interesting and useful when you get beyond these basics. I remember that light bulb moment when studying Chemistry A-level when we moved from the stable predictable world of thermodynamic equilibria to the crazy world of kinetics, where most of the real value lies. And yet the economic models the world uses, and around which the world of economics revolves, are fundamentally based on equilibrium thinking.

So if economists have physics envy, Mr Hidalgo’s ideas are exactly the sort of direction they should be looking to move forward. But, alas, macro-economists in particular would prefer to pontificate about comfortable aggregates like GDP, inflation, productivity and money supply as if these were genuine physical phenomena.

An information-based outlook would change the way we viewed economics. We would see that Saudi Arabia is not a rich country, but a poor one, as its economy is based on oil rather than the enrichment of information. And we might understand better why making organisations, and systems like national economies, big often makes things worse rather than better. It does so because these big places tend to concentrate their information development into tight networks at the power centres, leaving much of their human potential under-utilised.

It isn’t that theoretical economics itself offers any basis for so-called economies of scale. In fact the idea goes against the oft-used maxim of diminishing returns, which economists like more for its convenient mathematical consequences that any real grounding in reality. But economies of scale are the language and self-justifying belief system of political and commercial power. Advancing productivity, it is said, is the key to economic success. Bigger systems are more productive. So we must make everything bigger. For an example of this, look at the case being made for expanding Heathrow Airport. Economists are unable to present a serious counter-narrative, it seems, though a few are uneasy about this logic leading to monopolies.

The most important thing about Mr Hidalgo’s work is that it starts to give us a strong theoretical language with which to tackle one of the biggest social and economic issues of our time – the under-utilisation of human resources through the consolidation of large governmental and commercial networks – which lies behind growing inequality. It also helps us with another issue – the commonplace assumption that we must choose between improving the lot of the poor and protecting the future of our planet.

By thinking about information and networks, we break the stranglehold of thinking about the world in terms of money and physical things. That holds a lot of promise.




Learning from the rise of Mrs Thatcher

Mrs ThatcherI have recently finished reading Charles Moore’s excellent first volume of the authorized biography of Margaret Thatcher.  I wanted to read this as I inhabit a bit of a left wing bubble, politically anyway. We project cardboard fantasies onto Tories, as selfish, rich cynics. But we need to understand their true humanity and complexity – and Mrs Thatcher is such an important figure,that she is a good place to start. It is proving timely since some supporters of Labour leadership contender Jeremy Corbyn are suggesting that she offers an interesting precedent. Somebody who achieved power and dominance in spite of despising the political middle ground.

It is, of course, easy to dismiss the comparison of an ambitious and conventional careerist like Mrs Thatcher with the maverick Mr Corbyn, who has discovered serious political ambition late in life.  She had at least had been a cabinet minister, and had some kind of relationship with most of the important people in her party before her bid for power in 1974. Still, she succeeded in spite of rejecting consensus, and in the face of massive scepticism, while having solid grassroots support.

The book covers Mrs Thatcher’s early life up to the conclusion of the Falklands War in 1982, at which point she truly started to dominate politics. It is a fascinating story. Let me offer a few observations.

The first is not relevant to Mr Corbyn’s situation. It is that there was something quite liberal, and indeed Liberal about Mrs Thatcher’s political outlook. Her father had been a Liberal, and a senior local politician. If you had to pick one word that summarised her outlook it was Freedom. She did not believe in a ruling class that was born to rule. She wanted everybody to be able to access what society had to offer – though she assumed that they would have to work for it, rather than let things be handed to them on a plate. She hated trade unions because they underwrote a system that stifled freedom: but she admired the way that they stood up for the weak and voiceless. You just have to remember how stultifying the political consensus of the 1950s, 60s and 70s had become, not to mention the ever present Cold War mentality, to understand how liberal beliefs might drive you to the right rather than the left in those days.

In only two serious ways can I think that Mrs Thatcher’s beliefs conflict which core liberalism as I understand it. One was that she was fiercely nationalistic – although that may be more of a failure of imagination than principle. She swallowed whole a traditional view of English history – which she saw no need to question. Secondly she believed profoundly that people should strive to better the lot of their children – to the point that inheritance of your parents’ assets was a fundamental right. Modern liberals want people to strive for their children, of course, but think of legacies of property and money as a barrier to freedom of opportunity.

It need hardly be said that Mrs Thatcher had no time for the Liberal Party itself – who were often here main opponents in her local seat in Finchley. To her (and her father) Liberals had betrayed Liberalism.

A second point is that her advance from Leader of the Opposition to Prime Minister was precarious. She nearly lost the election in 1979. Her most reliable ally was a deep public distrust of Labour, following years of economic failure – high unemployment, inflation, and awful government finances. Trade union power, showing contempt for elected politicians and the rule of law, was a further cause of public disgust. But she did not have any convincing economic narrative with which to to oppose Labour, and that undermined her public appeal as the election drew close. The previous Conservative government, in which she had served, was widely regarded as a disaster. Her own economic policies were unclear, and to the extent they were formed, were doubted by most of her party.

This, of course, may be one thing giving Corbynistas hope: that Mrs Thatcher won in spite of lacking a clear economic narrative. It runs counter to the Labour centrist narrative that the party will only be electable if it follows the conventional economic wisdom, and much of the Tory economic narrative. But Mrs Thatcher’s lack of economic narrative nearly undid her. And for it to work the Tories will have to look a lot more financially incompetent than they do now. As I have written before, the British economy could certainly go off the rails in the next four years. Growth could fail; another banking crisis could strike. But the problem for the left is that any such new crisis might make the anti-austerity narrative look less credible rather than more so. Indeed, the best argument that can be made for the government’s excessive plans to reduce government expenditure is that they will be a better place to start if the economy at large disappoints.

And the third observation is how long it took for Thatcherism to emerge after she became Prime Minister in 1979. In her initial Cabinet she was outnumbered by sceptics (“the Wets”). The government had to deal with a raging economic crisis – and that absorbed its full attention. Her strategy was what today would be called austerity – cuts in government spending, and some tax rises, to try and bring government finances under control. It was all she could do to keep her Cabinet more or less behind her. This has echoes of the first Coalition years after 2010 – with an important difference: interest rates were sky high in the early 1980s in order to deal with rampant inflation. (And, I would add, the Coalition  Cabinet was considerably more united). At the time this was not a particularly ideological struggle; much of the impetus came from her Chancellor, Sir Geoffrey Howe, who was of the political centre, and with whom she did not see eye to eye. It was more a matter of asserting political control, based on age-old Treasury orthodoxy. And it is striking just how much of the problem of economic management derived from nationalised industries – which included steel, cars and coal – as well as energy and the railways. State control had allowed awful management to take hold, abetted by trade unions who had no conception that economic efficiency should be a political priority.

There is a tendency in the left to look back on the Keynesian consensus years from the 1950s to the 1970s as a bit of a golden age (though I would suspect that Maynard Keynes would turn in his grave to have his name attached to those policies!). The consensus favoured a highly active government, that tended to nationalise large industrial concerns when they got into trouble. But the country stumbled from one economic crisis to another from the 1960s onwards, and after the oil crisis of 1974 economic collapse (hyperinflation as the government was unable to pay its debts) beckoned. If Mrs Thatcher had failed, and been replaced by a government that was less determined to tackle government finances, in the name of Keynesian demand management, then economic collapse of some sort was surely the most likely outcome.

The emerging economic problems of the 2010s and 2020s take an entirely different form. Its symptoms are slow economic growth, an uncontrollable business elite accruing much of the wealth to itself, and the disappearance of stable, middle order jobs. These are trends brought about by changes in technology, the world economy, and demographics. The political right does not have the answers. But neither does the left… though they are both right about some things.

Mrs Thatcher is a hate figure on the left, but it is not an exaggeration to say that she saved Britain from economic collapse, with a lot of the hard work being done in those first, precarious years of power. What emerged was a less equal and less secure society, but one that was overall much more prosperous. And it functioned in a way that the previous one had become unable to – consumption and production were reconciled. This achievement required a combination of steely determination, the support of an inner coterie of determined supporters, and political skill in bringing along people who did not really believe in what she was doing.

And Jeremy Corbyn? There are similarities, but it’s more than hard to see Mr Corbyn and being a Mrs Thatcher of the Left.


The Chinese test the limits of a state managed economy

Political commentary on economic growth operates between two poles. On the one side the right argues that the state should get out of the way, and allow entrepreneurial businesses full scope to do their thing. On the other, the left says that growth is driven by investment, much of which must be directed by the state to be effective. Both are right, of course, and the balance depends on the circumstances. But China offers a fascinating case study in this discourse.

Until the rise of Deng Xiaoping in 1978, China offered a good example of a failed, state-led economy, alongside the Soviet Bloc amongst others. The economy was made up of state owned enterprises (SOEs) and state directed cooperatives, operating according to production quotas, all part of a state plan. But the economy took off as the shackles of state control were released.

This seems to follow the right’s playbook, but what happened was in fact much more subtle. The state quotas and SOEs remained in being, but a private sector economy was allowed to flourish alongside it. This contrasts with what happened in Russia after the collapse of the Soviet Union in 1990. There, following the advice of right-wing US economists, the state system was dismantled, with SOEs sold off and production quotas abolished. You can’t be half-pregnant, these advisers suggested. That was disastrous, of course. The SOEs were acquired by well connected crooks, who formed a governing oligarchy. Essential state support systems collapsed. A flourishing economy did not emerge until a natural resources boom saved things.

Meanwhile, China’s pragmatic approach delivered spectacular growth, which led to a rapid diminution of poverty. After a first phase in which private enterprise transformed agriculture, a growing private sector flourished in producing manufactured goods for export. It was one of the most brilliant acts of economic government the world has ever seen. They took no advice from westerners. But the Chinese governing elite was left with some difficult questions. Sooner or later the SOEs and political structures would present limits to growth, and would have to be reformed. Commentators, inside and outside the country, confidently predicted that the Communist Party would have to release its grip. But that is not how things have played out.  The Party did reform SOEs to make them more responsive to market economics, but they did nothing that would threaten its own monopoly of political power.

Instead, as the 21st Century has progressed, a new model of growth has emerged. Alongside a vigorously competitive private sector, a massive programme of state-directed investment has sustained growth. That meant growth rates of 10% or so, even through the world recession of 2008/09. Something like 35% of Chinese national income is directed towards investment, much of it through SOEs. This has now swung towards the left-wing model, and those suspicious of capitalism and democracy have taken inspiration. A wise government, unconstrained by the petty-corruptions of democracy, has led the way to continued spectacular advance – and throwing out all that austerity nonsense too.

But, as Martin Wolf writes in the FT this is all coming into question.  The Chinese economy is slowing down. To an outsider this might look like an orderly transition. Growth rates of 7% are still high by almost anybody’s standards; the government’s aim of moving to an economy led by consumption rather than investment looks natural enough – this will improve the wellbeing of the Chinese people. And yet deep flaws in the Chinese model are being exposed. China has rather little to show for years of massive investment – at least in terms of economic returns, rather than monuments in steel and concrete. And behind the investment lurks piles of debt – representing the savings Chinese people. Chinese productivity has been static.

And slowing the growth rate from 10% to 7% may sound easy, but it creates real strains on financial systems, with all the time lags built into it. It implies a much larger dislocation. But with a stock of useless investments, SOEs who are not used to making themselves more efficient and effective, and a financial system threatened by excessive debt, doubts are growing about how feasible even 7% is as a growth figure. And since China plays such a big part in the world economy, it is no wonder that financiers across the globe are getting jittery.

This has some resonance in domestic politics in the developed world. The left’s criticism of austerity policies since 2008 has been virulent, and joined by many respectable macro-economists. Surely, they suggest, the state should have shored up demand with a programme of investment. Labour leadership frontrunner Jeremy Corbyn’s economic proposals are thick with this sort of thinking. But this only works in two circumstances. First is that the pre-crash economy was sustainable, and can be revived quickly, so all that is needed is to cover a temporary lapse in demand. In this event it hardly matters if the investment itself is useless (digging holes and then filling them in, and so on). But in Britain at least there was good reason to question the sustainability of the pre-crash economy: a large current account deficit, a structural deficit on state finances, a bloated finance sector, a declining oil and gas sector. Besides it is all now a bit late.

The second way in which investment can shore up an economy is if that investment produces decent economic returns in due course, allowing debts to be repaid. The unfolding problems in China are showing what happens if investment is badly directed. There are plenty of other examples (Japan is another good one). The trouble is that the more you try and turn investment on and off like a tap, to regulate the macro-economy or in an explicit drive for growth, the more likely investment is to be wasted. The money is directed according to political imperatives, not economic ones. This is something that macro-economists, who don’t like to look behind their beloved aggregated and averaged statistics, often miss. In the UK the criticism that the government did not invest enough after the crisis remains a valid one – but it would not have been easy to pump in the sort of funds that the wider economy needed to keep on an even keel.

Time will tell on China. Its leaders are not to be underestimated. But they are demonstrating that you can have too much state direction for a healthy economy.


Immigration remains the top issue in British politics

As the left chatters away about the Labour leadership contest, and the economic and diplomatic implications of a Jeremy Corbyn leadership, the real stuff of politics in Britain goes on. And there is no doubting the top issue: immigration.

Immigration has, as in many developed countries, become a lightning-rod issue for general discontent. Grumpy conservatives, especially those of lower middle class and working class standing and white origin, have decided that it is at the seat of most ills. They see a world changing around them, with middle ranking jobs disappearing, house prices and rents escalating beyond reach,  public services under stress, and strange terrorist threats at home and on holiday beaches. The racist attitudes that could be taken for granted in my youth linger too, albeit in “I’m not racist but…” form. “We’re full up” is what people tell each other, and this all seems to be plain common sense. That immigration continues is simply evidence that Britain’s ruling elite is not up to the job.

Meanwhile a refugee crisis strikes Europe. The utter collapse of once-stable Syria is the most important cause. But the dire situation in Libya, Somalia, Eritrea and even Nigeria all contribute to numbers of escapees who are prepared to risk their lives in pursuit of something better. This keeps the flow of desperate people in the news, and stokes up a sense of threat. Sadly, instead of, or perhaps alongside, compassion, many people seem to think “I don’t want these people turning up in my street”. And now net migration to the UK is at record – something that has little to do with the refugee crisis, and much more to do with the relative success of the British economy. A number of right-wing newspapers are happy to keep the pot boiling, drawing connections where there aren’t any and generally playing on a sense of crisis and discontent. It is difficult not to see this as a malign intervention by media oligarchs with an agenda of their own: but this stuff clearly sells newspapers.

Mainstream politicians know full well that how firmly held these views are amongst the public at large, and feel obliged by the process of democracy to do some something. The trouble is that doing anything substantive is likely to damage other things that the public hold dear – such as the economy or public services.

Ordinarily a bit tokenism, followed by some ducking an weaving would be all that is called for. A prosperous growing economy would help distract people, and, in the classic public way, many people don’t really want to go further than have a good whinge.

But behind all this is an issue of real importance: Britain’s membership of the European Union. And behind that lurks another issue: whether or not the United Kingdom survives, or whether the kingdoms of England and Scotland go their separate ways. The government is committed to a referendum on Britain’s membership of the EU in 2016 or 2017. Superficially things are going quite well for those that want Britain to stay in the EU. The polls that once showed solid majorities for exit have now switched the other way.

But Britain’s exit campaigners are a determined bunch. For many it is the most important issue in current politics; for them there is no ill that does not have Britain’s membership of the EU at its heart. It plays the same role as Communism did in my youth: something that provides unity and coherence to an otherwise disparate movement. Large parts of the Conservative Party think this way, perhaps most of its grassroots membership; and they are being harried by the insurgent Ukip. They know that support for the EU is lukewarm, and there is one issue that could turn it: immigration.

Free movement of people lies at the heart of the EU treaties, something that many Britons have taken advantage of with alacrity. Not that that affects the public debate: Britons abroad are benign “expats”, while those coming to this country from other places are malign “migrants”. Many other EU citizens are as sceptical about free movement as Britons are, but securing a treaty change, even if desirable, is not feasible in the next two years. Treaty changes require ratification by all member states, a process that often requires a referendum. Each treaty change has become more difficult than the last; there is now no prospect of securing this. And without treaty change the main features of free movement will remain in place – something that is thoroughly good for the EU economies, including Britain’s, but of no help to those who want to present a “reformed” EU to the electorate.

And so the antis are keeping immigration up on the agenda. The refugee crisis helps: even though this has no bearing on Britain’s membership question, it serves to raise public unease. And slowly but surely the anti-EU campaigners are drawing a connection between EU membership and high immigration. The most conspicuous recent example came from the Home Secretary, Theresa May, no less. She suggested that EU migration be limited to those already with jobs to move too. This is half-baked, but that’s not the point. It is something an EU renegotiation cannot deliver, and this will help stoke discontent.

But leaving the EU would be a disaster for Britain. It would mire the country’s political leadership in many years of painful negotiation, and would give the Scottish independence movement a sound reason to rerun the independence referendum, and an excellent reason for Scots voters to vote for independence. Regardless of whether the Britain would be better off or not outside the EU in the long run, years of negotiation and uncertainty will damage investment, and no doubt slow down other areas of economic and political reform.

So what to do? Moderate Conservatives, led by the Prime Minister David Cameron, are trying to accommodate the anti-immigration movement, both in tightening rules, and in negotiations with the EU. This simply looks ineffectual – as well as damaging as the country’s demographic crisis slowly begins to bight, as well as the need for the country’s education sector to bring in foreign, fee-paying customers.

Labour have tried to find a middle ground too; this is an issue that bothers its working class core vote, now being picked off by Ukip. It has declared that its laissez-faire approach in the 2000s was a mistake. But it wasn’t, and this is intellectually dishonest. Amid such contortions it is difficult to sound convincing.

Nick Clegg, former leader of the Liberal Democrats, also tried to stake a middle ground. He wanted to combine clear and well-enforced rules on migration with a generally liberal attitude. The public wasn’t listening, though, and it sounded too much like liberal fence-sitting.

Which leaves liberals, left and right, in a bit of a bind. For now standing up for the principles of free movement and diversity is the only honest thing to do. But alongside the fictional problems that flow from this are quite a few genuine ones, that need real solutions. And anti-immigrant feeling is a sign of a deeper discontent, which liberals must address.

I think it has a lot to do with the hollowing out of society, as big institutions, from public ones like the NHS, to national commercial chains, take control. This provides the sort of rootless milieu in which outsiders seem much more of a threat to people’s security. It allows organisations that thrive on cheap, disempowered labour, often recruited abroad, to thrive.

But reversing that trend is a huge task. it means looking again at the standard language of economic growth and productivity. It is a cause that this blogger is increasingly devoting himself to.