The shape of Brexit is becoming clearer. Don’t write Theresa May off.

I've given Brexit it a well-earned rest over the last month. It remains Britain's leading political issue, but the commentary from all sides is completely unedifying. Remainers are mainly just whingeing, angry that we are were we are. I agree, but where next? This lets the Brexiteers off the hook: instead of being forced to be more specific about how to solve the many problems thrown up by Brexit, they can simply moan about the moaning and promote an unconsidered hard Brexit. And this is what most of them are doing, betraying a complete failure to understand the predicament that country finds itself in. Still, a little reflection shows us how things are likely to shape up.

Not that the government is giving us much clue. The Prime Minister, Theresa May is staying tight-lipped, though she has been offering hard-Brexit mood music. This is partly because that is the type of leader she is: she likes to weigh things up in private before committing herself, a characteristic that she shares with the German Chancellor Angela Merkel. That Mrs Merkel is one of the most successful politicians on our continent shows that many commentators are too quick to dismiss Mrs May. I think she could last.

The fact is that the government's silence is not just a question of Mrs May's style. There are sound political reasons for it. The Conservatives command but a narrow majority in the House of Commons, and the party is hopelessly muddled on the issue, as are Conservative voters. Any clear declaration of strategy will create a storm. When that time comes the government needs to be ready. Mrs May became prime minister by picking the right moment to attack after years of patient build-up in which her potential opponents each self-destructed. She no doubt hopes for something similar over Brexit.

The eventual strategy will be the product of an alliance of three critical minsters. Mrs May herself, the Brexit minister David Davis, and the Chancellor of the Exchequer Philip Hammond. The alliance between Mrs May and Mr Hammond goes back a long way; they operate in compatible ways. Mr Hammond is putting the soft Brexit side of the argument - about the need to prevent disruption to the economy and to protect inward investment. Mr Davis is an interesting character. He is an ideological Brexiteer, but he possesses an integrity that few of his fellow politicians can match, while remaining an intelligent man. So far these attributes have not helped his political career; he has been too much trouble, and easily outmanoeuvred by smooth operators like Mrs May's predecessor, David Cameron. Mrs May showed good judgement in picking him as her minister for Brexit. He doesn't give much away, but from what I have seen, he is steadily working through the different issues and options and weighing the pros and cons. Meanwhile other senior ministers involved with Brexit, the Foreign Secretary Boris Johnson, and the International Trade minister Liam Fox, are showing themselves up to be political lightweights not suited for these difficult times.

Given this background, we can divine what the government's strategy is likely to be: a soft Brexit leading probably, but not inevitably, to a hard one. First of all the government will push to activate Article 50 of the Lisbon treaty, giving two years notice to formal exit. This needs to be done by March, because that's what Mrs May has promised. There are sound political reasons for this: first it means that there will be no awkwardness over the European Parliament elections due in 2019; more substantively the formal exit will be completed in plenty of time for the General Election due in 2020. Incidentally, there is no evidence that Mrs May plans to expend precious political capital on trying to get round the Fixed Term Parliaments Act to hold an early election. The Labour Party is stewing nicely in its own juice and this mitigates much of the government's problem with a small majority. It is highly unlikely that they will stage a recovery by 2020, rather than being completely hollowed out. An election now would be a distraction from the problem at hand.

The problem with an early invocation of Article 50 is that it leaves a cliff face on eventual exit - the so-called train-wreck Brexit. Actually delaying Article 50 may not help by much - the real problem is negotiating alternative trading arrangements, which formally can't start until after exit. But there is an obvious solution to this: a transitional period after exit. In this period much of the current trading relationship would be preserved, and the UK would continue to make budget contributions. The spectrum of possible solutions runs from full membership of the EEA (European Economic Area - like Norway, Iceland and Liechtenstein) to simply membership of the customs union (like Turkey). The EEA option would be by some distance the simplest solution, but it would involve continued free movement of labour. That is surely a red line for Mrs May (though, I suspect, not for Mr Hammond). She has always taken a hard line on immigration, and seems immune to the economic arguments made for it. The Turkey solution would leave many markets not integrated, with high potential costs to some parts of the economy. She will aim for EEA market access with Turkey levels of free movement. She won't get it, but that is what negotiation is about.

How long will the transitional period be? My guess is five years (i.e. up to 2024), though her initial bid might be just two. That puts the ball firmly in the court of the next parliament. The government will paint a picture of full exit from the customs union after 2024 in terms that will warm the heart of ideological Brexiteers. In that way Mrs May will paint herself as a hard Brexiteer. But there will be a general election before then, and if public opinion swings away from Brexit, the transitional deal can be made into something more permanent.

That's what I think. It will remain formidably complicated - but it gives ground to both sides, and she can claim be implementing the mandate from the referendum, while giving everybody more time to think about how a standalone Britain should work. There will be meat for both factions in the Conservative Party - and Mrs May can present herself as a unifying figure. It might even work.

 

The Tories take possession of Brexit; the Lib Dems will benefit

Theresa May, Britain's prime minister, closed the Conservative Party conference yesterday with a striking vision of her political direction, which was consistent with speeches made by other members of her government. This is a marked change of tone from her predecessor, the rather liberal David Cameron, and his Chancellor, George Osborne. Brexit is at the heart of it.

Earlier this week, FT columnist Janan Ganesh suggested that the stream of social policies coming out of the Conservatives were an attempt to deflect the politicians' obsession with Brexit. But this is to misunderstand what these policies are about - they are an attempt by the Conservatives to tell people that voted for Brexit that they "get it". The vote to leave the EU is the starting point of the whole thing.

What Mrs May is trying to do is to adopt what I will call the "Brexit coalition" as a political base. This starts with her hinterland: the non-metropolitan middle classes - most especially their older members, as their children are going to university and becoming more metropolitan in outlook. This group has a nostalgic view of the past, and feel threatened by the cultural aspects of globalisation. All the talk of patriotism, the hard line on immigration and the attacks on liberal elites (Oh how sick I am of being told that I am part of a ruling elite when all I am is a school governor!). Other nostalgic policies, like promoting grammar schools are in the mix too.These are bedrock Conservatives, largely taken for granted by Mr Cameron.

What is more interesting is that Mrs May wants to add the disaffected working classes, who voted in droves for Brexit, notwithstanding the advice of the Labour Party. They share the cultural biases of the non-metropolitan middle classes, but add to this resentment about economic insecurity. Mrs May is making a particular pitch for this group: emphasising the struggles of people at the margins, though failing to observe how much austerity policies, such as changes to tax credits, have added to their hardship. For these people she made a strong pitch for "fairness", and indicated that she would act on a series of economic problems, like housing costs and poor infrastructure. She also rounded on unscrupulous businesses. In parts she sounded not unlike Ed Miliband, Labour's previous leader, allowing her to claim the "centre ground". Strikingly she also included a pitch for ethnic minorities, acknowledging discrimination. Ethnic minorities make up large sections of the working class, after all - though the Brexit voters tend to be "I'm not racist but..." types who think it is them who are the victims of discrimination.

But one part of the Brexit coalition is being left behind by all this: the businessmen who called for a bonfire of regulations to make businesses more competitive. On the one hand Mrs May's tough line on sovereignty, immigration and foreigners points to a hard Brexit, and so little need to heed EU regulations. On the other the threatened policies to limit immigration would add a very hefty layer of extra bureaucracy on businesses, and the appeals to "fairness" suggest a strong role for regulation and government intervention too. Regulation and democracy go together like a horse and carriage. They may be jumping from the frying pan into the fire. But this part of the Brexit coalition always mattered more for its money than its voter appeal.

It is possible to admire the political cleverness of this. Ukip, who had been harrying the Tories on their nativist flank, are struggling at the moment, and this sort of thing should see them off, in Conservative constituencies at least. One might ask what the point of Ukip is. It also takes advantage of Labour's disarray. At their own conference Labour failed to discuss Brexit. Their leader, Jeremy Corbyn, seemed to embrace it - but (admirably) failed to bang the drum on immigration. Other Labour big hitters want it the other way round: oppose or soften Brexit, but wave the flag on immigration. This leaves muddle at the core of Labour's message on the top issues of the day. The party will no doubt maintain its iron grip on public sector workers, and those vulnerable to government reforms (students, benefit claimants, etc.). I would also be very surprised if their grip on ethnic minority communities was seriously dented. But this falls way short of an election-winning combination. It is not clear what is their appeal to grumpy working class voters, to say nothing of the non-metropolitan middle classes that former Labour leader Tony Blair made inroads on the last time Labour won an election.

But speaking as an ordinary decent liberal and proud citizen of the world (subject to a sneering jibe in Mrs May's speech), I am aghast at the direction the Tory Party has taken. The are stigmatising foreigners and implying that I am unpatriotic. Many of us are friends, neighbours and work colleagues with people who are not British citizens, and we look on them as equal human beings who have earned our respect and a place in our society. I find that impossible to reconcile with some of the rhetoric coming out of the Conservative Party. And it gets worse. The EU referendum unleashed a wave of hate crime and anti-social behaviour aimed at people who are seen as not belonging here (not just foreigners of course). Much as the leaders of the Brexit campaign claim that this is nothing to do with them, Conservatives run the risk of allowing these attitudes to take root, even as they claim that it is not their intention. In the same way Mr Corbyn will not call off the misogynistic hard left thugs that are part his own coalition, contenting himself with mild disclaimers.

This is now becoming a real political opportunity for the Liberal Democrats. The party is now the best home for open-minded people who do not have a nativist outlook - or those of them appalled by developments in the Labour Party anyway. It becomes easier for the party to take credit for the better bits of the coalition years - which had accrued to Messrs Cameron and Osborne - rather than just the blame for the bad bits.

That opportunity for the Lib Dems will grow if the Conservatives fail to deliver on their new promises, as seems almost certain. As soft Brexit turns into a mirage, and hard Brexit turns out to be highly disruptive, and as the Tories fail to deliver economic gains, such as lower rents and better paid jobs, to working class and other struggling communities, and as the party's small parliamentary majority bogs it down, then the appeal of Mrs May's government will diminish. With Labour looking like an empty bubble of hope (or a pyramid scheme as suggested by the Economist's Bagehot column), there is reason for the Lib Dems to gain.

Of course, the Lib Dems themselves have many serious questions to answer. But it may be easier than people think for it to double its vote share to 15-20% before coming under more serious scrutiny. As the keener Lib Dem activists travel to the latest by-election in Mr Cameron's old seat in Witney, Oxfordshire, it is impossible not to notice the spring in their step. The bookies are already giving them second place (from fourth in 2015).

But this is a small shaft of light in a very gloomy British political landscape, as the wonton act of self-harm committed by its electorate in the referendum pushes events on a seemingly inevitable course.

The housing crisis is an opportunity for the left.

"A Britain that works for everyone." This is what Britain's Conservatives say they want to achieve under the new prime minister, Theresa May. Partly, of course, this talk is meant as an attempt to divert attention from the difficult choices implied by Brexit.  But there is an issue that is slowly coming to dominate the life-chances of "everyone", and could be even more important than Brexit: housing.  Or to give this a bit more precision: the high cost of buying or renting residential property. In order to fulfil their slogan, the Tories will have to make progress on this. Will they?

What brought this home to me last week was a report that people born in the 1990s (the so-called millennials) are worse off than those born in the 1980s at the same time in their lives. This is startling for a society that has, generally speaking, benefited from economic growth over the last 30 years, and where educational standards are rising. And the reason is easy to see: compared to people born even ten years earlier, many fewer millennials can afford to buy their own homes. They are unable to benefit from a general rise in property prices that has proceeded apace over that 30 years. Meanwhile rental costs have gone up too, which only makes the gap wider. This phenomenon does not just apply to Britain's overheated southeast - it afflicts most major urban centres, to say nothing of popular university cities like Oxford and Cambridge.

Why is this such a big issue? The millennials themselves are not particularly important electorally, especially as so many of them show little interest in the political process. But their troubles worry their parents. And the trend is evident from before the millennial generation. More importantly, the generations following the millennials will be equally deprived. The numbers of property have-nots are growing, and property wealth is being concentrated into a smaller number of hands. High rents is a cause of hardship for ever increasing numbers of people - and a cause of rising homelessness, with all the other problems that brings in its wake.

Politicians are increasingly aware of this. Conservative leaders are talking the talk. Mrs May has appointed a new cabinet level minister of housing, Sajid Javid, who talks of a moral crisis. All leading politicians talk grandly of building many more houses. But there are two political problems, which are linked. The first is that the crisis arises from a profound failure of market incentives. And the second is that any policy that actually works is going to hurt a lot of politically influential people. This combination presents a test for Mrs May that she is unlikely to pass. It is one of the few decent opening in British politics for the left.

First consider market forces. Read The Economist and you might think that the housing problem is quite simple at heart. It is a failure of supply to meet the increased demand for housing from a rising population and changes to lifestyle that mean more people want to live alone. And there is a ready culprit for this: restrictive planning laws and NIMBYs who resist new housing developments, which between them surround our cities with over-protected green belts. This glib explanation contains some truth, but it misses two awkward points: much land where development is permitted is not being developed because owners would rather wait - "land banking"; and loose monetary policy has pushed up the cost of housing regardless of supply and demand.

Consider the first point. Property developers profit massively from increasing property prices. Indeed, it is central to their business model. They like to build cheap houses to maximise their profits from land trading, fighting furiously any regulations that might make homes more thermally efficient, for example. It is not in their interests to increase supply to levels where the value of property starts to come down. For all their moaning, they are quite happy with the situation as it is - though they would love to get their hands on green belt land with permission to build, and bank that too. A similar logic applies to rental values, since so many new properties are bought to let. The economic incentives do not point to the private sector solving this problem by themselves. In fact many private sector actors are likely to oppose any policy that actually bites, since that means cutting rental and sale values.

The effects of monetary policy are less understood: by this I mean the way governments and their central bankers have had no real qualms about rising levels of debt used to finance private house purchases. This has been happening since monetary policy was let off the leash by the collapse of the Bretton Woods system of fixed exchange rates in 1970. The extra monetary demand for housing set off by this increased availability of finance has not been matched by an increased supply of housing. Indeed it is about this time housebuilding slowed down. Easy money has simply led to the inflation of land prices.

To illustrate this, look at this graph of the ratio of house prices to earnings from Wikipedia (By D Wells - Own work):

1200px-uk_housing_affordability_price_earnings_ratio

We should expect to see house prices rising in line with earnings, given its relatively limited supply. We can see that the ratio of prices is tied closely to monetary conditions. Monetary conditions were loose in the late 1980s (the Lawson boom), but had to be tightened as inflation started to get out of hand. That caused a crash that is seared into the memory of older Tory politicians - the years of negative equity. Then things eased, with the mid to late 1990s and early 2000s being years of easy money. The financial crash of 2008 tightened things up, but now conditions are loose again.

Of course easy money and land-banking are self-reinforcing. If property prices dip, property developers can be confident that monetary conditions will ease and come to their rescue.

If I am right about these two problems lying behind Britain's housing crisis, the solution is quite easy to see. First there needs to be a massive public-sector house building programme, including a large proportion of good-quality social housing, available at rents well below the current market level. This is best done by local and regional authorities, and financed by allowing them to borrow much more. This would put downward pressure on rents, which is perhaps the most urgent aspect of the housing crisis. It would also make it much easier to tackle homelessness.

The second thing that needs to be done is to tighten monetary policy. This may be by using some form of quantitative control on housing debt, but it may also mean raising interest rates. The main idea would be to encourage banks to finance local authority housebuilding, rather than private mortgages. This will require political courage, as it means, for a time at least, property prices falling without making property more affordable (since it will be harder to get finance) - as happened briefly after the crash of 2008/09.

The good news is that the first of these two groups of policy is fast becoming consensus on the left - sweeping in Labour, the Greens and the Liberal Democrats. And yet it will be very hard for the Conservatives to stomach. They associate social housing with left-wing voters. It may also upset NIMBYs where the estates are to be built, to say nothing of hordes of people who have invested in property to let - all natural Tories. Tory politicians talk freely of raising large sums of money to push house construction forward. But I have not heard any talk of giving a serious boost to social or public sector housing, or giving local authorities more freedom. It sounds horribly like subsidies for the private sector that will end up by inflating prices and developers' wallets further.

On the second issue - reducing the volume of private housing finance - I see little sign from anywhere in the political spectrum of this being taken up. This is unsurprising. It would mark a profound change in economic management, which is heavily based on monetary policy. And change would cause outrage in Middle England, attached to its property values. And yet the current way speaks danger. It is increasingly dependent on ever increasing property prices, as these lose touch with incomes. It is a bubble that will surely burst at some point. Even so, I am sure that the left is closer to this policy change than the right. One implication is that more of the load of economic management will be taken by fiscal rather than monetary policy. The left is much more comfortable with that, though I suspect few have taken on that it means supporting austerity at the top of the economic cycle.

Mrs May talks much of making life better for the hard-pressed in our society. Lower rents are surely by far the best way to achieve that. Does she and her party have the stomach for it? If not, the left will have its chance.

 

 

Theresa May’s policy on grammar schools is a new phase in the class war

Chatterers on the left had a clear narrative on the class tensions running through British politics. The Conservatives were led by toffs, who went to elite private schools, had no idea about how ordinary people live, and feathered the nests of their rich friends. They shrugged as they heartlessly condemned people to food banks. The appointment of Theresa May as Prime Minister does not fit that narrative, and that will make the left uncomfortable.

Mrs May is not one of the toffs. She went to a state school, and she has promoted others who were similarly state-educated, such as Justine Greening, the new Education Secretary. She has tossed out many of the toffish types, such as George Osborne, who had been Chancellor of the Exchequer and Oliver Letwin, in charge of the Cabinet Office.  At first this drew some positive comments, to the effect that Mrs May was more "grounded". That honeymoon is now over. Mrs May wants to bring back grammar schools.

At face value, this is a throwback to the 1950s. The brightest children were selected by exam (the 11 plus) and sent to grammar schools, while the rest were sent to secondary moderns. The grammar schools were treated as the elite of the state system, and got the best teachers, and were run with an ethos close to private schools, for whom selection was at the core of their being. The grammars were the route to advancement for many a working class or lower middle class boy or girl - thanks in large part to the vast expansion of middle class jobs in the era. They were sold as an engine of social mobility, and quite popular right across the class spectrum, though the toffs trended to sneer at them. Secondary moderns, by contrast, were neglected. The powers that be did not consider that most people needed a good education - there were plenty of lower-skilled working class jobs to go round, and even the more skilled ones did not require much formal education.

There were plenty of weaknesses in this system, which was especially hard on late-developing children. The secondary moderns were inadequate for the way in which society was developing - which required ever increasing levels literacy and numeracy, to say nothing of other disciplines. In the 1960s the Labour government drove through a move to merge the two types of school into comprehensive schools. This had broad, cross-party support. Grammars were not so popular with those that did not get into them. But people taught at grammar schools retained a soft spot for them, and they remained popular with what might be called the aspirant classes. The system lived on in a number of areas, such as Kent. The middle classes, however, increasingly understood how to game the system, so that the remaining grammars lost any aspirant working class character they might have had, and became a sort of state substitute for private schools.

Conservatives did not reverse the Labour move away from grammars, though they did experiment with selective admissions for some schools. But the grammar school system retained support amongst middle-class families who disapproved of comprehensive schools, and those who were nostalgic for the 1950s. A recent poll showed that more of the public favour more grammar schools than those who either want the system to stay the same, or who want to abolish all grammar schools. It did not help that the country's school leaders and teachers were ill-prepared for the move to comprehensives, and, in general, made a hash of it. A new ethos is required to make a non-selective schools work. British educationalists have only learnt slowly how to do this - though by and large they are doing a good job now. But public memories are seldom up to date. And in any case the suburban middle classes are very wary of social mixing.

And into this situation has stepped Mrs May, whose secondary school was a grammar that converted to a comprehensive while she was there. She has picked up on the popularity of grammars across swathes of the middle class and now wants to increase their number, to the horror of the educational establishment. She does this amid much rhetoric about meritocracy, and insisting that, somehow, all schools will be good. As a (Labour) friend of mine recently remarked, this is a bit like Jeremy Corbyn saying that he is going to pay for his extravagant spending plans by making the economy grow faster. The fine words cover emptiness.

As a policy idea, grammars make no sense to me - I agree with Michael Wilshaw, the government's outgoing Chief Inspector of Schools on this. But the politics is interesting. We find the politicians characterised by the left as "toffs" were quite close to the metropolitan middle classes that are the backbone of the left - some of whom have rather toffish backgrounds themselves (disclosure: I went tot he same school as Mr Osborne, though not at the same time). Mrs May is speaking for what I will call the suburban middle class, who are much more conservative. If the toffs are The Times and the metropolitan middle class are The Guardian, Mrs May is speaking for The Daily Mail. Her gender merely reinforces the stereotype: the Mail has a strong female readership.

This is going to harder for the left. The toffs were a small minority, and the left could pile on the sneers with little cost. Alas the suburban middle classes are a wholly different matter. They are numerous, and they are often close in attitudes to aspirant or better-off working classes. The sneers will come at a political cost.

Indeed this group of middle class and working class voters are critical electorally. Whichever political party secures their loyalty is practically guaranteed a close grip on power. Margaret Thatcher made them her own in the 1980s for the Tories. So did Tony Blair for Labour in 1997. The desertion of these voters in Lib Dem seats in the 2015 election proved catastrophic for the party.

So this looks like sound political strategy by Mrs May. The left - Labour and the Lib Dems -will have to work out how to craft an appeal to these voters. Opposition to grammars, which both parties must sustain. won't help, though some lines of attack are better than others. They need to find ways of pointing out that they could damage many existing schools, knocking onto property prices and causing an influx of less desirable children...

Mrs May will be more worried about opposition from the metropolitan middle classes in her own party than anything from the left. Class could yet fracture the Tories.