Month: August 2022

Russia’s endless war in Ukraine

Viewsridge, CC BY-SA 4.0 https://creativecommons.org/licenses/by-sa/4.0, via Wikimedia Commons

It is now six months since Russia launched its full-sale war against Ukraine, though hostilities started all the way back in 2014, with the seizure of Crimea. Not much changes day to day on the ground, and it is hard to tell if either side has an advantage. All the talk is of a long war and stalemate. It looks as if this is now Russia’s strategy. Will it work?

I last commented on the war in July. I mentioned then that my two main sources were The Economist and the Institute for the Study of War. The former is by far the better for getting an overall perspective. In the last print edition it had three interesting articles, on Ukraine’s prospective counteroffensive in the south, on life in occupied Ukraine, and a more general one on urban warfare. As somebody who can’t quite let go of his boyish enthusiasm for for military things (I still play with model soldiers), I find its coverage of military thinking of interest. It is, of course, very journalistic. It reports a number of points of view without being clear about the conclusion. In previous blogs I have expressed my frustration with its frequent repetition of the “conventional wisdom” that attackers need a three-to-one numerical superiority. It is clear that this piece of nonsense is actually quite embedded amongst western military theorists. This is a demonstration that the money-machine of the defence industry has a large bullshit factory attached. I shouldn’t have been surprised. All that can be said is that things look even worse in Russia, but at least Ukraine has demonstrated a capacity for intelligent pragmatism in military matters. That is doubtless a reflection of the extreme pressure they are under. They can’t afford bullshit.

ISW provides a bit more detail around the edges, but its quality has fallen off. It has a strong pro-Ukrainian bias. I mentioned in my last article that it nevertheless reported interesting colour from Russian “milbloggers” – commentators with military connections that were often critical of the Russian military leadership, though not of the war itself. Alas this source is a lot less interesting these days. The Russian government seems to be curbing it.

What do I learn from these sources? Well, not very much seems to be happening on the ground at all. Russian attacks in Donbas are slowing down, now that the more obvious targets, such as Severodonetsk have fallen. They are shifting strength to the south, in anticipation of a Ukrainian counteroffensive there. This counteroffensive has been talked up for the last couple of months or so, but not much seems to be happening on the ground, beyond an intensifying artillery battle, with Ukraine using its new advanced munitions to attack Russian logistics. The Economist is suggesting that the whole thing might be a feint. They don’t think the Ukrainians are ready yet. It is hard to tell how much of this assessment is based on hard reality, and how much is from the same western bullshit factory that thought the Russians were going to secure a rapid victory, and who keep talking about the need for a 3 to 1 numerical superiority for an attacker. The critical factor is the morale of Russian forces – which seems to be weak, since they depend so much on hastily raised and poorly trained and led units. These are the raw materials of a spectacular military disaster. On the other hand, plentiful Russian artillery presents a major problem for the attackers. And the Ukrainian military would be right to be wary of sending in inadequately trained forces. They can’t repeat Russian tactics.

With the situation on the ground moving to stalemate, more emphasis is going on symbolic and propaganda attacks. Ukraine’s attacks on Crimea look to be such, the area having been considered safe enough for Russians to use as a holiday resort. and so do occasional Russian long-range attacks on targets in Ukraine’s interior.

Meanwhile the Russian leadership thinks time is on its side. It’s not hard to see why. Ukraine is becoming more dependent on advanced western equipment and munitions, but these are expensive and supply capacity is constrained. Meanwhile the economic war with the West seems to be going quite well for Russia. Its economy is bearing up to sanctions better than expected. Meanwhile high energy prices are causing a major economic crisis in both Europe and, to a lesser extent, in America. There are signs of stress in the West’s political pro-war political coalition. The far right look as if it will come out on top in Italy; Emmanuel Macron has lost his parliamentary majority; Donald Trump looks ascendant in the US. Russia’s President, Vladimir Putin, has a low opinion of the moral fibre of the West. He surely thinks that Western resolve will collapse.

But that is to underestimate the strength of the West – a bit like the many Brexiteers thought the European Union was on the verge of collapse. It is hard to appreciate the strength of something you despise. Germany is the bulwark. Britain has found it politically convenient to back Ukraine’s war, and that will not change, even as it changes prime minister. Donald Trump is two years away from re-entering the White House – and his campaign may well collapse before then. Germany had staked a lot on a cosy commercial relationship with Russia, and access to its gas. Russia has betrayed the trust Germans placed in it, and the country understands that there is no going back. And so before our eyes that country s accomplishing a major economic realignment. The cost is enormous but the country is ready for it.

And meanwhile Russia has weaknesses of its own. Its army was never as effective as many thought, and now it is short of trained manpower and leadership. The problem will take years to fix. The government may have the political will, but it lacks the technical competence. Mr Putin has developed a highly effective internal security apparatus and propaganda machine, but beyond that Russia is being hollowed out.

So where does it end? The world is getting another lesson in how modern wars are easy to start and hard to end. As the war goes on, the stakes rise. What starts as a matter of geopolitical manoeuvre is sold as a clash of civilisations. In the early part of the war (or this phase of it), I speculated on what sort of a settlement might result. Such a settlement, with territorial losses to Ukraine, may come about if American patience is exhausted, and it forces Ukraine’s hand. That looks a long way off. The rise of Mr Trump, and President Joe Biden’s weakness, ironically, makes such an end less likely. Mr Biden can’t afford another embarrassing retreat after Afghanistan. Otherwise it will take regime change in Russia to end the war. It is hard to tell what might precipitate that. Mr Putin looks as secure as ever.

So the world has to endure yet another lesson in the futility of war.

Targeting help to the neediest depends on knowing who they are

This week’s Bagehot column in The Economist suggests that Labour’s policy of freezing energy prices is bad policy (actually “silly”) but good politics. It says that Labour has been too tied to “wonkery” – the design of policies that are clever enough to solve problems without the need to confront awkward choices. Their new policy is a welcome break form the current Labour leader, Sir Keir Starmer. But I don’t think the policy is quite so silly – even if Labour’s suggestions about how the costs will be managed mainly are.

The challenge is huge. British energy prices, especially for gas, have shot up this year. But that is just a foretaste. Further steep rises are in the pipeline: the graphic above, showing annualised costs, culled from the New Statesman (featuring widely quoted projections from Cornwall Insight – who seem to be the only people making them) shows the problem. The median annual household income is estimated to be £31,400 after tax – so costs are rising from 4% to maybe nearly 14% of income for the median household, and it could be double this for the bottom quartile. Other costs are rising too, and, for most people, pay is not keeping up (many senior executives and our local refuse collectors excluded). The media has little difficulty in finding cases of extreme hardship – of people choosing between energy and food for example – and, apparently, not even being able to heat that food up. In one case publicised by BBC News, somebody was selling their furniture to pay their bills. And that is before the forecast price rises have gone through, and before winter brings in the need for heating. Overwhelmingly the public feel that the government should step in to relieve hardship – although how many Conservative Party members share this feeling, while they choose their next leader, is not clear. So far, so clear.

This is where The Economist‘s wonkery comes in. The view amongst Britain’s policy wonks is that help needs to be concentrated on those that need it most. Trying to cap the price for everybody, a policy widely favoured in other European countries, is regarded as a bad idea. For two reasons: first it wastes public funds on people that don’t need it, and second it blunts the market signal that people should reduce energy consumption, and so ease the imbalance between supply and demand that is causing the problem in the first place. This thinking has guided government policy to date. British energy prices have been allowed to shoot ahead of those in the rest of Europe – while the government is trying to target the bulk of its help to the neediest. But this bumps into a major problem. How can the government tell who to help, and who can get along without it? They have two main ways of trying to do this. The first is to help those already entitled to other help, such as Universal Credit – and the second is to ask people to apply for help, and then to assess whether they actually need it.

Both solutions are badly flawed. A problem on this scale is going to hit many people not entitled to benefits, which have become notably stingier over time. I have seen this problem in a different context: the supply of free school meals to struggling families. Many families need the help but are just above the threshold for entitlement. The problem with asking people to come forward is that many will refuse to as a matter of pride, while others who don’t need the help will try their luck, and need to be weeded out in some way, or else the system will subject to allegations of widespread abuse. This last has been the case with help for businesses in the pandemic. This problem is what I have called the Information Gap. The state does not know enough about individuals or businesses to tailor its policies to specific need. It either creates universal entitlements, helping those who are not in need, or resorts to a number of very blunt instruments, which often create political backwash.

The Information Gap is not just some technical problem that can be left to policy wonks to solve. It is one of the central problems of the modern state, and everybody in politics, wonk or not, should be aware of it. There are three general philosophical approaches to dealing with the Gap. One is to use the best efforts of the state to gather information and close the gap, compelling disclosure as required. This is the approach we associate with the Chinese Communist Party; it is highly paternalistic, and seamlessly moves into the state intruding into our private lives in unexpected ways. And the state never gets enough information to solve the problem properly. Its opposite is the libertarian approach. This suggests that the state should not involve itself in helping individuals at all. It should establish a system of security and property rights, and not much else. This thinking is popular n the political right, though not amongst populists. The third approach is solve the problem through a combination of universal entitlements and high taxes. This has recently been popularised through the advocacy of Universal Basic Income. Of course nobody, or almost nobody, advocates taking any of these three approaches to the extreme. Practical statecraft involves balancing all three approaches. Politically, though, we need to develop a sense of in which direction is the site needs to tilt at the current time.

Alas politicians rarely succeed by being honest about the difficult choices involved. Tory leadership contender Rishi Sunak seems to be suggesting that we take the more paternalist approach – but without being clear as to how the information gap is to be closed. His past behaviour in the pandemic suggests that we will accept a high degree of failure and try to shrug it off. His rival, Liz Truss, is suggesting a more libertarian approach – but without being honest about the widespread hardship and business failure that is likely to result. And now Labour is suggesting the use of universal entitlements – but without being honest that this will lead to higher taxes. All three are displaying a dependence on magical thinking. Labour’s “costing” of its new policy is laughable – but the economic illiteracy it is showing is the rule amongst serious politicians, not an aberration.

Personally I think Britain needs to move further along the universal entitlements and high tax route – an approach derided by Ms Truss, but one which the better-run European states favour. That does lead to further problems. Public services will require more discipline to improve their effectiveness, which I believe will have to come alongside decentralisation – with political accountability moving in parallel. That will require deep reforms that people may support in theory, but will resist in practice. Without reform, services will simply gobble up resources without becoming more effective. A further problem, shown in other European countries, is that tensions over immigration have to be managed. If entitlements are high, the public resents people it sees as freeloaders – and there is political mileage in stoking up that resentment, whether fair or not.

So that’s two cheers for Labour – and indeed the Lib Dems whose policies Labour seem to be copying. Alas I don’t see any sign that either party is going to be honest about taxes. But the public, surely, will start to see the need for hard choices. The careers of the two British politicians most egregious in suggesting that no hard choices are required – Boris Johnson and Jeremy Corbyn – have both ended ignominiously.

Tackling inflation means a recession

I remember Britain’s inflation crisis of the 1970s well. I was a teenager, just coming into political consciousness. I started subscribing to The Economist newspaper in mid 1974, between the two British general elections in that year. Back then I was a firm supporter of the Conservative Party, which then entailed being a Europhile. Disillusionment did not overcome me until the end of the decade. Inflation remained the dominant economic issue until well into the 1980s. But these days most people in political power, political or economic journalism, or with economic responsibility are from a younger generation, who have only read about those times. I don’t think they have quite understood what is happening.

A number of things jar. The first is that discussion often fails to take in the difference between real and nominal statistics. Nominal data is simply the raw figures expressed in currency. These become of limited use when inflation takes hold, if you wanted to compare prices and values over time. So the concept of “real” data, adjusted for inflation, was developed. GDP data is expressed this way now as standard – as is almost all material in standard economics courses. Still, there has been a fashion of advocating monetary authorities targeting nominal GDP, rather than inflation. The concern was that if both real growth and inflation were very low, then the economy should be stimulated, even though inflation might not appear to be a problem. For a developed country, I think, the suggestion was that the target should be in the region of 5% per annum – allowing for 2-3% inflation alongside a “normal” rate of growth of about the same rate. It is now running at about 12% in the UK, showing an extreme overshoot. That suggests a case for hard monetary tightening – though, to be fair, with inflation at 9% and projected to go higher, an inflation-only target does the same job.

And that, if you read most comment, is exactly what the Bank of England is doing now, with a 0.5% rate rise recently, the highest increase since it became independent in 1997, we are told. But the “real” concept applies to interest rates too. The real rate base rate, by my calculation is around minus 7%. I find myself asking how can that can be described as tight. More seriously, it suggests that cash savings are being eaten away at a rate of knots. Other investments, apart from residential property, don’t look a much better bet either. Wealth is being destroyed at a rate we haven’t seen since the Great Financial Crisis – though conservative investors would have done well out of that episode in a way that they are unlikely to today (unless they held substantial amounts of index-linked stocks). Of course, it is not hard to see why people seem so unconcerned. The political weight of borrowers, and especially those with mortgages on their homes, has always been greater than that of savers. And higher nominal rates imply more cash flow stress on mortgagees, when income may not be guaranteed to keep pace. Still, I find it a bit jarring that there is so little political pressure to raise interest rates. A backlash from savers may yet emerge.

A further jarring side to the current discussion is that so many seem to think that inflation and growth are variables that are more or less independent of each other. An extreme example comes from Liz Truss’s campaign for the Conservative leadership. She seems to think that policies to support growth, or stop a recession, are independent of policies to curb inflation. she was a bit shocked when Chairman of the Bank of England suggested that attacking inflation would affect growth. At the same time, one her supporters, Suella Braverman, suggested that the Bank is to blame for inflation getting out of hand, and should have raised rates earlier – apparently impervious to the idea that this would have dented the growth that ms truss seems to hold as a sacrosanct economic objective. But growth and inflation are two sides of the same coin. You can’t stop inflation without putting pressure on demand, which limits growth. That’s politics, I suppose, but such comments should be enough for Ms Truss, and especially Ms Braverman, to be laughed out of court. If you you are in favour of tackling inflation, you should accept the risk to growth, and even welcome it. If you think inflation will disappear of its own accord (because it comes from external sources such as oil prices), then you should say so outright. But if you do, you face a tricky question on pay. If pay does not keep up with inflation, then real incomes will shrink – which means recession. So, if you want to avoid that, you should be more supportive of public sector pay increases. No senior Tory is in favour of that. In fact a growing part of inflation now seems to come from a wage-price spiral. This is exactly what you would expect when unemployment is as low as it is, and many employers face problems with recruitment, not least in the public sector. That means that any policies that support growth will make inflation worse.

Still, this is not the 1970s. Then the main industries were heavily unionised, and the public sector was huge, including public utilities, the coal and steel industries and a big car manufacturer. The size of payrises were front and centre of economic management and political discourse; strikes were commonplace, and not subject to the heavy regulation of today. It was much easier for inflation to become entrenched. It was also hard for major businesses, and especially the public sector, to push through productivity-improving changes to working practices. Stagflation was the result. Today, inflation should be much easier to bring under control.

Today’s discourse on inflation is right about one thing: one of the critical issues is hardship inflicted on the less well off. Funnily enough, I don’t remember people talking about this in the 1970s. Perhaps there was less financial insecurity, and benefits were relatively more generous – that is certainly a popular narrative on the left, but I would like to see more evidence before accepting that to be the case. It may just be my tilted memory. It is certainly one of the biggest talking points now, though it is hard to know just how widespread the hardship is. There is certainly plenty of it, as we can see even here in leafy East Sussex.

What is clear to me is that a recession of some sort is required to bring the economy under control. That means a reduction in overall living standards – and public policy should ensure that this burden mainly falls on those on middle and upper incomes. And that points to higher taxes and more “handouts” – at least in the short term. Alas our probably next prime minister is saying the opposite.