Category: Politics UK

Reflections on general political developments and ideas in the UK

British banks shoot themselves in the foot.

Oh dear!  The Vickers review on banking reform hasn’t been published yet, and the news is full of people taking positions and what it might or might not recommend.  I have a lot of sympathy with our Prime Minister, who wants the blessed thing to be published before we have a row about it.  What to make of it?

The reporting is a bit confusing.  The Independent has hyped the thing up to be a war between the Vince Cable and George Osborne, not so much about the proposed reforms, but how quickly they will be implemented.  Meanwhile somebody has briefed the FT that Cable has pretty much given way on timing so there is no real row at all.

The proximate cause of this flurry is a lobbying campaign by the banks.  This campaign will do nothing to redress their general aura of incompetence.  They are basically saying the reforms should be kicked into the long grass because they will interfere with their lending to British businesses, which is critical if business investment is going pull us out of the economic doldrums, as most people hope.  There is some merit in this, because some of the reforms (on capital requirements and liquidity) could have just that effect.  But the ineptitude of their stance is staggering.

Politics is built on simple messages, and the banks are offering the Liberal Democrats a very tempting proposition.  This is a wonderful opportunity for them to show what they are doing in government by showing that they are resisting pressure from the banks.  As the banks themselves continue to insist on paying large bonuses for reckless trading activities, this is a popular stand.  Ed Miliband and Labour have not been slow to take up the anti-banker sentiment.  The Tories, meanwhile, don’t seem to know what’s hit them, and none of their side are sticking their necks out on the banks’ behalf.  Meanwhile John Cridland, the CBI director general, has weighed in on the banks’ behalf calling a rapid implementation of the reforms “barking mad”.  It is difficult to understand what he thought he was doing; the CBI’s credibility has been badly damaged as a result.

There may not even have been much of a row in the coalition in the first place.  There is consensus on the general thrust of the reforms; no doubt Vince Cable was quite flexible on the timings of some aspects, provided others proceed fairly quickly.  Now it is important to him and the Lib Dem part of the coalition that they are seen to get results.  A public row makes things worse for the banks.  If ever there was a time for quiet lobbying based on dry details, this was it.  Using the megaphone is totally counterproductive.

Not that I have much sympathy with the banks.  They are making too much money, and any sensible reform would reduce their profits, both by taking away the implicit government subsidy and by increasing competition.  It’s bound to hurt.  If the banks want to take some of their activities, and even their HQs, elsewhere, then so be it.  I’m not actually sure where they would go though.  Switzerland has dramatically increased its capital requirements for banks, and the stratospheric Swiss franc doesn’t make operating there cheap.  If they don’t have the implicit backing of a big government then their business model breaks down anyway – ruling out places like Ireland and Bermuda.  Going into the Eurozone when its own banking system is under incredible stress hardly looks a good idea either.  In America they have a habit of sending bankers to prison.

The central reform is to separate banks’ trading activities from their “ordinary” ones of taking deposits and lending to the public and non-financial businesses.  This was quite contentious in the commentariat when it was first mooted a year or so ago.  But there seems to be a much greater consensus behind it now.  Who would have guessed it?  A lot of people assumed the bankers would get away with it while politicians tried to make up their minds, and the disaster of 2007/08 faded into the memory.  Not so.  The banks’ inept PR machinery can take some of the credit.

 

Letting the dust settle

Now, in London, is not good moment to be a thinking liberal.  The recent riots consume everybody’s attention, but there is too much anger and panic around to say anything sensible.  But nobody will listen if you want to talk about something else.

The anger is not in itself unhealthy, or bad – indifference would be much worse.  It may well have helped to stop the violence, which has thankfully calmed very rapidly.  But little of lasting value comes from it.  Mostly we get calls for extra punishment, police powers and so on.  There is a lot of harking back to mythical earlier times when people had stronger moral values beaten into them, and so on.  And we get the usual tripe about too much human rights favouring criminals rather than victims.  Unfortunately our Prime Minister seems to share many of these beliefs.

But as the anger settles we will be left to confront a number of questions, which do not have ready answers.  Why did so many people think it was OK to go rampaging like this?  How could they be so heedless of the consequences of their actions?  Is this new?  Is it getting better or worse?  How do we promote responsibility?  More facts will help us answer these questions – and we have little more than an accumulation of anecdotes at the moment.

The most rational debate for now is about policing.  The police weren’t ready for the trouble and did not handle it well.  And they are facing significant cuts in funding.  Personally I suspect the problem is weak police management, especially in the Met.  I think this has been evident for a long time.  They adopt inflexible tactical methods which they seem unable to adapt to the needs of the moment; common sense gets lost.  Their solution is always more men, more money and more powers.  Unfortunately they will be unable to deliver cuts without reducing operational effectiveness, even if there are opportunities to make them much more efficient – and it would be very surprising if such opportunities did not exist.

Another aspect of this episode has been a massive closing of ranks by the majority of society.  Here in Battersea (scene of the Clapham Junction riots, not, incidentally in Clapham itself, as almost universally mis-reported) masses of people turned up to help the clean-up – and the hoardings on the shops are covered in supportive graffiti (where these are bare wood; where painted they are left properly pristine!).

Supportive graffiti at TK Maxx in Clapham Junction, Battersea

This reaction seems to bridge class, race and age group.

Who can say where all this will lead?

When confidence is lost

A scary day.  Here in London people are appalled by the looting and burning, and angry and panicked.  Something analogous is going on in the world’s financial markets.  At times like this we realise how much of a modern society is built on trust and confidence in strangers.

On the streets we hope that our well-ordered and safe lives are built on more solid foundations: law and the agencies that enforce it.  But in fact it depends on almost everybody imposing voluntary boundaries on their behaviour.  Even a tiny minority can create havoc.  If it truly is a tiny minority then we can contain it, but at the cost of deadening society around us and reducing the level that different communities mix.  It’s impossible to know where we will end up, but our town centres may never recover and the divisions in our society may simply grow.

The financial markets are likewise built on trust.  We also like to think that it has more solid foundations, on decisions taken based on solid information, with effective regulation and security.  Alas no.  Decisions are taken in an instant, and often by computer algorithms with a limited digital input.  A lot has to be taken for granted, so when confidence diminishes panic is likely to follow.  One of the more irritating aspects of these markets is the way people jump to quick explanations as to why a market has moved in a particular direction.  This week there was a lot of talk about the downgrading of US debt.  But the causes are unknowable, the sum of many decisions based on partial information and individual circumstances.

The downgrading of US debt simply cannot be a rational explanation.  It was based on no new knowledge; it directly affects investors only at the margins.  US debt actually rose in price, while share markets tumbled.  Share prices had in fact mostly lost touch with reality anyway, so a sharp fall in value should hardly have been a surprise.  The ability of professional investors to accept clear nonsense as a basis for valuing shares is one of the remarkable features of modern finance.

The panic will subside.  Life must go on.  But the difficult times will continue, both in the economy and civic cohesion.

 

Why we should celebrate the 200th anniversary of Waterloo

This isn’t exactly a new story, but, hey, time works in mysterious ways on the blogosphere.  I have just caught up with this Daily Mail article a month old suggesting the this country will downplay the 200th anniversary of Waterloo on 18th June 2015.  I picked up on it from the monthly Civitas update – they provided one of the rent-a-quotes.  This article appears to be a classic piece of Mail journalism, trying create a shock story from thin air.  But it does raise the very interesting question of the status of this battle in British history.

Waterloo is very important in British history.  But why?  The obvious answer is that it was the battle that finally did for Napoleon.  This is true, but it is undermined by two further observations.  Napoleon’s strategic position was hopeless, and if he had won at Waterloo it is certain that he would have been crushed later on in the year, most likely by an Austrian-led army.  The second point was that it wasn’t a particularly British battle.  Wellington’s army was mostly Dutch, Belgian and various shades of German, and he was combining with Blucher’s Prussian army, whose intervention was decisive.

In fact from the point of view of showcasing Wellington’s undoubted military skills, this battle wasn’t the man’s finest hour.  He was caught napping by Napoleon, needed the Prussians to slow him down at the Battle of Ligny, and had to accept huge casualties to the British contingent at Waterloo and its prequel, Quatre Bras.  His gamble at Waterloo nearly didn’t pay off as the Prussians were much slower than he expected to arrive.  British generals were supposed to keep British casualties down.  In 1811 an equally desperate, but much smaller, battle in Spain, Albuera, led to a remarkable British/allied victory thanks to some absolutely herioc fighting by British units (and some Spanish ones).  But British casualties were so high that this is often regarded at a bit of a defeat – and that was certainly the reaction of the British commander, Marshal Beresford.  It would not have been so bloody if Wellington had been there, the soldiers muttered.

But, of course, if you pay such a high price in blood you have to build the battle up to be of huge importance to justify it to folks back at home; and that is what British politicians did, with the army and a string of British historians acting as willing accomplices.  On top of that, it was a particularly dramatic battle, that has held a fascination for more than just the British.  One of the best modern histories is written by an Italian and translated into several languages.

So is it all overdone?  There is in fact something very important about this battle, that symbolises something of importance today.  It is an example of Britain acting as a fully paid-up European power, paying blood to make the whole continent a safer place alongside European allies.  A precursor to the great struggles of the 20th century: acting against the wrong sort of European unity.  In this it contrasts with Nelson’s victory at Trafalgar, which was a victory of Britain against Europe, resulting in British domination of the sea that was to last for over a century.

Waterloo was a European victory in which Britain a very full part.  A good reason to celebrate in these Eurosceptic times.

A brief guide to Keynesianism and the economic crisis

Hardly a day goes by without the dead British economist John Maynard Keynes being invoked, such as this article from this morning’s Independent.  Generally it is the critics of austerity that use his name, although this article is more nuanced, blaming George Bush and Gordon Brown for getting us into this mess by ignoring Keynes’s prescriptions.  And many more economists, including big names like Paul Krugman, use ideas that most people understand as “Keynesianism” even if they do not evoke the great man directly, rightly thinking it is better to appeal to logic and evidence rather than dead men, however great.  Inevitably a lot get taken for granted in these arguments.  For the benefit of amateur economists like me, in this long posting I want to explain and re-examine Keynesianism, in order to assess its relevance to the current crisis, especially here in the UK.

What do we mean by “Keynesianism”?  It is the idea that government fiscal policy, public expenditure and taxes, should be used to counteract a deficiency in demand in the total economy.   It originated with the insights of the great economist, and his reflections on the Great Depression of the 1930s.  Its starting point is that a whole economy does not work like a household budget.  It may be very sensible for a household to choose to spend less than it earns, but a whole economy cannot do this.  Supply must equal demand; you cannot store more than a trivial amount of production from one period to the next.  If across a whole economy more people want to spend less than they earn, in other words to save, then there isn’t enough demand to meet supply and the economy must shrink; people are put out of jobs and so on.

Not so fast.  Things balance out of the net saving can be channelled into investment.  Investment, in economics, refers to production for future benefit.  This usually refers to business investment (machines to make future production more efficient) but can also refer things like building houses which are “consumed” over a long time period .  But if savings are not matched by investment there is trouble.

The possibility of trading with another economy complicates the picture, of course.  Net saving can be balanced out by net exports.  But net exports across the world economy are zero, so this option isn’t available to everybody.

In classical economics there is no lasting mismatch between savings and investment, because markets balance the two out.  If there is too much saving, then this stimulates the supply of investment opportunities, for example by reducing the rate of interest.  Keynes’s great insight was to see that often this market mechanism doesn’t function properly, leading to prolonged unemployment.  And unemployment is a waste; production lost forever.  Much better to use this surplus labour inefficiently than not at all.

Extra spice is added to this logic by the idea of the multiplier effect.  If, for example, you stimulated the economy by paying extra benefits, then the recipients of the benefit would go out and spend them, and the people receiving this spending will spend more in turn, creating further demand and so creating more work.  The same logic applies in reverse; austerity tends to multiply itself too.  This effect is probably what students remember best about Keynesianism.  It gives the idea of Keynesian stimulus gravity defying properties – so that government spending on stimulus can pay for itself in extra taxes generated by multiplied demand (and the reverse, of course, with cuts being self-defeating).

Keynesians point to the Great Depression as an example of how things can go wrong, where excessive austerity turned a setback into a disaster, only rescued by the War (and what could be more wasteful than fighting a war?).  Critics of this view, incidentally, point out that the primitive state of the world’s banking systems had a lot to with this disaster, and so you can’t really compare it to now.

After the war, demand management by governments using fiscal policy became pretty much the orthodoxy.  But this went wrong in the 1970s, when a Keynesian response to the oil crisis simply led to rampant inflation, rather than reduced unemployment.  What are the problems?

First of all, Keynesian stimulus can’t push an economy beyond the limits of its economic infrastructure. To do so simply creates inflation.  After the oil crisis disaster, economists modified their ideas to take account of this, bringing in such ideas a as a “natural” level of unemployment, and giving a major role to monetary policy alongside fiscal policy.  This set of ideas became “neo-Keynesianism” and the orthodoxy of the 2000s.  It was what I was taught in my macro-economics course in 2005-08 at UCL.

A more subtle criticism is that fiscal stimulus is undermined by human behaviour.  If people respond to extra money in their pockets by saving more, the stimulus effect evaporates.  An idea of “Ricardian equivalence” has been developed to postulate that extra government spending would always be offset by extra saving, because people know it would lead to more tax, for which they must save.  Responding to this, proponents tend to suggest stimulus to areas where this is less of a risk.  For example, benefits to the hard up, rather than tax-breaks for the rich.

Another idea, in floating exchange rate economies like Britain’s, is known as the Mundell-Fleming effect, which predicts that fiscal stimulus simply causes the exchange rate to appreciate and crowds out exports (or is lost in imports).  This idea is quite difficult to get a grip on, and anything to do with predicting exchange rates turns out to be impossible to prove.  But it does offer an explanation of why the pound appreciated after British government’s stimulus programme following 2001.  And the basic idea that fixed exchange rates undermine monetary policy while floating ones undermine fiscal policy has the undoubted merit of symmetry.  So British austerity should be offset by a lower pound which stimulates exports.  The first part of this prediction seems to be working, but the second is slow to come about, not least because so many of our usual trading partners are in crisis too.

But the strongest objections to Keynesians come from the so-called “Austrian” school, because its more famous advocates (Schumpeter and Hayek in particular) were born in Austria.  This sees unemployment as a essential to a process of creative destruction, as inefficient and unwanted businesses go to the wall, to be replaced by better ones.  Keynesian stimulus interferes with this process, in particular by leading to wasteful investment; any temporary relief is offset by longer term problems.

From within the neo-Keynesian camp there are also those who advocate the use of monetary policy to manage the business cycle, as being much more efficient and effective that fiscal policy.  These seem to include the British Chancellor of the Exchequer, George Osborne.

So how to apply to the current economic crisis, and in particular to Britain?  The first point is that the pre-crisis economy was built on false premises, with unsustainable borrowing and a property boom.  It cannot be recreated by applying stimulus.  Not everybody accepts this, but almost everybody without a political axe to grind does.  The serious Keynesian argument is not about stimulus, but about the effects of austerity.  Austerity policies are reducing demand, setting up a multiplier effect and causing pointless unemployment before the replacement jobs can be created.

It helps the Keynesians that there does not seem to be a big risk of inflation – or not wage inflation, anyway, which is the critical issue.  This seems to be held in check by strong market forces, in the developed world at least.  High price inflation in Britain is not matched by pay inflation, and it is much more about forcing Britons to accept a lower standard of living as a result of a lower pound and shortages of key raw materials.

Advocates of monetary policy are also in a weak position.  It simply does not seem to be all that effective.  Interest rates are rock bottom, and all quantitative easing seems to do is to keep asset prices at unrealistic levels.

Would extra saving undermine a looser fiscal policy?  Britons are heavily indebted, after the borrowing binge.  That might encourage them to save any stimulus money – but it also suggests that they can’t respond to lower income by borrowing more.  Since we are talking about simply slowing a downward trajectory, the latter is the more relevant argument.

For me the most persuasive case for some kind of Keynesian influence on policy is made by the Financial Times’s Martin Wolf (behind the FT paywall).  This goes back to first principles.  Consumers are over indebted and need to spend more than they consume.  Business confidence is low, which means that it is difficult to persuade businesses to invest.  The potential for more exports (or less imports) is certainly there, but is limited because to many other economies are trying to play the same game.  So we are exactly in danger of the doom loop of excess saving that Keynes worried about.  The government’s massive deficit offsets these problems to a great extent, but reducing it too fast could well lead to excess unemployment.

But we don’t know.  Austerity policies are stronger in rhetoric than practice.  We can’t avoid major cuts to government services, so there is something to be said for getting them over with as quickly as practical.  But there is also something to be said for having a “plan B” should unemployment start to escalate.  But if the government had one, they wouldn’t tell us.

Cutting VAT is one idea, advocated by Labour Shadow Chancellor Ed Balls, since it is quite likely that it will stimulate some extra expenditure – though it is very unclear by how much.  That is probably too much of a humiliating U-turn for the government.  But it is a better idea than cutting the top rate of tax, advocated by some Conservatives, since that is unlikely to have much immediate effect on demand, even if it does have longer term benefits.  Another idea is to ramp up investment projects – but it is very difficult to do this efficiently in the sort of quantities that would have a major impact on the overall economy.  Personally I would favour a go-slow on benefit reform, which is where a lot of the cuts are focused, since mostly benefits get spent.  Given how tricky this programme is already, it might happen anyway.

It would not be surprising if the government missed its deficit reduction target over the five year term.  What will not be clear is whether this happens because Keynesian policies were applied (i.e. by slowing the pace of austerity) or because they weren’t (i.e. austerity strangling the economy at large).  That won’t stop people being firmly on one side of the argument or the other.

Economic growth and the media circus

Today the ONS released their first estimates for economic growth for the second quarter.  These quarterly figures have become the centre of a media frenzy; the papers and the BBC have been speculating about them and their implications for days.  Some commentators have worked themselves up into a real state, saying these numbers will be critical to the government’s future (see this comment on one which gives quite a good idea of the general coverage before the figures have even been released). This is getting very silly.

The first problem is that these numbers aren’t very accurate; the second is that they don’t mean very much to ordinary people anyway.  GDP, and the growth figures based on them, have become very interesting to economists, especially in making comparisons between countries, and looking at trends over a period of time, and compiling all manner of ratios.  But they are obscure aggregates that mean very little to us day to day.  The economic statistics that matter are those on unemployment, pay rates and consumer prices.  Taken together these figures give you a much better idea of what life is like for real people.  Further light is thrown by various other measures, like trade figures, retail sales and so on, though these are bit too volatile for single month’s figures to mean very much.

These statistics are painting a clear enough picture of the British economy.  Unemployment is high, especially amongst the young, though not as bad as in previous downturns.  It remains steady, with employment overall growing.  Inflation remains persistently high, largely thanks to higher import costs and taxes.  Remarkably, average pay is not keeping up with inflation, so we know that people are being squeezed.  The fact that so much of the squeeze is being spread across the working population, rather than concentrated in rising unemployment, is the truly remarkable thing about the economy right now.  This is surely a better way for the country to adjust to the new reality.  But it does mean that gloom is spread far and wide.

The government should really start to worry if one of two things start to happen.  First that unemployment starts increasing again.  Second if pay inflation creeps up beyond about 3% (it is now about 2%), since this means that an inflationary spiral might be on hand, so interest rates have to go up.  Likewise they should start to feel relief if and when unemployment gets significantly lower, and when inflation falls below 2%.  The betting is that the economy will keep bumping on somewhere in between the good and the bad news for some time to come.

Meanwhile there is a very unedifyng argument about the economy going on, with people talking at each other without any serious attempt at improving their understanding.  Consider this little discussion on Lib Dem Voice to which I made a couple of contributions.  I think the founders of economics as a social science hoped that it would improve people’s understanding of the world around them, but so often economic arguments are just used as ammunition to support prejudices.  And you can use them to argue just about anything.

All the more reason to ignore the media coverage of the quarterly growth figures.

Affording the NHS

The British government has been talking darkly about the exploding demands on the National Health Service, which will rapidly make it unaffordable if it is not reformed.  This has recently been challenged by Professor John Appleby, at the health think tank King’s Fund.  This was in a recent article in the British Medical Journal, behind a paywall, but summarised by the BBC here.  This question goes to the heart of health policy in the UK, but politicians dare not discuss it – because it puts the very principles of the sacred NHS in question.  But the problem will not go away.

According to some figures on Wikipedia Britian spent an unremarkable 8% of its national income on health, compared to over 16% in the US, before the financial crisis struck.  Those figures will be higher now, since our income has shrunk, but the relativities will be much the same.  The comparison between the two countries is usually held up to show how ineffective US health spending is, since health outcomes look generally pretty poor there.  But the comparison can be looked at the other way.  The US can afford to spend more than 16% of its national income on health and still remain one of the most prosperous countries on the planet.  There is nothing mysterious about this.  Developed countries are long past the level where basic human needs of food and shelter are met; how we choose to spend the surplus is up to us, and there is no reason why we can’t choose health care over cars, designer clothes or big holidays.  It’s not as if it requires massive imports to sustain it.

You can take this line of reasoning further.  The basic proposition of health care is to reduce pain and prolong life; these are consumer propositions to, well, die for.  Suppose we lived in the economist’s free market utopia, where health spending was a matter of individual choice in a perfectly competitive free market with no information asymmetries.   There is no reason to think that health expenditure would not be higher than the 8% or so we currently spend in Britain, or indeed as high the US figure.  We can perfectly easily afford it.

That’s not the problem.  The problem is paying for it almost entirely through unspecific taxes, the core design principle of the NHS.  And here the government is on much stronger ground.  There is an upper limit to how much tax we can raise for health care.  Up to a certain point, of course, the NHS model works perfectly well.  Look on the taxes as an insurance premium and it helps spread risk in a way that people like.  But the more you spend, the more the weaknesses of the model are exposed.

  • There is no direct line of sight between what you pay and what you get.  How on earth are you supposed to decide whether you are getting value for money?
  • You have no choice in the level of service you get.  One size fits all.
  • People who are better off may feel that they are paying too much relative to what they get.  This may not be quite as strong an argument as it first appears, since the less well off pay a lot of tax through cigarettes, alcohol, petrol and VAT – but the perception is still a problem.
  • Taxes create a drag on the rest of the economy, reducing incentives to work and therefore shrinking the resources available.

America is able to get away with much higher levels of health expenditure because so much of it comes from private insurance premiums and direct private payments for treatment.  But even there a battle royal is developing over how to balance taxes and government support.

Of course, to some putting up taxes is the right way to go.  France and Sweden get away with higher tax burdens than the UK after all.  But this is very fraught.  Some think you can go after big companies and very rich people and leave everybody else.  This is not as easy as it sounds though, since this wealth is very mobile.  Property is not mobile, of course, but raising taxes on property is probably as politically toxic in Britain as taxing fuel is in the US.  There is also a problem if too much tax revenue comes from the very rich or corporations – these start to acquire more political weight.  Which leaves the not-so-rich.  But these people are under pressure and feel over-taxed – Ed Miliband’s “squeezed middle”.

So I think the government is right.  We have hit the limit of what the country can afford for tax-funded free-at-the-point-of-use health system.  But we have not hit the limit of what people are prepared to spend if it’s their own money and for their own benefit.  The risk to the NHS is that the more affluent middle classes start to opt out of NHS services, depriving them of critical mass and undermining the principle of social solidarity.  This has already happened to NHS dentistry.

Nasty.  In the last years of the previous government the issue of co-payments was quite high up the political agenda: the possibility of NHS patients topping up their treatments with their own money to get things not on the basic menu.  This had become politically charged because of the costs of some rather questionable cancer treatments which the NHS were denying but which people were prepared to pay for.  The Conservatives clearly considered the topic politically toxic, since they have fudged the issue of cancer treatments with a bit of extra funding.  Labour and the Lib Dems were inching towards accepting co-payments, though I expect both parties are now bouncing back.

But in my view co-payments is the best way to relieve the pressure.  The NHS should define a basic menu of treatments that everybody is entitled to, but accept payments for anything outside this.  This undermines one of the sacred founding ideas of the NHS, that everybody gets the same, no matter how wealthy.  But it is better than the alternatives.  It’s the debate we should be having.

Hacking scandal – enjoy it while it lasts

We haven’t seen anything like this since the MPs expenses scandal in 2009.  Rupert Murdoch’s newspaper empire is the centre of a media and political feeding frenzy provoked initially by outrage over mobile phone hacking, and now taking in dodgy relationships with the Police and management cover-up and dissembling.  Murdoch has had to close one highly successful paper, and now he’s  withdrawn his bid for 100% of BSkyB.  Commentators are using metaphors such as earthquakes and the shifting of tectonic plates.

Frankly I find it impossible not to enjoy this spectacle.  Murdoch and his acolytes are hard-nosed businessmen who would not have thought twice about meting out the sort of stuff they are now victims of.  We can only imaging what The Sun would be saying about the photogenic Rebecca Brooks, the senior manager at the centre of the scandal, where it not part of the Murdoch empire.  What’s more Mr Murdoch clearly had undue political influence, and liked hold politicians in fear – and now it is wonderful to see how politicians behave once that fear is lost.  And his influence was in no way benign, in favour of biased news, extreme Euroscepticism, and stoking up prejudice generally.

But will any lasting good come of it?  It doesn’t bother me that other, equally evil press barons have so far escaped unscathed.  Indeed widening the scope might diminish the punishment – it is surely more effective to totally dismantle one evil empire than damage several a bit.  The others will draw conclusions from Murdoch’s fate.

But the political earthquake of the MPs expenses scandal did not change very much, after its deserved and undeserved victims were buried.  The same prejudices and appetites that Murdoch fed on persist.  Others will move into any empty space that he vacates.  And it is almost impossible to regulate it properly.  It is difficult to believe that the public enquiry will change very much.  Indeed the political consensus around keeping its scope very broad might serve to weaken and dilute its effect.

But in amongst this battle there is one thing worth fighting to protect.  That is the regulation of news broadcasting in TV and radio, and the primacy of the BBC.  As this Bagehot column makes clear (see the end of the article), Murdoch clearly wants to establish a Fox News in the UK to do to TV what his print newspapers have done to that medium.  The BSkyB takeover was part of that strategy.  The baleful influence of this is all too clear from this poll which shows that TV and radio are the only medium that retains a high degree of trust in the UK, and that distrust of the press here is much higher than elsewhere in Europe.

The savages were circling.  They’ve been seen off for now.  But we must stay vigilant.

Is Britain about to go bust?

The debate about Britain’s economic policy rumbles on, with a speech by the Shadow Chancellor Ed Balls last week.  In previous posts I have dismissed the claim made by some that the government’s cuts are unnecessary, and most commentators, including Mr Balls, seem to accept this, even if they don’t say so explicitly. But there is a furious debate about how quickly the cuts should be implemented: 5 years as the government plans, or 8 years as Labour suggests, apparently including Mr Balls, though in the past he has been suggested longer.  An impressive array of economists seem to support the Labour argument.

The basis of the critics’ argument rests on conventional macroeconomics, and runs that cutting too fast creates needless unemployment and risks a spiral of lower demand which will make things worse.  This argument is open to challenge on its own terms (see The Economist’s Buttonwood column here, or Bagehot here), but the government’s defenders don’t generally try; instead they trump it with an argument about unsustainable levels of government debt.  I want to look at the macroeconomic argument in a future post.  Today I will consider whether unsustainable debt really is such a risk.

If government debt gets too high, it can derail the whole economy.  A default, when governments renege on the terms of their debt, can be absolutely catastrophic.  The problem is that if governments can’t raise the money then all the functions of government are threatened.  For countries like Greece who are part of the Euro, this means that they literally can’t pay the bills – salary payments are stopped and so on.  This is such a frightening prospect that there are strong incentives for other members of the zone to organise a rescue.  Countries like the UK do have another option: they can debauch their currency by paying bills with newly created money.  That’s how hyperinflation starts; the most recent example is Zimbabwe, and its implications are hardly less disastrous than default.

So what are the risks for Britain?  The good news is that before the crisis struck overall debt was modest by international standards at a shade over 50% of GDP.  Even better, the maturity profile of this debt, i.e. how soon it has to be rolled over, was long term – longer than any other major economy.  The bad news is the massive size of the current deficit – 11% in 2009, and the fact that 8% is “structural” or won’t bounce back with the economic cycle.  That means that total debt is increasing rapidly; by the end of 2010 it was already 75% of GDP. This gives two main problems.

The first problem is that debt risks spiralling out of control.  Few think that the current economy is capable of more than modest growth, austerity or not, which means that extra wealth is not being generated fast enough to get us out of trouble.  And debt comes with an interest bill.  There are some classic economic models of this, and on these the warning lights are flashing red furiously.  At some point lenders (characterised as the “bond markets”, but potentially including you and me) refuse to lend, or at least start to put the rate of interest up, making things worse.

The second problem is more subtle.  If total national debt levels off at a high level, this will drag down the whole economy for a long while to come, as we spend too much resource servicing the debt.  One study suggested that serious problems start to happen when debt reaches 90% of GDP – less than two years away at the current trajectory.  Taking longer to eliminate the deficit means that overall debt will level off at a higher amount, unless the aggressive option really does lead to meltdown.

There are three further overlapping problems for the UK.  Debt markets are very open; there is a degree of dependence on overseas support; and the pound is a floating currency.  Government debt problems are much easier to handle if there is ready access to lenders who are effectively forced to lend to you; this has helped such high debt countries as Japan and Italy.  Superficially the UK seems to look this way: pension funds are massive, and traditionally hold lots of government debt (gilts) for actuarial reasons.  But such funds are aggressively and independently managed, helping to make our financial services industry internationally competitive.   That means they switch away from buying gilts as soon as they think it is not such a good deal.  Dependence on overseas investors appears to be relatively modest, as buyers of gilts are overwhelmingly domestic (or so I believe).  But the country still runs a significant current account deficit (unlike Japan, and even Italy), meaning that the economy as a whole does need foreign lenders.  The floating pound is often presented as a get out of jail free card – but the benefits of being able to devalue are two edged.  Foreign investors will be wary of sterling if they think it will devalue; domestic investors will likewise increase their overseas exposures in the same event, reducing their ability to buy gilts (unless these are  issued in foreign currency, but let’s not go there).

But, the government’s critics maintain, there’s no sign of trouble, and never has been.  The government has had no trouble selling gilts, at very low interest rates.  The trouble with this argument is that markets can turn in an instant, and you won’t know until too late.  An investment decision depends on a judgement looking far into the future, and this can move very quickly.  Government ministers seem to have got a genuine fright in May 2010 with the Greek crisis.  By and large the closer a commentator actually is to the debt markets, the less sanguine they are about the whole thing.  There are just too many risk factors.

So what to think?  The Labour plan is probably viable, if backed by a real determination to follow it through (and Alistair Darling, the outgoing Labour chancellor would have been an excellent figurehead, unlike Mr Balls).  But it undoubtedly takes more risks with catastrophe.  Whether it is worth doing so does come back to your view on the macroeconomic risks.  If you think that the austerity programme really will lead to meltdown, then this has real power.  But neither is the government argument implausible.  It’s about the risks you are prepared to run.