All posts by Matthew

The Brexit paradox: its strongest argument is its least attractive

I originally posted this article on Friday 25 March, but there was a problem with either my web host or WordPress or some other technical factor, which mean that although the email was sent out, and it appeared to be published on my browser, the publication never actually happened. This is the second attempt.

I have been relatively quiet about the biggest issue in current British politics: the referendum on membership of the European Union. It’s not that I don’t care – it has defined my politics for well over 40 years. It’s a feeling of inadequacy that I can say much that will heard beyond the babble. When I started this blog in 2011 I posted prolifically on the referendum for electoral reform. All I was doing was cheering along a rather small band of the already committed. No serious debate was actually taking place over the merits of the reform. I don’t want to be just another pro-EU voice that is only heard by other pro-EU voices. Alas, the remains my likely fate.

Still, I do want to engage in serious discussion of the issues, beyond the polemic. That debate will mainly be with myself, no doubt, but it is better than nothing. In this post I will to look at the economic arguments. Life will clearly be harder outside the EU, but might not that actually be a good thing? It is, perhaps, the central paradox of the whole debate.

The most commonly heard economic arguments for leaving the EU are based on three themes: the taxes the country pays to the EU budget; the weight of EU regulations; and the economic problems and slow growth suffered by other EU countries. None of these stands up to close examination. The budget contributions are the price paid for access to the market, and are payable by non-members like Norway and Switzerland for access rights; any savings made post Brexit will be balanced by costs, such as tariffs payable on imports, and loss of exports. This is a hard calculation to make, but the contributions look like small change in the bigger picture for an economy, like the British one, that is so dependent on trade. The argument that a sweetheart trade deal can be secured easily because the country has a substantial trade deficit with the EU is nonsense. That deficit is largely with one country: Germany, and the deal has to be done with 26 others too. And Germany’s support of sanctions against Russia, which were very costly to it, shows that politics trumps economics anyway, in Germany as in all countries.

On regulation it is hard to believe that things wills be much different outside the EU; much regulation will stay in order that the country is able to export goods. Those that don’t will be replaced by home-grown regulations that will be approximately as onerous. Democracy and regulation go hand in hand, and Anglo-Saxon cultures are as prone to this tendency as any other. Just try to set up a hairdressing business in the US. If the Brexit campaigners talked about which regulations they want to throw in the bin (other then fictional ones like those specifying the shape of bananas, etc.) they would quickly provoke a backlash. What they generally mean is employee rights.

And the economic problems of the rest of the EU do not stop Britain from exporting to the rest of the world. After all, one of the most dynamic of the world’s exporting nations, Germany, is at the heart of the EU.

And yet. A while ago I heard an interview on the BBC Radio 4 Today programme with British businessman Peter Hargreaves (co-founder of financial adviser Hargreaves Lansdown, with whom I had many dealings when I worked in financial services). The Telegraph report is here. He spouted a lot of the usual nonsense, waving away concerns about disruption to trade and investment, and suggesting that relations with Commonwealth countries could substitute for those with our European neighbours. It is remarkable about how disciplined and on-message the disparate Leave campaign is, so early. But Mr Hargreaves went onto say something much more interesting. He suggested that life out of the EU would be more “bracing”, and that would stimulate British society to greater efforts that would make it more efficient. He wanted Britain to emulate Singapore after its breakaway from Malaysia.

It would be easy to poke fun at this. Singapore might be a paragon to Mr Hargreaves, but the country is subject to an authoritarian regime that puts British complaints about political correctness (and state paternalism) into the shade. It is also a city-state, without the complexities that a large hinterland brings. But. Think about that persistent trade deficit with the rest of the EU, which contributes an trade deficit. Since joining the EU the country has been living beyond its means. A strong pound, strong inward investment, and drawing down generations’ worth of foreign assets has given the country an illusion of economic success. There are no doubt many reasons for this: North Sea oil, the illusions brought about by global finance, loose fiscal policy after 2001, and so on. But being in the EU has surely contributed. It has anchored the country in a wider international system that makes imbalances easier to sustain; it has been most helpful in drawing in inward investment, a key factor in supplying the country with the foreign currency it needs to keep going. Life outside would surely be more bracing.

An interesting digression from this line of reasoning is how things might have been different if Britain had been part of the Euro, since so much of the economic illusion was sustained by a strong pound. A topic for another time, except that I must point out that the Euro was brought in too late to be of any use – the pound was already too high by then.

And so the best economic argument for Brexit is this: the EU is a comfort blanket that is preventing our political and economic elites from facing up to the country’s true predicament. Leaving the EU would provoke a necessary economic crisis, but this would head off an even deeper crisis down the road. Of course Remainers will hope that the deeper crisis can be headed off by British economic reform within the EU, while Leavers will hope that Brexit will have a delayed economic impact, allowing the crisis to be headed off.

But, of course, the Brexiters cannot sustain this line of argument in public. It is a hair shirt argument, and the wider public would rightly suppose that it would be them that would wear the shirt (the “necessary price”) and the various business elites that would scoop the benefits. In fact the line that life outside the EU would be “more bracing” was distinctly off-message for the Leavers – though the consistent refusal of Brexit campaigners to acknowledge any risk of economic cost or uncertainty is their least convincing line.

Nevertheless, we supporters of Britain’s future in the EU should pause and reflect. Our relationship with the rest of the EU is not quite right. That trade deficit is a worrying sign of weakness. Too much of our country is inward looking. The paradox is that membership of the EU makes that inward focus more sustainable – and yet it is precisely what makes it is easy for so many people to contemplate life outside.

 

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To see the significance of IDS’s resignation we must look past the dead cat

My last post on the Budget took on the gorilla cliché. This time I want to talk about dead cats. What brings this on is the spectacular resignation of Iain Duncan Smith, popularly referred toas IDS, who had been the Work  and Pensions Secretary.

Is this a dead cat moment? The metaphor comes from election strategist Lynton Crosby, who guided the Conservatives to their spectacular election win last year. He suggested that if the news agenda goes awry, you should “throw a dead cat onto the table” to distract attention. The IDS episode has certainly done that. It has dominated the news for well over a day now, pushing out all other political stories from home and abroad.

In whose aid would the dead cat have been brought into play? That would have to be the Leave campaign in Britain’s EU referendum, and indeed much of the comment suggests that this issue lay behind the resignation. But Mr Duncan Smith says it is about the Budget, and how it juxtaposed tax for the wealthy with withdrawing allowances for the disabled.

But it is hard to see what the dead cat was meant to distract our attention from. The Budget was hardly a triumph, and was pretty neutral in the great EU debate. The Remain side wanted to claim a coup with regard to VAT on tampons, which has got tangled up in EU rules. But that’s small beer. Maybe the Remain campaign were plotting something. There is surely frustration about how easily the Leaves seem to be able to hijack the news agenda, but it was surely too early for a news coup. If it had been timed to coincide with President Obama’s future visit to the UK, then that would have been different.

Indeed Mr Duncan Smith is a particularly guileless politician. This lends him a certain charisma, which briefly took him to a disastrous period as Conservative leader, but his general lack of political and management skill is very evident.

Which leads me to think that he can be taken at face value this time, which is what Observer commentator Andrew Rawnsley suggests in what looks like an authoritative analysis. The referendum has created the general context of tension, but Mr Duncan Smith and George Osborne, the Chancellor, have been at loggerheads for many years. Mr Osborne tweaked his tail once too often.

Which means that much of the chatter about the episode being linked to the referendum is misplaced. It is very hard to know what its impact will be on that campaign. It’s effect on two other issues may be more significant.

The first is the fate of IDS’s pet project: Universal Credit (UC). This aims to replace a complex system of tax credits and benefits with a single scheme that is linked to income levels in such a way that incentives to work are not destroyed. This idea has wide political support, and it is the a centre piece of the government’s benefit reform narrative. But it is technically difficult to do because it depends on near real time data on income levels. This, incidentally, is the opposite approach to that taken by the Treasury, which prefers to focus its data gathering on a small number of better off people, rather than tangling with the sometimes chaotic lives of the less well off.

The technical challenges mean that the roll-out of UC is a long way behind schedule. It had really only been sustained by Mr Duncan Smith’s political capital. Now that is gone, surely the project will collapse? That will be a victory for the Treasury, but it will leave a hole in the heart of government policy. What will the government do next?

But there is a bigger issue for the government than even that. In my last post I pointed about how hard it will be for the government to force through further cuts in public spending, leaving the government’s financial plans dependent on a sudden, and unlikely, spurt of old-fashioned productivity (as opposed to the new-fangled sort that will leave tax revenues untouched). The government has a small majority. It needs political will, discipline and cohesion to push its fiscal plans through without breaking promises on tax. Mr Duncan Smith had shown that solidarity until now. The Conservatives will have to find a way to rebuild it after the referendum, probably under a new leader. That is now more difficult than ever.

Who might that new leader be. Mr Osborne looks to divisive. The London Mayor Boris Johnson probably lacks support within the parliamentary party, and has a credibility problem. He’ll lead the polls under the going gets serious. I would not rule out that dark horse: Theresa May.

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Tax is the Budget gorilla

As a rule I hate clichés. I cringe whenever I hear about a “perfect storm”. But I have a soft spot for the gorilla in the room, who is sometimes an elephant. The huge thing, obvious to everybody, but which it is impolite to talk about. In responding to Britain’s annual (OK, twice yearly) Budget I’m looking at one of them.

Britain’s Budgets are political theatre staged by the Chancellor of the Exchequer, as our senior finance minister is known, annually, or whenever there is new government. There is also an Autumn Statement, which amounts nearly to the same thing. The whole exercise is a process of heavily manipulated speculation in advance, followed by a tumble of instant reaction. All this shows how news is the enemy of information. By the time facts are known, contextualised and properly analysed the news media have long since moved on. People who try to be a bit more serious, like me, are torn. By joining the circus of speculation and premature response we get more readers and more reaction. But this is often at the cost of saying anything that is worth saying. My compromise is not to respond until after I have read the reactions the morning after.

The Budget process seems particularly farcical at the moment. The government is trying to set out its plans over a five year period, and in particular over the five years of a parliament, which in both cases means up to 2020 at the moment. This means they depend on five year projections of the economy. These projections are produced independently of the Treasury by the Office of Budget Responsibility (OBR). Without the smoothing hand of political manipulation, the five year outlook is highly volatile. Last Autumn the OBR “found” £27 billion; a mere six months later they had “lost” £56 billion. I can’t offer much help about what is going on here, except to point out that economic forecasting is a dodgy business, and this sort of volatility simply shows the absence of manipulation. It is no basis upon which to carry out serious economic planning. And yet the government says that it is doing just that. Last Autumn it used the £27 billion windfall to relax its fiscal plans. This time it was forced to tighten up a little, plus deploy a few accounting tricks to pretend that it is on course to meet tis five year target to move the budget into surplus, even as interim targets fall by the wayside.

But nobody is convinced, and nobody cares. It is far too early to worry about 2020, with so many unknowns. The critical thing is the next year, and nobody disagrees much with the overall thrust of George Osborne’s strategy. The muddle is particularly noticeable on the left. They are trying to capitalise on the fact that the government is missing its short-term austerity targets, while at the same time condemning austerity. Since 2010, the government has taken a pragmatic, Keynesian stance to fiscal policy, while pretending that it is being austere.  This means that the country’s fiscal deficit and levels of public debt are higher than pretty much any other major developed economy apart from Japan, having started the crisis in a much stronger position. That this has still meant dramatic cuts to public spending shows just how out of control the government finances had become under the previous government, as it pursued the illusory goal of Scandinavian public spending backed by US taxes. The left are still in denial about this.

So what did Mr Osborne do? Not much. There were promised tax cuts on personal allowances and higher rate thresholds. He failed to increase tax on petrol, even after petrol prices have fallen so far. There were cuts to company taxes and capital gains. I don’t approve of much of this, though many liberals do. But the impact will not be huge. He stepped up the ratchet on public spending, without being too specific, but pushing the hard decisions way into the future in the hope, no doubt, that the economy will come to the rescue. There were gimmicks and irrelevances aplenty, like a sugar tax, and pushing schools towards academy status, which I comment on in another post.

But here’s the problem. Constraining, never mind cutting, public spending is getting harder. Benefit cuts are causing anguish that even Conservative MPs feel; the ambitious idea for Universal Credit could yet collapse amid its technical problems. The attempt to drive efficiency savings in the NHS through ratcheting up financial pressure annually, a policy that predates 2010, has now collapsed. Hopes that the NHS can achieve substantial savings through re-engineering are vanishing. The ugly behemoth is unmanageable, and the reforms made by the Coalition aren’t helping. Outsourcing bits of it will not help. Meanwhile demand continues to rise. The government’s bid to reform schools finance requires a lot of extra money to placate the losers if it is not going to run into big problems. Social care is in crisis. Attempts to curb the defence budget have collapsed.

Behind this can be spied a strategic problem. Or, rather, two. The first is a growing proportion of older people, with an added demand for public pensions, and health and social care support, while dropping out of the tax base. The second is that the benefits of a modern economy are increasingly going to the richest, leaving many behind without adequate savings, and putting pressure on the social security safety net. Rising property prices are exacerbating this, burdening many younger people with huge rents and no prospect of joining the property bonanza. I could add a number of further issues which suggest that the days of easy economic growth are over.

So demand for public services is rising, but the tax base is shrinking, or at least stagnating. There is a substantial current account deficit, which limits the scope for creative government finance (like “people’s QE) we need lots of foreign currency to buy the all those foreign goods we depend on. There is really only one way out. Taxes will have to go up, and not just on the richest. That means the sacred trio of income tax, national insurance and VAT. But nobody talks about this. Not even the opposition parties.

And that is the gorilla.

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Tim Farron sets about changing the Lib Dems

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Tim Farron is proving a decisive leader of the Liberal Democrats. The party is in a poor way. It languishes at about 6-8% in the opinion polls, and its doings are almost entirely ignored by mainstream media. Whether he is able to save the party remains to be seen; but he is certainly making his mark.

This struck me forcibly as I attended the party’s Spring conference in York last weekend. The most dramatic development there was the adoption of a motion on ensuring greater diversity amongst the party’s elected representatives. This has always lagged behind the party’s rhetoric. Dominance by white middle class males remains largely undisturbed after decades; even the Conservatives manage better. Some of the stories put about by female activists show the party in quite a shocking light, with discriminatory questions and petty harassment widespread (though I have to say that I haven’t seen it in cosmopolitan London – but maybe it isn’t the sort of thing I register). The only proven way of breaking this is positive discrimination, with the use of quotas or exclusive selection contests. This has been proposed many times in the party’s history, always to be knocked back by the conference as illiberal.

Tim meant to change that this time. He supported a motion that imposes all-women shortlists for replacing any MP that stands down, and at least one other more winnable seat in each region of the country. Local parties are mandated to apply all-women or all-disabled lists more widely. Positive discrimination for ethnic minorities is a lot harder legally, but the party is meant to push matters as far as it can. Having thrown his weight behind the idea, and, importantly, spent considerable effort in persuading key people in advance, he secured the change by an overwhelming majority, notwithstanding many eloquent speeches against.

That is quite an achievement. It is not beyond the bounds of possibility that if the party has a moderately successful general election next time (say raising its tally of seats from the current  eight to twenty or so), it could become 50% female in one sweep. Tim has already shown he means business by having more than 50% female and 10% BAME in his shadow cabinet, if it can be conferred such a grand title. Whether you approve of it or not, this is decisive leadership.

On policy too there is an evident change, led from the top. He is following a “core vote” strategy by picking issues that are likely to motivate core supporters, rather than the general public. The leadership supported motions against fracking and in favour of legalising cannabis at the conference. In his closing speech Tim supported the accommodation of refugees, backed the junior doctors in their dispute with the government, and opposed laws designed to make life easier for the security services to gather personal information. This is all crowd-pleasing stuff for liberals that a party with ambitions to govern would struggle with.

A third element of Tim’s strategy is more strategic. He is promoting community politics – which means the party’s activists cultivating contacts with their local communities and facilitating solutions to local problems. Related to this he is trying to promote policies that support small, locally based businesses. The party at large likes this in theory, but often lacks the understanding or appetite to put these ideas into practice. It pushes political activists way out their comfort zone and forces them to deal with real peoples’ problems, rather simply sounding off amongst the like-minded – which is, of course, why it is such a powerful idea if it can get going.

As with all strong leadership, this is taking risks. The diversity ideas have put quite a few people’s backs up, and may hasten the departure of many older hands who run local organisations. As one such I always feel weak after being lectured by assorted conference speakers about how local parties need to be made to do this, that and the other – and I support them. That is no bad thing in itself, but will enough younger and more willing people come to take our places? The collapse of much of the party’s local organisation will no doubt be hastened. With the paid part of the organisation also in free fall, and with the regional layer dependent on a small number of usual suspects, this is going to be hard going. The party will need to develop online networks and non-geographical interest groups to compensate for the hollowing out of much of its organisation. The push on diversity is hardly the cause of this hollowing out, and one day it will even be part of the solution, but it will make things worse in the short run.

The liberal populism is also risky. Some of the ideas are probably ahead of their time, like more liberal drugs laws perhaps. The world will catch up and the party will get kudos. But others will look plain nuts to most people. It’s lovely to help refugees, but won’t it just encourage more to take to boats and get drowned? Or just divert developing world entrepreneurship towards people-smuggling? It tends to reinforce the public’s fear about liberals – nice but too soft to be given real power. I think a lot of the party’s ideas on privacy may be backward rather than forward-looking, too. All this risks leading the party up the same old blind alley which it took in Charles Kennedy’s (much less vigorous) leadership – which means that if it enters government it will be accused of betraying its principles. Tim ran into bumpy waters himself when he decided to support the government over bombing in Syria. He risks more of that sort of thing. A broader fear is that “core vote” in fact equates to “middle-class”, and the party cuts itself off from working class support.

Community politics should counter these problems. It is a very good way of involving and empowering working class people, as well as showing that the party can deal with, tough, practical problems. It is Tim’s strongest suit, after the idea has been systematically neglected by his three predecessors. The danger is that he finds himself unable to deliver on it, as activists prefer sounding off in blogs and social media to helping to create a thriving environment for local businesses.

But the party must take risks. I admire the way Tim is trying to take the party by the scruff of its neck. He is working out much better than I feared. The unpredictable world of British politics may yet throw the party the lifeline it needs to make a comeback. The progressive destruction of the Labour Party makes that look a distinct possibility. And if it does, the party will be a different thing to the one that embarked on coalition government in 2010.

 

 

 

 

 

 

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The speech I would have given at #ldconf

I wasn’t called to speak to speak at the economics debate. Only one speaker was picked to oppose the motion. That reflected d the balance of cards submitted, apparently. This is what I was planning to say:

What on on Earth am I doing? Vince Cable is one of my heroes! He is one of the few economically literate people in British politics. How can I oppose a motion that he has proposed so eloquently? And a motion with so many worthy sentiments in it. It’s like voting against motherhood.

Well maybe that’s the problem. The party at this point in the political cycle needs  a serious motion on economics to do one of two things.

First it could set out a clear but simple vision that shows what the party stands for and who we are. It could pick up themes such as green growth or local enterprise.

Or it spell out specific policies. Things that can be put in a manifesto, or, Heaven forbid, a coalition agreement.

But the motion has no clear organising theme. Vince’s speech helpfully offered us four. But not the motion we are being asked to adopt. As originally published it had 10 complaints about current government policy, and no less than 15 themes for Lib Dem policy.  From my Conference Daily I see that it has grown. It truly is no hobby horse left behind! Where on earth is the clarity and vision in that?

Amendment one does try to build a green theme, which improves the motion, and I support it. But it cannot save it.

And neither does it help create detailed policy. Each of those 15 proposals needs a debate of its own.

This motion is neither fish for fowl.

Conference, you could take the easy option. You can vote it through, and let it be instantly forgotten. For that is the only fate that can await it. But is that what you really want for the first motion under One Member One Vote? No. You can be brave. Throw it out and send a signal that this conference means business.

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Neither fish nor fowl, why I will oppose the economics motion at #ldconf

This weekend the Liberal Democrats meet for their Spring Conference. To most observers of the political scene, this is an irrelevance. But with the growing gap between Labour members and the general voting public,  and the Conservative Party riven by splits on Europe, who knows what opportunities might arrise for the party? I still care about it, anyway.

The party is rebuilding itself after the five year car crash of coalition government ended last year with it being reduced to near irrelevance in the House of Commons. And that followed five years of rather gentler decline after its peak year of 2005. The party conferences are an opportunity for members and leaders to decide what the revitalised party stands for.

One complaint after last year’s meltdown was that the party was weak on economic policy, and so let others set the agenda. No doubt that motivated the submission of a motion on the economy as the first item of policy business on Saturday with just an hour’s debate. Alas the motion plumbs the depths of awfulness.

I can’t find a neat link to it, so I will reproduce it here in full below, so you can judge for yourself. But with its 10 whinges about the current situation, and 15 proposals, I’m not sure I would recommend a close read. It is mostly unobjectionable. It has some worthy ideas, and some airy aspirations. Item 11 od the 15 reads: “Addressing inequality through a renewed commitment across Government and society to analyse and address Beveridge’s Five Giants in modern society.”

In some contexts a list of 15 rather disconnected policy ideas is not a bad idea for a policy motion – for example if the party was planning to negotiate a coalition programme from a position of strength. This is hardly the context now, and even then it fails. Just what would you do with a commitment to tackle the Five Giants in a coalition negotiation? Instead all such a long list of vague ideas serves is to offend people whose own hobby horses are left out of the 15, or are underrepresented, or given too low a prominence.

What the party actually needs from a debate on economics at this stage in the political cycle either of two things.

The first thing it could do is set out a very limited number of general themes, around which to hang more detailed policies. These need to display a bit of vision, and show  what the party is all about. I suggested a few last year: green growth, small is beautiful (or greater diversity and innovation, if you will), problem-solving public services and addressing inequalities and imbalances. It would not be hard to do better than that, and any debate would say something about the party’s values and campaigning priorities. I can find no such clear general themes in the motion. Worse, I am rather shocked to see so few references to environmental sustainability in a party that used to pride itself on environmental consciousness – that alone is reason enough to vote the motion down.

The second thing it could do is develop a particular economic idea or solution to a specific economic problem. There are plenty of places where this needs to be done: investing for green growth; tackling the housing crisis; free but fair trade; taxing businesses. Or the role of fiscal policy in economic management, though the chances of getting a rational debate on that area in a left of centre political party are slim. This is actually where the heavy lifting needs to be done, and where the Lib Dems can make a substantive contribution to the wider political debate on economics.  The real world of democratic politics is evolutionary; revolutions fail. What is needed is a series of practical changes, each of which will works on its own merits, and which collectively will amount to radical change. The motion does point to some specifics, but each of its 15 proposals needs to be picked apart in a debate of its own. Instead we have a series of vague and useless commitments.

And as a result the motion is a complete waste of time. Much hope seems to be being placed on amendments. But unless these are allowed to replace the motion with an entirely new one, which would be an abuse of process, I can’t see how it can either be turned into a general vision or a specific economic proposal. It is neither fish nor fowl.  The best thing to do with it is to throw it out and start again.

Conference re-asserts the Liberal Democrats’ continuing commitment to sound public finances, social justice, an open economy in an open society, and the principle of free markets whenever possible with intervention where necessary by an enabling state.

Conference notes:

a) The Liberal Democrats’ effective record in Government in stabilising the public finances and major contributions in the fields of apprenticeships, banking regulation, the British Business Bank, the Green Investment Bank and the promotion of innovation through the Catapult network.

b) The fragile nature of economic recovery following the 2008 crash, evidenced by interest rates which are historically low and continued Eurozone uncertainty.

c) The growth of house prices carrying the threat of a price bubble and subsequent crash.

d) The Chancellor’s unhelpful and arbitrary re-definition of the deficit, doubling the total by including capital spending, in his attempt to justify Tory spending cuts.

e) The medium-term risk to the UK economy posed by increasing and unsustainable private and household debt.

f) The threats to the UK economic prospects posed by Conservative approaches to UK membership of the European Union and immigration.

g) The International Monetary Fund’s advice to reduce debt through growth not cuts.

h) The UK economy’s over-dependence on London and the South-East.

i) The UK’s bad record in allowing the growth of an increasing number of young people with low levels of education, training and aspiration.

j) Growing inequalities in wealth and income, coupled with unfair and regressive action against the poorest people in the country, now exacerbated by the assault on welfare spending.

Conference calls for effective measures to support and grow the UK economy, including by many established Liberal Democrat policies:

1. Increased investment, both directly by Government financed by public borrowing, and stimulated by Government, particularly in affordable housing including social housing and infrastructure to support balanced growth throughout the UK.

2. Support for planning reform, institutional lending to small builders and action by local authorities for planned development, including assembling land for auction.

3. Further measures to improve and regulate banking services by promoting efficient lending, particularly to small and medium-sized enterprises, encouragement of challenger banks and increased personal accountability.

4. Strengthening takeover legislation to protect the country’s science base.

5. Reversing cuts in the development of green energy and promoting investment in green business initiatives.

6. Further development of the Government’s industrial strategy, promoting co-operation and supply chain development in key sectors for the long-term.

7. Re-balancing the economy towards manufacturing industry and regions, based on the coherent and substantial devolution of political and financial power.

8. Further reform of corporate governance to encourage ‘long-termism’ and to discipline executive pay, including an employee role in determining executive pay.

9. Renewed emphasis on vocational education and training, particularly through effective apprenticeships and especially higher-degree level and engineering and construction apprenticeships.

10. Coherent efforts across Government Departments to address the needs of young people who are excluded from the labour market and participation in wider society.

11. Addressing inequality through a renewed commitment across Government and society to analyse and address Beveridge’s Five Giants in modern society.

12. Investigating sustainable ways of funding universal services, including a cross-party, cross-society settlement on funding health and social care.

13. A new commitment to taxing unearned wealth, including Land Value Taxation.

14. Measures to dampen the growth of asset bubbles in opposition to Conservative approaches which tend to increase that growth.

15. Support for more diverse ownership models including worker ownership, social enterprise, mutuality and co-operation.

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

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

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

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

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

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

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

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

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

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

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

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Economics essay 2: why global trade is going into reverse

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

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

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

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

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

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

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

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

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

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

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

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The Metropolitan Police: institutionally stupid?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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