Britain’s economic difficulties have deep roots

The Comet airliner was world-beating British design before a crash in the 1950s allowed US aircraft designs to dominate the market. The British aviation industry never recovered.

Our new prime minister, Rishi Sunak, says that Britain faces a profound economic crisis. I don’t disagree – few will. Neither do I disagree with his statement that hard choices lie ahead. I almost certainly will disagree with him what the right choices are. We are entering a period when politics matters. But we need to understand more about the mess and how we might progress.

Liz Truss, Mr Sunak’s predecessor, presented a clear narrative to explain the country’s economic ills. A timidity in the British ruling elite, abetted by the “abacus economics” of the Treasury, has stifled private enterprise, leading to a bloated public sector accompanied by low economic growth. She saw that a combination of lower taxes and deregulation could correct this, deliver economic growth, and that, thanks to the wealth thus generated, the country would be able to afford an acceptable level of public services and welfare safety net, together with improved state pensions. She thought that she could kick start the process with tax cuts. The overarching narrative may or may not have substance, but the timing was all wrong. The result was the shortest prime ministerial stint in British history.

Ms Truss was rare in offering us a clear narrative. Mr Sunak will not make that mistake. Clarity divides, getting in the way of the coalition building that successful politics demands. But a clear narrative helps the rest of us decide which policies to support. I will attempt one of my own.

My story starts in the middle of the last century. Britain was an industrial powerhouse, with a strong belief in free trade, though this regularly caused political controversy. Before the Second World War, though, this was marred by widespread poverty; the country had not found a good way of spreading economic (or any other) wellbeing across the whole of society. And then came the war. The necessities of the war ushered in a period of massive state intervention that followed a lot of the principles of socialism. Food was rationed, but people were amazed that levels of nutrition improved, as the diets of the poorest in society improved. Meanwhile the British war economy produced wonders of production and ingenuity, combining state direction with private initiative. People saw that a new way was possible, and this was brilliantly articulated by the Labour leader Clement Attlee, who reassured the middle classes with a particularly British slant on socialism, and Labour won an overwhelming parliamentary majority in 1945. He ushered in a period of profound welfare reform and the nationalisation of key industries. Labour lost power in 1951, but the landscape was so profoundly changed that most of the reforms were supported by a political consensus.

There followed two decades of what many regard in hindsight as a golden age. Economic growth was rapid, living standards advanced, poverty reduced and life expectancy dramatically extended. Many transitioned from working class to middle class. An expanding working population and an industrial revolution in the development of consumer products were the drivers. But all was not well. Other countries were doing better. Britain was steadily losing its place among the front rank of industrial powers, to America, to Germany, and even to Japan. Each of these countries turned into export powerhouses, while Britain, relatively, declined. What was happening? Poor management and a relative lack of investment were to blame, along with some bad luck (the crash of the Comet airliner in the 1950s dealt a body blow a world-leading aviation industry). A lot of this had to do with the fact that large parts of the industrial heritage was now under public ownership, and this increased as industries, notably the motor industry, started to fail and led to a clamour for government intervention. The government either starved nationalised industries of investment (the water industry for example), or squandered unbelievable sums on ill-conceived investment programmes (notably nuclear power). There were exceptions to this general mis-management, of course, such as the switch from coal gas to natural gas for domestic use. But by and large decisive management was replaced by consensus-building and political grandstanding, and the constraints of government financial management. By the 1970s nationalised industries were a by-word for bad management. Meanwhile the private sector was weighed down by high marginal rates of income tax (top rate 83%, or 98% for investment income by the mid-1970s) and corporation tax (52%).

The 1970s were a time of profound economic crisis, with many parallels to now. Energy costs rocketed with two Middle East crises following the Arab-Israeli war of 1973 and the Iranian revolution of 1979. Inflation took off, and policymakers struggled to respond, as this came alongside rising unemployment (which we don’t have now, or not yet). In 1972 the Conservative government of Ted Heath tried to break the deadlock with tax cuts and more public spending (I can still remember the party political broadcast promoting this – I was 14), in a move reminiscent of Ms Truss’s failed budget. This quickly collapsed into disaster, and the government was locked into a confrontation with the miners’ union, amongst others. Harold Wilson’s Labour government of 1974 did not make things much better. Unions were able to block any serious economic reform.

In 1979 came the election of Margaret Thatcher and the Conservatives. Mrs Thatcher brought with her a new economic philosophy of reducing the role of the state. She started to reform the nationalised industries preparatory to privatisation. She cut marginal rates of income tax (though putting VAT up to maintain the overall tax take). At first things seemed to be going very badly. Inflation persisted, unemployment climbed, and nationalised industries played havoc with government finances. But by 1982 things were getting better. She received a political boost from the Falklands war, while Labour seemed to be imploding. A new party, the SDP (which I joined and have never left), offered a diversion, but failed to break Britain’s electoral system, even in alliance with the Liberals. Mrs Thatcher won a landslide majority in 1983, and quickly became politically more secure. Inflation was tamed and economic growth returned. This period remains a matter of bitter controversy. Many say that her success was based on the exploitation of North Sea oil. This was clearly a factor but her economic reforms, especially the privatisations of the energy, telecoms, steel and motor industries, clearly helped. Another factor that proved of benefit, though perhaps more so later, was the development of the European Single Market, of which Mrs Thatcher was one of the architects. Prior to this European product and labour markets had been badly fragmented. The European Economic Community had tackled tariff barriers, but non-tariff barriers remained high. These were progressively dismantled, so that Europe could follow America in the benefits of a large domestic market for many goods – and labour. Britain became a favoured European base for American and other countries. But while this progress was happening a lot of industries, notably the coal industry, collapsed under foreign competition and changing production technology. This has coloured Mrs Thatcher’s memory ever since – as she saw no reason to soften the blow as swathes of the country went into industrial decline.

One of the driving forces of change was globalisation. Increasingly the Far East became a source of cheap industrial imports. This started with Japan, and then moved on to South Korea and Taiwan, amongst others. Falling import prices became one of the chief sources of improving living standards, but it hastened the decline of former industrial heartlands. By the 1990s we see taking shape some of the main outlines of the current British economy. The country became a major net importer of manufactured goods, only partially offset by a booming service industry. At this point the books were being balanced by net oil exports. But some areas of the country were doing much better than others.

Labour under Tony Blair took over in 1997. Mr Blair sought to maintain much of the Thatcher legacy, but with an important difference. After 2001 in particular he expanded the public sector, through expanding public services such as health and education in particular. In these years a powerful myth took over the British political class. You could solve the conundrum of getting Scandinavian-level public services and welfare with American tax levels though allowing economic growth to expand level of tax receipts. But the politicians failed to understand the source of Britain’s growth in the early 2000s. This was largely driven by three factors. The first was an acceleration of globalisation, enabled by internet technologies and driven by China. I remember looking at the components of Britain’s consumer price inflation, which was about 2% per annum. The prices of manufactured goods were falling; this allowed 4% inflation in many services to be balanced out. And pay tended to follow the services figure, staying consistently ahead of overall inflation, and so leading to improved living standards. The second factor was a dramatic increase in European immigration. By the early 2000s many parts of the country were experiencing labour shortages. The baby boom was over, and the process of bringing women into the workforce largely complete; pension schemes were only slowly catching up with increased life expectancy and the proportion of retired people was growing. But the European Union at this point admitted Eastern European countries with a workforce that wanted to improve its living standards by working abroad. Poles and others flooded in and the demographic crisis was averted. Inflation was kept at bay, the second major component of growth. The third factor was the rapid expansion of financial services, and especially the banking industry. Many banks made big profits, giving the City of London the air of a boom town, inflating the property market, and generating significant capital taxes. Pretty much all the increase in recorded productivity in the early 2000s came from the banking industry, alongside “business services” (management consultants, lawyers, accountants and others feeding off the banking boom, as well as juicy public sector contracts), and the now-declining oil industry.

None of this was sustainable, and the moment of truth arrived in 2007, when the world banking crisis developed. Those big banking profits, and the productivity gains that came with them, were exposed as fiction, and the industry experienced massive write-offs. Meanwhile the globalisation boom peaked, as China sought to improve its own living standards rather than those of westerners. The public increasingly turned against European immigration. And the decline of North Sea oil continued apace.

So in this account the slow growth that followed the crash arose not from a failure of government policy (be it austerity in the left’s account; or excessive tax and regulation in the right’s), but from the exposure of demographic forces that were always present, and the passing of globalisation into a new phase that was not producing gains in living standards. And two further things were added after 2015: the decline of North Sea oil turned precipitate, and Brexit, after the referendum in 2016. Brexit has raised the cost of imports (especially if you attribute the depreciation of the pound that coincided with it, though I’m inclined to believe that much of this was in the pipeline anyway), made exporting harder, reduced the attractiveness of inward investment, and caused many immigrants to go home and made immigration harder. On that last point it is worth observing that the country has made up the shortfall in European immigrants with people from other countries, and in any case the European labour market is becoming tighter. But the labour market for immigrants became much less responsive to short-term demands. All round Brexit has added to the friction of running a business, rather than causing an immediate catastrophe.

To these troubles we must now add two more. Firstly the gas and oil price spike, exacerbated by the war in Ukraine, and secondly the rise in world interest rates. The energy price rise is a double whammy. It is helping to stoke up inflation, which causes economic damage in its own right, but also causes nominal interest rates to rise, which disrupts the economy in further ways; and the public expects the government to shield at least some of us, or even all of us, from the effects, causing a massive outlay in government spending. Rising interest rates make mortgages more expensive, which causes further hardship, and also disrupts a finance sector that has grown complacent on low interest rates.

The problem is this. Britain has a deep structural deficit in the trade of manufactured goods. We are heavily dependent on imports for our standard of living, and exports are nowhere near enough to cover this. We now have a substantial trade deficit on energy too, made worse by the Ukraine crisis. We still have a trade surplus on services, but nowhere near enough to cover the gap. Inward investment is sluggish, and anyway broader troubles in the world economy limit the possibilities. This means that the country as a whole has to borrow heavily from abroad – whether this is to fund the national debt or the private sector. Rising interest rates makes that more expensive. Crashing the pound would help exporters, maybe, and inward investment, almost certainly – and since nearly all the debt is denominated in sterling. would not make those debts any harder to maintain. But that would feed through to consumer prices, and destroy the economic strategy of the last few decades of consuming cheap imports.

There is a striking comparison to be made between Britain and Japan. Both are island nations with challenging demographics. Both have an uneasy relationship with their continental neighbours, on whom there is a degree of economic dependence. Japan has long set its face against immigration, an attitude that is prevailing Britain too. Japan has also been suffering economic stagnation, but it is not so obvious that the people living there mind, as economic wellbeing is spread widely. Something like Japan is what many of Britain’s Brexit supporters aspire to. But there is a crucial difference. Japan remains an industrial powerhouse, and produces a substantial trading surplus. They do not depend on inflows from abroad to keep the show on the road. That means the government has a huge amount of flexibility in borrowing money to meet its needs. Abacus economics is dead. It is living proof of the Modern Monetary Theory (MMT) idea that the debate on government deficits and national debt is beside the point. Japan is in the position that Liz Truss seemed to think Britain was in when she promoted her tax-cutting and free-spending budget. But even under MMT consumption cannot outlast production forever, and inflation is admitted as a constraint. That is where Britain now is, and the government has little choice but to bring its budget position under control. The pressure is not extreme, as it has been for countries like Argentina or, in a rather different context, Greece in 2010 – but the trajectory needs to be clear or otherwise market interest rates will rise further than they otherwise would, with difficult repercussions.

That’s for now. But what should the country’s longer term strategy be? Ms Truss, and indeed Mr Sunak, subscribe to vision of what might be called a “buccaneer” strategy. They present a picture of the country being a haven for freewheeling businesses, attracted by low taxes and able to out-manoeuvre over-regulated competitors in Europe and elsewhere. But buccaneering has its dark side – the original buccaneers were licensed pirates, legal in their home domain and criminals elsewhere, after all. Britain would need to develop its already burgeoning function as a haven for grey and even darker money, from kleptocrats and criminals across the globe. The trick to this, as we have learned, is not so much lax laws on such things money laundering, but weak enforcement. Most Brexit supporters would likely connive at such a strategy, if not openly support it – on one condition: that public services are made more effective, and the state pension is improved – they are probably less fussed abut other aspects of welfare spending. This is where the main political battles are going to come in the next few years – as it is far from clear that such things can be maintained without increasing taxes.

Liberals recoil from such a strategy, but they will agree in principle to another strategic objective – that of energy security, and reducing the dependence on fossil fuel imports. There is a disagreement, of course, on whether that means developing the remaining domestic fossil-fuel opportunities. But, in principle at least, most can agree on the development of renewable energy, with the storage and grid upgrades that will be needed alongside it. One thing that helps is that this can largely be financed by foreign borrowing and equity investment – as the linkage of investment to financial returns is easy to make.

If liberals can agree on the need to turbo-charge the development of renewable energy, what alternative can they present to the buccaneer strategy? We can’t go back to being an industrial powerhouse with a strong export industry. That ship has sailed. We can make modest gains, but we can’t reverse more than half a century of decline.

I can’t see a single big idea, but a number of smaller ones might add up to a strategy. The drive for renewables should be tied to a more general mission to decarbonise the economy. This should drive a whole series of investments and reforms that will help renew life generally. The country should aim to ease trade with the European Union, which will mean accepting EU regulation in lots of areas. But we should be wary of relaxing immigration rules. The public seems to be happy with immigration by and large, if it is closely regulated. That means bureaucracy and friction, but in a democracy we have to work within the constraints of public consent. The government should also help develop industries where the country looks internationally competitive. Healthcare is the most promising area – I think the idea of cooperation between the NHS and private entrepreneurs to develop new treatments has much potential. The relatively unified state of health records is an opportunity, though bringing challenges with it. Also public services need to become more effective. That means shifting towards solving problems rather than simply repairing the damage after the event. This in turn means a stronger emphasis on prevention, and getting the various different services working together more closely. It is hard to see how this can work without more localised leadership and accountability – serious decentralisation and devolution. A further idea is political reform – through electoral reform, and reforming the House of Lords. This is as yet a bit of a long shot. For all public discontent about the state of politics, I see little groundswell for changing the system , as the was case in New Zealand in 1993, for example.

But we are going to have to get used to two two things alongside all of this. Taxes will need to rise, and economic growth will continue to be sluggish. This is the opposite to what Ms Truss was trying to achieve. That is not the end of the world. We can still achieve an improved quality of life and an environmentally sustainable way of being. That is a simple consequence of where the country stands as demographic forces assert themselves, and after the country’s mishandling of its industrial legacy over the generations.

The cake has gone: the revenge of Treasury orthodoxy

Boris Johnson promised us that we could have our cake and eat it. So we ate the cake. When his successor, Liz Truss, went to the cupboard to look for it, she found that it was all gone. The transition from the bounty of tax cuts and energy subsidies promised by Ms Truss when she took charge to the austerity being promised just a few weeks later is one the most dramatic policy reversals I have ever seen in Britain.

During her selection campaign for the leadership of the Conservative Party, Ms Truss railed against “Treasury orthodoxy”. This, she said, was responsible for the country’s strangled growth since the financial crash of 2007-09. She knew what she was talking about since she had served as Chief Secretary at the Treasury for a stint in 2017-19. This was a widespread complaint. I heard it made by Lib Dems during the coalition years, especially as many ideas for long-term investment were shut down. The complaint was much more virulent from Labour supporters, for whom “Austerity” was the root of all evil. It is interesting to see these usual suspects being joined by the libertarian right, who have elevated high tax levels to the same heights of evil that the left has for austerity.

It is important to distinguish Treasury orthodoxy from economic orthodoxy – though most people seem to do just this. Treasury types are steeped in economic orthodoxy: you won’t get away with the “lump of labour fallacy” (the idea immigrants, for example, take away people’s jobs) if you talk to one of them. But it is tempered by an older belief, dating back to Gladstone and beyond, in “sound money”. They do not like to see high levels of government borrowing, leading to creditors being able to dictate policy. The divergence between Treasury and economic orthodoxy was especially evident in the coalition government of 2010-15. Many orthodox economists argued that austerity policies were at best overdone, or at worst completely wrong-headed. They suggested that there was significant slack in the economy, and that policies that reduced demand were a self-inflicted wound (whether there was as much slack in the economy as they thought, and whether the austerity policies were as destructive, are questions for economic historians). They produced as evidence more generous US policies at the time, leading to less economic hardship. The Treasury thought otherwise. In 2010 coalition ministers were scared witless by warnings of dire consequences in financial markets if austerity programmes weren’t followed. Both Tory and Lib Dem ministers accepted this basic premise, while quibbling with the details. The previous Labour government under Gordon Brown and Alistair Darling had as well. Almost all serious economic commentators now suggest that this was a serious mistake – and that the market position was not nearly as precarious as suggested.

Doubtless this is what gave Ms Truss the courage to take on the Treasury, though her central idea that tax cuts can be paid for through the growth they stimulate, especially when unemployment is at a record low and inflation on the rise, was a challenge to economic orthodoxy as well. She noted the substantial “headroom” in forecasts by the Office for Budget Responsibility (OBR) earlier in the year – doubtless brought about by stealth tax rises through holding tax thresholds down. She also noted that government debt levels were not as high as other some other big developed economies. So she appointed her close ally Kwasi Kwateng as Chancellor of the Exchequer, and his first act was to sack the leading Treasury civil servant, with talk of replacing him with an outsider.

It fell apart with startling speed. In the popular telling the “Markets” struck back, causing mortgage rates to shoot up. This has wiped out any feelgood factor brought about by tax cuts and energy interventions amongst a key constituency of Conservative voters. The talk about the power of Markets is a convenient shorthand, but oversimplifies things a lot. Media coverage as been very muddled. At first a lot of attention was focused on the pound – which at one point nearly sank to parity with the US dollar. But it was the gilt (government debt) markets that caused the mortgage rate problems. I think this took a lot of people by surprise, including, perhaps, our political leaders. In the common understanding interest rates are determined by the Bank of England, which was not due to meet until early November – so people probably expected any crisis on the mortgage front to approach slowly. In fact Bank of England decisions are only one factor amongst many – and mortgage providers need to look forwards at potential future rises. Then a crisis blew up with the liability matching policies in certain pension funds. I have read two tellings of this crisis. In one the pension funds had been indulging in reckless speculation camouflaged as prudent management of future cash flows; in the other prudent management was caught short by a temporary liquidity crisis dictated by the way certain financial markets are structured. The Bank of England rode to the rescue, but a temporary tiding over of a technical crisis was presented by many as something much broader. The Bank’s attempts to communicate what it was doing and why didn’t really help. Neither did Mr Kwateng’s attempts to shrug the whole thing off.

The muddle made things worse. The pound recovered, but gilt markets have not made life for mortgage providers any easier. But what has now been revealed to the world is what the point of Treasury orthodoxy is. Financial markets are complicated things, and they can affect the public in a number of ways. As with any market, they are the meeting place of people with many different agendas. If mismatches occur they can be destabilised quite easily. The Treasury tries to manage things by making orderly, predictable demands, and not pushing its luck. It builds up a reservoir of confidence which means that it can respond to emergencies. The timing of Ms Truss’s attempted coup could hardly have been worse. Rising inflation, low unemployment (showing limited capacity to expand the economy) and the energy crisis, coming after the trauma of the pandemic and alongside the destabilising effects of the Ukraine war, all pointed to this being a particularly delicate moment. Ms Truss’s attempt to blame the demise of her strategy on the markets is a bit like the Captain of the Titanic blaming the iceberg for the loss of his ship. Except that this was no stray iceberg, the government was steaming full-steam ahead the middle of a known iceberg belt.

Now the government, having destabilised things, is having to work very hard to restore order. Treasury orthodoxy reigns triumphant. The new chief civil servant is an experienced insider; an experienced senior politician has replaced Mr Kwateng as Chancellor; most of the tax cuts have been withdrawn; public spending cuts are back on the agenda; the energy price intervention has been scaled back. There was even talk of not raising the level of the state pension in line with inflation – the Treasury has long hated the so-called “triple lock” on pensions.

The dust hasn’t settled, but the effect of this change is chilling. It isn’t just tax cuts that have been put on ice – but hopes by politicians on the left of raising spending on public services and benefits now look much harder to fulfil. Suddenly Britain looks like a lonely nation living beyond its means in a hostile world. Hard choices lie ahead.

Liz Truss is the Tory Nick Clegg

Nick Clegg

The new Conservative leader and British prime minister, Liz Truss, has endured a spectacular collapse in public approval after only a month in office. Her party’s poll ratings have collapsed, and there is an expectation – unthinkable not long ago – that Labour will win by landslide at the next general election. A lot of people have drawn a parallel with a similar collapse under previous Tory prime minister John Major in 1992, after the pound fell out of the European Exchange Rate Mechanism, shredding his government’s reputation for economic competence. Ms Truss’s misfortune followed her government’s first budget, which rocked financial markets, causing a temporary breakdown, followed by much higher mortgage rates. Mr Major lost to a massive landslide in the subsequent general election, put off for as long as he could, in 1997. Ms Truss has only two years to go.

But the episode also puts me in mind of a similar political collapse, suffered by the Liberal Democrats when they entered a coalition with the Conservatives in 2010, led by Nick Clegg. Their polling support shrank to a fraction, and the party was nearly wiped out in the subsequent general election in 2015, and has only partially recovered since. I was a loyal party member at the time – and I still am. The current machinations by senior and not-so-senior Tories is very familiar. Exhortations that the party could turn things around, that it is all unfair, and other variations on denial – together with searing criticism from others, and a steady membership exodus, followed by the disappearance of most of the party’s council base (this last has yet to happen to the Tories, but it surely will). The public turned hostile; it became part of every current affairs comedian’s contract with the BBC that they should heap derision on the party and its leader. I also remember the personal opprobrium heaped on Nick – who evoked a loathing among many members of the public that he never overcame. He fled to America to make his subsequent career. Ms Truss is suffering the same treatment.

Does Ms Truss deserve this? I hate to see politics descending into such personal abuse. And in some ways she is a refreshing change from Boris Johnson, her predecessor. She is clear and focused. This is a little bit of truth that a lot of the misfortune to mortgage rates would have happened anyway. It is a mark of courage to do unpopular things for the longer-term good. Still, she has no electoral mandate to take the government in the direction she has – and she seemingly fails to understand this. And the precarious nature of financial markets was well known before the budget – which makes its content all the more reckless. Her approach to appointing cabinet ministers – reading loyalty ahead of competence – betrayed a complete lack of political skill.

There are lots of contrasts between Nick Clegg and Ms Truss. Nick was a much abler and more rounded leader. He subsequently took up a senior role with one of the world’s most important companies, Facebook (now Meta), and has held down the role successfully, securing a promotion. Few British politicians from any party have been able to pull off such a feat (the only one I can think of is Labour politician David Miliband, now head of International Rescue; he’s perhaps one of the best prime ministers we never had). It is hard to see Ms Truss being offered a senior management role in anything other than a political think tank. Her clarity and focus would equip her well for a number of middle-management roles, but an absence of market or customer awareness, and a blind spot on risk management, would disqualify her from most serious roles. For all his abilities, Nick could not shake off his collapse in popularity – though his high point, during the 2010 election, was much higher than Ms Truss ever achieved. If he couldn’t turn his fortunes around, what chance has Ms Truss?

There was also a striking contrast in what brought about their undoing. In Nick’s case it was because he broke a firm pledge: to abolish student tuition fees. Ms Truss’s problem was sticking to a very foolish pledge – to deliver tax cuts as soon as she took office, regardless of the cost of government intervention on energy prices. Of course the pledge was made to party members – the public had no say in her elevation. The public sees Ms Truss as ideological and incompetent; they saw Nick as sacrificing his political principles for the status of ministerial office – after he’d promised to be different.

Still, there is something the two have in common: a lack of connection with the public at large. Neither had much in the way of a serious contested public elections on their rise to power. They didn’t have careers as councillors; they achieved their ambitions through appealing to party members instead. Nick first became a member of the European Parliament by getting to the top of the list for a list-based proportional election system; he then got elected to the national parliament by getting selected in a safe Lib Dem seat at the only election, in 2005, when such a thing existed. Ms Truss did have a run at being a councillor (in the London Borough of Greenwich), standing twice before being elected in 2006, and standing down in 2010, when she stood for parliament in far away Norfolk. These council elections were all in different wards – there was no sense of building a serious council career. She was just doing her bit while searching for a safe parliamentary seat. I don’t think either she nor Nick expected that the public would react as deeply as they did to their first steps in power. So far as Nick was concerned, going into a coalition is what politicians in minor parties should do, as happens so often in other countries; the reversal on tuition fees was just one of the compromises you have to make to achieve other objectives. Ms Truss seems to think there would be widespread public support for her vision, where it not for all those silly lobbyists and talking heads. And that you implement policies by declaring your objectives loudly and railroading them through with loyal but inexperienced subordinates, regardless of practical difficulties. In both cases they caused a profound breach of trust, both with specific promises – but more generally with what they had claimed to stand for when originally elected. Such breaches of trust are impossible to come back from.

Apart from the fact that Ms Truss achieved the top job in British politics and Nick didn’t, things look bleaker for Ms Truss. Many ambitious Lib Dems MPs in 2010 suspected that they would only get one shot in government in their careers, but accepted that it would be worth it – though I don’t know whether these included Nick. The Lib Dem parliamentary party remained disciplined, the government lasted a full term of five years, and the party had a pretty decent record of achievements within it. Looking back, the most important of these was turning the corner on the promotion of renewable energy. The Lib Dem pupil premium policy also made a profound difference in education. There were other, negative achievements – vetoing or softening Conservative policies. I am, though, probably alone in thinking that the overall balance on austerity policies was right (as implemented rather than as planned), or at least justified based on what was known at the time – apart from excessive restraint on capital spending, which the party argued against. Against this admittedly modest record, Ms Truss stands to achieve very little of her agenda. Her party is divided; the government’s financial position is weak; she doesn’t have enough time.

One thing I think we can learn from the experiences of Liz Truss and Nick Clegg is that it is dangerous to be led by politicians whose careers are built purely on appealing to party members – and not on direct voter appeal – or even a record of achievement in the world outside politics. What to do? Electoral reform could make things worse if the wrong system were adopted. It is one reason that I favour the single transferable vote system – which avoids this pitfall better than any other. But Britain’s politicos don’t want to change the system that has been the basis of their careers. If there is change – which remains unlikely – it is likely to be for a system that includes a role for party lists, which are just as bad as safe seats in the current system. Still a proportional system would do something to constrain the power of those that reached the top – by forcing compromises between parties. A Truss moment would be nearly impossible, and a Clegg moment probably less shocking.

Meanwhile, political parties should reflect on whether it is wise to let their memberships choose their leaders – which they all do – and especially if they are leading the government at the time. Surely this is best left to MPs?

Russia is exposed as a Potemkin state

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The story goes that when Russian chief minister Grigory Potemkin took Catherine the Great, Empress of Russia, on a tour to the south of her realm, he stage managed the process by co-opting peasants and painting up the villages she passed through to give her a false impression of the prosperity of the area, and her popularity. The expression “Potemkin village” has entered the language. Russia’s assault on Ukraine, launched in February, conjures up a similar image. Much of what we see of Russian power has been set up to give the right appearance. But things don’t actually work.

This was evident from the first days of the war. We were told, and Western experts accepted, that Russia had a modern army capable of quickly overwhelming Ukraine’s ramshackle affair. But Russian troops had not been properly trained; their equipment was not up to standard; their logistics systems could not cope with more than minor movements of troops. The army could produce glitzy videos of troops in action, but it was not up to the real thing.

We are now witnessing another example. Russia’s president, Vladimir Putin, has ordered a partial mobilisation, to provide 300,000 extra troops to complete the campaign. He set out some clear principles for this action: the recruits would have military experience and would be given extra training, certain professions would be protected, and so on. These followed clear Russian laws about who was eligible and how they should be treated. All this has been ignored by the officials trying to implement the orders, who simply focus on providing enough bodies in any way they can, and dispatching them straight to the front without training. The Russian state is incapable of following instructions properly – the systems needed to do so aren’t there. At at the front, Russia’s army is being hollowed out and filled by untrained and unmotivated recruits – even supposedly elite units. Meanwhile the impact of the mobilisation on Russia’s productive workforce has been doubled by people fleeing in fear of being drafted – unable to accept assurances that they aren’t at risk.

I last commented on the war towards the end of August. At the time there seemed to be a bit of a stalemate. Russian attacks in the east had run out of steam. Ukraine’s much talked-of offensive in the south looked rather underwhelming. But a couple of weeks later, the picture changed dramatically. Ukraine launched an offensive in the north-east, in Kharkiv oblast, and caught the Russians on the hop. The Russians were routed and Ukraine recovered swathes of territory. Since then Ukraine’s progress has slowed there, but it continues. They recaptured the significant town of Lyman last weekend and have made further advances since. In the south, things have been much less clear. Ukraine had been making slow but costly progress. They were using American and European supplied advanced artillery and rocket systems to degrade Russian logistics – but progress in doing so was slower than hoped – the Russians have responded with dispersal tactics that have proved quite effective. But more rapid progress has been reported in the last few days. Ukraine hopes to isolate the Russian forces around Kherson city and force their retreat or surrender, without destructive street fighting, and complete the recapture of all territory to the west of the great Dnieper river, before the expected autumn rains.

Ukraine now has two big advantages. The first is that Russian frontline troops are badly degraded. Their artillery still seems to be effective, and remains their battle-winning edge, though Ukraine’s use of Western artillery technology has redressed some of this advantage. The second advantage is that of a central position. It is much easier for Ukraine to switch resources between the various fronts than it is for Russia. Russia can’t deploy decisive concentrations of artillery everywhere, so Ukraine can attack areas where Russia is weaker. The military situation seems to be deteriorating rapidly for the Russians – and feeding untrained recruits into battle will make little difference.

The Russian leadership is now getting more desperate. The original intention was that the operation would not have a major adverse impact on the Russian public. One Russian apparently put it something like this: “It’s like de-fleaing your cat. Easy for you; painful for the cat; fatal for the flea.” The mobilisation changes all that. Now the war is serious for the public, and that has undermined the regime’s popularity. Meanwhile supporters of the war are becoming increasingly critical of the leadership, and the regime does not know how to handle this. The situation is getting harder for the regime to manage.

But does Mr Putin have an ace up his sleeve? He has invested a lot in the country’s nuclear arsenal, and he is desperate to show that this investment has clear benefits. Can he use nuclear weapons to tip the balance back? He is probably not too worried about the dire warnings coming out of the US. He has the means to respond to a direct escalation by them, by threat of more nuclear weapons. And as for sanctions, what more can the West do? And would it really lead to a loss of passive support from most of the rest of the world, including China and India? If they aren’t outraged by the trampling of Ukraine’s territorial integrity, will anything short of a direct threat worry them?

But how useful would nuclear weapons actually be? Russian forces patently aren’t equipped to deal with a contaminated battlefield. Firing weapons at Ukrainian logistics centres would destroy whatever remains of the Russian narrative of avoiding civilian deaths. And if they win, do they really want to clear the mess up? And if they don’t, what’s the point? Gradually people are steeling themselves for some form of nuclear demonstration.

That would change things in unpredictable ways. But we might pause to ask how Russia got itself into this mess. Post-communist Russia is a joint enterprise between its intelligence services and organised crime. Mr Putin seems to have had a soft spot for criminals from quite early. Doubtless the admired the way they could get things done – as well as they opportunities for personal enrichment they offered. It was a good fit with the shadowy, menacing way in which the intelligence services, his own powerbase, like to work. But this combination destroys the rule of law, and undermines institutions, including most of the armed services. It creates the Potemkin state. (In the metaphorical sense – actually the real Potemkin was an effective administrator, overseeing one of the more positive periods in his country’s history. Potemkin did not create a Potemkin state).

Meanwhile, as his failings become ever more exposed, Mr Putin gets more desperate. His most recent gesture was the annexation of four regions of Ukraine (in a ration to Crimea, already annexed), though Russia won’t say what the boundaries of the annexed states are. The desperation brings danger to the rest of the world. But it also makes compromise harder to envisage. We are moving into an even scarier phase.