Beveridge, the Bedroom Tax and community politics

Yesterday at the Lib Dem conference in Glasgow a noisy group of protestors gathered outside the entrance. I couldn’t tell exactly what they were protesting about, except that I caught a reference to the so-called “Bedroom Tax” on a banner. There were fewer protestors braving the wind and rain this morning, but some of them got close enough to press leaflets about the Bedroom Tax into our hands. By the time I reached the security tent at entrance to the centre the rain had pretty much destroyed them, and I accepted the the scanning machine operator’s offer to throw them away. The Bedroom Tax has become the centre point of left wing criticism of the coalition government. It refers to the withdrawal of housing benefit from social housing tenants who are deemed to be living in bigger properties than they need. The rule has applied to private sector tenants for some time. I have not been following the issue closely, but I don’t particularly trust the complainers to report the matter fairly. But it stinks of an arbitrary change of rules that has left unforeseen misery in its wake.

Let’s change the scene to yesterday afternoon’s speech by party president Tim Farron. This speech attempted to stake out some ideological space for the party. He celebrated the consensus forged after 1945 by the great Liberal William Beveridge. His master plan to deal with the nation’s great ills (poverty, lack of decent housing, poor health, unemployment, and lack of education) did indeed evolve into a social democratic political consensus, which gave the country the NHS and social security, amongst other national,systems. According to Mr Farron’s narrative this consensus was destroyed by the malign Margaret Thatcher, with Tony Blair and Gordon Brown completing its demise. Mr Farron wanted to re-establish Beveridge’s ideas into a new consensus. Leaving aside the impossibility of forging a political consensus on the issue, he then went on to combine this idea with that of developing the party’s commitment to community politics. This struck me as being inconsistent, but I did not pay it too much attention at the time. But it became clear from a comment I made on Facebook that many Lib Dems cannot see the inconsistency. To me this sums up the ideological problem that the party faces, and I need to explain why.

The Beveridge consensus represents a bold national programme which was implemented through a series of national policies enacted by Westminster politicians to confront a series of systemic problems. Community politics is the opposite. It is about finding local solutions to problems that can be clearly identified with particular people. This is not about the local implementation of national standards and policies. There is a fundament conflict.

So what has this got to do with the Bedroom Tax? It is a problem that has clearly been begotten by the sort of national policies favoured by advocates of the Beveridge consensus. To meet the problems of inadequate housing it was felt necessary to create a system of housing benefit that was designed nationally although administered locally. This evolved into a system where massive sums of taxpayers money was being poured into the pockets of landlords with rather doubtful social benefits; the benefit simply provided an incentive for landlords to raise rents. This was difficult to reform though, so not much was done. But eventually it was deemed to be unaffordable. And hence a series of arbitrary changes to the rules were made to save money, which affected many poor people who had adjusted to the system as it was, and for whom change meant hardship. This included the Bedroom Tax.

To me this is what happens when national, centrally imposed systems collide with the complexities of world they are trying to change. It was not so much that the systems were badly designed, but that the bad design took so long to fix, and when the fix came it had many unforeseen consequences. What if municipalities had designed there own systems of housing benefit out taxes they themselves raised? It is difficult to see that they would have dug such a deep hole for themselves. For one thing it would have hit crisis point much earlier.

But what if housing benefit was merely part of a community run system of aid that was centred on the needs of individuals, rather than a set of arbitrary national rules run by a series of separate agencies each reporting to a different minister in Whitehall? This is where community politics should lead. But it is incompatible with the system of nationally run social democracy…which is where an invocation of Beveridge leads.

Most Lib Dems are very comfortable in principle with the idea of locally administered solutions. But they have little idea of the costs these have to national institutions and power structures, that they simultaneously want to preserve. Invoking Beveridge’s legacy does not help the party to make that necessary transit . Instead most prefer to occupy a soggy middle ground with elements of both. For as long as they do they will be struck by more bedroom taxes.

Paddy lords it in Glasgow

“You’ve dropped some paper!” A shout came from behind me as I was wandered dazedly around the labyrinth that is Glasgow’s SECC, where this year’s Autumn Lib Dem conference is being held. I turned round to discover that is was no less a person than former Lib Dem leader Lord Paddy Ashdown who was calling out. And I had dropped accidentally dropped one of the many handouts that conference goers pick up. This one on plain packaging for cigarettes; or Battersea Power station; or from retailers fearing the effect of a new law on minimum pack sizes of cigarettes.

As I picked up the offending litter, Paddy went on to ask his assistant loudly about whether he had to wear a suit for this evening’s rally. He duly turned up at the rally wearing a suit. But no tie. But then party leader Nick Clegg was tieless too, though the evening’s host, Orkney & Shetland MP Alistair Carmichael, wore one. Paddy was first of a series of speakers, but for me he stole the show. It wasn’t so much what he actually said. He invoked memories of truly inspiring leadership in days when the party was a much lesser force. More than that, Paddy is one of the few current politicians that really seems to get it when it comes to understanding the need for a radical decentralisation of power, though that did not enter into his speech tonight.

There is an irony in this. Paddy had a very imperial style of leadership when he was in charge. Some members complain that Mr Clegg ignores the party membership but that is as nothing to how Lord Ashdown was.

Nick Clegg’s speech was chiefly remarkable because he spent more time attacking the Conservatives than Labour. We are starting to get the hang of this coalition business. He also put in good word for public sector workers. He is trying to distance himself from that species of villain that people on the left like to call “neo-liberal”.

What else? There are a number of food vendors in the SECC, and yet I could find only one sandwich that did not contain ham, bacon, or cheese. I’m going to have to bring my lunch in if I want to keep the saturated fats down. And they wonder why life expectancy is so low here.

The battle the Lib Dems’ soul

On Saturday the Liberal Democrats’ main annual conference starts, this year in Glasgow. As this parliament moves from mid-term to end-game, the party’s professionals will no doubt want us to focus on the fight for survival at the next General election, scheduled for 2015. I am more worried about the party’s soul.

Being part of a coalition government has been a searing experience for the party. It remains strong in some areas, but it is much weaker through most of the country, as members, activists and supporters have drifted away.  In national opinion polls the party languishes at about 10%, or about half the level it achieved in the last General Election in 2010. It used to be that the party was ignored as an irrelevance. That problem has been solved, at the cost of it coming under relentless attack from all sides: from the party’s coalition partners, the Conservatives, from the Labour opposition, and less attached observers generally. Most of this criticism is not particularly fair, but that’s politics. It is a necessary stage in the party’s evolution if is ever to be a major political force. But it is not entirely clear that the party will survive the experience.  If it is to survive, the party will need to have a clear idea of what it is for: otherwise it will fail to recruit new activists and win back the people that have drifted away.

The party’s leadership, and its professional staff and advisers, seem to concentrating on another question, however. And that is the case that the party needs to present to voters in 2015.  There is some clarity on this, as suggested by the party’s slogan: “Stronger Economy in a Fairer Society”. Framed positively, it is actually a double negative, contrasting with Labour’s alleged economic irresponsibility, and the Conservatives’ focus on making lifer better for the rich. This is fine as far as it goes: negative messages have a wider appeal than positive ones, and it should help the party benefit from the negative campaigns the other parties will wage on each other. But it is not enough to rally the faithful. Firstly because many are not convinced that the Coalition’s economic policies have been right, and secondly because, without spending more on public services and benefits, it is not clear to many how society is to be made fairer.

And here, I think, we come to a much wider crisis in British politics. Politics is increasingly the domain of a professional political class who have spent their entire working careers in politics or at its fringes. They pick up their ideas on policy from a series of lightweight think tanks and university politics departments. Their main concern is to compete with each other to attain the status and prestige of office. They operate within a series of assumptions about what government is and how it works: that it is about adopting the right policies at the centre of government, passing the necessary laws in parliament, and then getting the civil servants to implement them. Missing from this are two things: any clear idea of how power can or should be devolved away from central government, and practical skills in the design and implementation of policy. It seems to be quite fashionable amongst political types to blame the civil service for policy failures at the moment. And yet civil servants are often asked to implement policies that have not been thought through, and which are often contradictory. The politicians and their advisers don’t seem to see it as their problem to resolve the contradictions, as this carries political risks.

And this criticism applies to the Liberal Democrats as much as it does to the Labour and Conservative parties. The party’s MPs are mainly professional politicians with little experience in either the outside world, or even in local government. They are surrounded by like-minded professionals who want to be MPs themselves. They are charming, intelligent people – but do they really understand how to make things work? Or what motivates the army of amateur enthusiasts that the party needs to keep going?

What I think is needed is for politicians to hold a different model of government in their heads: one that pushes political power away from the centre so that local communities can solve problems for themselves. That sounds like advocating support for motherhood, but it means rejecting generations of accepted social democratic wisdom, which sees issues in terms of generic problems – crime, healthcare, unemployment, etc. – rather than people. The old Liberal Democrat idea of community politics is a very good place to start this revolution – and no other political party has a better tradition to build on. But neither the party’s national professionals, nor, I am afraid, its younger activists seem to have much idea of what this is all about.

So, in Glasgow next week, I will not be paying so much attention to the grand set-pieces – though I will still follow them with interest – but I will be looking for any signs of bigger ideas taking hold: ones that will shape the party’s soul, and offer the country at large real hope.

Us, them and Europe

Britain’s membership of the European Union used to command almost universal assent from the country’s intellectuals. Just how far this has changed was made clear to me by a recent BBC Point of View talk by the philosopher Roger Scruton. He concluded a thoughtful series of talks on the nature of democracy with what amounted to a diatribe against the European Union as an “unaccountable empire”. Mr Scruton is a serious man, and his criticism of the EU needs to taken seriously by supporters of Britain’s membership like me. .

The essence of Mr Scruton’s talks is that democracy is based on a series of institutions that allow opposition and argument. He criticises Egypt’s Muslim Brotherhood for claiming that its attempted imposition of a theocratic regime was democratic, when they were undermining the very institutions on which any democracy has to be based. Mr Scruton goes on to say that these institutions can only be sustained where a country has a sense of “us”, of identity that tolerates opposition with a sense of it being all in the family. But “there is no first person plural of which the European institutions are the expression”. He goes on to suggest that this because the EU is based on an international treaty that supersedes elected legislatures, and becomes incapable of being modified. He uses the EU’s free movement of peoples as his prime example, as many Britons are unhappy with so many people from other EU countries taking up residence here. He goes on to say that “democracies need boundaries, and boundaries need the nation state”, painting a picture of nation states coming together from a bottom up sense of togetherness and neighbourliness, shaped by shared language and culture – which the EU lacks.

I have two immediate reactions to this. Firstly I am very uncomfortable with the suggestion that our feeing of “us” and “them” are simply matters of historical and geographical fact that we should adapt to – and the all Britons are “us”, while Brussels bureaucrats are “them”. To me this has a rather scary overtone of the 19th Century idealisation of the nation state, based on language and culture. This movement led to the unification of Germany and Italy, and myriad calls for self-determination which led to the breakup of the Austro-Hungarian and Ottoman Empires. It helped usher in, from 1870 to 1945, 75 of the most disastrous years of war, conflict, forced migration and genocide in our continent’s history. Unscrupulous politicians played up on peoples’ sense of “us” against “them”, and tried to impose this on the continent’s tangled patchwork of languages, cultures and nationalities.

And if we think that Britain is exempt from all these continental complexities, I wonder if a Northern Irish person of Catholic heritage really thinks that government from Westminster is by “us” rather than “them”. And Scotland’s most successful political movement is based on the idea that Westminster is not “us”, and poses a threat to the country’s coherence. The first person plural is not a matter of received fact, but has to be built patiently out of liberal principle. And in the modern, highly interconnected world we must be inclusive. It is not as if Britain’s history is that of being an isolated island nation: we have been a hub of European and world politics; the country used by a the pinnacle of an empire that covered a quarter of the world’s surface, and for two millennia it been part of a highly interconnected European history. Britain is a trading nation and an international hub; we have to accept the responsibilities that go along with that or we will not appreciate its benefits.

As it happens, since being a teenager I have felt a strong affinity with the European project, and have ever since felt that the European institutions have been a political expression of my first person plural. And neither is it true that the European treaties have been fixed and unchanging; they have been subject to democratic pressures from below.

My second reflection is that the European Union is something of a lightning conductor of political discontent – and that removing it will not actually remove the discontent. When I look at technically fully independent countries like Australia, I don’t see places at are any more at peace with themselves and the world around them than we are. True, Australia has recently benefited from a good run of economic prosperity – but at the cost of big mining corporations running riot across the countryside (for people worried about wind turbines, just look at the open-cast mines marching across the Hunter Valley in New South Wales),and  who have such political clout that they are able to overturn tax proposals that they don’t like. And the politics of immigration are just as toxic.  Australia (and I could also use those other Anglo-Saxon bastions of New Zealand or Canada) finds itself at the mercy of an interconnected world, and it is by no means clear that they are better off outside an international federation like the EU. Britain’s problems would not go away, or become any more tractable, if it left the EU.

But having got all that off my chest, I have to admit that Mr Scruton has put his finger on a real problem, which is that EU institutions have lost popularity, and often seem beyond political accountability. His use of the free movement of people as an example is very telling. This idea lies at the beating heart of the European Union, but it creates a lot of tension. And unlike many supposed EU generated problems, like over-regulation, it’s for real. In Lincolnshire, where Mr Scruton was born and where support for the anti-EU Ukip is high, there have been real impacts from the influx of east European migrants in search of work. And yet freedom of movement has had real economic and personal benefits. And it is not just in Britain that anti-EU feeling, in large part directed at free migration, has been building up. This is all hobbling areas like energy policy where EU level action is increasingly warranted.

In the long run the answer is for Europe to develop a stronger sense of “us”. This may already be better developed than Mr Scruton allows, but it remains very patchy. I believe that there is enough of a sense of common values and history to provide a basis for this. One of the best ways for a Briton to feel European is to travel to a country like U.S. or, for slightly different reasons, Australia. But it needs to be promoted by liberal politicians, and is the work of generations.

A referendum on EU membership, the policy of our Prime Minister David Cameron, remains an enticing idea. The consequences of a “no” vote would be disastrous, but the pro-EU forces need to be rallied, and the institution’s legitimacy must be reaffirmed. I am also coming round to the idea of another of Mr Cameron’s ideas: a British Bill of Rights. This would mainly give a British label to core European principles, but it could also set clear British constitutional limits to European power, much as Germany’s Basic Law does.

But the bigger truth is that we must move on from the 19th century idea of an all-powerful sovereign nation state. We have to develop the legitimacy of multinational bodies like the EU; we also need to devolve power to more localised levels, especially in bigger states like Britain. This requires fresh thinking on the institutions of democracy. Roger Scruton is right to remind us that democracy is about more than voting, and requires a sense of common identity, but in the end he is not helping us to adapt the world where humanity now finds itself.

 

Positive linking: what do networks mean for public policy?

Ipositive linkingndependent and identically distributed. This assumption about data subject to statistical analysis is so routine that most students reduce it to the acronym “IID”. It means that the data follows a normal distribution and a routine set of analytical tools becomes available for the calculation of such things as confidence levels. Most of the evidence used by economists and other social scientists to support their theories is based on this type of analysis, and an IID assumption in the data. And yet human societies do not behave in accordance with this assumption; most of the choices we make are based on choices that other people have made, and are not independent. They are subject to network effects. It is a problem that most academic economists would rather not acknowledge. But the implications are profound.

This reflection comes to me after reading the book Positive Linking by Paul Ormerod. In this book Mr Ormerod attempts to show that all modern economics is deeply flawed because it ignores network effects, and that in future public policy should promote “positive linking”: promotion through network connections, rather than simply the design of incentives. He is only tangentially concerned with my worry over statistical analysis: he is more focused with the models built by economists based on rational people (or agents in the jargon) making independent choices based on an analysis of their options and preferences. These theoretical models lie behind the bulk of modern economic analysis, such how people might respond to taxes or changes to interest rates.

Unfortunately it is a very disappointing piece of writing. The language flows well enough, but it is full of repetition and digression. This sort of style probably works better orally than on the page, where it is a drag. But it is worse than that. His main concern seems to be to debunk conventional economic analysis rather than to promote a clearer understanding of networks and their implications. This verges on the unhinged sometimes, and you do not get the impression that arguments of the defenders of conventional economics get a fair hearing, and therefore that they are dealt with adequately. There are a lot of illustrations and “evidence”, but these are used anecdotally rather than to build up a coherent logical case. There are many digressions, for example about the rise of Protestantism in Tudor England. These seem to be included because they are good stories rather than taking his argument forward. The debunking of conventional economics is all rather old hat, though, and it has been done more coherently and entertainingly by authors such as Nasim Nicholas Taleb (of Black Swan fame).

The diatribes and digressions leave Mr Ormerod with inadequate space to develop his “twenty-first century model of rational behaviour”. His suggestions about how this might work in practice are left to a few pages at the end, and even this tends to drift into diatribes over how things are done now. For example he claims that sixty years of centralised, big-state social democratic government since the War has been a failure – on the grounds that unemployment is much the same on average as beforehand. But you can easily argue that this is the most successful period of public government in world ever – look at the rise in life expectancy, for example. Neither is it all that clear that everything, or even most things, these governments did was based on conventional economic models of human behaviour. Instead of explaining the religious dynamics of 16th Century England, he could have spent some time and space developing his argument here.

What a pity: because in the end I think he is right, and his suggestions for the way forward are sound. It isn’t that government since the War has failed, it is that its methods have run their course, and its policies now only seem to benefit an elite. Conventional economic analysis has more going for it than he suggests, but they are a blind alley now. But many economists and policy makers are in denial, to judge by the public debate – though some clear network-based ideas, like “nudge” theory are making their presence felt.

But there is a problem at the heart of the new twenty-first century network thinking, which Mr Ormerod acknowledges but dismisses too easily. The new models have weak predictive power. The point about normal distributions and the IID assumption that they are based on is that they produce a relatively tight distribution of data around a mean and few extreme results – “thin tails” in the jargon. There is a sleight of hand here: statisticians’ use of randomised data make their analysis sound more robust than it is; the IID assumption in fact makes the data tightly constrained. Consider a random walk, comprising a series of steps forward and equal steps backward. If the probability that your next step will be forward or backward is always 50% each, and the direction of earlier steps does not affect the direction of the next step, then this is an IID assumption. It sounds truly random. But you are unlikely to get very far from the starting point, which isn’t really very random at all. If your next step was more likely to be in the same direction as your last step than not, then you can end up anywhere. That’s real randomness, but it isn’t IID. There is no normal distribution. What looks like a soft assumption is in fact a hard one.

So it’s not just a question of changing the maths and updating the models. It is about accepting that social systems are fundamentally more unpredictable than we have previously accepted. It is not hard to see why policy makers and social scientists have struggled to accept this. I like to describe this by invoking the idea of “zeitgeist” – the spirit of the time, a ephemeral and unpredictable quality that in fact runs at the heart of everything. This is closely linked to Mr Ormerod’s ideas of networks, since it is networks that sustain the zeitgeist.

What to do? Mr Ormerod offers some useful rules of thumb. He also suggests investing more into research of network effects, which is self-interested but sensible, so long as we do not expect this to yield insights of anything like the theoretical precision of conventional methods. But ultimately his big idea, which he does woefully little to develop, is much greater delegation and localisation of decision making. Amen to that.

What does the Syria vote mean?

Last night’s vote by the UK Parliament to reject a government motion to clear the way for punitive action against Hafez Assad’s regime in Syria feels like a very important moment in British politics. It is a small but decisive step away from Britain’s centuries-old role as a Great Power on the world stage. This has good and bad aspects.

The vote itself has divided opinion among in my social network. The less political of them, including my liberal leaning but unpolitical friend at the gym this morning, are very happy. A depressing chain of events that started with Tony Blair’s joining of the Iraq war has reached an end. But many of my Lib Dem Facebook contacts are very unhappy: who will restrain President Assad’s regime now? But just as many share the views of my friend at the gym.  I find my feelings very mixed. I do not want this country to take sides in this conflict; but the thought that Mr Assad’s government will take comfort from it is not a comfortable one.

But what will non-Britons make of this episode? It doesn’t seem to be all that important. The real power is with the United States; Britain’s military capacity is puny by comparison. This debate is not being had in many other countries, from the economic powerhouses of German and Japan, to other world powers such as Brazil or India. Only our French neighbours are weighing up the same issues, apart from America, and, in a different way, Russia. It all seems to be more about maintaining the status of our political elite than something that a third rank world power should be concerning itself with. It will be more difficult now for that elite to maintain its delusions of grandeur.

In one way this a good thing. The expense of the country maintaining this world status is increasingly unsustainable, as cutbacks to the armed forces show. There have been successful military interventions: in Kosovo, Libya and Sierra Leone. And places were we probably should have intervened but didn’t: Bosnia and Rwanda. But the results of the bigger interventions, Iraq and Afghanistan, are at best ambiguous. Syria looks more like the latter, though the government has been trying to limit the scope of any intervention. The judgement of our political leaders and the civil servants and military men that back them up has not proved particularly sound. And successful small interventions only encourage them to think bigger. We are now facing up to a more realistic view of Britain’s place in the world.

But there is also a dark side. It is not good if a country turns in itself, and does not want to accept the implications of being part of a bigger world. There is a strong undercurrent of this in Britain: from anti-immigrant feeling to criticism of foreign aid, as well as resistance to taking part in the European Union. But the country’s fate is more bound up than ever by what goes on in the rest of the world, and far too often this sort of isolationism leads to paranoia and conflict.

Personally I would like to see Britain take further steps back from its pretension to a world role: giving up the country’s seat on the Security Council and our nuclear weapons. But I would also like the country to take part in military interventions if these are needed, especially in Europe and (perhaps) Africa. But we need new ways of going about this, and a clearer idea about when and how we go about it. I hope last night’s vote is a step along the path to a better way.

Can we learn from the 1930s?

Liberal Democrat conference goers are shaping up to a confrontation in three weeks’ time over economic policy. On the one hand the leadership wants to defend the current coalition government’s record; on the other many activists feel that this policy has been a dismal failure. This confrontation has been brewing for some years. It reflects a wider controversy in the country at large, though one senses that most people are now moving on. In this argument it does not usually take long before the government’s critics refer to the experience of the 1930s recession, or Depression, to back up their case. It’s worth unpicking that a bit.

My main source on this is a pamphlet produced by the think tank Centre Forum: Delivering growth while reducing deficits: lessons from the 1930s by Nicholas Crafts published in 2011. This concentrates on the experience of the UK. The first thing to point out is that the UK experience of the Depression is very different from the US one, though they are often conflated when people refer to the Depression now (just as the current experiences of the UK and US get conflated, especially noticeable when critics of UK policy quote U.S economist Paul Krugman in their support). The U.S. suffered a banking collapse, which then caused a catastrophic collapse in the rest of the economy, with real GDP falling by as much as 36% (hitting bottom in 1931); it only got back to its 1929 level in 1940. Behind the US collapse was a structural transfer of economic activity from agriculture to manufacturing, which it took the war economy to complete. Britain’s crisis was much less severe; it suffered a major loss of exports and economic shrinkage, but no banking collapse. The economy hit bottom also in 1931,  just over 7% down from 1929 and was back to 1929 levels in 1933; by 1940 it was over 20% ahead. By comparison with the U.S. the structural move from agriculture to manufacturing was much more advanced when the recession struck. Britain was, however, struggling to adjust to a world where it could not rely on its Empire to drive its economy.

In fact, after flatlining in 1930 and losing over 5% in 1931, the UK made rather a successful recovery from the recession, as Mr Crafts (a professor of economic history at Warwick University) points out. This was achieved in spite the government cutting expenditure and raising taxes – austerity policies in today’s talk. Mr Crafts is very clear as to why: loose monetary policy. Specifically interest rates where kept low, and the authorities persuaded people that inflation would be persistent (at about 4%), giving negative real interest rates, while the pound was allowed to devalue. Something similar happened in the U.S in the New Deal era. Mr Crafts suggests that this formula should be repeated now, if the Bank of England could credibly suggest that inflation would increase to about 4% for the medium term, instead of its 2% target. This is quite topical, as this is almost exactly the strategy of the current Japanese government, the so-called “Abenomics”.

One point of interest in this is the rival claims of “Keynesians”, who advocate fiscal stimulus (extra government expenditure) and monetarists, who advocate loose monetary policy – though quite a few, like Mr Krugman, advocate both. Both groups refer back the Depression for support. In fact fiscal stimulus was not much used in the 1930s, while loose monetary policy was. Fiscal stimulus only came into its own at the end of the 1930s and in the 1940s, when it was led by rearmament and provoked by fears and then the reality of war.

I must admit that I find the parallels with the 1930s, especially in Britain, to be entirely unconvincing. The one clear lesson I would draw is that a banking collapse, as happened in the US in 1929, can be catastrophic. The world’s authorities were absolutely right to head this off in 2008-2009, even if that leaves awkward questions over how we got into the mess in the first place. That lesson was well learned, but there the lessons pretty much end. Further lesson-drawing leans on a species of macroeconomic blindness, a sort inverse of the composition fallacies that macroeconomists like to accuse their critics of. This entails taking false confidence by examining a collection of aggregated statistics, dipping down only selectively into the realities that lie behind them.

Consider some important differences between the world of the 1930s to the 2010s, for Britain in particular:

  1. Britain’s banking sector was in much better shape in the 1930s. It was less dominated by big institutions (there was a thriving building society movement) and these institutions had not overreached in the way they had in 2008. The main barrier to borrowing was lack of demand for loans, which lower real interest rates incentivised.
  2. There were many fewer barriers to house building in the 1930s. The main source of investment in the 1930s recovery was private sector house building. It clearly helped then that there was a severe house shortage, and inflation encouraged people to bring forward building projects. There is a housing shortage now, of course, and to be fair Mr Crafts says that barriers to house building would have to be tackled. But more than planning barriers are involved here. There is the general zeitgeist around the future direction of property prices; this is largely founded on the idea of restricted supply. Currently developers are holding back on many projects not because of finance, or lack planning permission, but because of doubts over the future direction of property prices.
  3. Nowadays we live in a world of highly integrated financial markets and global trade. This has changed the way fiscal and monetary policy work. It is by no means certain (and in my view highly unlikely) that loose monetary policy would work itself out in such a benign way as in the 1930s. Would inflation in fact increase? If it did would wages stay ahead of prices? And if wages did not stay ahead of prices would companies invest their profits so as to boost domestic demand? (There is a fascinating aside in Mr Crafts’s pamphlet here. In the 1930s the Treasury assumed that prices would indeed run ahead of wages, boosting corporate profits, which would boost the economy. In fact wages kept pace with prices and the domestic demand was behind the growth).  And bumping up inflation would quite likely cause the price of government gilts to plummet, making it harder to finance the national debt: in this day and age it is not as easy to inflate your way out of debt as many economists assume.

And that’s just the start. The more you investigate and think about the rights or wrongs of different policies, the less relevant the 1930s looks. It is just as bad for fiscal policy. In the 1930s and 1940s rearmament was a useful outlet. It soaked up surplus labour quickly and led to the building of industrial capacity that, as it turned out, could be readily reassigned to more constructive and benign uses. And the threat of war was horribly real, allowing the public to be mobilised behind the dislocation of the civilian economy. I cannot see what the modern equivalent is. Rearmament now, even if you can find a wider justification, would require the wrong skills and capabilities. The building of social housing is a possibility, I think, but would be insufficient in its own right.

Indeed I think the real issue of substance that divides critics of the coalition from its supporters, among Liberal Democrats anyway, is whether there is a pool of £20 billion or so of capital projects that the government can immediately and profitably get in motion. In the 1930s and 1940s it was weapons. In the 2010s it is what?

 

Rebuilding local networks: it has to hurt

Last week I came across this interesting article in The Economist on Business Improvement Districts (BIDs), which are having some success in reviving local economies. It prompts several thoughts about how to rebuild local communities. And, as I advocated in my recent blog on the poverty of ideas on the British Left (The unbearable lightness of British politics) , I think this offers the key to future progress in our society. But some ways of attempting this are more helpful than others.

Here’s what I think the problem is. Over the last generation our social, business and political networks have been reconfigured. Local connections have been downgraded and replaced by national and international ones. In Britain (England and Wales anyway) this has given rise to a strong geographical focus on London. If you want anything done, chances are that at some point you will have to talk to somebody in London, or within its commuting orbit. It makes sense for most people to invest time in their London networks in place of local ones, a process that feeds on itself. This is part of a general process usually referred to as “globalisation”, with London serving as a global hub. There have been plenty of benefits to this: the country as a whole is economically much more efficient. But it brings with it two problems.

First is that the main beneficiaries of greater economic efficiency are a globally well connected elite. To make it, as a sports star, an artist or as a banker or business executive you need to be world class. The marzipan layer or national or, still less, regional stars are also-rans who, in some fields at least, find it difficult to even make a living. You can’t make much money out of the British “First” Division of the football league, because it is in the shadow of the Premier League. In the developed world at least, the economy does not work well for most people. The most successful developed world economies (in terms of widespread distribution) tend to be smaller – think of Denmark or Sweden.

The second is that in larger countries like Britain many local economies are struggling as the decent opportunities are elsewhere. Britain’s highly centralised political system exacerbates this. There is a growing gap between London and the South East and the rest – though Scotland may be starting to buck that trend. The poverty of local networks is surely part of the problem. The London centred networks are in control.

But we can’t turn the clock back. It isn’t just that a centralised political system has impoverished peripheral communities in a simple grab for power. Changes in technology made much of the old way of doing things obsolete. If the next step in our political evolution is to rebuild local networks, it must be done in such a way that economic efficiency is enhanced. That is where a lot of ideas for rebuilding local communities fail.

This is one of the things that make BIDs interesting. BIDs are an American idea (I think the Canadians may have started them); businesses in a locality organise themselves, and if a critical mass support the idea they can compel all businesses to take part, including contributing to the scheme’s funding. This raises money to make small improvements to local infrastructure which then have more widespread benefits. And the process of doing so revives local networks. As councils retreat, as central government funding is cut, the importance of BIDs rises. This prompts a couple of further thoughts.

First is the local councils, though obviously part of the solution, may also be part of the problem. In order for local networks to revive, local accountability is critical. If the trail of responsibility simply ends up in an office somewhere in London then it is compromised from the start. This is what undermined many of the last Labour government’s attempts to delegate power locally, such as through NHS Primary Care Trusts (PCTs). Local councils are electorally accountable locally, but get most of their funding centrally and are heavily constrained on what they can do without asking some national body for permission. And they often try to monopolise local power and smother initiatives that they did not invent. A diversity of locally accountable power centres is surely helpful. “Locally accountable” does not necessarily mean “controlled by the local council”. We must hope that the coalition government’s invention of Clinical Commissioning Groups (CCGs) in the NHS become genuine local power centres, not the playthings of the central bureaucracy, as the PCTs were. The jury is out on that one.

The second point is that it is about money. The BIDs’ power and influence derives from the money they levy from their members, which in turn can unlock funding from other sources, such as the National Lottery. As I have already noted, one of the weaknesses of local councils is that their local taxation powers are so limited. They have the Council Tax, a sort of residential property tax, and the Business Rate – both of which are highly constrained by central regulations. These taxation powers will have to be extended.

Which is a third point. The design of BIDs overcomes the “free-rider” problem, which is the bane of many local initiatives. There is a strong tendency for most people to sit back and let somebody else do the work. That makes legal powers to raise money – taxation in other words – a central requirement.

At the moment the London government is playing with localism. It is letting a number of ideas go forward if they promote better local management at no serious cost to the power of the centre. At some point progress will require reforms that will hurt the centre. So our political leaders, all of whmo have played with the idea of localism, need commit serious political capital to it. Unfortunately neither David Cameron (after the flop of the “Big Society”), nor Nick Clegg (in spite of the Lib Dems’ theoretical commitment to the idea), nor Ed Miliband show any real sign of taking the revolution out of Westminster’s comfort zone.

 

The West has become irrelevant in the Middle East

Along with most of my politically conscious compatriots here in Britain, I am deeply shocked by the massacres perpetrated by the Egyptian security forces on supporters of the Muslim Brotherhood over the last couple of days. A deeply shocking, and depressing, revelation came from an EU mediator in a BBC interview yesterday. Apparently he was very close to achieving a negotiated way forward, before hardliners in the Egyptian government overruled the people he was negotiating with to press ahead with the violent crackdown. This episode deserves more attention that it got (I have failed to find any report of it after searching both the BBC and Google, so quickly have the news media dropped the story), as it is very revealing about both Egypt and the Middle East at large. We in the West have become completely irrelevant.

What we had hoped for in the Arab Spring was the emergence of democracy in the various Middle Eastern states, with a working relationship developing amongst the main political factions, with workable, effective governments emerging over time. Perhaps a bit like Portugal after the 1970s. We cling to the hope of this now in just Tunisia and Libya. What has emerged instead is a conflict between an Islamist faction and the state security apparatus, neither of which is interested in liberal democratic government. In Egypt both factions have decided they should get what they want by ignoring the liberal factions and Western standards. They are following a path taken by Algeria; the uprising in Syria is evolving in a similar direction. In Jordon and Morocco the state security apparatus is in control but toy with democratic reforms to keep Western sponsors sweet. In the Gulf and Arabian Peninsula the state security apparatus is not even doing that. In Iraq democracy is gradually being pushed into the background as a similar dynamic emerges. Israel/Palestine and Lebanon are much more complex, but some of the same themes can be seen there. The real battle is between a powerful state security apparatus and an Islamist protest movement, which shades into insurgency and outright guerrilla war. Neither side is interested in democracy, and no other civic or foreign forces can persuade them otherwise.

The first disappointment in Egypt is that the Islamists failed to embrace democracy. Rather they saw democratic institutions as a means of seizing power for themselves. They seemed to have no concept of governing by consent, or of building democratic institutions. President Morsi’s democratic mandate was weak, as the electoral system failed to give voters a proper choice. There is no properly elected parliament, and the Muslim Brotherhood showed no real interest in conducting proper open elections for them. Their attitude to democratic institutions seems rather similar to that of Lenin or Hitler: a means to an end. This seems to be part of a wider pattern of similar Islamist movements in the Middle East – notably Hamas in Gaza, and Hezbollah in Lebanon.

Their implacable opponents are hardliners in the security establishment: armed forces, police and murky intelligence organisations. In Middle Eastern countries these forces in most cases, including Egypt, have become monstrous and unaccountable. They are usually incredibly incompetent at their alleged purpose of maintaining law and order, as this week’s massacres showed. They effectively control most Middle Eastern governments, though often with civilian or royal heads of state nominally in charge. They have no time for liberal democracy. The sort of accountability implied by such a system is anathema.

More liberal forces did flower for a while in Egypt, allying with the Islamists to temporarily turn the generals out of power. But the Islamists were not interested in a real partnership. There was a small hope that, after the military coup, the Brotherhood might again see that it was in their interests to team up with the liberals, and concede real power to them. That, no doubt was the substance of what EU mediators were trying to negotiate. But the security hardliners have now crushed all hope of that. And now ordinary Egyptians are faced with a stark choice. Whose side are they on? The Islamists or the security forces? After the Brotherhood’s disastrous period in power, many will choose the latter.

And there is practically nothing that we in the West can do to influence events. The best hope for democracy lies in the Islamist forces coming to understand that they need and should respect democratic institutions, even when it proves inconvenient. They can then build a secure partnership with secular liberals that will command broad popular support. This is what happened, eventually, in Turkey as the Islamists embraced the idea of Turkey being part of Europe. Instead the Islamists in the Middle East and Africa seem to take their lead from their implacable opponents in the security state: it is all about getting your hands on the levers of power.

All we can do in the West is help nurture the small shoots of liberal democracy as they emerge, through mediation and advice, as much as through money and aid – as the EU did with Turkey. Meanwhile we are condemned to being utterly helpless. Neither side needs us.

 

 

The unbearable lightness of British politics

The economic crisis in the developed world drags on, posing fundamental political and economic questions. And yet politicians here in Britain argue about not very much. The Labour leader, Ed Miliband, is currently attracting a lot of criticism for his lack of progress. But the real problem is that the political left has run out of ideas, while the Right complacently defends the status quo. This state of affairs will continue until we learn to look at our problems in a radically different way.

Nobody should doubt that capitalism is still in crisis. We have been cheered in Britain by some better economic statistics. But average wages remain stagnant, and are not keeping up with inflation. Some people are successfully adjusting to a reduced standard of living; others are running down savings or borrowing money. Private and public investment remains weak, and any benefits of a slightly stronger economy mainly accrue to a small minority of the better off, or to anybody that owns land and buildings, along with a trickle of unemployed people who are now finding rather poor quality work. Other developed economies, from the US to Europe to Japan seem locked into variations of the same dilemma: either the economy is stagnant, or it grows to the benefit of only a few people.

It is not difficult to see what the underlying problem is. Globalisation and the advance of technology are killing off industries that used to be the backbone of developed world employment, destroying lots of middle income jobs. We hear a lot about manufacturing industry, but the same dynamic applies to office jobs. There is not the same need for secretaries and administrators, with jobs tending to be either highly skilled (managers, technicians and so on) or else in soulless call centres; and some of those call centre jobs are being automated out of existence. There is a desperate hunt for the better paid careers, and many people have to settle for poorer quality jobs. In Marxist terms, the balance of power has shifted decisively towards capital and against labour. The process started as far back as the 1980s, with only temporary relief provided by the generosity of the Chinese who sold the developed world lots goods for less than they were really worth. Changing demographics adds to the difficulties of managing this problem.

Meanwhile a growing elite of capitalists and professionals are doing very well, but are under spending their incomes. More is being saved than invested, creating downward pressure on the economy as a whole. This is more or less how Marx predicted the end of capitalism. So if the traditional left-wing critique of capitalism is proving better grounded than many thought, why isn’t the Left benefiting?

The answer is that the Left have no convincing alternative to the capitalist model which does not destroy living standards. Marx could believe that common ownership of the means of production would do the trick, but we now understand that this is killing the goose that lays the golden egg. The turning point for China economically was its recognition that it needed a rampant capitalist economy to drive it forward, even if they also see the virtues of a massive state sector coexisting with it. Modern people love the benefits of capitalism, and in particular its constantly advancing technology, and constantly changing fashion – even as they struggle with capitalism’s consequences.

So what to do? There are still many on the Left, especially trade unionists, who think that the answer lies in a big public sector. This can be constructed to provide lots of well paid middle ranking jobs and, it is hoped, put market pressure on the private sector to treat their workers better. This strategy may be called “Sweden in the 1960s”, since that was when and where it worked best. But most appreciate that it is unviable. Sweden’s economy collapsed into a nasty mess after the 1960s. The state sector has no incentive to be efficient, and drags everybody’s standard of living down with it. It creates unbearable pressure on the private sector as they try to compete in world markets.  Constant devaluation of the currency might provide some relief, but in the end this leads to hyperinflation and total seizure (think of various South American economies over the years). In Britain the state sector is too large for the current tax burden, so to sustain it requires putting up taxes. This does not look a realistic political prospect.

So what’s left for the Left? Mr Miliband shows a good grasp of the basic problem but has found only lightweight solutions, such as putting moral pressure on big business to behave a bit better. And without any big ideas we end up arguing about not very much. Is the government’s austerity policy slightly too severe? Should we add a little bit of regulation to this or that industry? Or else do we just moan about various symptoms of the malaise, from immigration to the misery inflected on many who rely on state benefits, without offering any constructive alternative?

It’s much easier for the Right at one level. Their sponsors are doing quite well, so they can try to create smokescreens to pretend the problem doesn’t really exist. Some go further to try and suggest that we should place even less restrictions on the capitalist economy – though that line of argument is as discredited as Sweden in the 1960s. But ultimately they will have to confront the same problem: the economy doesn’t work well enough for most of the people most of the time.

And what is the answer to the problems of capitalism? Clearly this isn’t easy. I think we have start looking at our situation in a completely different way. We are stuck on grand policies that can be implemented by governments in London, accruing lots of prestige to national politicians. But this is just sucking power into an elite based in the country’s southeast. Is it an accident that Scotland is now doing relatively better as real power was devolved to Edinburgh? We cannot continue to destroy local networks and hope that people will be better off as a result. This is completely beyond the grasp of our political elite, left or right. But until politicians start to understand that they are part of the problem, not its solution, we are condemned to an unbearable lightness in our political debate.