Politics UK – Page 44 – thinking liberal

Where Keynes and Beveridge turned out to be wrong

The Spring 2013 edition of the Journal of Liberal Democrat History has a fascinating article on the role of Maynard Keynes and William Beveridge in developing Liberal Party policy, culminating in the party’s manifesto for the seminal election of 1945. These men took the party’s thinking decisively into what is now called “social liberalism”. Their vision was inspiring and coherent; much of it is now simply accepted wisdom. But I detect a tendency to treat these men’s ideas as holy writ. But nobody can be right on everything, and the world was changing fast. It is interesting to pick out the places where they got it wrong. This will perhaps help us to reflect on the challenges we face today.

Beveridge (in his report to the wartime coalition government) memorably set out the challenges to society presented by the “five giants” of Want, Disease, Ignorance, Idleness and Squalor. The answer was to extend what we now call the Welfare State, establish the National Health Service, nationalise a series of critical industries (railways, coal and power in particular) and to adopt a system of macroeconomic demand management, which we know as “Keynesianism”. These policies were largely adopted by the subsequent Labour government, albeit with more enthusiasm for their collectivist aspects, and retained by the Conservatives that followed them. The success of their ideas on the wider political stage contrasts with the Liberals’ disastrous performance in the 1945, when Beveridge lost his seat, and the Liberal Party faced extinction – in a crisis that makes its successor party’s current woes look like a picnic. Which only goes to show that winning the battle of ideas and having coherent policies is on a small part of how a political party succeeds.

But what has gone wrong? The Welfare State grew to be a monster of a size that Beveridge would have been horrified at, though it made much headway in combating Want and Squalor. The contributory principle, central to Beveridge’s vision, has largely broken down, with entitlement being based on need rather than past contribution. It has never broken free from the dependency problem, where people don’t have enough incentive to sort out their own problems – an issue that Beveridge foresaw. It strikes me how Beveridge’s system was overwhelmed by the breakdown of the traditional family, and of traditional working class communities. These were inevitable consequences of economic progress, as well as the march of liberal social values. But needs that used to be met within the community were now thrown at the state’s door, and, perhaps, the breakdown of discipline in some communities (about starting families in particular) added to the problem. Beveridge’s carefully worked out system of benefits and entitlements was not equal to the task.

Nationalisation has proved another disappointment. Keynes was convinced that these critical industries would not be managed for society’s overall benefit if they continued in private ownership. He also wanted to incorporate them into his system of macroeconomic management. But the state proved inept at setting strategy, and was often a prisoner of the short term interests of managers and workers. Strategic decisions tended to be made badly, and investment declined. They were all subsequently privatised and, except arguably the railways, have performed much better since. Regulation has proved a much more effective answer than state management.

Keynesian economic management has proved highly controversial, after two major economic crises, in the 1970s and now. But it is clear that widespread adoption of Keynesianism has moderated the economic cycle, and this has been of huge benefit. We have to accept though that it cannot deliver full employment sustainably unless the overall economy is in the right shape. In the 1970s it was too dependent on cheap oil. Now it is too dependent on finance and government jobs and funding.

But it is interesting to read that in 1945 Keynes thought that the main means of managing the business cycle was investment. He understood that private sector investment tended to follow the cycle (i.e. increase in the good times, and fall back in the bad – just what we are currently experiencing), and so make it worse. Government investment should counterbalance this – and he wanted to nationalise key industries so that the scope of government investment increased. This just hasn’t happened. Instead the expansion of the welfare state has created a counter-cyclical dynamic (called “automatic stabilisers” by economists) that has proved perfectly sufficient until now, with a few tweaks here and there.

But since the size of the welfare state and government generally is now part of the problem, using it to manage the cycle has hit its limit without the job done. A lot of economists (like Martin Wolf of the FT) now urge that we go back to Keynes’s original idea and increase the level of government investment. But I suspect that the reason why governments did not follow Keynes’s original system, apart from the growth of automatic stabilisers, is that this is much more difficult in practice than in theory. Examples of where it has been tried, such as Japan in the 1990s, and China in the present crisis, are not particularly encouraging. Vested interested and construction businesses close to the government have reaped benefit, leading to wasted investment and a corrupted political system. As a developing country China’s investment needs are huge, so they may still end up ahead, but the case for developed economies is much weaker.

What does this say to us now? The five giants are still with us, although they may not loom as large as they did. But I think the era of grand political projects established by clever men from on high has run its course. What is needed is a reshaping of government to make it more local, participative and people centred. But that is a very long journey.

The NHS crisis: while politicians look the other way, what should we do?

The NHS is deep in a long term crisis. Last Thursday NHS England published a “call to action” outlining the emerging crisis. This attracted a day or so of news coverage, focusing mainly on a £30 billion funding gap. But there was no political debate, and the story quickly died. It was replaced yesterday by a story on the NHS’s abuse of the “Liverpool Care Pathway” for end of life care, and today by an investigation on struggling hospitals. Both stories are backwash form the continuing struggle of NHS management and staff with financial pressures. But where are the politicians? Labour are waiting to pounce on stories of struggling accident & emergency services to promote a general air of government incompetence on the NHS; the government try to play things down, blaming any problems on long standing issues not tackled by the previous government. A debate about the long-term options for the service it is not. So what should they be talking about?

The dimensions of the crisis are quite clear. Britain’s NHS is almost entirely funded from tax. But after the economic crisis of 2007-09 the tax base has shrunk. Furthermore a number of trends, not least the increasing proportion of older people, point to a slowing down of the overall rate of growth in the economy and hence taxes. And yet some of those same trends will create growing demand on the NHS. The government has promised to protect the NHS budget in real terms, much to the chagrin of right wing critics, but this will not solve the problem of rising demand. The NHS England report settled on a headline gap figure of £30 billion by 2021 – after toying with £60 billion by 2025, the number used by Health Service Journal (HSJ) in its preview.

The strategy is to buy time through efficiency savings. As a large, monolithic organisation, with weak accountability, inefficiency is rife. NHS top management has been ratcheting up pressure on the component services by progressively squeezing the available funding, , in a process known as “the Nicholson challenge” after NHS England’s chief executive, Sir David Nicholson. The NHS England report claims that this is on track to deliver its target of £20 billion efficiency savings by 2015, but there is plenty of reason to doubt its efficacy, as the number of crises with a financial root seems to grow.

But the strategic point is that efficiency is not a long term answer to the pressures. The NHS paper calls for fresh thinking, but seems to rule out most radical ideas, like charging for, or heavily restricting services, although in doing so it is only holding to the current political near-consensus (the far right does not go along with this, but everybody else does). Let’s take a step back and look at this.

The first point to make is that increased demand for health services in the economy will be met by increased supply. Occasionally you hear people suggesting that the economy can’t bear an increase. But there is no fundamental economic reason why the proportion of the economy taken up by health care cannot increase substantially. It does not depend overly on imports, and there are plenty of things the public can give up to make way (own fewer or cheaper cars or clothes, go out less, and so on and on). Healthcare offers the prospect of a longer life and less pain; it is a consumer proposition, as I have pointed out in an earlier blog, to die for. If there is demand, there will be supply. The only question is how that supply will be met.

There are broadly four ways the NHS will meet this crisis:

Taxes will be progressively increased so that taxpayer funded services maintain their current profile overall. This is clearly what is favoured by most NHS insiders, and left wing policy types who like the paternalist structure of the current NHS.
It will stratify into a class-based service, where only poorer people will use it, while richer people go private. This will happen because the NHS service will be considered dangerous, shoddy, and accessible only after an intolerable wait. This is largely what has happened to NHS dentistry, and it is what will happen if the NHS is allowed to muddle on with its current level of funding (or if funding is cut).
The NHS will concentrate on excellence in a smaller core of services, while letting people go private for others. However healthcare has few neat boundaries, and it is difficult to see how this would work in practice.
The NHS will start charging for more services, and accepting co-payments for cosmetic and other add-ons. This may be done with increased collaboration with the private sector, rather like NHS optometric services. This is the direction of travel favoured by the right, apart from those who secretly favour option 2.

These solutions are not mutually exclusive, and indeed option 3 is probably only viable in conjunction with 4.

The first strategic question is how far new taxpayer funding will be forthcoming. Many seem to assume that it will be. John Appleby, economist at the health think tank the King’s Fund, assumes this will be so: the economy will be growing again by 2025, and public demand for increases to real spending will return. I’m not so sure: the headwinds on the economy are severe, and I don’t see any return to the growth rates we have previously seen for more than a two or three years in a row. Meanwhile demand from other areas of public expenditure has been suppressed and could bounce back. And I think public attitudes to higher taxes have changed, after the general squeeze that has been put on living standards. Some left-wingers assume there is large pot of money available from taxing rich individuals and businesses. This is open to doubt, however, and it has proved a volatile source of tax revenue both Britain in the past, and to other economies, like California’s, whose public funding depends heavily on taxes on the rich.

Besides, I do not think that taxpayer funding is particularly efficient. It means that resources tend to be allocated top down according to political objectives, and not where it is really needed. And difficult problems tend to be left unsolved rather than confronted. My guess is that we will end up with option 4, after having given options 2 and 3 a try. It will continue to be a very bruising time for the NHS.

For those that want to avoid this, I think the most promising way forward is to bring health services into a complete rethink of public services to make them more integrated with each other, and centred on people rather than symptoms. And in case you think that sounds like motherhood and apple pie, its practical consequence means dismantling current power structures, and pushing towards democratically accountable local control. That will not be popular amongst NHS professionals, and we know how much noise they can make. Some on the left are starting to think this way, and while I don’t trust the left, with their penchant for paternalism, this may be the basis for a useful political coalition. One interesting aspect of this is that the other services (personal care, housing) with which the NHS would be integrated are not “free at the point of use”, considered so sacred in the NHS, which may allow the whole question of charging and co-payments to be fudged in a constructive way. Here’s hoping that something can be achieved along these lines.

The pensions blind spot

“All in it together? MPs WILL get a payrise worth up to 12%” thunders this morning’s Independent newspaper. While I’m not a big fan of our MPs, this headline has persuaded me that they deserve the payrise that apparently will be proposed by the independent body given the task of setting their pay. If even a supposedly more mature and considered newspaper like the Independent indulges in this kind of vindictive, misleading headlining, then something is clearly wrong.

This headline is revealing about how information is communicated in our society. First of all, no formal announcement has actually been made. The headline is based on a leak, which only reveals a partial picture. And yet by the time the full news is released, it will be old news. Speed trumps accuracy in the world of news media. The 12% figure is also misleading. It compares the proposed salary to be implemented in two years’ time to the current one. 9% is a more accurate number, and indeed this is what other organisations are reporting. Such considerations do not weigh heavily with headline writers.

But there is a further distortion. Apparently the proposal will be to reduce MPs’ pension entitlements at the same time – though the details don’t seem to have been leaked. So the total package will not be as generous as the headline writers make it sound. But here the journalists seem to be at one with the general public: treating pension entitlements as being of little real value, and failing to realise the implications of changes to it. Over the past couple of decades companies have been squeezing their employees’ pension plans hard, so that overall pension provision is now pretty meagre, when it used to be generous. This has barely reached the popular consciousness. Only public sector trade unionists have grasped that this is an fact a steady reduction in what people are paid.

There are in fact sound economic reasons for changes to pension arrangements. The proportion of pensioners to the working population is rising, and this makes pensions less affordable. Unfortunately high rates of pension saving don’t help change this dynamic much: this is one of those things that may work for individuals, but not for society as a whole. Pensions have to become less generous overall, and the collapse of private sector occupational pension plans is just part of that process.

But there is a big problem at the heart of it. Employers are in headlong retreat from pension provision, but individuals are not stepping forward into the breach to save more into personal pension plans. Even where they do, and they are being “nudged” into doing so by opt-out pension schemes, the amount being saved will go nowhere near providing for the scale of pensions the previous generation had been entitled to. This is sometimes offered as an example of irrational economic behaviour. But it isn’t. The transaction costs of saving weigh heavily on all but the very rich, and investment returns are dismal – even without the current regime of very low interest rates. Personal saving is a very inefficient way of delivering a pension for the majority.

It is better if the state steps in. A state-managed pay as you go scheme has comparatively low transaction costs, as well as reducing the risk to individual savers. Reforming the state pension is one of the more impressive achievements of the current Coalition government. It has been led by Lib Dem pensions minister Steve Webb, but it has not been politically contentious – the Conservatives deserve credit for letting him get on with the job – and Labour have not got in the way. Previous governments have changed their pensions ministers every year or so before any reform effort could get going. The focus has been on establishing a good basic pension to which everybody is entitled, which people can then top up through personal savings. Previous state schemes have tried to concentrate entitlement on the most needy, destroying the incentive to save, or to create complex entitlements based on income and contributions, which few understand because of the need not avoid double counting with subsidised private savings.

But the cost of this pension commitment will grow, and this is causing many sage heads to worry. Personally, I think we have to grin and bear it. If it looks as if it will run ahead of the ability to raise taxes, then we have to push the age entitlement back. But this is one of the critical strategic issues that our political leaders must grasp as our demography changes. Paying for the NHS is another.

These are weighty and important matters, which deserve much more attention than they get. They are much more important in the scheme of things than how much our MPs are paid. The country needs more MPs like Steve Webb, with both the intellectual and political skills to push forward difficult reforms like the one on pensions. We have a long way to go on that score.

Nowadays it seems to be the economists who are obsessed with the short term

The relationship between economists and politicians is often strained. It’s easy to think that economists are taking a detached view of public policy and its long term effects, while politicians simply jockey for advantage at the next election. But, strangely, that doesn’t seem to be the pattern right now. It’s the politicians who are urging short term pain for long term gain, while the economists say it can all be left for another day. It is the politicians who have a better grip on reality.

The nature of the relationship between political leaders and economists has changed as economics has evolved. I think it was President Truman in the late 1940s who said he wanted to find a one-handed economist, so fed up was he with his economic advisers saying: “One the one hand this, but on the other hand that”. He wouldn’t have that problem today: there is no species of public policy commentator that is more one-handed than an economist nowadays, so confident do they seem about what they are saying.

In the late 20th century supply-side economics took hold, after the economic traumas and stagflation of the 1970s. This held that the route to economic success was in making sure that markets worked efficiently and government expenditure kept on a tight reign. Economists bewailed the fact that their advice was so often ignored by politicians, who found their prescriptions unpalatable. Only the unelected President Pinochet seemed to take economists at their word, as he implemented a series of reforms in Chile. The expression “politically impossible” was frequently used in discussions of economics. In fact politicians, starting with Britain’s Margaret Thatcher, largely implemented the supply-side economists’ advice, but this was only really acknowledged by most economists after the event.

But things seem to have moved on again. Politicians in Europe, including Britain, are grappling with the size of government in the wider economy, and pushing ahead with supply side reforms. This is hard political work, with scant reward on offer at the ballot box. But do politicians get credit from professional economists? Not a bit of it. Instead austerity policies are blamed for anaemic growth and high unemployment. Scarcely a day goes by without some economist, like Paul Krugman, Martin Wolf or Samuel Brittan thundering away that all this is foolish and bound to end badly: looser fiscal and monetary policies are needed, and the problems of government deficits can be sorted out another day.

What accounts for this? It is tempting to conclude that there is simply a time lag in economic thinking between the academics and the politicians. In academic circles the supply-side mania has run its course. It was always incomplete, and too often, not least during the great economic crisis of 2007-09, it had very little of value to say. Neo-Keynesianism had taken hold, with an updated series of macroeconomic models designed to deal with the issues that arose in the 1970s. The politicians, perhaps, haven’t moved on.

But I think there is a different explanation. It is that the politicians are much more aware of what is really happening in our economies, and the changes that are needed, while the macroeconomists are blinded by their use of aggregate statistics. The politicians can see that there are some fundamental problems with the way their economies are functioning, especially here in Europe. The first problem is that the state has become too large and inefficient. A second is that the progressive aging of populations is progressively weakening economies. A third is that globalisation has changed the rules of economic management. I could add a fourth issue, which is that the world’s financial systems have become dysfunctional, except that I think this is confusing politicians and economists alike, and is not a driver of tension between the two.

Economists agree with this analysis of problems by and large, of course, except that I don’t think that most have woken up to the implications of globalisation, and its profound implications for the way prices and wages rates are set. What the politicians appreciate is that these problems are desperately hard to fix, and that putting off the evil day is not going to help. In particular the central problem is to shrink the state. Politically it is much easier to put through tough changes in hard times, and not when things seem to be ticking along nicely. And if you look at the political forces that seize on what the economists are saying, you will find that they are mainly those that do not see the need to shrink the state at all.

Alongside this disagreement about the best time to reform is an economic judgement. Politicians are sceptical that sustainable economic growth is at all easy to find. Many economists think back to the decade before 2007, when 2% annual growth was more or less taken for granted, and assume with a wave of the magic confidence wand, this growth will come back – and that we might even be able to make up some of the lost ground. Even now I have seen some economists who should know better projecting trend growth before the crisis, to estimate the true cost of the recession. So in the five years since the crisis, the economy should have grown by 10%, they say; in fact it has shrunk by 4% (I haven’t checked that number), so the crisis and bad economic management has cost the economy 14%! But what if that 2% tend growth wasn’t for real? What if it was simply pumped up by borrowing and trade deficits? And what if the progressive aging of the population makes sustainable growth of 2%, or even 1%, unreachable? Blinded by their aggregate statistics, not enough economists are asking these questions, and still less following through their implications. But it is all too obvious to most politicians, and businessmen, come to that.

The gap between politicians and economists isn’t helped by the fact that the former keep using government debt as the main driving force of their argument. This is politically convenient, but the economists rightly spot that it is insufficient of itself. If the economy could readily be kicked back into a 2% growth trend with a bit of fiscal pump-priming, then the debt argument would not hold water. In today’s FT Samuel Brittan accuses politicians of falling for the fallacy of composition: that whole economies work like family budgets. In fact there are deeper reasons for what politicians are doing.

There is further disagreement over investment spending. Many economists think that they have found the magic bullet. Government funded infrastructure investment can both act as a short-term fiscal stimulus while delivering longer term benefits to the economy. So why are the politicians so reluctant to spend more on capital projects, and even cut them back? And yet this is another blinded by aggregates issue. The economists’ argument only holds water if the investment projects actually deliver economic benefits. This is much more difficult in practice than it is in theory. Under the last government investing in hospitals must have looked a sure-fire winner, given the ever rising demand for healthcare services. But we are now finding, as hospitals are collapsing under unaffordable PFI debts, that it wasn’t so easy. Too often they built the wrong sort of facilities. This is situation normal. The usual result of a public sector infrastructure project is to end badly. Japan’s investment splurge in the 1990s, in similar economic circumstances, simply caused many “bridges to nowhere” to be built.

And so, in this debate, my sympathies are with our political leaders.

Labour will subscribe to Tory cuts: the battle for the next General Election warms up

Nobody should underestimate the Labour leadership’s will to win the next British General Election, which should be in May 2015. I have been away for a couple of weeks. Before I left I was wondering what Labour’s response would be to the current government’s public spending review for 2015/2016, which will be announced later this week. It has been clear and unequivocal: they will sign up to the deep cuts in public spending that this review is designed to produce. This is breath-taking. What does it mean for British politics?

The spending review looked like a trap being set by the Conservative and Liberal Democrat coalition for Labour. Ambitious targets for savings were set: but Labour would be left with an awkward choice. Up until now Labour has been quite happy to ride the anti-cuts anger. Public sector workers, and many people relying on benefits, and others in the general ecosystem which they inhabit, are livid. Many workers with young families and mortgages are losing their jobs and facing steep cuts in pay. This anger has been fuelled by a myth: that cutbacks in public expenditure were unnecessary and motivated by Tory ideology, with the treacherous Lib Dems meekly giving in so that they can play with the toys that being in government gives them. This myth seemed to be supported by a whole army of economists saying that the pace of the governments austerity policies was undermining growth and making things worse. The Labour leader Ed Miliband and the Shadow Chancellor Ed Balls did not quite subscribe to this view if you read their words carefully. But they dog-whistled full support. Every cut was opposed angrily; they used the slogan “too far, too fast”, and mercilessly criticised the government for the negligible rate of growth in the economy, which they put down to its austerity policies. There was a studied vagueness about what they would actually do themselves.

But the 2015/16 expenditure review presented a challenge. According to the anti-cuts movement, the best thing would be to reject it out of hand, promise to reverse the cuts in large measure, so as to stimulate the economy and set off a virtuous circle of growth that would restore government finances and get the economy back to where it was in 2008, before the bankers’ sabotage act and global crisis got started. But if Labour did this, or even if they continued with the ducking and weaving, they would be open to a counterattack: Labour will put up your taxes. And the signs are that most people do not accept the anti-cuts narrative, and are hard-pressed financially – so not in generous mood when it comes to tax rises. No doubt the memory of 1992 haunts Labour’s leaders, when Labour lost a very winnable election after the Tories attacked them in the last week with a campaign based on “Labour’s tax bombshell” by hyping up the vaguenesses in Labour’s plans. But signing up to the coalition’s cuts would be hard too. It makes the manufactured anger about their impact difficult to sustain. Many of their supporters will feel betrayed.

But sign up to the coalition’s plans, with a bit of trimming here and there, is exactly what Labour have done. First in a speech by Mr Balls, and then this weekend by Mr Miliband himself. The message in the media has been very clear. I don’t know how it is going down in Labour’s activist base. Polly Toynbee, who often rallies to the anti-cuts cause, seems be showing resigned acceptance, while hoping than the party will come up with other ideas that will motivate the left. It isn’t exactly a U-turn. The narrative is that the economy, after the coalition’s poor management, is now so weak it cannot support more spending. This is weak fare indeed, and only shows that Labour had in reality accepted the bulk of the coalition’s austerity plans, subject to really very minor variations (like a temporary VAT cut).

The political calculation is clear. The angry brigade have nowhere else to go than Labour. Lib Dems may feel vindicated by Labour’s stance, but their previous public sector supporters will still not forgive them, except maybe in hard-fought marginal seats where they are up against the Tories. Britain’s two party electoral system means that elections are won by wooing floating voters. And these seem convinced by the case for austerity, even if, like Ms Toynbee, you blame this on the relentless right-wing press and the TV coverage that tamely follows in its wake.

The battle ground for the 2015 election is getting clearer. It won’t be about whether there should be cuts, but on where they should fall. For somebody like this blogger who accepts the basic logic of austerity economics in the UK, that should take the political debate into interesting and constructive territory. But others will feel disenfranchised and betrayed. Things are warming up.

The Woolwich murder: time for solidarity not demonisation

A week ago a British soldier, Lee Rigby, was murdered in Woolwich, in southeast London. His murderers (subject to due process of law…) were two British black Muslim converts, who had taken up Jihadist views. Their methods were as low tech as possible, and they were happy to be caught, though they may have wanted to be killed by police snipers. For them the point was publicity. In this they have succeeded beyond their wildest dreams. The story was promoted massively by all media outlets, and it is still getting a lot of coverage – quite out of proportion to other deaths, of civilians in London, or of soldiers on active service. The whole episode has stirred passions, and the results are disturbing.

At first I tried to retain a sense of proportion on the affair. It was pretty horrid, but more a random act of violence than a systemic threat to our way of life. But I seem to have missed something; the episode has hit Britain’s pressured working classes in a sore spot. For reasons that future historians will debate, soldiers have become a working class icon here in Britain (and perhaps the US as well). Their travails in Iraq and Afghanistan seem to symbolise the general pressures that working class people face: sent to fight wars nobody understands, and generally let down by the elites that sent them there. They are referred to as heroes.

This seems very different to the ways soldiers used to be regarded. The heroism is based on the dangers that the soldiers face and the endurance they show, not on the number of enemy that they kill. There was a bit of embarrassment when Prince Harry, after serving in Afghanistan, confessed that his actions would have killed people. Soldiering is about meting out violence; but we don’t really talk about that aspect of their work. There are occasional efforts to demonise the enemy, but it all turns out to be a bit complicated when many of your local allies appear little better. It is perhaps interesting that I don’t remember anything like this public regard for British soldiers serving in Northern Ireland, though I do remember having those feelings myself. The violence they inflicted on people that looked very like us, with some inevitable innocents, was altogether more visible, and made people feel uncomfortable.

Be that as it may, the target of last week’s attack could not have symbolised the working class icon better. And the reaction has been anger. The nasty islamophobic English defence League (EDL) has seen its popularity rocket. Attacks and threats on Muslims have soared. This seems to be a mainly working class phenomenon, though middle class prejudices are perfectly visible too, judging by the odd Facebook comment.

This is very depressing. The demonisation of Muslims and the Islamic religion is grossly unjust. All it can do is push more young British Muslims, suffering similar working class pressures, into extreme views. But demonising the EDL’s supporter doesn’t help either, and quickly takes on an air of class prejudice.

The fact is that most of British working classes, of all colours and races, are under pressure. Technology is killing traditional working class jobs and pressuring wages; housing costs, at least in places where there are jobs, are steadily rising. Benefit and public service cuts add to the pressure: though their effect on the working classes as a whole is complex – resentment at people living on benefit runs high amongst working class people. The education system often lets them down.

There are no easy answers. Stoking up a sense of victimhood, and throwing in the odd benefit or tax credit entitlement, is a road to nowhere, though advocated by many Labour politicians. By and large we need people to take more control of their lives and education, not blame everybody else when things go sour. The education system is slowly being fixed, though not all the government’s ideas are helpful. We need more social housing in the southeast, building on greenbelts if necessary. That’s hard and the government is doing much too little, though I don’t hear much convincing or constructive coming out of the Labour side either.

But it helps to understand and to listen. About the only shaft of light to emerge over the last week was an act of reconciliation made by a mosque in York to EDL protestors. Tea and biscuits made the headlines, but the real progress was made when the two sides got into dialogue and discovered their shared interests. Too many people advocate intolerance and confrontation (“standing up for what you believe in”), which only promotes misunderstanding and division. What is needed is true working class solidarity across race and religion to press for changes that will improve life in all our pressured communities.

The battle for Britain’s political centre

The idea of a centre ground in politics, where elections are won and lost, is a persistent one, especially here in Britain (and England in particular) and in the United States. Winning politicians are said to “triangulate” a political position in this centre ground; notable exemplars of this idea were Bill Clinton and Tony Blair. David Cameron is supposed to have rescued the Conservative Party from oblivion using this strategy in 2010 to turning it into the UK’s largest party, if not outright victory. Now, in Britain, there is a lot of talk about it, and what political strategy each of the three established main parties (Conservative, Labour and Liberal Democrat) should be; take this article, Both the Tory and Labour leaders need lessons in politcal geometry by Andrew Rawnsley. What to make of this?

This all starts with the idea that political views can be placed on a spectrum with the left at one end, the right at the other, and ground, the centre or middle, in between. Over the years I have repeatedly heard people claim that this idea is no longer a helpful analysis of modern politics. But it is remarkably persistent, and it appears to have been helpful to Messrs Clinton, Blair and Cameron. What seems to define the left-right spectrum is attitudes to social solidarity and the state. On the right there is a strong view that individuals are responsible for their own wellbeing, and that the state should do the minimum to help them, because such help is counterproductive. This view unites social conservatives, distrusting socialist values, and economic liberals. On the left there is a feeling that most people have little influence on their social outcomes, especially poorer people, and that they should band together, organised by the state to tilt the odds back in their favour.

And for all the talk about the differences between the political parties disappearing, it is very easy to see this fault-line separating the core followers and activists in the Conservative and Labour parties. Think of the last Labour government’s attempt to get state supervision, through Primary Care Trusts, local authorities and other agencies to take a broader role in achieving social outcomes, like reducing “health inequalities”. Compare this to Tory ministers who delight in dismantling this infrastructure in the name of austerity.

But elections are clearly won and lost by floating voters, who aren’t convinced by the true believers of either party. Appealing to these voters makes the two main parties look very similar in terms of their election promises at least. Strange then that both parties seem currently more concerned to shore up their core votes and activists, rather than make a play for the centre. By this stage before Mr Blair’s victory in 1997, he and Gordon Brown were challenging the party’s core supporters by, for example, signing up to the Conservative austerity policies and promising not to raise income tax. Similarly Mr Cameron was doing photo ops in the Arctic with huskies to show his concern for global warming well before the 2010 election.

But the political priorities have changed. Neither party has made its activists so desperate for power by being out of office for a decade that they will sign up for anything. Labour needs to nurture the anger felt its supporter by the current government’s austerity policies, especially amongst those claiming benefits and those employed, or formerly employed, in the public sector. The Conservatives are shaken by the rise of the distinctly right wing Ukip, who are stealing away its core activists, even if they are also pulling in actual votes from elsewhere too. Both parties will need its foot-soldiers when the next general election arises in 2015.

But there may also be a bit of a problem for those chasing votes in the centre: the centre itself is fragmenting. This is suggested by some survey work reported in The Economist a couple of weeks ago, here. On the one side are those whose living standards are being squeezed (one definition of the “squeezed middle” of which much has been talked). These people are not just those in the direct line of fire of cuts, but those who were not particularly well off, and are now finding that their income is frozen while prices keep going up. These voters are open to Labour’s rhetoric about the government’s failed economic policies, and ideas for kick-starting it with things such as a temporary cut in VAT. A second group of centrist voters are not badly affected in their personal living standards, and are much more convinced by the government’s line that austerity is a necessary evil, following the irresponsible profligacy (by both government and individuals) that occurred under the last government. Each side seems to be doing a reasonable job of appealing to one of these two groups, but not headway in appealing to both. This does not add up to a winning majority for either party.

The big unknown is how the economy will be faring in 2015, as this could influence the balance between these groups. The Conservatives hope that the current fragile recovery continues, inflation falls and people feel that things are getting better; they will then be less willing to risk any change in economic policy. If economic stagnation predominates, Labour narrative might get stronger, though. No doubt both parties are keeping their powder dry to see how things shape up. The Conservative fall back will probably be to persuade the squeezed middle that Labour’s policies will mean higher taxes for them. Labour might do a Blair and say that they will adopt the government’s current spending plans except for some carefully chosen minor exceptions, and so reassure the better off middle. Of these I think the Conservatives will be the more credible, and combined with Mr Cameron’s politically well crafted policy on Europe, the party will do much better than people currently expect.

And what of the Liberal Democrats? They do not have a heartland in either left or right, but it is wrong to suggest, as Nick Clegg is prone to, that it has an ideological affinity to centrist voters, as the centre is not a coherent ideological group. The big problem for them is that they are very much on the government side of the economic debate, and will struggle to appeal to the squeezed middle, though banging on about raised income tax thresholds is meant to neutralise this. But the collateral damage that the Labour and Conservative party’s do to each other in the campaign could help them. They can try to develop the idea that centre voters are better off backing a centre party, which moderates the left or right through coalition, rather than trusting the main party ideologues to stick to their manifestos. So far though, that line of argument seems to be getting little traction.

Understanding the case for Britain leaving the EU

The British Eurosceptics are on the march again. Much of this is the usual stuff and nonsense, based on Ukip’s good electoral performance last week, though that has more to do with an anti-politics mood, and worries over immigration, than EU membership. But of the noise has a more substantial basis. Former Conservative Chancellor and Europhile Nigel Lawson joined the fray with an article in The Times, shamelessly promoted by the BBC, advocating Britan’s departure from the EU. I see today that another former Tory cabinet minister, Michael Portillo, has joined in, though I’m not sure if he was ever much in favour of the EU in its current form – though this polyglot is anything but a Little Englander. An increasing proportion of Britain’s intellectual establishment is being persuaded by the case against Britain’s membership. I am interested to understand this phenomenon, rather than simply dismiss it. While any popular referendum will be won or lost on the basis of fear and ignorance (as we learnt from the AV referendum episode in 2011), I think it is important to engage in a more considered debate.

But I do need to declare an interest. I am a visceral supporter of the European Union project, and have been since I was a teenager. I was too young to vote in the 1975 referendum, which took place on the day of my Physics practical for A-level, but I was in no doubt where I stood a that point. I’m not sure where this feeling came from: it wasn’t my parents. I was a big admirer of Ted Heath, the former Conservative Prime Minister, which may have helped. Though while I fell out of love with the grumpy and inflexible Mr Heath, my Europhilia remained undimmed… though I shared it with replacement political heroes, Roy Jenkins and Shirley Williams. For all that, I hope I am able to put my emotions to one side to try and understand the arguments.

On doing the basic Internet research for this post, however, I found one thing rather striking. The absence of decent publicly accessible information on Britain’s relationship, and especially trade. The more serious analysis tends to have been done by Eurosceptic think tanks like Civitas. This Factcheck article from last year rather illustrates the point. This may be one of the reasons that Eurosceptics are making headway in the intellectual argument: the Europhiles aren’t really engaging, and where they do it is often weak stuff.

I think the intellectual case for leaving the EU is based on two key propositions: there is a huge dead weight of EU regulation which is dragging British businesses down, to say nothing of budget contributions; and the impact on trade of leaving the EU would be marginal, and the short term economic costs small. There are further arguments around sovereignty and immigration: but these are more emotional. Lord Lawson did not make much of them, so far as I could tell (I haven’t read his article, which is behind a paywall, though I did listen his BBC radio interview). I sense that behind the intellectual arguments there is a frustration with Britain’s slow economic progress, and a hope that leaving the EU would energise the country, perhaps rather like Japan has been energised by their recent change in economic policy.

Let’s look at each of the main propositions. First is the dead weight. I think this breaks down into the following areas: product regulation; financial services regulation; labour market policies; environmental standards; and agriculture and fisheries policy. Product regulation (on cars, for example) is probably the smallest worry. As we are increasingly global in our tastes, and need to export to pay for our imports, this is just a fact of life. International standards makes sense; I read an article in The Economist a little while back suggesting that the whole world was moving towards EU standards, making Brussels the regulatory capital of the world. There are clear advantages to the country being part of the creation process; but outside the EU the country could no doubt apply them more flexibly. I don’t think this is what is winding the Eurosceptics up.

Lord Lawson made a big deal about EU regulation of financial services harming the City of London and the country’s exports of financial services. As Britain loses weight in the EU, this is becoming more of an issue. There is a balance here: inside the EU it will be easier to export services to other EU countries; but outside it may be easier to do business with non EU countries. It is possible that the balance has shifted towards the latter. Behind this there seems to be a rearguard action by the City to undermine the idea that the British economy should be “rebalanced” away from its dependence on financial services. It’s no surprise that Lord Lawson is part of this rearguard.

Environmental policy is another ideological battle masquerading as an argument over the EU. There is a clear case for regulating such a cross-border activity as pollution and carbon emissions at an international level. But EU environmental policy has gone seriously off the rails recently. The Germans are building coal-fired power stations; biomass energy is being ramped up without regard to its wider environmental impact; political fudge has undermined the EU’s carbon trading scheme to the point of making it nearly useless. A weak economy makes higher environmental standards harder to fight for.

It is probably labour market and agriculture and fisheries policies that wind up the Eurosceptics more than anything else. Even Europhiles despair over agriculture and fisheries, though it is inching towards something a bit more sensible. The Working Time Directive is a major irritation to many employers in both private and public sectors. But British labour laws remain amongst the freest in the EU.

In summary, the EU surely does impose costs on the British economy, even if the sceptics exaggerate them. What of the benefits, and the costs of leaving? These centre mainly around trade. There are no tariffs in the EU, and there is a series of rights and enforcement structures that make non-tariff barriers difficult to apply. This reduces costs to British consumers and increases opportunities for British exporters. Membership of the EU is known to be important to some industries, especially the motor industry, and helpful to inward investment. One of the few proper analytical studies I found on the Internet suggested that gains from trade within the EU had been significant. Britain has become highly integrated with the rest of the EU, and for the most part, according to these academics, this has not come through simply switching from other world markets.

But leaving the EU does not simply mean this comes to an end. The benefits flow in two directions, and the remaining EU countries simply wouldn’t cut the UK off if it left. Britain imports substantially more goods from other EU countries than it exports to them (accounting for about half Britain’s trade deficit in goods). The statistics for trade with the EU in services, where the country has a world surplus, aren’t in the regular statistical release, and I haven’t found a breakdown. But the EU market on services is notoriously less free. Eurosceptics argue that if the continuing EU want to try putting barriers in the way of the UK’s exports, the UK has plenty of scope for retaliation. It should be perfectly feasible to negotiate a free trade deal. And, indeed, this would take the relationship to something like the organisation that Britain joined back in 1973, and subjected to a referendum in 1975.

Two arguments can be made against this line of reasoning. First is that the relationship between Britain and the rest of the EU is asymmetric: the trade matters to Britain more than it does to other EU countries. That will make negotiation harder. But a more fundamental issue is the rationale for EU regulation in the first place. It is largely to prevent unfair competition through laxer labour or environmental standards. And yet this “unfair” competition is exactly what Eurosceptics have in mind as a source of growth after Britain leaves: the benefits of membership without the costs. It is hard to see that other EU countries, more sceptical about unfettered free trade than most Britons, will not impose costs. Such is the experience of the deals that Norway and Switzerland have been left with. Why would the European nations be more generous to the UK outside the EU than in it?

So much of the cost of leaving the EU is in fact unknowable. Eurosceptics are happy to make the gamble. Behind this, I think, lies a classic libertarian view of the economy. The less government regulation and tax, the better for the economy as a whole. Leaving the EU would allow the regulatory burden to be lifted, creative forces to be unleashed, and the country to storm forward. They are quite excited by the prospect, after years of grind and stagnation. Those further to the left regard this as fantasy. A society that is lightly taxed and regulated is only good for a small elite and will fail to build the infrastructure required for long term prosperity. Would you rather live in America or Denmark? It is these conflicting visions of the way our country should be run that lie behind the argument over Britain’s EU membership.

Will the Dark Forces save the Tories and crush Ukip?

My advice to Ukip is to savour this moment. After being repeatedly being dismissed and written off, their performance in last week’s local elections was the story of the day. They took over a quarter of the vote where they had candidates, and that was in many more seats than before. They won well over 100 council seats. The commentariat are reeling, and were talking about little else over the weekend. As the dust settles somewhat, what are we to make of it?

The obvious comparison is with the Lib Dems and their predecessor parties in their two separate golden runs, in the 1980s with the rise of the SDP, and in the 1990s after the merged parties recovered from their near death experience. Those were golden moments for their supporters. But by and large they presaged disappointment in the subsequent general elections (though not in 1997). Many predict the same fate for Ukip. But their influence on British politics could be profound.

They are, of course, a very different party from the Lib Dems and their predecessors. The latter always had one foot in the political establishment, however much they were outsiders to government itself. Ukip are complete outiders; while they pick up the odd defector from the Conservative party, they are not high flyers – like Roy Jenkins or Shirley Williams were. Ukip are from the political right, and rebel against Politically Correct notions, where the Lib Dems were liberal and, if anything, more PC than the others. But both parties have a set of clear core values which can bind activists to the cause, and both have proved able to pick up a mid-term protest vote. Many voters feel badly served by established politicians, and want to kick them by voting for somebody else, when not much is at stake.

But the Lib Dems have been able to do more than this. They have built a big wedge of MPs and a solid presence in local government, which in turn has led them into coalition government at national level. Could Ukip do the same? We should put aside two common criticisms of the party. First is that it is a “one-trip pony”, obsessed with Britain’s membership of the European Union, an issue which doesn’t really engage the British electorate. The party has successfully branched out into capitalising on anti-immigrant feeling however, giving it a much broader policy appeal. Attacking immigration policies is a wonderful political tactic for opposition parties; the government can’t do that much in practice about it, and to the extent that they can, nasty consequences would flow. And they can add a few other goodies of more local appeal, like attacking wind farms. The second criticism is that they are too dependent on their leader, Nigel Farage, who is a bit of a media star. There may be some truth to this, but we must remember that it is of the nature of minor political parties that the media concentrate on just the personality of the leader. It was a common criticism of the Lib Dems that they were too dependent on whoever their leader was at the time. In fact strength and depth was being built from beneath. This could easily prove to be the case for Ukip too.

Ukip still has two deeper problems. First are its libertarian and socially conservative policy ideas. Worries about immigration and the EU can rally a broad spectrum of voters, but when you start wanting to dismantle the welfare state and cut taxes for the rich, you are backed into a minority. The second is linked, and it is that both their activists and voters are predominantly drawn from older people. Can such people put together hard hitting and disciplined ground war machines in the way the Lib Dems achieved?

And this leads to their main significance to British politics (this applies almost exclusively to England – but the implications apply to the whole country). To the extent that Ukip are able to capitalise on their current success, it will be at the expense of the Conservative Party’s core vote. Ukip are currently drawing voters from all over the place, but when it comes to activists and committed voters, this will surely mainly come from the Tories. Labour politicians fantasize that they will split the Tory vote, and let Labour into a majority, much as the SDP split the Labour vote and kept Mrs Thatcher in power for so long. Some Tories are suggesting some kind of electoral pact with Ukip to stop this from happening.

Behind all this I see the murky presence of what I call the “Dark Forces”. These are a collection of newspaper proprietors (Murdoch, the Barclays, Dacre and Desmond) and big party donors, who have a political agenda not dissimilar from Ukip’s. So far they have found Ukip a useful stick with which to beat the Conservatives. If Ukip do well, then it proves to them that their policies are vote-winners. But the one thing that unites the Dark Forces more than promoting their conservative-libertarian agenda is their hatred of Labour. If Ukip are posing a serious threat to the Tory majority in parliament that they crave, then they will turn on them.

There is plenty of time for this. The more the Conservatives are running scared, the more they will curry favour with the Dark Forces. There are signs of this already, with the Tories softening their stand on press reform. Ukip will be allowed a clear run up to next year’s local and European Parliament elections, where in the latter case they stand a good chance of being the top party. Then the worm will turn. The press will start stoking up fears about Labour’s plans to raise taxes (the truth never did stop the British press – Labour’s softer stand on austerity policies will give this line all the credibility it needs), and building up the Tories as the only people that can stop them. Will it work? It might. The press remains extremely powerful in the British media (the BBC seems completely cowed by them these days); I can’t see any obvious signs that the Labour leadership understands the danger.

The British political soap opera edges towards a gripping climax in 2015.

How is Labour’s economic stimulus meant to work?

ON Monday at lunchtime Labour’s leader Ed Miliband was subjected to a fierce interview by Martha Kearney on the BBC Radio 4’s World at One. The main subject of contention was Labour’s economic policy, and in particular whether the party’s plan for a temporary cut in Value Added Tax would increase government borrowing. Mr Miliband did not want to say this, only that, because it would stimulate growth, it would help bring down government debt in the medium term. This was not an assured performance by Mr Miliband, but beyond that it seemed to me, perhaps unfairly, that he only had a superficial grasp of the economics involved. If so, he shares this superficial understanding with many members of his party, who lap up quotes from economic commentators such as Paul Krugman, and marry it to half-digested economic theory. So how is it meant to work? How can a temporary tax cut reduce government debt?

Let’s start with the Keynesian multiplier, which is widely taught in basic economics, and which I suspect comes to mind to most people here. You really have to do a bit of maths to understand the implications. Suppose you have an economy with a national income of £100bn a year, and an average tax take of 40%. You decide on a 1% stimulus with a temporary tax cut of £1bn. As people receive the extra money, 40% of it goes in tax, and they spend, say 80% of the rest on domestic goods and services (it doesn’t work if people use it to pay off debt or spend it on a foreign made car…). This adds £480m to the economy with extra expenditure straightaway. And this process continues in a virtual but diminishing circle, as that £480m is taxed, spent and so on. If everything turns out to be mathematically consistent the stimulus adds over £900m to the economy. You have nearly 1% growth! This has cost the taxpayer (added to national debt) of £1bn in the first instance, but a lot of this has come back in extra taxes from the growth.

This is what people half remember when economic experts like Mr Krugman say that stimulus can reduce debt. But there are two problems. First of all, although on my fairly realistic assumptions most of the cost is clawed back, about a quarter of it isn’t. Keynesian stimulus cannot pay for itself at this simple, basic level unless people increase their spending by more than the stimulus itself. And secondly, it is a one-time event, so that you get 1% growth for one year, and then it stops, unless you repeat the giveaway. This tax cut is temporary. When you put taxes back up again, the whole process goes into reverse and the economy shrinks back to where it started. Something very like this happened to the last Labour government’s temporary cut in VAT: a small bounce that was undone when the cut had to be reversed, which, of course, they then blamed on the Coalition.

All this is well known to the Paul Krugmans of this world though, otherwise they wouldn’t be writing economics textbooks and winning Nobel laureates. When they advocate stimulus they are actually talking about something else: the effect of such a stimulus on the national zeitgeist. That 1% lift may make people and businesses happier. Businesses go out and invest more money; people save less, perhaps thinking that their share and property values will go up, and consume more. If this happens then all bets are off; the economy grows further, the government gets more taxes and the stimulus can pay for itself quite quickly and easily. Investment is particularly important; Maynard Keynes’s critical insight was that recessions happen when investments don’t match the amounts people save.

What to say about this? There are two potential snags and an irony. The first snag is that the zeitgeist is a hard thing to manage. The whole thing can be undone by another crisis from the Eurozone, for example, which might reduce prospects for exports and dent confidence generally; or there could be some other crisis. The second snag is that this model of short-term growth assumes that there is spare capacity in the economy. When people and businesses go out and spend, domestic companies can readily ramp up production, employ new people and so forth. This is usually the case in a recession. But not always. In the 1970s, after the price of oil skyrocketed, the economy had to be restructured in order to grow – which was particularly hard because of the trade unions. Attempts to stimulate the economy simply led to high inflation while doing nothing for unemployment. Today, more flexible and globalised markets seem to have reduced the inflation threat – but stimulus can still be dissipated on imports and asset prices. What of the British economy now? Many commentators think that the British economy should be “rebalanced”, reducing its dependence on financial services and North Sea oil, as well as excessive private consumption fuelled by debt and property prices.

These potential snags to stimulus are why many critics of the government, such as the FT’s Martin Wolf, and many Liberal Democrats, such as the Social Liberal Forum, say that any stimulus should take the form of added public expenditure on investment, in infrastructure and homes. Since these have an inherent value, and help expand the economy’s capacity, there should be much less risk. This is a sensible idea in theory that is a lot less easy in practice. The public sector has a tendency to invest in wasteful projects for political rather than economic reasons.

This is where Labour’s plans are quite distinctive. They talk about temporary tax cuts, and hint at increased current expenditure. This is founded on a belief that there was not much of a problem with the pre-crisis economy, or unsustainable about the growth rates achieved in the years leading up to it. The crisis was simply a problem with the global financial system, and the country’s poor performance since is down to incompetent economic management from the Coalition. This is pretty much what Tony Blair said in his recent piece for the New Statesman. If you believe this then capacity is not at issue, and the zietgeist should be readily easy to fix.

And the irony? Left wing economic commentators like to laugh at the “Voodoo economics” of Laffer curves and self-funding tax cuts advocated by far-right commentators. Paul Krugman talks about their belief in the “confidence fairy”. But the left’s economic beliefs are no less dependent on their own confidence fairy.