Matthew – Page 39 – thinking liberal

Making America small again. Trump’s victory marks the decline of the USA

“Make America Great Again.” That was the slogan of Donald Trump’s insurgent campaign to take the US presidency. It resonated with many Americans. They felt that the US had been subject to serial humiliations in its international dealings, and that Mr Trump’s more robust and confrontational leadership would help to reverse it.

But politics is full of paradox. To exercise power is to diminish it. Power accumulates to those who understand restraint. In Britain English and Welsh voters took to heart the slogan of “Take Back Control” and voted for Brexit. The country is now basking in the thrill of exercising direct power in its relations with its fellow European neighbours. And yet the result will be a medium-sized power adrift in a friendless world, seeking to trade freely when everybody else is becoming more protectionist It will be more rather than less subject to the whims of foreign powers. Britons may prefer it that way, but they will come to understand that the keys to “taking back control” actually lie in Westminster and their local council chambers, rather than in Brussels.

So it is in America. Mr Trump’s supporters will revel in the assertion their country’s direct power. And yet he will exercise this assertiveness in order to carry out a retreat. The result can only be diminishment, relegating the US to the middle part of a medium-sized continent.

Let’s look at some specifics. Consider the Trans Pacific Partnership (TPP): the multinational trade deal put together by President Obama. This was a central element of his Asian diplomatic strategy, designed to collect a number of Asian countries into America’s orbit in trading terms, conspicuously excluding China. Mr Trump (along with many Democrats) denounces this as a bad deal and will scrap it. That leaves a vacuum into which China is ready to pounce. It plans its own version of a free trade area, involving most of the same countries. Mr Trump has also questioned the value of America’s military alliances in the region. The clear message to countries there is that they must acquiesce with China’s increasingly imperial ambitions. The Philippines’ President Duterte looks a little less eccentric in his pivot to China. The USA is suddenly a much less important country.

Mr Trump’s promised assertiveness in trade relations with China makes little sense either. It comes at an important moment in the evolution of China as a nation. It has built its economy on international integration, especially with the US, and developed a large trade surplus in the process. But there is nothing particularly beneficial in a trade surplus – it implies that a country’s citizens are consuming less than they could – an act of self-denial. A trade surplus has political advantages – it makes you less beholden to foreign creditors – but China is already powerful enough for this not to matter much. So it is in the process of carrying out an economic pivot to develop its consumer economy, and away from integration with developed economies – though the scope for integration with less developed economies remains. An economic model where it exports less to America and integrates more with other Asian countries, and even African ones, suits it just fine strategically. Mr Trump means to hurry it along, but it will disrupt the US economy more than the Chinese one.

In Europe the issue is not so much trade. The proposed trade deal between the US and the European Union, TTIP, looks dead in the water without any help from Mr Trump. The main issue for Europeans is military and diplomatic support for the European countries against Russia in particular. Mr Trump has said that the current balance involves America in a disproportionate level of commitment. He has a point. If America steps back from its military commitments, and caves in to pressure from Vladimir Putin to create and extend a Russian sphere of influence, then it will put European countries in a very tough position. It is not very clear where this will lead – but one thing is very clear: America will be less important to Europe. This is not necessarily a bad thing for Europe, but it will be very uncomfortable.

And then there is economics. We are still guessing what will emerge from Mr Trump’s presidency – but there could well be a short-term lift for America. Some form of fiscal stimulus is in the offing. Mr Trump and his advisers hope to lure in US corporate profits that are stacked offshore for tax reasons, and to use the proceeds to fund infrastructure investment. Unlike many of his Republican colleagues, Mr Trump will be reluctant to cut state handouts, like pensions or healthcare – though health insurance is under threat. This could give a short term lift to the US economy . And, as this week’s Economist points out, much of this gain will be at the cost of other world economies.

That should please Mr Trump’s supporters. But the problems will start quickly. The stimulus is badly timed. In many aspects the US economy is running at close to potential output. All the stimulus might do is suck in imports and push up prices. But there may well be a lot of hidden potential in the US economy – more workers could be drawn into the workforce, and other workers could be made to work more productively. But if Mr Trump is serious about rolling back free trade and driving out foreign workers, then he will cut the capacity of the US economy when it needs to be increased. A financial crisis is in the offing.

The truth about the American economy is that, far from being taken for a ride and funding lavish lifestyles of foreigners, American consumption is being supported from abroad. This is what a trade deficit means. A transition to a more self-sufficient economy, as wished for by Mr Trump’s supporters, will entail economic shrinkage. Americans may rail at the loss of jobs in many industries, but they exchanged these for cheaper products, made abroad or with automated technologies, or both. Reversing that means reducing living standards.

Except that most Americans could still end up better off. If the country can share out income more evenly, with lower profits and higher wages, and more of those wages paid to middle and lower level employees and less to the top layer, then this shrinkage need not be painful to the majority. But what chance is there of a Republican administration, run by senior businessmen, achieving that? To Mr Trump exploitation is simply good business practice, and profits are reward for enterprise. There is no sign of a mindset that wants a different distribution of the fruits of economic success.

America and the world is in for a rough ride. But strategically it has been clear for a long time that American power, relative to the rest of the world, is in decline. That is not such a bad thing – it results from a fairer distribution of the world’s wealth. After the diminishment of Europe, it is now America’s turn. Mr Trump’s victory marks a big step along that journey. But it should surprise no follower of politics that he is claiming to do the opposite.

The centre collapses. What should liberals do?

Unlike on 23rd June (the day of the British referendum on the EU) I went to bed with a sense of quiet foreboding on Tuesday night. And that foreboding was confirmed by the shocking news of Donald Trump’s victory in the US presidential election.

It is a bad year for liberals. Some liberals did support the British vote to leave the EU, of course, and persist in saying this was a good thing. Well, maybe, but the campaign was not fought from the liberal centre, it was fought and won by those who persuaded the illiberal to vote in their masses – which is similar to Mr Trump. Meanwhile, illiberal governments face no serious challenge in Hungary and Poland, and in Turkey President Erdogan is crushing all forms of opposition, liberal and otherwise, following the example of President Putin in Russia. It does not seem so far-fetched to imagine that Marine Le Pen will take the French presidency next year. There are major populist uprisings in the Netherlands and Italy.

All this points to a collapse in the political centre. What do I mean by that? The centre is a set of political assumptions about the way the world should be run which has become the conventional wisdom of our governing classes, and which is shared by many political groupings. Those who did not support this centre used to be branded as extremists and pushed to the margins. Or sometimes parties would talk as if they were challenging the centre, but quickly adopted its principles once in power – France’s François Hollande comes to mind. Centrist principles incorporate free trade, free movement of capital and free movement of workers – an unmistakably liberal combination. Globalisation, and the economic growth that went with it, were embraced. Social liberalism ran alongside these principles, with the promotion of diversity at all levels of society. In Britain, Tony Blair’s enthusiastic embrace of these centrist values was the key to his taking the Labour Party to three election victories in 1997, 2001 and 2005. The Conservative victory in 2015 largely came about because it persuaded electors Labour had turned away from the centre – though, in a portent, the avowedly centrist Liberal Democrats were crushed in the process.

But Mr Trump’s campaign was based precisely on a rejection of the centre. He painted a picture of a politically corrupt and complacent elite who had let people down, and imposed social liberalism onto unwilling subjects. This brought previously apathetic voters out of the woodwork, and persuaded many who had voted for the left in the past – blue collar workers in particular – to change allegiance. By comparison Hillary Clinton struggled to raise enthusiasm for her campaign; this apathy may actually have been more important than enthusiasm for the insurgents. It would be wrong to blame that on her personally. She was in fact a strong candidate, but she represented a ruling philosophy that people have lost faith in. President Obama may be more charismatic, but his intervention seemed to have little impact. He seemed to be part of the problem.

Could the left have achieved a similar success with its own anti-establishment campaign? This is what Democratic contender Bernie Sanders attempted; and it is what Britain’s Jeremy Corbyn seeks to achieve. Like all counterfactuals this is impossible to prove. Many of the criticisms against Messrs Sanders and Corbyn – their lack of so-called “credibility” – seemed to positively benefit Mr Trump. But I think the rebellion is about more than changing personalities and attacking the political elite. There are overlaps in policy; Mr Sanders wanted to clamp down on free trade and attack big business – just as Mr Trump does. But he also stood for big government and social liberalism. These do not resonate with the disaffected. It might rally a lot of younger, urban people – but not the white working class. It would not have been hard for the Republicans to paint Mr Sanders as in fact being part of the liberal elite, who would bring with him socially liberal values, more interference in people’s daily lives, and higher taxes.

But for all that, the liberal left shares a disillusionment of the conventional centre with the conservative insurgents. They see the economic gains going to a lucky minority, while working class, and many middle class, people face increased insecurity – especially if they are young. The trouble is that the left lacks a convincing policy agenda to address it. Their solutions have a lot of the “same old” about them. And in particular they lack ideas on how to promote a thriving business environment, beyond more active demand management through fiscal policy, also promoted by Mr Trump, it has to be said.

So how to respond? Of course Mr Trump and his associates equally lack a convincing policy agenda to address the concerns of the left-behind. They will throw them some socially conservative red meat, but it is hard to see their economic policies making them better off. Meanwhile many social benefits, starting with health insurance, will come under threat. This gives the left the raw ingredients for a fightback. The developed world is becoming more socially liberal, so liberals must hold their nerve. And as conservative economic and foreign policies fail to gain traction, there will be more sticks to beat the conservatives with. Competence may come back into fashion.

But the left still needs a convincing policy agenda of its own. The old centrist agenda needs to be picked apart and put back together again. In my view this means a strengthening of local communities. Somehow a flourishing global economy needs to cohabit with flourishing local economies. Our hope must be that as Mr Trump as his conservative allies test their economic ideas to destruction, it will open people’s minds to fresh ideas. But those fresh ideas need to be fleshed out.

The government has made an error by not condemning attacks on the rule of law

Last Thursday the British government suffered a shock defeat in the High Court. It ruled that the government could not invoke Article 50 of the Lisbon Treaty, launching the process of exit from the EU, without parliamentary approval. Reaction to this has split along partisan lines, depending on whether you think Brexit is a good idea. But the reaction of some Brexit supporters is pure hysteria. This posed a challenge to the government that it has handled badly.

The case itself arises because Britain lacks a written constitution – so constitutional principles evolve in a rather haphazard way. The government’s case was founded on a curious combination of a brand new constitutional principle, and an ancient one.

The new principle is that sovereignty rests with the people, and that the referendum result was a clear expression of the will of the people, to which the state executive may conform directly, bypassing parliament. This is a perfectly viable idea. But it is not one that has been established in British law – and, indeed, it did not form the basis of the government’s legal argument, though it served to give it moral authority. The current principle is that parliament is sovereign, not the people, though parliament is subject to popular election. I am no fan of parliamentary sovereignty, though it makes some people misty-eyed – ironically it was much invoked as a precious British institution by Brexit campaigners during the referendum. Actually I see the sovereignty of parliament as a potential threat to freedom, and it should be subject to constitutional constraint, like all other parts of government. These restraints include such things as the Human Rights Act, and, indeed, the country’s treaty obligations to the European Union, which I view as a helpful restraint against corruptible power, rather than a dilution of democracy. One of my fears for Brexit is that it reduces the checks and balances of our constitution.

Still, parliamentary sovereignty is the rule, and it should only be changed through a due democratic process via parliament itself. And parliament has been very careful not to subordinate itself to referendums, which are an increasingly important part of our democratic system. They are always described as “advisory” – an act of consultation rather than authority in themselves. There is an ancient debate here between the virtues of direct democracy (such as referendums) and representative democracy (where elected parliaments have primacy). We haven’t resolved that debate properly – or if we have, it is in favour of the representative sort of democracy.

The ancient constitutional principle invoked by the government is that sovereignty derives from God to the anointed King or Queen, and from them to the Cabinet, a committee of the Privy Council. Parliament, or the People, are mere subjects of the royal whim (and, revealingly, “subjects” is the word commonly used in place of “citizen” in government language). This constitutional principle was heavily compromised by the Glorious Revolution of 1688, when parliament sacked King James II and passed the crown to William III and Mary II jointly; parliament further invoked its supremacy to secure the succession of Queen Anne in 1714 to George I. But the principle lives on under the Royal Prerogative, which is the basis of much executive power, including, relevant to this case, the making of treaties with foreign powers. The court decided that Article 50 would in fact involve a breach of Acts of Parliament rather than just the termination of foreign treaties, and so the government could not use the royal prerogative. Anybody who remembers the fraught parliamentary debates, from 1972 onwards, at each stage of the evolution of Britain’s membership of the EU, will not be surprised that it can’t just be unmade at the whim of the Queen’s representatives.

The court case isn’t over. There is an appeal to the Supreme Court, as is only proper in a case of such importance. But most think the judgement will be upheld. Talking to a senior lawyer when the case was brought originally, I was told that the High Court was likely to find for the government, but that the verdict stood a good chance of being overturned by the Supreme Court. So the government’s case looks weaker than it first appeared. You will gather than I am not particularly surprised.

So here we have a constitutional challenge being resolved in a civilised and proper way. That makes the reaction of some Brexit supporters very striking: they are saying that it is outrageous for unelected judges to intervene to thwart the clearly expressed will of the people. Suzanne Evans, a Ukip leader, has been particularly voluble, suggesting that the judges concerned should be sacked. But the Brexit newspapers, the Telegraph, the Express, the Daily Mail and the Sun in particular, are no better. The Mail sought to undermine the authority of the court by pointing out that one of the judges was openly gay.

This attitude reflects the views of much of the pro-Brexit public too, to judge by some vox-pops on the radio and social media comments. But it is in contrast to the equivalent populists in the US. These treat the US Constitution as holy writ, and nobody challenges the right of the Supreme Court to limit the actions of politicians or the state, or even to overturn the results of referendums, which happens frequently. Such is the difference that history makes.

What we have instead reminds me a lot of fascist attitudes in Europe before 1939, as practised by Hitler, Mussolini, and others, and advocated by a number of political groups in other European countries. The referendum was a favourite device of these dictators: a way of proving that they derived their authority from the will of the people. They saw the law as an instrument of executive power.

Of course we should not make the mistake of assuming that all Brexit supporters share such fascist tendencies, and we should remember that another key ingredient of fascism, the advocacy of a superman leader, is absent. Indeed pro-Brexit Tory MP Stephen Philips disagrees with the government on this, and has resigned in disgust at his party on this and other issues. But there seems to be a hard core, represented by Ukip, many Tory hardliners and a group of right-wing newspaper owners that are happy to undermine the independence of the judiciary. And that hard core holds the initiative, largely because the government lets them. The government response to the attack on judges has been limp; indeed one minister, Sajid Javid, actually joined in. Belatedly the Prime Minister and the Lord Chancellor affirmed their respect for the judgement, but failed to condemn the attacks made by their colleagues and the press, or create any kind of media splash.

This is a tactical error. The government’s best hope in pushing through Brexit is to take the heat out of it all. They had a major victory when Japanese carmaker Nissan was persuaded to keep investing in their British factory. This supported the general idea that the Remainers are stoking up a fuss about not much. Now the Remainers have something new to be angry about: the government’s complicity with an attack on the rule of law. Many liberals will be taking the Brexit slogan “We want our country back” for their own, so disgusted are they about the rise xenophobic and intolerant attitudes. Liberal Democrat campaigners trying to make the Richmond Park by-election about Brexit must be delighted.

Still, Remain supporters need to be careful. As yet there has been no major shift in public opinion. Most of the public will be unmoved by this rather abstract debate about the British constitution. That shift will only arise when there is a concrete threat to jobs, living standards and public services. Most voters assume the country will muddle through without too much damage. The government’s victory on Nissan was so important because it staved off one such concrete threat.

Incidentally that leads to an intriguing question. How was the government able to make the assurances it did to Nissan? It suggests that it is in fact aiming to achieve a version of “soft Brexit” with the UK staying in the EU customs union, and remaining subject to some EU jurisdiction – while the mood music is pointing to “hard Brexit”. This would explain why the government is so reluctant to say much about what it is trying to do.

But raising the political temperature on Brexit is a bad idea. The government needs to tread a middle course between the Brexit extremists and those that seek an opportunity to reverse the referendum result. A firm rebuke to those attacks on the judges would have been just that. And now it is too late.

Leave and Remain liberals will need to heal their rifts or the conservatives will take over

If we ever imagined that June’s referendum on Britain’s membership of the EU would end the arguing, we would have been much mistaken. I have taken part in this arguing enthusiastically, but it is time to take a step back. Where are we heading?

Let’s start with the Remainers. A recent poll has shown that few people who voted to remain in the EU regret their vote. They mostly believe that the results of Brexit will be highly detrimental, and many continue to protest. But what for? The vote for Brexit was narrow, but decisive within Britain’s political system. Most English and Welsh MPs have seen significant majorities for Leave in their own seats. The Remain vote was inefficiently distributed, with majorities mainly in London and Scotland, which is now politically marginalised by the rise of the SNP, a process that is likely to lead to that country’s breakaway. The vote is widely seen as an English and Welsh revolt against London, and the bulk of MPs are minded to heed it, and no general election will change that. The chances of stopping Brexit look thin – and would entail an ugly fight with Leave supporters that would do nothing to heal a divided nation. Only if the cohesion of the Leave side starts to break could alternative possibilities emerge – and there is no sign of that. Some leave voters express regret or apprehension, but this is very soft and is not a political move of any significance.

So why can’t Remainers move on and make the best of it? Because so many of them regard it as a matter of values. Remainers really don’t like the values of the stereotypical Leave supporters, whom they see as being illiberal – though not all are, of course. They get the anger of white working class voters, but blame it on national government failure not EU membership, and do not find that it is an excuse for narrow-mindedness or, as they see it, stupidity. Real venom is reserved for the many middle class supporters of Brexit – seen as a combination of the awkward squad, who always criticise and never take responsibility, and people who can’t accept that the world moves on. The rise in hate crime since the vote only convinces Remain supporters that they should stand up for their values. One way of looking at this is the popular model of grief, which sees denial followed by anger, bargaining, depression and only then acceptance. Remainers are stuck somewhere between anger and bargainings. They know that moving on means depression, and we are scared of the abyss, so are stuck on anger and bargaining.

What of the Leave side? It is possible to have some sympathy for them. The boot is on the other foot now. They are the ruling elite, receiving all the brickbats instead of giving them. Much of what is said against them is spurious or speculative, with an intention to stir up trouble rather than anything constructive. They find that nearly half the population is angry about the cause they support, and they don’t know how to handle it.

What Brexit supporters need to understand are the dynamics of change management: any disruptive change is going to be stormy. On one model I was taught in management training, change in an organisation goes through four distinct phases (clearly related to the five phases of grief). First there is denial. People think that the change doesn’t really affect them – it is about other people. Inexperienced managers mistake this calm for acceptance and think things are going well. Then comes anger, as the effect of the change sinks in and people realise that their comfortable ways will be threatened. Management is often accused of being clueless by people who haven’t understood what the management is trying to do. The next phase is chaos. As the change moves into implementation, things start to go wrong; people feel lost in an unfamiliar environment. Management’s reputation remains low. Finally things settle down and we have renewal. You have to understand that this pattern is inevitable in any meaningful change. In a well managed change there is still anger and chaos, but they are short-lived. In a badly managed one the change can be derailed, even if it is ultimately a good idea.

This is what is happening over Brexit. Brexit was always going to be disruptive: if you supported Brexit, this is what you signed up for – there’s no point in being annoyed about it. We have moved on from denial to anger: that’s progress. But the next phase is chaos – this has to be embraced rather than deferred, because otherwise we will never move on. The chaos phase will probably start with the invocation of Article 50 of the EU Treaty, which makes departure all but inevitable. But how to minimise the downside? The process has not been well planned (or planned at all, some would say), so getting through it quickly will be impossible. Brexit supporters need to keep moving things on so that things can start to settle down in a new reality. This requires a relentless focus on problem-solving, and not arguing about why you are doing it. But Brexit politicians tend not be strong on problem-solving – they are the disruptive types who like to blame others for anything that goes wrong, rather than sort things out themselves.

But within this chaos, there is a clear threat to liberals. Liberalism does not command majority support, but neither does its antithesis. If liberals form the right coalitions they can be politically dominant, as they often are. But the Brexit coalition is dominated by conservatives. Liberalism has been split. Most are Remain supporters, but many supported Leave. Leave liberals see the EU as an institution whose flaws are so deep that they threaten its avowed liberal values. They seek to combine liberal values with stronger self-determination.

So the threat is that conservatives dominate the ruling coalition, while Remain liberals absent themselves in a sulk. The result will be illiberal measures such as: excessive immigration curbs, which in turn limit the opportunities for Britons in the rest of Europe; conservative social policies, such as selective school admissions; and, in all probability, increased austerity as government finances come under pressure. Worse than all this there will be a prevailing political culture of blaming outsiders for the country’s mounting problems, resulting in a rise in intolerance of ethnic and religious minorities. Liberals of all stripes must resist this.

In the short term the anger of the Remain side may serve a useful purpose for liberals. It will weaken the Brexit conservatives, many of whom vastly overestimated the ease of transition, and certainly played down the difficulties during the campaign. But at some point Remain liberals will surely have to admit defeat and team up with the Brexit liberals to define a liberal Britain (with or without Scotland) outside the EU, and appeal to Brexit voters sceptical of the conservative political establishment.

How will this come about? Not by refighting the referendum. The two sides will simply have to agree to differ on the wisdom of leaving the EU. But liberals should find common ground in political and economic solutions that will make the country a better place. Political reform; devolution; improved education for all; better public services; and better support for communities disrupted by changes to technology and trade. Reconciliation will be hard, but if liberals don’t the conservatives will set the agenda.

Core vote or protest vote: what does Witney mean for the Lib Dems?

I seem to be one of the few Lib Dem activists in south England that did not go to the Witney by-election – though I was one of the earliest donors to the campaign fighting fund. The party stormed forwards from fourth place to a respectable second, with 30% of the vote, with the Conservative vote being cut to 45% and Labour holding on to 15% (they had been second). This result has predictably been spun a number of different ways. But what does it really mean?

Let me start with a couple of disappointments. First the swing of 19% to the Lib Dems was dramatic, but not good enough to secure the party much publicity. The coverage vanished quickly, and hardly registered at all in some channels. The Lib Dems badly need some eye-catching event to give them momentum, so that the public will start returning to voting for the party. My impression locally is that people are starting to move the party’s way again, but aren’t ready yet. This result will not do it. Only a win would have given the party real momentum, and that turned out to be too far for the party to reach. The result boosted morale internally, but I don’t see it having much more impact than that.

The second disappointment is that the result illustrates just how low the party has sunk in popularity. The party put out a widely quoted release that if the swing were repeated at a general election the party would win 26 seats from the Conservatives. My reaction: is that all? I wanted to insert a “just” in front of the number 26. It doesn’t seem that long ago when a swing like that would have taken the party into an absolute majority in parliament, with hundreds of new seats. Now it barely recovers half of what the party lost last year. And that was a by-election, where swings of that magnitude are hard to repeat more widely. That feels a distinct let-down.

Moving on, though, I have found two distinct narratives. First consider this from John Rentoul in the Independent, and this from Political Betting’s David Herdson. Both take the view that the Lib Dems are reverting to type as an inchoate protest party, that will say anything to pick up votes in a by-election, or anywhere else. This lack of coherence, they say, would be disastrous for the party if returned to a position of national influence, as whatever they did, they would annoy a large part of their electorate. The other narrative is totally different, and comes from The Economist’s Bagehot. He suggests that the party stuck to a core vote strategy, promoting the party’s open, and pro-European, credentials. Witney, near the university city of Oxford, is promising territory for such a core vote strategy – but it remains a minority strategy. In that light 30% is about the sort of result the party should have been looking for, considering the entrenched Conservative hold on the area.

So which version is nearer the truth? As I didn’t go there, I am at a disadvantage. From where I was sitting I could see evidence of both. There was much talk of squeezing voters (especially Labour ones) and using bar charts to persuade people to vote tactically. The campaign led off with a complaint about cuts to the local NHS, which hardly looked like a core vote thing. But the party also made something of its contentious stand on Brexit – where it is still firmly part of the resistance, compared to the Conservatives’ enthusiastic embrace of Brexit, and Labour’s reluctant one. And the result, with the Labour vote holding up quite well, points to a core vote proposition.

In fact the party still faces a choice between the two strategies. It might leap into the euphoria of protest politics, which was such a striking part of the party’s rise in the 1990s and early 2000s. Or it could stick with a more patient but in the long term more fulfilling core vote strategy – where the party builds up a loyal following based on its values, before chasing after floating voters.

Right now the two converge. The party’s core voters are angry and up for a bit of protest voting. But on the showing of Witney, people not in agreement with the party’s open values remain reluctant to vote for it. The party leadership needs to hold its nerve and stick with the core vote strategy.

Fiscal activism makes a comeback. But it won’t help savers

Even the Prime Minister Theresa May is saying it. Low interest rates are not lifting the economy in the right way. So time for government spending and tax cuts to take over? Or, as economists call it, active fiscal policy. She joins a chorus of academic economists and newspaper commentators.

The story goes back to the 1930s when the Depression was rampant. This hit government tax revenues and the conventional wisdom was that government spending had to be cut to balance the budget. Enter the great economist Maynard Keynes.

Keynes pointed out that the problem with the economy was a shortage of demand – not enough people buying things to pay for the people in jobs. Or to put it another way, there was excess saving. If people are saving, they are spending less than they earn. That means that there isn’t enough spending across the economy to pay everybody’s wages, so the economy sinks. Or it will sink if the savings are not spent on investment, which is another type of spending. Stuffing cash into mattresses is not investment. Neither is putting the money into a bank account unless the bank lends it to somebody who in their turn pays somebody to do something. In a depression people are unwilling to invest, and so saving tends to be higher than investment. And so the economy enters a doom-loop. Before the 1930s economies were marked by severe boom and bust cycles.

Keynes pointed to a way through. If government increased its spending or cut taxes, they would put money in people’s pockets, which would be spent, neutralise the excess saving and bring the economy back to life again. Slowly governments followed his advice, most famously US President Franklin Roosevelt with his New Deal. The most spectacular success came in Hitler’s Germany, which spent freely on infrastructure (think of the autobahns) and armaments. Keynes pointed out that it did not matter what the spending was on provided it was spent at home, or at any rate it didn’t matter at first. As the economy approaches capacity wasteful government spending is a problem, but not before then. The rapid expansion of the US economy as it was placed onto a war footing in the 1940s proved Keynes right beyond doubt. Thus was born fiscal policy as an instrument of economic management, and economics as a discipline entered a golden age. The swings from boom to bust were notably reduced in the 1950s and 1960s.

Then it came off the rails. In the 1970s things changed. The first shock was the breakdown of the Bretton Woods system of managed exchange rates – it could not handle the excess of US spending on the Vietnam war. This destabilised the international financial system. Then came the oil shock in 1973, as OPEC ramped up oil prices massively. The governments that tried to spend their way out of the subsequent recession merely created inflation and not jobs. The governments that applied stricter fiscal policy, West Germany and Japan in particular, suffered much lower inflation. Enter another economist: Milton Freidman.

Freidman suggested that Keynes had it all wrong. The issue was not managing government spending and taxes, it was managing the money supply. The Depression was severe because the banking system collapsed, and people couldn’t borrow money. A lot of what Freidman said turned out to be nonsense, but what evolved was the neo-Keynesian consensus. This relegated fiscal policy to a relatively minor role. In the conventional wisdom of the time (often referred to nowadays as “neoliberalism”), government spending could easily get out of hand, destroy inventives and make economies less efficient. Instead the main responsibility for managing the business cycle came to something referred to as “monetary policy”, run by central banks.

Monetary policy is a bit of misnomer, a hangover from Freidman’s emphasis on money supply. To this day people often explain monetary policy as if people paid for things in banknotes, which are printed at will by the central bank. In fact money has moved almost entirely to accounting systems of debtors and creditors, with banknotes relegated to a very minor role. The economic implications of a bank account are utterly different from those of a pile of banknotes. The idea of money supply is nearly meaningless. Instead of that, as regular commenter to my blog Peter Martin put it in a post to Lib Dem Voice, what we have is interest rate policy. Money supply in the economic models taught to students has become a completely theoretical concept that cannot actually be measured . If demand is falling in an economy, this is corrected by reducing interest rates, which should encourage people to spend more. If things look like getting out of hand, then interest rates are raised.

Through the 1990s and early 2000s this system seemed to be working, but it came under increasing criticism. Central banks used inflation targets to judge whether the level of demand was too high or too low. But this measure excluded asset prices, which were directly influenced by interest rates. Asset bubbles were allowed to develop. Then they popped in 2007 to 2009, in the financial crash and the big recession that ensued, which interest rate policy proved unable to correct.

Fiscal policy made a return. But it was tentative. As soon as the worst of the recession was over, governments cut back (widely referred to as “austerity”). Critics argued that this was stalling any recovery. Then the victims of low interest rates, those saving for pensions in particular, started to get agitated. This is most evident in Germany – but Mrs May was voicing concerns amongst her constituents in the UK.

So can fiscal policy help lift economic growth, in place of low interest rates? There is a strong case for this, but caution is warranted. Most economic commentators hedge their bets by recommending that extra spending is on infrastructure projects, that will yield economic returns in their own right.

This hints at the first of three reasons for caution. What if the reasons for slow growth are structural and not to do with low aggregate demand? Are we making the same mistake as the mid 1970s, when economists saw high unemployment and low growth and assumed that this meant lots of spare capacity? In fact economies then had suffered a major dislocation from the oil shock, and were slow to adapt because of excessively unionised and corporatist economic management. That was then, but there are plenty of suggestions as to what the capacity restraints might be now, starting with demographics. Investing in infrastructure should help overcome these constraints, killing two birds with one stone.

The second reason for caution is that economies have internationalised. A lot of the benefit of fiscal stimulus can leak abroad, especially if other countries have a deficiency of demand too. Fiscal stimulus might simply drag in imports from countries eager for export-led growth. Globally coordinated fiscal policy works much better. This was achieved in 2009, but consensus has broken down since. The risk of stimulating other people’s economies can be reduced if the stimulus programme is carefully designed. But it can be quite hard to tell where best to direct spending or tax cuts.

And the third reason for caution is the difficulty in understanding when to turn the tap off and tighten policy. Politicians are prone to fiddling the figures to put the evil day off. British Chancellor Gordon Brown was notorious for this in the mid-2000s, contributing, in my view anyway, to the severity of the financial crash in 2007-09. Anti-austerity has become a political totem on the left – and yet there must come a point in any business cycle when austerity is required. This is also a problem with using infrastructure investment as the prime instrument of fiscal policy – it is not so easy to manage according to the business cycle. Lead times can be long and if an investment project is worth doing, it is probably worth doing at all points in the cycle.

And a final point. looser fiscal policy is unlikely to help savers with raising interest rates. Interest rate policy and fiscal policy should not be working against each other. To raise interest rates we need to see a healthier British and world economy. That looks some way off.

Does the fall in the pound presage a financial meltdown?

The British pound is now at its lowest effective (i.e. trade-weighted) level ever, according the Bank of England’s 168 year index. There was a sharp initial fall after the referendum to leave the EU, and then a further fall over the last week after the prime minister’s conference speeches pointed toward a quicker and harder exit than expected. Is this just a routine fluctuation that can be shrugged off, as bigger falls have been in the past, or does it portend something nasty? It is, of course, too early to tell.

The pound’s fall has been seized on by supporters of Remain as the sole piece of substantive evidence to support their prediction that exit would make Britain worse off. Leavers are predictably unimpressed. Of course both sides seek to gather every scrap of evidence to justify the stand they took in the campaign, and this argument leaves us none the wiser. This blogger is not beyond such things, of course, but I do try to set a higher standard.

The first question posed by the depreciation is what was the pound doing so high before the referendum anyway. The country has a large current account deficit. In other words, as a nation we are spending more foreign currency in imports than we are getting in exports and investment income (or persuading foreigners to accept more sterling than they want to spend on British imports – it boils down to the same thing). In theory this suggests that the currency’s real exchange rate is too high. This has been a persistent and to me perplexing phenomenon since the late 1990s. Demand for sterling has remained high, notwithstanding the deficit. Investment by foreigners in property and business assets (or Britons selling off overseas assets and repatriating the proceeds) has kept the pound afloat for 20 years – though at a much higher level before the financial crisis of 2007-09.

This is, literally, a confidence trick. Investors have had sufficient confidence in the British economy to think that their assets will grow in value in terms of their home currency, rather than ours. It is hard to pin down why for sure. Britain is an easy place for foreigners to do business – we don’t have a xenophobic attitude to foreign investment, sometimes seen in countries as close as France. That encourages footloose capital in our direction. We have seen many takeovers of great British businesses (notably this year the chip designer ARM). Buoyant high-end property values have no doubt encouraged investors too, though it is hard to quantify.

Britain’s membership of the EU is doubtless part of the charm of Britain, for business investors at least. They can set up operations here with ready access to European markets, free of tariff and non-tariff barriers. Leaving the EU, and its single market, must surely dent the country’s attraction. But we don’t know by how much. It won’t change the ease with which foreigners can buy assets here. By itself it should not affect high-end property either.

There is, therefore, a clear case to keep calm. As sterling takes a fall, it makes British assets cheaper. This should be a compensation enough for British exit to the EU, though you might be wise to stay clear of some businesses, like motor manufacturing. A lower exchange rate should help rebalance the economy, reducing the current account deficit, and the country’s dependence on foreign investment flows. This is all self-correcting. And if you are a true Brexiteer you will be confident that a more efficient, better balanced economy will eventually emerge from any transitional wobbles. That may be right – I always thought that the hair-shirt case for Brexit, as I called it, was intellectually their most persuasive argument (referencing a post I made in March which stands the test of time). Could EU membership have caused that current account gap, or allowed it to persist, leaving us with an unbalanced economy?

There is a problem, though. Capital markets are not rational. Nobody really understands how they work, and they are at least as influenced by a complex game of second-guessing short-term movements as they are by cool, calm assessment of long-term prospects. They are prone to bubbles: excessive periods of confidence followed by excessive pessimism.

You can see this by the way market observers talk about movements in prices being persistent trends, rather than asking what the right price is. This is at its most striking in the property market, where price movements are talked as “performance” rather than finding an appropriate level. A long view investor might say that the pound has simply found a new and more appropriate level. A short view investor might suggest that the pound has been performing badly, so that further falls are to be expected. In the former case you have would expect the fall to be limited, in the latter the fall becomes a self-reinforcing trend. And the difference comes down to a not entirely rational quality: confidence.

Confidence is not a nice, mathematically well-behaved quantity. It is prone to behaving in a very non-linear way. It can disappear suddenly. Confidence in Greek government bonds used to be nearly as rock-solid as German ones. And then it disappeared. Could confidence in the pound, and then other British financial investments, like government and corporate bonds, disappear just as quickly? Could the 20 year bubble burst? It doesn’t have to be rational. If it does the wider consequences would be severe. Inflation could take off as the monetary floodgates are opened (by the government funding itself directly through the Bank of England); bank lending could simultaneously dry up causing a recession. Back to the 1970s in other words when, amongst other things, a massive rise in oil prices caused a rapid rebalancing. Is Brexit a similar shock? (even accepting, as with high oil prices in the 1970s, we end up in a better place).

It is hard to believe that things will turn out like this. There are some signs of vulnerability: property prices are high; the budget deficit remains high by historic standards, and so is the level of the national debt. There is little scope to restore financial markets by cutting interest rates. Gilt yields have been rising recently – suggesting that confidence in government finances is starting to fade. And yet the overall statistics do not suggest alarm – foreign exchange reserves, for example, look plentiful. But ultimately if the country has a current account deficit, and if foreign investors don’t want to finance it, there will be defaults or inflation or both.

As the FT’s Martin Wolf points out, a financial meltdown is not likely, but the risk of it has risen in the last week. The capital markets have given Britain an easy ride through its recent troubles, but that could change quickly. The government needs to be very careful about how it handles Brexit. Sovereignty in an interconnected world is always incomplete.

Can Brexit be reversed?

First was the shock. It seemed as if Britain had driven off the edge of a cliff. Then denial. The dust settled and nothing much seemed to have changed. But now, among those that follow politics and business, there is a slow, creeping realisation of just how big a mess Brexit is. This isn’t so much that the country has ruined itself in the long run (many believe that to be true, but a cogent case can be made otherwise); it is the sheer extent of short-term disruption. So we might ask: can it all be made to go away?

What has woken people up to the depth of problem is the government’s proposal to trigger Article 50 of the EU treaty in the first quarter of 2017, which leads to the country’s departure two years after that. That is not near enough time to put in place new trade treaties, and handle a host of other issues (who pays for British nationals’ medical bills in Spain? How do we manage the Irish border? And on, and on) all at once, given that this is all a matter of negotiation, and negotiations always go to the wire. That means that many businesses with an international dimension (not just exporters – anybody using imported parts or services from anywhere outside the UK) could hit a wall of confusion in 2019.

What makes this worse is the realisation that the split is going to be more “hard” than “soft”, for the reasons I explained in my recent blog. Remain supporters desperately argue for some sort of middle way that protects trading relationships – but no compromise deal looks anything like as good as the real thing, membership with the layers of concessions that Britain had accumulated for itself over the decades. So can we call the whole thing off?

The problem is that as soon as Article 50 is triggered (which astonishingly the government claims does not require a parliamentary vote), then it becomes very hard to come back. The government would have to negotiate re-entry from a very weak position. Such concessions as Britain’s contribution rebate would become an obvious target. So something needs to happen before that. Any hopes must largely rest on a court case challenging the government’s right to invoke the article under royal prerogative. If the government loses, then parliament has the opportunity to throw a spanner in the works.

Could the government fail to find a majority to push through Article 50, if it was forced to? Its majority is small, though some of the Irish parties would support it on Brexit. A rebellion from its backbenchers, or even ministers, is certainly feasible. But would Labour turn up with enough numbers to back them up? In the old days that would have been quite a safe bet. The party in opposition loved nothing more than to make mischief for the government, regardless of the rights and wrongs of the case at hand. But the current party leadership seems little interested in such games. There would need to be strong political reasons to galvanise both Labour and any Tory rebels.

What might those political reasons be? Remainers are trying to build a case around the idea that the Brexit vote did not amount to a mandate for the “destination”, or what replaces EU membership. This is weak. It suggests consultation just on the question of what type of Brexit we want – a choice between a miserable compromise or a highly disruptive major break. But the best alternative to hard Brexit is to overturn the referendum result itself. For that, something needs to happen to shake confidence in the referendum mandate.

Alas there is little sign of that. The lies peddled by the Leave campaign (most notoriously the idea that £350M would be available to spend on the NHS if we left) are being shrugged off, and set against some of the Remain campaign’s claims, such as that a Leave vote would lead to a draconian emergency budget. But something might blow up in the next six months and catch the public imagination. Or it could be financial instability, which is surely a possibility given the huge uncertainties and the country’s dependence of foreign finance. The wobbling pound is so far the only real sign of trouble – what if it keeps wobbling?

But these are thin pickings for people who support UK membership of the EU. It seems that the slim majority for Leave in the referendum, now routinely described as “overwhelming” by its supporters, has been the basis of a coup, which disenfranchises people like us. The people were consulted, and now the political elite has reasserted full control. The irony, of course, is that the Leave campaign was based on the slogan “take back control”, and appealed to voters who felt disenfranchised by political elites. No student of political history will be surprised that it is being used to consolidate elite power, albeit with some change in personnel.

There seems to be little that Remain supporters like me can do. It will take a feeling of betrayal from within the Leave camp, and a split, in order to give the idea of reversing the referendum result any traction. Unfortunately, if this ever happens it is likely to be too late.

So we must channel our anger into rebuilding the forces of liberalism for the long term. And we need to focus on two problems in particular. How can we give people a greater sense of political control over their lives, while enjoying the opportunities that global connections provide? And how should European institutions be reshaped so that they better serve European people, and so that one day, we may persuade the British people to rejoin? Meanwhile we must watch helplessly as a slow-motion disaster unfolds. “Told you so,” are the most unsatisfactory words in life, but I fear that it is all we are left with.

The Tories take possession of Brexit; the Lib Dems will benefit

Theresa May, Britain’s prime minister, closed the Conservative Party conference yesterday with a striking vision of her political direction, which was consistent with speeches made by other members of her government. This is a marked change of tone from her predecessor, the rather liberal David Cameron, and his Chancellor, George Osborne. Brexit is at the heart of it.

Earlier this week, FT columnist Janan Ganesh suggested that the stream of social policies coming out of the Conservatives were an attempt to deflect the politicians’ obsession with Brexit. But this is to misunderstand what these policies are about – they are an attempt by the Conservatives to tell people that voted for Brexit that they “get it”. The vote to leave the EU is the starting point of the whole thing.

What Mrs May is trying to do is to adopt what I will call the “Brexit coalition” as a political base. This starts with her hinterland: the non-metropolitan middle classes – most especially their older members, as their children are going to university and becoming more metropolitan in outlook. This group has a nostalgic view of the past, and feel threatened by the cultural aspects of globalisation. All the talk of patriotism, the hard line on immigration and the attacks on liberal elites (Oh how sick I am of being told that I am part of a ruling elite when all I am is a school governor!). Other nostalgic policies, like promoting grammar schools are in the mix too.These are bedrock Conservatives, largely taken for granted by Mr Cameron.

What is more interesting is that Mrs May wants to add the disaffected working classes, who voted in droves for Brexit, notwithstanding the advice of the Labour Party. They share the cultural biases of the non-metropolitan middle classes, but add to this resentment about economic insecurity. Mrs May is making a particular pitch for this group: emphasising the struggles of people at the margins, though failing to observe how much austerity policies, such as changes to tax credits, have added to their hardship. For these people she made a strong pitch for “fairness”, and indicated that she would act on a series of economic problems, like housing costs and poor infrastructure. She also rounded on unscrupulous businesses. In parts she sounded not unlike Ed Miliband, Labour’s previous leader, allowing her to claim the “centre ground”. Strikingly she also included a pitch for ethnic minorities, acknowledging discrimination. Ethnic minorities make up large sections of the working class, after all – though the Brexit voters tend to be “I’m not racist but…” types who think it is them who are the victims of discrimination.

But one part of the Brexit coalition is being left behind by all this: the businessmen who called for a bonfire of regulations to make businesses more competitive. On the one hand Mrs May’s tough line on sovereignty, immigration and foreigners points to a hard Brexit, and so little need to heed EU regulations. On the other the threatened policies to limit immigration would add a very hefty layer of extra bureaucracy on businesses, and the appeals to “fairness” suggest a strong role for regulation and government intervention too. Regulation and democracy go together like a horse and carriage. They may be jumping from the frying pan into the fire. But this part of the Brexit coalition always mattered more for its money than its voter appeal.

It is possible to admire the political cleverness of this. Ukip, who had been harrying the Tories on their nativist flank, are struggling at the moment, and this sort of thing should see them off, in Conservative constituencies at least. One might ask what the point of Ukip is. It also takes advantage of Labour’s disarray. At their own conference Labour failed to discuss Brexit. Their leader, Jeremy Corbyn, seemed to embrace it – but (admirably) failed to bang the drum on immigration. Other Labour big hitters want it the other way round: oppose or soften Brexit, but wave the flag on immigration. This leaves muddle at the core of Labour’s message on the top issues of the day. The party will no doubt maintain its iron grip on public sector workers, and those vulnerable to government reforms (students, benefit claimants, etc.). I would also be very surprised if their grip on ethnic minority communities was seriously dented. But this falls way short of an election-winning combination. It is not clear what is their appeal to grumpy working class voters, to say nothing of the non-metropolitan middle classes that former Labour leader Tony Blair made inroads on the last time Labour won an election.

But speaking as an ordinary decent liberal and proud citizen of the world (subject to a sneering jibe in Mrs May’s speech), I am aghast at the direction the Tory Party has taken. The are stigmatising foreigners and implying that I am unpatriotic. Many of us are friends, neighbours and work colleagues with people who are not British citizens, and we look on them as equal human beings who have earned our respect and a place in our society. I find that impossible to reconcile with some of the rhetoric coming out of the Conservative Party. And it gets worse. The EU referendum unleashed a wave of hate crime and anti-social behaviour aimed at people who are seen as not belonging here (not just foreigners of course). Much as the leaders of the Brexit campaign claim that this is nothing to do with them, Conservatives run the risk of allowing these attitudes to take root, even as they claim that it is not their intention. In the same way Mr Corbyn will not call off the misogynistic hard left thugs that are part his own coalition, contenting himself with mild disclaimers.

This is now becoming a real political opportunity for the Liberal Democrats. The party is now the best home for open-minded people who do not have a nativist outlook – or those of them appalled by developments in the Labour Party anyway. It becomes easier for the party to take credit for the better bits of the coalition years – which had accrued to Messrs Cameron and Osborne – rather than just the blame for the bad bits.

That opportunity for the Lib Dems will grow if the Conservatives fail to deliver on their new promises, as seems almost certain. As soft Brexit turns into a mirage, and hard Brexit turns out to be highly disruptive, and as the Tories fail to deliver economic gains, such as lower rents and better paid jobs, to working class and other struggling communities, and as the party’s small parliamentary majority bogs it down, then the appeal of Mrs May’s government will diminish. With Labour looking like an empty bubble of hope (or a pyramid scheme as suggested by the Economist’s Bagehot column), there is reason for the Lib Dems to gain.

Of course, the Lib Dems themselves have many serious questions to answer. But it may be easier than people think for it to double its vote share to 15-20% before coming under more serious scrutiny. As the keener Lib Dem activists travel to the latest by-election in Mr Cameron’s old seat in Witney, Oxfordshire, it is impossible not to notice the spring in their step. The bookies are already giving them second place (from fourth in 2015).

But this is a small shaft of light in a very gloomy British political landscape, as the wonton act of self-harm committed by its electorate in the referendum pushes events on a seemingly inevitable course.

The housing crisis is an opportunity for the left.

“A Britain that works for everyone.” This is what Britain’s Conservatives say they want to achieve under the new prime minister, Theresa May. Partly, of course, this talk is meant as an attempt to divert attention from the difficult choices implied by Brexit. But there is an issue that is slowly coming to dominate the life-chances of “everyone”, and could be even more important than Brexit: housing. Or to give this a bit more precision: the high cost of buying or renting residential property. In order to fulfil their slogan, the Tories will have to make progress on this. Will they?

What brought this home to me last week was a report that people born in the 1990s (the so-called millennials) are worse off than those born in the 1980s at the same time in their lives. This is startling for a society that has, generally speaking, benefited from economic growth over the last 30 years, and where educational standards are rising. And the reason is easy to see: compared to people born even ten years earlier, many fewer millennials can afford to buy their own homes. They are unable to benefit from a general rise in property prices that has proceeded apace over that 30 years. Meanwhile rental costs have gone up too, which only makes the gap wider. This phenomenon does not just apply to Britain’s overheated southeast – it afflicts most major urban centres, to say nothing of popular university cities like Oxford and Cambridge.

Why is this such a big issue? The millennials themselves are not particularly important electorally, especially as so many of them show little interest in the political process. But their troubles worry their parents. And the trend is evident from before the millennial generation. More importantly, the generations following the millennials will be equally deprived. The numbers of property have-nots are growing, and property wealth is being concentrated into a smaller number of hands. High rents is a cause of hardship for ever increasing numbers of people – and a cause of rising homelessness, with all the other problems that brings in its wake.

Politicians are increasingly aware of this. Conservative leaders are talking the talk. Mrs May has appointed a new cabinet level minister of housing, Sajid Javid, who talks of a moral crisis. All leading politicians talk grandly of building many more houses. But there are two political problems, which are linked. The first is that the crisis arises from a profound failure of market incentives. And the second is that any policy that actually works is going to hurt a lot of politically influential people. This combination presents a test for Mrs May that she is unlikely to pass. It is one of the few decent opening in British politics for the left.

First consider market forces. Read The Economist and you might think that the housing problem is quite simple at heart. It is a failure of supply to meet the increased demand for housing from a rising population and changes to lifestyle that mean more people want to live alone. And there is a ready culprit for this: restrictive planning laws and NIMBYs who resist new housing developments, which between them surround our cities with over-protected green belts. This glib explanation contains some truth, but it misses two awkward points: much land where development is permitted is not being developed because owners would rather wait – “land banking”; and loose monetary policy has pushed up the cost of housing regardless of supply and demand.

Consider the first point. Property developers profit massively from increasing property prices. Indeed, it is central to their business model. They like to build cheap houses to maximise their profits from land trading, fighting furiously any regulations that might make homes more thermally efficient, for example. It is not in their interests to increase supply to levels where the value of property starts to come down. For all their moaning, they are quite happy with the situation as it is – though they would love to get their hands on green belt land with permission to build, and bank that too. A similar logic applies to rental values, since so many new properties are bought to let. The economic incentives do not point to the private sector solving this problem by themselves. In fact many private sector actors are likely to oppose any policy that actually bites, since that means cutting rental and sale values.

The effects of monetary policy are less understood: by this I mean the way governments and their central bankers have had no real qualms about rising levels of debt used to finance private house purchases. This has been happening since monetary policy was let off the leash by the collapse of the Bretton Woods system of fixed exchange rates in 1970. The extra monetary demand for housing set off by this increased availability of finance has not been matched by an increased supply of housing. Indeed it is about this time housebuilding slowed down. Easy money has simply led to the inflation of land prices.

To illustrate this, look at this graph of the ratio of house prices to earnings from Wikipedia (By D Wells – Own work):

We should expect to see house prices rising in line with earnings, given its relatively limited supply. We can see that the ratio of prices is tied closely to monetary conditions. Monetary conditions were loose in the late 1980s (the Lawson boom), but had to be tightened as inflation started to get out of hand. That caused a crash that is seared into the memory of older Tory politicians – the years of negative equity. Then things eased, with the mid to late 1990s and early 2000s being years of easy money. The financial crash of 2008 tightened things up, but now conditions are loose again.

Of course easy money and land-banking are self-reinforcing. If property prices dip, property developers can be confident that monetary conditions will ease and come to their rescue.

If I am right about these two problems lying behind Britain’s housing crisis, the solution is quite easy to see. First there needs to be a massive public-sector house building programme, including a large proportion of good-quality social housing, available at rents well below the current market level. This is best done by local and regional authorities, and financed by allowing them to borrow much more. This would put downward pressure on rents, which is perhaps the most urgent aspect of the housing crisis. It would also make it much easier to tackle homelessness.

The second thing that needs to be done is to tighten monetary policy. This may be by using some form of quantitative control on housing debt, but it may also mean raising interest rates. The main idea would be to encourage banks to finance local authority housebuilding, rather than private mortgages. This will require political courage, as it means, for a time at least, property prices falling without making property more affordable (since it will be harder to get finance) – as happened briefly after the crash of 2008/09.

The good news is that the first of these two groups of policy is fast becoming consensus on the left – sweeping in Labour, the Greens and the Liberal Democrats. And yet it will be very hard for the Conservatives to stomach. They associate social housing with left-wing voters. It may also upset NIMBYs where the estates are to be built, to say nothing of hordes of people who have invested in property to let – all natural Tories. Tory politicians talk freely of raising large sums of money to push house construction forward. But I have not heard any talk of giving a serious boost to social or public sector housing, or giving local authorities more freedom. It sounds horribly like subsidies for the private sector that will end up by inflating prices and developers’ wallets further.

On the second issue – reducing the volume of private housing finance – I see little sign from anywhere in the political spectrum of this being taken up. This is unsurprising. It would mark a profound change in economic management, which is heavily based on monetary policy. And change would cause outrage in Middle England, attached to its property values. And yet the current way speaks danger. It is increasingly dependent on ever increasing property prices, as these lose touch with incomes. It is a bubble that will surely burst at some point. Even so, I am sure that the left is closer to this policy change than the right. One implication is that more of the load of economic management will be taken by fiscal rather than monetary policy. The left is much more comfortable with that, though I suspect few have taken on that it means supporting austerity at the top of the economic cycle.

Mrs May talks much of making life better for the hard-pressed in our society. Lower rents are surely by far the best way to achieve that. Does she and her party have the stomach for it? If not, the left will have its chance.