Economics & Finance – Page 21

The equality problem

A nasty problem stalks those who think about public policy, especially here in Britain, and in the US. It goes under the general name of “inequality” and is mainly about the growing disparity between the very rich and everybody else. There is a lot of anger (think of the Occupy protests) and shaking of heads, little convincing analysis and and even less in the way of convincing policy ideas. It’s worth everybody taking a few steps back and asking themselves what is going on.

Of course the debate about the justice of inequality is as old as political philosophy. But two new factors have changed the whole nature of the debate. The first is that the people in the middle of the wealth distribution are getting left behind. Depending on the stats and country the median family’s wealth is hardly growing at all, or stagnating, even as the economy as a whole grows (well, until 2007 anyway). So long as the median family is doing nicely the political heat can be contained – people can ask whether the problem really matters. But these stats make it appear that the country is being run for the benefit of a tiny elite – which makes it politically much more awkward.

The second new fact is that mobility between different levels of wealth appears to be declining. If you start life wealthy, you are increasingly likely to stay that way, and if not, you are less likely to break the barrier into a wealthier world. The traditional divide between those who are concerned about equality of opportunity and those who worry about equality of outcome is becoming a lot less significant. Both lots are angry.

There remains much to debate about how bad for us all this growing inequality really is. But you don’t have to be an equality extremist (like, or so I’m told, the authors of the popular book, the Spirit Level, which I’m afraid I haven’t read) to be worried about all this. The political consent upon which our democratic society is founded is being undermined – and indeed the extreme polarisation of US politics is perhaps one aspect of this.

Why is this happening? For all the quantities of research poured in to economics and the social sciences, there is rather little that is known. Economists don’t like thinking about the distribution of wealth as opposed to those comfortable aggregates that conceal so much. Mathematically it is an entirely different type of problem to the ones they are used to dealing with. I have seen one valiant attempt to grapple with the maths, under concept of “wealth condensation“, which did a good job of modelling the sort of power distributions so characteristic of wealth patterns, but this was not by an economist. Professional economists preserve their elite status through the gratuitous use of advanced mathematics; no doubt they feel very uncomfortable in dealing with problems that require sorts of maths they aren’t good at, or even no maths at all (e.g. through the use mass agent computer modelling). What we get is some rather airy stuff about the impact of technological change and immigration, with the former usually being fingered as the more important baneful influence.

One fact is quite well understood, though, which is the winner takes all effect of mass communications. Thus entertainment stars tend to win big or not at all – and similar can be said of sports stars. The mass market seems to concentrate its attention on a small world elite, ignoring anybody that hasn’t quite made it. This, of course, will increase inequality. But it is a retail phenomenon which ill explains why bankers and big corporate execs do so well.

Because we so ill understand it, it is unsurprising that our solutions seem so inadequate. In Monday’s FT the prominent American economist and policy person Larry Summers (paywall), after moaning about the problem, was pretty lame about what to do next. He suggested looking at three things: challenging the privileged status of the well off (especially the effects of the massive lobbying power of big corporations), a bit of tax reform (which is as much about not making things worse by rolling back estate taxes, etc) and state intervention to even things up, especially through education funding. All worthy, but it is difficult to think that it would have anything more than a marginal effect. The anti-capitalists aren’t any more convincing, of course. It’s the baby and bathwater problem.

Politically there seem to be two distinct poles of argument. The right wing idea is that it is the excesses of the state that is holding back the middle, and if we taxed and regulated more lightly an entrepreneurial boom would help the middle catch up with the top. I have to admit I haven’t seen this line of argument clearly articulated anywhere, but some such logic must lie behind the popularity of the American Tea Party, whose appeal goes well beyond the elite. On the left people seem to think the answer is in a bigger state, which intervenes to help the less well off, cracks down on excessive wealth, and drags pay up by creating masses of comfortable public sector jobs. A bit like Sweden before its economy collapsed in the 1980s. Neither course looks very encouraging to a liberal.

So what to think? I am not really any further forward than Mr Summers. But it would help if we better understood why so many in our society are being left behind. I shall return to the topic

Does the Euro need a Big Bazooka?

It is a commonplace amongst Anglo-Saxon policy makers that the Eurozone leaders need to use a “big bazooka” to solve the currency crisis that is engulfing the continent. David Cameron has been particularly conspicuous in using this expression. Is it all it is cracked up to be?

So what is a bazooka? Originally it was a tubular musical instrument made famous by the comedian Bob Burns in the 1930s (Mr Burns and instrument in second picture). It then became the colloquial name for an American tubular hand-held antitank weapon introduced in the Second World War (the illustration above is in fact of a more modern and shorter weapon). This was a revolutionary innovation, using recoilless technology and the so-called HEAT armour-penetration system – which allowed infantry to threaten tanks in a way not previously possible. The Germans quickly copied it with the bigger and better panzerschrek (“tank terror”). They also developed countermeasures, including thin armoured outer skirts to their tanks, which set off the HEAT system before it could inflict serious damage. In the 1960s the weapon became obsolete, replaced by more powerful technologies.

A “big bazooka” in the current context is used to mean the deployment by the state (central banks and/or governments) of overwhelming financial resources to bail out troubled banks and others in a financial crisis. The idea is to break a vicious cycle of declining confidence in banks and others, whereby lack of confidence becomes a self-fulfilling prophecy as creditors seek to move their money into safer places. The mere proposition of such resources can be enough to break the cycle, if credible, and prevent the resources ever having to be deployed. The Americans can proudly point out to the use of the technique to solve a series of financial crises, from the Savings & Loan crisis of the 1980s, to the LTCM collapse of the 1990s and the Lehman crisis of 2008. Such tactics are conspicuous by their absence in the Euro crisis, fiercely resisted by the German political class in striking unanimity.

There is an irony that the original bazooka was quite a small weapon – but I suppose it was big for one held by a single infantryman, and the German version conveys all the imagery the metaphor needs. A more telling parallel is that the bazooka, revolutionary when introduced, steadily became obsolete as the world got used to it. No doubt the Germans will point out that the American use of “big bazooka” tactics on repeated occasions shows that there is a flaw. The American financial system suffers a systemic crisis every 10 years or so. This is the first such crisis the Germans have endured since their currency was refounded after the war – and that is because the Germans aren’t running the show.

The have a point. The financial markets are amazingly short-sighted – for example that idea that the US and UK are safe havens because their central banks can overcome any crisis by “printing money”, or monetising debt, in the manner of Zimbabwe. But the long term logic always wins in the end. There seems to be a slowly dawning realisation amongst Anglo-Saxon commentators (for example last week’s Martin Wolf column, as well as the Economist) that the German position in all this amounts to a strategy, “just enough, just in time”, and not the absence of one – even if Mr Wolf grumpily calls it “too little, too late”. The short-term costs of the German strategy are doubtless higher than the American way – but the longer term position is much less clear.

Markets aren’t people – BBC’s Peston is taking anthropomorphism too far

Yesterday there were some rather worrying developments in the market for Euro area bonds, affecting even French and Dutch government stock. This caught the journalists on BBC Radio 4 off guard, including the famed Robert Peston. They quickly fell into the lazy habit of describing the markets as if they were thinking and breathing people, albeit in a plural form, like “Bond markets looked on the Italian government’s plans sceptically and yields rose over 7%”. This formula is usually used to link the movements in market prices to some new information or news event, regardless of whether any such link is actually significant. The idea of this mythical person or people breathing down the the necks of governments is clearly an attractive way to communicate a point. The trouble this morning was that there was no such easy link to make…which led at least one commentator to go a bit apocalyptic, that “the markets” had lost faith in the Euro completely and were expecting it to break up. This was more or less where Mr Peston ended up.

I have always hated this anthropomorphism of markets, which is by no means confined to journalists – market participants clearly enjoy the false sense of power it gives them. But markets are not people, they are mechanism by which buy and sell orders (in this case for securities) are resolved by striking a mutually acceptable price, often by computers these days. When nobody is buying or selling much, and market makers have to quote prices, then indeed human sentiment plays a major part in price movements. The market makers are usually part of a small and social group where collective sentiment can develop and they don’t mind telling outsiders. Journalists can find out what these sentiments are by talking to a couple of people. In this case the anthropomorphism does bear some resemblance to reality.

But as soon as the real money enters the market, then all this sentiment is mere chatter. And it often takes a bit of time for the real reasons for market price movements to emerge. People have to guess, and journalists usually go no further than to tap into the chatter. What moves the money? There are whole variety of things, many which economists would not recognise as rational – like a fund manager simply dumping shares to avoid an awkward situation with a client. Or, sometimes it can be plain errors. Then, of course, with so much automated trading it can simply be the unforeseen interaction of computer algorithms- as happened in the notorious “flash crash” in May 2010.

So what happened yesterday? I don’t know, of course. But the best explanation came to me via the Economist’s Buttonwood column, itself quoting one Michael Derks at a company called fxpro. In essence the Euro zone recapitalision of banks is having some malign effects. The idea was that banks should reserve more capital against their assets, so that they are better able to withstand losses. Reasonable enough (and vital to bring incentives at banks back into the real world, in my view), but banks can comply by dumping assets instead of increasing capital. That is what many banks are doing, and they are choosing relatively liquid government bonds to dump – including those of the French and Netherlands governments, as well as the usual suspects of Italy and Spain. It is a battle to prevent bank ownership being diluted, not a considered opinion on the future of the Euro.

Mr Peston should have known better, and helped his listeners try to understand what was going on, instead simply plugging this lazy and narcissistic drivel Shame on him!

Occupy: a difficult bandwagon to ride

There was a strained moment at last night’s dinner at the National Liberal Club for the London Liberal Democrats, when the party was challenged by a member over the Occupy protests at the City of London. Both the guest speaker, Paddy Ashdown, and the Mayoral candidate, Brian Paddick, said that the act of protesting was a wonderful, liberal thing to do, and that the party should engage with the protesters (and indeed has), but that there was too little in the way of constructive proposals for the party to take on. Given that the anger that drives the protests is shared widely across the population, this seems a rather inadequate response. But politicians of all stripes struggle to say much more.

The Labour leader, Ed Miliband, has tried to ride the bandwagon. It chimes well with his appeal for greater morality in commercial life. This line seems to play quite well with policy wonks and political professionals, but just seems to underline Mr Miliband’s lack of grounding in the gritty “real” world – a lack which, of course, he shares with most politicians of all parties. His ideas share with David Cameron’s “Big Society” a complete inadequacy when faced with the big issues highlighted by the protesters.

It is easy enough to accept the core of what the protests are about. There has been a lot of irresponsible behaviour in world finance which has helped bring about the current economic crisis; these financiers still seem to be attracting outrageous levels of pay; and taxpayers still underwrite the whole show. After this, however, practical politicians have to deal with four difficult facts in the search for policies.

First: world finance may have failed, but capitalism hasn’t. To many of the protesters world finance is simply the purest form of capitalism and its failure represents the failure of the whole capitalist system. Well greed and profit seeking, familiar parts of the capitalist way, had a lot to do with it – but as much of the problem was uncapitalist politics. Governments borrowing too much money to develop public services; interfering with the market to extend home ownership (especially in the US); China’s distinctly uncapitalist but de-stabilising trade policies, to name but three factors. The real problem was politicians trying to tilt capitalism to their own ends, even if these ends were quite laudable. There is in fact no substitute for capitalism if we are to maintain the living standards in the developed world, and to roll back poverty in the devloping world. Interfering with the workings of free markets is likely to make matters worse, not better.

Mention of politicians brings in the second awkward fact. The public (especially in the developed world) is at least as much to blame for the economic crisis as the bankers. Excessive borrowing was widespread, as was pressure on politicians to ride the boom and expand government. It wasn’t only the bankers that were being greedy. It is natural enough to blame the bankers, saying like children, “It wasn’t my fault, he made me do it!” – but this isn’t very helpful in the search for solutions.

And a third awkward fact is that banking and finance, apart from the greed and the excess, carry out a vital world function. The process of linking savers to borrowers, which is essentially what finance does, is vital for economies to develop and poverty to be fought. It is absolutely no coincidence that the growth in world finance in the last couple of decades happened at the same time as the biggest progress against world poverty that we have ever seen. And the beneficial effects of world trade that finance facilitated completely dwarf the well well-intentioned works of government aid and charities. The problem is that the bankers simply creamed off too much of the benefit for themselves.

Which leads naturally to the fourth, and awkwardest fact of all: the bankers are holding a lot of hostages. We need bank lending to keep productive industries going. Governments needs finance to keep public services going. In the UK, and especially London, world finance includes many perfectly productive jobs which we can ill afford to lose. Vindictive policies will hurt us all.

But finance does need to be tamed. But doing so is a slow process which requires a great deal of patience. There are two key sets of reforms, neither of which are quick:

Separate investment banking from utility banking. There are many abuses in utility banking, but the really dangerous stuff is in investment banking, and allowing investment bankers to run utility banks is a recipe for total disaster. The Vickers Commission’s reforms are an excellent start here – and seem to be leading the way globally. The investment bankers are patiently trying to undermine them – but politicians and the public need to stay on their case.
Make investment banking much less profitable. It is the profits that drive the excessive pay – and policy needs to focus on the causes of the disease rather than wasting time on the symptoms. There are two main causes of excess profits: lack of competition and the failure of organisations to bear public costs (for example of the public’s underwriting of the banking system). In investment banking, it is the second of these that is the most important (in retail banking it is the first…), and the most effective way forward is raising capital requirements. This is being done, and banking profits are duly under a lot of pressure. At first it will be the shareholders who feel the pain – but in due course it will be bankers pay, as shareholders get fed up with their overpaid servants.

Actually progress is rather good. We don’t need gimmicks like the “Tobin Tax”. we need vigilance and patience. I am proud of the way the Liberal Democrat ministers have been keeping the pressure up (Vince Cable is the star, but Nick Clegg is clearly on side). The bankers are waiting for the Occupy bandwagon to move on. It will, but I hope and trust that the Liberal Democrats will still be on their case.

Solving the Euro crisis means a stronger ECB

I do not regret paying my access fee to the FT website. This morning there are two excellent articles on the Euro crisis from the two regular Wednesday morning columnists: Martin Wolf and John Kay. It has helped clarify the way ahead for me.

Mr Kay comes in at high level to give an overview of the crisis. It is not comfortable reading for supporters of the Euro project like me, but, as usual for this author, pretty much spot on. The main problem is not that the currency area lacks appropriate institutions at the centre, but that local institutions in many member countries are not strong enough to cope with the pressures of being in the single currency.

The eurozone’s difficulties result not from the absence of strong central institutions but the absence of strong local institutions. A miscellany of domestic problems – rampant property speculation in Ireland and Spain, hopeless governance in Italy, lack of economic development in Portugal, Greece’s bloated public sector – have become problems for the EU as a whole. The solutions to these problems in every case can only be found locally.

So the answer will not come from strengthening the EU’s central institutions. This goes back to the original design of the Euro: the whole idea was to put pressure on governments to reform themselves, by denying them the easy escape route of devaluation. Unfortunately the EU’s politicians forgot this in the first decade of the Euro, so no real pressure was brought to bear, making the crisis infinitely worse once it hit.

This article does not say much about how to go forward from here, beyond suggesting that grandstanding at summits like today’s may be part of the problem rather than the solution. Mr Wolf’s looks at one aspect of how to manage the crisis itself. This in turn in is based on a paper by Paul de Grauwe of Leuven university, who literally wrote the textbook on the Euro (I know, since I read it as part of my degree course).

Professor de Grauwe points out an interesting fact: the bond markets are much harder on the Euro zone fringe economies of Italy and Spain than they are on the UK, even though the underlying positions of the countries is not all that different. The difference is that the UK markets are stabilised by having the Bank of England as a lender of last resort which is able to deal with liquidity crises (i.e. an inability to raise cash for temporary reasons rather than underlying insolvency). The European Central Bank does not do this, or not enough, for the Eurozone economies. Mr Wolf, who structures his article as an open letter to the new ECB president Mario Draghi, argues passionately that it should. This would stop the contagion spreading from the insolvent economies of Greece and maybe Ireland to solvent but challenged economies like Italy, Spain and indeed France.

This must be right. The Germans, who are the main sceptics, must be persuaded – and convinced that such interventions would only apply to liquidity crises and not solvency problems, and that the ECB has the integrity and independence to tell the difference, in the way that politicians never do.

Giving the ECB a wider and stronger remit will be a big help. This should extend to supervision of the European financial system (preferably for the whole EU and not just the Eurozone). This will help deal with one of the biggest problems for modern central banking – that of coping with spillover effects, as described in this thought-provoking paper from Claudio Bono of the BIS (warning: contains mild economic jargon, such as “partial-equilibrium”).

So a reconfigured ECB will help the Euro through the crisis and prevent self-fulfilling prophesies of doom in financial markets having to be solved in grandstand summits. That still leaves the longer term problem of how the less competitive Southern European economies can have a long term future in the zone. But then again, I think they would have just as challenging a future outside the zone – even if it were possible to devise an orderly exit mechanism for them.

Inflation and the British economy

There is an excellent article in today’s FT by Chris Giles. Unfortunately this is behind the FT paywall so I don’t think clicking through will help most of my readers.

Mr Giles considers what has gone wrong with the British economy over the last year – since growth forecasts are being consistently revised downwards. Two explanations are often offered – “it’s the Euro crisis” or the government is cutting “too far, too fast”. In fact both are wide of the mark. The simple fact is that while rates of pay have stuck broadly on forecast (2% increase), consumer prices have increased by more (over 5% compared to just over 3%). The gap is plenty enough to explain the lowering of real terms growth.

Why have prices shot ahead of forecast? Mainly external factors to the British economy – oil prices, global prices for food and clothing and so on. I really don’t like calling these price rises “inflation”. Inflation suggests a degrading of money which, inter alia, makes debts easier to afford. But incomes aren’t keeping up, so debts aren’t eroding by more than the 2% a year or so that incomes are rising. Similar considerations apply to government debt – taxes largely depend on income. VAT is an exception – but many benefits (like pensions) are linked to the rate of increase of consumer prices – so the national debt doesn’t get any more affordable.

The economic pain of these external price rises is being spread widely. Surely the Bank of England is right not to tighten policy – which would only cause unemployment and concentrate the pain on an unlucky few. Our comparatively low rate of unemployment, compared to previous crises of this economic scale, is one of the wonders of the British economy.

Five Eurosceptic fallacies

I caught a bit of last night’s Radio 4 Analysis programme driving home from a meeting, on Euroscepticism in Britain. One speaker (I didn’t catch who) suggested that the case for Britain being in the EU was mainly economic – that we could put up with a bit of lost sovereignty because we were being hitched to an economic powerhouse that would do our economy good. This he said, was now clearly nonsense. In evidence he said that the EU used to be 26% on the world economy and now it is 18% (I may have misremembered the numbers). “We are being chained to a corpse.” I was apoplectic. But it is typical of the drivel that is being spread across our media. It’s worrying that so few people bother to argue back.

Let’s clear the decks with some points of general agreement. The Euro is in crisis, and this crisis could lead to an economic disaster. This in some measure results from severe mismanagement of the currency by the EU’s leaders, aided by the European Central Bank (ECB). The stock of European institutions is low in public eyes, not just in Britain, but across most of the continent. This has something to do with a democratic deficit – with the institutions wielding power with little apparent democratic consent.

But it is possible to accept all this, and to think that the EU, and even the Euro, is fundamentally a good idea, and that Britain would be mad to consider leaving it. The country may even be forced to join the Euro – though that event is surely a long way off.

Let me try to help the feeble defenders of British membership by elaborating four critical fallacies behind the Eurosceptics’ arguments, and fifth that is a bit more arguable.

First fallacy: there is such a thing as “just” a free trade area. It often said the the country joined something that was just a free trade area, but this has morphed into something else. But free trade across borders is a complicated business – and not just a matter of border controls and tariffs. Its implications quickly reach into vast swathes of ordinary life. Most of the US Federal government’s powers rest on its right to regulate interstate trade. And the unhappy experience of the North American Free Trade Area (NAFTA) shows how politics gradually undermines transnational free trade projects that do not involve a significant pooling of sovereignty.

Fallacy no 2. Britain is being ripped off by the rest of Europe because we have a trade deficit with them. This leads to the idea that outside Europe we would get a sweetheart deal (like Norway of Switzerland, or at least in popular myth) because they need us more than we need them. But the British trade deficit arises from the chronic mismanagement of the British economy, which led to a prolonged period (since the late 1990s) where the Pound was too high for many of our export businesses to be competitive. This uncompetitive exchange rate has now been reversed, and so our trade balance with the EU will correct. And as for bargaining power, there is a fatal flaw to this line of reasoning: the relative size of the UK against the rest of the EU. EU trade is a major part of our economy; UK trade is not a major part of the EU economy.

Fallacy no. 3. Being outside the EU means that we don’t have to comply with EU regulations. This is largely true of the labour market, it has to be said. But far from true of product markets – since we need to sell our products in the EU. Also, if foreign manufacturers are forced to comply with separate British product standards before they can export here, they will either charge us extra or not bother. If you are in any doubt about this ask a Norwegian or Swiss about how much better life is without the burden of EU regulations. You will get a lecture about how they have to comply anyway, without any input into how they are made. This is of particular relevance to one of the areas where Britain has a competitive edge: financial services. Our representatives in Europe are forever batting back ideas for new rules that would disadvantage the City; I wonder what would happen if they weren’t there any more?

Fallacy no 4. We would save money by leaving the EU, because we are a net contributor to the EU budget. This is an illusion. We may pay less in net contributions, but we would pay more in tariffs And if we charge more tariffs in return? Any economist will tell you that this is a road to nowhere. Our net contribution is a small price to pay for access, and, besides, some of it helps to develop new markets in the Union’s less developed countries.

Fallacy no 5. Britain would have been worse off by joining the Euro at the start. This contention is unprovable, as is the opposite: that we would have been better off in it. The Euro, of course was badly managed. But so was the Pound. While the Euro was going on, the pound shot up in value, destroying many of our exporters and creating a big trade deficit. Borrowing ran amok, as did, to a lesser degree, government expenditure. When it all blew up, it left the British economy in a terrible state, one that it will take many years to recover from. Won’t the devaluation of the pound help our recovery? Yes, but it should never have got that high in the first place. What would have happened if we were inside the Euro? Almost certainly no better – except that our problems would have been more transparent, so we might have started to fix them a more quickly. My point: an ugly mess either way. Look at our Eurozone colleagues and the British economic performance does not look stellar. A floating currency is no free lunch.

Of course there is a lot wrong with Europe and the Eurozone. That does not mean that this country is better off outside. The best case for a referendum in this country is that it would force supporters of the Union to make the case more forcefully, and expose the fraud behind the anti-EU case. But on their performance to date, who can be confident of that?

Lib Dems and the Quality of Life

One of the more entertaining episodes of the last Lib Dem conference was the debate on the party’s new Quality of Life policy paper. This paper had wended a long but largely uncontroversial path through the policy formation process, including extensive consultation, before reaching the conference – and I was a member of the working group – interest declared. And generally policy that has followed this path gets more or less nodded through. Not this time. The motion and paper got the backs up of many representatives, and there were a number of well-delivered and entertaining speeches against. For a flavour of this ire see Alex Wilcock’s blog – scroll down past the Dr Who stuff to 20 September. If you click through to the comments page, you will find Alex describing yours truly as “not so much a thinking liberal as a sneering one”! The paper was passed, but the margin was quite narrow by the usual standards of these things.

And that’s a bit of a problem. This is policy that stands behind other policy – important not so much for its direct recommendations as its influence on subsequent policy. I hesitate to call it philosophical – since it does not attempt to develop the core values of the party, but rather to apply them in a new way. But if it is considered contentious, it may get ignored. And for all that it is official policy, this would be quite easy.

What’s the fuss about? The starting point of the paper is that public policy is too dependent on “hard” economic statistics, such as income and economic growth, to measure success. But these are only intermediate measures – in other words we like them because they lead to good things, rather than being good of themselves. That is because of the difficulty of measuring success in itself – the hitherto rather woolly concepts of wellbeing and quality of life. But social science has been advancing rapidly and it is now possible to measure wellbeing in a rigorous way – mainly through asking people to make subjective judgements on their state of mind.

What the paper recommends is to make wellbeing an explicit policy goal, alongside the traditional economic measures. To ensure this is done rigorously, it recommended that a National Institute of Wellbeing is established to promote standards. Various other devices (a cabinet champion, for example) were recommended to get it embedded into the business of government.

So far, so good, perhaps – but for liberals some loud alarm bells should be ringing by now. This could be a charter for highly paternalistic government. And especially when you come up against the evidence that many people seem to have a poor understanding of what is good for their wellbeing. So the beating heart of this policy paper is the insight that individual autonomy (“agency” in wonks’ jargon) is central to wellbeing. The idea is to help people help themselves, and not bullying and cajoling them into making better choices.

Education is central. And, to make a small digression, this takes you in a very interesting direction. A lot more is understood about life skills – emotional intelligence, resilience, and such – and the wellbeing insight gives these a much higher priority at all levels of education.

Fortunately there is a wealth of evidence to support the liberal view. There one further thing – the measurement mechanism of choice for social sciencists, self-reported wellbeing, is a thoroughly liberal idea. Wellbeing is what the population says it is, and not an arbitrary idea imposed by policymakers. It’s like voting.

What were people objecting to? One faction distrusted anything with so little in the way of concrete recommendations – especially when those few recommendations sounded like more bureaucracy and a new quango. At best they interpreted it as harmless, and so a cost-free policy to rebel against; at worst they thought it was opening the party up to being criticised for being irrelevant in times of widespread economic hardship. Others, Alex was amongst these though he was not called to speak, understood how dangerous the the quality of life idea could be in the wrong hands, and felt that it was too toxic to touch. Or, possibly, that the detail of the policy paper did not live up to its liberal intent. At any rate that is my reading of what they were saying.

All this put the promoters of the motion in a bit of a difficulty – it is really quite difficult to push abstract ideas in this kind of debate. In a short speech you don’t really have much opportunity to say more than “I think this is a good idea” rather than why you think it is good – at least not in a way that will connect to more than a minority of the audience.

Does it matter? The problem is that the wellbeing agenda is slowly but surely infiltrating itself into the public policy process already. The word (or “well-being”, the spell-check compliant variant which I don’t like) and quality of life come up with increasing frequency in all kinds of public policy contexts, and especially in health. The concepts, if not the measurements, lay behind so much of the last government’s meddling in people’s lives. And David Cameron is an enthusiast too, though with an entirely different agenda -but no doubt paternalist in a different way. Liberals need to get into this debate and push back hard against paternalism – but using the language of wellbeing, and not just pronouncing the plague on all its works.

And there is something else, even more important in my view, which the paper doesn’t really touch. And this is the usefulness of the idea in promoting a more environmentally sustainable economy. It is important to break through the tyranny of current economic measurements to show that a more sustainable way of life does not equate to poverty – and indeed that it can be better for everybody. This is why the New Economics Foundation is so interested in wellbeing. I particularly like their paper on Measuring our Progress.

So we need to keep pushing. As one of the motion’s supporters said to me afterwards “Who remembers how close Nick Clegg’s margin of victory was for the party leadership?”. Still, we that understand and support the policy have a selling job on our hands.

Understanding the Euro Crisis

My favourite contemporary economist is UCL’s Professor Wendy Carlin. She was my tutor at UCL, and led my second year macroeconomics course, and a third year course on European institutions. Her patient, dispassionate analysis is worth so much more than all that shoot-from-the-hip banging on by celebrity economists, Nobel Laureates and all. It was her analysis, well before the current crisis broke, that demonstrated to me that the last government’s economic “miracle” was unsustainable (the combination of an appreciating real exchange rate and a trade deficit being the giveaways). She also helped me understand the Eurozone, and pointed out the trouble ahead, again well before it happened, arising from diverging real exchange rates within the currency bloc – in other words Germany was becoming more competitive while Italy, Spain and others were becoming less so.

So I was delighted to read her summary of the Eurozone crisis – 10 questions about the Eurozone crisis and whether it can be solved. The is a wonderfully clear summary of the whole situation, written in early September. Her central point is that the zone’s banking system is at the heart of the crisis, and tackling the banks will the heart of any solution. European politicians have been trying to avoid this, no doubt because it shows that Northern European countries have played an important role in creating the crisis. However, not least thanks to the new IMF chief Christine Lagarde, this is changing.

Of course Professor Carlin cannot point to an easy escape. She points to two alternatives paths, other than the breakup of the zone:

Scenario #1 – a more decisive approach based on current policy (bailouts)
Policy-makers need

the existing bailout schemes to be successful and to be seen to be working in the next year

to keep Italy out of the bailout regime

to develop a replacement for the high moral hazard regime for banks and for governments but to do this in a way that does not undermine the bailout regime in the meantime.

Scenario #2 – large-scale restructuring of bank and government debts (defaults)
Policy-makers need

to move decisively now to end the high moral hazard regime by accepting that default on bank and government bonds on a much larger scale than envisaged in Scenario #1 is necessary

to engage in restructuring sovereign debt and bank debt by, for example, forcing bond-holders to swap existing short-term bonds for long-term

European politicians are attempting the first path, but the problem is contained in Professor Carlin’s third bullet: devising a financial scheme that avoids moral hazard by banks and sovereign states – this reckless behaviour in the belief that it will be underwritten by everybody else. The favoured answer of many is a “Eurobond” – i.e. government borrowing underwritten collectively, combined with a toothier version of the failed Stability & Growth pact. But this decisive step towards a more federal Europe runs well beyond any democratic mandate. The German Chancellor, Angela Merkel, is rightly suspicious.

Which leaves the second scenario, which is favoured by American commentators, based on their experiences of Latin American debt crises. This is surely much more convincing, and I hope that the IMF will use its influence to push down this path. Bank regulation clearly needs to change, but beyond that it doesn’t need a more federal Europe. We can use bond spreads to act as a break on government profligacy – which is how the Eurozone should have been run from the start.

A final point worth making from Professor Carlin’s analysis is that dropping out of the Eurozone wouldn’t really help Greece or any other country that much. They would still have to run a government surplus, and so still have to go through a very painful reform programme sucking demand out of their economies. Of course the hope is that a rapid devaluation would kick start exports – but it does not stop the need for painful supply-side reforms if these countries are to recover anything like their former standards of living.

Time the British woke up to the crisis in Europe

It is a commonplace for Britain’s politicos to sadly shake their heads and complain that the Euro crisis demonstrates a woeful lack of political leadership. Regardless of the fairness of this charge in respect of Angela Merkel, say, it clearly has resonance for Britain’s own leaders. There seem to be two camps: ravingly impractical Eurosceptics, and sheer paralysis from everybody else. The mood amongst Europhiles (as I witnessed at fringe meeting at the Lib Dem conference) is akin to deep depression. It is time for this to change.

To be fair some key players have been showing something less than paralysis – George Osborne and Nick Clegg have both been conspicuous in raising the seriousness of the situation with their international colleagues – but their pronouncements are hardly more helpful than anybody else’s. They aren’t bringing anything to the party and they aren’t trying bring our own public alongside.

The first point is that the Euro crisis has serious implications for Britain, much though most people seem to think it is happening to somebody else. This is for two main reasons. First is that this country would be caught up in any financial disaster. Our oversized banks are deep in the mess; Euro zone countries are vital trading partners for a country very dependent on trade – especially given that international financial services are so important to us. Our fragile attempts at recovery risk being completely blown off course. Forget Plan B if this lot breaks.

The second reason it matters to Britain is that resolution of the crisis could take the European Union in a direction that is against our interests. Britain leads the single market wing of the union: the chief Euro zone countries are more protectionist in their instincts. We risk being shut out of the design of critical architecture – much as the Common Agriculture Policy was put together in our absence.

How to proceed? We need to tackle the dark spectre head on: the best resolution of the crisis involves changes to the European treaties. To change the treaties will require a referendum here (let’s not weasel out of it this time). If we face up to that challenge now, it will show real courage, and help get things moving.

But, of course, we would need to see something in return. Changes to the treaties that would further our interests. These need to be to promote the single market, to protect London (and Edinburgh) as centres for financial infrastructure, and to reduce unsightly bureaucracy and/or operating costs of the Union (the siting of the European Parliamnet at Strasbourg needs to go on the table, at least). Given our understanding of finance, we might well have useful things to say on the Eurozone architecture too – even though we clearly can’t be part of it.

To do this our leaders (the Prime Minister and the Deputy Prime Minister in the lead) need to build two sets of alliances. The first is within the British body politic, so that the referendum can be won. This needs to cover Tory pragmatists (David Cameron, George Osborne and William Hague), the Labour leadership and, preferably, the SNP. The Lib Dems have an important role in making this hold together since, by and large, they understand the Union the best. Mr Clegg’s experience of deal-making in the European parliament counts for a lot. The next set of alliances is within the Union itself, to create a Single Market bloc. The obvious candidates are the Nordic countries, Ireland and the Netherlands, together with many of the newer members in central and eastern Europe.

This will be very difficult. That’s the point, almost. The reward is a stabler EU, constructed more to our taste, even if we must concede some powers to an inner core of Euro area countries. Everybody wins. And by taking on the wilder Eurosceptic fringe, including their newspaper backers, it will cheer all right-thinking people up. It’s time we stopped being paralysed by fear and came out fighting.