What does the Syria vote mean?

Last night’s vote by the UK Parliament to reject a government motion to clear the way for punitive action against Hafez Assad’s regime in Syria feels like a very important moment in British politics. It is a small but decisive step away from Britain’s centuries-old role as a Great Power on the world stage. This has good and bad aspects.

The vote itself has divided opinion among in my social network. The less political of them, including my liberal leaning but unpolitical friend at the gym this morning, are very happy. A depressing chain of events that started with Tony Blair’s joining of the Iraq war has reached an end. But many of my Lib Dem Facebook contacts are very unhappy: who will restrain President Assad’s regime now? But just as many share the views of my friend at the gym.  I find my feelings very mixed. I do not want this country to take sides in this conflict; but the thought that Mr Assad’s government will take comfort from it is not a comfortable one.

But what will non-Britons make of this episode? It doesn’t seem to be all that important. The real power is with the United States; Britain’s military capacity is puny by comparison. This debate is not being had in many other countries, from the economic powerhouses of German and Japan, to other world powers such as Brazil or India. Only our French neighbours are weighing up the same issues, apart from America, and, in a different way, Russia. It all seems to be more about maintaining the status of our political elite than something that a third rank world power should be concerning itself with. It will be more difficult now for that elite to maintain its delusions of grandeur.

In one way this a good thing. The expense of the country maintaining this world status is increasingly unsustainable, as cutbacks to the armed forces show. There have been successful military interventions: in Kosovo, Libya and Sierra Leone. And places were we probably should have intervened but didn’t: Bosnia and Rwanda. But the results of the bigger interventions, Iraq and Afghanistan, are at best ambiguous. Syria looks more like the latter, though the government has been trying to limit the scope of any intervention. The judgement of our political leaders and the civil servants and military men that back them up has not proved particularly sound. And successful small interventions only encourage them to think bigger. We are now facing up to a more realistic view of Britain’s place in the world.

But there is also a dark side. It is not good if a country turns in itself, and does not want to accept the implications of being part of a bigger world. There is a strong undercurrent of this in Britain: from anti-immigrant feeling to criticism of foreign aid, as well as resistance to taking part in the European Union. But the country’s fate is more bound up than ever by what goes on in the rest of the world, and far too often this sort of isolationism leads to paranoia and conflict.

Personally I would like to see Britain take further steps back from its pretension to a world role: giving up the country’s seat on the Security Council and our nuclear weapons. But I would also like the country to take part in military interventions if these are needed, especially in Europe and (perhaps) Africa. But we need new ways of going about this, and a clearer idea about when and how we go about it. I hope last night’s vote is a step along the path to a better way.

Can we learn from the 1930s?

Liberal Democrat conference goers are shaping up to a confrontation in three weeks’ time over economic policy. On the one hand the leadership wants to defend the current coalition government’s record; on the other many activists feel that this policy has been a dismal failure. This confrontation has been brewing for some years. It reflects a wider controversy in the country at large, though one senses that most people are now moving on. In this argument it does not usually take long before the government’s critics refer to the experience of the 1930s recession, or Depression, to back up their case. It’s worth unpicking that a bit.

My main source on this is a pamphlet produced by the think tank Centre Forum: Delivering growth while reducing deficits: lessons from the 1930s by Nicholas Crafts published in 2011. This concentrates on the experience of the UK. The first thing to point out is that the UK experience of the Depression is very different from the US one, though they are often conflated when people refer to the Depression now (just as the current experiences of the UK and US get conflated, especially noticeable when critics of UK policy quote U.S economist Paul Krugman in their support). The U.S. suffered a banking collapse, which then caused a catastrophic collapse in the rest of the economy, with real GDP falling by as much as 36% (hitting bottom in 1931); it only got back to its 1929 level in 1940. Behind the US collapse was a structural transfer of economic activity from agriculture to manufacturing, which it took the war economy to complete. Britain’s crisis was much less severe; it suffered a major loss of exports and economic shrinkage, but no banking collapse. The economy hit bottom also in 1931,  just over 7% down from 1929 and was back to 1929 levels in 1933; by 1940 it was over 20% ahead. By comparison with the U.S. the structural move from agriculture to manufacturing was much more advanced when the recession struck. Britain was, however, struggling to adjust to a world where it could not rely on its Empire to drive its economy.

In fact, after flatlining in 1930 and losing over 5% in 1931, the UK made rather a successful recovery from the recession, as Mr Crafts (a professor of economic history at Warwick University) points out. This was achieved in spite the government cutting expenditure and raising taxes – austerity policies in today’s talk. Mr Crafts is very clear as to why: loose monetary policy. Specifically interest rates where kept low, and the authorities persuaded people that inflation would be persistent (at about 4%), giving negative real interest rates, while the pound was allowed to devalue. Something similar happened in the U.S in the New Deal era. Mr Crafts suggests that this formula should be repeated now, if the Bank of England could credibly suggest that inflation would increase to about 4% for the medium term, instead of its 2% target. This is quite topical, as this is almost exactly the strategy of the current Japanese government, the so-called “Abenomics”.

One point of interest in this is the rival claims of “Keynesians”, who advocate fiscal stimulus (extra government expenditure) and monetarists, who advocate loose monetary policy – though quite a few, like Mr Krugman, advocate both. Both groups refer back the Depression for support. In fact fiscal stimulus was not much used in the 1930s, while loose monetary policy was. Fiscal stimulus only came into its own at the end of the 1930s and in the 1940s, when it was led by rearmament and provoked by fears and then the reality of war.

I must admit that I find the parallels with the 1930s, especially in Britain, to be entirely unconvincing. The one clear lesson I would draw is that a banking collapse, as happened in the US in 1929, can be catastrophic. The world’s authorities were absolutely right to head this off in 2008-2009, even if that leaves awkward questions over how we got into the mess in the first place. That lesson was well learned, but there the lessons pretty much end. Further lesson-drawing leans on a species of macroeconomic blindness, a sort inverse of the composition fallacies that macroeconomists like to accuse their critics of. This entails taking false confidence by examining a collection of aggregated statistics, dipping down only selectively into the realities that lie behind them.

Consider some important differences between the world of the 1930s to the 2010s, for Britain in particular:

  1. Britain’s banking sector was in much better shape in the 1930s. It was less dominated by big institutions (there was a thriving building society movement) and these institutions had not overreached in the way they had in 2008. The main barrier to borrowing was lack of demand for loans, which lower real interest rates incentivised.
  2. There were many fewer barriers to house building in the 1930s. The main source of investment in the 1930s recovery was private sector house building. It clearly helped then that there was a severe house shortage, and inflation encouraged people to bring forward building projects. There is a housing shortage now, of course, and to be fair Mr Crafts says that barriers to house building would have to be tackled. But more than planning barriers are involved here. There is the general zeitgeist around the future direction of property prices; this is largely founded on the idea of restricted supply. Currently developers are holding back on many projects not because of finance, or lack planning permission, but because of doubts over the future direction of property prices.
  3. Nowadays we live in a world of highly integrated financial markets and global trade. This has changed the way fiscal and monetary policy work. It is by no means certain (and in my view highly unlikely) that loose monetary policy would work itself out in such a benign way as in the 1930s. Would inflation in fact increase? If it did would wages stay ahead of prices? And if wages did not stay ahead of prices would companies invest their profits so as to boost domestic demand? (There is a fascinating aside in Mr Crafts’s pamphlet here. In the 1930s the Treasury assumed that prices would indeed run ahead of wages, boosting corporate profits, which would boost the economy. In fact wages kept pace with prices and the domestic demand was behind the growth).  And bumping up inflation would quite likely cause the price of government gilts to plummet, making it harder to finance the national debt: in this day and age it is not as easy to inflate your way out of debt as many economists assume.

And that’s just the start. The more you investigate and think about the rights or wrongs of different policies, the less relevant the 1930s looks. It is just as bad for fiscal policy. In the 1930s and 1940s rearmament was a useful outlet. It soaked up surplus labour quickly and led to the building of industrial capacity that, as it turned out, could be readily reassigned to more constructive and benign uses. And the threat of war was horribly real, allowing the public to be mobilised behind the dislocation of the civilian economy. I cannot see what the modern equivalent is. Rearmament now, even if you can find a wider justification, would require the wrong skills and capabilities. The building of social housing is a possibility, I think, but would be insufficient in its own right.

Indeed I think the real issue of substance that divides critics of the coalition from its supporters, among Liberal Democrats anyway, is whether there is a pool of £20 billion or so of capital projects that the government can immediately and profitably get in motion. In the 1930s and 1940s it was weapons. In the 2010s it is what?


Rebuilding local networks: it has to hurt

Last week I came across this interesting article in The Economist on Business Improvement Districts (BIDs), which are having some success in reviving local economies. It prompts several thoughts about how to rebuild local communities. And, as I advocated in my recent blog on the poverty of ideas on the British Left (The unbearable lightness of British politics) , I think this offers the key to future progress in our society. But some ways of attempting this are more helpful than others.

Here’s what I think the problem is. Over the last generation our social, business and political networks have been reconfigured. Local connections have been downgraded and replaced by national and international ones. In Britain (England and Wales anyway) this has given rise to a strong geographical focus on London. If you want anything done, chances are that at some point you will have to talk to somebody in London, or within its commuting orbit. It makes sense for most people to invest time in their London networks in place of local ones, a process that feeds on itself. This is part of a general process usually referred to as “globalisation”, with London serving as a global hub. There have been plenty of benefits to this: the country as a whole is economically much more efficient. But it brings with it two problems.

First is that the main beneficiaries of greater economic efficiency are a globally well connected elite. To make it, as a sports star, an artist or as a banker or business executive you need to be world class. The marzipan layer or national or, still less, regional stars are also-rans who, in some fields at least, find it difficult to even make a living. You can’t make much money out of the British “First” Division of the football league, because it is in the shadow of the Premier League. In the developed world at least, the economy does not work well for most people. The most successful developed world economies (in terms of widespread distribution) tend to be smaller – think of Denmark or Sweden.

The second is that in larger countries like Britain many local economies are struggling as the decent opportunities are elsewhere. Britain’s highly centralised political system exacerbates this. There is a growing gap between London and the South East and the rest – though Scotland may be starting to buck that trend. The poverty of local networks is surely part of the problem. The London centred networks are in control.

But we can’t turn the clock back. It isn’t just that a centralised political system has impoverished peripheral communities in a simple grab for power. Changes in technology made much of the old way of doing things obsolete. If the next step in our political evolution is to rebuild local networks, it must be done in such a way that economic efficiency is enhanced. That is where a lot of ideas for rebuilding local communities fail.

This is one of the things that make BIDs interesting. BIDs are an American idea (I think the Canadians may have started them); businesses in a locality organise themselves, and if a critical mass support the idea they can compel all businesses to take part, including contributing to the scheme’s funding. This raises money to make small improvements to local infrastructure which then have more widespread benefits. And the process of doing so revives local networks. As councils retreat, as central government funding is cut, the importance of BIDs rises. This prompts a couple of further thoughts.

First is the local councils, though obviously part of the solution, may also be part of the problem. In order for local networks to revive, local accountability is critical. If the trail of responsibility simply ends up in an office somewhere in London then it is compromised from the start. This is what undermined many of the last Labour government’s attempts to delegate power locally, such as through NHS Primary Care Trusts (PCTs). Local councils are electorally accountable locally, but get most of their funding centrally and are heavily constrained on what they can do without asking some national body for permission. And they often try to monopolise local power and smother initiatives that they did not invent. A diversity of locally accountable power centres is surely helpful. “Locally accountable” does not necessarily mean “controlled by the local council”. We must hope that the coalition government’s invention of Clinical Commissioning Groups (CCGs) in the NHS become genuine local power centres, not the playthings of the central bureaucracy, as the PCTs were. The jury is out on that one.

The second point is that it is about money. The BIDs’ power and influence derives from the money they levy from their members, which in turn can unlock funding from other sources, such as the National Lottery. As I have already noted, one of the weaknesses of local councils is that their local taxation powers are so limited. They have the Council Tax, a sort of residential property tax, and the Business Rate – both of which are highly constrained by central regulations. These taxation powers will have to be extended.

Which is a third point. The design of BIDs overcomes the “free-rider” problem, which is the bane of many local initiatives. There is a strong tendency for most people to sit back and let somebody else do the work. That makes legal powers to raise money – taxation in other words – a central requirement.

At the moment the London government is playing with localism. It is letting a number of ideas go forward if they promote better local management at no serious cost to the power of the centre. At some point progress will require reforms that will hurt the centre. So our political leaders, all of whmo have played with the idea of localism, need commit serious political capital to it. Unfortunately neither David Cameron (after the flop of the “Big Society”), nor Nick Clegg (in spite of the Lib Dems’ theoretical commitment to the idea), nor Ed Miliband show any real sign of taking the revolution out of Westminster’s comfort zone.


The West has become irrelevant in the Middle East

Along with most of my politically conscious compatriots here in Britain, I am deeply shocked by the massacres perpetrated by the Egyptian security forces on supporters of the Muslim Brotherhood over the last couple of days. A deeply shocking, and depressing, revelation came from an EU mediator in a BBC interview yesterday. Apparently he was very close to achieving a negotiated way forward, before hardliners in the Egyptian government overruled the people he was negotiating with to press ahead with the violent crackdown. This episode deserves more attention that it got (I have failed to find any report of it after searching both the BBC and Google, so quickly have the news media dropped the story), as it is very revealing about both Egypt and the Middle East at large. We in the West have become completely irrelevant.

What we had hoped for in the Arab Spring was the emergence of democracy in the various Middle Eastern states, with a working relationship developing amongst the main political factions, with workable, effective governments emerging over time. Perhaps a bit like Portugal after the 1970s. We cling to the hope of this now in just Tunisia and Libya. What has emerged instead is a conflict between an Islamist faction and the state security apparatus, neither of which is interested in liberal democratic government. In Egypt both factions have decided they should get what they want by ignoring the liberal factions and Western standards. They are following a path taken by Algeria; the uprising in Syria is evolving in a similar direction. In Jordon and Morocco the state security apparatus is in control but toy with democratic reforms to keep Western sponsors sweet. In the Gulf and Arabian Peninsula the state security apparatus is not even doing that. In Iraq democracy is gradually being pushed into the background as a similar dynamic emerges. Israel/Palestine and Lebanon are much more complex, but some of the same themes can be seen there. The real battle is between a powerful state security apparatus and an Islamist protest movement, which shades into insurgency and outright guerrilla war. Neither side is interested in democracy, and no other civic or foreign forces can persuade them otherwise.

The first disappointment in Egypt is that the Islamists failed to embrace democracy. Rather they saw democratic institutions as a means of seizing power for themselves. They seemed to have no concept of governing by consent, or of building democratic institutions. President Morsi’s democratic mandate was weak, as the electoral system failed to give voters a proper choice. There is no properly elected parliament, and the Muslim Brotherhood showed no real interest in conducting proper open elections for them. Their attitude to democratic institutions seems rather similar to that of Lenin or Hitler: a means to an end. This seems to be part of a wider pattern of similar Islamist movements in the Middle East – notably Hamas in Gaza, and Hezbollah in Lebanon.

Their implacable opponents are hardliners in the security establishment: armed forces, police and murky intelligence organisations. In Middle Eastern countries these forces in most cases, including Egypt, have become monstrous and unaccountable. They are usually incredibly incompetent at their alleged purpose of maintaining law and order, as this week’s massacres showed. They effectively control most Middle Eastern governments, though often with civilian or royal heads of state nominally in charge. They have no time for liberal democracy. The sort of accountability implied by such a system is anathema.

More liberal forces did flower for a while in Egypt, allying with the Islamists to temporarily turn the generals out of power. But the Islamists were not interested in a real partnership. There was a small hope that, after the military coup, the Brotherhood might again see that it was in their interests to team up with the liberals, and concede real power to them. That, no doubt was the substance of what EU mediators were trying to negotiate. But the security hardliners have now crushed all hope of that. And now ordinary Egyptians are faced with a stark choice. Whose side are they on? The Islamists or the security forces? After the Brotherhood’s disastrous period in power, many will choose the latter.

And there is practically nothing that we in the West can do to influence events. The best hope for democracy lies in the Islamist forces coming to understand that they need and should respect democratic institutions, even when it proves inconvenient. They can then build a secure partnership with secular liberals that will command broad popular support. This is what happened, eventually, in Turkey as the Islamists embraced the idea of Turkey being part of Europe. Instead the Islamists in the Middle East and Africa seem to take their lead from their implacable opponents in the security state: it is all about getting your hands on the levers of power.

All we can do in the West is help nurture the small shoots of liberal democracy as they emerge, through mediation and advice, as much as through money and aid – as the EU did with Turkey. Meanwhile we are condemned to being utterly helpless. Neither side needs us.



The unbearable lightness of British politics

The economic crisis in the developed world drags on, posing fundamental political and economic questions. And yet politicians here in Britain argue about not very much. The Labour leader, Ed Miliband, is currently attracting a lot of criticism for his lack of progress. But the real problem is that the political left has run out of ideas, while the Right complacently defends the status quo. This state of affairs will continue until we learn to look at our problems in a radically different way.

Nobody should doubt that capitalism is still in crisis. We have been cheered in Britain by some better economic statistics. But average wages remain stagnant, and are not keeping up with inflation. Some people are successfully adjusting to a reduced standard of living; others are running down savings or borrowing money. Private and public investment remains weak, and any benefits of a slightly stronger economy mainly accrue to a small minority of the better off, or to anybody that owns land and buildings, along with a trickle of unemployed people who are now finding rather poor quality work. Other developed economies, from the US to Europe to Japan seem locked into variations of the same dilemma: either the economy is stagnant, or it grows to the benefit of only a few people.

It is not difficult to see what the underlying problem is. Globalisation and the advance of technology are killing off industries that used to be the backbone of developed world employment, destroying lots of middle income jobs. We hear a lot about manufacturing industry, but the same dynamic applies to office jobs. There is not the same need for secretaries and administrators, with jobs tending to be either highly skilled (managers, technicians and so on) or else in soulless call centres; and some of those call centre jobs are being automated out of existence. There is a desperate hunt for the better paid careers, and many people have to settle for poorer quality jobs. In Marxist terms, the balance of power has shifted decisively towards capital and against labour. The process started as far back as the 1980s, with only temporary relief provided by the generosity of the Chinese who sold the developed world lots goods for less than they were really worth. Changing demographics adds to the difficulties of managing this problem.

Meanwhile a growing elite of capitalists and professionals are doing very well, but are under spending their incomes. More is being saved than invested, creating downward pressure on the economy as a whole. This is more or less how Marx predicted the end of capitalism. So if the traditional left-wing critique of capitalism is proving better grounded than many thought, why isn’t the Left benefiting?

The answer is that the Left have no convincing alternative to the capitalist model which does not destroy living standards. Marx could believe that common ownership of the means of production would do the trick, but we now understand that this is killing the goose that lays the golden egg. The turning point for China economically was its recognition that it needed a rampant capitalist economy to drive it forward, even if they also see the virtues of a massive state sector coexisting with it. Modern people love the benefits of capitalism, and in particular its constantly advancing technology, and constantly changing fashion – even as they struggle with capitalism’s consequences.

So what to do? There are still many on the Left, especially trade unionists, who think that the answer lies in a big public sector. This can be constructed to provide lots of well paid middle ranking jobs and, it is hoped, put market pressure on the private sector to treat their workers better. This strategy may be called “Sweden in the 1960s”, since that was when and where it worked best. But most appreciate that it is unviable. Sweden’s economy collapsed into a nasty mess after the 1960s. The state sector has no incentive to be efficient, and drags everybody’s standard of living down with it. It creates unbearable pressure on the private sector as they try to compete in world markets.  Constant devaluation of the currency might provide some relief, but in the end this leads to hyperinflation and total seizure (think of various South American economies over the years). In Britain the state sector is too large for the current tax burden, so to sustain it requires putting up taxes. This does not look a realistic political prospect.

So what’s left for the Left? Mr Miliband shows a good grasp of the basic problem but has found only lightweight solutions, such as putting moral pressure on big business to behave a bit better. And without any big ideas we end up arguing about not very much. Is the government’s austerity policy slightly too severe? Should we add a little bit of regulation to this or that industry? Or else do we just moan about various symptoms of the malaise, from immigration to the misery inflected on many who rely on state benefits, without offering any constructive alternative?

It’s much easier for the Right at one level. Their sponsors are doing quite well, so they can try to create smokescreens to pretend the problem doesn’t really exist. Some go further to try and suggest that we should place even less restrictions on the capitalist economy – though that line of argument is as discredited as Sweden in the 1960s. But ultimately they will have to confront the same problem: the economy doesn’t work well enough for most of the people most of the time.

And what is the answer to the problems of capitalism? Clearly this isn’t easy. I think we have start looking at our situation in a completely different way. We are stuck on grand policies that can be implemented by governments in London, accruing lots of prestige to national politicians. But this is just sucking power into an elite based in the country’s southeast. Is it an accident that Scotland is now doing relatively better as real power was devolved to Edinburgh? We cannot continue to destroy local networks and hope that people will be better off as a result. This is completely beyond the grasp of our political elite, left or right. But until politicians start to understand that they are part of the problem, not its solution, we are condemned to an unbearable lightness in our political debate.