All posts by Matthew

Time to rethink the Bank of England

It seemed a great idea at the time.  Independent central bankers managing our economy on a strictly technical basis, preventing politicians from mis-managing it for short-term ends.  Alas, even if this was not an illusion then, it surely is now.  Central bankers across the world are becoming politically controversial.  Meanwhile their policy decisions, be they changes to the interest rates under their control or buying bonds (“quantitative easing” – QE), either have no effect on the real economy or do not have the effect intended.  But the recent coverage of the Bank of England’s latest interest rate decision shows than most observers are still stuck in the old narrative.  The present system is obsolete; the real question is what the Bank’s role should now be.

Monetary policy, as now conceived, arose in the 1980s, after confidence in economic policy collapsed, amid a toxic combination of high inflation and high unemployment in most countries.  Out of this wreckage came the idea that the economy at large responded to changes in the money supply, which influenced the decisions people made in output and employment, and in prices and wages.  By managing the money supply we could manage the overall economy.  And what was more, we could make this a relatively objective, technical process, by limiting growth to what the economy was able to produce, and keeping inflation into a nice, tidy band.  Fiscal policy, taxes and public spending, were pushed into a relatively minor role, and became politically suspect.  A new economic orthodoxy grew, sometimes called neo-Keynesianism, with Economics students given new sets of diagrams to learn, while economic modellers translated this into more complex mathematical equations.   Then, in 2007, it all went horribly wrong.  Two basic problems are now quite evident.

The first is trying to understand how exactly monetary policy works.  Its advocates had always been vague about this, their case based mainly on historical correlations rather than actual, practical mechanisms.  To the public, policymakers talked about printing presses, as if it was all about the number of banknotes printed and put into circulation…which was clearly nonsensical in a modern economy.  During the 1990s the process focused on the setting of interest rates, with the central bank using its power as banker of last resort to manage interest rates on the overnight deposits made by commercial banks, a process which indirectly affected the supply of money.  While I was studying economics at UCL (in 2005-08) our lecturers admitted this was pretty thin.  Long term interest rates were more important, and yet the central bank’s influence over these was marginal.  More important, as electronic money and “shadow banking” exploded, it was not at clear how central banks were supposed to manage the volume of money supply at all; even defining it became impossible.  The whole thing completely fell apart in 2007 when the interbank market seized up, leaving the central banks’ instrument of management broken.  The central banks pulled their levers one way, and yet the actual supply of money, in practice if not in statistical definition, went the other.

The second problem with monetary policy is more fundamental still.  Real people and markets don’t respond to changes in money supply as they theoretically should.  The main effect of policy changes seems to be on the prices of shares and property – not the amount people consume.  So loosening policy merely inflates asset prices, having little effect on output, prices and employment.  Alan Greenspan, the US Federal Reserve’s previous chairman even seemed to make a virtue out of this – suggesting that strong share prices helped sustain investment and consumer demand.  But this leads central bankers into a very dark place, as the Economist’s Buttonwood column has recently pointed out.  What on earth are central bankers doing trying to manipulate asset prices?  Surely asset prices should be set by a properly functioning free market?

So central banks have comparatively little influence on the real economy, and what influence they do have is mainly on asset prices, rather than on employment and consumer prices.  Accept this and you quickly see that asking them to manage inflation as we do in the UK (or inflation and employment, as in the US) is absurd.  It may not even be healthy to confine inflation to a narrow band – there can be perfectly good reasons why it is right to allow inflation to run ahead at a particular time in a particular economy, or, indeed, to let the supposedly wicked deflation to run.  Central banks’ role should be much more limited.  They should control seigniorage (profits made on the creation of currency) and ensure that the markets for money are orderly.  And that’s about it.  Even managing exchange rates is toxic, as the Swiss are finding.

This is the best reason for raising interest rates in the UK (and US) at present.  They are so low that money markets can’t do their job properly – it is much healthier if savers can expect some rate of return.  And, frankly, asset prices are too high anyway.  Not that anybody on the Bank of England’s MPC seemed to offer anything like this reason for raising rates in their  minutes.  George Osborne still seems to believe that the Bank can help him out if fiscal policy seems to be too tight.  The level of denial remains astonishing.  The game goes on; it’s not going to end well for the Bank, I fear.


Sex offenders

Here is an article I had published yesterday in Lib Dem Voice on the disgraceful behavior of political leaders over the recent Supreme Court ruling.  Things didn’t get any better after I wrote the article on Wednesday, judging by Theresa May and Jack Straw on Today in Parliament.  Lib Dem politicians are just keeping their heads down, it seems.


Megatrends – where will we be in 2030?

Mark Pack recently wrote an article in Liberal Democrat Voice about how badly awry political predictions went in 1992.  Politics, an interaction between adaptive and opportunistic parties is inherently unpredictable.  What about the economy?  The big trends (“megatrends” I will call them, to contrast with “microtrends” in fashion a couple of years back) of the 1990s were technology (internet and mobile phones) and globalisation, especially the rise of China and India.  I may be mis-remembering, but these unfolded more or less as predicted if you discard the excitable froth.  But these trends have played out.  What does the future hold for the British economy.  What will 2030 look like?

First megatrend.  The era of cheap imports is over.  Chinese and Indian costs were so low in some industries that ours could not compete; many jobs were lost in manufacturing, especially.  These jobs were replaced by well paid jobs in more up-market and high tech businesses (including finance) and by a lot of poor quality service jobs too.  On average, Britain prospered, but inequality grew as well.  The economics of this (the law of comparative advantage, to talk technical) is notoriously difficult to pick up intuitively.  But, as the developing economies prosper, their cost advantage erodes.  We saw this with South Korea and Taiwan; it’s now happening to China and India, whose costs are rising rapidly.  There doesn’t seem to be a huge pool of undeveloped countries to replace them at the bottom of the market.  Bangladesh, Pakistan and various African nations might rise to it, but they don’t seem to have the political stability or governance required.  The good news is that the steady stream of job losses will diminish, especially at the lower value end, and jobs will even be repatriated.  The bad news is that our overall living standards will stagnate, since we no longer get the boost from consuming cheap imports.

Second megatrend.  Energy costs are going up.  The range of predictions ranges from the serious to the apocalyptic.  Demand for energy of all sorts, but especially oil, grows as developing countries develop.  There are plenty of energy sources, but to increase overall supply means tapping into energy that’s much more expensive to get.  The consequences of this are quite profound (this is a favourite topic of the Economist Buttonwood blog, like here and here).  This will prove a major drag on living standards and we will have to invest huge sums in both new energy sources (especially alternative energy) and energy conservation (especially our homes).  Something analogous may be happening in food and agriculture.

Third megatrend.  The work force will stagnate.  The baby boomers are retiring, or at least want to wind down; most mothers that want to are already working for as many hours as they want, rather than staying at home with the children. Immigration is coming down, as we fret about the social consequences, and anyway we don’t provide such an attractive proposition to immigrants, as the economies of east Europe steadily catch up.  And productivity has reached such levels that many question the need to work so many hours, and crave a better work-life balance.  This puts a strong damper on the economy, although it’s not all bad.  More leisure, if people want it, is a sign of economic success, not failure.  The problem is if publicly funded benefits are supporting leisure that is not earned (by artificially low pension ages, for example)…though my feeling is that this is less of a problem in Britain than elsewhere.

This is pretty negative stuff.  So what about the fourth megatrend: the continued advance of technology?  This is very difficult to read.  One article I read recently suggested that current technology trends are rather ephemeral: smartphones and social networking don’t have the power to change things like the internet and mobile phones did.  But we can’t know; the Economist carried an interesting article last week on how print technologies are transforming manufacturing industry.  We have to invest a lot of hope in technological change to help meet the other challenges.  Which means we must understand how technological advance works.  It’s disruptive; the law of diminishing returns slowly kills off the current industry leaders (look at Pfizer closing down its R&D outfit because it doesn’t pay any more).  The process is disruptive and favours the nimble, be it glitzy Silicon Valley start-ups, or earnest German family businesses.

So where am I going with all of this?  The trends that shaped our economy in the last 20 years are coming to a halt or reversing.  We face major challenges which mean improvements to standards of living are most likely to come from technological innovation and a more equal distribution of wealth.  Some of the trends of the last 20 years, growing inequality and companies retaining a bigger share of profits, may well go into reverse.  Bad news for share prices.

What should governments do?  First promote innovation – and the key point is to make it easier for smaller and medium sized companies to get cheap finance; which means big changes to our banking system.  Second, energy policy will be critical; even if you are a climate change sceptic, there remains a lot of value in low carbon policy as cover for dealing with rising energy costs.  Third, the public demand for “fairness”, however impossible to define, is here to stay.

Economists may fret about stagnant income, but this doesn’t have to end badly.


Manufactured outrage won’t help elderly patients

John Humphreys was apoplectic when interviewing Ann Abraham on the Today programme.  She has produced a report detailing several cases of appalling treatment of elderly patients in the NHS.  How on earth can these wonderful dedicated NHS staff we keep hearing about allow such abuse?  Ms Abraham did not try to give us any insight into how such things happened, merely echoing Mr Humphreys’s anger.

Not long after the interview there was a rather interesting counterpoint in the sports report.  Garry Richardson was interviewing the trainer of one of the horses killed at Newbury over the weekend, asking him about how he and his staff felt about the whole thing. This was clearly designed to bring on the normal outpourings of emotion that are now the expected face of public grief.  Such a a beautiful horse; a real character; we’re all devastated; we need answers….and so on.  Instead all he got was, more or less, just a bad day at the office and life goes on.

That would be a more helpful attitude in the NHS case.  Whatever Mr Humphreys and Ms Abraham are suggesting, it really isn’t hard to reconcile the dedication of NHS staff to systematic abuse of patients.  It’s what Richard Adams in Hitchhiker’s Guide to the Galaxy called the “SEP field”, which guarantees a cloak of invisibility.  SEP stands for Somebody Else’s Problem.  Anybody who has worked in a large organisation is familar with the idea of bad things happening while everybody involved is convinced they are doing a highly professional job.

The SEP field arises from the way we organise work, splitting it up into separate bits for which individuals can take responsibility.  We only look at our bit.  Bad things happen between the bits.  The first reaction is to blame management, who are supposed to be making sure the whole thing adds up.  And the quickest and easiest response for management is to make the process yet more complicated by adding in more bits, with checks and controls.  That’s how they tend to behave when people get outraged.  But it doesn’t really help, because the main problem is complexity; nobody wants to take wider responsibility because they don’t understand what’s going on.

This is an old problem, and solutions should be familiar.  You simplify processes, empower staff to act outside their normal remits, and engender team-working attitudes.  Simple but hard.  It means telling people comfortable with their narrow jobs, who think they are doing wonderfully well, that actually they are part of the problem.

But for NHS managers that should be another day at the office.  We, the public, should be encouraging them to be braver.  Instead we stoke up the outrage, and even start suggesting the NHS doesn’t need managers at all.

The NHS needs better leadership at ground level.  We should be demanding it.  Perhaps we should even ask ourselves, as Jeremy Laurance does in the Independent, whether our beloved NHS is capable of ever managing itself properly ever.


Prisoners’ voting and the European Court

I’m an increasing fan of The Economist’s new Bagehot columnist.  His approach to blog posts is self-confessedly long and unpolished.  But worth bearing with.  His post on the Prisoners’ voting rights and the European Court must be his longest yet.  But wonderful.

Quite apart from the rights and wrongs of giving prisoners the vote, thumbing our noses at the court is the wrong kind of signal to send countries with lest robust judicial systems, like Russia.  Just as the shortcuts we used on the War on Terror have been used by as excuse by countless bad regimes, like Robert Mugabe’s, to bypass due process in their countries.   Moral leadership implies doing things that hurt.  Tony Blair never understood this; the signs aren’t good for Cameron.

At least I can be a little bit proud of the Lib Dems this time.


Multiculturalism and terrorism

I am an admirer of our PM’s political skills, but like his predecessor, Tony Blair, he has a weakness for half-baked thinking.  We see this in the Big Society.  His speech last Saturday and its critique of “multiculturalism” is another example.

The kerfuffle was predictable.  One example, and the only one I have read in full, is Yasmin Alibhai-Brown’s piece in The Independent, headlined “David Cameron’s message is that Muslims are not wanted”.  What to make of it?  I decided to take a drastic step.  I read David Cameron’s speech in full.

The first point to make is that Mr Cameron delivered this speech at a security conference.  Islamic terrorism (and I can find no better words with which to describe this phenomenon), is a clear security threat, whether or not it is the biggest one the country faces, as Mr Cameron claimed.  As a clear threat it is a legitimate topic to make a speech about.  Ms Alibhai-Brown has it entirely back-to-front when she complains that it is an insult to Muslims to talk about Islam in the context of terrorism.  If you are going to talk about security, you have to talk about the specific phenomenon of Islamic terrorism.  Mr Cameron went out of his way to explain he wasn’t talking about Islam itself.  He describes Islamist extremism (from which terrorism stems) as a political phenomenon and not a religious one.

Mr Cameron described the process by which young Muslims become disenchanted with our society, and find identity in the ideology of Islamist extremism.  This creed may be nominally peaceful at first, but they then get drawn into groups that espouse terrorism.  So far, so good; the insight that there is often an intermediate step of hostile but peaceful preachers is an important one.  The trouble starts when Mr Cameron goes on to make a further point: that “multiculturalism” is part of the problem, because, by accepting or even encouraging different communities to live separately, it creates a vacuum of identity.  He advocates stronger engagement to establish a national identity, promoted through “muscular liberalism”.

“Multiculturalism” is a vague word, and no doubt to some it does mean “hands-off” – complete disengagement from different cultural groups by the establishment.  But the term is best understood as the antithesis to “assimilation” – the process by which minority cultures are destroyed so that everybody has the same cultural identity.  Assimilation should have no part as an official ideology in modern British society.  We should celebrate diversity and draw strength from it.  The problem about attacking multiculturalism is that it sends a dog-whistle signal of support to assimilationists and nativists.  It is much better to try and redefine multiculturalism in a more helpful way than to attack it.

Multiculturalism is not incompatible with different cultural groups interacting, finding out about each other – and challenging each other’s values, if this is done according to proper liberal norms.  We should never use it as an excuse just to shrug at the abuse of women and promotion of intolerant attitudes, for example.  If that’s what we are doing then we should stop.  If people want to associate with other members of their cultural group, they should be free to do so; if they form exclusive monocultural communities, we must tolerate it.  But toleration doesn’t mean that we should refrain from criticism.  But when we criticise we shouldn’t simply attack the attempt to maintain cultural identity – we should raise specific issues which we think are wrong – such as intolerant attitudes.  Engage, challenge, listen, find common ground, progress.

But the most worrying aspect of Mr Cameron’s speech was that it his attack on multiculturalism, in practice if not in theory, singles out the Muslim community – and here I agree with Ms Alibhai-Brown.  Is he saying the same about Hassidic Jews? Or about the religiously exclusive schools being set up with government support by various groups?  Mr Cameron started by talking about terrorism and he should have stuck to the subject.

In fact, it is pretty unconvincing to suggest that the disaffection of young Muslim men in Britain has much to do with a hands-off attitude by the establishment.  Surely any attempt to promote our liberal values in a more “muscular” way would raise hackles further.  Many Muslims see an apparently amoral and degenerate society, promoting drunkenness and promiscuity; to find all the evidence they need to support this view they need go no further than the Daily Mail.  They are constantly open to slights and humiliations from other communities.  Our entirely muddled involvement in Iraq and Afghanistan, and confused attitude to the Israel/Palestine problem, adds grist to the mill.  To them this is evidence that we apply our vaunted values selectively.  Challenging their attitudes to women and gays may be necessary, but it has nothing to do with preventing terrorism.

Mr Cameron may be right the government engages some of the wrong Muslim groups under the aegis of preventing terrorism; he inherited a very muddled strategy.  We do need intelligence and support from Muslim communities.  But the way forward is to promote genuine multiculturalism – and not sending implicit messages of support to those with anti-Muslim prejudices.


Public services are different

As he left office as Prime Minister, and age ago in June 2007, Tony Blair wrote the following in The Economist:

Public services need to go through the same revolution – professionally, culturally and in organisation – that the private sector has gone through.

It is easy to understand how politicians become frustrated with the leaden ways of so much of the public sector.  And the private sector has indeed been revolutionised in the last two decades.  Recently I’ve experienced this private sector revolution full on.

Somebody has been setting up mobile phone contracts in my name.

The first I heard of this was when a welcome arrived through the mail.  My daily post hasn’t been this exciting for years (well since the last time somebody did this).  Then comes the difficult bit: I have to phone the company to stop the contract.  Since I don’t actually have the phone and the free service line that goes with it, this usually means phoning a premium number and then wading through the various options.  Funnily enough none of the options says “If you want to report a fraudulent transaction press 3” – it’s always “other” at the end of the list; one company only lets you in if you have a PIN – not easy if you didn’t actually set the contract up.  Eventually you speak to somebody with a script, sometimes in India; actually this bit usually works OK: these people are polite and know what to do; only once was I just passed round the office. And there it seems to end; somebody gets a free handset and a few days worth of free calls.  Just another business expense.

It is a huge, horrible impersonal nightmare of systems, procedures, filters and scripts, with the minimum human contact.  The fraudster doesn’t know who I am.  The company allows the fraud because it is worth the expense.  I have to wade through the system to protect myself.  This is the dark side of the private sector revolution of which Tony Blair writes.  The personal element is sucked out and crime lurks in the fringes.  Perhaps Prime Ministers are cocooned from this.

The process is relentless.  I should know, since I used to manage a financial services operation that underwent just such a transformation.  The starting point was a clumsy labour-intensive operation, not easy to manage; the service may have had lots of human interfaces, but you didn’t really know what the staff were doing: not until too late and you had an irate customer.  Then along comes a salesman with a system that helps you control all this and keep proper records.  He or she would be gushing: you would save money, improve the quality and customer satisfaction all at once.  So you implemented these wonderful workflow and customer relationship systems, and indeed you could improve controls and improve quality of service.  But if you wanted to reduce costs as well, then you had to keep the customers away from the workforce and build barriers.  And then came a process called “de-skilling”: using less skilled staff, usually in a location were wages are much lower, and giving them simpler procedures to follow.  And the pressure to reduce costs is absolutely relentless, not least because mostly the public chose lower costs over better service.

Clearly there is a big upside.  The public can consume more and (usually) gets more choice.  No doubt this is what Mr Blair was thinking of.  If everybody is going to get richer, or even just have more leisure, then we must produce more per person.  This is just another way of saying that the personal content in the goods and services we deliver has to be less.  Sweden is often cited as an example of a society that is well off without rampant, exploitative capitalism: but try finding a member of staff at IKEA.  And, we shouldn’t view the past with rose-tinted spectacles: services may have been more personal, but they were often shoddy and high-handed.  Overall we are better off.

But public services are different.

Personal contact, and understanding the user’s individual needs is often of the essence for public services – think of schools, doctors, social workers.  And simply deciding that somebody is too difficult to deal with is not an option.  If people fall off the edge they create even bigger problems.  In fact so many of societies problems are the result of lack of human contact and understanding – think of antisocial behaviour or mental illness.  Public services should be more human not less.  If they were, we’d need them less.

What we need is a complete rethink of public services, not copying blindly from the private sector.


Hello world!

This blog has been long in gestation, so here’s hoping that lives even longer in execution.

It is a platform to express my thoughts on the issues of the day.  My interests are pretty broad, but the idea is to concentrate on politics, with a special interest in the economy and public services.  I’m no expert (a mere BSc in Economics doesn’t get you beyond the lowlife in the economics profession); still less am I an insider, drifting around the outer fringes of the Westminster village.  I hold no public political office.  But I’m a free agent and I will not feel bound to any party line, though I am no political neutral.  And I’ve been around quite a long time, and I’ve done some interesting things (well, I think so) – I think I have some interesting insights to offer.

Another thing I am not, is a journalist.  There’s no particular virtue in being quick off the mark at the expense of insight.  The best insights take time to emerge.

What do I mean by “thinking liberal”?  I’m a political liberal; I want people to be free to take the course they choose and say what they like, so long as they don’t harm others.  I believe that society should organise itself so that as many as possible have the practical freedoms that come with their basic physical and emotional needs being met, and a decent education.  Thinking is a big part of what I’m trying to do.  Emotional reactions and partisan advocacy have their place, but not here.  I want to promote insights and understanding.  I want to find a better way.

And there’s something else.  I want to be constructive.  So much of what passes for comment is negative, telling us what’s wrong with an idea, without trying to put up an alternative.  Of course alternative ideas will usually have flaws – but the only way to find the best ideas is to keep trying.  Which means being brave enough to be wrong.