Britain’s ungovernable Conservatives

I can remember when Britain’s Conservative Party was thought to be the country’s natural party of government. This feeling reached a peak after John Major’s shock win in 1992, when the party looked all but unelectable. The journalist Will Hutton wrote a best-seller “The State We’re In” which explained why. The party was deeply embedded into the country’s establishment. The discipline of its membership was legendary. Its hunger for power also made it adept at judicious compromise. It was a well oiled machine to keep an elite in power. The brief intervals of post-war Labour government in 1945, 1964 and 1974 seemed like awkward aberrations. Now, as the party wrestles with today’s vote on same-sex marriage, many observers of the British political scene wonder whether the party will ever secure a majority in the House of Commons after that win in 1992. What went wrong?

The party’s troubles are clearly deep. When David Cameron took over, after the party’s third successive defeat in 2005 it was clear that the party’s image with the public was toxic. Polling showed, the story went, that if the party came out in favour of a particular policy then that was reason enough to turn people against the policy. Mr Cameron’s mission was to re-brand and de-toxify the party, much as Tony Blair did with the Labour Party after that defeat in 1992. It seemed to be working. Mr Cameron embraced liberal causes like environmentalism and the inclusion of gays, while putting the party’s obsessions with Europe into the background. In doing so Mr Cameron put the party’s official position in a place where most Britons would not disagree with it. The party’s enthusiasm for the privatisation of public services was, and is, the only major exception.

He failed to win a majority in 2010, but by embracing coalition with the Liberal Democrats, he seemed burnish the party’s liberal credentials. While the Lib Dems were thrown into existential crisis, it seemed that the Tories were on a stepping stone towards power in their own right. But then people started to discover what the new Conservatives were really like. The problem wasn’t so much the Coalition’s programme of austerity and public service reform – “The Cuts”. These have produced a deafening whining sound from the left of the political spectrum. But these mainly originate from a complacent Labour establishment who had got used to a way of doing things, and it is not resonating with a majority of the British public. It is more of a problem for the Lib Dem element of the coalition than the Conservatives, though the NHS reforms remain a danger to both parties.

The real problem for the Tories comes on just those symbolic issues where Mr Cameron had tried to change the mood music. An obsession with the European Union and calls for a referendum on it have come to the fore. Reform to the House of Lords was firmly squashed, notwithstanding a seeming commitment to it in the party’s 2010 election manifesto. And now same-sex marriage (“equal marriage” to its supporters, “redefinition of marriage” to its opponents, “gay marriage” to the BBC). I must admit that this is an issue I struggle to get worked up about. But most of my friends are for it (though at least one is a passionate opponent), and it fits with my generally progressive outlook on life. Our understanding of what marriage is has changed over the years. But to many people in the country the reform is the last straw in a constant process of the undermining of traditional values. Such people feel that the political system tramples over them regardless, and their frustration makes them angry. They are in a minority, but not a voiceless one. They are particulalry well represented in the ranks of the Conservative Party, and many Tory MPs are taking up their cause.

This leaves three problems for Mr Cameron and his modernising allies. First is that it exposes divisions in his party, and that makes it look less credible as a governing party. Second it shows that whatever Mr Cameron may promise, even if it is in the election manifesto (same-sex marriage wasn’t in the main manifesto, it has to be said, but in separate party publications for the gay community), he cannot deliver on liberal, reforming policies that do not involve privatisation. Third is that there is a risk of defection from the traditional wing of his party in protest, reducing the party’s potential in the electoral ground war, and potentially helping UKIP, which is positioning itself as a vehicle for just such traditionalists. Under the country’s electoral system it is tough enough for the Tories to win outright. Surely it is now impossible?

Of course Mr Blair faced major challenges from Labour traditionalists, but still forged a highly effective political machine that still looks in good shape, even after its heavy defeat in 2010. But Mr Cameron does not command anything like the same loyalty amongst party apparatchics, and above all MPs, that Mr Blair commanded at the equivalent stage in his government. Mr Cameron never attempted Mr Blair’s “Clause 4 moment”, of a deliberately engineered confrontation with his critics to show he was boss.

Is it all lost for Mr Cameron? Not quite. There is always the example of 1992. Then the Tories were able to demonise the Labour Party and its leader sufficiently to scare first the press, and then voters into voting for it in large numbers. Ed Miliband, like Neil Kinnock, Labour’s leader in 1992, does not cut a particularly prime ministerial figure. There may well be an opportunity to stoke fears about tax rises under Labour too. As the General Election approaches Mr Cameron could rally the dissidents. He can still call on rich donors and much of the press will still rally to their cause.

But the Conservatives are no longer the party of the establishment. Their hidden advantages, so strong in the 20th Century, are eroding away. The 2015 election looks like another stalemate.

Abenomics: why it doesn’t look good for Japan’s economic experiment

A few years ago, as the Greek crisis unfolded, an Economist blogger suggested that its austerity programme would be an interesting experiment. Did the then fashionable idea of austerity growth have any validity? The answer to that experiment seems to be a clear no, though now doubt there are get out clauses. Now a very different economic experiment is taking place in Japan, after the election of Shinzo Abe and the Liberal Democrat Party last December. It is popularly referred to as “Abenomics”.

Abenomics, described by the Economist here,  has three elements: increased infrastructure expenditure, looser monetary policy (through focus on a higher inflation target), and “supply-side” structural reform. This coordinated nature of the policy is one of its most important aspects. Here in Europe we are used to fiscal policy pulling one way, while monetary policy and structural reform pulls in the other. All this has “Keynesian” economists like Paul Krugman in raptures (I used the inverted commas because no self-respecting economist accepts that label, it’s just common sense after all, though their political supporters love it). Japan has been stuck in the economic doldrums for two decades, and these economists feel that at long last the country might be digging its way out. Better still, success in Japan will show that these policies can be applied in other developed economies. But this analysis is deeply flawed – a case of macroeconomic blindness, a sort of failure to see the trees for the wood.

Look again at Japan. Its unemployment rate is currently a shade over 4%, having fallen from a peak of 5.5% in 2009. Compare that to the UK’s rate, which has hovered around the 8% mark since 2009, compared to about 5% before the crisis. This does not suggest a huge amount of slack in Japan, even allowing for distortions in the way it measures its unemployment. Growth will have to come about either through productivity growth or new people entering the workforce (e.g. through immigration). There is plenty of scope for both. Japan may have some of the world’s most efficient companies, but these dominate its export economy only; there is a lot of inefficiency in domestic markets. Japan has long eschewed immigration as placing an unacceptable strain on its social infrastructure. All this depends on the third prong of Abenomics, structural reform. And yet the government already seems to be going slow on this, afraid that the public will disapprove, with bad consequences for upper house elections due later this year.

In fact what Abenomics really seems to be about is to make government debt more affordable through setting off inflation (specifically of incomes, and hence tax revenues). Japan’s inflation has been very low, and negative for much of the stagnant period. Even this may not work – economists understand little about how inflation actually comes about, assuming that it is some kind of endogenous variable in that depends on such things as aggregate demand and money supply. Instead the policy may simply lead to state bankruptcy – though that is no doubt a long way off.

What are the implications for the rest of us? The justification for “Keynesian” policies in most developed economies, including th UK, remains intact because our high unemployment shows that there is quite a bit of slack, though we don’t actually know how much (the 1970s stagflation crisis arose because economists too readily assumed that unemployment meant economic slack). But they are not the answer to raising long term growth rates. And Japan’s agonies with inflation and government debt may well foreshadow future dilemmas our own governments will face.

What arrogant economic commentators, like Professor Krugman, need to accept is that economies are the sum of freely made choices of individual citizens, excercised through both markets and the ballot box, as they try to shape the world they live in. They are not the creation of governments and policy makers playing with their economic toolkits to win prize for the biggest d**k growth rate. Japan’s stagnation is the result of choices that Japanese people are making about the sort of place they want to live in, one which consideres wider factors than monetary income. Get over it.

That speech: just a ripple on the surface of British politics?

Last week I commented on David Cameron’s speech on Britain and the EU, where he promised an in-out referendum, following a “renegotiation” if the Conservatives win the next General Election in 2015. For some days after I though this was a decisive moment in British politics, in which Mr Cameron seized the initiative, and the Labour leader, Ed Miliband, lost his chance to win the next election. A week on, the dust has settled and the news is dominated by other stories. Was is such a decisive moment, or a mere ripple, a failing prime minister making a promise he can’t deliver?

The weekend polls show no decisive shift, with the coalition parties trending up a tad, but Labour still comfortably ahead, following a trend already evident before the speech. One poll seemed to show a big advance by the Conservatives at the expense of UKIP – but on further examination it looks as if this has more to do with polling methodology than people changing their voting preferences. Mr Miliband’s calculation appears to be that the main issue for British politics is the economy, and so the best thing to do is to change the subject back to this issue. His line that the speech hurts the economy because it creates uncertainty, that old argument against any form of decisive leadership, seems to be carrying weight with the British public, according to a further poll published by The Independent – though this also showed Tory support rising. And in the ephemeral world of British political commentary that should be enough to say that this is just a small tactical victory for Mr Cameron, making his party less vulnerable to UKIP, and not much more. But I think two big things have changed, and a big problem has opened up.

Firstly, Mr Miliband has made a serious strategic error, even if its significance will not show up much before 2015. His strategy should be to focus the political debate onto a small number of subjects and overwhelm the opposition there. This is a strategy I have called “the same, only different” following a 20th Century advertising campaign for a product I have long forgotten. It was used by Tony Blair’s New Labour to devastating effect in 1997. Basically you shadow your opponent’s policies in almost every detail except for a small number carefully chosen issues, plus a big investment in mood music to make your party appear more caring and more competent. I remember the exasperation of Tories; whenever they came up with a new policy to try and get an edge on Labour, Labour promptly adopted it as their own. It prevented the other side from changing the agenda. This seems to have been what Mr Miliband is trying to do, albeit without actually committing to any policies just yet (again following Mr Blair’s example). He is not creating sharp policy differences with the government, and making the main focus of his attack the economy. He is trying to create the right mood music by painting the government as by turns gratuitously nasty, and shambolic and incompetant. This strategy was slowly paying off.

But Mr Cameron has hit Labour below the waterline. He has created a clear area of policy difference, where he is probably more in tune with the British public than Mr Miliband, and one in which he can guarantee coverage from Britain’s still-important press. But also the issue makes Mr Miliband look weak, indecisive and un-prime ministerial. That could be fatal. What Mr Miliband actually should have done was welcomed Mr Cameron’s speech and adopted his policies as his own. That would have taken the wind totally out of the Tory sails.

The second way that Mr Cameron’s move may be decisive is that it may have turned the advancing tide of British Euroscepticism, while at the same time unifying his bitterly Eurosceptic party. I have read Mr Cameron’s speech, and the most striking thing about it is how Europhile it is. He has well understood the arguments for Britain staying in, and put them forward. Britons are a suspicious, conservative bunch as the 2011 AV referendum showed. Leaving the EU would be a big step into the unknown, and the more people think about it, the more nervous they are likely to become. And yet the sceptics are happy because they have their precious in-out referendum.

Mr Cameron’s speech was a genuine act of decisive political leadership. There are risks, but there always are. There is also a risk that the EU needs to take forward a treaty change that we are forced to put to a referendum that is then lost. This risk has now been sidestepped, because we now have the opportunity to package it up with more popular changes and put it too an in-out referendum.

But there is a big problem with Mr Cameron’s speech, which I did not pick up last week. Aside from its tactical genius, it is intellectually vacuous. Its economics is based on a fatuous understanding of international competition and the fear of Europe falling behind the developing economies. Its analysis of how the EU needs to be changed is hot air with no concrete proposals. A single market without harmonised rules may sound good, but what does it mean in practice? I really don’t understand how this wishful vision breaks down into nitty-gritty negotiating points. Mr Cameron badly need somebody with intellectual heft to lead the negotiation – the job the Lord Cockfield did for Mrs Thatcher in developing the original European Single Market in 1992. The risk is that he will make no headway in the negotiations, and waste an opportunity to improve both Britain’s role with the EU, and the stability of the EU itself. That’s the big problem the speech opens up.

Growth: the deeper questions

Today first estimates of the UK’s final quarter GDP show that the economy shrank by 0.3%. There will be a lot of posturing around this but it doesn’t mean that much. GDP is not a direct measure of wellbeing (unlike unemployment, for example), and it isn’t that clear how one quarter’s statistics have a bearing on people’s day to day lives. Besides these early estimates are not very reliable. Still these GDP figures do prompt some wider questions.

The first is about short-term economic strategy. A large number of government critics, loosely referred to as “Keynesians” though no professional economist would accept that label, say that a series of poor GDP returns reflect a failure of economic management. Firstly that cutting government expenditure reduces demand, which has a multiplier effect to shrink the economy as a whole. Second that the government should in fact be doing the opposite: using fiscal policy to use the same multiplier effect to boost the economy at large. I don’t intend to discuss this much further today, except to make this point. These arguments have weight because the UK economy is in recession, with high unemployment. This means, or should mean, that there is slack. Slack is usually inefficient, especially when unemployment is involved, and evidence that the slack is being taken up would come from better GDP growth figures. But what people are talking about is a short-term effect: once the slack is taken up the economy bumps into more substantive constraints and “Keynesian” stimulus would have undesirable effects, such as inflation or an unsustainable trade deficit. But what are the prospects for growth in the longer term, and does it matter?

There is now quite widespread pessimism about the long term prospects for growth in the UK and other developed economies. Mostly this is ephemeral. People assume that current trends simply continue; a few quarters of stronger growth and the mood will lift, even if this says nothing about longer term prospects. But more serious questions are being posed. Mostly these are based on demographics – the aging of the baby boom generation – and an allegedly slowing pace of innovation. The Economist had an interesting article on the latter a couple of weeks ago. This explained the reasons why people are becoming pessimistic – but then pointed to reasons for counterbalancing optimism. I think The Economist is right as far it goes: innovation picks up in some areas just as it slows in others. But they miss an important wider question about the role of economics itself. They too easily assume that innovation will lead to increased productivity and this to growth, in accordance with conventional economics. I think this may be breaking down.

Try to think about this in terms of three ways in which economic wellbeing advances. First is the conventional consumption which dominates economists’ thought. People consume more goods and services, and the economy is able to deliver these because productivity rises. Second is the consumption of what I would describe as personal goods and services. This superficially resembles the first sort of consumption, but the very nature of these goods and services is that productivity cannot grow. Think about personal therapy – shorter sessions or sharing sessions with more people undermines the product we want to buy. Another example is status goods – often the whole point is to show status by buying goods or services that are produced at low productivity. And finally people may opt out of the conventional economy altogether: take time off, pursue hobbies and so on.

So what if people direct their energies (and use innovation) to consuming personal goods and/or opting out, rather than consuming conventional goods? Economic wellbeing advances but GDP growth does not; in the case of opting out, GDP actually shrinks. Economists tend to be very dismissive of this, and try to assume their way out the problem: in particular that than economy advances on all three fronts at once, so that conventional consumption is representative of the whole. This has worked well enough for the “opt out” option: I am assured that there is good evidence that leisure increases alongside consumption, not in opposition to it. But there is a logical problem with the advance of personal goods, and economists have a name for it: Baumol’s disease, after the economist who pointed it out. The more productivity advances on conventional goods, the higher share of the economy is taken up with personal goods – and you have to work that much harder to improve productivity on conventional goods to achieve the same level of growth. Economists may have named it, but they still usually ignore it and its implications. They usually just have a quick moan that we should spend more energy trying to improve the productivity of services (the problem is usually defined in terms of agriculture, manufacturing and services – with what I am calling personal goods being part of services).

But I think the whole balance is shifting. There are limits to the extent that people will want to improve wellbeing by simply consuming more mass-produced goods and services. An increasing proportion of the population has reached that limit (I certainly have), instead increasing leisure or buying “quality” (lower productivity) goods. And look at innovation. I consider my smartphone to be a fantastic technical advance that has improved my life a lot. But has it helped the conventional economy by helping me to produce more services for other people to consume? It hasn’t. Quite apart from the demographic issue, which is real enough (and you could say this is actually the same thing, with people choosing more leisure by retiring for longer and consuming more personal services through hospital and other care), the rate of conventional economic growth is slowing in the developed world.

Does it matter? After all economic wellbeing may still progress. Unfortunately there are two reasons that it may: debt and taxes. These two lie at the very heart and purpose of the conventional economy. Debt and credit tend to get washed away in a high growth economy – but it will get increasingly difficult for people, businesses and governments to service past debts in a low growth environment. And a lot of the personal services that take up a higher and higher proportion of our economy (like health) are funded through taxes, as well as support for leisure (pensions) – and yet if the conventional economy does not grow this will bulk larger.

Debt and taxes. These issues are destined to dominate developed world politics in the century to come.

Cameron may yet win his gamble on the EU

This morning the British Prime Minister David Cameron gave his long awaited speech on the European Union. I didn’t listen to it, or read it, so you won’t get any light on the nuances of his argument here. I’m interested in the political dynamics, which, as usual, do not depend on exactly what he said. From the BBC report his speech was fairly much as the last two weeks’ briefing had suggested. We wants to “renegotiate” Britain’s terms of membership, and then offer the British public an in/out referendum, after the next General Election, by the end of 2017. Mr Cameron’s political reputation is mixed. He showed brilliant footwork when he first took over leadership of the Conservative Party, but rather fluffed the 2010 General Election with his incomprehensible idea of the “the Big Society”. He restored his reputation with the assured manner in which he put together the Coalition government with the Liberal Democrats. After that he seemed lack vision and grasp. Will today’s move restore his reputation? It might.

A couple of weeks ago I thought he was onto a hiding to nothing, and in the process of leading his party to defeat at the next election, set for 2015. Various shades of Euroscepticism seem to define the rank and file of the Conservative Party, right up to Parliamentary level. It seems impossible to satisfy them. On the other hand assorted Europhiles (in deed rather than word in most cases) amongst the deeply conservative British establishment don’t want to rock the boat.  He risks isolation and an almighty mess. His own view seems to be that the UK is better off inside the EU, but it would be really nice if its institutions were less intrusive.

But Mr Cameron has two things going for him. First is that his personal view on the matter probably represents what most of the British public thinks: a very grumpy “well yes I suppose so” to the EU. From this he should be able to build a bond of trust, unlike other participants in the debate, whose firm views one way or the other are not shared by the public. And second, Mr Cameron is a vital swing voter in the debate. It is highly unlikely that either side can win a referendum without his support. The smart thing for the various players here and abroad is to build bridges with him, rather than try to isolate and vilify him. This could put him into the driving seat.

Things are now starting to get very interesting.  In spite of the very long time they have been given to develop a party line, the Labour opposition is completely at sea. They are trying to paint a picture of a PM beholden to his backbenchers, and who, by creating uncertainty, is making things worse for the national interest. This is desperately unconvincing.  The British public probably rather agree with what their PM is saying, while Labour are merely offering obfuscation and procrastination.  Uncertainty over Britain’s future in the EU is already a fact of life.

Meanwhile, those who are in favour of the UK staying in the EU are at long last starting to stir. Their silence to date has been one of the main frustrations of the public discussion so far. The Eurosceptics have had the field pretty much to themselves, unchallenged. What these EU supporters – from outside and inside the country – have to say is pretty ugly, it has to be said. They aren’t trying to sell the EU as a positive vision. They are stoking fears about what life would be like outside. Real Europhiles, like me, really dislike this negative stuff, a lot of which is intellectually unconvincing. But elections are won on the ugly stuff – just look at the 2011 referendum on a fairly minor tweak to Britian’s electoral system, which was portrayed as the end to life as we know it. The Eurosceptic arguments are being given much greater scrutiny, and many will wilt.

The big problem for Mr Cameron is how the “renegotiation” will work out.  I use quotation marks because ever since Harold Wilson used it in the 1970s (in my formative political years) I have felt it to be an sham concept, used by armchair commentators. Either you enter into an honest negotiation about matters that need fixing, or you are going back on your promises; you should be honest about which it is. The difficulty is that our existing treaty terms are a carefully balanced whole, and if you change one bit it unbalances others.  The favourite Eurosceptic idea of opting out of the social standards bits we don’t like, and then use this to give British businesses a competitive edge over their foreign rivals, has a rather obvious flaw as a negotiating stance.  What’s in it for them?  The country’s European partners would mainly rather have us in than out, and we do have a trade deficit with them, but this does not add up to a strong negotiating position. Mr Cameron might simply do what Mr Wilson did: get a few token concessions and try to big them up. That would be risky for Mr Cameron’s reputation, though he might still win.

But Mr Cameron has set quite a long time frame for his negotiation. In that time it is quite likely that the EU will want to alter its treaties to make the Eurozone more stable. Under Britain’s “referendum lock” legislation this could trigger the need for approval by referendum in the UK anyway. If Mr Cameron can tie these treaty changes into his “renegotiation”, and then use his in/out referendum to endorse it as a package, then he does have something to negotiate with – and can paint himself as doing the EU a favour. The transfer of powers between EU institutions and the UK might actually be two-way traffic. If he pulls that stunt off, his political legacy will be secure, in my book anyway.

They Came to a City: what happened to wartime Utopianism?

they_came_to_a_city_01Last week we we saw the film of J.B. Priestley’s They Came to a City shown by the BFI as part of their season of Ealing Studios films.  As entertainment the film lacked a certain something, but as a political and historical document it is of real interest.  It reflects the wartime desire of many Britons to build a better society once the war was over – as a sort of quid pro quo for pulling together as part of the war effort.  Does this have anything to say to us now?

The film, made in 1944 from a play produced in 1942, transports nine people drawn from across British society to a Utopian city, where life follows the Priestley’s distinctly socialist vision of the way life should be.  We don’t see the city itself, merely the reactions of these individuals to it: they are offered the choice of staying or returning to current society.

The film only offers hints of what this ideal society is.  Back in the 1940s people probably had a better idea about it than we do now.  It is an egalitarian society where people are focused on well-being rather than possessions, cooperate rather than compete and “do an honest job for the community for what the community thinks we’re worth,” to quote a later Priestley work.  People are happy, and capitalism, or its prewar incarnation, is banished.

The three working class characters, including the two principals, all like this vision and want to stay – or promote its ideals in the real world.  The capitalist plutocrat hates it: he is told that what he does for a living is criminal there.  Two of the three aristocrats also reject the city, for similarly predictable reasons: the male character giving a little speech about how he didn’t really like to have to deal with people at all.  The middle class couple is split.  The bank manager husband is keen to throw off the oppressive stupidity of his organisation; his rather neurotic wife is horrified: she wants a garden and children of her own, and doesn’t want to mix with “common” people.

The film is making two distinct points here.  First is that many people want this ideal society but are convinced that it is impossible or impractical to achieve, and so do not strive for it.  It is important to inspire such people with the hope that it is possible: which is what the thought experiment of the city does, and gives rise to film’s messianic conclusion.  The second is that the ideal society will be disliked by many people, and not just those at the top of society.  At all levels people pin their hopes on a vision based on the way society is: material possessions, status and so forth, and so resist changes to the way society works.  The opposite is also true, of course: some of the upper echelons of society will be as anxious for liberation as anybody else, represented in this film by the upper class daughter who breaks from her mother to stay in the city.

How does this look now?  The first reaction is to think that all the hopes have come to nothing, and that we are reduced to the cynicism that Priestley was so anxious to combat.  Putocrats flaunt their wealth; capitalist competition drives most of the economy; people remain obsessed with possessions and status.  Utopianism is dismissed as impractical.  You can imagine Priestley preaching to us today with the same fervour.

But that’s a glass half empty view.  Since 1945 much of the socialist vision has come to pass.  Social security, the National Health Service and free education are now all accepted foundations of modern society.  The proportion of economic activity not driven by competition: government administration and services mainly, is much higher than the pre-war level.  Even a shadowy idea of competition within the NHS is bitterly contested, with most people instinctively against.  Class distinctions may be persistent, but they are a faint shadow of what they were.  The overwhelming majority of Britons would identify with the (rather articulate) working class characters in this film, who seem distinctly middle class to us.  The aristocracy is an irrelevance.  The middle class characters look hopelessly outdated.  Apart from the working class characters only the plutocrat remains of our time – and he is a figure of humble origins made good.  And poverty of the sort taken for granted before the war has been largely banished – and people are much happier in all sorts of ways.

But it is not our way to reflect on these gains.  However close we get to utopia it always seems an infinite distance away.

Taxing multinationals – after the sound and fury we need solutions that work

Multinationals like Starbucks, Amazon and Google has been on the wrong end of publicity in recent weeks here in the UK.  They don’t seem to be paying very much corporate tax, in spite of well established and successful commercial operations here.  But there is something missing from the debate: nobody seems to be offering much of a solution to the problem of taxing multinationals.  There’s a lot of sound and fury, but it all ends in a bit of a whimper.  We can do better than that – but only by adopting policies the government’s Conservative members will be deeply uncomfortable with.

The problem is easy to see.  If a multinational makes something in one place and sells it in another (to take the simplest possible description of a multinational supply chain), then it has the opportunity to apportion profits to more then one place…and to manipulate this to where tax rates are lowest.  This has always been so, but with an increasing proportion of costs being attributable to soft things like intellectual property, this is getting much easier to do.  The traditional way of fairly attributing profit is through establishing a fair “transfer price” for goods or services as they move between countries along the chain – based on open market value.  The idea of open market value has always existed more in theory than practice, and the process often ends up in endless bickering between the company and the tax authorities of the various countries it operates in.  And in the end the results are often hard to justify.  What are the alternatives?  There are two main approaches.

The first approach is to reduce corporate tax rates to make the issue irrelevant, and along the way to make your own jurisdiction very attractive to investors.  This is not as crazy as it sounds, and has quite a respectable intellectual pedigree.  Companies aren’t people, and ultimately taxation is about people.  Taxes are charged whenever people try to extract money from a company, through salaries, dividends and what have you.  Money that is left in companies is reinvested, and taxing it merely reduces the amount available for reinvestment.  This is an example of the idea that tax should be based on expenditure rather than income and capital.  It encourages saving and investment, and most of the time economists think that economies would be healthier if more resources were invested rather than consumed.

This line of reasoning was very popular in the late 20th century, but has since lost much of its appeal, except amongst the very rich.  Something has gone wrong with the savings and investment cycle.  The amount of constructive, worthwhile investment that comes out of savings is not what economists used to think.  A lot disappears into various forms of financial engineering that fatten up an overpaid finance industry and not much else, inflating selected asset values into unsustainable bubbles along the way.  Overall savings, especially by the very rich, seem to be a drag on an economy – often requiring “negative savings” from government deficits to keep the economy on track.  This process was described by Maynard Keynes in the 1930s and it is still true today.

Low capital taxes, including company taxes, simply seem to exacerbate a growing gap between the very wealthy and everybody else, without generating the needed investment. Profit taxes have a particular attraction: they are economically efficient and do no distort ordinary business decisions, outside the allocation of capital.

So what’s the alternative approach to taxing multinational businesses?  This is what we should be talking about a lot more: the top down apportionment of profits.  Under this system you establish a business’s worldwide profits, and then apportion it to national jurisdictions by a formula which measures activity: a combination of sales, employees, pay or suchlike.  Those jurisdictions can then decide what rate they want to charge.

The idea of top-down apportionment has been developed for some time by US states for allocating profits between the states of that country.  In the 1980s California tried to extend the idea to global operations, but was forced to back down, mainly after furious international lobbying from our own British government.  There is a nice irony if American companies are now runiing rings rounds us British.

But that example shows the idea’s main weakness: it needs international cooperation to get going.  It helps if all countries are doing it, and using the same formula.  There is an obvious first step for the British government though: to agree and apply such a system to the European Union.  I don’t think there would be much difficulty in mobilising the other EU countries; Ireland, a traditional advocate of tax sovereignty, is not in a particularly strong bargaining position these days, and we can let them keep their low rates.  Once the EU has an agreed system for recognising and apportioning profits, we would then need a treaty with the US.  Since that country is already a wide practitioner, there is good reason to hope for progress there too.  With the EU and US on board, a global critical mass starts to build.

But Britian’s coalition government does not seem to be thinking along these lines.  For its Conservative members, no doubt doing deals on tax with the EU is anathema.  Instead they are happy to quietly go down the first route and cutting business taxes, in spite of little evidence that this is stimulating investment.  Of the Liberal Democrats, however, I had expected better.

The imperial illusion of macroeconomics

Once again the UK Chancellor of the Exchequer’s Autumn statement has provoked a storm of claim and counterclaim among economics commentators.  The particular breed of expert whose voice is loudest is the macroeconomist.  They have a lot of important things to say.  And yet their analysis is often superficial.  We end up talking about the wrong things.

There is a magnificent imperial power about macroeconomics.  It looks at economies in aggregate, and develops a broad sweep.  It deals with national income, growth rates, productivity, inflation, unemployment – all concepts that are represented by neat numbers.  Their policy instruments are referred to as fiscal and monetary policy – policies that are meant to influence these aggregates in a fairly direct way, and which

For me, the metaphor of imperial rulers to represent these experts has strong appeal.  It conveys the right sense of arrogance.  I conjure up pictures of imperial aides to the Russian Czar (or his Soviet successors) implementing arbitrary policies to be implemented across their domain.  They deal in the big picture – and refuse to hear the special pleading of provincial representatives.  Of course things don’t work out in every detail, they say, but the reach and sweep of their rule means that much more good than harm is done.

Macroeconomists themselves no doubt would prefer an analogy with classical 19th century scientists.  They did not concern themselves with the movement of individual atoms, but derived physical laws that worked at a higher level.  In aggregate the behaviour of atoms and people are predictable.

The idea that leaders deal with big strategic matters, and leave the details to their underlings is an old one, that has enduring appeal.  It enhances the egos of the leaders. It doesn’t work, though.  The best leaders find themselves having to command both the strategic sweep and the tiny detail.  The Russian Czars came acropper.  And the theroties of 19th century scientists turned out to have much less value than they thought in the real world.

This is true of macroeconomics too.  In the first couple of years of taking an Economics degree, you learn about macroeconomic models – about the use of fiscal and monetary policy to guide the aggregate movements of an economy.  It is tremendous fun – but by the third year you really should be growing out of it.  In the end economies are driven by what is happening at the level of individual people and businesses – and as people are highly adapable, and behaviours change – never mind the evolution of technology – what works one year may not the next.  Unfortubately too many economists can’t seem to get past the imperial illusion.

Take the current furure over the British economy.  It’s full of growth rates, deficit levels – and demands for this and that on fiscal and monetary policy.  Two elements of the macroeconomist’s stock in trade are prominent: international comparisons (the British growth rate is less than Germany’s, etc.) and comparisons with the past, going all the way back to the Great Depression of the 1930s.  And the analysis usually stops there – few attempt to pick apart the differences and similarities that these comparisons invite.

And yet there are a number of big changes taking place in the British and world economies that are bound to affect the choices open to our policymakers.  These get superficial coverage, if at all.  Here are a few:

  1. Finance’s role in the economy is diminishing, as we understand that much of its alleged value is illusory.  This means that a sector that appeared to be highly productive in macroeconomic terms is shrinking.  That is not a bad thing – but people seem to be screaming blue murder when the national income figures suffer the inevitable outcome.
  2. Likewise the benefits of North Sea oil are fading – another statistically highly productive sector shrinks, though this one has more underlying substance.
  3. Banks’ lending practices are changing, as credit to private individuals becomes less easy, and loans to property developers more difficult.  This is inherently a good thing, as it helps get the economy onto a sustainable path – but it is playing havoc with the macroeconomic statistics.
  4. The gains from globalisation are going into reverse.  For years in Britain the prices of imported goods fell or stayed the same while wages and domestic prices rose steadily at 3-4%.  These “gains from trade” added a lot to the feel-good factor and growth before the crisis- even though we whinged about loss of manufacturing and overseas call centres.  Now import prices are rising steadily while pay remains frozen.  These gains from trade were not permanent, bankable changes – but reversible.  This is nothing to do with protectionism, by the way, but arises from the perfectly predictable workings of the economic law of comparative advantage.
  5. Meanwhile “additive manufacturing” and other technology changes mean that fundamental technological change is alive and well, bringing both new opportunities and continued obsolesence – but of quite unknown impact on conventional economic measurements.

I could go on.  These factors, and others, should be very much part of the discussion.  They invalidate historical and international comparisons – until and unless we dig a lot deeper.  To me the wider message is that we can’t simply wind the clock back to where we were in 2007, and it is not self-evident that a sustainable growth rate of 2% or even 1% can be regained just a lifiting levels of confidence a bit.  Therefore using fiscal policy to stoke up aggregate demand may simply bring short-term relief followed by an even bigger crisis.  Increasing government sponsored investment is almost certanly a good idea, but it matters where this goes.  But neither the government’s critics, nor even its defenders seem interested in such details.

In an excellent article in this week’s FT, Sebastian Mallaby shows how macroeconomic success leads to microeconomic complacency, which in turn leads to breakdown.  The developed world has just gone down this route.  Now the BRICs are doing it.  China shows no sign of dealing with the baleful influence of its state owned enterprise; India is content to let curruption and inadequate infrastructure go unaddressed; Russia sees no reason to change its contempt for the rule of law; and Brazil’s government is releuctant to take on vested interests.  All these economies are now slowing.

Meanwhile, back in the developed world you would have thought that we had been cured of macroeconomic complacency.  And yet almost nobody seems prepared to take on the deeper issues that lie behind the crisis and any solution to it.

European elections: saving the Lib Dems from wipeout

Winner Lib Dem Golden Dozen Blogs – 9 December 2012

The Liberal Democrats have just selected their candidates for elections to the European Parliament in June 2014.  These elections are important to the party – it takes itself seriously as a player in this forum, and it contributes a lot to the party’s strength and depth nationally.  But the party faces a wipe-out.  It needs some radical thinking to have a chance of avoiding such a fate.

The problems start with the party’s low opinion poll standing.  The typical 9-10% is not enough to get the party representation in any of the regional constituencies, except the South East, under the PR system that is used.  But it is worse than that.  The party has always underperformed in these elections.  Its usual campaigning methods are worse than useless.  The party’s appalling showing in the London 2012 elections is a much better guide: closer to 5-6%.  Complete wipe-out.  How to save the party?

The first point is that the party needs to acknowledge the root causes of its campaigning weakness in this type of election.  The party’s electoral successes in local and Westminster elections have been achieved using campaigns that focus on three things in particular: identifying local issues that stir the passions of floating voters, a ruthless third party squeeze (“Labour can’t win here, etc”), and identifying voters and getting to them to the polling stations.  All three are useless in Euro elections – and yet they are so deeply embedded in Lib Dem campaigners’ thinking that they infect everything the party does.  The party fails to put over a message that motivates voters, and since canvassing covers such a small proportion of the potential electors (and usually they are based on other sorts of elections anyway), the polling day knock up has very little impact on the result.

Unfortunately, it gets worse.  The party’s Euro candidates tend not to be, shall we say, the party’s most inspiring campaigners. They are very interested in the goings of the European Union.  This makes them well qualified to be Euro MPs – and indeed the party punches well above its weight there.  But they are not good at finding messages that connect with voters.  Even when they think they have found a killer, like using European arrest warrants to catch terrorists and paedophiles, this in practice has little resonance with the public.

So the party’s normal messages and techniques are ineffective, and the Euro candidates struggle to find an alternative.  In the last election I remember delivering piles of tabloid newspapers that were clearly going to have little or no effect.  Motivating the activists is a real problem, never mind the voters.

So what to do?  The basic strategy is quite clear, and has been talked about for some time.  Find enough voters who feel positive about the EU’s role in Britian’s future to turn up and vote to reach about 15-20% of the vote share.  No other significant party is rallying that vote.  The Labour Party is trying get these voters by default, but without prejudicing its chances with the more sceptical majority.  The Tories don’t seem to think these voters even exist.

Next, how can effective campaign be mounted?  What will be needed is poster and Internet advertising, mass direct mail based on promising demographics, and a good freepost (the single leaflet delivered for free by the post office).  This is supported by an online and social media campaign.  All this activity, combined with the right messaging, will draw in media attention.  Almost no need for local activists to do much legwork – they can get on with their local campaigns.  This will cost a lot of money – so the first priority will be to raise it.

The party is getting better at fundraising, but many party activists have little idea about how it works.  Donors, rich and not so rich, need to be motivated in a very similar way to ordinary voters.  They need to be inspired by the campaign’s messages, and think they might catch on with the wider public. You don’t raise the funds first, then decide on the campaign’s messages; it is the other way round.  So the work on messaging needs to start now.

Here is my humble suggestion.  The campaign theme should be “Save Europe!”.  No doubt this can be improved on, but note the key features.  First and foremost it is pitched as a response to a threat.  People are more motivated by response to threats than positive ideas, and motivation is critical.  The “No” campaign for the AV referendum was highly successful as it pitched AV as a threat to the status quo.  So is pulling out of the EU a threat to the status quo.  The party can be progressive and conservative at the same time!  Further is the idea of “Europe” – vague and big.  The idea is to appeal to people with an international consciousness.  There is a double meaning: first to save Britain from leaving the EU, and second for the country to play its full part in solving a continental crisis that will affect us anyway.

How to build on this idea to make the threat seem real?  “Save jobs” and “Save the Environment” should be the focus.  Messing around with EU membership is a clear threat to jobs – and indeed one of the main appeals will be to businessmen who fear for the future of Britian’s relationship with the EU.  The environment allows the party to play on its international outlook.  Indeed it is an appealing idea to use an Earth from space picture with Europe visible on the surface as a campaign logo.  It also sets the party up for some skirmishing that may be needed with the Greens.  And it contrasts with Ukip’s outlook.

Ukip are the rising starts of Euro elections, which frightens the two main parties.  But if the Lib Dems are after core voters rather than floaters then Ukip’s strength is an opportunity.  It helps define the party: “We are the party which is against everything Ukip is for.”  The more they know about Ukip, the more they know about us.  The party should indulge in some relentless negative campaigning against Ukip – including how they have behaved in the European Parliament – though not straying into accusations of racism.

So you get the general idea.  The best next step would be to appoint a national organiser to work on messaging and strategy.  This needs to be somebody comfortable with challenging the Lib Dem conventional wisdom on campaigning, but with a degree of political realism (contrast some of the Yes to AV campaign types).  Though much of the campaigning needs to be done in the regional constituencies, a lot of the design effort can be done nationally – and the Internet and media campaign needs to be led nationally too.

I do hope the party wakes up to the danger and tries to a bit radical!