Islam and the modern world

We’ve just finished watching Rageh Omaar’s Life of Muhammad, although the BBC series finished a couple of weeks ago – the joys of the PVR.  In spite of a snarky piece in Private Eye, I really enjoyed it.  I probably know more about Islam than the vast majority in Britain, but this programme revealed how little I actually know.  And while being appropriately respectful, the programme did not shrink from posing many of the challenges made by people today.

Of course, the benchmark I measure Islam against is Christianity, about which I do know something.  Islam is clearly from the same family of religions, and like it sprang from nowhere to become one of the world’s great religions.  Unfortunately, since the programme focused on the life of Mohammed himself, we did not get much insight into how it took the world by storm, merely its eventual success in Arabia.

Islam clearly has many strengths against Christianity.  Its core narrative and doctrine is much better worked out.  Christianity is an accidental religion bursting forth from the teachings of Jesus over a very short period.  So there’s a lot of muddle at the heart, the doctrine of the trinity, the incarnation, virgin birth, and the idea of the Atonement, and so on.  Compared to this Islam is a model of clarity, with the overwhelming dominance of the one God at its heart.

Still, I had not appreciated that the Koran, the revelations of God’s word that came to Mohammed, built up over a period of quite a few years as the prophet struggled from crisis to crisis before his eventual triumph.  This leaves it with a certain amount of ambiguity, which is clearly a problem today.  What makes it worse is the idea that the Koran, as the direct word of God, is sacrosanct and incapable of being wrong.  This is an even harder doctrine than than the popular Christian one of absolute faith in their Book.

Two examples were discussed at some length in the programme.  First there was women’s dress, and the popular idea that Islam means that women should be veiled in public.  Several modern scholars popped up to say that this was not what Koran teaches, with the offending verses being both vague and explainable in context.  Set this against the absolute confidence of a fully veiled woman who believed that the more modestly she dressed, the more pleasing it was to God.  No number of urbane scholars were going to convince her otherwise.

Likewise the jihad doctrine behind terrorist movements like Al-Qaeda.  An even wider range of scholars was on hand to say that this was a misinterpretation of the idea of jihad, and that the killing of innocent bystanders was absolutely forbidden.  Again this had to be set against the conviction of a pair of young men that jihad exactly meant war against the infidel, supported by a blood-curdling looking verse from the Koran itself (which the programme flashed across the screen without reading out); they also had difficulty in accepting that there was such a thing as an innocent bystander.

This kind of irresolvable dispute is all too familiar in Christianity – consider the issues of homosexuality and women priests.   No amount of scholarship will help here, since the believers on either side feel the truth deeply in their hearts.  There is enough in the writings and doctrines of Islam to give terrorists and oppressors of women’s freedoms what they need.  But at the same time these are far from necessary implications of the faith.  In fact Islam is remarkably similar to Christianity in being a basis for all manner of good works and liberal ideas.

My understanding of Christianity is that it has a stronger pacifist element than Islam, though pacifism was not absent from Mohammed’s message.  It will, of course, be very difficult to persuade Muslims of that, given the wanton violence committed in the religion’s very name in the Crusades, and by many Christians since.  Indeed, it only recent political correctness that is taking the positive connotations away from the word “crusade” in the West.

Islamic scholars and imams clearly have a job on their hands in adapting their religion to the needs of the world around them.  But this is not an impossible task, as this wonderful religion, and the life of the great man its prophet, has all the required raw material.  We westerners should respect it more; the basics of Islam should be taught in all our schools, along with those of Christianity.  It is above all the sense of threat that drives so many followers of Islam into an extremist path.  We must reduce that feeling of threat, while standing up for women’s rights and peaceful coexistence.


Why we should celebrate the 200th anniversary of Waterloo

This isn’t exactly a new story, but, hey, time works in mysterious ways on the blogosphere.  I have just caught up with this Daily Mail article a month old suggesting the this country will downplay the 200th anniversary of Waterloo on 18th June 2015.  I picked up on it from the monthly Civitas update – they provided one of the rent-a-quotes.  This article appears to be a classic piece of Mail journalism, trying create a shock story from thin air.  But it does raise the very interesting question of the status of this battle in British history.

Waterloo is very important in British history.  But why?  The obvious answer is that it was the battle that finally did for Napoleon.  This is true, but it is undermined by two further observations.  Napoleon’s strategic position was hopeless, and if he had won at Waterloo it is certain that he would have been crushed later on in the year, most likely by an Austrian-led army.  The second point was that it wasn’t a particularly British battle.  Wellington’s army was mostly Dutch, Belgian and various shades of German, and he was combining with Blucher’s Prussian army, whose intervention was decisive.

In fact from the point of view of showcasing Wellington’s undoubted military skills, this battle wasn’t the man’s finest hour.  He was caught napping by Napoleon, needed the Prussians to slow him down at the Battle of Ligny, and had to accept huge casualties to the British contingent at Waterloo and its prequel, Quatre Bras.  His gamble at Waterloo nearly didn’t pay off as the Prussians were much slower than he expected to arrive.  British generals were supposed to keep British casualties down.  In 1811 an equally desperate, but much smaller, battle in Spain, Albuera, led to a remarkable British/allied victory thanks to some absolutely herioc fighting by British units (and some Spanish ones).  But British casualties were so high that this is often regarded at a bit of a defeat – and that was certainly the reaction of the British commander, Marshal Beresford.  It would not have been so bloody if Wellington had been there, the soldiers muttered.

But, of course, if you pay such a high price in blood you have to build the battle up to be of huge importance to justify it to folks back at home; and that is what British politicians did, with the army and a string of British historians acting as willing accomplices.  On top of that, it was a particularly dramatic battle, that has held a fascination for more than just the British.  One of the best modern histories is written by an Italian and translated into several languages.

So is it all overdone?  There is in fact something very important about this battle, that symbolises something of importance today.  It is an example of Britain acting as a fully paid-up European power, paying blood to make the whole continent a safer place alongside European allies.  A precursor to the great struggles of the 20th century: acting against the wrong sort of European unity.  In this it contrasts with Nelson’s victory at Trafalgar, which was a victory of Britain against Europe, resulting in British domination of the sea that was to last for over a century.

Waterloo was a European victory in which Britain a very full part.  A good reason to celebrate in these Eurosceptic times.


A brief guide to Keynesianism and the economic crisis

Hardly a day goes by without the dead British economist John Maynard Keynes being invoked, such as this article from this morning’s Independent.  Generally it is the critics of austerity that use his name, although this article is more nuanced, blaming George Bush and Gordon Brown for getting us into this mess by ignoring Keynes’s prescriptions.  And many more economists, including big names like Paul Krugman, use ideas that most people understand as “Keynesianism” even if they do not evoke the great man directly, rightly thinking it is better to appeal to logic and evidence rather than dead men, however great.  Inevitably a lot get taken for granted in these arguments.  For the benefit of amateur economists like me, in this long posting I want to explain and re-examine Keynesianism, in order to assess its relevance to the current crisis, especially here in the UK.

What do we mean by “Keynesianism”?  It is the idea that government fiscal policy, public expenditure and taxes, should be used to counteract a deficiency in demand in the total economy.   It originated with the insights of the great economist, and his reflections on the Great Depression of the 1930s.  Its starting point is that a whole economy does not work like a household budget.  It may be very sensible for a household to choose to spend less than it earns, but a whole economy cannot do this.  Supply must equal demand; you cannot store more than a trivial amount of production from one period to the next.  If across a whole economy more people want to spend less than they earn, in other words to save, then there isn’t enough demand to meet supply and the economy must shrink; people are put out of jobs and so on.

Not so fast.  Things balance out of the net saving can be channelled into investment.  Investment, in economics, refers to production for future benefit.  This usually refers to business investment (machines to make future production more efficient) but can also refer things like building houses which are “consumed” over a long time period .  But if savings are not matched by investment there is trouble.

The possibility of trading with another economy complicates the picture, of course.  Net saving can be balanced out by net exports.  But net exports across the world economy are zero, so this option isn’t available to everybody.

In classical economics there is no lasting mismatch between savings and investment, because markets balance the two out.  If there is too much saving, then this stimulates the supply of investment opportunities, for example by reducing the rate of interest.  Keynes’s great insight was to see that often this market mechanism doesn’t function properly, leading to prolonged unemployment.  And unemployment is a waste; production lost forever.  Much better to use this surplus labour inefficiently than not at all.

Extra spice is added to this logic by the idea of the multiplier effect.  If, for example, you stimulated the economy by paying extra benefits, then the recipients of the benefit would go out and spend them, and the people receiving this spending will spend more in turn, creating further demand and so creating more work.  The same logic applies in reverse; austerity tends to multiply itself too.  This effect is probably what students remember best about Keynesianism.  It gives the idea of Keynesian stimulus gravity defying properties – so that government spending on stimulus can pay for itself in extra taxes generated by multiplied demand (and the reverse, of course, with cuts being self-defeating).

Keynesians point to the Great Depression as an example of how things can go wrong, where excessive austerity turned a setback into a disaster, only rescued by the War (and what could be more wasteful than fighting a war?).  Critics of this view, incidentally, point out that the primitive state of the world’s banking systems had a lot to with this disaster, and so you can’t really compare it to now.

After the war, demand management by governments using fiscal policy became pretty much the orthodoxy.  But this went wrong in the 1970s, when a Keynesian response to the oil crisis simply led to rampant inflation, rather than reduced unemployment.  What are the problems?

First of all, Keynesian stimulus can’t push an economy beyond the limits of its economic infrastructure. To do so simply creates inflation.  After the oil crisis disaster, economists modified their ideas to take account of this, bringing in such ideas a as a “natural” level of unemployment, and giving a major role to monetary policy alongside fiscal policy.  This set of ideas became “neo-Keynesianism” and the orthodoxy of the 2000s.  It was what I was taught in my macro-economics course in 2005-08 at UCL.

A more subtle criticism is that fiscal stimulus is undermined by human behaviour.  If people respond to extra money in their pockets by saving more, the stimulus effect evaporates.  An idea of “Ricardian equivalence” has been developed to postulate that extra government spending would always be offset by extra saving, because people know it would lead to more tax, for which they must save.  Responding to this, proponents tend to suggest stimulus to areas where this is less of a risk.  For example, benefits to the hard up, rather than tax-breaks for the rich.

Another idea, in floating exchange rate economies like Britain’s, is known as the Mundell-Fleming effect, which predicts that fiscal stimulus simply causes the exchange rate to appreciate and crowds out exports (or is lost in imports).  This idea is quite difficult to get a grip on, and anything to do with predicting exchange rates turns out to be impossible to prove.  But it does offer an explanation of why the pound appreciated after British government’s stimulus programme following 2001.  And the basic idea that fixed exchange rates undermine monetary policy while floating ones undermine fiscal policy has the undoubted merit of symmetry.  So British austerity should be offset by a lower pound which stimulates exports.  The first part of this prediction seems to be working, but the second is slow to come about, not least because so many of our usual trading partners are in crisis too.

But the strongest objections to Keynesians come from the so-called “Austrian” school, because its more famous advocates (Schumpeter and Hayek in particular) were born in Austria.  This sees unemployment as a essential to a process of creative destruction, as inefficient and unwanted businesses go to the wall, to be replaced by better ones.  Keynesian stimulus interferes with this process, in particular by leading to wasteful investment; any temporary relief is offset by longer term problems.

From within the neo-Keynesian camp there are also those who advocate the use of monetary policy to manage the business cycle, as being much more efficient and effective that fiscal policy.  These seem to include the British Chancellor of the Exchequer, George Osborne.

So how to apply to the current economic crisis, and in particular to Britain?  The first point is that the pre-crisis economy was built on false premises, with unsustainable borrowing and a property boom.  It cannot be recreated by applying stimulus.  Not everybody accepts this, but almost everybody without a political axe to grind does.  The serious Keynesian argument is not about stimulus, but about the effects of austerity.  Austerity policies are reducing demand, setting up a multiplier effect and causing pointless unemployment before the replacement jobs can be created.

It helps the Keynesians that there does not seem to be a big risk of inflation – or not wage inflation, anyway, which is the critical issue.  This seems to be held in check by strong market forces, in the developed world at least.  High price inflation in Britain is not matched by pay inflation, and it is much more about forcing Britons to accept a lower standard of living as a result of a lower pound and shortages of key raw materials.

Advocates of monetary policy are also in a weak position.  It simply does not seem to be all that effective.  Interest rates are rock bottom, and all quantitative easing seems to do is to keep asset prices at unrealistic levels.

Would extra saving undermine a looser fiscal policy?  Britons are heavily indebted, after the borrowing binge.  That might encourage them to save any stimulus money – but it also suggests that they can’t respond to lower income by borrowing more.  Since we are talking about simply slowing a downward trajectory, the latter is the more relevant argument.

For me the most persuasive case for some kind of Keynesian influence on policy is made by the Financial Times’s Martin Wolf (behind the FT paywall).  This goes back to first principles.  Consumers are over indebted and need to spend more than they consume.  Business confidence is low, which means that it is difficult to persuade businesses to invest.  The potential for more exports (or less imports) is certainly there, but is limited because to many other economies are trying to play the same game.  So we are exactly in danger of the doom loop of excess saving that Keynes worried about.  The government’s massive deficit offsets these problems to a great extent, but reducing it too fast could well lead to excess unemployment.

But we don’t know.  Austerity policies are stronger in rhetoric than practice.  We can’t avoid major cuts to government services, so there is something to be said for getting them over with as quickly as practical.  But there is also something to be said for having a “plan B” should unemployment start to escalate.  But if the government had one, they wouldn’t tell us.

Cutting VAT is one idea, advocated by Labour Shadow Chancellor Ed Balls, since it is quite likely that it will stimulate some extra expenditure – though it is very unclear by how much.  That is probably too much of a humiliating U-turn for the government.  But it is a better idea than cutting the top rate of tax, advocated by some Conservatives, since that is unlikely to have much immediate effect on demand, even if it does have longer term benefits.  Another idea is to ramp up investment projects – but it is very difficult to do this efficiently in the sort of quantities that would have a major impact on the overall economy.  Personally I would favour a go-slow on benefit reform, which is where a lot of the cuts are focused, since mostly benefits get spent.  Given how tricky this programme is already, it might happen anyway.

It would not be surprising if the government missed its deficit reduction target over the five year term.  What will not be clear is whether this happens because Keynesian policies were applied (i.e. by slowing the pace of austerity) or because they weren’t (i.e. austerity strangling the economy at large).  That won’t stop people being firmly on one side of the argument or the other.


Sometimes things just don’t make sense

It is one of the most enduring human characteristics to try and see patterns in the world around us.  We don’t like the idea of random events.  People even pore over lottery numbers.

After the awful events in Norway last week, it is only natural that people try to make sense of them.  The most common is that it is part of the rise in right-wing hate politics – for example Timothy Egan in the New York Times or Matthew Feldman in the Independent.  A more original alternative, from Joan Smith, also in the Independent, is that it is part of frustrated male pride, with parallels in the British 7/7 bombers.

But I don’t think any of this helps.  Of course people who think we should do more about the extreme right will use this event to bolster their case.  And the extremists themselves may also do so, on the grounds that this act shows just how desperate things are getting.  Frustrated macho pride was clearly part of the toxic mix, but this afflicts most of the male population.  The more I find out about Anders Behring Brehvik, the more I think his lawyer is closer to the mark by describing him as “mad”.

I am no psychologist, but I don’t think Brehvik fits the normal description of insanity.  But he does seem to have something that the professionals call a “personality disorder”.  He seems to have real difficulty in socialising.  He acted alone, almost certainly, when most terrorist acts are collaborations, like the 7/7 bombings, with people encouraging each other on.  He read widely, and took inspiration from a lot of different sources, but he doesn’t seem to have tried harden his ideas through proper discussion and argument with anybody else.  They are a very flaky agglomeration of fantasies.  The idea of a cultural war between the West and Islam has many followers, but allying with mumbo-jumbo of the Knights Templar?  Describing himself as Christian without any reference to what that actually means?

It is nonsense.  If he hadn’t picked up on these ideas, something else might have done.  Anarchism, perhaps.  The closest parallel is the US Unabomber, another unconnected loner.  We can try too hard to find patterns.  Sometimes the only way to understand something is to say that it is senseless.  The random act of a madman.


Economic growth and the media circus

Today the ONS released their first estimates for economic growth for the second quarter.  These quarterly figures have become the centre of a media frenzy; the papers and the BBC have been speculating about them and their implications for days.  Some commentators have worked themselves up into a real state, saying these numbers will be critical to the government’s future (see this comment on one which gives quite a good idea of the general coverage before the figures have even been released). This is getting very silly.

The first problem is that these numbers aren’t very accurate; the second is that they don’t mean very much to ordinary people anyway.  GDP, and the growth figures based on them, have become very interesting to economists, especially in making comparisons between countries, and looking at trends over a period of time, and compiling all manner of ratios.  But they are obscure aggregates that mean very little to us day to day.  The economic statistics that matter are those on unemployment, pay rates and consumer prices.  Taken together these figures give you a much better idea of what life is like for real people.  Further light is thrown by various other measures, like trade figures, retail sales and so on, though these are bit too volatile for single month’s figures to mean very much.

These statistics are painting a clear enough picture of the British economy.  Unemployment is high, especially amongst the young, though not as bad as in previous downturns.  It remains steady, with employment overall growing.  Inflation remains persistently high, largely thanks to higher import costs and taxes.  Remarkably, average pay is not keeping up with inflation, so we know that people are being squeezed.  The fact that so much of the squeeze is being spread across the working population, rather than concentrated in rising unemployment, is the truly remarkable thing about the economy right now.  This is surely a better way for the country to adjust to the new reality.  But it does mean that gloom is spread far and wide.

The government should really start to worry if one of two things start to happen.  First that unemployment starts increasing again.  Second if pay inflation creeps up beyond about 3% (it is now about 2%), since this means that an inflationary spiral might be on hand, so interest rates have to go up.  Likewise they should start to feel relief if and when unemployment gets significantly lower, and when inflation falls below 2%.  The betting is that the economy will keep bumping on somewhere in between the good and the bad news for some time to come.

Meanwhile there is a very unedifyng argument about the economy going on, with people talking at each other without any serious attempt at improving their understanding.  Consider this little discussion on Lib Dem Voice to which I made a couple of contributions.  I think the founders of economics as a social science hoped that it would improve people’s understanding of the world around them, but so often economic arguments are just used as ammunition to support prejudices.  And you can use them to argue just about anything.

All the more reason to ignore the media coverage of the quarterly growth figures.


Could the hacking scandal threaten David Cameron?

Am I being too sanguine?  I asked this of myself a week ago after posting on the Euro crisis.  Now I’m asking myslf the same thing over my recent posting on the hacking crisis.  Could there be a lot more trouble than I was predicting for David Cameron and the Police?

Consider this article in Lib Dem Voice on Cameron.  This develops the idea that there was a lot of railroading of the rules when the PM hired Andy Coulson as his Downing Street (i.e. Civil Service) press adviser.  The pressure building up on this story could prove intolerable.  Of course the public at large won’t take a great deal of interest in this, but it’s sort of thing that can obsess people in the  Westminster bubble.  And this bubble, to switch metaphors in midstream, is the pond in which Mr Cameron swims; he can’t survive if it becomes poisonous, even if the world outside is fine.

I also bought Private Eye for the first time in years this week.  This is thick with innuendo about actual police bribery, using travellers’ cheques, which goes against my suggestion that this is quite rare in the modern force.  And lots of innuendo about the closeness of the Murdoch empire to both the Police and government.

The problem is that I share a characteristic with Mr Cameron – my first reaction to trouble tends to be to play it down.  This can be be very useful; it tends to calm people down, buy you time for a more considered view, and stop time-wasting.  Too many people have the opposite tendency to panic at everything.  But it can leave you flat-footed on those occasions when trouble is both real and unexpected.  I remember being most senior person in our Moorgate office when the 7/7 bombs went off; for the first few hours I was behind the curve.  To compensate what you need is to have some good advisers close to you who can challenge your assessment.  Ironically this was one of the things that Mr Coulson did for Mr Cameron, and did very well, as far as I can make out.  In fact it’s because he was so effective in the job he was employed for that Mr Cameron has difficulty in understanding that the fuss amounts to much.  But if Mr Coulson used his privileged position to improperly advance the interests of the Murdoch empire, then there’s real trouble.

Still, I may have been right on the Euro crisis.  The can has been kicked down the road again.  There was a lot of relief after last week’s summit of the Euro leaders; no doubt as the detail comes to light people will be less reassured.  In one sense it gets more and more difficult to kick the can each time – but it is equally clear that the Eurozone’s leaders have the political will to do the necessary.  Gradually a new architecture for managing the Euro zone is emerging.  It is one that condemns the UK to the sidelines, but that’s another story for another day.


What will the hacking scandal change?

I’m afraid I’ve been swept along by the drama of the hacking scandal, even as the Euro heads for meltdown, the US for financial suicide, and famine ravages the Horn of Africa.  I watched the Murdochs before the Select Committee on Tuesday afternoon, and spend more time than I should reading online articles.  The human drama is compelling, with a steady stream of people coming a cropper.  But as I posted last week I am a lot less sure about longer term consequences for the press and politics in general.

There may be further damage to come for News Corporation.  Rupert Murdoch at the hearing said that “this is the humblest day of my life”, and that was his clear intention – to halt the damage at that point.  He was appropriately contrite and respectful.  But he clearly equates his organisation with himself.  He seemed puzzled with the suggestion that he might resign.  He feels betrayed by people he trusted, and that’s it.  The success of his damage limitation depends on what further comes out.  Anything that gives the affair legs in the US could be toxic; he has plenty of enemies there.  In the UK the worst is probably over; there will be prolonged skirmishing over who said what to whom, which will get insiders worked up, but not the public at large.  People already suspect the worst, so the damage is already largely done.  It would help him a lot if similar issues emerged at other newspapers.  If everybody is to blame, nobody is.  The Murdochs quite rightly steered clear making any suggestions that other organisations were just as bad, but it must be on their minds.

The Police, and especially the Met, are the next victims.  But again I think the worst might be over.  People suspect rampant police corruption, with journalists paying for information.  I doubt whether much of this actually went on.  I’m sure it used to, but it really is at odds with modern police culture.  The police have provided lots of information to journalists, but not in exchange for bribes.  The police were much too close to the press, as were Tory and Labour politicians, but it will be difficult to pin this down to what people euphemistically call “wrongdoing” – i.e. actual criminal offences as opposed to the merely  unethical.  One or two individuals may get caught out, but they are likely to be more junior than those already forced to resign.

Next in the firing line is David Cameron.  Ed Milliband has decided that he is vulnerable, and has been banging away endlessly about his employment of Andy Coulson.  His discussions with the Murdoch organisation over the BSkyB bid has opened up a new line of attack.  This may have some way to run, but it doesn’t feel fatal.  The whole Coulson affair has been pretty open; there are no fingerprints on the BSkyB issue, though Mr Cameron’s evasions are not doing him any good.  There’s a good article from Steve Richards in the Independent on this.  Some of the shine is coming off Mr Cameron, but to my mind this was always coming to him.  His performance as PM has been less than assured, notwithstanding his Etonian self-confidence, and I have been amazed that it has taken this long for people to see through it.  There’s no serious alternative to him in the Tory party, and talk of him having to resign is just typical of the silly chatter that can build up.

Mr Milliband, by contrast, has done quite well.  Enough to keep his rivals at bay (and there are serious alternatives in the Labour Party), but not enough to allay wider doubts.  There are some signs of a Lib Dem  recovery – but not because any of their figures are playing a prominent role, despite efforts to boost Vince Cable for being the first to “declare war” on the Murdochs.  In fact it was his foolish loose talk that deprived him of a serious role in the affair.

One change may be long lasting – and that is the influence of the tabloids.  Tony Blair set the trend of very close relationships with them, not least by his employment of Alistair Campbell as his communications adviser.  In his time Mr Campbell was lionised, as being the power behind the throne.  He spent a lot of his energy setting up meetings with tabloid editors and, indeed, owners.  Having set the trend, everybody else followed.  Including the Metropolitan Police and Mr Cameron.  As the light is being shone on this, it doesn’t look so clever.   The cosy relationship has ceased.  Steve Richards has again written very well on this.

The tabloids play a unique role in British politics, in delivering the sort of attack material that in the US is done by television advertising.  I won’t forget the anti-Clegg frenzy unleashed by them in the last weeks of the 2010 General Election.  It’s small wonder that politicians have sought access to this power.  But tabloids are a declining market, with more and more people getting their news from the internet.  Younger media owners, not excluding James Murdoch, are more interested in readership than in throwing their weight around to influence politics. This affair may mark a decisive episode in the decline of the tabloids’ role in politics.


Europe’s financial crisis gets dangerous

While the British news media and politicos alike obsess with the unfolding of the News of the World hacking scandal, Europe’s financial crisis enters a dangerous stage.  In fact this crisis seems to unfolding just as quickly, and with much more important potential consequences.  Was I being too sanguine last Friday, when I blogged that it was a learning curve rather than a fundamental problem?  Well, probably.

I had hardly posted it than a flood of dire articles about the crisis came out.  One of the best is by  eminent US economist Larry Summers in this morning’s FT(£); alongside it an equally gloomy article from FT regular Wolfgang Munchau (£).  Mr Summers points to the critical issue of confidence that could be destroyed in a default, drawing a parallel with Lehman in 2008.  He then offers quite a plausible way out.  But the problem, as Mr Munchau points out, is:

I often hear that Ms Merkel in particular has moved a long way from her original position 18 months ago, when she ruled out any money for Greece. This is true. But the crisis now moves at a rate that exceeds her political speed limit.

There’s clearly a problem.  One issue is the expectation that European leaders will muddle through, as they always have.  This, unfortunately, is a self-destroying prophesy.  Because Europe’s leaders expect everything to come right in the end, they don’t have the incentive to make it actually happen.  Actually Europe’s greatest achievements have required some strong leadership, with Helmut Kohl, Germany’s Chancellor in the 1990s standing out.  Mr Kohl achieved German unification on his own terms, pushed through monetary union and the massive eastward expansion of NATO and the EU right into the former Soviet Empire.  Mrs Merkel does not fill his shoes.

Still, there are plenty of bright ideas for ways out, without the Eurozone collapsing, Mr Summers’s among them.  They will all require Mrs Merkel to shift her current stance.  Things could get worse before they get better.  At any rate it looks more soluble than the US budgetary stand-off.


The Euro crisis: structural failure or learning curve?

Coverage of the crisis in the Eurozone is astonishingly poor.  Commentators scarcely try to analyse the situation properly; instead they revert to one of two unsatisfactory critiques.  First, the Eurosceptic one, is that the Eurozone was always an unworkable idea and the best thing to do is abandon the whole thing.  The alternative, the Europhile critique, is that a currency union without political integration was a major mistake, and the best thing to do is move further towards the political integration of the union.

These positions are both unhelpful.  The Eurosceptics fail to see the benefits of the currency union, the awful logistics involved in unpicking it, or the unsatisfactory nature of floating currencies for most countries.  The Europhiles want to drag European peoples down a road they do not want to go.  There is a third way: that Eurozone governments change their countries’ economic arrangements so that they can live within the currency zone, more or less as it is currently configured.  This crisis is a learning experience.

The more far-sighted of the Eurozone’s designers did not want full political integration.  It was never to be a currency zone like the USA, with a federal government able to make massive fiscal transfers across the union to help balance out asymmetric crises.  Instead the single currency, alongside the single market, was meant to act as a discipline on national governments.  This would address the widespread failure of floating currencies, which allowed governments to buy time through currency depreciation rather than addressing economic inefficiency.  This was a process leading inexorably to hyperinflation and economic collapse – which was very clearly beckoning for Portugal in particular before the Euro project was taken on board.

Discipline was required in two particular areas: government finances and labour markets.  In the former case discipline is to be provided by the threat of default; in the zone it was impossible to evade default by debauching the currency.  The consquences of a sovereign default are very severe, and European leaders sought to prevent it through the muddled Growth & Stability Pact, which sought to restrict deficits and levels of government debt.  For labour markets the discipline was that without flexible labour markets, economies would become uncompetitive, creating unemployment.

But things went badly wrong almost immediately.  Bond markets did not seem to believe the default story, as spreads between the more creditworthy governments (like Germany) and the less so (Italy and Greece) were impossibly narrow.  Governments in the shakier countries (especially Italy, Portugal and Greece) found it much too easy to borrow cheaply and used this as an excuse for not proceeding with reform.

Labour markets were largely untouched by reform, as were other economic inflexibilities.  This caused major problems in Spain, Portugal, Italy and Greece whose economies became increasingly uncompetitive.  Only one country (apart from Ireland perhaps) really grasped the implications of living inside the Euro, and that was Germany.  After unification the German economy lost competitiveness and unemployment became a real problem.  But through its system of corporate deal-making between employers and unions, pay was restrained and other reforms instituted.  Competitiveness was duly restored, as was employment.  Unfortunately that made things worse for the laggards.

While the Eurozone had proved a failure in these two areas it proved a bit too successful in another: capital flows.  There was a lot of reckless lending, with quasi-public banks in Germany in prominence.  Capital flowed freely to countries, like Spain and Ireland, that didn’t really deserve it, allowing problems to be hidden in a property bubble.  And then Pop!  The Eurozone has lurched from one crisis to the next.

But the basic idea remains intact.  Markets now fully appreciate the risks of default and are pricing debt accordingly.  This is applying pressure on governments like Italy’s that the Growth & Stability Pact simply could not.  And the pressure to make market reforms is likewise proving unbearable.  It’s been a horrible experience for many, but this is not a structural failure: it’s a learning curve.

So what next?  The Greek government must default, and default properly (i.e. the principal must be cut rather than repayment simply deferred).  Maybe it will be forced out of the Euro.  If so, it will be a terrible example.  Some eurosceptics make it all sound rather easy (“decouple, default, devalue”), but it involves the utter collapse of the Greek economy with private savings being wiped out.  The hope would be that it would be easier to rebuild from the ashes than interminable limping along inside the zone.  Portugal and Ireland (whose crime was not to manage its banking system properly) may also go through some form of de-facto default.  But they will stay in the zone.  Portugal must go through a painful period of reforms, but at least for them this path is clearly better than being outside the Euro.

Meanwhile the Euro governments need to keep “kicking the can down the road”.  This is not as short-sighted as it sounds, since with each kick the various parties invovled understand the situation better and what needs to be done.  The default word is now openly talked of.  German bluster over not bailing out the profligate is gradually having to come to terms with the role German banks played in the disaster.  There is learning for the Germans too.  Bold decisive action can be disastrous – it didn’t help the Irish.  This way things are properly thought through.

Reforms?  Fiscal reforms are unnecessary.  But the banking system does need serious attention.  The regulatory system is badly coordinated.  There are too many cosy quasi-public banks who have been allowed to make silly investments.  Banks remain largely national affairs, with only a limited number of transnationals.  There is strong case for a centralised banking regulator.  And cross-border banking mergers need to be encouraged.

But the Eurozone is not dead; and neither are we on the verge of a more centralised European government.


Affording the NHS

The British government has been talking darkly about the exploding demands on the National Health Service, which will rapidly make it unaffordable if it is not reformed.  This has recently been challenged by Professor John Appleby, at the health think tank King’s Fund.  This was in a recent article in the British Medical Journal, behind a paywall, but summarised by the BBC here.  This question goes to the heart of health policy in the UK, but politicians dare not discuss it – because it puts the very principles of the sacred NHS in question.  But the problem will not go away.

According to some figures on Wikipedia Britian spent an unremarkable 8% of its national income on health, compared to over 16% in the US, before the financial crisis struck.  Those figures will be higher now, since our income has shrunk, but the relativities will be much the same.  The comparison between the two countries is usually held up to show how ineffective US health spending is, since health outcomes look generally pretty poor there.  But the comparison can be looked at the other way.  The US can afford to spend more than 16% of its national income on health and still remain one of the most prosperous countries on the planet.  There is nothing mysterious about this.  Developed countries are long past the level where basic human needs of food and shelter are met; how we choose to spend the surplus is up to us, and there is no reason why we can’t choose health care over cars, designer clothes or big holidays.  It’s not as if it requires massive imports to sustain it.

You can take this line of reasoning further.  The basic proposition of health care is to reduce pain and prolong life; these are consumer propositions to, well, die for.  Suppose we lived in the economist’s free market utopia, where health spending was a matter of individual choice in a perfectly competitive free market with no information asymmetries.   There is no reason to think that health expenditure would not be higher than the 8% or so we currently spend in Britain, or indeed as high the US figure.  We can perfectly easily afford it.

That’s not the problem.  The problem is paying for it almost entirely through unspecific taxes, the core design principle of the NHS.  And here the government is on much stronger ground.  There is an upper limit to how much tax we can raise for health care.  Up to a certain point, of course, the NHS model works perfectly well.  Look on the taxes as an insurance premium and it helps spread risk in a way that people like.  But the more you spend, the more the weaknesses of the model are exposed.

  • There is no direct line of sight between what you pay and what you get.  How on earth are you supposed to decide whether you are getting value for money?
  • You have no choice in the level of service you get.  One size fits all.
  • People who are better off may feel that they are paying too much relative to what they get.  This may not be quite as strong an argument as it first appears, since the less well off pay a lot of tax through cigarettes, alcohol, petrol and VAT – but the perception is still a problem.
  • Taxes create a drag on the rest of the economy, reducing incentives to work and therefore shrinking the resources available.

America is able to get away with much higher levels of health expenditure because so much of it comes from private insurance premiums and direct private payments for treatment.  But even there a battle royal is developing over how to balance taxes and government support.

Of course, to some putting up taxes is the right way to go.  France and Sweden get away with higher tax burdens than the UK after all.  But this is very fraught.  Some think you can go after big companies and very rich people and leave everybody else.  This is not as easy as it sounds though, since this wealth is very mobile.  Property is not mobile, of course, but raising taxes on property is probably as politically toxic in Britain as taxing fuel is in the US.  There is also a problem if too much tax revenue comes from the very rich or corporations – these start to acquire more political weight.  Which leaves the not-so-rich.  But these people are under pressure and feel over-taxed – Ed Miliband’s “squeezed middle”.

So I think the government is right.  We have hit the limit of what the country can afford for tax-funded free-at-the-point-of-use health system.  But we have not hit the limit of what people are prepared to spend if it’s their own money and for their own benefit.  The risk to the NHS is that the more affluent middle classes start to opt out of NHS services, depriving them of critical mass and undermining the principle of social solidarity.  This has already happened to NHS dentistry.

Nasty.  In the last years of the previous government the issue of co-payments was quite high up the political agenda: the possibility of NHS patients topping up their treatments with their own money to get things not on the basic menu.  This had become politically charged because of the costs of some rather questionable cancer treatments which the NHS were denying but which people were prepared to pay for.  The Conservatives clearly considered the topic politically toxic, since they have fudged the issue of cancer treatments with a bit of extra funding.  Labour and the Lib Dems were inching towards accepting co-payments, though I expect both parties are now bouncing back.

But in my view co-payments is the best way to relieve the pressure.  The NHS should define a basic menu of treatments that everybody is entitled to, but accept payments for anything outside this.  This undermines one of the sacred founding ideas of the NHS, that everybody gets the same, no matter how wealthy.  But it is better than the alternatives.  It’s the debate we should be having.