Secular stagnation: the curse that still haunts developed economies

The financial crash of ten years ago was something of a paradox for conventional economists. It took most of them by surprise, and dented their reputation. And yet economists became more important than ever to the running of our world. But now, to listen to most of them, the equivocation is over. We’re back to normal, as the global economy looks in much better shape. This looks complacent.

The crash was a double shock to economists. The first was how it happened at all, when most economies seemed to be purring on at a relatively steady rate of growth (often referred to as the trend rate), which seemed to relate to growing productivity, and which most economists, driving through the rear-view mirror, assumed to be a law of nature. The second shock was that developed world economies, especially the British one, were so slow to recover. Economists  simply assumed that with a bit of stimulus, economies would not just return to trend growth, but make up for lost ground too. I don’t think any advanced economy has done this – and in Britain we lag far behind. In the years after the crash an expression was coined, or rather resurrected, to describe this second problem: secular stagnation.

The person whose name is most attached to this is Lawrence Summers, who had been prominent in the Clinton administration. By it he meant that economies could only achieve growth by extraordinary and unsustainable efforts to stimulate it. And, as Mr Summers recently pointed out in the FT, you cannot say that it has disappeared. Growth has returned, but the measures required to produce it are unsustainable. What he is referring to is the extraordinarily low interest rates prevailing in the developed world.

This has been going on for so long that we have become accustomed to it. But what do negative real interest rates mean? They mean that in order to use up available savings we have to create investments that have little or no financial return. Now that is at the margin, not on average, but even so it does not suggest an economy that is at all healthy. If investments don’t produce a return, productivity will not advance, and growth will not be sustained. And in particular we will accumulate debt that cannot be paid off. Or not without inflation which destroys the accumulated wealth of the middle classes. And sure enough, many economists are warning us about mounting debt levels. In due course this will lead to a financial crisis.

Why are we in this situation? And what can we do? There are many speculations as to why, and most commentators, including me, tend to gravitate towards the one that suits their overarching narrative. Many blame a skewed distribution of income for creating a surplus of savings that cannot be used properly. Others say that modern businesses don’t need so much traditional capital (Google doesn’t need to issue debt or share capital to keep its investments going). Then there is the gradual ageing of the population reducing the size of the workforce. Others blame the wrong sort of stimulus – if only government spending hadn’t been cut back (“austerity”), we’d have bounced back in no time. My favourite is the Baumol effect which suggests that we are in a transition towards industries, like healthcare, that are less financially productive, though still improve human wellbeing. Whatever it is (and it could be all at once) it’s a problem because it is dragging down the potential growth rate.

And what can we do? People often talk of unconventional policies, but what are they? The most interesting idea is  to run up bigger government budget deficits. Piling up government debt is much safer than piling up private debt, as we are doing now. Why? Because governments can finance that debt by a process that is usually referred to as creating money, and the burden can be shared more equitably.

But piling up debt and creating money often ends in tears. The best current example of that is Argentina, with rampant inflation and impatient foreign creditors. The problem for Argentina is that its monetary system has been mismanaged for so long that much borrowing, public and private, has to be in foreign currency, which the central bank cannot create. But there is an opposite example. Japan has been piling up public debt for decades, and the central bank has been buying up debt, with few apparent ill-effects.

So how do you know whether you are Japan or Argentina (and no doubt Argentina looked like Japan once)? The first, obvious, difference is that Argentina has had a current account deficit for some time, while Japan has generally been in surplus. That means that Argentina is importing more than it exports and requires financing by foreigners – who are less likely to be happy to take payment in domestic currency. Current account deficits usually flow from budget deficits – though not always, as the recent crisis in Spain showed. That would be a bad sign for countries like Britain that also have a current account deficit. But Britain’s standing in international markets looks a lot more like Japan’s than Argentina’s. The government has no trouble in borrowing in sterling, and the same goes for most British businesses.

So why are we in Britain so worried about budget deficits and debt? One explanation is that we have been persuaded into this view by malign political forces who use the analogy of household financial management to make their case. But there are deeper worries. The first is how do you tell when you have gone far enough with budget deficits and need to stop? The traditional economists’ answer is when inflation starts to take hold. But it might be too late by then, and anyway it is not so clear that in a modern, globalised economy inflation works in quite the way economists think. You know it is too latewhen there is a rush of people trying to change domestic currency into foreign, creating a panic and to people, including the government, having to borrow in foreign currency. That can happen without inflation.

The problem behind that is the politics of it. Opening up the possibility of more government spending is a huge boost to the power of central government politicians, who do not have strong incentives to apply the brakes when they need to – any more than those bankers did before the crash of 2008. It is too easy to believe your own hubris. I think this happened to the Labour government in the mid 2000s when the government should have started to tighten spending but decided not to. This didn’t cause the financial crisis, but made it harder than it should have been to manage. Even now, though, it is impossible to get anybody on the political left to accept that. It’s the one thing that unites Jeremy Corbyn with Tony Blair.

Still, we should be able to find ways increasing government borrowing that helps stimulate demand more sustainably. Building public housing is one idea. Other infrastructure policies should help (but not all of them). There’s also a case for taking a longer view on some public spending, like education , community policing, mental health services and public health that heads off future trouble. But not building more navy frigates or, even, hospitals. We might need these, but they need to be securely funded by current taxes. The trick politically is to create a system of checks and balances that lets you invest productively and not let central government managers run away unchecked.

Behind this lies an important but rarely acknowledged idea. It is that, in the 2010s and onwards, public investment is often more productive than private investment. And that, I think, is one of the causes of secular stagnation. So in the developed world we need more public investment, and that we can afford to borrow much more to pay for it than most people think. And we need less private investment, much of which is wasted on asset recycling schemes that will end in tears. It may well take another financial crisis before we start to realise this.

 

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Life in the tunnel. Being a Liberal Democrat

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I just want to ask: when will the party face up to the fact that whatever it is doing isn’t working even in the slightest?

This was from Lib Dem blogger Nick Tyrone before the recent local elections, after a London opinion poll showed weak figures for the Liberal Democrats. The party’s appeal to Remain voters had pretty much failed, he thought, with the party lagging even the Conservatives in this group, never mind Labour.

Then came last week’s local election results. If you are going to take a cold, hard look at them in the round, they were nothing to shout about. They were perfectly consistent with that poll. In equivalent vote share they even marked a slight fall from the rather dismal 2017. And yet. Look at the London results (as a Londoner, I have an excuse for being London-centred – though my story works just as well outside it). The two most spectacular results for any party on the night were the Lib Dem gain of 25 seats from in Richmond, and 21 seats in Kingston, mostly at the expense of a Tory party that collapsed to a rump in both boroughs. And at last the party started to win seats from Labour, gaining seven in Haringey, for example. And the party had its Wandsworth moment too, fending off a sustained and confident campaign by Conservatives in the one borough it controlled in Sutton. Minds aren’t swayed by dry statistics but by stories – stories that show what is possible. In London, and across the country, the Lib Dems had plenty of good stories to encourage them. That made them a much better set of results than the party has had for a long time, even in 2017 when the equivalent poll share was higher.

Not that you would have guessed this from the media coverage. Even in its later coverage (when the Kingston result was known, giving resonance to the Richmond story) the BBC chose to highlight the relative failure of Labour in Wandsworth to the spectacular écrasement of the Conservatives in two neighbouring boroughs, which went unmentioned. Why were the non-events in Wandsworth and Westminster more important? Because, apparently, they are a “flagship” boroughs. Actually I think the Wandsworth result is an important story, but this prioritisation is an interesting window into the current journalist mindset, even at the politically balanced BBC. This may not be bias; it may just be a bid to cover up the humiliation of the editorial team of not getting the story right in advance, and sending its big guns to the wrong places. News is made on expectations, not real events.

Which, I think, is the issue at the heart of Nick Tyrone’s critique. Whatever the party does, nobody in the media, mainstream or otherwise, is listening. The only stories that are of interest are the sorts of stories that Ukip still manages to pick up: ones that point to the parties final, humiliating death spiral. I don’t think it is fair to blame that on the party’s leadership or messaging.

Life as a Liberal Democrat supporter is like being in a long, dark tunnel. Things are miserable; nobody can see you; and too often any small flickers of light vanish, rather than grow into that light at the end. But last week’s small chink of light just could be what we hope it is.

The point is this: the problem isn’t the message, it is getting people to listen to it in the first place. It is nearly hopeless achieving this through the media. It is just possible that a moment of genius or massive good luck suddenly does the job. But waiting for such a moment does not amount to a strategy. The other way to get noticed is to go out and talk to people directly – through door-to-door canvassing and attractive literature pushed through letterboxes, and with videos promoted through paid-for advertising. This is inevitably very localised, and it tends to happen in the run-up to elections, when people have a good reason to take notice. The good news is that when the party was able to do this, it, by and large, raised its share of the vote. And sometime spectacularly – in Remain-voting Richmond and South Cambs, in Leave-voting Kingston-upon-Hull, and in the somewhere-in-between Kingston-upon-Thames. That suggests that Nick Tyrone is wrong. What the party is doing is working at least a bit more than the slightest.

And the hope is that if the party keeps going, the general public, and the media that follows it, will start to notice. Even now, the BBC must start to question its policy of giving the party so little coverage compared to Ukip, which has now virtually ceased to exist.

But why soldier on in the cold, dark place, where hope is but fleeting? Because we believe in our liberal message. That humanity is more important than the nations and religions that divide it. That all humankind benefits when we listen to different points of view with respect. And that we should look at facts and evidence rather than let our prejudices run riot. No other party is doing that as much as the Liberal Democrats in British politics. It is worth pushing on through the tunnel.

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Complacency undoes Labour in Wandsworth

The Conservatives in Wandsworth know the price of everything and the value of nothing.

That isn’t a quote from this year’s council elections in Wandsworth, where Labour gained 7 seats, but fell 5 short of what they needed to take control of the council. It comes from Labour’s final week literature in their campaign in 1990, when they also expected to take control. To me it sums up Labour’s complacency in both failed campaigns. Elections are won with grit, no waffly ideals.

Labour’s spin machine are desperately back-peddling, to say that they never really expected to win control this time, and that the advance shows that things are slowly moving their way. That is nonsense. They had the Conservatives on the ropes and, to mix metaphors, they threw them a lifeline. The results were very close in a number of wards. A more effective campaign would have secured control for Labour. And what a victory that would have been! The Tories, weakened by Brexit in a strong Remain borough, could have imploded without the business of running the council to hold them together. Resourceful and resilient, they may well punish Labour, who have their own internal issues, when the next meeting with the voters happens.

This year I often thought back to 1990, which was a few years after I moved back into the borough of my birth. Then Labour only needed a net gain of one seat after making gains in the previous elections in 1986. The Conservatives were doing badly in national polls. It should have been easy. But reading that leaflet I immediately understood that Labour wasn’t up to the job. And so it proved: the result was a catastrophic loss of 17 seats, including that of their leader. This was a massive propaganda victory for the Conservatives, who used it to deflect attention from bad results elsewhere in the country. Old Labour hands have not forgotten this; winning back the council this year would have been a powerful signal of Labour’s rise.

And there was every reason to think that it was possible. Labour did very well in the borough in last year’s general election, without even trying very hard. They picked up Battersea, and came close to picking up Putney too, to add to Tooting which they already held. Recent council by-elections, in which Labour did well, confirmed this trend. In 2014, the previous elections, Labour had shocked the Conservatives by making strong advances. The EU referendum then dealt a body-blow to the local Conservatives which give Labour the chance to do something special.

What made the Tories so resilient in 1990 and able to hold off the challenge this time? In 1990 the party was in peak form, with a number of very capable and clever leaders, who had seized control of the borough from Labour in 1978. They adopted strong financial management, when most local Labour politicians didn’t think this mattered, while being remarkably alive to middle class sensitivities on things like recycling. They oozed competence where Labour resorted to waffle. An efficient, but low profile, local propaganda machine got this gritty message out to voters, many of whom had benefited under the then Conservative government’s right-to-buy legislation for council housing. This year things were much more propitious for Labour. The Conservatives have lost their shine; they are often complacent and out of touch; their new leaders are not of the calibre of the old ones. They have lost a lot of members. Meanwhile Labour (thanks to Gordon Brown) have addressed some of their reputation for financial incompetence, and they had more help from members than they knew what to do with.

So what happened? The Tories stuck to the same old gritty message about competence. No matter that this is less true than it has ever been – local Labour are firmly in the Sadiq Khan, centrist, competent wing of the party. And the council’s once-vaunted efficiency is now nothing special. Changes to the law under which council tax operates means that differences between boroughs are completely down to decades-old historical legacy, and tell you nothing about how things are likely to change in the future. But the Tories were able to plant doubts about Labour to which Labour had no convincing answer.

But Labour could surely have won. After their success in 2014, I remember thinking that the party needed to focus hard on what it needed to do to take control in 2018. The five wards they already held looked secure. They needed to win the five seats they didn’t have in the three split wards, and seven more seats from other wards. That meant a minimum of three more wards, four to be on the safe side. That was a big ask, but the reward was surely big enough to warrant a serious effort, starting in 2014. This should have meant identifying which four wards they needed to target straightaway.

But there was nothing. Residents of wards which the party eventually targeted heard practically nothing from the party until this year. Candidates weren’t in place before this. When it came, the campaign was almost completely generic, with nothing more than a few photos geared to the locality in which they fighting. Candidates did not have time to meet enough of the electorate and build trust – and didn’t really try. To them it seemed that controlling the council as a whole was what mattered, not looking after their ward. A personal vote of one or two hundred built up over two years or more would have made all the difference. and it would have been the best possible counter to the doubts that the Conservatives were trying to spread.

A lot of the same criticisms can be levelled at my own party, the Liberal Democrats. The party was too late to put in place its candidates and get out and about meeting the electorate. Too much of the literature was generic, making too much of issues like Brexit which, in the end, did not motivate voters much. We had an excuse. Though the party was in quite good shape in 2010, the coalition trough nearly destroyed it. The party made a dramatic recovery following the 2015 election and especially after the 2016 referendum, but trying to turn this new energy into an effective political force proved too much. The party made a lot of progress in the campaign, but too late have much impact.

All of which points to a disturbing aspect of modern politics. The parties are too interested in talking to themselves about their own political concerns, and not enough in meeting voters and solving their problems. There seems to be an idea that politics is about condemning abstract nouns like “austerity”, and putting “radical” ideas in front of the electorate and being swept to power in a tide of enthusiasm. Labour has succumbed to this. The Lib Dems are not immune.

But the Wandsworth election contained one shining rebuke to this politics of the abstract. The highest number of votes won by any candidate was by the independent Malcolm Grimston. Back in the 1980s I remember Mr Grimston as an obnoxious, fat young Tory (though the fatness should not be held against him, it was very much part of his persona). I have watched as he turned into somebody else entirely. He lost weight and became a gracious, polite politician who listened to people. We worked hard for his local electors, who came to know and respect him. After the 2014 elections he became so fed up with the arrogant Tory regime in Wandsworth that he defected. And he triumphed. Meanwhile another Tory councillor defected at about the same time. But he was much more of an abstract modern politician; he chose to adopt the label of the new Renew Party. But vacuous promises were no substitute for the graft of getting to know and help your local area. He had the ignominy of being beaten by a Lib Dem who did not campaign at all in the ward.

There is a lesson there that I hope local Lib Dems can learn. I suspect the current Labour Party would find it all too difficult. I wouldn’t have minded if Labour had won in Wandsworth, but they did not deserve to.

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Don’t let the BBC and Brexiteers confuse you: Norway and Turkey aren’t the same

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This blog’s track record on Brexit remains solid. A while ago I predicted that the UK would opt to stay in the (or a) customs union with the EU. That hasn’t happened yet, but the tectonic plates are slowly but surely moving that way. Meanwhile opponents of the idea are trying to undermine it by confusing people about what it amounts to, and the media, even the BBC, aren’t helping.

First: what is the difference between soft and hard Brexit? A hard Brexit means a complete break with EU institutions and trading with the EU either on World Trade Organisation (WTO) terms or through a tailored trade deal, such as the one the EU has negotiated with Canada. You might call these the Japan and Canada options respectively. A soft Brexit means remaining part of some EU institutions, without being a full member. It boils down to two main options: the Norway option or the Turkey option. There is technically a third: the Swiss option, but EU officials regard this approach as a failure, and are likely to prefer a hard Brexit.

The Norway option is given support by this week’s Economist. It means being part of the the Single Market, but not the customs union. This Norway does though membership of the European Free Trade Association (EFTA), which includes Iceland and Lichtenstein as well. This excludes agriculture and fisheries. It means accepting EU directives as far as most trade goes, and the “four freedoms” – goods, services, capital and labour. It has been given a bad press by both sides of the EU debate. Brexiteers say that it turns the country into a vassal state because it has to accept regulations without a right of veto, and only limited consultation. Remainers say much to the same thing, so why leave? The Economist valiantly makes the case nevertheless. It would be the least disruptive approach for British business, while giving the country significant new rights not available to EU members. Apart from agriculture and fisheries policy, this includes doing trade deals with other countries; Iceland has made a deal with China, for example.

Norway does pay significant sums into the EU budget, though – a bit of a flash-point for Britons. But this is not as bad as it looks: it is mostly aid to Eastern European countries, which is separate from other EU aid, and Norway has a lot of say over where it goes.  So it is actually politically quite useful.

So might this be the elegant compromise that brings the two sides together without entirely satisfying them? There are two big problems. The first is border controls. Not being in the EU customs union means that goods have to be checked as they cross the border, as happens between Norway and Sweden. Since one of the UK’s aims is a frictionless border in Ireland in particular (helpful in Gibraltar too), the Norway option would fail. This is one of the toughest issues emerging in the whole process (as predicted from the start by this blog). Brexiteers, who tend to deal in broad visions and not detail, can’t stand this instance of the tail wagging the dog. They hope that if Britain says that there will be no checks on goods coming into Northern Ireland, it will force the EU to reciprocate. But that turns out to be more difficult than it sounds – unilaterally waiving tariffs creates issue under WTO rules – as well as being reckless with the Irish peace process.

But there is an even bigger problem with the Norway option: the four freedoms. Or rather one of them: labour. Claims by Brexiteers that more than a minority of their voters wanted a total break with the EU are hard to sustain: the Leave campaign deliberately obfuscated the issue by using Norway as an example of what Brexit might mean. But a claim that those voters wanted complete control over the movement of labour into the country is perfectly credible. The Economist argues that there is more Britain can do to manage incoming EU workers more strictly within the Single Market. I don’t think that washes.

The Turkey option addresses both these problems. There are no customs checks at the border, and there is no free movement of labour. The lack of customs checks means that most of those complex supply chains that cross the border between the UK and the rest of the EU should suffer reduced, and manageable, disruption. Agriculture and fisheries can be excluded (as are services, most likely – but this is where the Single Market works less well anyway). What’s not to like? It means that doing trade deals with non EU countries can only happen for those goods excluded from the customs union (agriculture and services most likely). The more extreme, neoliberal branch of the Brexit movement, well represented in the Conservative Party, has set great store by doing such deals. And yet to most critics of Brexit this has always looked to be the weakest part of the Brexit case. These other countries are far away, drive hard bargains, and Britain’s negotiating position is weak. There is little evidence that the voters are that bothered. Nobody could accuse Turkey of being a vassal state to the EU, so why should they be?

And so the Turkey option looks the most viable form of soft Brexit. In a speech today the Labour leader is taking a step towards it by advocating a customs union with the EU. However he is blurring the issue by suggesting that he wants to be part of the Single Market too. And yet he wants exemptions to suit his agenda, especially on state aid and free movement. The EU will never wear that because of the political difficulties it would create within the union. I would go as far as to say that it is dishonest of Mr Corbyn even to suggest it. It would be much clearer to go straight for a variation of the Turkey option. Still it has served to put the customs union idea on the agenda, and presents the possibility of linking up  Tory soft-Brexit advocates, who have a much clearer grip of the key issues.

And what of the government? It has rejected the idea of a customs union out of hand. But this is just words, meant to placate hard-Brexit advocates within Tory ranks. What the government says it wants is what it has called “Canada plus plus plus”. That is almost as dishonest as Mr Corbyn’s Single Market minus. The government wants to stay integrated in some sectors but not others. This looks like the sort of cherry-picking the EU so dislikes. But it could be an intermediate negotiating step towards a Turkey-like solution, even if they try to avoid the words “customs union”. I believe this may be the game plan of Theresa May, the prime minster, and David Davis, her pragmatic Brexit Secretary. Whether they have the political skills to pull that off is open to question, though.

Meanwhile supporters of hard Brexit are trying to turn the public against the Turkey solution by conflating it with the Norway one. This includes Australia’s undiplomatic ambassador, Alexander Downer, to his great discredit, on the radio last night. This allows them to suggest it means accepting free movement of labour, for example. They also suggest that it means that the UK cannot do trade deals with other countries: that is not true either, though the scope of those deals would be restrained. Britain could import US chlorinated chicken and Australian wheat tariff-free if it wants to, as agriculture is not in scope.

For now the politicians are exercised about a potential vote in parliament over the customs union. Expect the government to defer this until the actual shape of its deal with the EU becomes clear. Something like a customs union with the EU is on its way. It is exactly the sort of compromise the country should be aiming at.

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Do not underestimate the Labour Party

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Britain’s Labour Party is neck-and-neck with the Conservatives in opinion polls. Surely, many claim, this means that Labour are in trouble, and its leadership is woefully complacent? The Tories are in an utter mess, the argument goes, so if Labour aren’t streets ahead now they never will be. I’m not so sure.

The first part of that argument is surely correct. The Conservatives are caught in a conflict between Brexit fundamentalism and reality. Such conflicts, when you are the governing party, bode ill. Government pronouncements are almost comic. Today, for example, David Davis, the Brexit Secretary, raised the prospect of a Mad Max dystopia after Brexit, which we can happily avoid, he suggests, by staying in the EU in all but name. Well that’s how it sounds. But worse, Theresa May is a lacklustre leader, neither able to present an inspiring vision, nor to handle the everyday give and take of networking and negotiation the role requires. The party is shrinking, and it is failing to capture the interest of younger voters, by which I mean under-50s. Its chosen core support base is literally dying. The party is being hollowed out in a way reminiscent of the not dissimilar situation it faced in the mid-1990s under John Major.

But then a relaunched Labour Party under Tony Blair established a massive poll lead and then crushed the Conservatives in the election of 1997. So why isn’t today’s Labour Party doing much better than it is? It is reported that the Labour leadership feel confident that they can repeat their performance in last year’s election of a poll surge during the campaign itself. And yet surely the Tories will not run such a dire campaign? They may be running out of activists but they have no shortage of donors. A halfway decent manifesto should mobilise the oldies better, and in a second attempt they can surely create doubts about Labour under Jeremy Corbyn’s leadership. And the voting system is tilted in their favour.

What the Conservatives have to play with is Labour’s lurch to the left under Mr Corbyn, and the rapidly growing hold of his supporters, organised by the Momentum movement, over the party. This has awoken traditional fears of Labour – and this seems to be propping up the party’s poll rating, as well as motivating wealthy donors. In the 1990s Mr Blair tacked his party to the centre and wooed Tory backers. He left his opponents with no oxygen; how different is Labour’s strategy now.

But I have underestimated Labour’s leadership once (last year), and I don’t want to do it again. Labour retains some key strengths, and the Tories some concealed weaknesses. This will not guarantee Labour victory in the next election, but it will give them a base from which to make a serious challenge.

Labour’s first strength is that they are building a solid political coalition of core support. Last week I described an idea that I called “Brixton liberalism”, and how it gave me hope about the future of liberal values. Labour has a stranglehold on Brixton liberals, notwithstanding the party’s distinctly un-liberal instincts. They have seen off two challenges: from the Liberal Democrats, following the period of coalition in 2010 to 2015, and the Greens. The Lib Dems, my party, seem to have retreated to the professional middle classes; they are hoping to win liberal voters from Labour through anti-Brexit feeling. This shows no sign of making headway. The Greens have been almost completely crushed; Labour’s intent to maintain their stranglehold was recently shown by their airing of policies on animal welfare. They are presenting themselves as the Green Party by other means.

The Brixton liberal coalition comprises many younger professionals, especially those linked to the public sector, and the new working classes, who are often members of ethnic minorities. A common theme is that these people have been priced out of owning their own property, and have no prospect of secure social housing. It is particularly strong in London. To these can be added trade unionists, who see real hope of extending their influence, through job protection, nationalisation and subsidies for declining industries. How will Labour fare amongst traditional, white working classes, especially outside the cities? These are the Labour heartlands that Mrs May hoped to capture last year, and came closer than many credit to succeeding. But the Tory appeal to this group may have peaked. It is very conservative, and Mrs May was a good standard bearer for that type of conservatism – she might have succeeded if she had offered more to older voters. But her reputation for competence has taken a knock, and any successor is likely to a sharper, more liberal type who will be distrusted by working class voters. We can expect Labour to continue their studied ambiguity on Brexit and immigration, so as not to scare off this group.

The second thing going for Labour is that they are doing careful work on their policies. Their critics dismiss Labour’s policies as a throwback to the failed policies of the 1970s. Public ownership of utilities, the roll-back of public-private partnerships of all kinds, free university education, and so on all seem to play to that narrative. But Labour are quietly giving a modern gloss to these policies. They will argue that they developing new models of managing the public sector, and not going back to the bad old days. No doubt they plan to have it both ways – invoking nostalgia for the old days alongside enthusing newer voters. Besides, some of those old ideas don’t look that bad in hindsight: council housing for example. By contrast any new ideas the Conservatives come up with are likely to be more neoliberal fare that will themselves look dated. While South America shows that we should not write off neoliberalsim, it is only likely to make a comeback after voters have experienced a long period of badly implemented socialist policy.

And the third thing in Labour’s favour is the diminishing hold of traditional media, which have acted as the Conservatives’ attack dogs for generations. Last year’s election was something of a watershed there. Jeremy Corbyn was their dream target, but they could make no traction. Their current campaign that Mr Corbyn was a cold war spy show that they still haven’t got it. Who cares?

And the Conservatives hidden weakness? They are not preparing for the next election in the way that Labour is, or the way that David Cameron did before 2015. Last year’s snap election showed how important such preparation is. Mrs May turned out to be flying blind, without any of the usual preparatory groundwork. Two things are spoiling the outlook for the Conservatives. First is Brexit – it so hard to see how it will play out over the next few years, and therefore what message will work best for the government. Could it be a big anticlimax, defying the Remoaner critics? Could there even be some quick wins, allowing a pro-Brexit counterattack?Or will there be early victims, forcing the Tories to find appropriate scapegoats? And an even bigger problem is the leadership. Mrs May showed herself up as inept in national campaigning, and if anything she has deteriorated since. And yet her party dare not replace her, as each of her rivals shows even deeper flaws. If a new, more dynamic leader should emerge later in the parliament, as many Tories hope, he or she will not have long to pull together an effective campaign, which can take years.

And so if the Labour leadership look quietly confident, they have every right to be.

 

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If Brexiteers want to reassure Remainers they will have to start talking specifics

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There was a certain inevitability about the Foreign Secretary Boris Johnson’s speech yesterday. It was meant to reach out to Remainers by presenting a liberal case for Brexit, but instead it drew raspberries. Britain’s polity is bitterly divided. It was always going to take more than a few speeches to change that.

Is there anything useful to be learned from this episode? One of the central themes of the speech was perfectly sound, if unwelcome to Remainers. The result of the referendum cannot be reversed, and Brexit is going to happen in some shape or form. The reason for that is basic politics. The leadership of the Conservative and Labour parties have both signed up to it. The Tories can rely on Democratic Unionist support. We’ve already had a general election following the referendum. There simply isn’t the political support to reverse Brexit.

And as for another referendum, Mr Johnson made a perfectly sound point. Another period of political battle between the two camps will only make things worse. There is no sign of a major shift in opinion in either direction. Remainers are clutching at straws when they look at polls suggesting opinion has shifted. It was looking at the polls that got is into the mess in the first place.

That makes the case for Remainers to try and get used to the reality. But those facts don’t make the pill any easier to swallow. What Mr Johnson tried to do on top of that was persuade Remain supporters that Brexit will not be as bad as they fear. And here the speech was a complete failure. He came out the same old platitudes and generalities that have been a feature of the Brexit campaign from the start. There have always been two prongs to the Brexit case. One is an appeal to conservative voters who oppose immigration and feel strongly that national sovereignty is a birthright that trumps any freedoms in the world beyond the country’s borders. The second is an appeal to liberal types with the idea that post-Brexit the country can be a liberal haven, free from the restraints of EU obligations. The problem is that these two lines look dissonant. It is easy enough for Brexit supporters to concentrate on their preferred line of argument and ignore the others. For sceptics it is that very dissonance that worries them.

And to overcome that fear it will be necessary to address that dissonance. How? By moving on to the specifics. Which regulations do you want to dismantle to make us free? How will you satisfy the need for regulatory alignment promised to the Irish without becoming a vassal state of the EU like Norway? And how will the rights of young people to travel and work in Europe be secured? And so on. Mr Johnson did not begin to do this.

Only one government minister seems to have understood what needs to be done: Michael Gove, the Environment Secretary. He is trying to show us in concrete terms what opportunities leaving the EU might bring – for example in making the EU’s clumsy system of farm subsidies much more focused.

In the absence of such substantive proposals the government gives the impression that it has not made up its mind and is putting off hard decisions. We are instead told that such detail might harm the country’s negotiating position. But most of us suspect it is because of deep disagreements in the government, and not just between Brexiteers and closet Remainers, but between the Brexit liberals and their illiberal supporters.

It is a situation that is crying out for strong political leadership from somebody that has both vision and a grasp of detail, and from somebody that knows how to build and maintain political coalitions. That person is not our Prime Minister, Theresa May, nor is it the Labour leader Jeremy Corbyn. And yesterday’s speech showed us that it is not Boris Johnson either.

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British regional policy needs more government

Featured on Liberal Democrat Voice

I found this week’s Bagehot column in the Economist interesting. It complains that Westminster is brain-dead, but that elsewhere there are signs of innovative thinking. This helps to raise the question of how to address the imbalance of Britain’s (and especially England’s) imbalance towards London. But it betrays some rather stale thinking.

The article itself is lightweight. It shows enthusiasm after a visit to the University of Warwick, and witnessing its projects promoting industrial innovation, and in particular the efforts of Kumar Bhattacharyya to push back against the idea that Britain’s future lies in financial services and not manufacturing. It contains no hard analysis. This is less disappointing for a political column that it was for an article a few months ago about what to do about the developed world’s “left behind places”. Towns and rural areas left behind by changes to the industrial economy. In spite of the promise of its headline, this article had very little to say about solutions. It instead seemed to encourage the further expansion of already thriving urban centres, on the grounds that this would clearly be good for productivity. This was another symptom of the the stale, conventional thinking that dominates the Economist’s journalism.

But the issue is an important one. The gap between London and England’s southeast, and other regions of England, Wales and Northern Ireland is problem for everybody. It is an obvious problem for the struggling regions, from Cornwall to Tyneside. It is also a problem in the prosperous regions, where the cost of housing is exacerbating social divisions. If economic prosperity could be distributed more evenly geographically, then it would be easier to distribute it more evenly between the classes and generations. Scotland, incidentally, is something of an exception, and a revealing one.

This has been obvious for a long time, but efforts by governments to do something about it have at best been only partially successful. Two things have been tried: money, and relocation of government agencies. There have been various initiatives to pump money into the poorer regions, a number of which are under the banner of EU aid. These clearly help, but the beneficiaries too often seem to be large corporations headquartered elsewhere, who simply manage to funnel the money back again. So many English regional towns are dominated by national and international brands at the expense of more local ones. The relocation of government agencies manage to disrupt local labour markets (the jobs tend to be quite well paid and put local businesses under pressure), but a bigger problem is that they fall victim to government efficiency drives which shrink them.

Where the Bagehot article is clearly right is that there needs to be more going on locally in these regions that central largesse. Centres like the Warwick Manufacturing Group clearly help. At the centre of thriving modern economies is brainpower. Universities and research are clearly part of this – as experience in other countries shows. But two points need to be made: political structures are vital, and we need to think about tomorrow’s economy rather than today’s or yesterday’s.

The lack of interest in political structures was a big disappointment in the Economist’s analysis. Political structures clearly affect the way economics is distributed geographically. Countries that are both quite large and politically centralised, like Britain and France, have more uneven economic geography than those that don’t – like Germany and Scandinavia. I think this is for two reasons. One comes from network theory, which I have advanced before. Humans can manage only a couple of hundred connections with other humans efficiently, so at the heart of any organisation, however large, there is a small network of people within it, and people that the organisation does business with. Large organisations simplify management to reflect this, which means concentrating power geographically. When government power concentrates, corporate power tends to concentrate with it, as government has such an important effect of modern business. Superficially this looks efficient – the trap that the Economist falls into, because the concentrated power centres are efficient in themselves – but that is at the cost of hollowing out elsewhere. Scandinavia may not have a centre that compares with London or Paris, but you can hardly say it is not prosperous.

The second, and overlapping, reason that centralisation of government is bad for outlying regions is the sheer dead weight of government decision making. In England most decisions involving significant money find their way back to the Treasury in London. Decisions get stuck in queues, and when they come to be taken, risk aversion prevails unless huge political capital is expended. Human progress generally demands risk-taking. The fairly obvious idea that rail links between northern British towns should be drastically improved is bogged down in Westminster politics. If the north of England was an independent country it would already be finished.

So it is not surprising to see that developed countries with devolved political structures usually have better distributed wealth than ones that don’t. Switzerland, a small country with highly devolved politics reeks comfort and prosperity almost wherever you go. As I have already alluded, it is no accident that Scotland, with its advanced level of political devolution, is the one British region that has been able to push back against the gravitational pull of the southeast. It doesn’t always work. Political devolution allows regional governments to choose incompetence; Welsh devolution has an unconvincing track record. And what of distribution of wealth within regions?

The idea that political devolution needs to be part of any solution is very gradually taking hold in Britain. Most politicians play lip service to it. But there is long way to go to change the political culture. But we also need to think about how the economy is to develop. This is the biggest gap in the Bagehot article. It bangs on about manufacturing. Manufacturing still dominates the way most economists and policy makers think about economics. But we need to move on. Manufacturing is going the way of agriculture. There is only so much stuff we can consume, just as there is only so much food we can eat – and in both cases you can argue that we consume too much already. Consuming more stuff is not what will make our lives better (though it will for an important minority of us). The more productive manufacturing becomes, the less important it will be to the economy as a whole – the paradox outlined by the economist William Baumol.

Before I develop that argument further I must qualify it. Manufacturing is still important. It is changing radically in ways that mean that we should produce more locally, and rely less on global trade. This is partly technological, and partly because the economics of importing from less developed countries changes as they, and especially China, develop. There is plenty of scope for innovation and Britain needs to keep up it. Manufacturing innovation based in Warwick, Sheffield and other places needs to be kept going. But it won’t be enough.

What we need to think about is services. The health economy will grow in relative terms, and not just because of demographics – prolonging life and reducing pain is what people want to spend money on when they get more of it. Public services such from social work to law enforcement also need to grow – or get radically better at solving problems rather than pushing them around the system. And there is care for the elderly. We shouldn’t just be sponsoring research into manufacturing into the regions, but into all these other things and more.

And it will not be lost on my readers that this means more government and not less, which has been the prevailing wisdom of most of the last 40 years. But it needs to devolved and better at its job.

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Can liberals ever match the emotional appeal of populists? Should they?

Boris Johnson, Britain’s Foreign Secretary, understands the new politics. This week he put it about that he wanted to provide the British public with a dividend from Brexit by increasing funding to the NHS to the tune of £100M a week (or £5Bn a year). If the facts don’t suit you, you create new ones; emotion beats dispassionate analysis every time. This is the policy of U.S. President Donald Trump, and it is working very well for him. Is there anything sensible politicians can do about such behaviour?

There are plenty of good reasons to increase funding for the NHS, but a Brexit dividend is not among them. Such a dividend, famously estimated at £350M a week, was one of the most effective slogans of the Leave campaign in the EU referendum in 2016. It had only a slender basis in fact. Britain’s gross contributions to the EU are in that order, but most of the money comes back to Britain, including an unconditional rebate. So even if EU funding to poorer regions like Cornwall and Wales was cut off, along with farming subsidies and other goodies, there would still not be £350M a week of extra funding to go round. And that assumes that the economy, and the taxes funded by it, would not be adversely affected by Brexit. These criticisms were made during the referendum campaign, but the objections only served to publicise the original claim. People believed what they wanted to believe. For many this was the extra £350M a week for the NHS, starting on the day after the referendum result. Most were no doubt more realistic, and simply took the wrangling to mean that something was up, and there would be some kind of dividend.

But, a year and a half on, it is clear that any Brexit dividend will be a long time a-coming, if it ever does. It is not so easy to escape many of those payment obligations (e.g. to fund the pensions of British members of the European Parliament, such as the former Ukip leader Nigel Farage). There will be at least two years of transition in which not much will change, and certainly not the money the UK is paying out to the EU. And then even most Brexit supporters accept that there will be some economic dislocation, even if it does not turn out to harm the economy overall in the longer term.

Mr Johnson is well aware of all this; he is a clever man and very much part of the political class where such discussion is common currency. But the recent success of populist politics means that facts don’t matter any more. So why not just claim a dividend even if one does not exist? And so what if the government overspends a bit? It isn’t clear what adverse consequences would flow, after all. It would also show a government taking the initiative, rather than being trapped by events. A bigger political problem is that the government could announce the extra funding and then nobody actually notice any difference to the NHS. Its problems run deeper than money – such as its loss of EU national staff, and the reduced ability to recruit immigrants. The government already claims it has increased funding by a similar amount, and and the NHS winter crisis seems more dire than for many years. The NHS is an organisational monster than can quite happily eat money to no effect: it would takes greater management skills than Mr Johnson’s to achieve anything noticeable.

You don’t have to be much of a cynic, though, to think that Mr Johnson has no intention that the policy actually be implemented, knowing full well that the government will stamp on it, as it duly has. The whole thing is got up to improve his own chances of taking the top job, before a supposed generation of Tory bright young things pushes his generation out of leadership contention. MPs are rumoured to organising a putsch on Theresa May quite soon. There is a snag to that theory, of course: it might work. If Mr Johnson does indeed become Prime Minister, he would be left with the responsibility of managing the NHS.

Which is where the example of Donald Trump is instructive. Mr Trump was elected on a series of unachievable promises, based on a deep emotional appeal. That he has failed to implement many of these does not seem to bother him: he either pretends that he has, or blames some popular scapegoat group for any lack of progress. And it works. His approval ratings may be dismal by the standards of earlier holders of the office in the first year, but support amongst his base looks rock-solid. Few seem prepared to bet against him making it to the end of his term in 2020 and then being re-elected. He does the new politics of emotional manipulation too well.

Is there anything liberal political types can do? Mostly their attacks on populist politicians backfire.They either make dry intellectual arguments using facts, which are then ignored, or express emotional outrage, which tends to simply wind up the populist supporters even more. Trump supporters doubtless think that calling African and Middle Eastern countries “s**t-holes” is merely talking truth to the liberal elite.

People suggest that liberals should follow either or both of two strategies: to meet the populists half-way to undermine them, or to counter emotional appeals with emotional arguments of their own. The former is happening quite a bit already: it is becoming the centre-right mainstream in Europe. That is what the British Conservatives are trying to do, along with similar parties in other European countries – including Germany’s liberal Free Democrats. And it seems to guide the practice of Emmanuel Macron’s French government. While I would like to say that such strategies are doomed, it looks more like a response to political reality. The problem is that it is impossible to back it up with an emotional appeal that will beat the populists. That appeal is based on closet racism and an attachment to old values that contain the seeds of their own destruction: it is an attack on an important part of liberals’ own base.

Having said that there are two emotional strategies that might work: fear and backlash. For the former it is necessary to find a weakness in the populist position that will make people fear for their security and savings. But that is actually quite quite hard: the Remain campaign in the British referendum conspicuously failed, perhaps because the Conservatives in the campaign pulled their punches for the sake of party unity. Mr Macron did succeed in the final round of the French presidential election, however, when Marine le Pen’s ambiguity towards the Euro suddenly frightened a lot of her potential supporters.

The backlash idea takes the emotional appeal of the populists as the starting point, and stokes up outrage amongst those it attacks. But it is quite hard to appeal beyond a minority – populism’s targets are often chosen with care. Not always: the #MeToo campaign against sexual harassment has real power, feeding off the misogynist attitudes of Mr Trump – that is surely the reason why this campaign is succeeding now where its predecessors over the years have fizzled. Women are not a minority, and you don’t have to be liberal to think that sexual harassment is disgusting.

But both types of emotional appeal suffer a problem in the political sphere. You have to pick up the pieces afterwards. Fighting emotion with emotion leads to either prolonged conflict or depression. In the end society must be healed somehow, and that healing takes place through putting emotions to one side, and understanding what people have in common and using a gradual process of persuasion and confidence building. That is one reason that populists will ultimately fail – and it helps that so many of them, Mr Trump and Mr Johnson included, do not value hard work or competence.

So what is the liberal strategy? They must let the populists burn out and collapse under their own contradictions. And then they must be ready with new ideas that will help society to cohere.

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2018: Trouble is brewing between Germany and Italy and between China and the US

Prediction is a mug’s game; you are more likely to miss something important than demonstrate insight. And yet it is the only good way to put your insights to the test. Science may be mostly about gathering and reviewing evidence, but the true test of its worth is prediction. And so, in line with tradition for this time of year, I feel I must have a go.

When I started to think about it, my feelings about 2018 were anticlimactic. The British political deadlock will continue: there will be no election and no change of PM. The Brexit negotiations will somehow manage to put off the more difficult problems yet again, probably through a transition deal that will look very like staying in the Single Market. The investigation into the Trump’s campaign’s connections to Russia may snare members of his team but not the man himself; he will stay in office. The Democrats may take the House of Representatives, but they won’t manage to retake the Senate. And so on. Things will limp on much as they are now.

But none of that is very brave. It just guessable, keep-your-head-down fare that does not put my understanding of the world under any real stress. And yet proposing something more exciting is a matter of luck, especially if I am confining my predictions to a twelve month period. I need to look at things another way. Where do I see trouble brewing, even if the chances of something breaking in 2018 is less than 50%?

Let’s start with the world financial system. There is something unstable about it, even if it does not look as dangerous as it did in 2007 – it is more like the tech bubble of 2001. Asset prices look too high, largely because there is more saving than than the system is able or willing to convert into productive investment. This applies to the West, where too many assets are piling up in the hands of businesses and rich individuals, while many forms of investment are commercially unattractive to most people. And it applies to China, where there is something not right about the volume of money invested, especially through state owned businesses; a lot of useless assets don’t seem to have been written off.  But what will be the proximate cause of a financial crisis? A Chinese banking breakdown? Inflation breaking out in the US? A panic in the property markets? And when will the crisis strike? Personally I feel that government bonds are a better bet than other asset classes in the medium term, though that would not be the case if inflation got going. But that is more of a threat in America than it is in Europe or Japan.

And there is something not right with the capitalist system. Technology has changed the way it works, and our political systems have not caught up – rather like the mid 19th Century world in which Marx wrote Das Kapital. Most conventional economists really haven’t grasped this or it implications. The answer will be political change, but what? Without answers, political pressures will build up, and not just in the developed world. It is fashionable to suggest that liberal democracy is in danger, but the situation in the autocracies of China, Russia and Turkey, to name but three, don’t actually look any less tractable. But where will the political system crack? Governments have become better at repression. And there is no convincing alternative to sell. Yet.

What of Britain? The Conservatives look to be in deep disarray, but they have a lot of strengths – especially the widespread fear of the alternative, and the substantial funding that could unlock. We need to remember how close Theresa May came to a triumph, with the coherent ideology of Nick Timothy behind her – she might have destroyed Labour’s working class base. Their introversion did for them in the end. Can a new leadership revive their fortunes? I see similar strengths and weaknesses in Labour. Are they peddling new or old wine in their old bottles? I suspect more new than their critics give them credit for, which will make them a much stronger proposition. But there is an introversion too. The leadership is not sharing its thinking about what to do with this country; it just wants disparate people to project their hopes onto their vague pronouncements, so that they can gain power; only then might they share their real thinking with us. Meanwhile, the tensions within British society – the stagnation of the left-behind places, the squeezed funding for public services and benefits – will serve to increase frustration. Something spectacular could break the deadlock. But what and when?

And Europe? This looks like another deadlock. The populist xenophobes may have stalled a bit in 2017, but they are alive and well. It is striking that Poland’s ruling party remains very much in control, in spite of the fact that many Poles do not share their paranoia – their economic policies, which involve widespread cash handouts, are popular, and may not be as disastrous for the economy as many critics suggest. Economics is at the heart of politics – and politics is at the heart of economics. But the biggest threat to European stability comes from Italy, where elections are to be held in 2018. We might well get a strong pushback from that country against the way the Eurozone is run, at a time when German politics is being pushed in the direction of more conservatism on the Euro, and not putting Germany’s savings surplus to constructive work across the zone. That conflict could cause the system to break. But maybe the French can intermediate to give the Italians what they want while making the Germans feel they have won?

In America I see a strange mix of euphoria and anger. The tax reforms passed before Christmas were a big win for the Republicans, and it will give them real momentum. While the Administration, and the tax reforms, are generally unpopular, relentless propaganda from the many rich winners may baffle floating voters for a bit. That could be good for the Republicans in the congressional elections. It is a tall order for the Democrats to take either house, especially the Senate, where Republicans have plenty of opportunity to win back seats lost at Barack Obama’s high point. But the Administration’s malign neglect of the healthcare system could bite back.

Perhaps more significant for the world as a whole is the thought that China and the USA are on a collision course. Donald Trump is itching to start a trade war with China, to reverse what he sees as America being ripped off. China’s ambitions are increasingly global. At the moment the two have come to an uneasy accommodation, with North Korea a joint focus of attention. But this looks unsustainable; China will not stop North Korea from developing nuclear weapons, as only a military intervention of some kind will achieve that, and China surely does not have the appetite for that. But a trade war between China and the USA would be an attack on one of the central economic and political pillars of the early 21st Century world. It would be extremely destabilising economically and politically. China still needs exports to the US to sustain its economy; the US still requires to be bankrolled by Chinese money. This is surely the most likely source of a financial crisis.

And then there is the risk of war. North Korea is determined to develop a genuine nuclear threat to America, and this is a huge provocation. It’s not a happy situation when we seem to be relying on military men to provide the restraint on the President.

So to summarise: the two critical developments to watch are a clash between Germany and Italy over the economic management of the Eurozone, and a clash between the US and China over trade. Either or both could precipitate a global financial crisis resulting in a substantial reduction in asset values and the banking woes that would follow from that. I am cautiously optimistic that the problems of the first of these will be contained; I am not at all optimistic on the second.

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Brexit: Britain will end up in the Customs Union

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This blog has been wrong about a lot of things. Especially the Labour Party. But one area where my record has been very strong, in spite of standing outside the conventional wisdom, is Brexit. This is encouraging me to be recklessly brave in making my next prediction: Britain will stay in the EU Customs Union, even if it will take another two years or more before that becomes apparent.

Before the vote last year, I was always worried that the Leavers would win. I felt that my most persuasive argument for Remain was not that Britain would be better off in the long run outside the Union (though I did think that), but that the process of extraction would dominate British politics for so long that progress on any other of the county’s pressing issues would be halted. And thus it has proved. Poverty is growing, and Alan Milburn, the government’s (Labour) adviser blames it on the Brexit effect. The government may riposte that “absolute” poverty is still on the way down, but that claim looks very doubtful; “relative” poverty is clearly getting worse, after decades of progress. Poverty is a subject I will return to – I am working my way through a very challenging study from the Webb Foundation, which will require a degree of reflection. But Brexit is throwing up urgent problems in almost every area of government policy. And where it doesn’t, there is the indirect issue of distraction.

After the vote my first comment was that a long transitional period would be essential. A further prediction was that Northern Ireland would be the “surprise” issue that could derail the whole process, and it was the most important thing to get sorted out. This is now nearly consensus. , but at the time people were obsessing about whether Brexit would be soft or hard. The answer was in fact clear: soft in the short term, and then we’ll see once we’ve all understood it a bit better.

More recently there seemed to be an impasse between the British position that we should proceed to trade talks with the EU now, and the EU position that the “divorce” questions be settled first. I suggested that the British would win out in the end. And so it is proving. It suits the British commentariat to say that it is the British that are caving in, but in fact it is the EU side that has moved substantively; they are having to settle for some reassuring words. The mystery was why it took Britain so long get there; the answer to that was maybe that a bit of theatre suited both sides. There is a snag, though; just when it all looked settled, the Northern Irish Democratic Unionists (the DUP) torpedoed it. That was my Irish caveat – and, I should add, I understand Irish politics, north and south, even less than the Labour Party. Still, this looks more like a glitch than a full stop – a result from the Prime Minister Theresa May’s debilitating introversion that had left the DUP out rather than talking them to death – which is now what she will have to do. All that is required for the moment is a dose of fudge. The DUP may well create some real trouble later on, but now does not look the right moment.

I had drafted a blog a month ago saying that I thought the talks were on track to succeed in moving to the next step, just when everybody was saying it looked hopeless. I didn’t post it because it was ended in a whimper. So what? Where was it all going? I now think I have the answer.

The firstly, I think Brexit will happen. Many Lib Dem friends hold on to the hope that the seeming chaos of the negotiating process, and the absence of any clear vision of the long term, means that the whole thing will collapse. But the negotiating machinery in Britain and the rest of the EU is in place, and officialdom has got used to the idea. It will happen, it may just not make as much difference, in the short run, as people thought. The way politicians deal with hard problems (I nearly wrote “modern politicians” but this is surely as old as the hills) is to string things out. The expression is “to kick the can down the road”. You decide as little as possible for now, so that reality has more time to sink in, and hardened positions can soften. The consequences of this approach are not well understood by the commentariat. They talk as though you negotiate treaties as if you were buying or selling a house, which is the biggest thing that most of these people have had to negotiate for themselves. We are for ever hearing about this or that strengthening a negotiating position, and in particular how threatening to walk out makes you stronger. But it is nothing like selling a house. It is infinitely more complex; you have to live with, and do more deals with, your counterparty afterwards; and you can’t simply choose to sell your house to somebody else. You have to keep the engine running, to switch the metaphor.

So complete collapse is unlikely, and Brexit nearly inevitable. Reversal would cause more problems (in the short term at least) than it would solve. Besides, the political conditions for it do not exist. There has been no seismic shift in British opinion, even if polling shows Remainers edging ahead. The Conservatives desperately want to hang on to power to keep Labour out, and keeping to the legal form of Brexit is essential to keep the party together. Labour would like to create trouble for the Conservatives, but do not want to be put on the spot. The desertion of Brexit supporting working class voters from Labour could torpedo their hopes of winning the next election. And power, for the Labour leadership, is much more important than Brexit.

But time is short. The priority now is to get that transitional deal up and running. Though the idea is to make as little difference as possible to current arrangements, beyond a few bits of carefully chosen and powerful symbolism, it will be hard enough. There will be no time to sort out the ultimate destination. Hard Brexiteers will continue to babble away about complete independence; the more pragmatic people will keep arguing for this or that aspect of the status quo. The truth is that the British governing class, and still less the public, have not understood the options properly, and not decided between them. And that is not surprising, given how big and complex it all is. We have to kick the can down the road. (Alas I had hoped to resist clichés in this blog, but I need to finish this piece).

So the process will drag on. Perhaps even the British people will be allowed a say in the process. Another referendum looks very unlikely – and probably not desirable. Trying to reduce everything down to “yes” or “no” has proved very unsatisfactory. But a general election during the transition process is another matter. An election is not due until 2022, which would be three years into the process, by which time many decisions will have been taken. But once the current government has delivered formal Brexit in 2019, it may find it hard to hang on. Brexiteers seem desperate to avoid any popular participation in the decision-making process, however – a role reversal from before the referendum. But the government’s minority status, and its lacklustre leadership, will make it hard to hang on.

But where will we end up? A divided nation will at some point be desperate for a compromise, and one that makes the Irish border more workable. It is in fact quite clear what that compromise is: membership of the Customs Union. If it is good enough for a prickly and independent Turkey, why can’t it be good enough for a prickly and independent United Kingdom? The government has ruled it out. But the whole process has been one of options being ruled out and then being ruled back in again. Brexiteers have a vision of Britain being a free-trading beacon, showing the rest of the world how it is done – and that would mean standing outside the Customs Union. But the British public are not interested in that vision; and, besides, the rest of the world has moved on. The massive expansion of world trade is coming to an end (except maybe within Asia and between Asia and Africa).

It may take a general election before before the British ruling elite reconciles itself to staying in the EU Customs Union. But I think that day will come.

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