Month: January 2024

The Conservatives are unpopular because power has forced them to make hard choices

Bing Image Creator is much easier than trawling public domain photos, though it’s quite hard to realise your initial vision. This is supposed to represent the collapsing Conservative coalition – but it looks more robust than the reality

I have discovered Matt Goodwin. Of course I have long known about him, as he is frequently quoted in articles on British politics. He started as an objective-sounding commentator on the rise of British populism, and has been slowly morphing into an partisan advocate for it. But he still has a certain respect for evidence, unlike many of his fellow advocates. Which means that it is more useful to read and digest his output, and not dismiss it out of hand. Recently a friend quoted one of his Substack posts at length, and this was interesting enough for me to subscribe to his feed, though not enough to be a paid subscriber, which limits my access somewhat.

The post quoted talks about the death of the British Conservative Party. Most political commentators assume that the party will recover to some extent before the forthcoming General Election. This has been the pattern for pretty much for every governing party in Britain that had been lagging the opposition in the year before an election. Personally I am not so sure this time, and Mr Goodwin helps me to sustain that doubt – albeit that we have very different ideas about where this should lead. He thinks that nationalist populism will be reborn and triumphant in a new guise; I think that it will usher in a long period of mediocre Labour-led government.

Mr Goodwin’s argument is that the Conservatives won their substantial majority in December 2019 by “leaning in” to the populist trend evident elsewhere in the developed world, and mobilising a discontented group of voters angry at the level of immigration, the loss of national sovereignty and “woke” values infecting state institutions. These voters backed Brexit, and, he suggests, form a majority in 60-80% of parliamentary seats – evidenced, I suppose, by the referendum result in 2016 (whose parliamentary majority was much higher than its voting majority). This was main reason for the Tory victory, rather than the personality of the party leader at the time, Boris Johnson, or fear of the Labour leader, Jeremy Corbyn, he says. However, since that election, Mr Goodwin argues, the Conservative leadership have completely failed to live up to the expectations of these voters. Mr Johnson proved lazy and incompetent, filling his Cabinet with lacklustre loyalists. Subsequent leaders, Liz Truss and Rishi Sunak, have been out of sympathy with the populist project, in their different ways. Instead they listened to business lobbyists “addicted to cheap labour”, and to the liberal SW1 elite. The current government has no coherent ideology, and continues to be liberal on immigration in practice, if not in rhetoric. Whether this is a matter of their own policy preferences or sheer incompetence doesn’t really matter. The newly motivated 2019 voters have been betrayed, and will not be brought back to vote for the party, but will either stay at home or vote for the Reform party. It gets worse. The oncoming electoral disaster awaiting the party will wipe out all those MPs with populist sympathies, leaving the more liberal part of the coalition in charge – who will then blame the populists, and fail to rebuild the winning coalition. Or so Mr Goodwin suggests.

Mr Goodwin feels that the Tories have squandered an opportunity to drive forward a government true to the principles of low immigration and ultra-nationalism. It is worth developing that thought a little. The narrative prevalent in 2019 was that restricted immigration would boost wages for lower-skilled workers and enabled a redistribution towards many of the left-behind groups. This isn’t nonsense. A couple of years ago our local refuse collectors got a massive pay rise because restrictions to foreign lorry drivers had drastically increased pay for these workers. This was an example of this idea in action and working. So why has the government used the inflation crisis as an opportunity to squeeze public sector pay rather than try to draw in more local workers with more generous pay? It is not just businesses that are addicted to cheap immigrant labour, but public services are too. Generous public sector pay settlements in areas formerly reliant on immigrant labour would be a sign that the government believed their narrative. But, of course, it is in fact much harder than that.

I haven’t read much of Mr Goodwin’s work, but his narrative seems to be that a large majority of British voters are sympathetic to conservative values, especially over immigration and national sovereignty. These voters are being ignored or patronised by an “elite” of about 25% of the country, mainly university graduates, who have liberal values, and who control almost all the state institutions and big business. This dynamic is present across the Western world and is why populist movements of the right, from Donald Trump in the US to Marine Le Pen in France, and the AfD in Germany are gaining popularity. This narrative clearly touches on a grain of truth – but there are many problems with it.

Doubtless answers to polling questions and probing in focus groups can demonstrate majorities of the public supporting certain conservative views, and scepticism over immigration in particular. But turning these attitudes into both an election-winning coalition of voters, and keeping faith with them once in power, is a much more complicated business than Mr Goodwin allows. Those majorities can vanish very easily once the harder choices behind them are exposed. The 2016 Brexit referendum majority was a small one; populists have repeatedly fallen at the last hurdle in Europe – and their victories often aren’t what they seem. British media often report that the populist Geert Wilders “won” last year’s election in the Netherlands – but what they mean is that his party received more votes than any other. It was still less than 25% of the total vote, scarcely more than the serial British losers, the Liberal Democrats, get in a good year. Other winners, such as the populist coalition led by Giorgia Meloni in Italy only succeeded by making some major compromises to establishment politics – notably by dropping opposition to the Euro.

A particular part of the problem is that a critical part of the conservative coalition is formed by the mass affluent – people with a significant stake in financial assets such as property, pension schemes and other investments. Property investment are typically financed by mortgages. Shortly after the Brexit referendum I attended an event put on by an investment manager for the mass affluent (I too am part of this group, and I was one of their clients); I was taken aback that the overwhelming majority of people in the audience were pro-Brexit. These people were not the left-behind working classes of the Brexit legend. The mass affluent, and especially those with mortgages, have a huge stake in financial stability. Fulfilling the anti-immigration dream of rising wages for lower-skilled workers means letting inflation rip, at least in the short term. It is a wealth redistribution exercise, and inflation is one of the classic mechanisms by which such redistribution takes place. People imagine that a tiny mega-rich minority take the strain of wealth redistribution – in fact the pain goes much, much wider. Conservatives may be insouciant about the effect of conservative policies on economic growth – but that is largely because they assume that somebody else will face the pain. In particular high inflation leads to higher nominal interest rates, and that can cause the dreams of newer property owners to collapse, as their mortgage payments become unaffordable, and their property values plunge into negative equity. And those without mortgages will still see the real value of their assets sinking. High inflation is one of the reasons that Americans think their economy is in terrible shape, and blame President Biden for it – in spite of otherwise very good statistics. A conservative government can’t afford to let inflation get out of hand. Hence the tough line the present government is taking on public sector pay and the softer line on immigration.

In these circumstances it is hardly surprising that the Conservatives fell apart after 2019. They needed a strong dose of economic good luck to come anywhere close to fulfilling their promises. Instead they had the opposite – the Covid pandemic followed by the escalation in the costs of fossil fuels. Even a competent government would have found itself having to make impossible choices. It was Donald Trump’s good luck that he lost power in 2020, before the inflation surge took off. The main reason why Britain’s Conservatives are doing so badly while other conservative movements are doing so much better is that they are in power and the others aren’t, and therefore they cannot escape the blame for the economic mess. Their incompetence just compounds the problem.

The problem for all conservative populist movements is how to reconcile their hostility to immigration and free trade, and worship of national sovereignty, with maintaining a financially stable economy. This is not impossible – the Liberal Democratic Party in Japan has succeeded in just such an accomplishment – but it requires the cooption of those hated elites, who bring with them the administrative competence required, and not hounding them out of government. The Conservatives after Brexit did have an opportunity, but by selecting Boris Johnson as their leader in 2019, they threw away that chance. One of his first moves was expel almost all his most experienced MPs who had demonstrated administrative competence. He demanded that loyalty was the only prerequisite for ministerial office.

This is yet another example of a wider political lesson. Electoral success is gained by stitching together coalitions of voters who can agree on some things, but who also have conflicting vested interests. The creation of these coalitions, and holding them together in power is where the skills of political leadership lie. Elements of a coalition will aways end up feeling let down or taken for granted. This has happened with unusual speed to the Conservatives after 2019.

What of the future? Mr Goodwin is wrong to suggest (as I think he does) that a stable electoral coalition can be built on a radical populist base, i.e. based on very strict limits to immigration. But what is surely true is that no stable governing coalition can be put together without the support of conservative voters. The current Labour leadership clearly understands this, though many of its activists do not.

What of the Conservative Party? The odds are surely that it will reform and survive after losing the next election. A radical rival, based on the Reform Party perhaps, would undermine it but not destroy it, unless a particularly skilled leader emerges from the shadows that understands that it must ultimately make compromises. That leader is not Nigel Farage, Reform’s most successful leader, who effectively owns Reform. And even if the party goes down to a heavy defeat, unseating its most radical MPs, I don’t see that the rump party will reject radicalism. Too many of its centrist denizens have left, and its activist base remains radical. A long period in the wilderness beckons. Probably.

That bodes well for Labour, in spite of its evident mediocrity. But it too could be ruined by economic bad luck. There may yet be an opportunity for the 2019 conservative coalition to come back quicker than anybody expects. Opposition is much easier than government, after all.

The Post Office scandal shows the limits of nationalisation

More fun from the Bing image creator. Post Office management about to conduct a branch audit. Actually I told Bing to portray gangsters…

The big British political news of 2024 so far has been the scandal of the Post Office’s persecution of sub-postmasters from the late 1990s on, based on erroneous reports from its Horizon system. The scandal itself wasn’t news; it had been making a number of people’s blood boil for years (including mine), but no politician in government felt the need to deal with it with any urgency, and all tried to manage it through the organisation’s dysfunctional management. An inquiry had been set up – the classic British method for kicking institutional problems into the long grass. But a television drama over the Christmas holiday caught the public imagination, and at last pushed it to the level of public attention it has deserved for years.

I personally still don’t understand what went wrong. As an accountant who has had quite a bit of experience unravelling knotty problems, I have not been able to get any sort of clarity. The drama did help a bit here – as the previous press reporting was extremely uninformative as to what the problem with the system actually was. Just what were the deficits that the sub-postmasters were being asked to fund? Usually these should fall into one of three categories: missing sales, false expenses, or missing assets. This doesn’t seem to be any of these – but just muddle. The Horizon system doesn’t seem to have been properly integrated with the accounting systems, and appears to have lacked basic accounting controls. This is not so uncommon with systems designed by computer programmers rather than accountants. But the system does not appear to have been adequately managed or audited by the Post Office’s accountants. The suggestion made by one of the characters in the drama was that the differences were parked in a suspense account, which was then not properly interrogated or investigated. That may not make much sense to my readers, but it does to me. As an auditor most of the big errors I have found arise from pulling apart suspense accounts.

Meanwhile responsibility for managing the problem seems to have been split between senior managers unable to grasp the detail, and junior auditors not given a wide enough scope to explore what the problems actually were – they were just hired bullies. There was a missing middle. But the senior managers should have asked questions as problems started to emerge; as should the investigators. Instead they swept the problems under the carpet, assuming that people raising concerns were just trouble-makers. People have a natural tendency to compartmentalise their lives, and set boundaries to the sort of things they worry about. This is one of the leading causes of organisational dysfunction as those boundaries always leave gaps (as well as overlaps). Still, senior managers should be alive to those sorts of risks and much of the Post Office managers’ behaviour was clearly unethical. Injustice to individuals should not be sacrificed to maintaining an organisation’s reputation. The propagation of untruths is not quite the black and white issue we might like to think – but the Post Office managers clearly went into the black zone far too often.

But such a lack of ethics in senior management is extremely common. This transcends time (think of the Dreyfus scandal in the 19th Century), and culture (problems are at least as bad in China and India, for example; would you believe what an Iranian government spokesman said?). It affects all types of organisation: government, commercial and religious (think of child abuse scandals in various churches). Having said that, I haven’t seen it, or not in extreme, in any of the commercial, public or political organisations I have worked with. There is always a defensive first reaction to bad news; but what happens next is more telling, and here things were better. But those organisations have almost all been relatively small; I have worked in two multinational groups, however, although in one of there were ethical questions haunting senior executives, they didn’t last long. That’s not to say these organisations were perfect – it’s just to say that I didn’t witness the extremes evident in the Post Office, and often witnessed its opposite – the owning up to problems and mistakes.

But what tilts an organisation towards ethical conduct? Prevailing culture in society clearly helps. Most developed countries have a bit of a head start there. I don’t think there is anything special about Western culture here, even though it generally prevails there. All cultures know what strong ethical standards are (think of Confucianism in China, for example). The more ethical conduct becomes the expected norm in a society, the better. Accountability is clearly critical. If it is easy to sweep things under the carpet, and if you are confident that you will never be scrutinised aggressively, then the temptation to do so is often irresistible. It is easy to persuade yourself that you are protecting something more important, and that it is all for the greater good. But accountability comes with a certain precariousness amongst senior leadership; the more entrenched, the less accountable. That precariousness was visible in all the organisations I have worked for. But in the Post Office it seems to have been lacking. It was a publicly owned organisation, accountable to, in theory, everybody but in fact nobody. It had extraordinary control over the information required to make judgements. The politicians to whom they were nominally accountable are good at some types of scrutiny, but not the oversight of large, complex organisations, and still less the operation of their IT and accounting systems.

This is a huge problem with all nationalised industries. Being accountable is to a large extent a choice made by the people running those organisations. I have witnessed this at first hand as a school governor. Fortunately all the headteachers I have worked with thought accountability was a good thing, and accepted scrutiny, even when it got annoying. But I have seen cases of schools where this is not the case, and where the governors were bypassed and flanneled – and looked woefully ineffective. This is less of problem with commercial entities, because they are judged on commercial success, which is hard to fake, or not for long. Public organisations seem to have a degree of political protection that most commercial organisations do not.

This is a problem for the sort of left-wing narrative that suggests that capitalism has failed, and that the solution to any given market failure, especially in public utilities, is nationalisation. They are often right to point out the failures of commercial organisations, such as Britain’s water or rail companies. They are wrong if they think that nationalised organisations will be any better. They are often worse. Water companies are accused of milking their assets to pay fat dividends to investors instead of investing in infrastructure. And yet tight public Treasury management has a similar practical effect, with holders of public debt being the beneficiaries. Perhaps the division of the spoils would be fairer, but it won’t stop the under-investment. The nationalisation of the water companies was undertaken in the first place to increase the level of investment – which it did.

There is no easy answer. Public services are usually natural monopolies, which often bring out the worst in capitalism. But there is no fool-proof way to make public organisations properly accountable.The answer is surely some sort of messy mix private contracts, regulation and intelligent structure.

Meanwhile, Post Office culture looks so rotten that it surely needs to be wound up and replaced by something with better organisational design and stronger governance.

Britain is not Japan. Abenomics would stoke inflation

I asked Bing Image Creator to give me a picture of shoppers in an English town buying foreign goods. This is one of the four results. Me neither.

Somewhere over the Christmas holiday I heard on BBC Radio 4 a very authoritative gentleman suggesting that Britain should copy Japan’s economic policies. Alas I didn’t catch who it was, and can’t trace him. I think he was on the World at One, but these days the BBC doesn’t let you search past programmes for particular items. Anyway, it is an excellent illustration of the point that I was making about the British economy a couple of posts ago. It’s worth explaining why he is so wrong. I suspected that the gentleman was a graduate of PPE at Oxford, like former Prime Minister Liz Truss: a degree course that equips its subjects to sound plausible when talking about economic policy, without necessarily grasping even the basics of the subject. Ms Truss did not seem to realise that reducing inflation meant limiting demand.

The particular set of Japanese policies the interviewee referred to dates from a number of years back, and was advocated by the late Japanese Prime Minister Shinzo Abe, and is often referred to as Abenomics. He himself called his approach as the “three arrows”. This was based on the ancient wisdom that while it is easy to break the shaft of a single arrow, it is hard to break the shafts of three arrows bound together. His three arrows were monetary policy (ultra low interest rates supported by Quantitive Easing (QE), i.e. the buying of government bonds by the central bank), fiscal policy (extensive infrastructure investment funded by budget deficits) and supply-side reforms. All these policies were mutually reinforcing. Supply side reforms were required to expand the capacity of the economy, fiscal policy to ensure that aggregate demand met this this expanded capacity, while loose monetary policy made the large government budget deficits implied by this sustainable. Without all three strands of policy, there would be failure. Japan had endured many years of economic stagnation, and Abenomics was an elegant and coherent approach to this – more than can be said for British policy economic policy since 2010, when the different policy levers often seemed to work against each other.

The interviewee did advocate one point of departure from Abenomics. When explaining supply side reforms, he advocated three “Is”. The first of these was “investment” – I can’t remember what the other two were (perhaps “institutions” was another). Investment was not a focus of Abenomics. Fiscal policy was directed at public investment, admittedly, but there was little economic coherence to this – it. was mostly about the dispensation of political favours (“bridges to nowhere”) – and the desired economic impact was to raise aggregate demand, not to expand economic capacity. Supply side reforms were aimed at non-financial barriers that were holding the economy back, such as the low rate of employment of women, and not investment.

So what’s wrong with all this in the British context, skating over its mediocre results in Japan itself? Japan was, and is, in a very different economic place. It has a robust industrial base which routinely delivers export surpluses, in spite of having to import raw materials and energy. It has a high rate of domestic savings (in other words domestic consumption is much less than income). Investment is plentiful. But it has all manner of market inefficiencies due to conservative business practices and cultural mores (for example severe prejudice against working women). Contrast this with Britain: its industrial base is comparatively weak, delivering no trade surplus so far this century; the private savings rate is low; investment is weak; but business practices, regulations and social mores are as conducive to economic efficiency as they are anywhere in the world – with a high rate of overall employment, for example. Both countries share grim demographic trends, with a reducing ratio of people of working age – though Britain has been mitigating this with immigration on a scale that Japan doesn’t.

What ails Britain? Pretty much everybody seems to agree that the country lags other developed countries, though whether you compare with America or with Europe depends on your politics. Apart from the lacklustre growth record since 2007, the main evidence is poor comparative statistics on productivity. A lot of the analysis is very shallow, however. Even many academic economists who should know better are susceptible to the fallacy of composition. While they quickly recognise that national decisions on budgeting and demand management are not the sum of individual household budgets – and what would be right for a household would not be right for the country as a whole – they fail to see the same thing on the supply side. They often talk of the country’s production side as if it is a single business (“UK plc”), but that is grossly misleading.

For a start, the supply side of the economy is very heterogeneous. Computer factories are highly productive; hospitals are the opposite. It doesn’t follow that we would be better off if we closed our hospitals and replaced them with computer factories. Furthermore, if individual businesses become more efficient, it also does not follow that this translates into the whole economy doing so. That depends on what those individual businesses do with their extra efficiency. They might expand production, perhaps helping to expand the economy as a whole – provided that there is latent demand for their product. If this happens there may be a virtuous circle that helps the whole economy grow. Or they might just keep production levels steady and sack some workers, paying extra dividends to investors who use it to invest in other businesses. Or the directors may pay themselves more in bonuses to spend on personal trainers, luxury goods, and other things where low productivity is the essence. Overall there is a well-established pattern, however, referred to by economists as the Baumol effect. As productivity advances in some sectors of the economy, lower productivity industries come to occupy a higher proportion of the economy as a whole. The balance of wealth creation (highly productive industry) to wealth realisation (the part of the economy that prioritises self-actualisation and typically has a high human content – i.e. low productivity) shifts towards the latter. What’s the point of being rich if you can’t access decent healthcare, drive around in Bentleys or eat organic food?

The problem for Britain is that the overall mix of its economy is out of kilter. It imports a disproportionate share of the goods and services where productivity is very high, while producing too much of the goods and (mainly) services that are critical to quality of life, but where productivity is low, and export potential is much weaker. The answer isn’t to try and raise the productivity of the latter goods, as this will tend to kill the quality. It into rebalance the production side of the economy towards high productivity goods that can be exported. There is another way of looking at this problem: it is that British consumption is too high. We are living beyond our means, importing more than we export. Consuming less would give the supply side of the economy the chance to rebalance in favour of exports. This is the opposite problem to Japan, where aggregate demand tends to be too low for economic efficiency. In Britain there needs be more private saving and more investment. In Japan it is the opposite.

So Abenomics would not work here. Looser fiscal policy would push us into inflation. Loose monetary policy would simply build speculative bubbles. Supply side reform would not make enough difference, though doubtless there are some useful things to do.

But the interviewee was right about one thing: the key to progress in Britain is greatly increased investment. Any move to highly productive, high exporting businesses will entail substantial investment. What are these businesses? Basic economics teaches us that these should focus on areas where the country has a comparative advantage – but that is a very slippery thing to identify. We shouldn’t be chasing a past golden age, or trying to directly copy other successful economies. If you care to look, there are areas of promise – for example life sciences, especially if the country can tap into NHS patient data. The government, at least does seem to appreciate this – it talks about building the industries of the future. But it struggles to deliver the right economic conditions to generate the level of investment required. There are not enough private savings to fund the business investment required; too much of what there is disappears into government debt – pushed that way by conservative regulation.

This points to a different three arrows to those advocated by Mr Abe. We need to incentivise more equity investment in businesses with export potential – especially if these are based outside London and the South East. Much of this must be led locally by regional and local governments, able to raise their own revenues. Pension regulations need to be overhauled. Second we need a much tighter fiscal policy in order to damp down private demand and keep inflation in check – this will consist of higher taxes and more efficient government (e.g. coherent public services that solve problems rather than passing the buck). If the public won’t save more of their own volition, then the enforced saving of higher taxes has to do the job. This would then give the government space to kick-start investment and tackle bottlenecks. Third monetary policy should primarily be focused on creating a healthy climate for savers, and ensuring financial stability. That will surely mean higher interest rates.

No politicians can advocate steps two and three of this programme. But the first part is near political consensus – and we could find that it drags fiscal and monetary policy in its wake. British policy usually advances by muddle. It is possible that the country will muddle along in the right direction. That is the best we can hope for.