Economics & Finance – Page 11

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.

Globalisation has undermined economic autonomy by more than most people realise

“We are all in this together.” Thus spoke George Osborne, Britain’s Chancellor of the Exchequer in 2010, to justify the austerity policies of the Conservative and Liberal Democrat coalition. He meant that the burden of austerity should be shared right across society. Whether or not his government delivered on that promise, it is true in another sense. The world increasingly works as a single economy, and individual nations are losing their power to manage their own microclimates.

This is the message of a very interesting article in last week’s Economist. The immediate point of the article is to criticise Germany for its persistent and large current account surplus. This is making it harder for its neighbours, especially in the Eurozone. It is sucking demand out of the European economy; meanwhile, through its strong advocacy of budget discipline, Germany is making it very hard for other European countries to make up the shortfall, especially in countries like Greece, who arguably need it the most. This is an old story, which has been pursued many times by commentators such as the FT’s Martin Wolf; some recent IMF research just underlines the matter.

But the article goes on to make a wider point. There seems to be a wider contagion problem in global demand. In weak economies, demand falls, and one way or another this reduces current account deficits and increases surpluses. Weak demand directly reduces imports; a weak currency or pressure on wages makes exports more competitive. Greece has turned a spectacular deficit in 2009 into a significant surplus. But this reduces demand in healthier economies, spreading the weakness. There arises a cycle of doom, unless surplus economies, like Germany, start borrowing to stoke up demand. But there is little political imperative to do so: there are political benefits to surplus, which tend to strengthen the hands of ruling elites and allow greater stability. Financially secure deficit countries, like the US and Britain, might also do a bit to stoke up demand – but ultimately their deficits limit their capacity to do so. Sustained fiscal stimulus, as practised by Japan for example, really requires a current account surplus.

But this is only the start of global interconnectedness. Both inflation and interest rates seem to be determined more by world markets than domestic policy – in the developed world at least. Hence a remarkable convergence between nations as far a apart as Japan, Britain and the USA. The penny does not seem to have dropped amongst many economic commentators, though.

What accounts for this degree of interconnectedness? It was not so evident in the 1970s, when there was much more divergence between the major economies: compare that decade for Britain, Germany, Japan and the US. The most important single driver was the collapse of the Bretton Woods system of global capital controls, and the liberation of currencies to float where markets took them. There is a paradox here: these freedoms should in principle make governments more independent. Alas there are no free lunches in economics.

Free capital movement frees up countries to run large current account surpluses and deficits. In a system of limited capital flows a surplus country had a problem of what to do with its foreign currency earnings. Meanwhile deficit countries can find it quite hard to find the money to pay for imports. The decades before the 1970s were dominated by balance of trade crises. Older Britons will remember the devaluation crisis in 1967 (which I still remember though I was but 9 years old – such was its impact). In 1956 the US abruptly ended Britain’s adventure in Suez as it threatened to cut support for the UK currency.

Now governments find it much easier to ride imbalances of trade, though eventually deficit countries run out of road (Argentina comes to mind); surplus countries find things much easier, except every so often their foreign financial holdings can take a hit.

But the freedom to run up surpluses and deficits has also given rise to a dependency on global capital markets to fund businesses, governments and private individuals (typically to fund house purchases). The financial crash of 2008-2009 was only the nastiest episode of many, where events in one country shook economies far away. The British government of the time could not believe that a tumble in US sub-prime real estate prices could totally derail their own economy. Labour politicians still put on an air of injured innocence – though Britain’s dependence on global capital flows was positively reckless.

There has been an important second development, apart from the freedom of global capital, though: the rise of global supply chains, and of China in particular. It is hard to underestimate the impact of global trade and global competition on the world economy. This has led to the biggest reduction in world poverty in human history – but the impact on traditional industrial areas of the developed world has not been so benign. One of the most important consequences has been to change the dynamics of price movements in both the labour and goods markets. A rise in the price of goods does not automatically lead to a rise in wages, as it used to. In the 1990s and 2000s economists attributed the remarkable stability of inflation in the developed world to sound monetary policy. But the globalisation of supply chains was a large factor – which may have allowed monetary policy to be looser than it should have been, contributing to the eventual crash.

All this leads to a key question in the current world economy. Does the generally disappointing level of demand in the developed world arise from the lack of coordination of economic policy, rather than deeper factors like demographics and changes to technology? The recent G20 meeting seemed to suggest as much, but no concerted action was agreed upon. I have always suggested that deeper factors where more significant – but Economist article poses troubling questions.

And then there is a question of economic strategy. A global economic government is clearly out of the question. We only have to look at the struggles of the Eurozone to see that. So is there a way of regaining control of our microclimates, without throwing away the gains from world trade? This applies, incidentally, not just to countries, but regions within countries. Clearly the answer is not the free movement of currencies, as some Anglo-Saxon commentators like to think. But we do need to think about how to manage the movement of capital better, both internationally and within our countries.

Should central banks raise their inflation targets?

About this time of year the world’s central bankers converge on Jackson Hole, Wyoming for a conference. This is an opportunity for many to think about what this important set of government officials should be doing. To judge by the coverage in the Economist, one of the main topics is whether the developed world’s leading central banks should raise their inflation targets, from, say, 2% to 4%. The Economist thinks they should. I am sceptical.

Monetary policy, and in particular the manipulation of interest rates, has a special place in the neo-Keynesian conventional wisdom that became mainstream in government circles from the 1990s through to about 2007, when things started to go badly wrong. The idea was that economies are best regulated at the macro level through interest rate policy, alongside “automatic stabilisers” in fiscal policy; this replaced an approach centred on fiscal policy alone that fell apart in the 1970s. Essentially central banks cut interest rates when the economy needs a lift, and raise them when it needs cooling down. The way this is managed is in relation to an inflation target, typically of 2%. If inflation dropped much below the target, it was time for a lift, if it rose above, it was time to remove the punchbowl from the party, as one central banker put it. Inflation is the main way policymakers are supposed to judge whether an economy is running above or below its natural capacity, around a target rate which is supposed to be neutral.

For a decade or so this all seemed to go very well, as the leading economies experienced steady growth and low but steady inflation. Japan was the exception, as it suffered from deflation and weak economic growth – and the country’s central bankers and political leaders were much criticised as a result. It was all too good to be true. After 2007 all the leading countries looked like Japan, and proved unable to use monetary policy to give their economies the lift they generally thought was needed. Central bankers had to deal with low inflation and near zero interest rates, meaning that they could not use interest rate policy to achieve stimulus – since they could not reduce rates below zero (a boundary that some have tried testing more recently, with mixed results). They resorted to buying bonds instead (which they called “Quantitative Easing”). Amongst other problems with this policy, it threatened to blur the line between central banking an ordinary government treasury management. There remains little sign of a serious breakout from the lacklustre post-crash economics.

Hence the idea of raising the inflation rate target. The theory behind this is that it would allow central bankers to put more oomph into their monetary easing , once they have found a way to raise inflation up to the target. The advantage of a higher rate of inflation is that it becomes much easier for central banks to implement a negative real interest rate, should that be warranted. If inflation rates are 4%, and interest rates zero, the thinking is, people and businesses will rush out to buy things rather than watch their monetary assets shrink. That then corrects the imbalance savings and investment that they think is dragging economies down.

This idea is unlikely to get very far. The first reason, and probably the most important, is that allowing inflation to rise breaches what many see as a sacred bond of trust between a government and its people. This is something that liberal economists struggle to understand. To them money is just another tool to be used in the process of managing an economy; a means to an end. But many others have a different view – a theme explored by Lionel Shriver’s recent novel, the Mandibles. This sacred bond view is why linking currency to gold is so persistently popular. And it has particular strength in the US and Germany, in spite their very different histories. Using inflation as a state policy is abuse of power in this way of seeing things. At the very least it needs a democratic mandate.

This is no small political obstacle, though I personally incline the liberal economist view, and feel that gold used as money is an outright evil. But I am sceptical that inflation works in the way it used to in the world’s leading, developed and globalised economies. Raising the central bank target is one thing, but persuading the rate of inflation to follow in an economically constructive way is another (it doesn’t help if consumer prices race ahead at 4% while wages are stuck at zero).

What’s the problem? I think global markets for goods and capital have become so integrated that efforts to raise inflation are rapidly undermined. Furthermore wages and prices seem to be driven by different forces. Public expectations of inflation, the critical driver of inflation in the neo-Keynesian model, have lost their force. The idea that there is a universal rate of inflation reflecting the depreciation of money is an idea that is becoming distinctly unhelpful. Inflation, for example, does not make private debt more affordable if it does not feed through to pay (quite the opposite, in fact); and something similar happens to public debt, as tax revenues are more likely to be driven by pay than the prices of goods and services. This is a problem that does not seem to occur to many commentators on economics.

A further problem is how low interest rates or QE transmit themselves to raised prices anyway. The old idea of expectations being managed by the government and the central bank has signally failed in Japan, for example, when Shinzo Abe’s government tried to do just that. Companies did not want to raise pay unless they really had to, and would not raise prices of goods either. It is true that a loose monetary policy can cause the currency to fall and raise import prices – but this does not necessarily transmit to the rest of the economy. In Japan it took much bullying by the government of big businesses to have any effect, and their response was so grudging that no lasting change was made. Other governments and central banks may have even less power. Imagine how German firms would respond to the ECB saying they wanted a bit of extra inflation?

So what does a looser monetary policy achieve? First there seems to be a lot of idle cash. Money that hangs around unused does not stimulate anything. And then the prices of some assets may be raised, both at home and in wider capital markets, which the globally liberated world has made very easy, without the creation of new assets. In other words, asset price bubbles start to inflate.

In short the conventional neo-Keynesian theory should be given a decent burial for the leading developed economies. It is a bit different in less globally integrated countries, or in developing countries that are subject to rising in productivity where we can expect pay to be more buoyant.

Instead of chasing this particular phantom, economists and policymakers need to ask themselves more searching questions. Why is the rate of investment so sluggish, and unable to keep up with savings? Why is conventionally measured productivity stagnant? This is the real problem. And what if low investment and low growth are facts of life in a mature economic system, rather than ills to be cured? And meanwhile we economic chatterers might ponder the role that the constancy of money plays in the social contract, and how, perhaps, we take a bit too lightly sometimes.

The post-Brexit phoney war on the economy

Two months after Britain’s shock referendum result, and what has happened? Not a lot. Though you wouldn’t think it from reading the running commentary. So was Project Fear the hoax that the Leave campaigners always said? Probably not.

The few days after the result seemed to fulfil Project Fear more quickly than even Remain campaigners suggested. The pound fell sharply and many stock indices tumbled too. There was much talk of this or that investment being stopped, or this or that institution or business being under threat. Remain supporters have kept up the pace of alarmist talk ever since, to judge by my Facebook feed.

But Brexit campaigners have a point when they poke fun at this. When it comes to cold, hard economic statistics it is very hard to see much, or any, adverse impact. The stock markets have fully recovered. Retail sales, employment and prices all looked pretty healthy in July. The government still finds it laughably easy to raise money on the bond markets; the Bank of England’s currency reserves went up. Only that fall in the currency has persisted. And no doubt that reflects weaknesses in the economy before the vote – given the scale of the ongoing current account deficit. The various indicators that have taken a plunge represent sentiment rather than hard fact, and may have been contaminated by the sheer shock of it all, as might the gloomy reports from the Bank of England and the Institute for Fiscal Studies.

On only one thing can Brexiteers be disappointed. The remaining EU has sailed on just as smoothly as the UK, with the Euro strengthening significantly against the pound. This defies predictions of imminent panic and collapse gleefully made by (some) Brexit campaigners. No other country seems at all inclined to follow Britain’s lead to the exit. Even as the emerging kerfuffle on Italian banks is as good evidence as you might ask for about problems with EU rules and democratic mandates.

There is, of course, one possible explanation for this insouciance: denial. Maybe people think that exit is so hard, and will have such obviously dire consequences, that it will never happen. Speculation about the invocation of Clause 50 for formal exit pushes it further and further into the future. If so it shows remarkably little insight amongst the market makers. Any process by which the referendum result is reversed will be very messy, and entail a lot of collateral damage.

Personally I think people are putting too much faith in the markets’ ability to see trouble ahead. The signs that the 2008 crash was in the works were obvious more than a year beforehand, when the interbank markets froze. Strong enough, as I don’t tire to point out, for me to move my pension portfolio from shares into index-linked gilts and cash. The more perceptive would have seen the trouble coming a year before even that, when US property prices started to slide, threatening the foundations of the whole financial edifice. And yet the markets did not reflect the mounting danger at all.

And at the other end of the scale, when it comes to the multitude of small decisions taken by consumers and businesses that drive the short term statistics, there is also a sort of built-in inertia. Short term decisions quickly overwhelm intangible longer term worries. People don’t know what to do, so they carry on as normal.

There are two ways in which the Project Fear may yet turn out to be on the money. One is a slow decline that accumulates: slower growth turns to a shallow recession that persists. That would be perfectly consistent with current statistics. The other way would be like the 2008 crash: a delayed reaction leading to a sudden crash. Both of these follow my metaphor of the economy being holed below the waterline in my post in the week after the result. The ship is in mortal danger despite no damage visible above water.

Why might trouble happen? It comes back to the basic weakness of the British economy (which, it must be said, EU membership was doing little to help) – a substantial trade and current account deficit. Britons as a whole are spending more than they are earning, and have been for many years. That has been OK because plenty of foreigners have been prepared to lend us money, or to invest in British businesses or property. Also British multinationals may be selling off foreign assets and bringing the proceeds home. Brexit is putting that investment flow at risk.

What happens if the country can’t get enough currency to pay for imports? Demand for Sterling falls, and the currency sinks. That might attract investors (British assets look a bargain) or scare them (with the risk of further depreciation). Currency reserves, private and national, start to be drawn down. That will affect living standards. Then either the trade balance corrects (buy fewer imports and sell more exports), or things start getting nasty with a financial crisis as the stability of banks and the entire payments system comes into question – which is what happened in 2008, for different reasons. These changes tend not to happen smoothly.

The problem is that the financial system is very complex, with all sorts of buffers and hidden dependencies, which makes it non-linear. Responses are not proportionate to the changes to the system. Past performance is a poor guide to future dangers. There might be a lot of short-term factors stabilising things, but that could be undermining resilience. The country could be building up vulnerability to the next financial crisis, just as the Labour government of the naughties created vulnerability to the banking crisis of 2008.

Or perhaps the Brexiteers are right. The financial system will adapt to the new realities calmly and the British economy is fundamentally stronger than the pessimists say. The economy will sail serenely on and gather strength to boot.

The thing is that it is just too early to tell. It could be many months, or even years, before any crisis caused by Brexit emerges. I will be watching for signs of trouble. But, to be honest, I haven’t seen them yet. It’s all a phoney war.

Was the coalition’s austerity policy a colossal mistake?

Politics is dominated by historical myths, about which the different political camps disagree. Examining these myths critically is one way that societies can find reconciliation. While “austerity”, the favoured shorthand for government cutbacks, is fast sinking as an issue in British politics, long since overtaken by Brexit, its mythology remains a defining issue. This mythology has right and left versions. I want to look at the mythology of the left.

Few in the Labour Party would disagree with Oxford Economist Simon Wren-Lewis in a recent article that austerity “will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.” We in the Lib Dems are implicated in this criticism, as part of the coalition government of 2010-2015 that implemented austerity. It is exhibit B in the Labour case that the Lib Dems should cease to exist as a political party, and that all “progressives” should simply join their party (exhibit A being the tuition fees fiasco). So what are we to make of it?

Mr Wren-Lewis sets out this narrative very clearly in his article. He is an open Labour supporter, so his comments come with a political slant – but he is a proper economist and the case he makes is a substantial one.

This narrative runs something like this: in 2008-2009 Britain followed the world into a severe recession, brought about by a global banking crisis. This inevitably created a government deficit, of which he says: “We experienced record deficits in 2010 simply because the recession was unusually severe.” The Labour government used fiscal stimulus to moderate the effects of the recession, but the Conservative-Liberal Democrat coalition that came to power in 2010 rejected this approach and focused obsessively (so the story goes) with reducing the deficit, using austerity policies – cutting government spending severely. He claims that this focus on austerity had no economic merit, and is best understood as a political exercise to reduce the size of government, with misery as its by-product.

Mr Wren-Lewis says that the government defended its policy with three arguments: that innovative monetary policy would provide the necessary stimulus; that improved business and consumer confidence would do the trick; and that financial markets would not finance the national debt unless action was taken. He demolishes each of these arguments, and I would not disagree with him, though there is an element of hindsight and the first two ideas came good in the end. As a result, he says, the British recovery was extremely slow, costing the average household £4,000 a year – coincidentally about the same as the Treasury’s estimate of the costs of Brexit.

But Mr Wren-Lewis is being disingenuous. There was a fourth argument for austerity. And that was that most of the deficit in in 2010 was “structural” – in other words had a deeper cause the recession. If I remember correctly, the Office of Budget Responsibility estimated that about 8% or so of the 11% deficit was structural. In other words a lot of the pre-crash tax revenues were gone for good, and would require more than short term demand management to bring them back.There is plenty of scope for disagreement amongst professional economists here – but it does suggest an alternative narrative, to which I personally subscribe.

This narrative posits that the British economy was not in a stable position when recession struck. It had already been pumped up by excess fiscal stimulus; there was too much private sector debt; and there was an unhealthy dependence on international finance and, to a lesser degree, North Sea oil. The evidence for this is not just the precipitate nature of the crash – bigger in Britain than in other developed nations – but the large current account deficit before, during and after the crash, and the high level of Sterling beforehand, and its abrupt fall. It is true that the public deficit did not look outsized by international standards before the crash, but, as my macroeconomics lecturer pointed out at the time, the overall economic context had classic signs unsustainable fiscal stimulus. The crash was more than an ordinary business-cycle downturn, it was Britain’s financial chickens coming home to roost.

So what does that mean? It means that fiscal stimulus as a response to the recession would have only a limited impact, and would not have restored the economy to its previous health, and in particular it would not have solved the government’s deficit problem. Before long the additional demand generated would have led to inflation (in fact unlikely outside economics textbooks) or (much more likely) a worsening current account deficit, i.e. stimulating other countries’ economies rather than ours. That put the British government in a bind. There was a case for stimulating demand through fiscal policy, and yet government expenditure had to be cut back towards something sustainable in the medium term. The government in fact plotted a middle way and, far from obsessively focusing on deficit reduction, moderated the cuts when the recovery proved slower than they expected. The trajectory of deficit reduction was close to that projected by the outgoing Labour government in 2010.

But many distinguished economists were and remain highly critical of the coalition’s austerity policies. Labour supporters can quote any number of famous names. But you need to read what these distinguished people actually said, rather than the mood music they fed into. In fact they hedged their bets. They focused criticism on the lack of public investment, and not across the board austerity. Investment, in theory anyway, is a magic bullet in this context. It generates future productivity growth, so helps to put the economy on a more sustainable future path, while at the same time providing short-term demand. This is a perfectly valid criticism of the coalition record, shared by many Lib Dems who were part of the government. But it does not suggest that the majority of austerity policies were wrong in principle. Taxes and spending were badly out of line and something had to be done to return them to balance. All I can say in the government’s defence is that public investment is much harder to do in practice than in theory – so often the money ends up in wasteful white elephant projects. But it would have relatively easy to allow the building of more council homes, for example.

Where I agree with Mr Wren-Lewis (though he does not explicitly say it) is that the macro-economic policy presented by Labour at the General Election in 2015, under Ed Balls and Ed Miliband, was much more sensible than the one presented for the Conservatives by George Osborne. Mr Osborne proposed a charge towards fiscal surplus that made little economic sense – and one year on it is being buried by his successor. The Labour strategy would have knocked some of the hard edges off austerity, while promoting a higher level of investment. The left is right to call to call it “austerity-lite”, but wrong to suggest that this was a bad thing.

So criticism of austerity is warranted, but this does not amount to what the left wants it to do: to prove that cuts to government spending and benefits were unnecessary, and still less that they can be reversed. Extra spending will require higher taxes. Economists may feel that austerity policies are self-defeating in many instances, such as in some of the Eurozone adjustment programmes. But there is also growing recognition of a deeper weakness in many advanced economies, including Britain’s, signified by the stagnation of productivity. That is limiting tax revenues and what governments can afford to do. That weakness should be the central topic of political debate.

How should Lib Dems embrace economic policy?

The British Liberal Democrats are setting up a policy working group on the “21st Century Economy”. I was among over 200 people to volunteer to take part, but sadly I was not picked. Those that have been picked will face truly daunting quantities of advice and reading material, but nevertheless but doesn’t stop me from offering my thoughts today. This time I won’ focus on the hard content of any new policy, but on its all-important political framing.

So far as content is concerned, regular readers will have got the hang of it. I blogged about it last year as part of another Lib Dem initiative, recommending Four Themes. These themes are green growth, small is beautiful, humane public services and redistribution of imbalances.

This line of thinking is very compatible with Lib Dem values and should go down well with the membership. But it presents a political problem. It means overturning several beliefs that the British public policy establishment holds dear. These include that higher volumes of consumption of things are essential to economic health (and may even be a measure of it), and that large, centrally controlled systems and organisations are the most efficient. It amounts to a policy revolution. And revolutions make people uncomfortable.

It is essential for future political success for the Lib Dems to have one foot in the political mainstream – so that they are regarded as being basically a sensible party. If they aren’t they will be condemned to the margins of politics like the Greens. It is the same dilemma faced by Labour supporters as they challenge capitalist ways. You do not secure lasting political progress in a democracy from the extremes.

The Lib Dems should therefore present a radical policy agenda in an un-radical way. It must be evolutionary, not revolutionary. The party needs to specify small steps forward, each of which is able to achieve demonstrable improvements, that will over time change the conventional wisdom.

This is why I particularly like the idea of Green Growth. it contains a highly constructive ambiguity. On the one hand it suggests that the party favours economic growth in the conventional sense, which the public has come to associate with better employment conditions and higher pay. But it does not quite say what is actually meant by growth – it could mean general wellbeing and quality of life rather than volume of consumption. Meanwhile the phrase unambiguously points to environmental sustainability. I strongly suggest that the Lib Dems make the phrase central to their proposition, or come up with something that does the job even better.

That’s my first piece of advice. My next advice is that they need to tread very carefully around two hot political topics: free trade and macro-economic management (aka “austerity”). These may well be excluded from the policy group’s formal scope, but the party’s wider narrative cannot avoid tackling them.

Free trade is a totemic issue for the Liberal Democrats. It was the one of the key organising themes of its predecessor: the Liberal Party. That was in a different time and context, of course. The Liberals then saw free trade as a way of breaking the hold of the landowning classes, who sought to protect their business interests (especially agricultural) at the expense of high prices for the masses. But even now, it is clear that freedom of trade, and competition, is a good way of keeping consumer prices down and freedom of choice up. By and large the general framework of world trade is something that Lib Dems will be quite happy with.

But something has changed in the power balance. Free trade helps keeps prices down, but it also seems to be doing the same with wages, until you reach a globally mobile elite of senior managers and other professionals. And worse, the instruments of free trade can allow globally powerful businesses to legally challenge public policy. There are some particularly odious examples from the tobacco industry as they have successfully slowed down, though not defeated, the introduction of plain packaging of cigarettes. Intellectual property is another issue that needs to be examined with a sceptical attitude. It is promoted by many businesses as being akin to any other form of property right and fundamental to civilised existence, but it is often used to stifle freedom and innovation, rather than encourage it. It is a favourite means for the manipulation of profits to low tax regimes by multinationals.

And trade agreements make this a hot topic. Brexit adds to the relevance. There were already cogent arguments that the EU was using its free trade rules to block general public policy (such as restricting state subsidies to the steel industry – though liberals should see two sides to that argument). Brexit does let Britain off the hook for the proposed EU-US trade pact – TTIP – which is causing a lot liberal angst. But the country must decide what sort of trading relationships it wants, and how far to go – including whether to join multilateral pacts such as the nascent one in the Pacific, TPP, which the country could join if it left the EU (or so I read). I have to say that I am agnostic on this question. My faith in free trade pacts has been shaken, but not destroyed. But the issue is becoming a political touchstone, and the Lib Dems would do well to apply some serious thought to this area, rather than recycling old slogans.

The Lib Dems will also find a minefield confronting them on macroeconomic management. The left have decided to make opposition to “austerity” one of its organising principles. I suspect that is because they draw so much strength from public sector employees and people from places such as universities and charities that depend heavily on public largesse in some shape or form. But anti-austerity does not resonate amongst the general public, who generally get the impression (justified or not) that public spending benefits other people. Since the Greens and Labour have drawn away the more trenchant political voices on the left, the Lib Dems have the opportunity to strike a more nuanced tone. Austerity is an elastic idea, so it is quite possible to say that you are against it, but the party should not apply “homeopathic policy” – mouthing anti austerity rhetoric while diluting the substance – as this did not work well for the previous Labour leadership.

My advice is for the Lib Dems is to stay clear as they can from the word “austerity”, and to strongly advocate higher levels of public investment in education (not just schools, incidentally) and green growth. Public services, though, must deliver value for money, and will need continued reform – though not the brainless outsourcing and “payment by results” favoured by the Conservative government.

So there are some hard questions and tricky politics. But as I said last week, the left has to develop a new economic narrative. Given the staleness of the economic discourse on the far left, the Lib Dems have real opportunity to take up thought leadership. There is a real prize to be taken here.

The Mandibles: Lionel Shriver’s liberal dystopia is a must-read

I have recently finished reading The Mandibles, the latest novel by Lionel Shriver, whom I chiefly know through her novel We Need to Talk About Kevin, which I haven’t actually read. The new book is set in the US in the future (2029 to 2047), and the core of the book’s meaning is in economics and politics. It is a must-read for anybody interested in either.

I don’t want to spoil the plot too much. I will say nothing about the interplay of the characters, which is very well done, in the first two-thirds of the book anyway. This may be strong enough to entice even readers not interested in the wider narrative, if it wasn’t for rather long passages of explanatory text in the first part of the book, thinly disguised as conversation. I found the economic explanation fun, of course, but it does slow things down in the first part of the book. Ms Shriver is very skilled at understanding how different the world looks from different points of view, and how this breeds misunderstanding. She also has a wry sense of humour, which is never very far away.

I will instead talk about the economic and political context which she sketches out. The book is in two parts. The first part (which is about two thirds of the text) is set in the years following 2029. In it the US economy suffers an implosion when the rest of the world turns on it. This follows from three trends which are clearly visible in the current US scene. First, the country can get away with huge net indebtedness to the outside world because the US dollar is the top global reserve currency. This allows it to sustain large trade and fiscal deficits, which “Keynesian” economists suggest is not an urgent problem; Ms Shriver suggests that liberals will never get round to taking it seriously. And second, the political liberals will come to dominate US politics, in the way they have Californian politics, through the rise of Hispanic Americans. And third demographic change will exert a growing pressure on state finances with rising demands on the state to deal with the needs of aging baby boomers.

So the US deficits persist until the rest of the world decides that it has had enough, and no longer wants to keep piling up US currency debt. They launch a coordinated coup to replace the US dollar as the reserve currency with a new currency that they create for the purpose. To cut a long story short, the US government reacts badly and the US economy collapses. I will leave the details for those who want to read the book. The striking thing to me is the plausibility of it all. Notwithstanding the elegant arguments put by one of the characters, who is a Keynesian economist, which at times sound very similar to the sorts of things I say in my blog (especially his hatred of gold).

The second part of the book takes the scene to 2047, after the US economy stabilises and recovers, and takes up a much diminished place in global terms. In terms of drama this part of the book is much weaker. The cast of characters is greatly reduced, and the main focus is on just two of them (one of whom, is Ms Shriver’s alta ego, a by then nonagenarian novelist), and much less actually happens. From purely a novelistic point of view, this section probably wasn’t necessary. But it is essential for the development of Ms Shriver’s political message. She sets out the US as a sort of liberal (in the US sense) dystopia. There is a wall along the US border with Mexico; it is built by the Mexicans to keep US refugees out. The demographic balance has become so out of kilter than the tax rates have to be raised sky high – and the government creates an insidious method of ensuring compliance – planting a chip in each citizen’s head that records all their financial dealings. Again I will spare you the details: read the book.

Ms Shriver’s political standpoint is clearly a libertarian one. She values individual freedom ahead of collective social obligations. Her novel’s message is that social democracy contains the seeds of its own destruction, and will either collapse, or undermine the liberal ideals that many of its supporters hold dear. I have to say that her alternative does not look much better: wellbeing seems to depend on inheriting wealth to create a degree of personal capital.

So why should somebody like me, who has very different political values to Ms Shriver’s, give so much time to this novel? Firstly, those ideas are presented in a digestible way. The second part of the book may drift into one–sidedness occasionally, but Ms Shriver’s great gift is to understand differing points of view, which makes her case much more accessible. Secondly we must resist the tendency for modern political discourse to be tribal. Liberals like me do spend quite a bit of time in dialogue with those on the left of the political spectrum, but not nearly enough trying to understand the right. That is a dangerous thing.

It is dangerous because so much of politics and economics is a matter of balance. It is not a matter of finding the right ideas and taking them to an extreme, but understanding the dangers of different policies and plotting a way between them. Too many on the left have an excessive faith in “Keynesian” economics (I use quotation marks because this economic philosophy has drifted so far from the flexibility of mind that characterised Maynard Keynes himself). The fact that many developed countries can easily afford high levels of government borrowing is not to say that such borrowing does not present longer term dangers. And high-tax high-public service societies have their attractions, but present major challenges for the longer term, which the political right see more clearly than we do. Above all the novel serves to show how fragile the foundations of modern middle class society might be.

So this book should promote a bit of healthy self-examination among those on the liberal left. As well as being a well-written and very enjoyable read.

Economics is at the heart of the left’s weakness

In my last post I said that the lack of a convincing economic vision was at the heart of the British Labour Party’s difficulties, and a problem for the left generally. It is worth unpacking that a bit and sketching the direction that any new thinking should take.

The central political problem for the left is the disaffection of so many working class and lower middle class voters, particularly ethnically native people. They are becoming increasingly voting for right wing populist parties and causes. This was a dominant factor in the vote for Brexit in Britain, and the rise of Donald Trump in the US and Marine Le Pen in France, to name just a few examples. These voters had been part of a left wing coalition, but leftist parties moved up market to attract liberal middle class voters, especially those employed by the public sector, and also pitched for ethnic minorities.

Meanwhile problems for the traditional working classes go beyond political neglect. They are overwhelming the losers from the advances in technology and globalisation which have destroyed the relatively stable and well-paid jobs on which they used to depend. Whole swathes of Britain are stuck in a post-industrial doldrums, especially in smaller towns in England and Wales. The left needs to win back these voters if it is to challenge the populists and the centre right. They have little clue as to how to do this, and distract themselves with other issues. Labour indulges in internecine strife. The Lib Dems are concentrating on rebuilding their core vote – i.e. focusing on the middle class vote.

But the cluelessness of the left in Britain struck me most forcibly from a comment made by the Green MP Caroline Lucas. She blamed the Brexit vote on austerity – government cutbacks since 2010 following the financial crisis. And yet the bulk of the disaffected voters were never very dependent on government jobs and handouts, and are often quite supportive of austerity policies, as they felt they hit the undeserving – immigrants and layabouts – rather then themselves. Indeed, they benefited probably more than most from government generosity on raising tax allowances. It’s not austerity, it is the lack of decent jobs that is the problem. And government handouts are not the answer because these foster dependency and undermine people’s sense of self-worth.

The left starts with a cultural problem. They are by and large liberal, inclusive and cosmopolitan in outlook. This helps in coalition building generally, and especially in outreach to ethnic minorities, but it creates immediate distrust from native working classes. In order to overcome this the left needs to offer hard benefits – and that involves two things. Good quality jobs and decent public services. The left loves good public services too, of course – they provide lots of employment opportunities for their core supporters – though they are less certain how to pay for them as an aging population pushes up demand. But on jobs they have almost nothing to say.

Such talk as there is concerns macroeconomics. The left favours stimulating demand through generous fiscal policy to create jobs in the economy as a whole. Jeremy Corbyn, the Labour leader, talks of investing in infrastructure. This may be a good idea in itself, but by and large these policies create the wrong jobs in the wrong places. New housing, for example, needs to be built in the prosperous south east, where the shortage is greatest, and firms often have to import the workers from abroad because local ones lack the skills. Some infrastructure projects should help the economies of the more run-down regions, it is true, but these need to be part of a more coherent strategy of regeneration. Meanwhile the centre-right has cottoned on the ideas of infrastructure and regional redevelopment as well.

What to do? The first thing is accept that the problems of the disaffected working classes are more than a little local difficulty with conventional economic policy. It is an aspect of a broader crisis brought about by globalisation and technology change, and a blind spot in conventional economic thinking, with its emphasis on aggregated statistics like GDP, and one dimensional concepts of efficiency and productivity. It needs fresh thinking of a type that will be heavily criticised by the conventional public policy establishment. As fellow blogger David Boyle has pointed out, this is not necessarily a problem with economists, but with public servants tied to the old conventional wisdom.

The problem is that conventional policies are tied to highly centralised political structures and tend to concentrate the benefits of economic growth at the centres of power, while hollowing out the rest. While promising efficiency, it is in fact wasteful because it leaves so much human capital under-used. So political decentralisation is a large part of the solution. This is very hard for Britons to grasp, since we have been centralising since William the Conqueror in 1066. But countries with a more distributed history of political power, like Germany, Scandinavia and Switzerland, perform much better while having very similar cultural conditions.

But if political decentralisation is part of the answer, it is incomplete. The USA is politically highly decentralised and yet suffers similar problems of alienation. There localised political units have not been able to challenge the power of big corporate interests, who collect large monopoly profits and suck them out of the local economies in the name of economic efficiency. Wider national and international political structures need to keep these corporations in check, and yet too often they are captured by them. This is an unresolved battle in the European Union, incidentally, and the best reason to be sceptical of the EU project – though the EU also does much to counter global corporate power.

Meanwhile we need to stack the economic odds in favour of local entrepreneurship and innovation, and celebrate localised, human and integrated services that tailor service solutions to individuals. Much more public money needs to be channelled into rebuilding skills in de-industrialised regions – something Britain is woefully bad at by international standards (consider this interesting article in the Economist).

Some on the left are starting to get this. American Democrats are waking up to the evils of large corporate oligopolies. British Lib Dems are sympathetic to the decentralisation agenda. A number of Labour city leaders also grasp it. But it is complex and difficult area. It needs both grand visions to change mindsets and capture the imagination, and small, practical steps that will achieve the goals in an evolutionary way that convinces sceptics.

I will try to use this blog to help develop the new economic thinking in my very small way.

Don’t panic, but look for signs that Britain’s finances are holed below the waterline

Last week, before Britain voted, I suggested that Britain’s finances were vulnerable, and that a vote for Brexit would lead to a financial crisis. After Britain duly voted for Brexit, many commentators have suggested that just such a crisis is unfolding. Is it?

My form on predicting such crises is mixed. I thought that Britain’s failure to join the Euro in 2000 might lead to a crisis in due course, as international investors shunned Sterling. This was very wide of the mark. But in 2007 I correctly foresaw that the apparent calm after the interbank markets froze could lead to a serious financial crisis, moving all my pension fund’s assets to index-linked gilts and cash. Its value rose while most funds were badly battered in the crisis of 2008/09, facilitating my early retirement. So I need to take a deep breath and try to look at this objectively.

First, what do I mean by a financial crisis? There are two things to look out for. First is a collapse in asset prices that causes people who have borrowed to finance assets (which what people usually do for property) difficulties, which in turns affects banks and squeezes demand, causing job losses and recession. The second is one of governmental finance, whereby the government finds it hard to finance the national debt, forcing interest rates up, and a drive to austerity regardless of any need to stimulate demand. This is likely to be combined with pressure on the currency that makes it impossible for monetary policy to take up the slack. The 2008 crisis was of the first type, but the government managed to head off the second type. For the second type examples are Brazil currently, and Britain in the late 1970s and early 1980s.

Why did I say Britain was vulnerable? First, the country has a large current account deficit, running at about 7% of GDP, historically high. This suggests that the economy requires substantial amounts of foreign investment to keep going, at a time when uncertainty would put such investment off (both by foreigners and locals’ overseas assets). Second the national debt is high, at over 80% of GDP, and there is still a fiscal deficit; though at 3% this is far from scary, there is not much margin for it to deteriorate into scary territory. Against this Britain’s national financial management, led by the Treasury and the Bank of England, is world class, prepared (unlike the government for Brexit negotiations) and with an excellent track record. British banks are also in much better shape than in 2008, adding to overall resilience. International financial flows are very mysterious, and it is hard to forecast safety or disaster.

The best thing to do from where I’m sitting, without high powered computer models, is to describe the danger signals, and keep a watchful eye. This means keeping an eye on some key statistics.

First there are share values. The FTSE100 is a darling of journalists, because it is so accessible. It also tells us not very much, since many of its components are multinationals and not really British. Last Friday was not a good day for share markets, but nothing out of the ordinary either. Today is also bad, with the more representative FTSE 250 falling by 4.6% in three hours (the 100 fell by an unremarkable 1.3%). If these sorts of falls persist, then that could be a wider sign of poor business confidence, which will affect all important investment. But for an asset based crisis it is real estate that is much more important, and this moves at a more sedate pace. Too early to tell there.

Next, there is the pound Sterling. This is much more important. A weak pound will feed through to inflation, for example in petrol prices. This could put pressure on the Bank of England to raise interest rates, which would have all sorts of nasty knock-on effects. But I think that risk is overdone in market commentary – it is very 20th Century. These days employers do not feel the need to match price rises with wage rates, which puts a cap on general inflation. In the recent crisis the Bank was able to ignore rises in consumer prices without risk. But it will mean the public faces a squeeze, which will reduce domestic demand. A second issue with the pound is any effect it has on investment; a weak Sterling will reduce the attractiveness of gilts (government bonds) as a safe haven asset.

The pound had a bad day on Friday, though that was partly because markets were so confident of a Remain victory. But is has continued its fall this morning; if this trend persists there is serious trouble ahead. But there is no sign that the pound’s troubles are affecting gilt prices; they have risen, as they are still regarded as a safe haven. If this continues the government stands a good chance of weathering the crisis. So far it is definitely a case of Don’t Panic.

Looking further ahead, there are two statistics to keep an eye on. One, inevitably, is GDP. The stats here are wobbly and don’t deserve the attention they get. But if growth slows or even goes into reverse, then the government will be under pressure either to extend austerity or to provide Keynesian stimulus, depending on its reading of the situation. The second, more relevant , statistic is tax collections. If this is under pressure then there is a risk of government finances spiralling out of control.

The first question is when the short term reaction to the vote overwhelms the country’s financial system, causing emergency measures. Based on the gilt yields this looks highly unlikely, even in today’s febrile conditions. The more important question is whether, having survived the immediate storm, the financial system is holed below the waterline, to use a nautical metaphor. When a ship is holed below the waterline, it sails serenely on, with only fairly minor signs of damage. But it is taking in water that may cause it to keel over later, if it does not make to safety in time. This was how the world financial system looked to me in 2007 – while many fund managers were saying that the crisis had passed. And the drying up of inward investment could make that metaphor appropriate to the British financial system now.

So my message is this. Don’t panic, but look at for small but significant signs of longer term trouble.

Afterthought

What I probably should have emphasized is that I think it is gilt yields/prices that are the critical statistic to watch. If these stay low (yields) or high (prices) than it indicates that the government can readily borrow Sterling, which gives it the scope to manage the financial situation. If they go in the opposite direction, then it could be a sign of a more serious crisis.

The Brexit paradox: its strongest argument is its least attractive

I originally posted this article on Friday 25 March, but there was a problem with either my web host or WordPress or some other technical factor, which mean that although the email was sent out, and it appeared to be published on my browser, the publication never actually happened. This is the second attempt.

I have been relatively quiet about the biggest issue in current British politics: the referendum on membership of the European Union. It’s not that I don’t care – it has defined my politics for well over 40 years. It’s a feeling of inadequacy that I can say much that will heard beyond the babble. When I started this blog in 2011 I posted prolifically on the referendum for electoral reform. All I was doing was cheering along a rather small band of the already committed. No serious debate was actually taking place over the merits of the reform. I don’t want to be just another pro-EU voice that is only heard by other pro-EU voices. Alas, the remains my likely fate.

Still, I do want to engage in serious discussion of the issues, beyond the polemic. That debate will mainly be with myself, no doubt, but it is better than nothing. In this post I will to look at the economic arguments. Life will clearly be harder outside the EU, but might not that actually be a good thing? It is, perhaps, the central paradox of the whole debate.

The most commonly heard economic arguments for leaving the EU are based on three themes: the taxes the country pays to the EU budget; the weight of EU regulations; and the economic problems and slow growth suffered by other EU countries. None of these stands up to close examination. The budget contributions are the price paid for access to the market, and are payable by non-members like Norway and Switzerland for access rights; any savings made post Brexit will be balanced by costs, such as tariffs payable on imports, and loss of exports. This is a hard calculation to make, but the contributions look like small change in the bigger picture for an economy, like the British one, that is so dependent on trade. The argument that a sweetheart trade deal can be secured easily because the country has a substantial trade deficit with the EU is nonsense. That deficit is largely with one country: Germany, and the deal has to be done with 26 others too. And Germany’s support of sanctions against Russia, which were very costly to it, shows that politics trumps economics anyway, in Germany as in all countries.

On regulation it is hard to believe that things wills be much different outside the EU; much regulation will stay in order that the country is able to export goods. Those that don’t will be replaced by home-grown regulations that will be approximately as onerous. Democracy and regulation go hand in hand, and Anglo-Saxon cultures are as prone to this tendency as any other. Just try to set up a hairdressing business in the US. If the Brexit campaigners talked about which regulations they want to throw in the bin (other then fictional ones like those specifying the shape of bananas, etc.) they would quickly provoke a backlash. What they generally mean is employee rights.

And the economic problems of the rest of the EU do not stop Britain from exporting to the rest of the world. After all, one of the most dynamic of the world’s exporting nations, Germany, is at the heart of the EU.

And yet. A while ago I heard an interview on the BBC Radio 4 Today programme with British businessman Peter Hargreaves (co-founder of financial adviser Hargreaves Lansdown, with whom I had many dealings when I worked in financial services). The Telegraph report is here. He spouted a lot of the usual nonsense, waving away concerns about disruption to trade and investment, and suggesting that relations with Commonwealth countries could substitute for those with our European neighbours. It is remarkable about how disciplined and on-message the disparate Leave campaign is, so early. But Mr Hargreaves went onto say something much more interesting. He suggested that life out of the EU would be more “bracing”, and that would stimulate British society to greater efforts that would make it more efficient. He wanted Britain to emulate Singapore after its breakaway from Malaysia.

It would be easy to poke fun at this. Singapore might be a paragon to Mr Hargreaves, but the country is subject to an authoritarian regime that puts British complaints about political correctness (and state paternalism) into the shade. It is also a city-state, without the complexities that a large hinterland brings. But. Think about that persistent trade deficit with the rest of the EU, which contributes an trade deficit. Since joining the EU the country has been living beyond its means. A strong pound, strong inward investment, and drawing down generations’ worth of foreign assets has given the country an illusion of economic success. There are no doubt many reasons for this: North Sea oil, the illusions brought about by global finance, loose fiscal policy after 2001, and so on. But being in the EU has surely contributed. It has anchored the country in a wider international system that makes imbalances easier to sustain; it has been most helpful in drawing in inward investment, a key factor in supplying the country with the foreign currency it needs to keep going. Life outside would surely be more bracing.

An interesting digression from this line of reasoning is how things might have been different if Britain had been part of the Euro, since so much of the economic illusion was sustained by a strong pound. A topic for another time, except that I must point out that the Euro was brought in too late to be of any use – the pound was already too high by then.

And so the best economic argument for Brexit is this: the EU is a comfort blanket that is preventing our political and economic elites from facing up to the country’s true predicament. Leaving the EU would provoke a necessary economic crisis, but this would head off an even deeper crisis down the road. Of course Remainers will hope that the deeper crisis can be headed off by British economic reform within the EU, while Leavers will hope that Brexit will have a delayed economic impact, allowing the crisis to be headed off.

But, of course, the Brexiters cannot sustain this line of argument in public. It is a hair shirt argument, and the wider public would rightly suppose that it would be them that would wear the shirt (the “necessary price”) and the various business elites that would scoop the benefits. In fact the line that life outside the EU would be “more bracing” was distinctly off-message for the Leavers – though the consistent refusal of Brexit campaigners to acknowledge any risk of economic cost or uncertainty is their least convincing line.

Nevertheless, we supporters of Britain’s future in the EU should pause and reflect. Our relationship with the rest of the EU is not quite right. That trade deficit is a worrying sign of weakness. Too much of our country is inward looking. The paradox is that membership of the EU makes that inward focus more sustainable – and yet it is precisely what makes it is easy for so many people to contemplate life outside.