Is the world heading for a new financial crash?

Yesterdays’ Guardian carried an article entitled Apocalypse now: has the next giant financial crash already begun? by Paul Mason, who is Channel 4’s economics editor. The same paper carried an article last week by David Graeber: Britain is heading for another 2008 crash: here’s why. So it’s clearly becoming fashionable for left wing types to start spreading stories of doom. Could they be right?

Mr Graeber is not a professional economist (neither am I, I should make clear); he’s an anthropologist, in fact. He has written engagingly on financial matters though, notably his book Debt: the First 5,000 years. His enthusiasm is for the big picture and the global explanation. I found his book a huge let-down because he was incapable of analysing more recent financial events at any level below sweeping generalisation.

And so it is this time. His central argument is that enthusiasm for governments to cut their financial deficits means that private debt, at less affordable rates of interest, will pile up. The key strand of evidence is this graph, which shows public, private and external deficits:

Graeber graph

He notes that it is symmetric, because it is based on an accounting identity. So, if the external balance is constant, which it roughly has been, any reduction in public deficit must be matched by an increase in private deficit. Ergo, we are simply swapping public debt for private debt. And since, as everybody knows, the crash of 2008 came about because of excessive private debt, another one is inevitable. He calls this the Peter-Paul principle (ie. robbing Peter to pay Paul).

Oh dear! It’s hard to know where to begin. As anybody with an understanding of mathematics will tell you, accounting identities don’t tell you as much as you might think. They are tautologies: you can’t use them to predict anything useful about the world. I remember, back in the 1980s, another accounting identity, this time on money, growth and inflation, getting people into trouble, as monetarists used it to “prove” that inflation and growth depended on money supply. Alas all it showed was how uselessly elastic are the concepts of money supply and velocity of circulation. A moment’s thought tells you that Mr Graeber’s argument must be flawed. He is suggesting that the amount of debt in the economy remains fixed – and yet it clearly goes up and down. Actually, the amount of debt is fixed – it is a net of zero! For every debtor there is a creditor; gross debt, however, must be independent of the sizes of the sectoral balances. The Peter-Paul principle is not the great taboo of economics as Mr Graeber suggests. It just doesn’ tell you very much. Not nothing, as the FT’s economics writer Martin Wolf, has shown – but it has taken him in a different direction. He suggests that if government austerity is not matched by extra private sector spending, the economy will shrink. An altogether more subtle point.

Mr Mason’s line of argument is sounder, in that it is based on more factual evidence rather than airy assertions. His line of argument is that aggregate debt has continued to rise, but the world economy has stalled, so that debt will be unrepayable, and so there will be a financial crisis. But this is still lightweight fare, based on aggregated data, which may be unreliable, and not on the specifics of who owes what to whom. The problem is that the world financial system is a very complex thing. It very hard to attribute cause and effect – or rather it is all too easy, it is just impossible to prove that you are right. The financial crash of 2007/2008 came about with the convergence of a number of things, of which the reckless build-up of private sector debt was only one (rising oil and food prices, reckless use of off-balance sheet finance by banks, persistent trade surpluses from China and oil states, a false sense of security from central banks – to name but a few).

One thing we can say is that the world in 2015 is very different from that of 2007, when the last crisis started. It is commonplace in left-wing circles to suggest that nothing has changed in the world of international banking since the crash. Well some banks are making money again, and some bankers are taking outrageous bonuses. But there are many fewer of them; there is much less profit sloshing around. The banks have been forced by regulation and bitter experience to be more prudent. Off-balance sheet finance, at the heart of the 2007 crisis, has been drastically reined in. And the world financial situation is very different, with low oil and commodity prices, a fading China, and the US fast becoming self-sufficient in hydrocarbons.

But that may not offer us much reassurance. We may not be heading for another 2007/2008 but we could still be heading for something nasty. There are four things that could be a sign of trouble:

  1. There are asset bubbles in some places. What is referred to as “emerging market” assets are the most spoken of: debt, shares and property located in China and various parts of the developing world. But there are others: London property and US shares come to mind. Some suggest that developed government bonds are in a similar bubble, as their prices are historically high, but Japan has shown that these prices can stay high for a very long time indeed.
  2. Central banks are running with ultra low interest rates, meaning that the main arm of monetary policy is not available. Quantitative Easing (QE) is problematic. This leaves them without the firepower to deal with a crisis as it emerges – or so many people think. In fact the dynamics of monetary policy have moved well beyond textbook theories about money supply and inflation expectations, leaving us unable to understand how things work.
  3. The maturing of China and the rise of shale oil and gas in the US have changed world financial and trade dynamics fundamentally from the pattern of the last two decades. I suspect the new pattern is more stable than the old one in the long run – but any such change tends to cause dislocation. It may, for example, become much more difficult for many countries, including Britain, to finance their deficits (the blue bit in Mr Graeber’s graph could shrink).
  4. International politics has become more fractious, making international deals more difficult to do. And populists from left and right are making it harder for governments to intervene to stabilise financial markets – often portrayed as bailing out bankers at the expense of ordinary taxpayers. That will make any future banking crisis harder to manage.

So I share some of Mr Hunt’s and Mr Graeber’s worries. I have my own airy narrative. Since the the Bretton Woods system of fixed exchange rates and gold underpinning was broken in the 1970s, by President Nixon who needed to fund the Vietnam war without raising taxes, the world has been addicted to an increasing cycle of debt. Some of this debt might be regarded as lubrication for the wheels of capitalism. But also there seems to be a bit of Ponzi scheme about it, with debt being repaid by the issue of yet more debt, rather than through substantive economic advance. In the long run, that cannot be stable. And yet it may take a long while yet before the trouble starts to show up.

 

The tax credit row: ignorance and obfuscation are rampant

Britain’s tax credit row  reached a milestone last night with a government defeat in the House of Lords. As I said last week, it doesn’t show British politics in a flattering light. Then I complained about the failure of the government’s critics to tackle the financial implications. But ignorance seems to be wilful on both sides. What is the row really about?

First, we need to understand what tax credits are. There are two systems: Working Tax Credits (WTC) and Child Tax Credit (CTC). WTC amounts to £1,890 to £4,525 per annum, plus more for those with disabilities. It starts to be withdrawn when income is above £6,420 and the rate of withdrawal is 41%. In other words, for every £1 you earn above £6,420 your benefit is cut by 42p. CTC is for parents responsible for children. This amounts to a basic £545pa plus £2,750 per child (plus extra if the child has disabilities). For those in work these amounts are added to WTC and withdrawn at the same rate. For those not claiming WTC, withdrawal starts at £16,105 (I’m not sure how that works, and why you would be in work and not claiming WTC, but I’ll leave that for now).

So what were the proposed changes? There are two sets. The first is due to be implemented in April 2016. The withdrawal threshold for WTC is to be cut to £3,850; for those only on CTC the rate is cut to £12,125. The withdrawal rate is increased to 48%. The second set of changes will be made in 2017 to CTC. The £545 family element will be withdrawn, and the benefit per child will be limited to two children. These elements will apply to new families, not those who are currently claiming.

So what do the changes mean? First: the basic amounts of the benefits are not being changed, until the changes in 2017, and the latter do not cover existing claimants. This allows the government to say that it the Prime Minister David Cameron was not lying when he said that “he did not want to cut” CTC, during the election campaign. But, of course, the changed withdrawal rules mean that the benefit is being cut for everybody earning more than £3,850. The impact will be concentrated on lower earners, who will face a high marginal rate of tax, starting at 48%, and rising to 60% as National Insurance kicks in, and then 80% as Income Tax joins the party.  This creates something of a poverty trap effect, reducing the incentives to work. But then again, the tax credits are not being abolished, and workers do keep some of their extra earnings.

The government’s chief advertised mitigation measure is raising the national minimum wage. This should put more money in the pockets of the poorest workers, provided employers don’t cut their hours. But much of the benefit of this will go to workers not claiming tax credits, and it will do little to alleviate the hardships of those worst affected. There seem to be two strategic aims. The first is to transfer some of the economic burden of lower wages to employers. There is a suggestion, for example, that employers are paying lower wages because they know that tax credits will make up some of the difference. The evidence that this effect is important is weak, however. A second strategic aim, not doubt, is to reduce the poverty trap element of the changes – so that workers are pushed through the levels of pay at higher marginal tax rates faster. The problem with these strategic aims that the new levels set for the minimum wage are arbitrary. Much of the cost will have to be borne by small and marginal businesses that can ill afford the cost – they may well choose to cut hours paid, and so undermine the policy.

The worst of the interventions in the debate, however, come from some of the suggestions made as to how to mitigate the effects of the changes. These have centred on raising the thresholds at which Income and National Insurance are paid. This is obvious nonsense. It may be clever to mitigate the withdrawal of a universal benefit by using targeted ones. The mitigation will cost less than the original change would save. To suggest the opposite, which is what these ideas amount to, is plain stupid. Worse, the poorest earners are not even paying these taxes, so exempting them will not help. And yet the BBC interviewer on the Today programme this morning sounded surprised when his interviewee pointed this out to him. This is wanton ignorance. The ulterior motive for these “mitigations” is to provide tax cuts to the better off, not to help the poor and struggling.

Moving on. Here are the points that should be being made in this debate, and either aren’t being made, or are being made by too few people:

  1. The government’s changes are tackling the symptoms of the disease of low pay and poverty, and not its causes. Raising the minimum wage may help, but not by much, and could backfire. The real problems arise from the economic pressures that cause lower wages, and from increasing housing costs that make that poverty harder to bear. The risk is that the savings made from cutting tax credits will ultimately be overwhelmed by the less direct effects of poverty on the state. Instead of making it easier climb out of poverty these changes make it harder.
  2. The cost of tax credits will fall if lower incomes rise. The whole design of tax credits is that their costs fall as the need diminishes.
  3. The 2017 proposed changes, are more harmful and ill-considered than the 2016 ones. Clearly the thought is that the level of benefits is encouraging poor families to be larger. I don’t think any strong evidence is being put forward to justify this. It looks positively vindictive.
  4. The government’s policies are not a vindictive attack on the poor, but an attempt to rebalance the system to something that is more sustainable in the long term. But they are a gamble. They are making several changes at once, without a base of evidence to support them. It is these risks that should be the focus of the debate.

Personally I feel that the basic, original, design of tax credits is reasonably sound. The fact that they are costing much more than originally planned is a problem in itself, of course. But it is also an alarm bell – it points to even deeper problems in our society. If we take away the short term cost to the taxpayer, it does not mean that this problem has been solved. I would tackle the funding problem through taxes on the better off (loosely defined, not just chasing the slippery very rich). But the real energy needs to go into alleviating the causes of tax credits. Nobody is talking about that at all.

 

Saving tax credits means raising taxes. I’m OK about that.

The current political storm over the British government’s proposed scaling back of tax credits is not showing politics at its best. On one side a cynical Conservative government is pushing through changes will make the poor poorer and reduce social mobility. On the other we have opposition grandstanding that has no interest in suggesting alternatives. I despair.

First of all, what is the fuss about? Tax credits were introduced by the Labour government in 2003. They are a way of providing means tested benefits to those already in work, but on low incomes, and especially those with children. They are designed to taper off as income grows, so that claimants will always benefit from any increase in earned income. They are copied from a US idea, but they have been Britannicised so that they can operate within the country’s system of taxation at source, PAYE. In America claims are made at the end of the tax year when tax returns are filed; the UK use a monthly system.

Originally the problem with tax credits was the operation of the monthly calculations. Inevitably the information they used was often out of date, and so many claimants were faced with clawback claims, for which they were not prepared. We hear much less of this these days. Nowadays the problem is the cost. Claims about this vary, but it was always expensive, and, with low paid jobs multiplying, it has grown sharply. And yet they are well targeted to those most in need, especially families. They do not penalise work, so many means-tested benefits do, while costing much less than universal benefits.

During the coalition years of 2010 to 2015 the government trimmed back tax credits, in particular they tapered off the withdrawal more sharply. Previously incomes up to around £40,000 (from memory – this figure may well be incorrect) could claim something, but this has been reduced. Now the government proposes to reduce tax credits even more harshly, and especially for larger families. It estimates that the savings will be between £4bn and £5bn. That will cause real hardship for many families that include working people. In fact, the very “hard-working families” that we got so sick of hearing about from politicians at this May’s election. The cuts will also be a setback for attempts to give children from poor families a better start, and so reduce inequality.

For all that there is a certain honesty about the plan from the Conservative Chancellor George Osborne. The government’s financial deficit is running at about 5%, far higher than it should at this stage in the economic cycle. During the election the Conservatives made it very clear that they wanted to balance the budget. They also made it clear that they would do so by making cuts to benefits. They were very coy about where these cuts would fall, and even suggested that child tax credits might not be affected – but there really is no other way to make their plans work. This is what politicians do in a democracy: vaguely promise “tough” measures before an election; implement them soon after, and hope the fuss has blown over by the time the next election comes around. A lot of publicity has been attracted by a Conservative voter saying that she felt very let down – but I’m afraid that’s political naivety. If the issue was that important to her, she should have voted for somebody else.

The government are honest, by the standards we have to apply to politicians (no truly honest politician would get elected), but misguided. But a lot of the opposition is a nonsense. It amounts to no more than a collective yelp of pain, and wishes for the government to “reconsider” without offering any kind of escape route. This is particularly annoying from Conservative MPs. They offer no alternative. The various mitigations proposed, such as raising the minimum wage, or tax thresholds, are badly targeted and won’t help much. Tax credits are the most efficient way of doing what they do. Any change is going to make things worse. There is no clever wheeze that will make the problem go away.

The opposition parties: Labour, the SNP and the Lib Dems are at least a little more honest than the Tory moaners. Labour initially got itself into a tangle, but soon put that right. I personally dislike the way these parties (and especially Labour) treat the status quo as a sacred thing to be “defended”, and any change that makes people worse off as tantamount to robbery. It’s still somebody else’s money. If systems of benefits, or public services, aren’t doing what they are supposed to, they should be changed, even it makes some people worse off. Still, that’s what politicians do. And in this case I think they are right. There is so much evidence that poverty in early life ruins chances later, which is why benefits focusing on families are a good idea. The system could be improved, no doubt, but not in a way that makes it any less expensive.

But these parties still should be clearer on what they think the government should do instead. All three of those parties have said they want the fiscal deficit reduced. They make an exception for capital spending – but tax credits is patently not that. Neither are they advocating cuts anywhere else (with exception of nuclear weapons systems, in some cases, but they usually want to increase spending on conventional forces instead).

Neither is it realistic to appeal to economic growth. This is not something that can be turned on and off like a tap by politicians. If it was the Conservatives would have that tap in the “on ” position already. Keynesian stimulus, which may have been relevant in 2010-2012, does not apply at this point in the economic cycle.

The only way to convincingly square the circle is to raise taxes. Of course the far left think they have the answer here: to crack down on tax avoidance and evasion, and to reform corporate taxes. Closer examination reveals these ideas to be chimerical. That still leaves the idea of taxing the rich harder. But the rich are slippery. There are still some things that can be done: taxing land, in particular, and tightening inheritance tax, rather than loosening it, as the Conservatives are doing. I wouldn’t bet on these ideas yielding much new money quickly though.

To have real credibility in “defending” tax credits, the NHS, local government spending, the police, or any other aspect of expenditure, politicians will not carry conviction unless they are prepared to raise one or more of the big three taxes: Income Tax, National Insurance, or VAT. Alas on this all parties are silent.

But such is the importance of tax credits to me, that I would indeed support the raising of one of the big three to keep them in being at current levels. I just wish the governments’ critics would say so too, and so start some real debate about the country’s fiscal priorities.

 

4 liberal themes on economics and public services: my contribution to Lib Dem Agenda 2020

Agenda 2020 is the consultation exercise being carried out by the Liberal Democrats to set the framework of policy in the period up to 2020, when we next expect parliamentary elections. At this stage the idea is to keep the thinking at quite a high level. This is always quite hard for political activists. We somehow got onto VAT on tampons in the consultation exercise in Bournemouth. Then again, I’m always saying that political types on the left are too abstract. I haven’t submitted the following contribution yet, but the idea is to be strong on general direction, with only a few pointers on the detail. I’m afraid that it’s still a bit longer than my normal posts.

Economics, public services and wider Liberal Democrat policy

Economics and public services should be at the heart of any political narrative. Too often in the Liberal Democrats both topics have been neglected. The party has opted for a simple middle ground between the Conservatives and Labour. The 2015 General Election was no exception, at least as far as the headlines went. The time has come for a much more robust narrative. Here are some ideas on what this might look like.

The story so far

After 1945 the great Liberal thinkers Maynard Keynes and William Beveridge founded a post war consensus on economic management and public services. This was based on the state taking responsibility for managing the business cycle through fiscal policy, and a greatly expanded set of state services, funded by much higher taxes (compared to pre-war levels), to fulfil a series of new entitlements, designed to ensure that everybody obtained a basic level of wellbeing. These ideas were taken on by the Labour and Conservative Parties, and developed into an overbearing state, which also took over a series of failing businesses, from railways, to steel, to even aero engines.

By the 1970s the state had lost control of its finances and the country was heading for towards economic collapse. Public services had been captured by vested interests, with very little regard for their users. In reaction to this emerged a new conventional wisdom, initiated by Margaret Thatcher and expanded by Tony Blair. This new thinking was again based on liberal principles, and it is often referred to as “neoliberalism”.  The idea was that citizens should be empowered as buyers in a market economy, with the state stepping back to provide only basic services and a basic safety net. Much of the regulation of the business cycle would be taken up by monetary policy, so as to reduce the role of the state. Marginal rates of tax on income were cut, though overall levels of tax increased, if anything.

Probably not coincidentally, this change to public policy was accompanied by dramatic shifts in technology and global trade. Society changed substantially, mostly for the better. Living standards advanced, life expectancy improved, and pollution was cut. But now the country, in common with the rest of the developed world, seems stuck. Most economic growth just benefits a rich elite; businesses hoard excess earnings rather than invest or pay their workers more; property prices escalate. The number of badly paid jobs rises; most younger people are shut out of decent jobs and decent homes. Demand for health and care services grows, while public resources do not keep pace. And prosperity is restricted to a small number better-off areas, especially in the south east of England.

Liberals should worry. Power is being concentrated among a wealthy elite of people connected to big businesses. This trend Is abetted by a highly centralised national government that would rather deal with these large businesses, or else large public agencies like the NHS, than directly with the public. The power of the markets works for many people, but it is failing many more. Many people have inadequate leverage in the markets for jobs and homes in particular, leaving an unequal power balance in both domains. This state of affairs breeds fear and insecurity, which in turn leads to the rise of the political extremes of right and left, which threaten social cohesion.

In the meantime thinking on economic policy has not caught up with these profound changes. Most economists still think of the economy in a highly centralised way, in terms of aggregates across the whole economy, rather than the fate of its component parts. And thinking about productivity is stuck with ideas appropriate to manufacturing industry and economies of scale – and not to the efficient use of the human resources the country actually has to hand, in an economy increasingly dominated by personal services. The left rails against a series of pantomime villains, but resists any serious progressive reform of public services. This old thinking simply concentrates more power and wealth into the hands of a well-connected elite. Public services are dominated by functional silos based on political empires, not people’s actual needs.

We need fresh thinking, and my suggestion is to organise this around four liberal themes.

Liberal theme 1: green growth

Green growth means the advancement of human wellbeing while reducing the consumption of physical resources, especially non-renewable energy. The twin objectives are to ensure that everybody has the chance to live a healthy and fulfilling life in a comfortable environment, while easing the stress on the local and global environment.  There are two aspects to this: developing and implementing technologies that are more environmentally efficient, and breaking the idea that ever increasing consumption is the path to improved wellbeing. This requires a profound change in outlook – though one that is already taking place.

Green growth may or may not entail economic growth as currently measured. That depends on how advanced wellbeing is reflected in the monetary economy. In the short to medium term it entails a substantial level of investment, in more efficient homes, power infrastructure and transport infrastructure, as well as research and development. If properly carried out these investments will entail improved economic growth. Longer term growth requires the harnessing of human resources more effectively. This means a wider distribution of information management and decision making, or:

Liberal theme 2: small is beautiful

Large organisations, be they businesses or government agencies, are one of the main threats to green growth and liberal values. They concentrate power in the hands of the elites that control them, leaving the majority of their employees disempowered, and unable to react most effectively to the world as they find it. The elites are geographically concentrated, leading to geographic concentrations of power and wealth, and the hollowing out of communities elsewhere. This hollowing out leads to a waste of human resources, which must be tapped if green growth is to take root. Furthermore, large commercial organisations have a tendency to hoard surplus earnings (often abroad) rather than invest them, acting as a further drag on the economy.

Of course large organisations also play a vital role in any efficient economy; they are the best organisational form to take on some functions. But these are not as many as often supposed. A liberal government must change the legal and regulatory environment so that it favours large organisations less. This will include reforms to political structures, banking and taxes.

It will also entail a substantial reform of public services:

Liberal theme 3: public services that solve problems

It should be obvious that the main reason that public services are inefficient is that they do not work together to solve people’s problems. Housing, mental health, addiction, crime and poor physical health are very often bound together in one person’s feeding on each other – and yet we persist in trying to deal with each of these issues separately, in separate chains of command all the way to Cabinet. Often the key is making all the relevant services work together in such a way that the user moves to a better way of life, with less call on the public purse. Usually what happens is that the relevant agencies work against each other.

Public services should be organised to meet the needs of people, and solve problems rather than playing pass the parcel. This should be the foremost area for the development of policy, based on best existing practice. There may be a number of possible approaches.  Some of things are clear, however:

  • Changes will be easier to implement if responsibility for public services is more localised and more integrated.
  • Some form of empowered professional intermediary will usually be required to assess the users’s needs, to coordinate the different agencies and, where needed, to negotiate the compliance of the user. Empowerment will mean some form of budgetary control. This means a step back from the current tendency to disempower and de-skill such intermediaries, like social workers and probation officers.
  • Large scale functional outsourcing will usually take services in the wrong direction. Repeated tendering also leads to a dumbing down, a tendency to gloss over more complex issues. The greater use of local social enterprises may well be a better approach in a framework that ensures proper accountability.

Public services should help with some of the most difficult problems relating to poverty; but this has to be in a wider context wealth and income distriubtion. We also need:

Liberal theme 4: redistribution to correct imbalances

A well-ordered, liberal society might not require the redistribution of income and wealth. And liberals dislike redistribution for its own sake – different levels of wealth may simply reflect freely made choices over how to balance accumulating money with other things life has to offer. But in our society imbalances of wealth and income pose a threat. The less well-off are denied the opportunities that should be theirs. Excessive wealth can be used to buy political influence and monopoly power, reducing choices for others. The accumulation of wealth may also lead to excess savings and economic stagnation. Liberals must embrace redistribution, albeit warily.

Redistribution needs to work at two distinct levels: personal and geographical. The wealthy must be taxed on both income and assets (land, in particular), and the worse off must be compensated through access to benefits and rights to state services, especially housing. Children must be a particular focus of redistribution as early years are critical to life chances.

Also funds must be redistributed from wealthy regions and districts to those less well off, to offset the negative network effects of clusters of wealth.

At both levels redistribution arrangements must be designed so as not to create dependency. Those less well-off should be encouraged to improve their lot – but at the same time the level of redistribution must fall as the need for it falls. Systems of redistribution based on universal rights (like the state pension) have their place, but have limits too. Truly liberal systems of redistribution will require careful design.

A policy programme to match

At this stage the idea is to sketch out broad political priorities, and not detailed policy programmes. I do not believe that in most cases a radical departure is needed from adopted Liberal Democrat policy. The high level emphasis will need to be rethought, however.

The main policy implications of taking forward the four liberal themes are:

  1. Political reform, and especially the devolution of power to regions and districts. This is essential to create the right political environment. This may be combined with a new federal settlement for the UK and reform of the House of Lords. Electoral reform is important to ensure a plurality of power – but the priority must be to implement proportional voting systems at local level rather than at Westminster. A further important strand of political reform should be restricting the influence of wealthy individuals and organisations, especially through political donations.
  2. A programme of green investments must be instituted, including high quality social housing.
  3. With public service reform the emphasis should be on bottom-up initiatives – but national funding structures will have to be reviewed to facilitate this.
  4. The tax and benefits system will need to be re-examined. The Lib Dem commitment to increasing personal allowances must be rethought, as it is inefficient as a redistribution policy. Restoring tax credits is a higher priority. Taxation of land in some shape or form makes sense, though we may get no further than reforming Council Tax.
  5. On overall fiscal policy it is best to manage down expectations of additional government spending – though the principle that the government (including local governments) can borrow to invest must be clear.
  6. The banking system must be reformed to allow new, locally-based lenders to come into play. Investment in the “real economy” should be encouraged to create new assets, While avoiding a merry-go-round of existing assets.
  7. The UK should act internationally through the EU to curb tax avoidance, especially by large corporations. Trade agreements and relations with the EU should be viewed through the prism of promoting smaller businesses, and not simply advancing the interests of large multinationals.

Of course there are many more important policies that have a bearing on the economy and public services – not least reducing the level of carbon emissions. But overall such a policy platform should be quite distinctive from the orthodoxies of right and left, and yet fully in tune with modern times.

Labour changes the meaning of austerity

So far, so good. That’s my verdict of the remaking of Labour under its new leader, Jeremy Corbyn. I’ll say more about the big picture later in the week, after Mr Corbyn’s speech later today. This time I want to focus on economics and the performance of the Shadow Chancellor, John McDonnell, who spoke yesterday.

Like Mr Corbyn, Mr McDonnell is a serial rebel and a political outsider – and he is very much Mr Corbyn’s right hand man. That is why he was given the job of Shadow Chancellor over the much more politically correct Angela Eagle. Both Mr McDonnell and economics are central to the Corbyn project.

The first thing to note is the new regime’s ambition in taking on economics. The previous leader, Ed Miliband, was a bit embarrassed to talk about economic policy. He did not try to defend the previous Labour government’s economic policies, nor seriously criticise them for matter, in spite of the opprobrium being dumped on them by the coalition parties. He was late in developing his own economic proposals, and when these came out, they appeared to be “austerity-lite”, and not seriously challenging the government’s narrative.

Mr McDonnell, on the other hand, wants to take control of the economic narrative. He is enlisting the help of heavyweight economists to both support his own plans, and to undermine the government’s version of events. In this he is capitalising on a remarkable fact. Academic economists have been very critical of government policies and “austerity” generally. Indeed government policy seems to be more based on 200 years of Treasury orthodoxy than modern economic insight. This is an opportunity to undermine the government’s reputation for competence, and make it look ideological.

Labour is still left with the two paradoxes of anti-austerity economics that I referred to in a previous post.  The first is that by opposing austerity Labour will have to make its peace with the global financial markets that it so despises. Mr McDonnell tackled this head-on in his speech, and in an interview with the Guardian newspaper last weekend. He has nominally adopted the government’s trajectory for reducing the UK’s fiscal deficit, with its aim of bringing it into surplus by 2020. With a huge rider: he will exclude borrowing to fund capital investment. Depending on how loosely “investment” is defined, this is perfectly sensible public policy, and not, in fact, very different from Mr Miliband’s. It reduces dependence on international finance – remembering that the Bank of England’s Quantitative Easing policies may come to the government’s aid if the economy takes a turn for the worse.

There is, of course, a problem. It means signing up to austerity as most people understand it. And yet opposition to austerity remains his rallying cry. One of the many weaknesses of the left is its love of abstract nouns, especially as things to oppose – austerity, neoliberalism, inequality, and so on. Ordinary working people don’t understand what they are on about, but the activists work themselves up obsessively – and at the moment austerity is public enemy number one. But Mr McDonnell and Mr Corbyn have an ingenious answer to this: just change the meaning of “austerity”.

To them, the word now applies not to tightening the government’s finances overall, but to cuts and tax rises that might affect low and middle income workers. There will be cuts, said Mr McDonnell, but not to the numbers of policemen, nurses or teachers. Instead the cuts would be to “corporate welfare” – tax breaks to businesses, as well as raising taxes on the rich. He was careful not to be too specific about all this.

There are some pretty solid grounds for scepticism here. Mr Corbyn has brandished the figure of £93 billion for corporate welfare, a figure conjured up by the Guardian. Mostly these are allowances or direct support for investment, exports and research and development – all things Labour will want to encourage. And the small print of the Guardian’s report suggests not that this is low hanging fruit waiting to be plucked, but that it is, to switch metaphors, a rather overgrown hedge that can be trimmed a little. There is reason to doubt how easy it will be to target other measures to raise taxes, or clamp down on avoidance, without collateral damage to the small and medium sized businesses that the economy so needs. This is what undid Francois Hollande’s Socialist government’s attempt to do much the same thing.

But it isn’t nonsense either. Big business, and the pampered elites that run them, are not a benign force these days. They contribute to the hollowing out of much of the economy by destroying middle ranking jobs and sucking the soul out of towns and villages away from the main commercial centres. They also siphon profits out of the economy rather than reinvest them. Labour will do well to be wary of big business, unlike the earlier regimes of Tony Blair and Gordon Brown. But finding policies that will tilt things against big business without damaging the wider economy will not be easy. I think that tax treatments for intellectual property and debt interest are a better place to look than the Guardian’s corporate welfare list. And international cooperation on corporate tax avoidance will help (especially if we can move to unitary taxes, such as the US states apply among themselves).  But such policies will take time.

All this takes us into the territory of my second paradox for anti-austerity economic policy. It calls for more economic growth, and yet bears down on much of the private business that will be needed to generate it. This will be the next challenge for Mr McDonnell and his colleagues. It is fair enough to bear down on many businesses, especially the giants. But Labour also needs to show encouragement and support for more positive businesses, through investing in support infrastructure, improving access to credit for genuine investment, improving public procurement, and through reducing the burden of petty regulation. As yet I see no sign of this – but it is early days.

I remain highly sceptical of the new Labour project. But its leaders have made a competent start, and there is undoubted fresh air. The floor is still theirs.

Political reform is the acid test for Corbyn’s Labour

Jeremy_CorbynBritish politics has suffered a massive earthquake with the election of Jeremy Corbyn as Labour leader. There is a lot of dust; there will be aftershocks. But what can liberals say at this point?

Let us for now take this development at face value. There is an upsurge of public support for Mr Corbyn amongst people desperate an alternative narrative to “austerity”, and for a political party with real left-wing values. Let us say that the half a million or so people who took part in the party’s election process are not mainly London clictivists, but will join Labour’s campaigning by making phone calls, knocking on doors and donating money, from London to Leeds and from Bristol to Glasgow. Let us also say that Labour will not be riven my infighting but will mobilise behind a concerted attack on government policies.

If this happens there will be real momentum  behind Labour. It will take the wind from the sails of the Green Party; Tim Farron, the Liberal Democrats’ new leader will find it very difficult to attract people to his party through returning to left-wing campaigning. Many working class Ukip voters will consider returning to Labour, now that it has rejected the establishment consensus. Labour will start winning by elections against all comers.

All this would throw down the gauntlet to liberals who reject the government’s creed of economic liberalism. If it looks as if this reinvigorated Labour party might make headway against the Conservatives, do liberals support them in the hope that a transfer of power will be good for the country? Or do they think this new movement is fundamentally wrong, and has to be stopped at all costs? There seem to be three groups of issues that could decide this.

The first is Britain’s place in the wider world and defence. At this point it is very unclear what Labour’s new stance will be. Mr Corbyn himself has been associated with some very extreme views, such as that Britain should leave NATO. It’s pretty safe to say, though, that Labour’s policy line will be more moderate than this.  But surely it will oppose just about any foreign military intervention, and the the odds are it will come out against renewal of Britain’s Trident nuclear weapons systems. Not so long ago these views would have been considered so extreme that no respectable politician should entertain them. But now there is a good case to be made. There seems to be little point in such  heavy-duty and expensive nuclear armaments, which will be dependent on US support. There is a respectable case for more limited nuclear weapons, or even complete nuclear disarmament. Likewise foreign military intervention doesn’t seem to be making the world a safer place. They provide no answers to filling the political vacuums that are the real threat to stability. If Labour starts to support leftist regimes that do not support political pluralism, such as those in Cuba or Venezuela, then that will be another matter. But I don’t think Mr Corbyn will be able to take his party to those positions. So liberals may not be given enough reason here to oppose the movement.

The second groups of issues is economics. This is central to Labour’s new appeal, as cn be seen by Mr Corbyn’s appointment of left-winger John McDonnell to the role of Shadow Chancellor. It will define itself through a bitter a bitter opposition to “austerity”. It will oppose this they mean cutbacks to benefits or public services, or raising taxes on anybody but a rich elite. They are also opposed to any serious reform of public services, apart from moves to a model of state-owned command and control organisations, staffed by union members on permanent contracts. Two ideas are offered to make this economically viable. The first is a sort of semi-digested Keynesianism, which suggests that their policies will stimulate demand and so economic growth and, through this, extra tax revenues. The second is that there are vast amounts of extra tax available from taxing the rich more, clamping down on tax avoidance and evasion, and attacking “corporate welfare” – tax breaks and subsidies for businesses.

I have commented on these ideas before. For now all I need to say is that there are two paradoxes at the heart of this economic programme. The first is that, almost by definition, rowing back on austerity means a greater dependence on global financial markets to provide funding – printing money is not a long term strategy. And yet these markets are treated with contempt. The second paradox is that their policies depend on a healthy private sector economy to deliver economic growth and tax revenues, and yet they also want to make life more difficult for the private sector, and encourage businesses to take their investment elsewhere. No left wing government, from Francois Hollande’s Socialists in France to Alexis Tsipras’s Syriza in Greece, has found an answer to these paradoxes. The anti-austerity programmes of the former were sunk by the need to attract private sector investment, and the latter by the need to keep borrowing money from abroad without a clear prospectus for paying that money back.

But, if in the end governments will be forced to their senses by the dictates of markets, perhaps we can tolerate a little short-term economic chaos? We can, after all, be sympathetic with the idea of using the tax system to effect redistribution of wealth. That depends on the third group of issues: political reform.

The Conservatives now control the government because the current political system is weighted in their favour. Liberals favour a more pluralistic system, with greater checks and balances. To achieve this we need political reform in a number of areas. Will Mr Corbyn’s Labour Party support these, or simply offer vague platitudes like his predecessor, Tony Blair? That will be, or should be, the defining issue for liberals. What are these areas?

  1. The first is political finance and the reach of big money. The UK is not anything like as bad as the US – but that country points to the dangers. Laws start to be dictated by corporate vested interests – a particular problem in public services outsourcing, and intellectual property. Mr Corbyn’s Labour Party will surely be much more serious about this than its predecessors.
  2. Next is devolution. This means not just protecting the settlements in Scotland and Wales, but promoting further devolution to English regions and councils – including revenue raising powers, and the coordination of public services. There is reason to be suspicious of Labour intentions here – though since Labour also control England’s major cities, there might be some constructive tension. I have not forgiven Andy Burnham’s scepticism of the devolution of health services to greater Manchester.
  3. Then there is the House of Lords. Will Labour support complete abolition, or replacement by an upper chamber with real powers? Personally I think a new upper chamber should be part of a new constitutional settlement for the UK, taking it to a more federal structure. But a proportionally elected revising chamber would be acceptable. Which brings us to:
  4. Electoral reform. This really is the only way of promoting political pluralism in the long run. We need a system based on some form of proportionality, such as the Single Transferable Vote (used in Northern Ireland, and indeed the Irish Republic) or the Alternative Member system (used for the Scottish and Welsh Parliaments and the London Assembly). We have to be careful here; there is real public scepticism about this. And moving to PR at national elections is a big step. But a firm commitment to PR for local elections is an essential accompaniment to serious progress on devolution.

Will Labour deliver on these? I would be most surprised if we get anything more than a few warm but vague words. For the hard left consolidating political power is the whole point and purpose of politics, and they want to monopolise it. They don’t accept pluralism except as a way of identifying enemies. The can’t accept that empowering the people can mean anything other than conferring the mandate of heaven to their own political elite. There are pluralists in Labour, but on political matters the Blairites and the hard left are remarkably close together. If Jeremy Corbyn strikes out on a different line, then the movement he has started may yet be a worthy revolution.

 

 

Corbynomics: hope, fantasy and shaky foundations

Jeremy Corbyn, the front runner in Labour’s leadership race, is clearly somebody that mainstream politicians and media types underestimate. The standard criticism of him is that he a blast form the past – somebody that wants to take the country back to the failed solutions of the 1970s. No doubt that’s how it looks if you just examine the various things the man has said down the years. But many of his supporters are young and are projecting something quite different onto him.  He has crafted his message to appeal to this group, to look like something much more modern. Today I want to take look at his economic ideas.

These have been set out in greatest detail in his paper The Economy in 2020, published on 22 July. It isn’t hard to see why he is enjoying so much support. He offers the hope of something fresh. He starts by attacking the government’s economic policies, which he characterises as “austerity” in the now familiar language of the left. Thankfully he has shown more sense than to use the word “neoliberal”, putting him ahead of the Green leader, Natalie Bennett, who put forward a strikingly similar prospectus in the May General Election.

“Austerity” is used as a general shorthand for economic liberalism, and in particular the attempt to keep government expenditure and taxation in check – which at present means reducing the scale of government expenditure. It also refers to attempts to reform public services through such policies as privatisation. Instead Mr Corbyn calls for investment to rebalance the economy towards higher paying jobs, though not ones in financial services. He has time for some supportive words for private industry – recognising that private enterprise will have to be part of the growth and investment process. It reads as constructive and hopeful.

This overarching narrative has some macroeconomic credibility. The current British economy is nothing like as strong as the government claims, and many of his criticisms are on the mark. Alas it falls apart on closer scrutiny. I want to quickly look at three aspects in particular: the so-called tax gap of £120bn, corporate subsidies of £93bn, and the idea of “people’s QE”.

But first I must mention a name that keeps popping up, and who ideas seem to be behind much of the document: Richard Murphy, an activist associated with the Tax Justice Movement. There are some striking parallels between Mr Murphy and me: he was born in 1958, he took an economics degree, and he is a Chartered Accountant. The main difference was that his Economics degree was joint Economics and Accountancy (at Southampton) in the 1970s, and mine was full Economics (at UCL) in the 2000s. It is one of the rare occasions when my formal qualifications in economics outrank that of a public policy wonk.

The Tax Gap estimate comes from this paper commissioned by the Public and Commercial Services Union and written by Richard Murphy in 2014. Mr Murphy (like me born in 1958 and a Chartered Accountant) is a prominent campaigner for Tax Justice. I first came across this document when it featured in a 38 Degrees campaign (“it isn’t rocket science”, which suggested that collecting more tax was basically quite easy), and I think its claims are firmly embedded in the hard left mythology. It suggests that the Revenue & Customs vastly underestimates the amount of tax lost through avoidance, evasion and the like – and that the real gap is £120bn and not £35bn (and falling). This is important because it suggests that a huge amount of extra tax could be collected if only politicians were less indulgent of wealthy taxpayers. To give some context, the Lib Dems were criticised in the General election for being speculative when they suggested that £10bn cold be gained by tackling the tax gap (more than the other parties, except the Greens, of course). Mr Corbyn has his eyes on something much grander – and thus funding extra government spending without raising taxes on ordinary working people.

The biggest part of this gap is the untaxed shadow economy, which Mr Murphy says is much bigger than official estimates. I can’t offer an opinion on whether this is true – but I can suggest that this is hardly low hanging fruit, and is by no means confined to fat cats (think small building jobs, domestic cleaners, to say nothing of drug dealers and the smuggling of booze and fags). This does explain a rather tangential reference to cracking down on small business tax evasion though in Mr Corbyn’s document.  It is hard to see how any government could do much more than make a marginal difference without a draconian clampdown on the black and grey economies which would carry a lot of uncomfortable implications right across our society.

Another number that gets an airing is the idea the government subsidises business to the tune of £93bn. The source of that seems to be the Guardian newspaper, and its correspondent Adtiya Chakrabortty (“The 93bn handshake” is their headline). This is unbelievably flaky. The biggest single item is £44bn of corporate tax benefits. This is mainly credits for investment expenditure. Calling this a subsidy is more than a stretch – it is simply putting capital expenditure on a level playing field with revenue expenditure by, in effect, making depreciation tax-deductible on some types of investment. I’m not clear whether the figure includes tax releif for research and development, but that would be entirely consistent with the logic. If Labour is serious about helping manufacturing industry, it will need more of this sort of thing, not less. Another thing thrown into the pot is export credits, which allow British exporters to compete on a level playing field. If George Osborne abolished this the noise from Labour benches would be deafening. Cleaning up old nuclear power stations is in there too. There is something not a little bizarre in on the one hand suggesting that the government should promote investment, and on the other hand attacking all attempts by government to promote private sector investment as corporate welfare that should be stopped.

Next comes the idea that the Bank of England’s Quantitative Easing (QE) programme should focus on public investment in housing and infrastructure and the like – “People’s QE” – rather than buying government and other bonds. This is promoted by Mr Murphy again (his ideas pop up several times – and not all of them are bad), in spite of his lack of economic qualifications. Quite apart form the fact that the Bank of England has ended QE because the monetary conditions no longer apply, it gets the Bank into the unenviable position of evaluating public investment projects.  Getting unelected technocrats to do this sort of thing rather than government ministers (funded by gilts subject to QE) is hardly democratic either. To be fair, Mr Corbyn just says that the idea should be looked at, not that he would do it. But it betrays a very weak understanding of economics. He seems unaware that the Keynesian critique of austerity is weakening all the time, especially now that real wage increases are growing, suggesting that economic slack has been taken up. The Keynesian critique may have had authority in 2010, but 2015 is another matter.

The truth about the modern economy is this: the world has moved on from the easy textbook world of the 1960s, and even the 1990s. Technology has made manufacturing so efficient that there are few jobs in it any more; most white collar jobs have likewise been automated away; we are left with a lot of important jobs (carers, nurses, cleaners, etc.) that cannot be made more productive (and so better paid) through investment programmes. Some things can and should be done: investing in public housing, rail infrastructure and building up renewable energy, for example. But these will not yield the hordes of well-paid jobs that politicians left and right so badly want. Productivity improvement has moved from the workplace to our private lives (think smartphones and search engines). And you can’t tax that. Meanwhile demographic change is adding a further brake to the formal economy. This is the real reason why the economy under the Conservatives is not doing well, not “austerity”. Mr Corbyn is offering 20th Century solutions to a 21st Century problem (as is George Osborne, the Conservative Chancellor, I must add).

Slower growth means that it will be a struggle to raise much more in taxes, and certainly not without increasing taxes on middle income people. That is a hard political sell that Mr Corbyn only hints at (“there will be hard choices” he manages at one point). And it means that the government can’t just keep adding things to public expenditure without public services being unable to keep up with demand. That’s why abolishing student tuition fees is such a bad idea, for example – you only have to look at Scotland, where the state pays for university education, to see that. The universities can’t keep pace with demand, and fewer people from poorer backgrounds go to university than in England as a result.

I believe that there is a way forward from here. It does not come from the current government’s economic liberalism. It comes from strengthening local communities and the small businesses that serve them. It will not necessarily produce lots of conventional economic growth, and it will not produce masses of new tax. But it might produce public services that don’t keep failing; it would stop national and multinational chains sucking the life out of local economies; it would harness the potential of the underemployed.

Some of the ideas Mr Corbyn is promoting might help; he seems to suggest devolution of power to centres away from London. But too many look like national solutions that draw power back to London; others look like a path towards mass surveillance in order to collect more tax. I cannot see that it is any better than what the Tories are doing – and frankly I fear it would be worse.

Mr Corbyn promises hope, but his ideas are built partly on fantasy and definitely on shaky foundations. And that is even before he attempts to convince the public at large.

The political isolation of Britain’s working class: liberals should reach out

Conservative Chancellor George Osborne’s Budget last week, his first without the need to negotiate with the Liberal Democrats, was widely hailed as a feat of political brilliance. It has put the opposition Labour Party into disarray. At its centre was a direct attack on Britain’s working poor. Nothing could demonstrate that group’s political weakness better.

Part of the political acuity was the spread of confusion over where the budget pain was to be felt. Mr Osborne, and the Prime Minister, David Cameron, had earlier set out their intention of wooing working class voters to their party. Huge cuts to tax credits, the Budget’s centrepiece, were camouflaged by rises to the minimum wage, to be renamed “living wage”, by more than even Labour had been proposing before the election.

Britain’s tax credit system was implemented by Labour Chancellor Gordon Brown. It is designed to top up the wages of those not earning enough to meet basic needs, in particular the costs of bringing up children.  Various arguments were used to justify this. It was said that companies were paying workers less because they were anticipating the effect of tax credits. The system was created by Labour so as to create a bank of dependent voters. Aspersions were cast on claimants as being shirkers, or feckless, especially poorer people who dare to have larger families (one proposal is to stop support for children after the second). It would be better to pay people more, and to tax them less, than to hand out state aid.

None of this really bears up to scrutiny. The minimum wage and higher tax thresholds are pinpricks on the wider problem for low pay. There was no sign that the public sector, for example, was going to be any more generous in its treatment of lower paid workers, many of which it pays for, directly or indirectly (through outsourcing contracts). Academic research does not support the idea that tax credits lead to lower pay – or at least, not by much. Claimants for tax credits are already working; they are very clearly not part of the army of shirkers, who, so far as they actually exist, claim direct state benefits. With an ageing population it is far from clear that the country needs fewer children with working parents – and poverty can adversely affect the progress of those children, reducing their chances of playing a full and active part in the economy.

This was nicely illustrated the Economist’s Bagehot column this week. He (Jeremy Cliffe) visited a local estate in south London (not all that far from where I live, as it happens), and talked to some of Mr Osborne’s proposed victims. He found a number of working women, with a diverse range of heritages, facing up to a difficult predicament with dignity. At the school where I am governor, such families demand increasing levels of support if their children are to keep pace with those from more fortunate families. We are lucky that the proportion of such families is manageable: but their needs will grow; our funding will not.

What our society is confronting is one of the most important issues it faces. It is the disappearance of mid-level blue and white collar jobs, and their replacement by less secure and less well-paid ones. These new jobs are overwhelmingly in service industries – carers, cleaners, call centre operatives, security guards, and so on.  This change is overwhelmingly due to new technology – but it has been helped along the way by globalisation. These new jobs often do not pay enough to allow their workers to fully participate in society – especially if they have children.

But it is not at all clear what the solution is. Two traditional answers do not look promising. The first is to improve productivity. And yet in these jobs it hard to see how this can be done without increasing general alienation. In any economy some jobs lend themselves to advances in productivity (think factories) and other don’t (think hairdressers). As the former become more productive, the proportion of workers in the second group increases. This is a phenomenon known as “Baumol’s disease” by economists – and it is a large part of what is going on here. The economy is stratifying between a small number of highly productive jobs, and a large number of relatively unproductive ones.  The former can lift up general levels of pay for everybody – but only so far. Improving productivity may simply help an elite of better off workers, without doing much for everybody else.

The second traditional answer is to increase job protection to improve the bargaining power of those in poorly paid jobs. This is the route favoured in such countries as France. It tends to lead to either or both of two things: higher unemployment or a growing army of temporary workers with fewer rights.

We are left with three routes that look inadequate, but must still be pursued. The first is redistribution through tax, benefits and freely available public services. Our tax credit system is a key element of this. The fact that its cost has escalated well beyond the scale originally envisaged simply shows that the problem it is trying to fix has grown. The answer is as surely to be higher taxes and not reduced benefits. The second route is universal education, and initiatives to ensure that children from poorer backgrounds get more support. This gives more people access to better paid jobs, and makes the job market less easy to stratify. Progress has been made on this, but it remains under pressure from lack of finance. The reduction of tax credits associated with children will be a step in the wrong direction.

And third is the strengthening of local communities and local economies. This may not make the economy much more productive in the traditional economic sense of creating more goods and services to consume, but it serves to humanise society and to tackle the exclusion that is the biggest cost of poverty. Tax credits have no role to play in this. They are a giant, soulless centralised system controlled by rules made by bureaucrats and politicians far, far away. They only help by improving incentives to work, and participate in communities that way, rather than dependency on straight benefits – which is corrosive of communities. But nothing the current government is doing, or the political elite is thinking about, is advancing this third, important approach. It does not follow from grand initiatives that make big political careers.

And the sad thing is to see how politically marginalised the modern working class has become. Our old picture is of white men, working in factories and belonging to unions. But this strata of working class is disappearing. Instead we have a growing army of male and female workers from diverse ethnic and cultural backgrounds. They are not unionised, and split into multiple communities. They often do not vote. The Labour Party, the traditional sponsors of the working classes, is now more interested in chasing their more engaged and better off cousins in what is left of the traditional working classes and in the middle classes (“Middle England” as I have called it). Middle England is not very sympathetic to the plight of the new working class. This has weakened the party’s opposition to Mr Osborne’s budget – though thankfully three of the four prospective leaders see that their stop-gap leader Harriet Harman has gone too far in suggesting that Labour will not oppose the cuts to tax credits.

Liberals, I believe, must stand firm behind tax credits, accepting tax rises to support them if need be. We should also support education policies to ensure the full participation of children from poorer families. But the real hope lies in reinvigorating local communities. We should remember that this is not just a middle class thing. The Liberal Democrats in particular have been forced back into a middle class ghetto, and I suspect that many find this a comfortable, if small, place to be. But the real need for liberal solutions is amongst the country’s new working class, and that is an important area for outreach, based on community politics.

 

Election issues: the economy

The quality of debate in Britain’s General Election campaign is predictably awful. Arguments are reduced to simple sound bites. And parties try to muddy the waters on their opponents’ key issues rather than engage with them properly. Many issues are hardly discussed at all. In a doubtless futile mission to raise the level of debate I will look at a number of issues from rather more objective perspective, and handle the arguments on an altogether deeper level. I am not, of course, an objective observer: I will generally make the case for voting for the Liberal Democrats.

Let’s start with the issue the Conservatives most want to talk about: the economy, and which party is best placed to manage it. Their argument runs something like this: Labour cannot be trusted with the economy because they presided over the economic crash in 2008 and haven’t admitted their culpability. The Conservatives have a “long-term plan” that is yielding results without getting the country into too much debt.

Labour are more reticent. They don’t accept that their party was responsible for the crash (or no more responsible than anybody else). They are severely critical of the coalition’s economic record, which, they say, swung to much to “austerity” (i.e. too many spending cuts, benefits savings and a rise in VAT), which choked off and delayed the recovery. They point out that Tory plans for the next few years imply vicious cuts to welfare. They also point to stagnant living standards for most people. Their plans for the next parliament involve significantly more public borrowing, supposedly supported by higher levels of investment.

Arguments over the records of both sides over the last two parliaments are interesting enough. I mostly support the narrative of the coalition partners – but Labour can call on the support of many independent economists with real heft. But past record only counts to the extent it tells us about the future – and in this case it doesn’t tell us much at all. Both sides are placing more faith in the robustness of the British, European and world economies than is prudent.

Many economists and politicians assume that there is a natural rate of growth of about 2% per annum, based on improvements to productivity, that the economy can be guided towards by governments with sensible macroeconomic policies. This seemed to be true before 2008, but it is surely questionable now. Demographic changes, with the proportion of working age people falling, are only the most obvious reason for scepticism; there are plenty of others, about which I have written often. That leaves us with two critical problems. How would the parties cope with the likely possibility of continued economic stagnation? How might they reduce the risks of such stagnation by making the best of any opportunities the country does have for growth?

In the first case prolonged stagnation points to renewed austerity. In order to keep the national debt under control expenditure will have to be cut, or tax increased, or both. The deficit between taxes and spending is still high, and deficits are much harder to sustain if growth is low, even if, as now, interest rates are also low. Japan has managed to get away with prolonged deficits in spite of stagnation, it is true, but that is because they have trade surpluses and accordingly are less dependent on foreign borrowing. What will happen if Britain fails to get to grips with government finances? That is hard to say. In the modern, globalised economy, inflation looks much less of a risk, unlike the last time this situation arose, in the 1970s. Instead stagnation may become more entrenched, and unemployment rise, until there is a financial crisis and our banks start failing again.

If there is renewed austerity the question arises as to how much of the strain is to be taken by tax rises and how much by public spending cuts. As a nation, we have higher expectations of our public services and benefits than most: the NHS, schools, social care and pensions in particular. I cannot see how such expectations can be met without raising taxes. And here there is a big snag.

Both Labour and the Conservatives have ruled out any increase to Income Tax, National Insurance or VAT. These are the main taxes that the general public pays, and account for some two thirds of all taxes. Tax rises without touching these three mean, generally, that somebody else is paying. The trouble is that the “somebody else” idea is wearing thin indeed. Tax breaks for the rich have been steadily pared back (most recently on pension contributions), making our tax laws more complex and draconian in the process. Company taxes are considered off the agenda because that threatens investment (this may not be right – but treating company taxes as a football is clearly bad for investment). The wealthy are already paying for a large part of the services which they never use. Apart from practicality, we are threatening the idea that everybody should pay something towards public services, in order to maintain solidarity and consent. No party is facing up to this issue.

Labour is particularly vulnerable. Their spending plans are more generous than the Conservatives’, as they hope to borrow more against infrastructure investment. Their plan to cut university tuition fees is particularly foolish. The SNP and the Greens are even worse. The Tories are more realistic, if you take their formal plans, laid out in this year’s Budget, with a pinch of salt. These envisage an unrealistically vicious attack on benefits in the first two or three years, followed by a relaxation. This is likely to be smoothed out in practice. But the party gives the impression that they would squeeze public services and working-age benefits rather than raise taxes. This probably is not what most people want.

So, if the parties would rather not contemplate stagnation, how would they create the growth in productivity that would head this fate off? How might this be done? The traditional formula is so-called “supply-side” reforms – deregulation for the most part. The trouble is that these tend to benefit the lucky few, both in terms of skills and income, and geographical location, largely London and the south east of England, where property prices are already through the roof. So the most promising idea is to promote growth in the regions of England, and also Wales (Scotland is the one region of the UK has seems to have bucked the gravitational pull of the South East). There is no sign that any party wants to relax planning controls that might allow this swing to the prosperous areas to occur more smoothly. There is a growing realisation that more balanced growth can only be done through the devolution of political power, and the release of funds for infrastructure investment between and within the regional centres. The Coalition has been feeling the way forward with its City Deals, with Greater Manchester being the flagship.

Once again, the main parties are disappointing. The Conservatives seems to place too much faith in deregulation – and their hostility to the EU and immigration represent roadblocks to future growth. Labour shows an alarming impracticality when it comes regulating and taxing businesses – and tackling such issues as low pay and insecure temporary contracts. While both parties are starting to talk the game on regional devolution, there is reason to doubt their commitment. Labour’s attack on the decentralisation of the NHS to Greater Manchester was particularly revealing. On both sides there is a lack of fresh thinking. The Greens, SNP and Ukip, in their different ways, are worse.

What of the Lib Dems? They are silent on raising tax rates – which undermines their commitment to funding the NHS, for example. They are closer to the fresh thinking needed for regional growth – with a real understanding of what devolution means. They also have interesting ideas on developing a more diverse banking system and promoting alternative business ownership structures. But these ideas aren’t fully formed. They are the best of a bunch that ranges from weak to hopeless.

Labour’s voodoo economics

“Voodoo economics” was the name given by George Bush Senior to his presidential rival Ronald Reagan’s economic ideas when the two were vying for the Republican nomination in 1980. Mr Bush’s scepticism proved well-founded. Now I don’t accuse Labour of promoting the same ideas – but there is the same sort optimistic logic and build-up of false expectations amongst supporters. Except that in Labour’s case it will be politically much riskier if they actually achieve power.

The original voodoo economics, or “Reaganomics” to its supporters, is associated with two ideas in particular. The first is “trickle down” – if the rich become wealthier then soon enough everybody else will benefit. So it’s OK to cut taxes on the rich – which would stimulate economic growth that benefits everybody. The other idea is known as the “Laffer curve”. If you cut taxes rates then in due course tax revenues increase because economic growth enlarges the tax base.

Reagan won the presidential nomination, and then the presidency for two terms. He wasn’t quite as  reckless as is often portrayed with tax cuts, but he did oversee more liberal economic policies that coincided with renewed economic growth. Mr Bush succeeded him in the 1988 election, and was then forced to raise taxes, in spite of his “read my lips” pledge against “new taxes”. He then lost out to Bill Clinton in 1992, who both raised taxes and oversaw a period of rapid economic growth. Trickle down was notably absent in this period, where median earnings in the US did not track overall economic growth; inequality rose sharply. There was no convincing evidence of the Laffer curve effect either, hence Mr Bush’s predicament. This still hasn’t stopped tax cutting being a central tenet of the US right’s faith.

So what is Labour’s voodoo? This is the idea that raising the wages of the lower-paid will generate sustainable economic growth, which in turn will generate tax revenues from which public services like the NHS can be funded. I’ve heard some such line of argument presented by Labour spokespeople over the last week. It replaces the classical Keynesian stimulus idea that the party had been peddling, until the the economy inconveniently grew and soaked up the slack needed to make such a policy work.

How might this idea work? Well I think it stems from the observation that productivity is weaker in Britain than in many other developed economies – notably France and Germany. So, if employers are forced to pay their workers more, they should be able to find ways of raising productivity to pay for it. And if they do that, the economy as a whole benefits, as well as the lower paid workers.  After all when Labour introduced the minimum wage under Tony Blair, the sky did not fall in. This isn’t nonsensical, but to put it generously, it is open to risk. Employers might indeed raise productivity, but they might well sack workers at the same time. In other words they would produce the same volume with fewer workers, rather than more with the same number. The result would be an increase in unemployment. And this is surely the most likely outcome. The examples of France and Germany are not encouraging: both have been haunted by high levels of unemployment to match their more generous levels of pay. East German pay was rapidly equalised after unification, for example, and the results were disastrous.

The truth is that nobody really understands why British productivity is so weak. Has it always been so, and simply exposed by the come-uppance of sectors like finance and oil which had disguised it? Is it based on poor skill levels, as employers tend to claim? Is it lack of capital investment forcing businesses into labour intensive operations? Or does it simply reflect the bargaining power of employers that will be sorted out as soon as the labour market becomes a bit tighter? I suspect that it is a combination of all of these factors.  Without knowing the causes of poor productivity, it is impossible to know whether any particular policy will work, or do more harm than good.

Of course Labour’s purpose isn’t to convince sceptics – it’s simply to confuse voters who are tempted to vote Conservative based on its economic record, and to give its core supporters some kind of fig leaf with which to cover the flaws in their treasured policy beliefs.

The problem will start if Labour win power, which, albeit probably as a minority, remains the most likely outcome of the election. As they push up the minimum wage and create a bureaucratic morass intended to encourage the use of the higher “living wage” and restrict the use of zero-hours contracts, they will not find the economy responds as they hope. Soon enough they will be forced to backtrack, if not on these policies then others, especially those involving taxation and public spending.

The Labour leadership remind me of the French Socialists under François Hollande. They developed a series of crowd-pleasing leftish policies, which helped secure them victory in 2012. Then the trouble started, and they were forced to backtrack. Their popularity fell into an abyss, to the benefit of the far right Front National. Something similar is building in British politics. Ukip, from the right, the Greens, from the left, and the Lib Dems from the centre are waiting to pounce on disillusioned Labour voters.