May 2012 – thinking liberal

It’s official: the Budget was a disaster

When George Osborne launched his 2012 Budget, I was one of a minority of people to praise it. I admired the boldness of his move on the top rate of income tax, even if I did not approve of it. And often Budgets look better (or indeed worse) in hindsight that they do at the time. But that happy fate will not await this Budget. Today the third successive retreat was announced from its proposals, this time on tax relief for charities – following VAT on hot food, and the taxation of caravans.

I haven’t followed the issues on hot food and caravans in any detail. The former, at least, looked quite reasonable – and extending the base of VAT is quite sensible policy. The regressive impact of such an extension (i.e. the idea that they affect poorer people proportionately more that the rich) is generally overdone by lobbyists and mischief making politicians. The charity issue (limiting the amount of tax relief on charitable donations) was an idea that looked more sensible the more I thought about it.

What went wrong was the politics. The measures came out of the blue and sowed panic. As I blogged at the time, the charity lobby has shown formidable political skill. The sort of skill that this government seems to lack.

This does not bode well for the stormy European waters ahead. Downing Street needs an Alistair Campbell – a no nonsense head of communications with a feel for the tabloids – who once again have shown their ability to set the political agenda. And his 0r her brief must be to make the Coalition as a whole look good. It doesn’t help that both Tories and Lib Dems are spending so much time trying to show differentiation from each other, however understandable that might be.

Murchoch and BSkyB: Hunt isn’t the issue. It’s Cameron

The Culture Secretary is in a tight political spot. He showed overt political support for Rupert Murdoch’s News International media empire, and especially its attempt to consolidate its hold in the highly successful British satellite broadcasting business BSkyB. Today was supposed to be his moment of truth, in front of the Leveson inquiry. There is much speculation that he will be forced to resign. That may be so, but based on today’s evidence I don’t think he’s the main culprit in a shabby episode.

The story so far. Back in 2010 Murdoch launched his bid on BSkyB, which his empire controlled but did not fully own. Because of its wider implications this was referred to the government, which was required to act in a quasi-judicial capacity – that it acts with the same impartiality and fairness of process as a court of law. The minister given responsibility for this was the Lib Dem Business Secretary Vince Cable. But Dr Cable (as he likes to be known) made some rather rash comments about the Murdoch empire to undercover reporters working for the Daily Telegraph (which ironically opposed the bid). As soon as these became public, Murdoch objected that he did not have the necessary degree of impartiality for a quasi-judicial role. Within hours the job was given to Mr Hunt instead.

But Mr Hunt, it now turns out, was the subject of intense lobbying by the Murdochs (mostly via their respective minions), and had been lobbying the Prime Minister, David Cameron, in their support. The awkward issue is that if Dr Cable was unfit for the job because he was biased one way, then Mr Hunt was equally unfit because he was unbiased the other way. As the closeness of the relationship between Mr Hunt and the Murdoch empire became clear, there were calls on him to resign. These were strong enough for his special adviser, Adam Smith, to fall on his sword.

The logic of this is that Mr Hunt should have refused the job. But the nature of his relationship with the Murdochs, and his views of the bid, were certainly known to Mr Cameron. Surely the bigger problem was the Mr Cameron appointed him to do the job in the first place. The communications between Mr Hunt and Downing Street (actually with George Osborne rather than the PM directly) seem to show this.

Mr Hunt’s defence is that once he got the job, he created a robust decision-making process that transcended his prior inclinations – and that the decisions he did make showed no bias (before the bid was overwhelmed by the phone hacking scandal that engulfed the Murdoch empire). The trouble is that exactly the same defence is available to Dr Cable, who was much more scrupulous about showing distance. Indeed I suspect that Dr Cable would have been driven to approve the bid since the main objections to bid did not form a substantial barrier legally. To Dr Cable passing this particular baton over was a silver lining to the very dark cloud that this embarrassing affair comprised.

It was Mr Cameron that acted inappropriately. If he accepts Mr Hunt’s defence, he should not have stripped Dr Cable of the job, and made the same defence of him. If he was worried about open bias, he should have found somebody other than Mr Hunt to replace him – and that is what he should have done.

That won’t help Mr Hunt. Just as Adam Smith’s resignation was meant to protect his master, Mr Hunt may need to take the rap for his boss. The whole Murdoch episode is toxic to Mr Cameron. He badly needs to make it go away.

The Guardian’s bubble – the view from my bubble

It’s nearly a cliché, but it still resonates with me. People accuse each other of living in “bubbles” – and when they do so, the accusation usually has bight. But the people who make the accusation are merely living in different bubbles. We all are; and it helps us if we realise it.

A bubble is a small, self-contained world which contains its own atmosphere, protected by a nearly invisible wall, which lets those inside see the wider world outside, and maybe pretend that they are fully part of it. And every so often the bubble hits an obstacle in the outside world, and bursts. Suddenly those inside are subject to a catastrophic shock.

As a metaphor it describes a describes an intellectual process. We sustain ideas by protecting them from the vicissitudes of what is going on in the real world around us, discounting facts that challenge them, seizing on ones that support them – and a similar process goes on with those that we consort with – we prefer people who support our view and avoid those who don’t. As this bubble existence continues our strength of conviction is increased by this process. Until one day, maybe, the idea can’t be sustained and it’s all over. Actually the bubble rarely bursts so dramatically in real life – though we always fancy that other people’s bubbles will.

What bought on this reflection? Reading Saturday’s Guardian I reached the “Comment & Debate” section, and there were two articles on the same page which seemed to sum up what I think of as the Guardian’s bubble – one that persists in believing that austerity economic policies are a fraud and a failure. One was by Robert Skidelsky – U-turn for the better – a direct attack government policy, while welcoming the apparent softening of it in favour of more infrastructure investment. The other was from Jonathan Freedland – Balls has the rare political right to say: I told you so – praising Ed Balls, and especially that he was amongst the first to criticise austerity. I didn’t read either article, but just harrumphed and moved on.

Still, this is a blog, not a Twitter feed, and I owe it to my readers to actually read the articles before passing comment, and I did so today. Mr Freedland’s doesn’t fit my bubble pattern. He clearly inhabits the bubble, agreeing with Mr Balls’s analysis of the economy, but this only affects one non-critical sentence in the piece. The article makes perfect sense politically, even if you don’t happen to agree with the economics; it’s a good article, in fact. Mr Balls has been written off, but he’s winning.

But Professor Skidelsky produces pure bubble fare. He does report the government logic more fairly than some, merely to dismiss it with this: “This is discreditable nonsense. But it has an air of plausibility.” Actually precisely what I think of the professor’s article. To me the give-away was this sentence: “If the [infrastructure] spending had not been cut, the deficit would now be smaller, because the economy would be larger.” This is either a suspension of the laws of arithmetic, or shows an astonishing faith in in the multiplier effect of this type of spending – for each 1% of extra deficit spending you need to add 12% or more GDP as a whole to sustain this argument. By substituting “debt” for “deficit” it may be somewhat more sensible (you need less than 2% growth for each 1% spend -at the most optimistic) – but it still heavily depends on the multiplier idea. This is an area of ongoing debate amongst economists – and yet Professor Skidelsky presents it as an accepted fact. And without it the rest of his argument starts to fall apart.

Professor Skidelsky is not a fully trained economist (though neither am I), and I think it shows in his writing; his main claim to credibility is that he wrote an authoritative biography of Maynard Keynes. But plenty of fully fledged economists agree with him – but that does not make this argument less contentious.

Or less wrong. From my bubble. Because I clearly inhabit my own bubble. One in which the Government’s economic policies are making the best of a bad situation, and, separately that the Liberal Democrats will not be annihilated for a generation. A more neutral observer would not share either conviction.

Why do we live in such bubbles? It’s just very hard to stay on the fence the whole time, or to change your mind every few days with the next piece of passing news. The only way to do it is by not really caring. But really it helps to have some self-awareness about this – and this is the only way to appeal to those outside your bubble.

The Guardian is a better newspaper than many. But what is the point of giving such prominence to purely polemical articles like Robert Skidelsky’s? They need more serious comment, like that produced by Jonathan Freedland, which do not insult their readers’ intelligence just to give the members of their particular bubble something to cheer at.

Translating that IMF report into English: the blindness of macroeconomists

Yesterday the IMF released one of its regular reviews (“Article IV consultations”) on the UK economy. Both government and opposition seized on it to reinforce their narratives. But for observers trying to make sense of these claims by reading what the IMF’s summary actually says (here) there is a problem: it’s written in economics jargon and not English. For example, in the passage central to the controversy passage:

Under these circumstances, gains from delaying fiscal consolidation could be larger as multipliers are estimated to move inversely with growth and the effectiveness of monetary policy. To preserve credibility, reconsidering the path of consolidation should be in the context of a multi-year plan focused on further reducing the UK’s large structural fiscal deficit when the economy is stronger and taking into account risks to sovereign borrowing costs. Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending.

What they are trying to say here is that attempting to lift the economy using a fiscal stimulus, i.e. reduced taxes and/or increased public spending, works best if growth is already low and if loose monetary policy isn’t working – which will be the case if the economy does not improve soon. But any stimulus has to be carefully designed to ensure that the government’s deficit reduction plans retain credibility. They suggest two types of policy that might achieve that: temporary tax cuts or greater infrastructure spending. In other words, not a slower pace or reversal of public expenditure cuts.

More on this later: first it helps to get a wider perspective of what the IMF is trying to say.

Their starting point is that the UK economy is currently unsustainable because of the massive government deficit (i.e. that public spending is way ahead of taxes). That means that the public sector is too large and has to be cut back to rebalance the economy. This is completely consistent with the Coalition government’s analysis, and it is where the Labour opposition is most uncomfortable. Labour draws a lot of political support from public sector workers and beneficiaries of government expenditure. They would rather not admit publicly either that the level of such expenditure before the crisis was unsustainable, or that it needs to be cut back now at anything like its current pace. But it is difficult to dispute the numbers, so they keep mum or change the subject.

But the IMF also says that there is considerable spare capacity in the economy – in other words that the private sector could expand easily if only consumer and investment demand was stronger. This fits better with the Labour narrative. Government supporters often suggest that the UK economy’s unbalanced nature was more than just an excessive public sector, which leaves little practical spare capacity, and so it is not so easy to grow through boosting demand: the extra demand might simply go into inflation or imports, for example. They point to the decline in manufacturing and the size of the “socially useless” investment banking sector before the crisis.

This leads to another point made by the IMF, which is that persistent low growth will cause longer term damage to the economy, as the spare private sector capacity whittles away. And unemployed people tend to lose their skills and value the longer they are out of work. There is a nightmare that stalks the minds of economists which they name “hysteresis” (borrowing the word from materials science) whereby people who are put out of work never get back into it, and high unemployment persists long into a recovery. Europe in the 1980s and 1990s is held up to be a prime example of this, compared to the US in the same period. The word makes its appearance in the summary.

But they do point out that UK unemployment is remarkably low compared to previous recessions, or what is going on in other economies, including the US. They put put this down to “labour market performance”, though others suggest that this has more to do with the fact that home construction played a much smaller part in the economic boom than elsewhere, and a lot of the vanished GDP was in sectors, like finance, which weren’t big employers.

The IMF report goes on quite a bit about monetary policy, not criticising the Bank of England’s performance so far, but suggesting that it could be further loosened. This might be through even lower interest rates or through “quantitative easing” – the buying of bonds by the Bank – especially if the latter was more in private sector bonds, rather then the gilts which the Bank has so far been buying.

The continued fragility of the UK banking sector causes the IMF some worry, as does the possibility of further trouble from the Euro zone. The former could provoke the government into more bailouts, which would put government finances under strain. The latter would exacerbate this problem as well as making growth more difficult. They welcome the government’s attempts to reform banking to expose government finances less to risk.

So where does that leave us? the Government can take comfort from what amounts to a strong endorsement of its policies. But by leaving open the idea of a fiscal stimulus, especially through a temporary tax cut, it gives Labour ammunition. Labour’s shadow chancellor Ed Balls can quite reasonably suggest that things are bad enough now for such a policy, without having to wait.

But, while wading through the dense economic jargon, I am left with an overwhelming impression of the blindness of macroeconomists, hiding behind their aggregated statistics and theoretical models. They don’t look far enough behind the figures. This is starkest in their faith in monetary policy. The theoretical models of money have entirely broken down in the wake of the financial crisis – but economists have placed so much weight on them that mostly they still cannot admit that they are so much garbage. The monetary authorities are left with a number of policy levers, interest rates and so on, whose effects are not properly understood. Whether looser policy will lead to any significant stimulus in demand that will lead to job creation is in fact very doubtful.

And talk of multipliers and other economic mumbo-jumbo gets in the way of trying to see if a particular form of fiscal stimulus might do more harm that good. An example of the kind of thinking that is needed comes in an article by US economist Raghuram Rajan in today’s FT: Sensible Keynesians see no easy way out. The problem with stimulus is that you have to balance the benefits now against the costs later. If the stimulus addresses the problem of unemployment, especially the long term sort, then the trade off is likely to be worth it. If it doesn’t then it won’t. Would a temporary tax cut, such as in VAT, achieve this? Personally I think the effects are likely to be marginal, and that most of the stimulus would disappear in higher prices, higher pay and increased imports. A more cogent case can be made for infrastructure spending if the infrastructure is genuinely useful to the future economy. That’s a harder test than theoretical economists allow – it is difficult to see much benefit from Japan’s massive infrastucture spending in the 1990s, for example. And the spending may not help provide jobs where they are most needed. In the UK there seems a good case for more house building: but by and large we do not need more houses where most of the unemployed people are living.

In last week’s Bagehot column in the Economist, the writer describes how people are hoping to wake up from the austerity nightmare so that they can get back to real life before the crisis. But the nightmare is reality and the pre-crisis existence is the dream.

Europe and the US: the tortoise and the hare

Comparing the European economy to that of the US reminds me of Aesop’s fable of the race between the tortoise and the hare. The US’s flexible labour and product markets, and decisive interventions in time of crisis, give it the ease of the hare. To US politicians you only have to mention Europe to conjure up a picture of stagnant, over taxed and socialist economies.

But the tortoise wins the race in the fable. And indeed, if you look beyond crude GDP growth statistics the race looks close, depending on the precise time frames and so on. GDP per head tells a different picture to aggregate GDP (this is regularly quoted by The Economist, though I haven’t found a recent example to link to). Other statistics on the incidence of poverty, life expectancy and so on, show Europe in a better light – though the US still does well in self-reported wellbeing, but not as well as Scandinavian countries.

All of which demonstrates how commentators, especially in the US and here in the UK (whom I shall collectively call the Anglo Saxons, following French practice – though this is a dangerous shorthand) don’t understand the dynamics of European economic policy. As the EU lurches into another round of crises, this is worth taking on board. Once again the US hare looks better placed than the European tortoise. But look closer, and it isn’t so clear.

This is not to underestimate the scale of the crisis facing the Eurozone in particular. Massive problems confront the economies of Greece, Spain, Italy and Portugal; the French economy is not in a place of safety either. But Anglo Saxon commentators tend to relentlessly focus on the short term problems, to the exclusion of longer term issues, which they assume best dealt dealt with at a later time. Europeans (from which I exclude the British, for now, though for most purposes the British are very much European) tend to look at the problem differently. A crisis is one of the few opportunities to tackle longer term problems, and fixing the crisis while neglecting the long term is criminal.

The southern European economies are inefficient by developed country standards, and uncompetitive within the current Euro structure, and can’t sustain the level of social benefits that their electorates have come to expect. This lack of competitiveness was not invented by joining the Euro – it predates it, and is based on decades of poor economic leadership. Joining the Euro gave these economies a boost by reducing government borrowing costs – but this boost was used to put solving the bigger problems off until later. Their northern European partners are to blame for going along with this, until a crisis threatened to engulf them all. When the Euro project was launched, its supporters advocated it on the basis it would force governments to confront the inefficiencies of their economies, rather than rely on devaluation to put the problem off – a strategy that ultimately leads to stagflation, and even hyperinflation. But somehow these supporters seemed think that the omelette could be made without breaking eggs. But Europe’s leaders are keenly aware of their mistakes now.

The position of the southern European economies is not unlike that of Britain in the 1970s. A massively inefficient and uncompetitive economy had been kept alive by a benign international economic climate, until the 1973 oil shock knocked it over. There was no quick fix, no macroeconomic palliative to ease the pain. A floating currency hindered rather than helped. The turning point came in 1976, when the Labour government had to call in the IMF. Then started a painful process of government cuts and market reforms. This wasn’t what the party had promised when elected in 1974, and the government was grudging in the reform process. They lost the election in 1979, with Margaret Thatcher being swept to power, redoubling the pace of the reform process through the 198os. This cut huge swathes through much of British industry – making the current economic crisis in the UK look like a picnic, whatever the GDP figures say. It took about a decade of pain from 1976 before clear benefits started to show.

A similar hard road awaits the southern European economies. Leaving the Euro and devaluing won’t help (during the Thatcher years, to continue the comparison, the pound stayed high), and is institutionally much more difficult than most Anglo Saxon commentators assume. Europe’s politicians know this, and so aren’t looking for quick fixes. They are looking at a process of near continuous crisis in which the institutions, and political culture, required to make the Euro work are gradually put in place. Greece may be a casualty – it faces a real danger of being expelled from the Euro and probably the Union as a whole (it’s difficult to disentangle the two). It is slowly but surely being isolated to make that option less and less of a threat to the zone as a whole. But unlike many British commentators assume, Greece will find life no easier outside the Euro.

Martin Wolf’s gloomy article in today’s FT illustrates the difficulty Anglo Saxon commentators have in viewing the scene – and Mr Wolf is no shallow commentator. He makes reference to the comparison with Britain, thus:

This leaves “structural policies”, which is what eurozone leaders mean by a growth policy. But the view that such reforms offer a swift return to growth is nonsense. In the medium run, they will raise unemployment, accelerate deflation and increase the real burden of debt. Even in the more favourable environment of the 1980s, it took more than a decade for much benefit to be derived from Margaret Thatcher’s reforms in the UK.

Structural reforms are dismissed as taking too long. But is there any other way that such necessary reforms can be taken forward? Surely the British case illustrates that miserable economic performance for an extended period is unavoidable?

How different from the US approach! By comparison, the US’s economic problems are nowhere near as great as those facing southern Europe: at the core the US economy remains wonderfully competitive. But they have a terrible problem of government finance and social justice, which neither politicians nor public want to confront. Instead we get a series of short term fixes, which look decisive, but which simply increase the scale of the problem that has to be tackled later. Americans have to choose between higher taxes and reduced Medicare and Social Security benefits, or some combination of both – and yet neither are seriously on the political agenda.

In the fable the hare loses the race because he is so confident he takes a nap. A similar misjudgement by America’s political class, abetted by British and American observers is in the process of unfolding.

The Tories are living up to their “Stupid Party” label.

As I posted yesterday, the recent local elections were bad for the Liberal Democrats, the party for whom I am an activist. But if there’s any cheer to be had, it comes from looking at the behaviour of the other parties.

Labour have reason to be cheerful, but the results contain a trap. Their party has lurched to the left, going back on Tony Blair’s legacy. They want more spending, and more taxes to pay for them. This is a good line for motivating activists, many incandescent over the Coalition’s cuts, which they consider to be unnecessary and ideologically motivated. This is great for getting the turnout up in local elections. But it’s not enough for them to win in 2015 – and the weakness was evident in their failure to capture the mayoralty in an essentially Labour London. Liberal Democrats must hope that they keep reading their Polly Toynbee and let their anger trump their strategic sense.

But what is even more remarkable is the response of the Tories, to judge from the weekend’s press and backbenchers popping up on the radio. It echoes my advice yesterday to the Lib Dems in London yesterday – to shore up their core vote. They think the party will fail because it isn’t right wing enough, and that they should go back to being “the Nasty Party” to fit the nation’s sour mood. This is sheer panic, and befits the party’s other nickname: “the Stupid Party”.

They do have a problem, and one that I predicted over a year ago before the referendum on the Alternative Vote. There is a resurgent UK Independence Party (UKIP) chipping away at their core vote, while the Lib Dems find it easier to convince soft Tories to vote for them than soft Labour voters – and so they are going after them. That is why they should have supported a Yes vote in the referendum last year – or at least not fought too hard for a No vote. The more they go after the UKIP vote, the easier the Lib Dems wll find it to pick their centrist supporters off; the more they shore up the centre, the easier it is for UKIP to continue their progress.

But the correct answer to this problem is “don’t panic”. They should endure a few difficulties in local council elections and the Euro elections in 2014 – because the real prize they are aiming for is outright victory in the General Election in 2015. In this election they should have no difficulty in crushing UKIP, by painting the real enemy as Labour and the Lib Dems. They will then use Labour’s lurch to the left to scare Lib Dem inclined voters into supporting them too, while reassuring them that they are quite nice and liberal really. It’s the latter task that is by far the trickiest, so they shouldn’t jeopardise it by lurching to the right.

David Cameron knows this perfectly well, and his continued leadership represents the party’s best chance of outright victory in 2015. But if the right openly rebels, the party will both make itself look divided, and retoxify the Tory brand. The rebels should shut up and wait for 2015 – much as the Labour left did before 1997, and indeed 2001, before that party lurched to the left with its big spending expansion of government in the 2000s.

Labour lurching to the left. The Tories to the right. This makes life a lot easier for us beleaguered Lib Dems. Please let it continue.

London elections – the Libs Dems need to rally the base

After the Lib Dems shocked the world by going into coalition with the Conservatives in 2010, plenty of commentators threatened the party with oblivion. At first glance this week’s results in the local and London elections show this prediction to be comfortably on course. In fact the Lib Dem vote held up well in the party’s strongholds (including in their vilified leader Nick Clegg’s Sheffield constituency), so extinction is not beckoning. Some very challenging questions are being posed for the party’s leaders and campaigners, though, especially here in London.

The London results look particularly bad. Brian Paddick, the mayoral candidate, managed a deposit-losing 4%, and was behind Jenny Jones of the Green party, and only just beat the independent Siobhan Benita, advocating a new runway for Heathrow. In the Assembly the party mustered a mere 6.8%, leaving it with just two Assembly seats: the peerless Caroline Pidgeon and newcomer Stephen Knight. These results represent a big fall in the results achieved in 2008, which was already a very bad year for the party.

But it gets worse. This time the party had the best funded and best organised campaign it had ever put up across the capital. The results acheived did not match the Greens, who who were barely funded and organised at all, having a much smaller base of activists and donors to draw from. It wasn’t that the Greens did particularly well – the Lib Dems did very badly. A repeat performance would mean that the party will lose its London MEP at the Euro elections in 2014.

The London elections are an awkward challenge for the party. It’s entire campaigning wisdom is based on going after floating voters to win first past the post elections. This already makes the party vulnerable in proportional representation systems, such as that used for the Assembly. And yet the attention of the electorate is drawn to the parallel mayoral race (rightly, in view of the office’s powers), which is (near enough) first past the post. This draws the party in a floating voter campaign for Mayor, that fails either to attract floating voters (because the party is not amongst the front runners) or to rally the core vote, the “base” in political jargon. The party gave a lot of prominence to tough-sounding slogans like “you break, you fix” to reassure the floaters about the party’s stance on crime, but this left more liberal voters (like me) cold. The party’s literature consisted of a lot of tabloid newspapers which neither worked as sources of local news to draw people in, nor to rally wavering loyalists.

And the base seems to be disappearing. Surely metropolitan London is the most liberal part of the country? And yet the overall results must be amongst the worst in the country.

So the lesson for the party must be to spend more time rallying the base. It needs to be spell out what the party stands for, liberal values above all, and less defensively justifying the coalition, and not trying to appeal floating voters in areas where the party isn’t strong anyway. The requires a completely new mindset from the party’s campaigners. Even when they promise to do this (I remember last time’s Euros particularly well), they tend to get the same old rubbishy tabloids, positioned messages, and so so on. The next Euros will be an important test. I’m not holding my breath.

That applies especially to London. The party still needs to hang on to its MPs and councils, which takes relentless floating voter persuasion – but the party surely can’t afford to disappear into nothingness outside its bastions. The party needs activists, donors and the moral authority that come with a genuine nationwide base.