Matthew – Page 33 – thinking liberal

Household debt: the slowly developing crisis of capitalism

This week there is much debate on whether the Bank of England or the US Federal Reserve should raise interest rates from their current rock-bottom level. Behind this lies an important debate on the future of our economic system. A crisis, arising from high levels of household debt, is in the making.

Let’s set this in some sort of context. In the 1950s and 1960s levels of household borrowing (that is mortgages, car loans, consumer debt and such) were strictly managed, in a system designed to ensure financial stability as part of the global Bretton Woods system of managed exchange rates. This era is often viewed as something of a golden age by people on the left, as there was steady growth across all levels of income, and high levels of social mobility. There is a tendency to attribute this to the Keynesian consensus, of which the Bretton Woods system was a part. In fact it also had a lot to do with the explosion of consumer goods industries which set in motion a virtuous circle of job creation and increased household consumption.

By the 1970s this system had broken down. The Bretton Woods system collapsed as the United States sought to finance the Vietnam war without raising taxes. We entered the world of floating exchange rates, which allowed much greater freedom for both public and private sectors to borrow money. Middle East tensions saw a spectacular rise in oil prices, which disrupted developed world industries. The consumer boom started to reach saturation, and growing productivity halted the job creation machine. Much heavy industry, such as coal-mining, and steel production, became obsolete, along with other job-rich industries like textiles. Keynesian economic management simply led to inflation while unemployment continued to rise.

Enter the neoliberal era, starting in the 1980s. Governments embraced the freer financial system. Consumer demand was now sustained by growing levels of household borrowing. Alongside this came an expansion of world trade. Developed countries bought growing amounts of goods from developing economies in Asia; the first wave were the “Asian Tigers”, especially South Korea and Taiwan; these were followed by the giants of China and India. This expanded trade reduced prices for consumer goods, and allowed a period of steady, if somewhat uneven, income growth in the developed economies. Slowly the developed economies reshaped themselves to a combination of highly productive high technology jobs, and a mass of low productivity service jobs, especially in healthcare. But the uneven nature of income growth, sustained by household borrowing was creating strains by the mid 2000s. In Britain household debt had increased from about 50% of national income in 1980 to 160% in 2007.

Then the great financial crisis struck in 2007, reaching its climax in 2009. This was only indirectly linked to high levels of household debt. The crisis mostly arose because the finance industry was allowed to grow in a very unstable way. This gave the illusion of growth, especially in Britain, in the years before 2007, only for the awful truth to be revealed when the government had to bail the system out. By and large, that source of instability has been fixed. But meanwhile globalisation as a source of growth for the developed world has run its course, while increasing productivity has become like running up a down escalator. Improvements in one area of the economy are most likely undermined by the creation of low productivity jobs in another, in a process economists call the Baumol effect. We are stuck in an era of low economic growth in the developed world.

Which is why some people are starting to worry about levels of household debt. Since the crisis household debt in Britain has been bumping along at about 140% of income, and it has been trending up in the last two years. But people’s capacity to repay debt is weakening. Back in the 1980s it was assumed that rising incomes would make debt more affordable. This is plainly not the case.

A further risk factor is that central bank interest rates are rock bottom. These interest rates are not the same as what is charged to real people and businesses (something we learned during the crisis, when the central bank cut interest rates, but most consumer interest rates went up). But it doesn’t look as if the interest rates people pay are going to get any lower, and so debt become more affordable. In the past central bankers could help alleviate crises by cutting interest rates, but now they have run out of road.

A third risk factor is asset prices: the price of property, shares and bonds. All three look high by objective measures, and so could fall. The process by which asset prices are set is complex and mysterious. But if assets are sold to unwind debt, then prices are liable to tumble.

Stagnant incomes; interest rates that can’t be cut; asset prices that look too high. This is a toxic brew. Some people hope that by raising interest rates gradually, we can slowly normalise the financial system, with overall levels of debt stabilising or even falling. Others fear that any rise in central bank rates will trigger a downward spiral.

But we need to understand that wider perspective. The neoliberal system has become unsustainable, and developed countries (especially the British and American ones that embraced it so wholeheartedly) need some fresh thinking.

One point should be clear, but still remains under-appreciated. Levels of private debt need to fall, and the safest route to doing so, without a disastrous collapse in demand, is for public debt to replace it. In other words we should not be so worried about budget deficits and national debt. However government spending needs to focused on things that will support the transition to something more stable, rather than just propping up structures that will be unsustainable in the long run. Ultimately national debt can be unsustainable too (though just when that point is reached is very much a matter of context; Japan has public debt of 200% of income without much sign of trouble). This is a national debate we badly need to have.

A second point also seems quite clear to me: asset prices must fall. This includes property, shares and bonds. This is required to correct some of the toxic inequalities of wealth. That will clearly create hardships and problems, but the government must stand ready to tackle these. Putting off the evil day will not help. That is why I think that central banks need to start the process of raising interest rates.

And a third point is that we need some serious policy ideas on how to tackle the issue of low pay for low-productivity jobs. It is no use hoping that productivity is going to resume the steady growth it saw in the later 20th Century. The forces that drove that – automation of manufacturing, and globalisation – are played out. In my view that means a much bigger role for the state in supporting society – but not by an unaccountable and out of touch central government.

These are radical changes. History teaches us that such radical change only comes from crises. There will be a new economic crisis. The only question is when, and whether our leaders will be intellectually prepared to manage its aftermath.

Universal Credit is a bad idea badly implemented

Recently I complained about how government incompetence was now routine. One example of this is the government’s reform of benefits, known as Universal Credit. It is a particularly good example of what I was talking about. It is a misconceived idea, poorly executed.

Interestingly, the political conventional wisdom is that Universal Credit is a sound idea, but lamentably executed. And yet problems with execution usually reflect problems of design. Universal Credit was originally conceived by the Coalition government’s Work and Pensions Secretary, Iain Duncan Smith (known as IDS). It is designed to replace a series of benefits, including unemployment benefit, tax credits for those on low incomes, and housing benefit to help those with low incomes pay their rent. The idea is that the level of benefit is scaled back as income rises, so that it is always worth a claimant’s while to take a job and increase their hours or rate of pay. Previously many of these benefits (though not tax credits) had a cliff-edge effect: if your income exceeded a threshold then you lost all of your benefit. It was sold as a simplification that improved incentives for people to be self-sufficient, and welcomed across the political spectrum. But it is only simple in the sense that it is relatively easy to understand what your entitlement is if you know your income. There is some law of government which runs that there is nothing more complicated than a simplification.

The problem is knowing what a claimant’s income actually is at any point in time and therefore how much they should get. This faces two problems. First is that claimants are by definition poor and struggle to manage cash flow. Keeping them waiting for their money while you work things out is not a good idea; paying them an advance runs into difficulty if the advance is too high and so the clawback becomes onerous – an issue that led to notorious problems for Labour’s tax credit system. The second problem is a complete lack of trust: the idea that claimants should report their own income would not be taken seriously by any politician – probably with some reason, though the contrast with the way better off people are treated is striking; the benefit had to be linked to hard data on income. IDS’s answer to this was to link the information gathering to systems for Pay As You Earn (PAYE) for administering income tax and national insurance deducted at source. But this was a highly complex undertaking, and, since mostly PAYE works on a monthly cycle, still leaves a six-week wait for new claimants, and a monthly payment cycle, for people used to budgeting by the week.

The complexities associated with this should have been obvious from the outset, but IDS is a particularly ideological and obstinate character, and refused to accept the scale of the problems. Implementation deadlines kept being put back. When he resigned last year, I predicted that Universal Credit would have to be killed off, along with the fact that Theresa May would be the next Prime Minister. But although Mrs May is now PM, Universal Credit lives on. But the six week wait and monthly cycle are now becoming a hot political topic. A weak government will have to give ground, and doubtless a fudge is in the works. But that fudge will lead to further difficulties.

That’s not the only problem with Universal Credit. I haven’t mentioned issues that arise with self-employed people, of which there are increasing numbers amongst low income earners (known as the gig economy). Another issue is not with the fundamental design, but the way in which the government has turned the relatively gentle withdrawal of benefit into something much sharper, undermining the incentives for people to increase income. This was part of the government’s promise to reduce the costs of welfare. That is another aspect of the self-defeating nature of austerity – savings that build up future costs.

But it is the administrative architecture that is the real problem with the benefit, and why it will never work satisfactorily. The DWP wants a giant database for everybody with all the real time information on it that you might need to administer tax, benefits and any other entitlements, which can then be automated. This is a wildly impractical idea, but promoted by IT consultants on the basis that they will be able to get out with their fees long before the inevitable collapse. To be fair, I suspect that many IT professionals are just as deluded about the capabilities of IT as the shallow think-tankers who promote this sort of thinking in government. Even in a world of massively more capable IT, trying to get accurate, real-time data on incomes in a modern, free and diverse economy is an impossibility.

Are there other approaches? The US operates a rather similar idea in its tax credit system. This is based on the annual filing of tax returns by all citizens. This means that any amount owing comes back as an annual payment – something that makes the current discomfort with six-week waits and monthly payment cycles look laughable. Poorer citizens have to borrow against the expected credit, inviting high financing costs. But whatever the virtues of the American approach, it is incompatible with the way the current British tax system works. We deduct tax as much as possible at source, and tax free allowances scoop up a host of small payments that would otherwise be within scope. Only a minority of citizens have to file tax returns, with all the hassle and expense this entails. Extending Self Assessment (as it is known) to the whole population is not an inviting prospect – though the system is much simpler than its American equivalent.

So what to do? A popular idea on the left is to replace universal credit with a universal basic income to which everybody is entitled – so eliminating the need to gather data on incomes. The problem here is that it would require a big expansion of tax if this income is going to be at the level of maximum universal credit (up to £3,800 per year). My back of the envelope calculation is that the cost would be about £200bn per annum (excluding pensioners) – about the same as the entire income tax take. This is not impossible: overall tax receipts are currently £700bn, and a good proportion is being paid out already (especially if you include the tax free allowance). But it brings with it a host of issues around consent and enforcement. And would that level of income really be enough?

The alternative is to move away from these centralised, universal systems to ones that are more piecemeal and community-oriented. That would mean that each local area would need to work out its own system for alleviating poverty, including social housing, and job guarantees as well as cash benefits. All this to be administered by one-stop-shops that are able to deal with each person’s needs in the round.

But that would require such a radical change of thinking that I cannot see any sign of it happening. Our politicians, and political activists generally, are addicted to creating giant, universal systems administered through online portals, that have failure designed into them.

What does the new data protection law say about British politics?

A new fear is quietly stalking the land, haunting administrators of businesses, charities, schools and even political parties. It is called the EU General Data Protection Regulation 2016 (GPDR). It replaces our old friend the Data Protection Act 1998 with a set of regulations that are much more onerous. The usual experts are going back and forth gleefully stoking up fear, no doubt in the hope of consultancy fees and demand for training courses. But even allowing for their exaggerations, the change is significant. The politicians, meanwhile, are nowhere to be seen.

This is information politics in action. Loyal readers of this blog will know that I think that information politics should be, and will be, one of the most critical areas of political engagement, notwithstanding its current neglect. The political issues raised by this legislation illustrate that rather well – and the failure of the British political establishment.

To simplify gloriously, there seem to be three main approaches to data regulation: the American, the European and the Chinese. The Americans are giving general freedom to businesses, leaving privacy largely a matter for civil law to be resolved between businesses and citizens. They do, however, want to place limits on government abuse; many Americans are more worried about Uncle Sam prying on them than Google. The Chinese believe in complete government control, with no right to individual privacy. The Europeans believe in strong privacy rights backed up by criminal sanctions, and severe constraints on government agencies too. The GPDR, as its full title suggests, is very much in the European tradition. The purpose of the the extra regulations is to enhance individual rights to privacy, with rights to rectification, erasure and access. So citizens have a right to know what data is held on them, to correct errors and to be forgotten if they want. That means that the organisations have to know themselves how their data relates to individuals, and to make corrections and deletions accordingly. The new rules are altogether more thorough than their predecessors. They cover all data, not just electronic databases; political parties, which only caught the fringes of previous law, face much more onerous requirements, as do many charities.

What are the implications? It will put a lot stress on small organisations, something the British civil service will shed no tears about; they have always preferred to deal with a small number of big agencies. But some bigger businesses are going to find the going harder too – notably Google and Facebook. Mostly organisations will manage the risk by holding the minimum possible amount of data on their own behalf, digital and otherwise. Ironically this may be no bad thing for efficiency. Efficient people and organisations travel light. It’s an old trick of personal organisation: if you destroy everything, then you don’t waste time looking for things. Clever service businesses should be able to design inexpensive support systems that allow small organisations to comply with the regulations, once they have got into the habit of holding no paper records and regularly purging the digital ones. But until organisations realise that this is the new way, there is going to be a bumpy ride. The law may turn out to be almost impossible to comply with – and feel a bit like one of those Russian laws that are intentionally impossible, to give state agencies more arbitrary power.

But surely Brexit will come to the rescue? If there was an example of onerous European regulation that we can be freed from, then this must surely be it. Why can’t we now move to a more light-touch American regime? Alas no; the British government have made it very plain that this law is built to last after the country leaves the EU. Indeed, I understand, the law has been gold-plated to make it more onerous than the European standard. For what reason I’m not entirely sure; the government just seems to think it is a good idea.

Which it may be. These new rights do empower the citizen. Once explained to the public, they might very well like the new law. They would certainly not think that political parties, for example, should be given a free pass, and the rights to access and rectification look basic. The American way, where big businesses have excessive sway, is not necessarily the best. But it is a political choice, and there has been next to no political debate; if there was any, I missed it. This says a lot about how British politics works. A European regulatory proposal comes along; British officials decide whether they like the idea or not, and negotiate with other EU interests accordingly. They then present it to the British parliament as a fait-accompli, and promptly embellish it. And then it gets dumped on the British public with a shrug. It is no wonder that so many intelligent people became fed up with the EU. The British political establishment is using it as a way to bypass awkward political discussion; no doubt this happens in other European countries too. It is a colossal failure of the political class, but in a long British tradition. British institutions have long thought that secrecy over decision-making ensured its integrity.

Why wasn’t there more political debate? This could, or should, have happened at two distinct stages. The first was when the directive was being put together at EU level. The British government clearly had opportunities to intervene if it wanted to – and probably did, but with the minimum of consultation with its own people. And failing that there was the European Parliament. These institutions failed. Brexiteers will suggest that this is an example of arbitrary Brussels lawmaking; Remainers that it is a failure of the British political class to exercise their responsibilities properly. The second possible intervention was when the directive was translated into British law, when Parliament had a chance to scrutinise the proposals. If the directive was indeed gold-plated, then this would have been the appropriate moment to challenge it. But neither the popularly elected commons, nor the supposedly hard-working and expert Lords seem to have done very much.

Behind this there is a deeper failure. Who are the advocates of a different approach, easier for small organisations, profit or non-profit, to manage? Labour aren’t instinctively for enhancing individual rights, they aren’t very interested in making life easier for businesses either. Some on the left probably hanker after a more Chinese model of data regulation – but that is only hinted at in some dark statements on cracking down on tax evasion. The Lib Dems are not inclined to challenge European integration, which GPDR is part of, and anyway probably quite like the enhanced individual rights, in principle anyway. But you would have expected some resistance coming from the Conservative Party.

Alas no. The radical Brexiteers aren’t interested in detail. To them deregulation is a theoretical idea where somebody else has to do all the hard work subject to their backseat driving. The pragmatists are happy enough to go along with European integration. I have heard a bit of talk that there is fresh new thinking in the party, led by a crop of bright new MPs recruited in David Cameron’s tenure. If so you might expect that somebody would make the running and present a vocal challenge to the new regulations, and an alternative vision on how data regulation should work. But so far there is silence.

The truth seems to be that few British politicians have thought deeply about how me manage privacy and data, and therefore recognise the nature of the choices they are making. That is very disappointing.

Electoral reform: is there any hope?

The British parliament will soon debate electoral reform, thanks to a citizens’ petition. This campaign looks hopeless, but then so did Brexit not that long ago – so am I being too pessimistic?

This was one of the issues that first drew me into politics, back in the 1970s, along with Europe (I was an enthusiastic pro-European from the start). However, since the referendum on the Alternative Vote (AV) in 2011, I have found the topic deeply depressing. That referendum showed how low the forces of conservatism could sink in order to defend what they thought was in their interests. And then The Economist, the paper that originally persuaded me of the virtues of AV, turned against it, simply because they didn’t want to back a loser. That showed just how hard reform will be.

Is it worth getting excited about? My chief objection to the current system is that it is undemocratic – not so much in the overall result, but in how the results are achieved at constituency level, where an MP can be picked on a minority of the vote. And then there is the issue of safe seats, which mean that so many people have no meaningful choice. Travelling across southern England during the June election was to witness a depressing sea of blue. Supporters of other parties were effectively being disenfranchised, as it was not worth these parties putting any serious resources into these contests. I received not one single piece of literature from either of the two main parties where I lived, because neither thought it was worthwhile campaigning there. As it happens they were mistaken – Labour took the seat off the Conservatives. It pays political parties to concentrate on a small minority of seats; the problem for the Conservatives in June was that they picked the wrong ones.

Still, other electoral systems have their disadvantages too, and it is hard to argue that they engage their voters more effectively. Political disenchantment is widespread, and largely independent of electoral system. Still, injustice is injustice. The British system excludes more people than it should, and all too often it empowers the mediocre, rewarding schmoozing with activists rather than dialogue with ordinary electors.

Proportional representation (PR) has been brought into British politics since 1997 (and earlier in Northern Ireland). This was first in the devolved parliaments of Scotland and Wales, and then the largely powerless London Assembly. Elections to the European Parliament were also changed to a proportional system. This has given oxygen to smaller political parties, provided that they achieve a certain critical mass – which few manage. Ukip was obviously a big beneficiary, and also the Greens; less so the Liberal Democrats, in spite of their ardent support – the party has had little idea of how to campaign under proportional systems – preferring locally targeted messages to broad ones. But perhaps the biggest beneficiary has been the Conservatives. The party was practically wiped out in Scotland under First Past the Post – they won no seats there in the UK parliament in 1997, and hung on to just one from 2001 until this year. That is enough to suffocate a political party – as Labour have found in the south of England, outside London. But with PR the Conservatives established a substantial presence in the Scottish Parliament, and led a fightback from there. The party is now in second place, and gained 12 seats in the UK parliament – without which the party nationally would have been sunk.

But implementing PR at UK level involves some tricky calculations for the main political parties. Actually not so tricky for the Conservatives; they have been so consistently opposed to reform in the past that a change of mind would cause major ructions they don’t need – even if it would be a good way to build the party up in north England. Labour would stand to gain hugely in southern England, where it struggles to get traction under the current system. The party has a strong brand with wide appeal, and it could use this like the Tories have in Scotland. But it also reduces their chances of achieving an overall majority in Westminster. And to many in the party, nothing matters more than the possibility of monopoly power at national level.

But there is a possible compromise, which might appeal to the more strategic Labour and Conservative leaders: PR for local government. Far too many local authorities are run as one party states, to the huge detriment of the quality of government. PR would tackle this, and give both parties a chance to establish themselves in areas where the other dominates. And it might even make life easier for parties in those areas where they do have monopolies: they do not have to stuff their benches with mediocrities to make the numbers up – and it should sharpen them up generally, as competition usually does. I think it was Lib Dem leader Nick Clegg’s biggest mistake not to go for local electoral reform in the coalition negotiations with the Conservatives in 2010, instead of what turned out to be that hopeless referendum on AV. David Cameron and George Osborne might just have gone for it. Whether it would have done the Lib Dems much good is another matter – but democracy would have been a winner. The party must not make that mistake again, and it should make local electoral reform a major plank of its policy platform. There is a precedent: the Lib Dems forced local electoral reform in Scotland on a reluctant Labour Party as part of a coalition deal.

That’s one small hope. I don’t see either Labour or Tory establishments having the guts to take such a reform forward by themselves however. The only possibility I can see is if Labour’s newly recruited younger activists take an interest in the issue: such people tend to mistrust systems handed down by their elders. The parliamentary debate will hopefully flush the Labour leadership out. As more younger activists get involved with the injustices of the current system, that could create some real pressure. especially if the Lib Dems can become competitive to Labour leaning voters again.

Long shots. But that is all advocates of electoral reform have.

Economists are failing to understand the 21st century economy

When is a fact not a fact? When it is an economic statistic. Economists use statistics like GDP, productivity or inflation, as if they were facts. And because economists set the terms of public policy debate, the rest of the world follows them. But they are abstract artefacts, designed to help us see the facts, but which conceal as much as they reveal. There may have been a time when this didn’t matter much. That is certainly not the case now. We are missing something very important.

Economists like to accuse others of the fallacy of composition. That is the assumption that the finances of a nation work on the same principles as that of the households that make it up. For example, the budget constraints in a household work in an entirely different way to those for state finances – which doesn’t stop politicians lecturing us about the absence “money trees”. But economists are the world’s worst at a very similar fallacy: assuming that national level statistics represent the truth for individual households and businesses.

This is very striking with discussions about productivity, such as on this morning’s Radio 4 Today. This is newsworthy here in Britain. Growth in productivity grew at about 2% a year in Britain until 2008, during the financial crisis. It then stopped growing – creating what is often called the “productivity puzzle”. This is happening, to a lesser extent, in other developed countries too. It is the news now because the Office for Budget Responsibility has admitted that its assumption that productivity growth would revert to historical norms has failed to materialise for yet another year. That matters because it affects forecast tax revenues, around which the Chancellor of the Exchequer must base his annual budget, due next month. It is also the explanation offered for the fact that rates of pay seem to have stagnated for many Britons.

What is productivity? It is output per worker per period worked (typically a day or an hour). If you work in a ball-bearing factory it is relatively easy to understand what this actually means. You count the number of ball-bearings produced in a month, say; you count the number of hours worked in that month; you divide one by the other. Because of this simplicity it is easy to imagine the national economy made up entirely of ball-bearing factories or close equivalents, so that if productivity rises, it means that more ball bearings are being produced for the same number of hours. And most of the discussion about productivity uses something like this mental picture. Economist speculate about businesses using cheap labour as a substitute for upgrading capital equipment, for example. This is like the butler in Kazuo Ishiguro’s The Remains of the Day who immerses himself in his familiar daily duties so as not to confront the realities of the changing world around him.

To understand this, consider two groups of problems. The first type of problem is how do you actually measure output? The more you consider this, the harder it gets. Start with some obvious problems: what is the output of a squadron of jet fighters? Then how do you compare organic carrots with carrots grown on a farm pumped with environment-degrading chemicals? Or an iPhone 6 with an iPhone 8? Or is a loss-making factory with few people and overpriced robots really more efficient that a profitable one with lots of labourers and primitive machinery? Economic statisticians wrestle with such questions, but largely hidden from view. Economics undergraduates are barely troubled with such issues, and are quickly ushered on to the certainties of supply and demand curves and medium term fiscal policy. The result is a series of estimates and fixes, but not enough discussion about what they all add up to. Occasionally a conservative politician will pop up to suggest that lower-paid workers should be much happier because improvements in technology aren’t properly reflected in inflation. But that’s about it.

The second group of problems is conceptually somewhat easier: it is variations in the composition of the economy. Overall productivity may be improving not because individual businesses, or even industries, are becoming more efficient, but because industries with a higher measured productivity are taking a larger share. In fact it turns out that this was largely the case in Britain before 2008, with the expansion of banking and professional services. Just how productive these industries were in reality was thrown sharply into question in the following year, when banking threw up eye-watering levels of losses, from which government finances have never recovered.

These difficulties have been known about for a long time, and professional economists are more aware of them than the public whom they lecture. But they are shrugged off, with the assumption that it all comes out in the wash. Policymakers should be doing something about productivity, they say. This needs some serious challenge. And the consequences of that challenge are profound.

My first challenge is known as the Baumol effect, or more usually known, revealingly, as “Baumol’s cost disease”, as if it was something to be eradicated rather than an ordinary physical constraint. Suppose a legal firm adopts a highly efficient artificial intelligence system and makes most of its workers redundant. And then those workers take up jobs such as being personal trainers or producing craft pottery. All the positive productivity effects of the firm’s investment in AI is neutralised by the displaced workers moving into low-productivity jobs. Perhaps we are at state where most productivity improvements are being statistically neutralised in this way? After all, the more efficient an industry becomes, the fewer jobs in that industry there are overall.

Now let’s get into territory that mediocre economists really want to avoid: human alienation. One way of looking at productivity is that it advances by two alternative means: cutting wastage and cutting human content. By and large nobody will argue with cutting wastage. Vacuum cleaners have liberated home-keepers; time spent in queues is good for nobody; and so on. But cutting human content, and human contact, is distinctly two-sided. This is the world of standardised products, specialisation and automatic interfaces that may reduce costs but leave workers and users alike cut off from their fellow human beings, and being forced to conform to somebody else’s idea of what they should be. That is alienation, an idea first made famous by none other than Karl Marx in the Communist Manifesto – a document of startling insight. Alienation can be to the good overall, but it often isn’t. And there are bad signs all around us, from the obesity epidemic, the poor mental health of teenagers (especially girls), to the breakdown of community activities in our cities. Now, to back to my example of the legal firm, what if one of those displaced admin assistants finds life much more fulfilling as a personal trainer, even if the pay is miserable? A conventional economist would fret that surely it is better for her clients to download a demo video from You-Tube so that the trainer can work in a soulless call-centre? Well it would for those aggregated statistics, but not necessarily for the state of the human condition. In fact many economists suffer from acute double-think. On the one hand they praise markets and the wisdom of freely made choices of individuals over bureaucratic planners. And yet when those freely made choices go to more leisure, low productivity work and locally-sourced vegetables, they moan like mad.

But there is one sense in which those economists are right. Those aggregate statistics have one useful purpose: in planning taxes. Taxes are based on the money economy, which is the foundation of those statistical measures. If the stagnation of productivity is a fact of life, and actually represents a struggle against human alienation, then tax revenues are going to stagnate unless the rates increase. And since demand for tax funded services is liable to keep rising, we are going to have to think very hard how we order people’s relationship to the state. We are surely heading for an era of higher taxes. But how to design these taxes?

Instead we just get useless calls for action to raise productivity. Time to move on.

Theresa May is channelling Nick Clegg

I read somewhere this week that the Conservative Party gathering in Manchester felt like a “Potemkin conference”. It had all the forms of a party conference, with hordes of journalists and lobbyists, but few actual members. That reminded me of something: Liberal Democrat conferences during the coalition era of 2010 to 2015. So, after comparing Jeremy Corbyn to Margaret Thatcher, an ideological leader who had a shaky start before eventually becoming dominant, this time I will compare the Conservative leader and Prime Minster Theresa May to Nick Clegg, Lib Dem leader and Deputy Prime Minister during the coalition.

Nick (I usually use first names for members of my own party) was little known to the public before he burst onto the scene in the 2010 General Election. His performance in the leader debate astounded people, and led to a brief moment of Cleggmania, in which the party stormed up the polls. A concerted press campaign, and a late rally by Gordon Brown’s Labour Party, brought him down to earth somewhat. But the party did well enough to enter coalition with the Conservatives. That was a heady moment for the party; we had hardly dare hope that the party could enter government, and that some of our colleagues would be cabinet ministers. This looked to be another important step towards the party taking its place at the top table of British politics. But that was a serious misreading of the situation. Large numbers of supporters were outraged, support plummeted and membership drained away. And yet the party retained all the outward forms of success, including those Potemkin conferences. Insiders talked up the party’s prospects with various arguments about historical precedent, real achievements and the need for a centre party. But nobody outside the party was fooled. Nick limped on as captain of a sinking ship; nobody wanted to replace him, and a change of leadership looked too risky. The party’s collapse was confirmed in the 2015 General Election.

Theresa May too burst onto the scene suddenly, after the EU referendum did for her predecessor David Cameron, and one by one her rivals for the leadership were sabotaged. Her honeymoon lasted much longer than Nick’s. But then came that fatal moment of hubris when she called an early election. At first it looked a brilliant move that would usher in an era of Tory domination of parliamentary politics, and her personal authority would be unchallenged. The speed with which she fell apart staggered everybody. Suddenly the Conservative Party looks vulnerable: on the wrong side of history and, to mix metaphors, lacking the will to fight its way of the cul-de-sac it finds itself in. The party is haemorrhaging members. It all reminds me of Nick Clegg’s fall from grace in a few weeks in 2010. The Tories cling to power; they try to convince themselves that things aren’t as bad as they look; but to outsiders they look doomed. Only Labour can save them. But they can carry on in this living-dead state for years, just like the Lib Dems in coalition. Or John Major after Black Wednesday in 1992.

But wait, are things really that bad for the Tories? Their poll standing has not collapsed, unlike the Lib Dems after 2010; Labour’s lead is a narrow one – and not enough for that party to win a majority. Labour aren’t following Tony Blair’s strategy of pitching for the centre ground – instead they are trying to present a radical alternative. That gives the Tories more air to breathe. There is a potentially winning coalition of working class Brexit supporters, middle class conservatives, and private sector workers worried about Labour. That was Mrs May’s strategy in the Spring, and it looked like a winning one then. But there are three huge problems for the Tories.

The first is Brexit. After the referendum the party had little choice but to take ownership of it. But there is no coherent plan for Brexit; if there had been such a plan it would have given the remainers something solid to attack, and surely they would have won. There is no political majority to be forged for any particular vision of life after exit. Meanwhile Brexit will take the blame for everything that goes wrong in the country for the next decade, regardless of whether that is true or not. British politics is stuck between two incoherent camps who can each prevent the other from ruling effectively. And disruptive change is inevitable. Since hanging on to the certainties of the status quo is usually any government’s best defence, it is fatally undermined. And Labour’s radicalism doesn’t look so bad compared to the crazy talk of the more radical wing pro-Brexit Tories, such as Boris Johnson, Michael Gove or Jacob Rees-Mogg. This looks a hard situation for even the most capable government to handle.

The second problem for the Tories is demographics. Mrs May’s potentially winning coalition is a shrinking one – it depends disproportionately on older, white voters. And on people who own their own homes. But the proportion of such people is shrinking relentlessly. Somehow the party needs to break out of this bind to appeal to younger voters, and those renting their homes. Mrs May seems to understand this, but has little idea how to do it without putting off the party’s core support. A few gestures about building more houses will not be enough.

And thirdly there is the party itself. It has been shrinking for some time. There is a story circulating that its rank and file membership is now smaller than even the Lib Dems, who have seen a membership surge since 2015. No doubt fear of Labour will keep money flowing into the party – but a political campaign based on money rather than grassroots support is a fragile thing. Mr Cameron’s success in 2015 took years of careful preparation; the absence of such preparation was painfully apparent in the Tory campaign this year. And yet the party now lacks the stability and consistency of leadership needed for such planning to work. Things are hardly better when looking at the party’s elite: its parliamentary party. Mrs May is a gritty and determined leader, but lacks political skill, and her authority is shot. But her main rival, Boris Johnson, looks a more effective rebel than a leader. He showed no great skill or leadership in his role as Mayor for London, which is hardly the most demanding of jobs. In Lib Dem terms he is Tim Farron to Mrs May’s Nick Clegg (though, I need to add, that Nick has far more political skill than Mrs May). For all Tim’s talents he fell short of what was needed for the top job. And yet four years of the party being hollowed out under Mrs May’s leadership is a pretty much a guarantee of disaster.

The Conservatives have no serious rivals on the political right. Ukip has collapsed. The Lib Dems ar interested in picking off the Conservatives’ more liberal supporters, but not its core vote. The party can surely reinvent itself – just as the Lib Dems are doing. But you can’t do that in government. Tory prospects for the next five years look dismal indeed.

Brexit is drifting into stalemate

Transitions are always hard. Honest Brexiteers always knew that about the UK’s exit from the European Union. So it isn’t surprising that pessimism about Brexit is fashionable in the metropolitan classes. Until recently I had dismissed it as just chatter: Brexit has its own momentum. Now I am not so sure.

Recently the focus on Brexit has been about a transitional deal – part of a phased exit from the union. This is an entirely sensible idea, and, this blog has argued from the beginning, practically inevitable. The EU is a massively complex thing, and 45 years of acquired institutional integration takes a lot of unpicking. Surely it is sensible to do so at a measured pace with democratic consultation along the way? But there is something strange about all this talk. Nobody is talking about what happens after the transition. Salespeople for airline flights are urged to sell the beach, not the flight itself. And yet Brexiteers have stopped selling the beach. Instead they keep talking about the past – the referendum and its supposedly decisive mandate: selling the airport after you’ve already been through it.

This is the latest sign of insecurity amongst the advocates of Brexit. The fact that they were arguing for so long against the idea of a transition period was an early sign. Now they reserve their passion for keeping the transition period short – and the need to avoid having a general election in the middle of it. The trouble is that a transitional arrangement looks too comfortable a place to inhabit; we might never work up the courage for that next brave step. As Janan Ganesh points out in today’s FT, a country that cannot face down enough nimbys to expand Heathrow airport stands little chance of doing the brave things needed to make Brexit happen. “Leave now at the risk of economic chaos or leave late at the risk of never leaving. It is the Eurosceptic dilemma,” he writes.

The truth is that the various optimistic visions of Brexit are wilting. There was never consensus amongst Brexiteers amongst them anyway. In particular the Prime Minister’s idea of the oxymoronic “Global Britain” is collapsing. The emerging dispute between Britain and Canada and the USA over the aircraft producer Bombardier shows just how difficult that vision actually is. Just after Labour leader Jeremy Corbyn said that he wanted to leave the European Single Market because of its state aid rules, Boeing is trying to close Bombardier’s factory in Northern Ireland on the grounds of excessive state aid. Boeing’s case is a weak one, but it is a big company in a big country, and such companies have no ethical compunction about bullying. They simply want to squash a potential future competitor by using principles designed to foster competition rather than suffocate it. The American government is happy enough to play along. The mechanisms of the World Trade Organisation (another transnational limit on sovereignty) look inadequate. Anybody who thinks that India or China will be any easier to deal with (or indeed the EU from outside) is not living in the world as it is. Small powers need a transnational order to thrive. But transnational order is going out of fashion amongst the world’s great powers.

Still, there are other visions for a post-Brexit Britain. They are of a more self-sufficient Britain. More complex manufacturing, such as the motor industry and aerospace, look doomed in the long-term outside the Single Market. But these are becoming less important to the whole economy. Modern technology is making smaller scale manufacturing easier. And the information economy is less bounded by the constraints of old-fashioned borders. A new meme on the political left (Jonathan Freedland in the weekend Guardian, repeated by Nick Clegg in today’s FT), that you can’t banish austerity outside the Single Market looks like nonsense to me. In the long term anyway. Britons might need to adjust their appetites on goods that are typically imported: cars and fossil fuels, for example, and things like foreign travel. But health care, social care, education, housing and employment support don’t require a major trading economy to support them, even if they need to be adjusted around the edges a bit. Except, of course, that “austerity” is code for any kind of disruptive change. Full Brexit will mean more disruption. But few politicians seem up for selling that to the British public.

And so we drift into a political stalemate. The country remains locked in a 50-50 split as to whether Brexit is right or wrong. The forces of remain look in no shape to launch a counterattack, and are content to obfuscate and delay. They have always been averse to selling the beach anyway. I cannot see that formal Brexit can be stopped. The purgatory of half-in and half-out seems a fitting verdict on a failing political system.

The Great Divide in liberalism: school holidays or basic income? @Radix_UK

Liberal blogger David Boyle and I are the same age. We have worked together on Liberal Democrat policy. But, according to David, we are on the opposite sides of a great divide across the heart of what he calls the “radical centre”. But I don’t think we are.

David is a much more successful blogger and general activist than me, and has got as far as founding a think tank – Radix. He is an old Liberal, where I was a founder member of the SDP in 1981. But I thought we were converging – and I had regarded myself closer to the old Liberals these days than the SDP.

That was before I read David’s article in the most recent Liberator about Lib Dem tribes. That was followed by this article published by Radix, after a fringe meeting at Bournemouth, which I did not attend. On both counts it was clear that I was still a social democrat in his eyes, and he a Liberal, and that, furthermore, there was no more important division in what he calls the radical centre, and which I prefer to refer to as “liberalism”.

David set a test to show which side you are on. What is your attitude to the fining of parents who take their children out of school for holidays in term-time? He is against; I am for (though I am actually against automatic fining, which is what he posed to the Radix fringe). To him we should assume that parents know what is best for their children, and not the experts. What is needed in politics is to break the power of the experts, in his view, and empower people to make their own decisions.

I don’t really disagree with that sentiment, but I do believe in state intervention in a number of cases, and compulsory schooling is one of them. The question of school holidays is not an abstract proposition in my case. I have been a primary school governor for 18 years or so, and chair of governors for ten (at two different schools). This issue is a hardy perennial. The teachers insist that term-time holidays disrupt both formal education, and also the cohesion of the school community, and I have been on their side. We haven’t gone as far as fining people (or if we have that is only because regulations have become more restricted – and it is the local authority, not the schools which impose them). Instead there has been a sort moral war of attrition. I think the presence of fines is there to set the moral moral tone, and to give schools a weapon in this moral war. I’m much more hesitant about actually using them – hence my reservations about making the fines automatic. But withdrawing the fines could set in motion a disruptive free for all.

At the heart of this is an age-old battle between freedom and solidarity. Flourishing societies need both. My worry is that in modern Britain, and not least the poorer urban communities that my schools serve (alongside more prosperous ones), the elements of solidarity are breaking down. A lot of people are struggling, and worse, not really coping. The modern state would rather hide these people away. I am a deeply-believing liberal, but I recognise that liberal language can be used to camouflage hard questions. Why not say that the struggling individuals and families are free to solve their own problems, and that we shouldn’t burden others with them?

State schools are one of the most powerful forces for solidarity that we have. They can, and should, be a lifeline to struggling families, and make them feel part of a wider society. Schools also provide a a good place from which to make the sort of state interventions needed to give disadvantaged families help to cope with the stresses of society. They should also, in subtle ways at least, open the eyes of others to some of the difficulties faced by their neighbours. A well-run, socially mixed state school one of the wonders of the British state system; it would not happen without compulsory schooling, and it is undermined by an excessive emphasis on parental choice – which often leads to de facto segregation. Parental freedom on school holidays chips away at that solidarity.

So I worry that vocal Liberals are a middle-class pressure group who want to push their own families forward without regard to what is going on around them. But, of course, I know that is not fair.

I think I have a better question to divide the radical centre: do you believe that a universal basic income should an important part of the state system? I suspect that some Liberals and social democrats alike would say yes. It empowers poorer people by giving them cash to spend as they choose, and it offers a way replace a costly and divisive welfare system with universal entitlements. Others (like me) say no – it is just an attempt to hide away the needy with no-questions-asked cash so that the rest of don’t have to bother with them.

In fact I think the real choice is between grand designs to be rolled out nationwide, like UBI, and community interventions with a human face, carried out on a localised scale and based on a sense of human solidarity. I don’t know if that is Liberalism or not, but I’m sure that is what David is looking for, to judge by his railings against empty corporations (though he has said some favourable things about UBI). There is an important line to be drawn, but I think he is drawing it in the wrong place.

Postscript:

I strikes me that my defence of school holiday fines doesn’t contradict David’s distinction between Liberals and social democrats. Social democrats are more inclined to appeal to solidarity. But social democrats also tend to like standards set nationally, and are suspicious of localised solutions. That’s where I part company. And I do that is the most important thing about trying to develop answers to the crisis in modern government.

Why is government so incompetent?

Every day brings a fresh example of a government policy that is not working as it intended or a public service that has gone badly off the rails. It is usually accompanied by a government press release (rarely a ministerial interview) denying that there is any kind of problem, or minimising it. No wonder the public is losing faith in the political class. When human knowledge has never been greater, our education systems have never put out more well-educated people, and our technology has never been more capable, this problem should provoke more comment than it does. What is happening?

Let’s make this abstract observation more concrete with a few examples. The Grenfell Tower tragedy showed that safety regulation for the cladding of buildings had become meaningless, and consultation with residents completely empty. The only surprising thing about the recent reports of abuse of innocent immigrants in detention centres is that the scandal took so long to emerge. The implementation of the government’s new nursery care entitlement went off the rails many months ago, and will probably lead to less nursery provision, not more – and yet the government still denies it. New regulations on data protection in the pipeline look unworkable and retrograde to everybody I have met who has taken the trouble to examine them( and that is blamed on the need to comply with EU regulations, but I wonder if other member states are having such problems?). I could go on. And on. Everybody who has direct involvement with public services or government initiatives (in education, health, unemployment support, etc.) will have an example of rampant policy madness. Sometimes these stories are ill-founded grouching by people resisting change. Mostly they are not.

But why? There some usual suspects. Politicians like to blame the other side. So Labour (and Lib Dem) ones will label this as Tory incompetence, and claim they would do better if only they were in charge. They would say that. But one of the most egregious bits of government incompetence in recent years was on the Labour watch, and they still deny it: the macroeconomic and regulatory failures that made the impact of the global financial crisis of a decade ago much more severe than in any other major developed country. Those in power tend to blame the supposedly deteriorating quality of civil servants trying to implement their clear vision – in the way that bad workmen blame their tools, or bad generals blame their subordinates. Another common complaint is that modern politicians have less real-world experience than they used to, of running businesses or commanding troops, say. And yet there has always been something amateurish about British politicians. And there is still quite a bit of real world experience on the political front benches.

For my part I can’t help recalling Tony Blair’s valedictory article in the Economist in 2007. Consider this quote:

The state today needs to be enabling and based on a partnership with the citizen, one of mutual rights and responsibilities. The implications are profound. Public services need to go through the same revolution—professionally, culturally and in organisation—that the private sector has been through.

The first bit is classic Blair. It sounds very good and liberal, but it isn’t clear what it actually means. It is used to dress up the second bit: that public services should learn from the private sector, and reflect the revolution that the private sector has been through. Well I was, in small way, a standard-bearer of that private sector revolution. I led the transformation of the various operational units I was responsible for, with massive advances in efficiency and improved customer service (certainly in the reduction of mistakes). But here’s the thing: since Tony Blair’s time that private sector revolution has shown its dark side (already evident when I was working, up to 2005). We are now being assaulted by examples of private sector incompetence that match those I have been complaining about in the public sector. The biggest by far was unfolding as Mr Blair was writing his article: the great financial crisis of 2007-2008 that climaxed with the collapse of Lehman Brothers. The levels of misjudgement in so many financial firms is completely breathtaking. Governments and regulators contributed (especially in Britain), but often because of pressure placed on them by businesses.

It’s worth mentioning just a few modern examples of commercial incompetence. In Europe we are reeling from the problems at Ryanair, where changes to pilots’ holiday rosters have caused thousands of flight cancellations. This has parallels with Southern Rail’s travails earlier this year, after they played with staff rosters – with the trouble wrongly blamed by the company and government on the trade unions,who are admittedly making things worse. Americans are alarmed about massive data breaches at credit firm Equifax. It is not hard to find other examples.

Perhaps the problem is for public services and government in Britain is not that they have learned too little from the private sector, but that they have learned too much. Or they have learned the wrong things (I can vouch that they could learn many good things…). The dark side of private sector transformation might be called “simplify and exclude”. A simple business model is much easier to manage than a more complex one, and in its own terms it is more efficient. It also makes increases in scale easier to manage. And it can benefit the world as a whole by cutting out wasted duplication. I did a lot of this at work – especially when my firm took on outsourcing contracts for operations in financial services. But even then the dark side was evident. If it didn’t fit the model, you excluded it. This leads to two distinct problems.

The first problem is tunnel vision. People running large businesses with simple operating models simply lose the capacity to engage with the complexities of the real world. The public is becoming increasingly aware of this as it tries to deal with problems and engage with larger businesses – it is harder and harder to have a meaningful conversation with anybody. This increasingly marks our engagement with public services too. This isn’t helped by what Douglas Adams called the SEP field in his hugely perceptive A Hitchhikers Guide to the Galaxy – a powerful cloak of invisibility. SEP stands for Somebody Else’s Problem. One prominent victim of the SEP field was Labour Chancellor and Prime Minister Gordon Brown, as the great financial crisis developed. He (or some of his apologists) complained that part of the problem was responsibility for handling finance was split between the Treasury, the Bank of England and the Financial Services Authority – though it should surely have been clear that it was his Treasury that was responsible for the system as a whole.

The second problem with Simplify and Exclude is the revenge of the excluded. This is much more of an issue with government and public service than it is with big business. The inconvenient people who do not fit your simplified service model do not disappear. Very often their needs are left unmet and they come back to deliver bigger problems later. Children excluded by schools are more likely to become drug addicts and indulge in crime and antisocial behaviour, for example. The Department of Work and Pensions (DWP), perhaps the biggest champion of Simplify and Exclude in government, may celebrate that is has driven many people of their claimant rolls, but it is has no understanding of why. It has not attempted to to solve the underlying problems of worklessness – it has just made access to benefits more restricted. That just means more trouble for everybody else. Knife crime and acid attacks are rising here in London – it is hard not to think that this has something to do with the simplification of services in the DWP, as well as youth provision, employment and policing. This is closely linked to funding cuts (“austerity”) of course, but I am convinced the problem is much deeper than the lack of public funds. It is the narrow way in which public servants are approaching the problem.

At the heart of this is a trade-off between scope and scale. In order to improve the scale of services it is usually necessary to simplify the scope. But by reducing the scope you make them less effective. The answer, in public services, is to bring together services for different things around the needs of individual citizens. You can only do that by devolving political responsibility to a much more localised level. More people are realising this – but few are ready for the change in political culture required to drive it through.

Information technology is enslaving us: we must learn to master it

I have a new hobby horse: the politics of information. The development of information technology is transforming our lives, but the politicians are being left behind. This is becoming at least as important as economics and finance to the way we live our lives.

But we amateurs face a problem. The IT industry obfuscates everything in jargon and tech-speak. It is easy to get intimidated. In the FT Gillian Tett draws a parallel with the finance industry before the great financial crisis of 2007-08. It is liable to end just as badly. We really must try to hack back the thicket.

I’ve been here before. Back in the 1990s I was appointed Director of Information Systems by my firm, in spite of having no direct IT background. I was nearly suffocated by the jargon and tech-speak. But gradually I came to realise that IT wasn’t as complicated as people were making it out to be. In fact it wasn’t fundamentally more complex than the average office filing system in pre IT days, and it was dealing with much the same issues. If you stuck to firm logical ground, the techies would retreat. I found a world dominated by bluff and which reasoned in a series of attractive sounding non-sequiturs. People were watching each other and saying whatever they had to to fit in. With just a little clarity of thought you could get a long way.

So I will take a deep breath and start to think about the world of information systems and technology, even though it is a very different one from where I left it in the 1990s, or even in 2005, when I stopped working with information systems professionally as a user.

And so to the basics. How do we, as people, manage information? We do two basic things. The first is to gather data from the world around us. The second is to process that data into information that we can use to achieve goals both passive (looking out for danger) and active (finding food, say). All this requires us to be both aware and focused – two things that tend to be mutually exclusive. How humans (and other animals) do this is a very complex process that is only very loosely understood by scientists. The interesting thing is that at its core is a duality – the outwardly referenced right brain, and the inwardly focused left brain. I am currently reading Iain McGilchrist’s The Master and his Emissary which builds a substantial intellectual critique of the modern world from a right-brain left-brain duality. At this stage, though, all I want to say is that the outward/inward duality is central to the understanding of how we deal with information.

This duality is recognisable in the way modern technology works. Here I think it is useful to distinguish between what I would call “big data” and “useful data”. Big data is the amassing of data from many sources. In the modern age this is often from such things as video footage, photographs and sound recordings. But big data is not directly usable to achieve anything. To do that it has to be reduced to patterns and digits that are useful data. The big modern development is the use of artificial intelligence (AI) to achieve this. Previously, useful data was mainly gathered through human input.

There is one key point that needs to be understood about the useful data sitting in computer databases. It works on the principle of distillation. It is an infinitesimal subset of the real world, and even that is before you deal with problems of reflecting time. To move from the real world to this data requires a series of simplifying judgements.In practice this means that data does not multi-task well. To be efficient the data has to be referenced to a particular need, and it will serve other needs less well. And yet the pressure to make such data multi-task is enormous. And this leads to widespread problems.

Lets take an example. One commonly used bit of data is the British postcode. It is designed to delineate postman’s walks to organise mail delivery. It is not designed to reflect insurance risks, for example – but it is often used for just that purpose. As an example I was told by an eminent geologist about how he was asked to assess landslip risks in a town’s postcodes. He found one code which consisted of a valley with no homes in it, with the edge of the town where people actually lived. The landslip risk in the valley was high, but in the town it was negligible. So how to rate the risk for that postcode? According to the rules he was being asked to abide by, he should rate it as high. And yet that would mean that the homes in that code would be overcharged for their insurance. He refused to do it; but doubtless the insurance company found somebody more compliant. Why should they care about a bit of collateral damage? That kind of problem predates modern IT, but technology allows it to proliferate in multiple hidden ways.

That perhaps illustrates the scale of the challenge that IT presents to liberal values. We as individuals are being made to conform to a world of arbitrary categories, because that is more convenient for systems builders. Instead of technology giving us more control over our lives, it is forcing us to conform to somebody else’s will.

But humans can be masters of technology, rather than being slaves to it. That is the liberal challenge.