Liberation Day 2: American turmoil

Trying to write a considered commentary on events in America is a hazardous business. Things will change even as you write. In the middle of preparing this article President Donald Trump executed a screeching handbrake turn on his tariff policy, having paused the higher tariffs for 90 days. This leaves it as a universal 10% tariff, with massive mutual tariffs remaining with China. Stock and bond prices bounced back sharply with a huge sigh of relief. The political pressure on Mr Trump evaporated. But the dust hasn’t settled, and on any other day the remaining tariffs would have constituted a major escalation; bond market troubles may well be more deeply sourced; questions remain over the direction of tariffs in future. Disaster still beckons.

The economist Paul Krugman, whose Substack I recommend, warns against the “sanewashing” of Mr Trump’s policies – the projection of a rational strategy when none is there. This will lead to disappointment. There is not a coherent strategy behind his tariff policy – it has conflicting goals, for a start – but it flows from strongly-held beliefs, and some of his advisers have a more coherent take on it. The most important of these is Peter Navarro, who wrote an article for the Financial Times recently; I would recommend reading it if you want an insight into the administration’s outlook.

Mr Navarro presents a long list of grievances: of unfair trading practices from America’s trading partners, which are leading to a hollowing out of the United States, and a system that is tilted against it. That has led to a substantial overall deficit, and huge individual deficits with many countries. Europe bans America’s chlorinated chicken; China manipulates its currency; Vietnam acts as a conduit for Chines goods; and so on. The “reciprocal tariffs” – now in suspended animation – are a quantification of these trade barriers; he does not explain that they are simply half the ratio of trade deficits to imports, subject to a minimum of 10%. This picks up on two ideas explained in my previous post. First is the “victim narrative” of trade deficits: domestic production has been suppressed by unfair competition, meaning that it cannot fulfil domestic demand, which is in turn sustained by capital transfers from abroad. These transfers are being used to buy up American assets, ceding control to overseas interests. The second idea he picks up on is that fair trade implies that there should be no deficit at at all between countries; any imbalance is therefore evidence of trade distortion – and so as the proposed tariff is proportional to the deficit – the fewer the distortions the lower the tariff. Lost in that is the fact that 10% is still a high tariff by current international standards, and that it applies even to countries with whom America is in surplus. Mr Navarro shows that there is enough evidence for his narrative out there if you really want to believe it. I don’t know enough about the man to understand why this is – just that he has held these views for a long time. Other narratives and supporting evidence is available. After all, if America is being ripped off, why does it have the most successful economy in the world?

Mr Trump’s thinking is broadly consistent with this, though without its intellectual gymnastics. His view is more akin the idea of Mercantilism. This idea was developed by the 17th-Century French statesman Jean-Baptiste Colbert, who was first minister to Louis XIV. Colbert was a brilliant administrator, and his ideas set the tone for European statecraft for a century. He suggested that trade was about maximising exports and minimising imports so that the country would accumulate wealth, which at the time could be equated to “treasure”, the banking system being pretty crude. This was the set of ideas that were unpicked by Adam Smith and David Riccardo more than a century later. The French economy at the time consisted of a state dominated by a substantial war machine (there was barely a year when Louis was not at war) financed by excise duties and taxes on the poor. An export surplus would have implied suppressed consumption by the aristocracy (the poor had nothing left to give), which I suppose was not really a hardship. So far as Mr Trump is concerned, exports imply money coming in; imports represent money going out – so surpluses are power, while deficits mean you are being ripped off. His business philosophy is very much that if you not ripping somebody else off, you are being ripped off yourself; the idea of mutual benefit does not compute.

But Mr Trump’s love of tariffs goes further than countering perceived trade distortions. He also wants an extra source of tax revenue that he can tell his supporters that foreigners are paying rather than them. In his wilder moments he dreams of this replacing income tax. After all, income tax was brought in at first, both in America and in Britain, to compensate for the loss of tariff revenue from free trade. Of course to generate substantial revenue then the US must continue to import lots of goods. His supporters suggest this might come about through the strengthening of the US dollar, as happened to some extent in his first term, to offset the cost of the tariff. The tension between this and reducing deficits and protecting US industry is obvious.

Another aspect of tariffs for Mr Trump is that he hopes it will turn the clock back to a time when America had a lot of manufacturing jobs. Many Americans have fond memories of when many working class people had reasonably well-paid and stable (and unionised…) jobs in manufacturing. According to the MAGA mythology these were the jobs destroyed by unfair foreign competition, so rebalancing means that they jobs can come back. 

And yet another reason to like tariffs is that it allows Mr Trump to throw his weight around on the global stage and make deals. He gets high on what he sees as grovelling by foreign governments to reduce tariffs by dismantling trade barriers; he makes sure that his fellow Americans see their humiliation. Many of Mr Trump’s cheerleaders from the business world thought that this was the main point of his tariff talk, and that they were just a negotiating tactic. Just like Russia’s military buildup on the Ukrainian border in early 2022 was supposed to be something called “power diplomacy”. But the Liberation Day system is so comprehensive that it appears negotiation will be just around the edges. Anyway you can’t do 70 highly personalised bilateral deals at once. It is now unclear what future negotiations will be about. Will some countries be allowed to escape the 10% lower limit? Is it about modifying the suspended “reciprocal” scheme? Or will the focus be on the special regimes for cars and steel – as the British government appears to believe. Nobody, including Mr Trump, knows.

But problems are coming in multitudes. The first is that, whatever Mr Trumps says, tariffs are a tax on American consumers. Americans cannot avoid buying imported goods (often as components of more complicated things like cars), and prices will rise across a wide range of goods. America is less dependant on trade than many economies, but even so they will have a significant impact. There will be a temporary bump to inflation. The Federal Reserve might be induced to raise interest rates. I think that risk is overdone; it is a temporary adjustment, and unless a wage-price spiral is threatened, there is no longer term threat. Weakness in the wider economy reduces that risk. The main problem is political: Mr Trump suggested that he would cut prices rather than raise them. The MAGA faithful will accept that this is a short-term adjustment and that better times are around the corner; many other Trump voters will feel let down, or even betrayed.

Next the economy will weaken, perhaps to the point of recession. The problem here is less the extremity of this particular policy (which has been softened after all), but the perception of instability across the whole of American public policy, which has become dependent on one mercurial individual with little grasp on reality. Mr Trump talks of vast amounts of inward investment, as firms promise factories in America to avoid the tariffs. But long term investments require a stable economic outlook; companies will delay doing much until things settle down – which could take some time. Exports are likely to suffer too, from retaliatory action by foreign governments (and especially China) and from a loss of confidence in America generally. Foreign visitors, especially students, are alarmed by the arbitrary application of policy that can see visas revoked on a whim, and detention at the border. This might help reduce the current account deficit – but through making Americans poorer. 

The questions really start to arise when trying to picture the American economy the Trump administration is trying to create. He wants to shield US businesses from competition. That means that inefficient businesses are given a lifeline, and more efficient businesses don’t need to try as hard. That is not a recipe for economic dynamism – and thus has been the experience of most highly protected economies in history. A partial exception has been Asian economies that have used protectionism as part of an industrial strategy to allow the build-up of new industries. There is no such strategy in America. To be fair, America is a naturally competitive economy, and large enough not to need foreign trade as much as others to keep it so. But still, high tariffs will make America less efficient and wealthy, not more. 

And it is hard to see those old industrial jobs returning. Technology, more than foreign trade, was responsible for their demise, and there has been a Baumol shift towards services, as Americans see to bank productivity gains in manufacturing by consuming more services. A more rational expectation is that America becomes a powerhouse of modern manufacturing business, in highly automated businesses, which export much of their output. But that entails a level of investment that will not happen in the current chaotic policy environment – and tariff barriers are not a particularly good way to achieve it. President Joe Biden’s use of subsidies was a more realistic idea.

But am I overdoing it? Will it be a matter of disappointment rather than disaster? Well, maybe. But that will entail the Trump regime rowing back on its revolutionary mission. Anything is possible in Trump World.

First published on Substack 12 April 2025

Liberation Day 1: the economics of trade

It is hard to overstate the significance of President Donald Trump’s Liberation Day US tariff plan, announced last week. It is a rewriting of the world order – and America’s place in it. It’s going to take more than one article from me to explore its significance. This time I want to look at the general context – as this is essential to understanding how things might develop from here – and it is very widely misunderstood by even expert commentators. The president’s action looks like one of the most colossal acts of self-harm in history – but the impact on the rest of the world may not be as bad as many suggest.

Any discussion of the economics of trade must start with the idea of comparative advantage – first articulated by David Riccardo 200 years ago. It is one of the most powerful economic ideas out there, and it is also one of the most neglected. I don’t want to go back to Economics 101 here. Suffice to say that the theory shows that trade is driven by opportunity costs and not productivity. There is a limit to how much each country can produce – and if each one specialises where it is relatively the most efficient (but not necessarily in absolute terms) then production across the world is maximised and everybody should benefit. Differences in actual productivity are taken care of by exchange rate differentials. It is why equilibrium exchange rates do not conform to purchasing power parity. “Comparative Advantage” may sound rather like “Competitive Advantage”, and we may often make an analogy between a country and a firm (“UK plc”) – but they are very different things. In economics firms compete but countries do not – they optimise. Tariffs, meanwhile, distort pricing signals and lead countries to sub-optimise.

This theory does a wonderful job of explaining the world we see today – why there is so much trade, and why and how exchange rates differ from purchasing power parity (i.e. currencies buy different amounts of goods and services in different countries). What it doesn’t do is help with the sort of fine-grained predictions needed for economic models. That requires a very detailed understanding of economies and what the opportunity costs are – way beyond the capabilities of current economic data and analysis. Attempts to model it at an intermediate level, by looking at broad factors of production (land, human capital, etc.), have failed. In modern economics, if you can’t put it into a model, it’s no use at all. So while most economists have a general idea about comparative advantage, it’s a distant memory from their undergraduate days. They haven’t thought about it very much. Politicians and political commentators pick up on the general idea but garble it – falling into a fallacy of composition (assuming that the production side of an economy is analogous to a firm) and muddling competitive and comparative advantage.

Two insights get lost in all this. The first is that the theory has nothing to say about trade deficits and surpluses. In the standard exposition, exchange rates should adjust so there are no deficits or surpluses – though whether this applies country to country, or to countries across all their trading relationships is an interesting question that I’m unable to answer. I will come back to that. The second is that the benefits of trade are driven by difference – and that the more similar economies become the fewer gains from trade there will be. Let’s take a closer look at that in the context of the US and China.

In 1990, when trade between the two countries started to open up, the US was one of the world’s most advanced economies and China one of the least developed, after the failure of Maoist Communism. Most of China’s workforce was tied up in massively unproductive agriculture. Only a tiny proportion of America’s was in its hyperproductive productive agriculture. America had a massive comparative advantage in agriculture; China therefore had a comparative advantage in pretty much everything else that was tradable, apart from technologically advanced goods that were beyond its capability. To put this another way, China’s hideously unproductive agriculture sector meant that Chinese wages were tiny compared to America’s, which meant that even very inefficient manufacturing businesses were highly competitive. And so they had the basis of massively beneficial gains from trade. America exported agricultural products and advanced goods, while importing cheap manufactured goods. Both countries benefited from cheaper inputs. 

So far, so good. But the situation was dynamic. Rural workers in China responded to the demand for extra manufacturing jobs; rural productivity improved. Chinese manufacturing invested; infrastructure was improved; productivity and wages rose. America and China converged. It follows that the gains from trade diminished. This has mostly been at America’s expense. Chinese goods became more expensive relative to domestically produced ones. Meanwhile, because productivity was advancing rapidly, in China the lost gains from trade were compensated for by gains from productivity. This has been replicated on a global scale as the dynamic between developed and less-developed countries. There were massive gains from trade in the early days, and a convergence between the two sides that has seen the biggest ever eradication of extreme poverty. But the gains from trade are now much less. This is one of the reasons that living standards in the developed world have struggled since the mid-2000s; access to ultra-cheap goods from the less developed world has drastically diminished. This development is almost unacknowledged by economists; the late great Paul Samuelson has been to the only one that I have seen to point this dynamic out – largely before it happened. Instead people are bewailing the loss of a system of global trade that delivered so much benefit in the past.

The world has progressed in another way. Manufacturing productivity has advanced steadily, mainly through automation, but also through better process management. This has tilted the balance of developed economies towards services that are largely untradable. This means that the impact of trade on developed economies is steadily diminishing. 

This doesn’t mean that gains from trade have disappeared. Surely it still makes sense for Apple to make its iPhones in intermediate economies? But it does mean that strategic considerations are weighing more heavily than commercial ones. In particular both America and China are worrying about what would happen if war broke out between them – an increasing risk given China’s ambitions to absorb Taiwan. It also doesn’t mean that the reordering of manufacturing supply lines that the Trump administration seeks won’t be painful and disruptive for both America and its trading partners – especially those in East Asia. But it does mean that ultimately it will almost certainly be worse for America than anywhere else. I want to talk about the impact on America in more detail in my next post. 

But what about trade deficits and surpluses? A current account deficit represents an excess of demand (consumption plus investment) over supply; a trade deficit has a slightly narrower definition – it applies to goods – but it is much the same thing. If demand can’t be met by local supply, you need to imports to make up. This, however, tells you nothing about what caused it. The victim narrative suggests that the surplus of demand arises because domestic supply is being driven out of business by competition from abroad. The economy then runs up debt (or sells its assets to foreigners) in order to maintain demand, which has to be supported by imports, and it all ends in ruin. An alternative, boomtime narrative is that consumers are on a demand binge which domestic supply cannot meet. Foreigners are happy to finance this because this booming economy provides opportunities to make returns. Trump supporters are scarred by the sight of business closures with the excuse of foreign completion being given, or outsourcing to cheaper suppliers abroad, and point to victim narrative. Trump critics point to low US unemployment and a healthy economy, and say that there is no obvious case that the supply side is being suppressed – and so lean to the boomtime narrative.

But there is a further dynamic. Some countries, including Germany and China, enjoy trade and current account surpluses as a matter of policy. They achieve this by, one way or another, suppressing demand so that the supply side can generate a surplus to export. This might be by underpaying their workers and letting businesses accumulate profits; it can be through governments over-taxing and leaving an unspent government surplus; or it can be through a conservative public forever saving for a rainy day. Why do governments let this happen? A surplus means that the country does not require foreign finance, and that generally makes the national finances easier to manage; for dictatorships, like China, that can be especially important. If some countries run a surplus, then others must run a counterpart deficit. This pattern can help fuel the victim narrative of deficits. The alternative view is that surplus countries are selling themselves short – they could charge more for their exports and/or allow their citizens to consume more – and that deficit countries are beneficiaries of this generosity – and should be sending the surplus countries thank you notes. Which narrative (and others are available) better fits the facts depends on the circumstances. One the one hand you might have a colony being exploited by its ruling power; on the other you could have an industrial powerhouse using foreign capital to build up its infrastructure and industrial base. You need to get beyond the raw statistics to work out what is going on.

There is an argument that all trade should be in balance, and persistent surpluses and deficits show distortions from “fair” trade. This comes up quite a bit for people trying to “sanewash” Mr Trump’s actions. He himself seems to have a much cruder understanding: a surplus means you are getting one over on the other side and building up wealth; a deficit means you are being ripped off and seeing your wealth disappear into foreign pockets. The idea that surpluses and deficits may simply be a reflection of supply and demand being out of kilter runs counter to this.

What role do exchange rates play in all this? Exchange rates should adjust to an equilibrium that allows trade and capital flows between countries to balance – letting the market decide. Countries can try to lean on the market by buying or selling reserves – but this only really works to manage short-term blips where governments think the markets are temporarily distorted. Monetary policy, fiscal policy and capital controls all affect the exchange rate, and can be used to fix exchange rates – but ultimately because these policies work because they affect supply and demand, and the capital flows required to finance them. You can get too hung up on asking what a “fair” exchange rate is. 

What is the impact of the Trump tariffs on the world economy? In the short term there will be a lot of disruption, and we have only seen the start of it. There are two pressure points that will need close attention. The first is less developed economies that have been slammed with high tariffs: notably Vietnam, Thailand and Bangladesh. These do not have the resilience (or negotiating power) of bigger economies, such as China, Japan or South Korea. They may be able to divert to other markets, but long term damage looks likely. The second is in the financial system; this has been delivered a series of shocks by the Trump administration, of which Liberation Day is merely the biggest. A lot of bets made by intermediaries have gone sour and these could have ripple effects that start to endanger bigger institutions – this is what happened to Liz Truss’s government in the UK in 2023, causing its demise. A danger sign is that the price of safe haven assets, such as US Treasuries, has been sinking alongside riskier ones. An added risk is if China starts to dump its some of its substantial holdings of US Treasuries – which it might need to do to counter the disruption of trade. A new financial crisis might develop.

But this crisis is not the end of globalisation: it simply marks exit, or intended exit, of the US as a global trading power. The rest of the world can carry on trading more or less freely with itself – and that seems to be what they want to do. And in some respects America will continue as a global commercial power: Google, Meta, Apple, Microsoft and even Amazon will be disrupted but there is no fundamental threat to their business models. The globalisation of information will go on. The big question is who, if anybody, will take up America’s leadership role? China could curb its own tendency to bully; the European Union could have its moment. 

In due course, however, I expect the Trump tariff regime will collapse, and America will come back into the world system as a diminished player. But that’s another story.

First published on Substack on 9 April 2025

Meanwhile, how is the Ukraine peace process going?

Donald Trump’s Liberation Day tariffs shocked even me. I want to respond to it in two ways – first to examine the economics, since I think that the understanding of comparative advantage, the driver of global trade, is weak amongst most commentators; second, the politics of it, and whether the backlash could lead to an early termination of the Trump presidency. But I think both commentaries would benefit from a little more time passing to clarify things. Before that, I want to look at the Ukraine peace process started by Mr Trump’s administration – about which I have commented here previously.

In those comments I suggested that the process would encompass three things: a ceasefire on something close to current front lines; ending sanctions on Russia; and ending US aid to Ukraine. Only a token effort would be made to tackling a longer-term peace treaty. The strategy was first to pressure Ukraine into going along with this broad strategy and then to tackle Russia. The pressuring of Ukraine has gone more-or-less to plan. The second step has got absolutely nowhere.

There was always a puzzle about this process. Why wasn’t the Trump regime placing any pressure on Russia? Instead Mr Trump and his allies repeatedly parroted Russian talking points about who started the war (Ukraine/NATO); the impact of US aid (overwhelming); the legitimacy of the Zelensky government (elections overdue); how the war was going (Russia dominant); and who was the main obstacle to peace (Volodymyr Zelensky) . Russia, meanwhile, made plain their objection to the ceasefire idea unless the settlement “dealt with the root causes” of the conflict. This is code for an effective capitulation of Ukraine. Those experienced in negotiating wondered by Mr Trump was being so soft on Russia when it was so clear that a lot of pressure was going to be needed on them in due course. Instead, Mr Trump suggested that Russia would be easier to handle than Ukraine, and that they would be compliant for reasons that only he understood.

Just what was going on? One well-rehearsed conspiracy theory is that Russia has private information on Mr Trump and that they were blackmailing him. I find this hard to accept: surely there really isn’t anything out there that could harm him? Corruption; illicit sex – you name it, Trump can shrug that kind of thing off. There is an ideological overlap between hardline MAGA Americans and Vladimir Putin’s stated ideology – the stuff about white-supremacy, “Christian” civilisation and so on – but I’m not sure this has much sway on Mr Trump himself – he’s a narcissist not an ideologue. I’m left with the conclusion that it is sheer stupidity. I would call it naivity except that Mr Trump has four years experience of the highest office. The Putin regime has sugar-coated its hard line with flattery, talk of its desire for peace and the promise of exciting business deals; Mr Trump doesn’t seem to have got beyond the sugar coating to the bitter kernel what Russia is actually saying. You would have thought that a New York property magnate would have an ear for bullshit – but apparently not.

Still, this is a bit of a gamble for the Russians. They are hoping that the Trump regime will lose patience, blame the lack of progress on Ukraine, and suspend aid and sanctions without a ceasefire. But I think Mr Trump is expecting serious engagement with the ceasefire idea, and will eventually notice that he’s not getting it. The Russians might then end up with nothing. There are some early signs of frustration from Mr Trump. Interestingly, he was especially annoyed by the Russian suggestion that the Ukrainian government should make way for a UN-led interim regime while elections were held. This seems to break one of the principles of Mr Trump’s negotiating approach – after investing so much into bullying Mr Zelensky, removing him would destroy that investment. And yet it’s all of a piece with those Russian talking points. 

But I can’t be too optimistic. The Trump regime has an America-first attitude to Europe, in stark contrast to its attitude to the Middle East. There are benefits to the US, as they see it, from ending aid to Ukraine and the sanctions – and so they may very well be tempted to do this without a ceasefire. But the plaudits as a peacemaker that Mr Trump seeks would disappear. Mr Zelensky realises all this and is now playing his weak hand well. He has to give way to American bullying in order not to be seen as the problem party; and this he is doing without being too craven.

Meanwhile the war itself has slowed down. Russia made a strong bid to recapture the territory in the Kursk region it lost to a surprise Ukrainian offensive. They have pretty much succeeded – but casualties were high and progress elsewhere largely stalled. They are doubtless regrouping – but then so are the Ukrainians. A decisive military breakthrough seems a long way off. Two questions lurk. The first is how close is the Russian war effort close to failing from its losses? Some western commentary suggests that it is much closer than most seem to think. Still, the resilience of despotic regimes under pressure can be surprising. The second is how well could Ukraine hang on without US support? It would clearly struggle – but would not fold as quickly as Russia is suggesting, and the Trump regime seems to believe. But both Ukraine and the European powers are desperate not to put this to the test.

What of the European powers? These are being treated with contempt by America and Russia alike. But in a long game their influence is growing. They are putting a remarkable amount of effort into developing the idea of an armed+ presence in Ukraine to secure any ceasefire. This seems odd, as it is categorically unacceptable to the Russians, and the Americans seem uninterested; militarily it doesn’t make much sense either. It seems to be a way of reminding both that Europe has some weight to pull in this affair. 

The biggest question of all is whether Mr Putin will break free of the Russian stated position, and agree to a ceasefire without major concessions, in exchange for lifted sanctions (including those from Europe) and a suspension of US aid. It is possible, even if it doesn’t look very likely from where I’m sitting.

First published on Substack

The UK government is hostage to financial markets

This is not (entirely) Rachel Reeves’s fault

As I’ve written before, I don’t warm to Britain’s Chancellor of the Exchequer, Rachel Reeves. This is mainly because of her poor communication skills – she is certainly more on top of her brief, and responsible, than her two immediate predecessors, Jeremy Hunt and Kwasi Kwateng. It seems that the British public shares my prejudice. She is popularly spoken of as a liability. But I think this reflects much wider problems within this government.

Government finance policy needs to achieve four things. It needs to ensure that the government has the resources it needs to deliver on public services and social insurance policy; it must ensure that there are appropriate incentives in the tax and benefits system for the economy to work effectively; it needs to balance supply and demand in the economy at large to ensure that there is full employment and low inflation; and it needs to ensure that the financial markets are kept happy. The problem for the government is that it is the fourth requirement that is dominating the other three.

What do I mean by “keeping the financial markets happy”. It is hard to be precise, but the immediate measure is cost of government debt – what the government must pay to borrow money over the maturities it needs to finance itself. This is more complicated than it appears at first, because it can also affects requirement three – balancing supply and demand. As Britain operates its own currency, which is not pegged to any other, it has the option of financing itself by creating money. This has been done recently through the policy known as “Quantitative Easing”: letting the Bank of England buy longer term government debt. The danger is that this creates extra demand in the economy and causes inflation.

The government’s predicament is defined by three things: elevated inflation, high levels of outstanding debt, and internationally elevated levels of interest required to finance that debt. Inflation is not high, but at the top end of an acceptable range. If it rises then political disaster beckons – firstly because people feel that their living standards are being eroded, and secondly because the cost of home mortgages arises, causing widespread financial stress. The government therefore feels it can’t take liberties with large budget deficits or monetary financing. Debt, meanwhile, is nearly 100% of GDP, a historically high level for peacetime – courtesy the financial crisis of 2007-09, and the covid crisis of 2020-21. A large amount of debt means that interest payable becomes a bigger issue. And the cost of government borrowing is at historically high levels compared to the USA and Germany (both of whom are themselves under some stress) – though not especially high in absolute terms by 20th century standards.

Listening to commentators, you would think that interest costs had the same economic implications as real spending, like running the NHS – just as interest costs are very real to ordinary households. This isn’t really true – it isn’t about mobilising real economic resources, it’s about shuffling wealth around the financial system. It does not in fact have much direct impact on the first three government objectives, but it is critical to the fourth, and so indirectly impacts them. It is possible for nations to get into debt spirals, like households do – but actually pretty rare. The outcome is usually a grim austerity-based international re-financing, with a loos of sovereignty, or else hyperinflation, which usually leads the same way. It’s very rare in developed economies. The Eurozone crisis of 2010, affecting Greece, Spain, Portugal, Ireland and Cyprus has a lot to do with the fact they were part of a common currency area. The interwar catastrophes in Central Europe can be linked to war reparations and naive macroeconomic management. The question is whether this rarity is because finance ministries are so afraid of it that they are more cautious than they need to be – or because the management tools available to modern developed economies are powerful enough to fend off the risk, provided they control their own currency. 

In Britain’s case there is no doubt that the government is scared stiff of financial chaos when managing its debt, and is very risk-averse. The financial wobble that brought down the government of Liz Truss in 2023 is seen as a cautionary tale. The reasons for this financial crisis are pretty technical, and arguably just bad luck, but it has made people more cautious than ever. And it certainly did for any suggestion that governments could ignore financial markets. But nobody knows exactly what will cause a breakdown – except that the processes are non-linear. Trouble can happen with little warning.

So how do governments keep markets happy when, as seems to be the case for Britain now, warning lights are flashing? It’s a matter of confidence and trust. The benchmark bond maturity is 10 years, and the ability to issue bonds cheaply for greater maturities makes the overall management process easier – an art that the Bank of England is very good at. So investors need confidence that the currency will hold its value for that long, with regard to domestic prices and, to some extent, with other currencies. I think investors are looking for two things, on top of a strong underlying economy: consistency and restraint. Consistency means that the broad contours of the country’s financial management will remain constant (or perhaps drift in a conservative direction) over the long term. Restraint means that there are checks and balances within the system to ensure that levels of debt do not explode unsustainably.

With this in mind the Coalition Chancellor George Osborne set up the Office for Budget Responsibility (OBR) in 2010 (a moment of high financial stress), and this system has been maintained ever since. The OBR is independent of government and reports on government financial plans twice a year, coinciding with fiscal events, one of which is the annual Budget. It prepares its own economic forecasts and shows how much the government’s published plans will affect the economy. This is the basis on which the government can show that it is adhering to its fiscal rules, without fiddling the forecasts, and governments were prone to doing before 2010. Fiscal rules set limits for the size of budget deficits and levels of debt. This system delivers consistency and restraint for as long as governments stick to it. Tinker with it, and markets become much harder to manage. Ms Truss tried to play fast and loose by letting her Chancellor, Kwasi Kwarteng, deliver a major fiscal event without and OBR report.

But this approach comes at a huge cost. The first issue is that the OBR’s forecasting methods are conservative, though not inconsistent with mainstream economics. That means that radical ideas for reform will be treated with scepticism – the up-front costs are fully loaded but the subsequent benefits treated very conservatively. This is a feature, not a bug. Evaluating reform schemes to distinguish between the half-baked ideas from lobbyists and wonks, and really promising ideas is beyond the competence of such an outfit – and anyway often requires a degree of political judgement. Most ideas that come through the political system are in the former group. Even where the OBR accepts that there will be benefits, it is often over-optimistic. Past reforms to benefits in Britain have not yielded the expected savings for example. The markets want conservative projections, not political manifestos. Alas most promising efforts at radical reform entail substantial costs up-front costs, so adherence to fiscal rules can be severely limiting.

There is another problem. The OBR figures give a false sense of precision. Even estimates of current economic data, such as GDP, inflation and, especially, productivity, are uncertain – never mind future projections. We may live in an Information Age, but reliable data on the economy as a whole is unattainable. I have seen earnest discussions about trends in productivity – and yet the estimates used are bases an uncertain data and heroic assumptions. The only hard data is that on tax receipts, government spending and the level of national debt.

And so the government is forced to take OBR forecasts as holy writ, and tailor its policies to producing forecast outcomes rather than real ones. And Ms Reeves has given us an unedifying display of managing minuscule “headroom” calculated by the OBR. Reforms to the benefit system, where legitimate questions can be asked about its effectiveness, end up looking more like brutal cuts than intelligent redesign. But if Ms Reeves doesn’t play this game she risks trouble in the financial markets.

The biggest problem for the government is that the previous government, and its Chancellor Jeremy Hunt, ruthlessly gamed the system to secure temporary advantage, in the hope that this would turn the political tide in time for the election. The “headroom” was cut to minimal levels; unrealistic assumptions about future cuts to public spending were pencilled in for the next parliament. This was used as the basis to cuts to employee National Insurance that were plainly a very bad idea. This was obvious enough at the time, but Labour failed to call the antics out. That left them supporting unrealistic expectations that they are now paying for. By being politically risk-averse they ended up by taking big financial risks.

What the government is clearly hoping for is a change in the economic data – especially GDP and tax receipts – that will start to give it more margin with which to enact policy. The consensus is very pessimistic (a view that I share for a number of reasons), but good news might emerge from something as insubstantial as a change in public mood – or a reinterpretation of the economic data. Clearly Labour hoped that the formation of a new adult-minded government would be enough to lift the mood. That failed to happen as international news, and especially the antics of President Donald Trump, only made things worse.

One way to give the government extra headroom would be increase taxes. You can make a good intellectual case for doing this on mainstream taxes (income tax in particular), but the government feels that this would be political suicide. They may well be right. The left wants to find ways to tax the wealthy – but this is much easier to do in theory than in practice, and its economic effects are uncertain. One of the props to the economy has been the influx of money from wealthy individuals abroad to buy property. Mess with this and you could get a currency crisis.

So the government looks trapped. It clearly needs to make radical changes to public services and social insurance, so that these are both more effective and less costly. But this means dealing with social problems at source, working across traditional departmental lines, rather than tinkering at the edges with budgets in the search for marginal “efficiencies” that often cause further cost downstream. 

The government has some ideas. It is boosting NHS budgets and hoping that this will enable radical reform to make it more efficient. It wants a drive to renewable energy to reduce energy costs. It hopes that a substantial increase in house-building will lift economic growth (though how putting people in better houses will make them more productive is less clear). It is raising the minimum wage and employer National Insurance in the hop that this will incentivise higher productivity. Each of these efforts (except perhaps the last) is worthwhile but also undermined by compromises. Social care has not been explicitly brought into the scope of NHS reform. Budgets for the energy transition have been crimped. Planning reform is not as radical as it might be. The government seems to be ignoring the implications of raising the cost of lower paid employees on social care – a big driver of health costs.

The government’s luck could turn. This can happen quickly and unexpectedly. But meanwhile, as the FT’s Stephen Bush puts in in a well-written article “Not quite enough may prove to be Labour’s epitaph.” But we should not blame that on Ms Reeves.

Also published on Substack

American winter – calamity awaits the once-great country

I was wrong. Before last year’s US presidential election I said that it wasn’t the most consequential in a generation (or such longer period offered by breathless commentators); it would be no more so that the elections of 2016 (which could have done for Trump altogether) or 2020 (a weaker argument there…). A new Trump administration would soon sink into chaos and drift – a bit like Boris Johnson’s British government following the December 2019 election. In fact the new US administration is revolutionary; it is changing things as radically as the Roosevelt presidency of 1933. The election of Kamala Harris would have stopped this, and probably done for Trump for good – though who knows what would have been cooked up for 2024.

Even after the election I compared the new regime to Mr Johnson’s, though I also offered Hitler’s 1933 ascension into the chancellery as a comparison. This latter is now looking the stronger parallel. Hitler was no details man, but set a vision in which groups of underlings competed with each other to destroy the old regime, with varying levels of competence, though with more violence than the current US regime has shown so far. The chaos that I predicted has indeed come to pass, but it has not stopped the destruction. And the checks to presidential power that I had thought might come into play seem to have been neutralised. Congress has been bypassed, and the Republican majorities seem to be shrugging this off, and offering little challenge. The courts have been stacked in the new regime’s favour – as evidenced by the shocking extension to presidential immunity made by the Supreme Court last year. A doctrine of unchecked presidential authority is taking hold. Even states’ power, a cornerstone of the Republican anti-establishment rhetoric until now, is being undermined. Mr Trump’s underlings, up to the level of Vice President, openly talk of ignoring court rulings anyway; it isn’t clear what could stop them. It will be no surprise if moves are made to further undermine the democratic standards of elections.

Pretty much all of this was predicted before the election, with plenty of evidential support. While I was broadly right on the administration’s economic policies, unlike many who really should have known better, I failed to understand what was coming for the reordering of the state itself. Not all that is happening is necessarily bad. Many aspects of the state work poorly, and sometimes shock treatment – “move fast and break things”- is the best way to achieve radical change. The problem is I have no confidence in the good faith or competence of this revolution’s leaders. This is the contrast with Roosevelt. They are leading their country to a bad place.

It starts with a complete failure to understand how a modern economy works. The country’s large trade deficit is not a sign of failure – of being ripped-off by foreigners – but a sign of economic success. As Americans become more wealthy, demand for non-tradable goods and especially services grows; to make room for extra supply of these things the country must import more tradable goods and export less. This is easy to fund as the country is attractive to foreign capital. It follows that trying to reverse this, by balancing trade and bringing more manufacturing “home”, the gains will be reversed. America becomes poorer. It’s worse than that, because the government is trying to put the toothpaste back into the tube, and its policies, notably punitive tariffs, are likely to to cause economic harm with doing much corresponding good. Whether this is leading to recession is an open question, but inflation and stagnation are a stronger bet. It is not what so many Trump voters thought they were going to get.

Then there is foreign relations, though this may be less of a concern to most voters. The abrupt tearing up of treaties and promises is destroying trust, which will ultimately make things harder for America. Bullying works by picking weaker subjects off; it doesn’t work when you are trying to bully the whole world. The regime might achieve a ceasefire in Ukraine, and at least a temporary halt to the killing. But its bullying of Ukraine while soft-pedalling Russia boads ill for longer term results. Likewise the regime is giving succour to the Israeli hard right, whose ultimate aim is ethnic cleansing. That does not bode well for long term peace. It will also ultimately undermine dealing with other Middle Eastern regimes. In the Far East things are unclear. The Trump regime is full of China hawks, but Trump himself is more ambiguous. The China hawks are useful for the securing of better relations with Russia, something Mr Trump clearly wants. But he can discard them when it comes to Taiwan, and China may get its opportunity to make the island into its control, which would be a disaster for America.

And what of Americans welfare (pensions and healthcare) and government services? These are being run down, and run by Trump loyalists rather than people with competence. These will surely be weakened. Corruption is likely to take hold.

Meanwhile Mr Trump has a solid base of fanatical support. These are a combination of frustrated conservatives who love that their side is doling it out to the hated liberals, and crooks and chancers who spy opportunities to turn a profit. They will not acknowledge failure, blaming things that go wrong on an array of conspiracies and usual suspects. There seem to be enough of them to keep the regime going. Others will be afraid to speak out or act out of line. Freedom of speech may have been a conservative rallying cry, but, likes states’ rights and rule of law, they don’t mean it.

The question now is whether things will go badly or very badly. In the latter case democracy is subverted and the current regime retains and extends power beyond Trump’s four year term. A successor is found – and there are clearly a number of candidates. I don’t think this is likely. The regime will increasingly be hobbled by infighting, made more vicious by a record of failure. Mr Trump’s charisma will start to fail. Opposition will cling on in many states, and even the judiciary might draw a line. 

But a winter approaches. This is not a good time to be an American.

First published on Substack

Are there modern lessons from slavery compensation?

In the 1837 the British government passed the Slavery Compensation Act, whereby slave owners were paid compensation following the emancipation of slaves in the British Empire. Recently I started to think about this given the repeated claims that governments can’t afford to do things: such things as extra defence spending, investing in the green transition, compensating WASPI women, and so on. The slavery compensation was substantial, but government finances weren’t derailed. Surely the question of affordability shouldn’t be reduced to the level of household budgeting? Sometimes it is quite safe for governments to spend freely without raising taxes. I did some gentle internet research. I was a bit shocked.

What shocked me was that nobody seemed very interested in how the British government was able to afford the compensation, or what the economic consequences of the scheme were. Instead they focus on political questions. More recently this has turned on the injustice of slave owners being compensated for an immoral practice, while the slaves received no monetary compensation at all. This, then, inevitably, gets tangled in the question of modern demands for slavery compensation, promoted by Caribbean governments in particular. You would have thought that the economic questions would have interested writers considering these issues, but apparently not.

The amount of compensation was £20 million. That was about 5% of GDP, by modern estimates (such things weren’t measured at the time). It was, apparently 40% of the Treasury budget – an oft-quoted figure though it isn’t explained whether that is the budget before or after the compensation. Overall government receipts at this point were about 10% of GDP. At the time government debt was about 150% of GDP, a legacy of the Napoleonic wars. There was no income tax, with government revenue primarily drawn from excise duties on imports (notably foodstuffs, including, notoriously, imported corn) and alcohol. So this was a substantial sum, paid when government revenues were highly constrained, and debt at very high levels. Much of it was paid through annuities (only finally bought out in 2015). This would have greatly softened the impact on government finances – but for the most part the receivers of compensation sold their annuities for cash, so the impact would have been significant on the economy as a whole. 

What about this impact? I have seen two things mentioned. A television documentary I saw on the topic a while ago suggested that much of the funding was invested in industrial infrastructure, and railways in particular, and so helped promote the industrial transformation of Britain. The Wikipedia article I have linked above suggests that it contributed to a banking crisis – though since the main ones in Britain were in 1825 and 1866, it could not have been all that serious. I have been unable follow the reference to the article that suggested this. 

A general survey of historic government finances by the Office for Budget Responsibility (OBR) fails to mention the episode. Income tax was introduced (or re-introduced, as it had been used in the Napoleonic Wars) in 1841, following the abolition of the Corn Laws, which reduced excise revenues. Government debt steadily fell until it was 40% of GDP at the outbreak of the First World War in 1914. This was primarily due to economic growth – the level of government revenue fell to about 6-7% until the Boer War in 1900, when it returned to 10%. This era saw little inflation – attributed to strict adherence to the Gold Standard.

A further modern article on the topic of how the compensation was afforded suggests that the debt for compensation was paid off by taxes from the freed slaves – with the author getting appropriately worked up about the injustice. It is very hard to see how that could have been the case. This looks like yet another example of economic illiteracy amongst commentators and historians. And that is as far as I was able to get. There seems to be no generally available study of the economic impact of slavery compensation. It appears to have been shrugged off at the time as well as later.

It occurs to me that ignorance about economic history is widespread and almost wilful. An example is the belief that Britain lived off its empire – that the relative wealth of British people was at the expense of poverty in the colonies. Economists that have tried to substantiate this idea have failed. Indeed the loss of Empire in the later 20th Century coincided with a period of significant growth. The economics of slavery is doubtless mired in similar ignorance. In this case though the impact of wealth made in the sugar and cotton trades, dominated by slavery in the West Indies and America, is very visible in such places as Bristol, Glasgow and Liverpool. Still, I doubt that anybody has attempted to construct counterfactuals with the use of free labour or alternative sources of trade. It remains a very influential political narrative – that British economic success was built on the slave trade. This is not wholly implausible (unlike the story of ex-slaves paying off the compensation debt), but surely the picture is far more complex. Germany had no slave trade but built an economy that became just as powerful as Britain’s in the 19th Century.

I was hoping to use the episode as example of how governments can make substantial financial commitments without having to raise taxes. That is hard to pin down as the financial system was very different. The government was able to make the settlement using perpetual debt – which is the easiest form of debt to service, though still requiring interest payments. That would not be done today. On the other hand, since most recipients appear to have sold their bonds, there would have a substantial cash injection into the economy. What was the impact?

The first thing to remember is that money is just a social convention: it’s not for real. It’s a lubricant and not a fuel. Overall what matters is how we use real resources – labour, infrastructure, and so on. Slavery compensation created a financial windfall without directly adding to resources – potentially boosting demand without any corresponding boost to the supply side. In a modern economy that could lead to inflation. In Victorian times it could cause financial dislocation – so linking it to a banking crisis is plausible, even if it is hard to pin down what the crisis actually amounted to. 

If a financial windfall is not spent immediately, however, but simply banked or invested, then the impact on the balance of supply and demand is limited. If this translates into immediate investment spending, however, such as building railway lines, then the same problems may arise – depending on the exact circumstances. It is usually reckoned that a surge in investment spending is easier to accommodate and consumption, however – and it should, after all, lead to an increase in productive capacity. The idea of the windfall helping to propel industrial capacity and growth is therefore quite plausible. If the money is directed abroad, then it won’t impact the domestic economy either. The Wikipedia article suggests that this might have been the case for slavery compensation. But I find myself in a fact-free zone.

What of modern times? Government is much larger, with revenue at about 40% of GDP, and debt smaller, at about 100%. The currency is freely floating, but under domestic control – unlike the days of the Gold Standard. Inflation is a constant threat now in a way that it wasn’t then. There are two particular problems with large government spending commitments. The first is that the impact could be inflationary, if the recipients quickly add to overall economic demand without any corresponding supply boost. The most effective counter to this is to raise taxes to reduce demand by a corresponding amount – or “funding” the spending. But not all taxes are created equal here: capital taxes, or taxes restricted to the very wealthy, affect demand by much less. Alas very few people in the current political debate have grasped this – instead thinking of this as an analogous to household budgeting. A recent example of this debate is the green investment splurge initiated by President Joe Biden’s administration. This is alleged by Republicans to have caused an inflationary surge. And yet the increase in American inflation was hardly different to other countries that were managed much more conservatively.

The second problem with government spending splurges is on the capital markets. The government may need to fund the spending through raising debt. The capacity of the market to do so is limited, though nobody is sure by how much. The government can fund the debt through the creation of money too – but this creates problems of its own (leading straight back to the inflation problem). Also if a country, like Britain, needs to sell the debt to foreign investors there may be constraints. Ultimately the government may have to borrow in foreign currency to bring such investors in – something that adds hugely to the financial risks. Britain has never been forced to do this – but is that because the Treasury is run so conservatively? It was the financial markets that undid Liz Truss in 2023. But Ms Truss was particularly inept – and we should be careful about using this as a general warning about increasing government debt. There are solutions, other than raising taxes on income and consumption – capital taxes can be used to balance the books, or the markets can be convinced that the government will continue to have the capacity to honour the debt. This would be the case if the finance was to be used for capital projects with a good return – including boosting economic growth and tax receipts.

So let’s think about three examples where people are advocating the government boost spending: defence, green investment and the WASPI women. Defence is the most straightforward. Expenditure is likely to be fed back fairly directly into demand, without a corresponding increase in productive capacity. Economic resources are to be repurposed, from things like healthcare and consumption, to armed forces and munitions. This is likely to be inflationary if not supported by tax rises – and these need to be on income tax, national insurance or VAT to work properly. Or else by reducing public spending elsewhere. This is why it is such a political challenge for the current government. I have heard more than one commentator suggest that defence spending can boost growth – but alas that is more economic illiteracy. This is only the case if it is used to soak up spare capacity in the economy (which was the case in the 1930s, for example). This is doubtful now, unless there is a way of bringing back lots of people from sick leave and retirement. It is sometimes said that war spending has boosted the Russian economy – but inflation is growing there, so this growth is illusory. There is a lot of activity but people generally aren’t better off.

The green transition is another matter. Here the funding is being used on capital projects that boost infrastructure. For the most part these projects have clear economic benefits – especially when used to boost solar power, whose economic benefits could be substantial. Carbon capture and storage, used to prolong the use of fossil fuels, is an exception here: this looks like deadweight loss. The Labour Party suggested that it would raise £80 billion a year for a hugely ambitious programme – but then they lost their nerve and scaled back drastically. The number was a bit of a nonsense, admittedly, but the idea that the government could fund substantial green energy projects through borrowing is perfectly plausible. Of course to the extent that energy is a profitable business, a lot of this could be done through the private sector – but a lot of the infrastructure probably is best done through public ownership, and in particular the electricity grid. The government is being too cautious.

How about the WASPI women? This case is closest to slave compensation. The WASPI women were those adversely affected by in an increase on pension age, equalising it with men. They claim that they weren’t informed of the change in time to do anything about it. I haven’t been following the debate in detail, though I am instinctively sceptical of the merits of their case. Still, many politicians, including those leading the current government, have expressed support for compensation in the past. I see that an amount of a bout £60 billion has been suggested – or about 2.5% of GDP. As a one-off cost this does not have the same implications as increasing defence spending, for example. In particular it is unlikely to have a huge immediate effect on demand. A lot of the money will be saved and invested. The people concerned are retired, and doubtless want to improve their lifestyle, but they are also likely to be conservative about it, and save much of it initially. It is unlikely to do much for economic growth, however, though to the extent that the funds are used for investment, there might be some benefit; if people use it to stop working, however, there would be a negative impact. The whole thing is probably much more affordable than it looks – not unlike the slavery compensation.

Alas we will not have a sensible debate on this. Doubtless the government fears that if it gave ground on the WASPI women, it would give a boost to many other aggrieved parties (those in leasehold flats, for example). Still the costs of economic illiteracy are great indeed if governments are needlessly constrained.

President Trump grapples with the Ukraine problem. It’s harder than he thought

I am finding it much easier to blog on Substack that here, and I’m starting to think that I should stop posting here at all, and subscribe my loyal email followers directly to Substack.

Anyway, I posted on Substack last week on the topic of Ukraine, and then went abroad for a few days – not posting it here. I returned yesterday and I’ve done an update. I’m posting both here.

Here’s the first, posted on 17 February

What can Trump achieve in Ukraine?

Don’t expect a lasting settlement

Gloom is spreading over European politicians as the nature of the USA’s Trump administration becomes more explicit. They are joining the legions of people shocked by that regime doing pretty much what they said they were going to do, and having to discard to the more optimistic gloss that they had been hoping for. Commentary is being overwhelmed by this sense of shock, which is not very helpful for people trying to understand what is happening. The forthcoming negotiation over the Ukraine war is about three things: a ceasefire, American military and financial support for Ukraine, and sanctions. The Trump regime simply doesn’t have the bandwidth to deal with more complicated problems, like a territorial settlement or a long-term security architecture.

First, let’s look at these three in turn. I have no doubt that Donald Trump sincerely wants the killing to stop. For all his violent talk he is actually quite squeamish about violence – and he craves the recognition that he would get from halting the actual exchange of fire. The only practical way of achieving this is an early ceasefire based on the current position of the two sides, pending some further form of negotiation – in which his regime will not really engage. Other members of the regime, such as the Vice President, JD Vance, are probably less bothered by this, however. And Russia does not want a ceasefire without getting more of what it wants to neutralise Ukraine and make it easier to attack at a future date. 

The biggest prize for the Trump regime is to stop financial and military aid to Ukraine. They have developed a narrative that this aid is creating hardship in America itself – and this seems to be accepted by the bulk of their supporters. They imagine that cutting all foreign aid (excepting Israel, of course), and waste within Federal bureaucracy, will transform the country’s budget deficit problem. Many senior people in the administration, including the President, almost certainly believe this. In fact it is only by tackling Social Security (i.e. state pensions) and health spending that a serious dent in the US finances will be made; that is off-limits. This is weakest part of the regime’s negotiating position. Russia thinks that it can win relatively easily if this support is withdrawn – after all the turning point in the war so far came when US aid was suspended at the end of 2023. However this does offer US leverage over Ukraine.

America’s negotiating position is much stronger when it comes to sanctions. Europe has a stronger incentive to lift these than America does – as that would allow European countries to diversify their sources of natural gas – and away from America. Because of this strength, the Trump regime is placing huge reliance on it. It is hard to know how important this is to the Russians.

The American hope is that the lifting of sanctions will be enough for Russia to agree to an immediate ceasefire, and that the prospect of loss of American aid will do the same for Ukraine. This might be combined with a limited swap of territory: with Ukraine withdrawing from the Kursk region, and Russia from the Kharkiv one. Some kind of negotiation process would then be put in place for a longer term settlement that will never in fact happen. America will block Ukraine’s access to NATO – but they will be unable to stop European countries from giving security guarantees. It is by no means impossible that the US will withdraw from NATO, meaning that it can’t veto Ukraine’s entry, but limiting the value of its worth. It is more likely that Mr Trump will seek to neutralise NATO by sitting fat, dumb and ugly inside its structure – much as the country does within the World Trade Organisation.

What if this plan doesn’t work? Russia calculates that America will stop its assistance anyway, and may not be so worried about the lifting of sanctions. And they might hope to talk Mr Trump into lifting them anyway. That may be too optimistic on Russia’s part. Mr Trump can sense when he’s being stitched up, and will walk away abruptly when he does. That is what happened in his attempt to negotiate a deal with North Korea – and this has many similarities. What happens then? My best guess is that US aid would continue, but would be renegotiated with Ukraine’s European supporters, and with Ukraine itself. The gloomier prospect is that he will walk away from the whole thing, blaming Ukraine and Europe, and ending the aid – which is the outcome Russia seeks.

This is putting the European powers in a tough position, as they at last recognise. If the war continues, they need to find an effective way of continuing to support Ukraine. This is, after all, the most cost-effective way to keep Russia at bay. If there is a ceasefire, then they need to reevaluate the Russian threat, in the knowledge that American support will be limited at best.

Much has been made of America giving away part of its negotiating position in advance. But there are many ways to negotiate and you shouldn’t listen to so-called experts on this. In negotiating terms The American government has put the ball in the Russian court. The Russians will be expected to move from their own hardline negotiating position in order to give proceedings a start – though they are unlikely to do this in public. An immediate ceasefire will be the critical point, though, and I doubt that they will concede this early. 

Donald Trump is not a great negotiator on the international scene – but he isn’t a dummy either. A ceasefire and frozen conflict is not the best outcome, but it would be an improvement on what is happening now. No better outcome is available for the time being. We must hope that Mr Trump has the patience to secure it.

And here’s the update, posted today, 23 February

How are the Ukraine negotiations going?

Not well, but there is hope

I posted last week on President Donald Trump’s negotiations to end the Ukraine war. I said that they would revolve around three things – a ceasefire, ending US aid to Ukraine, and lifting sanctions on Russia. There would be no long-term resolution of the dispute, which would be kicked into the long grass. How is it looking?

The Americans say that they are seeking a long-term resolution, rather than my rather short-term analysis. My prediction is that they will find this hard going. Russia is offering its own version of a long term resolution, but this will prove unacceptable to the Ukrainian government, even under extreme duress. Moving Russia from its solution will be just as hard.

The remarkable thing about events so far is that there seems to have been little negotiation at all. Mr Trump has spoken to the Russian and Ukrainian presidents; Russian and American officials have met in Saudi Arabia; the Americans have tried to strong-arm Ukraine in giving up mineral rights to the US in return for nothing – supposedly to recoup past American aid. Following the first of these Mr Trump has parroted Russian talking points, such as the war being Ukraine’s fault, and that President Volodymyr Zelensky’s mandate has expired, on top of his flat rejection of most ofUkraine’s war aims (starting with the reclamation of lost territory). After the talks in Saudi, American officials gushed about the business opportunities available in Russia for American businesses. But Marco Rubio, the Secretary of State, did not offer a date for a meeting between the Mr Trump and Vladimir Putin, the Russian president; he said this would be done once the Russians proved that they were serious. In other words the Russians hadn’t shown they were serious yet. I take this to mean that they haven’t offered a ceasefire. Mr Trump then backtracked on some of his remarks, and appeared to be showing the Ukrainians slightly more respect. 

The Russians are cock-a-hoop. Their plan is to get America to stop its aid and lift sanctions, without giving away a ceasefire, and then to force Ukraine into a humiliating defeat. Ukraine would be seriously hobbled if it lost access to the US Starlink system and to American Patriot missiles, if nothing else. They think things are going their way, because the Americans, and Mr Trump in particular, seem to be conceding all their negotiating points without a fight. This is surely too optimistic on their part.

What to make of the American attempt to bully Ukraine into conceding mineral rights? The curious thing about this is that it would give America a stake in a continuing Ukraine – especially since many of the minerals in question are in the Russian-occupied zone. Those rights would not be secure if Russia got its way in Ukraine – it would violate Russia’s sphere of influence. It is for this reason that Mr Zelensky may give ground on this. It would also be pretty useless without a ceasefire.

The Russians are not responding to Mr Trump’s negotiating tactics, which seem to a sort of tennis strategy – I make a concession and then it’s your turn. They are going to have to try putting real pressure on Russia for them to offer a ceasefire. I’m not sure that has dawned on Mr Trump yet. But it must have on some of his advisers – even if others (including the Vice President J D Vance perhaps) would happily cut Ukraine off and walk away.

What has become crystal clear, though, is that Mr Trump has no idea what the war is about. He seems to think that it was a stupid misunderstanding that got out of hand. He hasn’t grasped that for Russia the war is about incorporating Ukraine into its polity and suppressing Ukrainian nationalism – and for Ukrainians it is a desperate fight to stop this from happening. It is all much more serious that he appears to think. And it’s all much harder than he thought to stop it. 

I’m clinging to the hope that Mr Trump will realise that he is being stitched up by the Russians and start getting tough. And I’m sticking to my original prediction.

Is Rachel Reeves looking backwards or forwards?

Her growth ideas are a blast from the past

I have never really warmed to Rachel Reeves, Britain’s Chancellor of the Exchequer. She hid behind a wooden exterior without revealing anything beyond carefully-crafted PR messages. Still, she was eminently qualified for the job (more so than most of her predecessors) and she has helped transform Labour’s credibility, when her predecessor in the shadow role, Annaliese Dodds, was floundering. I also want to keep my inner misogynist in check: I bristle at a certain type of smartly-dressed, carefully presented, armour-plated, middle-class Labour female politician that has been prominent since New Labour days in the 1990s. I have been giving her the benefit of the doubt.

I forgave Ms Reeves when she announced the withdrawal of the pensioners’ winter fuel payment (or the means-testing of it, to be precise) leading to a blizzard of vituperation. I still think that it is a good policy, even though it is now clear that its political presentation was disastrous. And when she quickly settled many public sector pay disputes I thought this showed evidence of some welcome risk-taking in trying to fix longer-term problems against short-term financial pressures. Her first budget, though, was underwhelming. The only thing that was remotely bold about it was increasing the cost of lower paid employees through adjustments to employers’ National Insurance contributions, and raising the minimum wage. This seems to be a move against employers trying to solve problems with cheap labour. And the budget was sold with a patently dishonest narrative, that the government had discovered a black hole in the country’s finances. The black hole is real enough: but Labour had known its basic contours long before the election: these had been set out by pretty much every intelligent commentator, including, for example, the Institute for Fiscal Studies. Labour simply chose not to call it out. 

My reaction to the budget seems to be widely shared – it helped sustain a negative zeitgeist around the economy, which is discouraging investment. Lacklustre GDP statistics (which in reality are pretty meaningless as a performance indicator) supported the negative mood. Ms Reeves has then decided that she needed to lift the mood a bit, with a string of public appearances pushing the idea that the government will not compromise in its search for growth. The good news is that this extra exposure at last seems to be breaking down her woodenness and she has been more inclined to answer questions rather than just spout pre-prepared sound-bites. The bad news is that what she is communicating is pretty disappointing. 

Clearly Ms Reeves is anxious to get across the message that the government is really, really keen to encourage investment by reducing red tape. This is a popular theme right now, with the Trump administration trumpeting the message in America, and The Economist has a long article on the subject this week. I have a lot of sympathy. Most regulation is badly designed and implementation is usually even worse. Bureaucrats (in both private and public sector) lay on cautious over-interpretation, and then spend their time chasing innocent minor infractions and slowing down worthwhile projects, rather than tackling the harms that the regulations were designed to prevent. Sometimes this is a necessary evil, but surely we should aspire to do much better. Alas, all this is popular thing for government ministers to say, but there is a huge creditability gap, as they rarely deliver anything worthwhile. And that is especially true of Labour politicians. Their core supporters adore regulations (they are often the ones tasked with managing them) and any worthwhile deregulation hits stiff political resistance. Ms Reeves clearly knows this and realises that she needs to make an unpopular gesture to show that she means business. So she chose airport expansion, and expansion of London’s Heathrow airport in particular.

This has a great deal of symbolic value. Heathrow expansion has been a political football for as long as I can remember. Its advocates have always justified it in terms of “growth”, and there is a fierce NIMBY opposition. These can be presented as London elitists – but there are no obvious beneficiaries to the project outside the country’s richest region. Driving this through would be a signal achievement, showing that the government really does mean business.

There is a plausible economic case to be made for expanding Heathrow – The Economist makes an attempt this week, based on its value as a hub airport for Europe. Ms Reeves failed to make it on her media round. This included an extended interview with Justin Webb for the Today Podcast. In it she insisted that the potential impact on carbon emissions has been neutralised since it was last reviewed by the use of biofuels. Well there are ambitious targets for the greening of aviation fuel globally – but these lack credibility and look more like a smokescreen for the aviation industry. There is no way that Britain’s pressurised agricultural sector could produce these fuels itself. The Economist doesn’t even try to suggest this (though another article suggests that Brazil might turns itself to this fuel, if it can find sufficient investment); it just says that the use of electric ground vehicles (a lot of the pollution comes from the ground, apparently) and the diversion of flights from other other ports mean that the impact on carbon emissions is reduced. I don’t understand why Ms Reeves chose to make her central argument on such tricky ground.

I am personally unconvinced by the economic case for Heathrow expansion, even though it is no longer in my backyard (though Gatwick is, but that’s another story). I have a more quotidian worry. The new runway would cross London’s orbital M25 motorway, which would have to go through a tunnel underneath. The western M25 is a critical road artery (pretty much unavoidable if you want to travel to western parts of the country from here in East Sussex); it has already been badly disrupted by the rebuilding of its A3 junction. That work will barely be finished before it would again be disrupted by the construction of the tunnel. That will have its own impacts on economic activity. That’s small beer – but the prospect of re-launching the expansion programme for the managers of Heathrow remains a very daunting one – and notwithstanding government support for the next 4 years – they may not be willing to risk another failed project.

What is striking about Ms Reeve’s dash for growth, though, is how retro it looks – and not just Heathrow. The infrastructure projects are concentrated in the already prosperous South East (including two more airport expansions) and the government promises to play fast and loose with environmental objections. Gone is the idea of “Levelling up” or a “Northern Powerhouse”, to try and secure growth by helping less prosperous regions catch up. These ideas were admittedly Tory – but they helped keep the so-called Red Wall of seats in the North, Midlands and Wales in play. Labour won these seats back in their landslide, and it is striking that the government is leaving them out of its flagship programme, given that these same seats are subject to a surge of support for Reform UK. But it represents economic orthodoxy (the prevailing culture in the Treasury after all) – and thus the government’s seriousness about the whole thing.

That’s striking because the government is still pushing back against two other bits of orthodoxy. It won’t seriously engage with the EU about substantive trade integration for fear of reopening the Brexit wounds (this time in deference to that Red Wall). And it continues with its ambitious strengthening of workers’s rights; orthodox economics would suggest that this will discourage investment. Businesses are now hoping that they can pressure the government into watering these down. They may well make headway.

All this is rather depressing. Some of the ideas are perfectly sound, and it would be really encouraging if the government could push them through – the Oxford-Cambridge corridor (including rebuilding a railway line stupidly closed by Beeching in the 1960s, in accordance with the then economic orthodoxy), and a further lower Thames crossing. But a retreat into old-fashioned orthodoxy feels like the government is trying to revive a lost past, rather than providing a vision of a hopeful future.

Perhaps that’s unfair. The government is desperate to try and create a more hopeful zeitgeist. Attempts to try and paint a more hopeful and optimistic vision, around green energy for example, have fallen flat in its absence. One of the government’s ideas for regional development involves reorganising local government. also the government sets great store by the gutting of planning laws (and the local government reorganisation into bigger units may also have the aim helping drive through planning applications). These will take time to yield results. Ms Reeve’s budget will increase public spending over the next year, and this should rev things up a bit. Once the mood shifts to something better, it may be time to be a bit bolder.

Perhaps so, but my abiding impression is of a Chancellor who lacks a bold vision of a new, modern economy, and is unduly reliant on the conventional wisdom of her Treasury civil servants. I hope I am wrong.

First published on Substack

Liberals must rethink the state to renew their appeal

Were the neoliberals right after all?

People on the political right are still enjoying themselves now that Donald Trump has assumed the US presidency. Unlike his first term, but much as was forecast, he has established real momentum. He has surprised even me in how he has managed to bend his narrow majorities in the legislature to his will – in contrast to his last presidency. Opponents seem largely stunned into silence. Even The Economist is trying to put a hopeful gloss on things. But it is not enough to predict that this is hubris before a fall: the alternative liberal and left narratives have been shattered. How are they to be replaced?

The Trump euphoria puts me in mind of two episodes, one from the recent past, and one from history. The recent one, which I have already written about, is Boris Johnson’s landslide victory in December 2019. This was accompanied by much hubris, which rapidly unraveled for the same reasons that Mr Trump’s will: impossible promises and valuing loyalty over competence in senior appointments. Such euphoria is common – I can also think of Joe Biden in 2021, Barack Obama in 2009 and Tony Blair in 1997. All led to various levels of disappointment, notwithstanding some genuine achievements. Opposition appeared muted at first on these occasions too. Interestingly, there was no euphoria last year when Labour achieved a landslide victory after 14 years of Conservative-led government in Britain. 

The other episode is much darker because it did not precede a fall: Hitler’s assumption of power in 1933. Hitler’s democratic mandate was a weak one, but he used his access to the levers of power ruthlessly to generate momentum that won over some of the sceptics and many of the undecided. He used this momentum, including the propagation of many fascist narratives, to dismantle the checks and balances of the constitution and secure his power. It took twelve years and the worst war the world has ever seen to dislodge him. There are elements of this in Trump’s accession: he has shown disregard for the constitutional order; he relentlessly promotes false narratives; he commands a party that is intensely loyal to him personally; there is a willingness to threaten violence to get his way. But Mr Trump is no Hitler – he is much more driven by personal narcissism; he is less shaped by a racist narrative (though he’s happy to co-opt many who are racist); he is more influenced by a libertarian narrative, quite unlike the Nazi one; he appears to genuinely dislike war, even as he likes to issue threats, where Hitler saw war as destiny. And he is much older and time-constrained. And the USA in 2025 is not Germany in 1933 – democracy is much more deeply embedded, government is much less centralised, people are much wealthier, and there is no shadow of a major military defeat. But some very bad things could happen. In the end, though, this brand of politics is likely to get weakened and collapse as it will self-evidently be unable to deliver. Hitler had the opportunity of a Keynesian expansion of the economy to transform incomes and jobs; Mr Trump does not.

But such an insight is little help to liberals. Mr Trump’s victory marks a serious defeat. The actual margin may have been small, but he was a manifestly unsuitable candidate, promoting extreme policies. He has a base that accepts pretty much all of what he says – but he also persuaded many millions of less committed people, who saw through his schtick but nevertheless still thought he was a better bet than the liberal alternative. And the momentum following his victory will have only consolidated his support. After his first victory in 2016 there may have been a “Did we really mean to do that?” moment amongst many who voted for him. There will be few doubts this time – indeed people will be anxious to prove to themselves that they made the right choice. The relatively muted liberal (and left) response is warranted. This is a necessary step on the path to renewal. In 2017 there was denial and anger; now we are in negotiation and depression. One of the things that I have learnt since my idealistic 20s is that all lasting change must go through these stages of grief. You must get beyond the anger, but that path leads through depression. You can speed the process up but you can’t avoid it. So depression now is a good sign – it means that people understand how serious the problem is and are a step closer to renewal.

I find myself thinking back to 2017. Then, in the aftermath of the Brexit referendum, Trump’s first victory and the rise of the far-right in many European countries, I pondered how to save liberalism from the rising tide of populism. But the mainstream response was less to reflect on failure, and more on the call to resist. Denial and anger won. Emmanuel Macron won a remarkable victory for liberalism in France; Joe Biden was elected in America on 2020; Boris Johnson’s populist coalition fell apart almost as soon as it had been created. But then Mr Trump came back harder and wiser. Mr Macron came unstuck not despite his attempts to promote serious economic reform, but because of them. Mr Biden’s path of hope and denial was no more successful than Mr Macron’s telling of hard truths. Sir Keir Starmer’s Labour Party may have won in Britain, but he secured only 34% of a relatively low turnout, with the populist Reform UK surging. And now his government finds itself prisoner of its denial of the problems that the country faces.

The problem is that the world has changed. The economy has changed so much that a reordering of government and society is required to meet it. Current ways – with a substantial government payroll and vast social safety net – were based on a growing economy, which allowed an ever increasing tax take, and an ever-increasing workforce as the baby bulge worked through its working years and women were drawn into the workforce. The production side of the economy steadily expanded, allowing the state to expand, and especially to provide services and benefits to older people. But the baby bulge is joining their ranks – they are now living much longer previous generations too. Those older people, either retired or winding down productive work, are delivering a double whammy – exiting the productive, taxable economy, while demanding ever more resources from the state. To sustain this in the traditional way, requires a combination of three things: increased productivity, gains from trade, and immigration. But productivity gains are harder to get, and require unpopular disruption; the opportunities for gains from trade have diminished; and immigration is creating social stresses, especially in housing, where in most countries supply is not keeping pace with demand. The result, right across the developed world, is economic stagnation and widening government deficits. This may not be as unsustainable as many pundits profess, but it can’t go on indefinitely. The capital required to keep things running, from domestic savings or from trade surpluses in the less developed world (notably China) must have limits. 

There are opportunities as well. The two big ones are clean energy – and especially solar power – and information technology (including, but not restricted to, AI). Also the need to reduce over-consumption in developed countries can be linked to a compelling case to protect the environment, especially from climate change. Further developments in life sciences also offer the prospects for improved length and quality of life: not just from more effective treatments and procedures, but also from a better understanding of how to live healthily. 

The right are currently thriving on a diet of denial. They think that good, and improved, standards of living can be sustained without higher taxes, adaptation to clean technologies, or higher levels of immigration. But they have no coherent plan for doing this and are heading for disaster. They are in denial and anger, while liberals are in negotiation and depression. What does renewal look like?

The first thing to say is that the political left has proved an utter failure and is imploding. These have been liberals’ traditional allies – and indeed in America most people make no distinction between liberals and the left. The left has lost its connection with working classes – not keeping pace with how these classes have changed. Instead their base is government workers, and workers in non-governmental organisations which are mainly sustained by governments. They have a huge stake in maintaining the size of government, and giving the government more to do through creating and enforcing rules and regulations. This amounts to managing social problems rather than solving them. This was evident in the left’s shrill opposition to “austerity” in Britain following the great financial crisis of 2007-09, and especially the policies of Conservative-led governments from 2010. This is increasingly unsustainable. Furthermore the left has disappeared into a rabbit hole of identity politics focused on ethnic minorities in particular. They have developed a new language – “cultural appropriation”; “white privilege”; “micro-aggressions”; “critical race theory” – which they seek to impose by regulatory fiat, meaning that majority communities feel they are constantly treading on eggshells, while minorities are encouraged to express offence at a broader and broader range of things. Challenge is suppressed (“cancelled”) rather than taken on. I suppose the hope was that regulations would lead and hearts and minds would follow. But instead they have created stress and people are reeling – including increasing numbers from minority communities. Many are cheering Mr Trump’s roll-back of DEI (Diversity. Equity and Inclusion) initiatives, and not just those on the hard right. It is not that the aims of DEI are wrong, but that they seem more of a job-creation scheme than a solution.

Just how far the left appreciates its failure, and how much they are stuck in denial and anger, I don’t really know. But it is clear that the left is losing political traction everywhere. They may yet be part of a liberal-led political coalition, but they are not enough to defeat the right. Liberals need to distance themselves from the left and attract the centre-right, who will become rapidly disillusioned with the radical-right.

What does that mean? I think it means that liberals need to take a more robust and critical view of government – seeking to make it much more effective and efficient. I am taking care not to say that it should shrink – but it does need to achieve more with the same level of resource, and retreat from areas best left for people to work out for themselves. Fundamentally that means trying to create a better-ordered society with healthier lifestyles – so that fewer public services are needed to fix problems. Funnily enough this is pretty much exactly what the British Conservative leader, Kemi Badenoch, is saying – though she is much better at diagnosing the problem than offering any coherent solutions. In policy terms I think we can see a number of specifics, thinking especially of the British perspective:

  • The drive by the government to improve efficiency by the application of AI is half-right – but it is in danger of being a solution in search of a problem. The objective should be to re-engineer public services holistically – with AI and other technologies enablers. Otherwise we will simply automate bad practice. The key is to break down departmental silos – with solutions based on the needs of people rather than a collection of abstract problems.
  • The NHS presents a particular problem. No amount of reengineering is going to allow it to keep pace with increased demand. And trying to solve those problems without addressing social care, as the government seems to be trying to do, is nonsense. Vastly more resources are needed for social care and health services – especially if we are to rely less on cheap labour imported from abroad. This means higher taxes or a much enlarged private sector, or some combination of the two. Funnily enough the last government, between Boris Johnson and Rishi Sunak, made an important step in that direction with their hypothecated National Insurance. Reversing this may have been may have been Liz Truss’s most consequential and most destructive achievement. Now mainstream politicians seem unable to face up to the challenge. That has to change.
  • Taxes will surely have to rise on exactly the “working people” that the current government is trying to avoid raising taxes on. These taxes are the most economically efficient for a number of reasons. My vision of a smaller state is based largely on reduced demand for its services (except health); but this will take time to achieve and there will be short-term costs. Achieving all the required investment through additional borrowing presents some big risks.
  • The current government is right about many of the things it wants to do. Investment must continue in clean energy infrastructure, requiring NIMBYs to be dealt with more robustly. Social housing must be expanded – as lack of availability of housing is behind so many social problems. Deregulation may be helpful but it would be better if this was part of a vision of more effective overall governance than an invitation for lobby groups to peddle their hobby-horses. I am less convinced about expanding air travel, though.
  • The UK needs to re-embrace the European Union. This will have to be gradual – focusing on making trade more efficient. For all the Union’s many flaws, economic integration with our closest neighbours is one way to make the economic activity more effective, and we will need all effectiveness we can find.
  • Mass immigration, however, for so long the safety valve for the British economy, will need to be brought down. It is creating too many stresses and does not provide a long-term solution. That is the main reason why both taxes will need to rise and public services made more effective and efficient. Politicians should start making that connection with the public. Lower immigration does not come for free.
  • The private sector – and capitalism – must be embraced as the most efficient way of reconciling supply and demand. But there must be minimum levels of income so that all have a degree of consumer power. And monopoly capitalism must be closely watched. Some services are genuinely better provided by the state.

It strikes me is how much overlap there is here with old neoliberal ideas, which emphasised smaller government, a less regulated private sector and lower taxes. I don’t think lower taxes can be part of the equation, because of the demographic pressures, especially in a lower-immigration environment. And neoliberals were more relaxed about migration. Neoliberals are an object of loathing by the left – who are inclined to suggest that capitalism has failed, without providing any idea of an effective alternative. This is another reason that liberals need to break free of the left until and unless it goes through its own process of renewal.

And what is the vision? It is of a well-ordered society with low levels of crime, inured into healthy lifestyles and carbon-negative. Nobody should struggle to secure some level of decent housing and other basic needs, provided that they make a positive contribution to society in some way. I don’t think that is impossible, but we have a long way to go. Perhaps above all liberals need to think more about what this vision is and how it might work. Only then will we have a persuasive case to make to people who do not currently think of themselves as liberals – on both right and left.

This post was first published on my Substack account.

What do we learn from the grooming gang scandal?

A political pile-on distracts us from institutional failures

One of Elon Musk’s tamer tweets over the New Year

Over the New Year the grooming gang scandal flared brightly here in Britain, inflamed by tweets on X by its owner, Elon Musk. Politicians of various stripes piled on; establishment types came back with “nothing to see here,” with varying levels of indignation, before making interventions that should have been done some time ago. It has now died down again, as Mr Musk’s attention has moved on. But the episode is instructive.

The scandal concerns the grooming and abuse of teenage girls in a number of English towns (and presumably other British towns too) by groups of Pakistani-heritage men from the late 1980s on. The scandal was brought to public attention in the 2010s and has been flaring up periodically since. Abuse is probably continuing in some places – it has been so hard to contain because it was so widespread, especially if you consider group-based abuse more widely than that perpetrated by this ethnic group. The abuse was not investigated at the time it was occurring because the girls, from a lower class background, weren’t taken seriously, because there was a perceived sensitivity around the ethnicity of the perpetrators, and because authorities were generally struggling to take child sexual abuse seriously. It is far from the only child sexual abuse scandal circulating – others include the Church of England and the Catholic Church, and children’s homes (i.e. what used to be called orphanages).

Political exploitation of the scandal was led by what I will call the “far-right”, because I can’t think of a better term. Unfortunately different people mean different things by this term – so I need to explain what I mean. I am talking about extreme white-nationalist groups that believe in the use of violence to promote their beliefs. The de facto leader of this fringe is “Tommy Robinson” (not his real name, but that’s another story), now in prison, but with a following in social media, including in the United States. This group focuses explicitly on the racial aspects of the scandal (the victims are overwhelmingly white). Their political objective is the removal of people with brown or black skins (doubtless with exceptions), and a stop to their immigration. They have very little public support – their tendency to violence and the explicitness of their racism puts people off. Tommy Robinson has been vocal about the scandal for many years, and so far as his supporters are concerned, he is being victimised by the establishment for his troubles, and should be freed. Mr Musk has piled on his support for this, though how far he actually supports far-right objectives I am less clear; more likely he doesn’t really know who he is. 

The next group to move in are what I will call the populist-right – which includes the Reform UK party led by Nigel Farage, and the Substack activist Matt Goodwin. These eschew the violent methods and explicit racism of the far-right, though their critics accuse them of implicit support of both. Their objective is to stoke up anger at an out-of-touch liberal elite. They don’t put forward specific policy solutions (though opposition to immigration is a central theme of theirs): in this case they are simply calling for any kind of public enquiry that the political establishment doesn’t want. They just want to scratch the itch until it bleeds. Ultimately their aim is to take political power. Reform UK polled in the teens in the 2024 election, and have 5 MPs, including Mr Farage. They now poll in the 20s, in the same ball-park as Labour and regularly overtaking the Conservatives. They are much more popular than the far-right, though to date a majority of electors has a strong dislike of them – which doesn’t stop the populist-right, especially Mr Goodwin, claiming that they speak for the majority.

And then finally came the Conservatives. In government they followed the establishment line, but now in opposition and worried about Reform, they are calling for a national enquiry, after calling for the publication of an ethnic analysis of abuse statistics that had already been published. The focus of this enquiry seems to be different from the call for a public enquiry that precipitated this particular flare-up – which just focused on the town of Oldham. The government had turned down the call for a central government-led enquiry in favour of a locally-led one. Some Conservatives, notably shadow justice secretary Robert Jenrick, are channelling the populist-right.

What about the establishment? They want to generalise the case of the Pakistani gangs into the wider problem of child abuse (which they say is much, much bigger) and adopt general solutions to the whole field, marginalising the racial aspect. They point to a public enquiry by Alexis Jay that reported in October 2022. There is no need for a further high-level enquiry, we just need to get on with implementing the Jay recommendations, they say – though it turns out that this implementation has not been particularly rapid. If further enquiries are needed for specific towns, these are best to be locally-led – and, indeed, there are several successful examples of these. Labour are following this establishment line, and, though I have heard nothing explicit, the Liberal Democrats and the Greens are too.

What of the victims? Everybody claims to be putting them first, but that is hard to swallow. The BBC has found a few, and interviewed them. These women want a public enquiry – the motivation seems to be the feeling that the world has moved on since the original scandal broke, and they want more attention paid to it. I suspect they want the circle of accountability to broaden, beyond the direct perpetrators, to include those whose poor judgement and prejudice allowed the abuse to persist for much longer than it might have done. That would be a valid concern – though many local political leaders have paid a price, following local enquiries.

The victims seem to have been mainly from what used to be called “broken homes” – lacking a secure family life, and in many instances in institutional care. The authorities regarded them as unruly and badly behaved, and the authors of their own fate. Lacking a loving home environment, they were very vulnerable to grooming tactics. The police and those responsible for their care were unwilling to help. This has been put down to class prejudice, though the difference in social class between the victims and those that might have helped probably wasn’t that great – so the prejudice was a more complex thing. I would like to think that things have moved on, but I am constantly surprised about how persistent prejudice can be.

A further aspect of these cases is the accusation that the authorities were soft on the perpetrators because of their ethnicity. This aspect is played up by both the far-right and the populist-right. The police are accused of fearing accusations of racism. There does seem to be at least some basis for this. But from the accounts I read when the scandals first emerged, it was a bit more complicated than that. Local government in the towns concerned was typically run by Labour councils who had a monopoly or near-monopoly of councillors. This meant that the key politics was between the various factions of the Labour Party and not public elections. These included paternalistic ethnic groups (typically referred to as “community leaders”) who were allowed to run their patches as their own fiefdoms. The problem largely stemmed from this: these leaders would rally round the accused individuals to protect their community’s reputation – and did not seem to be overly worried about it themselves. (Much as churches have in their own abuse scandals – lest anybody think this behaviour is specific to ethnicity). Any attempt to disturb this arrangement would indeed have been branded as racism – a standard defence of such community leaders and their political associates. The way that the British electoral system (more precisely English one now, as Scotland and Wales have reformed theirs) creates local one-party states is a democratic disgrace that both Labour and the Conservatives shrug at. It is much harder for such unaccountable relationships to flourish in properly competitive electoral systems. One of the biggest mistakes of the Liberal Democrats in coalition in 2010 was not to insist on local government electoral reform – rather than accepting a referendum on the Alternative Vote that set the cause of electoral reform back. This is beyond the scope of any mooted enquiry into child abuse, of course.

What of public enquiries? This is the standard British response to any scandal. The British way is to adopt a cumbersome process that usually takes years to get anywhere, and usually without any serious impact once it is finished. Politicians are accused of using them to kick issues into the long grass. As this episode shows, though, that isn’t entirely fair. In this case it is the voting public that seems keen, with politicians taking their lead from them. There seems to be something about the process of compelling witnesses to testify in public that the public likes – a case of the process achieving a degree of accountability that the wheels of justice don’t. The government’s case against the need for a new national enquiry is a sound one though. It actually delays the process of justice.

But this case is about a lot more than ensuring that criminal sanctions are brought against the perpetrators. It is about getting a degree of accountability for those who enabled the abuse to go on, often in open sight. Local enquiries can do that – and the government has announced five more. But there are also wider systems failures – and we are not likely to see much recognition of this.

I have already mentioned the tendency for one-party states to dominate the political leadership of local government – and this often creates a culture of paternalism and coverup. There is a further problem with the management of children and young people who lack a stable home life – and especially those who are institutionalised. Some public institutions actually work quite well: primary schools for example. But social services are hopelessly overstretched. Attitudes of the professions involved may have improved in the last 50 years, but resourcing has not kept pace. It is widely known that early interventions are the most effective – and the Labour government of 1997 to 2010 was making some headway – but this gets lost amid shorter-term public spending priorities, and the austerity years did for any progress. There was indeed too much waffle and verbiage (consultant-speak) in the government’s approach – but the direction was right. I am not as critical of austerity as many – but this is one of the areas (along with the criminal justice system) where very short-sighted cuts were made. The failure was both allowing the abusers to get away with what they were doing, and not looking out for vulnerable young people.

What is required is not more inquiries. What is needed is good political leadership, both locally to strengthen communities, and nationally to ensure that adequate resources are made available. This is not totally lacking, but it should be much, much better.

First published on Substack here