World – Page 12 – thinking liberal

The West has become irrelevant in the Middle East

Along with most of my politically conscious compatriots here in Britain, I am deeply shocked by the massacres perpetrated by the Egyptian security forces on supporters of the Muslim Brotherhood over the last couple of days. A deeply shocking, and depressing, revelation came from an EU mediator in a BBC interview yesterday. Apparently he was very close to achieving a negotiated way forward, before hardliners in the Egyptian government overruled the people he was negotiating with to press ahead with the violent crackdown. This episode deserves more attention that it got (I have failed to find any report of it after searching both the BBC and Google, so quickly have the news media dropped the story), as it is very revealing about both Egypt and the Middle East at large. We in the West have become completely irrelevant.

What we had hoped for in the Arab Spring was the emergence of democracy in the various Middle Eastern states, with a working relationship developing amongst the main political factions, with workable, effective governments emerging over time. Perhaps a bit like Portugal after the 1970s. We cling to the hope of this now in just Tunisia and Libya. What has emerged instead is a conflict between an Islamist faction and the state security apparatus, neither of which is interested in liberal democratic government. In Egypt both factions have decided they should get what they want by ignoring the liberal factions and Western standards. They are following a path taken by Algeria; the uprising in Syria is evolving in a similar direction. In Jordon and Morocco the state security apparatus is in control but toy with democratic reforms to keep Western sponsors sweet. In the Gulf and Arabian Peninsula the state security apparatus is not even doing that. In Iraq democracy is gradually being pushed into the background as a similar dynamic emerges. Israel/Palestine and Lebanon are much more complex, but some of the same themes can be seen there. The real battle is between a powerful state security apparatus and an Islamist protest movement, which shades into insurgency and outright guerrilla war. Neither side is interested in democracy, and no other civic or foreign forces can persuade them otherwise.

The first disappointment in Egypt is that the Islamists failed to embrace democracy. Rather they saw democratic institutions as a means of seizing power for themselves. They seemed to have no concept of governing by consent, or of building democratic institutions. President Morsi’s democratic mandate was weak, as the electoral system failed to give voters a proper choice. There is no properly elected parliament, and the Muslim Brotherhood showed no real interest in conducting proper open elections for them. Their attitude to democratic institutions seems rather similar to that of Lenin or Hitler: a means to an end. This seems to be part of a wider pattern of similar Islamist movements in the Middle East – notably Hamas in Gaza, and Hezbollah in Lebanon.

Their implacable opponents are hardliners in the security establishment: armed forces, police and murky intelligence organisations. In Middle Eastern countries these forces in most cases, including Egypt, have become monstrous and unaccountable. They are usually incredibly incompetent at their alleged purpose of maintaining law and order, as this week’s massacres showed. They effectively control most Middle Eastern governments, though often with civilian or royal heads of state nominally in charge. They have no time for liberal democracy. The sort of accountability implied by such a system is anathema.

More liberal forces did flower for a while in Egypt, allying with the Islamists to temporarily turn the generals out of power. But the Islamists were not interested in a real partnership. There was a small hope that, after the military coup, the Brotherhood might again see that it was in their interests to team up with the liberals, and concede real power to them. That, no doubt was the substance of what EU mediators were trying to negotiate. But the security hardliners have now crushed all hope of that. And now ordinary Egyptians are faced with a stark choice. Whose side are they on? The Islamists or the security forces? After the Brotherhood’s disastrous period in power, many will choose the latter.

And there is practically nothing that we in the West can do to influence events. The best hope for democracy lies in the Islamist forces coming to understand that they need and should respect democratic institutions, even when it proves inconvenient. They can then build a secure partnership with secular liberals that will command broad popular support. This is what happened, eventually, in Turkey as the Islamists embraced the idea of Turkey being part of Europe. Instead the Islamists in the Middle East and Africa seem to take their lead from their implacable opponents in the security state: it is all about getting your hands on the levers of power.

All we can do in the West is help nurture the small shoots of liberal democracy as they emerge, through mediation and advice, as much as through money and aid – as the EU did with Turkey. Meanwhile we are condemned to being utterly helpless. Neither side needs us.

The Euro does not need a federal superstate to prosper

The Euro crisis is in one of its quiet phases. But few are foolish enough to think that its future is now secure. It is often said that the currency is destined to fail because of a fundamental economic law which means that you cannot operate a successful currency without the full authority and resources of a state behind it. The Euro needs to the apparatus of a federal superstate to survive, it is said. One Tory MP even suggested that the Euro’s promoters were committing fraud to suggest otherwise. But, for all that many in Brussels want it, establishing such a superstate is not politically feasible. And yet it is possible to see emerging the institutional architecture that will allow the Euro to survive and prosper without it. It’s a hard road, but there are enough benefits for the currency’s members to persist with it.

There are four key elements to the architecture. The first is an obvious one: a powerful European Central Bank (ECB), able to do what it takes to ride out the various crises that financial markets will throw at the system. The current ECB has proved up to the task, albeit by pushing at the boundaries of its formal powers, for example by buying the debt of member governments on the secondary market. Confidence that it can handle future crises is growing, adding to the overall stability of the system. And yet this power has its limits; it cannot transfer taxpayer funds from one country to another (referred to as “fiscal transfers” by economists), in the way a federal government could. The Euro has to find a way of existing without the sort of massive fiscal transfers that you see in the United States, for example.

In its place is the second element: provisions for states to default on their debts. This has been resisted tooth and nail by Euro federalists, but at long last it has been implemented for Greece. Alongside this, a crisis infrastructure is emerging, including crisis funds to support governments that are in the process of restructuring their obligations. This whole process needs to go further: publicly held government debt, e.g. that bought by the ECB, needs to be included, for example. Greece will surely need another restructure. But we are seeing the different nations’ bond prices reflecting the risk of default, and this imposes a discipline on government finances. And no government will want to follow the humiliating path of Greece into default, if they can help it.

There remains the problem of managing the banking system, which is very much run along national lines. While Greece got into trouble because of a profligate government, Ireland, Spain and Cyprus were brought down by banking crises. At first the response to a banking crisis was for governments to underwrite all banks’ creditors in order to restore confidence. Many applauded the Irish government when they did this early in the crisis; but it is a terrible idea, transferring liabilities from various people who should have known better to taxpayers who could ill afford it. Therefore the third element of the new architecture is to force bank creditors to pay, or at least contribute to, bailing out bust banks, referred to as “bailing in”. This solution was put in place for Cyprus, and hopefully will be the pattern in future. Of course it remains possible for financially strong governments, like Germany’s, to stand behind their own banks – but this should be discouraged. It is essential for discipline to be brought back into banking, and the system whereby bankers keep the profits and pass losses on to taxpayers has to be terminated.

But this approach is undeniably destabilising; it adds to the risk of bank runs. The obvious solution to this is to establish a Europe wide deposit insurance scheme, just as America has its federal scheme. Initially European governments seemed to favour this, but as they grew to understand its full implications, possible taxpayer transfers between states and increased central regulation, they have backed off. This has left us with the fourth and final element of the new architecture: emergency capital controls. This has been implemented for Cyprus, where depositors at Cyprus banks are suffering severe limits to their ability to move money out. It is an ugly process, and represents a big step bank from the integrated ideal of the Euro. The third and fourth elements in particular mean that a Euro held in a German bank is worth more than one held in a Portuguese one, say. But this is better than the alternatives, which attempt to wish financial risks away into an anonymous federal centre.

I believe that these four elements can evolve into a system that will give the Euro long lasting stability, and a better distribution of risk than a federal system would. We must remember that systems of human relations are only in a small part dependent of formal laws and powers, and much more based on expectations of how people should and will behave. This is how the management of the Euro is evolving. In the early days those expectations were wholly unrealistic, and ultimately required some kind of federal system to underwrite them. Now that we know this cannot be, new expectations are evolving. This is a bit like the way the British constitution and Common Law develops.

But is it worth it? Is it a loveless marriage between southern economies locked into permanent austerity, and more dynamic northern ones which are constantly being dragged down by their neighbours? (And France which manages to be on both sides of this equation at once!) If so the enterprise will lose political support and die anyway.

This question deserves a post all to itself, but I believe that all this pain has benefits to both sides. For the southern economies, joining the Euro was all about converging with their rich northern neighbours and their higher standard of living. Unfortunately they at first thought this would be easy. Lower interest rates and hot money from the north created a short term boom, but could not do the trick. Endless tax transfers (like between north and south Italy), are not on offer, and probably wouldn’t work either. In order to raise living standards the southern economies will have to undertake a painful series of reforms, rather in the way Britain did in the 1980s, Sweden in the 1990s, and, to a lesser extent, Germany in the 2000s. The process is starting, and the new disciplines of the Euro zone help this.

And for the northern economies of Germany, the Netherlands and Finland? Being in the Euro gives them a more stable economic environment, at a time when the global economy has been destabilised by the rising of China and other emerging markets. With a lower exchange rate than otherwise they have been able to preserves their exporting industries and maintain a degree of social stability. You only have to look at Britain to see what might have happened otherwise. There a short-term boom and appreciating exchange rate led to a flooding in of cheap imports and a hollowing out of export industries. Living standards grew for a while, but it could not last. The country is still struggling to escape the bust of 2008/09, with exports remaining weak.

The first decade and a half of the Euro has not been a happy experience, taken as a whole. But these are difficult times for developed world economies. In these circumstances the Euro remains a good idea, and indeed eastern European countries are still queuing to join. In the rough, interconnected world that is the modern economy, living with a freely floating currency is much harder than many would have you believe.

Japan: are there lessons for other developed economies?

A while ago I wrote that the radical economic policies of Japan’s new government under Shinzo Abe would be an interesting experiment for the world. They were much lauded by austerity sceptics, such as Paul Krugman, who drew attention to aggressive monetary policies and fiscal stimulus, which they were advocating for other developed economies. I was sceptical. But early results have exceeded expectations. There is a good analysis here from the Economist, which also discusses the new government’s nationalist tendencies. Is this evidence that the austerity policies being pursued by much of the rest of the developed world are mistaken?

My scepticism when I last posted was based on two things. First that the policies hinged on companies raising wages, when their profits were under pressure. Second was that, based on Mr Abe’s previous form, I did not think that structural reforms to Japan’s economy would be pursued with vigour. On both counts it looks as if I was too pessimistic. This means that Japan’s economy might well get a sustained period of growth, and that it will reduce the burden of government debt. But applying its policies to other developed economies is problematic. There are three reasons for this.

The first is that for longer term success it is still the element of structural reform that is critical. Mr Abe refers to his programme as “three arrows”, in reference to a Japanese folklore story that you can snap the shaft of a single arrow easily, but not three held together. These three are monetary easing, fiscal stimulus and structural reform. Austerity policies in Europe and America are firmly based on structural reform: especially in reducing the size of the state. Opponents of austerity tend to want to halt or slow down structural reform. Some say that it should wait until growth is resumed; others would rather avoid the reform process altogether. The three arrows approach would in fact promote reform, alongside the monetary and fiscal palliatives, and, indeed, the more considered critics of austerity do say this. But here there is a problem: Japan does not have an oversized state, so cutting back government expenditure is not a major reform priority, as opposed to opening the economy up to more competition and reforming corporate taxes. In Britain, France, Italy, Spain and so on the size state has run beyond what the economy can sustain, and so it has to be cut back, which in turn drains demand from the economy in the short term. There is good reason to doubt whether fiscal or monetary stimulus, beyond their current levels, are compatible with the need to shrink the state.

There is a second important difference in Japan. Its economy has a trade surplus and (which is linked) a savings surplus, albeit temporarily challenged as it has to import energy while its nuclear programme is in abeyance. That means that a fall in the exchange rate, as has happened to the Yen, will generate an immediate bonus to businesses, easily outweighing the extra costs imposed on the economy. This allows companies to put wages up. The savings surplus also means that the economy is not dependent on borrowing from overseas investors, who might be shaken by such currency depreciation. This is not the case with the austerity economies. Where their exchange rates have fallen, as in Britain, this has simply contributed to the squeeze on consumers without benefiting business to anything like the same degree.

Mentioning the exchange rate brings me to a third observation. It is that a lot of Japan’s success so far has less to do with with the country’s actual economic policies than with the effect of announcements on the zeitgeist. Implementation has hardly started, and yet the exchange rate has already plummeted and stock market risen, which is having the necessary warming effect, and set off a virtuous circle. The same can be said, in reverse, for austerity policies in the West, of course. But where reforms are necessarily painful, this is almost impossible to do. Economists have long been reluctant to admit the role of psychology in macroeconomic policy, and have let it in only gradually (through such ideas a inflation expectations). Governments and central banks have long known it – and Mr Abe’s government is acutely aware. The question for Europeans, in particular, is whether further aggressive monetary easing, linked to higher inflation expectations, combined with some fiscal stimulus would lift the zeitgeist and get the economies moving again. We have reason to be sceptical.

Almost all the developed economies in the world are experiencing difficulties. It is easy to fall in with the idea that this must be for similar reasons and that the solutions for each economy are similar. In fact each major economy is unique. And the differences between Japan and the others is amongst the largest. Abenomics may work for Japan, but that does not mean they will work anywhere else.

The private war of the jihadi terrorists

Last week’s bombing of the Boston marathon received blanket coverage here in the UK. In a world where there is still plenty of death and destruction, it seemed to be particularly shocking. But the strangest aspect of the episode to me was that nobody claimed responsibility. We were left to speculate as to whether it was Islamic jihadis, right wing extremists or some tortured loner. What’s the point if nobody knows why you did it? It turns out that it was the jihadis: but this still leaves us with the question of what their cause is all about.

Describing the jihadist enterprise as a war, as in “war on terror”, is controversial on the part of the western states that seem to be the main targets. Be that as it may, the jihadists themselves see it as a war. “I am a soldier,” said one of the London terrorists of July 2005 in the video released to publicise his suicide attack. But it is a strange sort of war.

Following the 19th Century philosopher of war Carl von Clausewitz very loosely, we can see war in terms of three elements: purpose (the political, rational element), strategy (the way the two sides try to outwit each other, which resolves to a game of chance), and will (the primordial hatred and drive to violence). The will is evident, and there is quite a bit of strategy too, as the jihadis spend quite a bit of time plotting their acts, while the authorities try to catch them. The problem comes with the political purpose. What is all this designed to achieve?

It did seem a bit clearer in September 2001. The scale of the attacks on New York and Washington was breathtaking, and there seemed to be a strategic driving force, based in Afghanistan. The Western media focused on the personality of Osama Bin-Laden, though what his personal role was in all of this I find it difficult to say; he was a convenient focus for the attacked nations. But if not him, there were other strategists and leaders in a global enterprise. We could make out some kind of purpose. There was something about establishing a global caliphate, and pushing the Western countries towards enlightenment and the Islamic path. The terrorist attacks would so disrupt western civilisation, whose foundations they believed to be very weak, that its economy would collapse and they would then be forced to consider their ways. With talk of escalating the violence towards nuclear and biological weapons and “dirty bombs”, you could just about see this as being rational, if deluded.

But those delusions became pretty obvious pretty quickly, and the jihadist campaign resolved to a few nasty pinpricks that could do little to undermine the fabric of western society itself. The Al-Qaeda leadership, so far as it exists, is focusing on maore local issues, in Iraq and Afghanistan, and expanding elsewhere in the Middle east and Africa. It is an armed part of a puritanical, fundamentalist Islamic political movement, operating in countries that are predominantly Muslim. They have no real interest in pursuing terrorist campaigns in the West, which might even harm their cause by getting Western securities services involved. Western countries don’t want to get themselves bogged down in messy wars in countries they don’t understand. The foreign jihadists might see some use in recruiting sympathetic residents of Western countries to act as foot soldiers in their wars, but that is probably the limit.

But terrorism in the West lives on. Not only are there the occasional successful attacks, like that in Boston, but many more plots that come to light before they are executed – such as a Canadian plot in the news today. But these are local affairs carried out by citizens or residents of the countries concerned, with little outside involvement. The plot of the US TV series Homeland is a fantasy. Does that mean that the US military effort against the terrorists, drone strikes and all, is purely a geopolitical game? Or is it successfully suppressing outside terrorism? It is impossible for us ordinary members of the public to know.

What we have is a very private war, carried out by isolated and frustrated members of minority communities, who feel excluded and alienated. Terrorism is some kind of release, but serves no wider goal. As one character in the BBC TV series The Village set in the First World War says in another context (I paraphrase from memory): “He thinks that by going to war and getting killed he will impress her; he forgets that the problem with being killed is that you are dead.” This was quite striking with the 7/7 bombings in London. It was perpetrated by a well-organised cell (compare their attacks with the ham-fisted ones that took place a week later), but it was a one shot weapon. Any military virtues died with them. The silence that followed the Boston bombings has something of the same disconnection with any wider objectives.

So what to we do to protect ourselves? The police and intelligence effort has to go on, even if we suspect those that lead it are playing the threat up, and hiding behind national security. But we also need to carry on the slow, awkward process of outreach and integration of minority communities: multiculturalism. We need at least to try to drain the hatred that drives these very private wars.

David Graeber’s Debt the First 5,000 years – the emperor has no clothes

One of the books I received for Christmas was David Graeber’s Debt, the First 5,000 Years. Mr Graeber is an American anthropologist, now working at Goldsmiths in London, who has been active in the anti-capitalist Occupy movement, and describes himself as an anarchist. The book promises to give some intellectual heft to the anti-capitalist case, by examining the origins and history of debt and money, and how we need to rethink it. So far so good. But after the book promised so much at the beginning, I can hardly contain my disappointment with its limp ending.

The book starts well enough. He immediately focuses on modern economics’s weakest point: the theory of debt and money. He may labour the nonsense of the economist’s creation myth of a barter a economy a bit too much: economists aren’t really interested in history after all. But economists’ confusion over the role and meaning of money is evident; personally I wouldn’t use the barter myth to illustrate this, but the way economists still talk about printing preses and helicopter drops when trying to explain monetary policy. Mr Graeber runs his hand across the soft underbelly of economics, but then, instead going in for the kill, he throws away the knife. He rejects the whole, quantitative, mathematical language of economics. He thinks that the discipline’s attempt to preserve moral neutrality is in fact condoning immorality and violence. Like it or not, numbers and mathematics are central to our society’s workings, and rejecting these tools out of hand leaves Mr Graeber’s arguments with very little purchase.

The full, awful implications of this are not immediately clear, however. Mr Graeber puts the question of money and debt into an anthropological context, and this is a good read. I found his categorisation of human interactions into three types very illuminating. These types are exchange, what he calls “communism” and hierarchical. The exchange relationship is the typical arms length commercial one: one item is exchanged for another, typically money, and there are no further implications for the relationship between the parties; it ends with the transaction. A communistic (or perhaps communal would be a less provocative word) transaction is typical of close communities: transactions aren’t exchanges, those who are able give to those who are in need, all a part of a wider, long term relationship. Relationship is also key to hierarchical transactions, but it is one of authority. A lower individual pays tribute to a higher one, while the higher one may cast beneficence to those beneath. Mr Graeber is careful to say that none of these is inherently superior to the others, and any society needs to use all three. But he complains that the modern world puts exchange relationships on a pedestal at the cost of communistic ones, costing the quality of human relationships.

All this leads into a broad historical narrative – the 5,000 years – of the Eurasian continent. Originally money develops as a credit relationship, and is not seen as a thing in itself: its accounting function is the critical element, and it is woven into the fabric of society, based on trust. But then the idea of precious metals, gold and silver in particular, becoming money in its own right rapidly took hold across the entire continent. The effect, in his telling, was malign. Money existed independently of states and relationships. Soldiers could loot money from one place as they destroyed it and spend the proceeds elsewhere. It facilitated both the running of armies and trading of slaves. Sinister, cynical empires came to dominate the world in Europe, India and China in the centuries before and after Christ.

These empires then broke down (or changed nature in China) as precious metal (bullion) money was drained from the system. In Mr Graeber’s telling this has much to do with the new world religions (Christianity, Islam and Buddhism) in what he calls the Middle Ages. His account is admirably even handed in its geography, rather than the customary focus on Europe. In this age Europe is a barbaric offshoot from the civilised worlds of the Middle East and China. Credit becomes central to commerce, which operates independently of the state, and is based on trust. This is something of a golden age to Mr Graeber, though not the European end.

This unravels in the Renaissance, with the Europeans leading the way. Gold and silver is looted in America and then traded with the Chinese. An age of violence and destruction is born, as trust is no longer required in trade and commerce. Then, in the 17th and 18th centuries the malign instruments of modern finance, bonds and shares, are invented in order to fuel society’s appetite for war. Meanwhile, the slave trade takes off, destroying African society amongst other victims. An age often portrayed by western historians as one of progress, Mr Graeber portrays as one of a descent into destruction. This is deliberately provocative, but he has a point: this is an age of war, colonialism and slavery.

And it is here, as the industrial revolution begins, that Mr Graeber’s account runs out of steam. All the building blocks for capitalist society are in place, and its evil roots clear; he almost says “and the rest is history”. He swiftly moves on to his final chapter, where a new era begins with the collapse of the Bretton Woods system, and with the inevitable collapse of capitalism in its wake. I was expecting to read an account of the era of economic growth, but there’s practically nothing there. And the awful truth dawns. Up to this point I had been giving Mr Graeber the benefit of the doubt, for all his provocations. But the emperor has no clothes. When it comes to describing the modern world he is utterly out of his depth and as a result anything of consequence he has to say (and there are some) seems a matter of random chance. An example is his idea that the purchase of US Treasury securities, which will always be rolled over rather than repaid, is in fact paying tribute to the primary military power. the USA. He spots a problem with this account: the Chinese are amongst the largest buyers, and they are power rivals. He then has to concoct a story that this is part of a long term Chinese game. This is really very silly. The Chinese are buying US Treasury stock because they are running a big trade surplus and there is nowhere else for its surplus dollars to go; the power transfer implied is minimal; but the trade surplus is an important element of the Chinese development strategy, which involves building up production in advance of consumption, and in the great scheme of things the dollar surplus isn’t that important to them; it’s only money – if they lost the lot in a crash tomorrow, how much does it really matter? The Chinese seem to have grasped Mr Graeber’s message about money rather better than he has himself. Mr Graeber’s lack of economic literacy has him floundering to comprehend what is happening around him.

His thesis is that modern capitalism is a typical bullion economy based on power and violence, and the absence of trust, with exchange and hierarchical transactions driving all else out. Most people in developed economies are little better than slaves, tied to their employers and struggling to pay off debt. Debt is used to enslave people. But this system is fundamentally unstable and is in the process of collapsing.

But after the emperor-has-no-clothes moment there is no aspect of Mr Graeber’s thesis that doesn’t look questionable. Is is really true to say that capitalist transactions are based on the ultimate sanction of force, and not on trust? Is it not trust that distinguishes advanced capitalism in say, Denmark, from the less developed versions in Russia and China?

And he misses the whole issue of growth. This process, driven mainly by increased productivity, has improved the lives of countless millions – and is genuinely popular with most people in both the developed and developing world. It is by no means evident that today’s workers can be compared to Roman and African slaves. And debt has played a critcal role in lubricating this growth process, by allowing investment: payment now for a later gain. The whole culture of investment is omitted from Mr Graeber’s analysis: debt for him has but one purpose: to enslave the debtor by forcing him to make a promise he cannot keep.

Mr Graeber’s failure is underlined by the absence of any practical ideas about how the world should change to make it better. His only idea is a Jubilee: a systematic forgiveness of debt. But he hasn’t thought about the social chaos that would result as all savings were wiped out. The modern way of doing a Jubilee is called hyperinflation. It is hardly evident that the phenomenon that created Nazism is necessarily helpful to the development of society and the empowerment of the poor.

Is there anything to be retrieved from Mr Graeber’s spectacular collapse when confronted with the modern economy? He happens to be right about an awful lot of things. Money is best regarded as an abstract concept, a social invention without underlying reality. Debt also is a social convention that can outlive its usefulness, and should not be treated as sacred promise. The exchange method should not be idealised as model for all life, as Chicago School economists do. And economic growth in the developed world does seem to have hit natural limits, whose consequences we still don’t understand. Capitalism may indeed collapse if it continues in its current form.

But the answer is not to condemn capitalism as the work of Satan, and hope for something better to turn up. Mr Graeber’s work is pure antithesis. Progress is made by synthesis: by taking capitalism and making it better. And you can’t do that by rejecting the discipline of economics, for all its manifest faults.

Abenomics: why it doesn’t look good for Japan’s economic experiment

A few years ago, as the Greek crisis unfolded, an Economist blogger suggested that its austerity programme would be an interesting experiment. Did the then fashionable idea of austerity growth have any validity? The answer to that experiment seems to be a clear no, though now doubt there are get out clauses. Now a very different economic experiment is taking place in Japan, after the election of Shinzo Abe and the Liberal Democrat Party last December. It is popularly referred to as “Abenomics”.

Abenomics, described by the Economist here, has three elements: increased infrastructure expenditure, looser monetary policy (through focus on a higher inflation target), and “supply-side” structural reform. This coordinated nature of the policy is one of its most important aspects. Here in Europe we are used to fiscal policy pulling one way, while monetary policy and structural reform pulls in the other. All this has “Keynesian” economists like Paul Krugman in raptures (I used the inverted commas because no self-respecting economist accepts that label, it’s just common sense after all, though their political supporters love it). Japan has been stuck in the economic doldrums for two decades, and these economists feel that at long last the country might be digging its way out. Better still, success in Japan will show that these policies can be applied in other developed economies. But this analysis is deeply flawed – a case of macroeconomic blindness, a sort of failure to see the trees for the wood.

Look again at Japan. Its unemployment rate is currently a shade over 4%, having fallen from a peak of 5.5% in 2009. Compare that to the UK’s rate, which has hovered around the 8% mark since 2009, compared to about 5% before the crisis. This does not suggest a huge amount of slack in Japan, even allowing for distortions in the way it measures its unemployment. Growth will have to come about either through productivity growth or new people entering the workforce (e.g. through immigration). There is plenty of scope for both. Japan may have some of the world’s most efficient companies, but these dominate its export economy only; there is a lot of inefficiency in domestic markets. Japan has long eschewed immigration as placing an unacceptable strain on its social infrastructure. All this depends on the third prong of Abenomics, structural reform. And yet the government already seems to be going slow on this, afraid that the public will disapprove, with bad consequences for upper house elections due later this year.

In fact what Abenomics really seems to be about is to make government debt more affordable through setting off inflation (specifically of incomes, and hence tax revenues). Japan’s inflation has been very low, and negative for much of the stagnant period. Even this may not work – economists understand little about how inflation actually comes about, assuming that it is some kind of endogenous variable in that depends on such things as aggregate demand and money supply. Instead the policy may simply lead to state bankruptcy – though that is no doubt a long way off.

What are the implications for the rest of us? The justification for “Keynesian” policies in most developed economies, including th UK, remains intact because our high unemployment shows that there is quite a bit of slack, though we don’t actually know how much (the 1970s stagflation crisis arose because economists too readily assumed that unemployment meant economic slack). But they are not the answer to raising long term growth rates. And Japan’s agonies with inflation and government debt may well foreshadow future dilemmas our own governments will face.

What arrogant economic commentators, like Professor Krugman, need to accept is that economies are the sum of freely made choices of individual citizens, excercised through both markets and the ballot box, as they try to shape the world they live in. They are not the creation of governments and policy makers playing with their economic toolkits to win prize for the biggest ~~d**k~~ growth rate. Japan’s stagnation is the result of choices that Japanese people are making about the sort of place they want to live in, one which consideres wider factors than monetary income. Get over it.

That speech: just a ripple on the surface of British politics?

Last week I commented on David Cameron’s speech on Britain and the EU, where he promised an in-out referendum, following a “renegotiation” if the Conservatives win the next General Election in 2015. For some days after I though this was a decisive moment in British politics, in which Mr Cameron seized the initiative, and the Labour leader, Ed Miliband, lost his chance to win the next election. A week on, the dust has settled and the news is dominated by other stories. Was is such a decisive moment, or a mere ripple, a failing prime minister making a promise he can’t deliver?

The weekend polls show no decisive shift, with the coalition parties trending up a tad, but Labour still comfortably ahead, following a trend already evident before the speech. One poll seemed to show a big advance by the Conservatives at the expense of UKIP – but on further examination it looks as if this has more to do with polling methodology than people changing their voting preferences. Mr Miliband’s calculation appears to be that the main issue for British politics is the economy, and so the best thing to do is to change the subject back to this issue. His line that the speech hurts the economy because it creates uncertainty, that old argument against any form of decisive leadership, seems to be carrying weight with the British public, according to a further poll published by The Independent – though this also showed Tory support rising. And in the ephemeral world of British political commentary that should be enough to say that this is just a small tactical victory for Mr Cameron, making his party less vulnerable to UKIP, and not much more. But I think two big things have changed, and a big problem has opened up.

Firstly, Mr Miliband has made a serious strategic error, even if its significance will not show up much before 2015. His strategy should be to focus the political debate onto a small number of subjects and overwhelm the opposition there. This is a strategy I have called “the same, only different” following a 20th Century advertising campaign for a product I have long forgotten. It was used by Tony Blair’s New Labour to devastating effect in 1997. Basically you shadow your opponent’s policies in almost every detail except for a small number carefully chosen issues, plus a big investment in mood music to make your party appear more caring and more competent. I remember the exasperation of Tories; whenever they came up with a new policy to try and get an edge on Labour, Labour promptly adopted it as their own. It prevented the other side from changing the agenda. This seems to have been what Mr Miliband is trying to do, albeit without actually committing to any policies just yet (again following Mr Blair’s example). He is not creating sharp policy differences with the government, and making the main focus of his attack the economy. He is trying to create the right mood music by painting the government as by turns gratuitously nasty, and shambolic and incompetant. This strategy was slowly paying off.

But Mr Cameron has hit Labour below the waterline. He has created a clear area of policy difference, where he is probably more in tune with the British public than Mr Miliband, and one in which he can guarantee coverage from Britain’s still-important press. But also the issue makes Mr Miliband look weak, indecisive and un-prime ministerial. That could be fatal. What Mr Miliband actually should have done was welcomed Mr Cameron’s speech and adopted his policies as his own. That would have taken the wind totally out of the Tory sails.

The second way that Mr Cameron’s move may be decisive is that it may have turned the advancing tide of British Euroscepticism, while at the same time unifying his bitterly Eurosceptic party. I have read Mr Cameron’s speech, and the most striking thing about it is how Europhile it is. He has well understood the arguments for Britain staying in, and put them forward. Britons are a suspicious, conservative bunch as the 2011 AV referendum showed. Leaving the EU would be a big step into the unknown, and the more people think about it, the more nervous they are likely to become. And yet the sceptics are happy because they have their precious in-out referendum.

Mr Cameron’s speech was a genuine act of decisive political leadership. There are risks, but there always are. There is also a risk that the EU needs to take forward a treaty change that we are forced to put to a referendum that is then lost. This risk has now been sidestepped, because we now have the opportunity to package it up with more popular changes and put it too an in-out referendum.

But there is a big problem with Mr Cameron’s speech, which I did not pick up last week. Aside from its tactical genius, it is intellectually vacuous. Its economics is based on a fatuous understanding of international competition and the fear of Europe falling behind the developing economies. Its analysis of how the EU needs to be changed is hot air with no concrete proposals. A single market without harmonised rules may sound good, but what does it mean in practice? I really don’t understand how this wishful vision breaks down into nitty-gritty negotiating points. Mr Cameron badly need somebody with intellectual heft to lead the negotiation – the job the Lord Cockfield did for Mrs Thatcher in developing the original European Single Market in 1992. The risk is that he will make no headway in the negotiations, and waste an opportunity to improve both Britain’s role with the EU, and the stability of the EU itself. That’s the big problem the speech opens up.

Cameron may yet win his gamble on the EU

This morning the British Prime Minister David Cameron gave his long awaited speech on the European Union. I didn’t listen to it, or read it, so you won’t get any light on the nuances of his argument here. I’m interested in the political dynamics, which, as usual, do not depend on exactly what he said. From the BBC report his speech was fairly much as the last two weeks’ briefing had suggested. We wants to “renegotiate” Britain’s terms of membership, and then offer the British public an in/out referendum, after the next General Election, by the end of 2017. Mr Cameron’s political reputation is mixed. He showed brilliant footwork when he first took over leadership of the Conservative Party, but rather fluffed the 2010 General Election with his incomprehensible idea of the “the Big Society”. He restored his reputation with the assured manner in which he put together the Coalition government with the Liberal Democrats. After that he seemed lack vision and grasp. Will today’s move restore his reputation? It might.

A couple of weeks ago I thought he was onto a hiding to nothing, and in the process of leading his party to defeat at the next election, set for 2015. Various shades of Euroscepticism seem to define the rank and file of the Conservative Party, right up to Parliamentary level. It seems impossible to satisfy them. On the other hand assorted Europhiles (in deed rather than word in most cases) amongst the deeply conservative British establishment don’t want to rock the boat. He risks isolation and an almighty mess. His own view seems to be that the UK is better off inside the EU, but it would be really nice if its institutions were less intrusive.

But Mr Cameron has two things going for him. First is that his personal view on the matter probably represents what most of the British public thinks: a very grumpy “well yes I suppose so” to the EU. From this he should be able to build a bond of trust, unlike other participants in the debate, whose firm views one way or the other are not shared by the public. And second, Mr Cameron is a vital swing voter in the debate. It is highly unlikely that either side can win a referendum without his support. The smart thing for the various players here and abroad is to build bridges with him, rather than try to isolate and vilify him. This could put him into the driving seat.

Things are now starting to get very interesting. In spite of the very long time they have been given to develop a party line, the Labour opposition is completely at sea. They are trying to paint a picture of a PM beholden to his backbenchers, and who, by creating uncertainty, is making things worse for the national interest. This is desperately unconvincing. The British public probably rather agree with what their PM is saying, while Labour are merely offering obfuscation and procrastination. Uncertainty over Britain’s future in the EU is already a fact of life.

Meanwhile, those who are in favour of the UK staying in the EU are at long last starting to stir. Their silence to date has been one of the main frustrations of the public discussion so far. The Eurosceptics have had the field pretty much to themselves, unchallenged. What these EU supporters – from outside and inside the country – have to say is pretty ugly, it has to be said. They aren’t trying to sell the EU as a positive vision. They are stoking fears about what life would be like outside. Real Europhiles, like me, really dislike this negative stuff, a lot of which is intellectually unconvincing. But elections are won on the ugly stuff – just look at the 2011 referendum on a fairly minor tweak to Britian’s electoral system, which was portrayed as the end to life as we know it. The Eurosceptic arguments are being given much greater scrutiny, and many will wilt.

The big problem for Mr Cameron is how the “renegotiation” will work out. I use quotation marks because ever since Harold Wilson used it in the 1970s (in my formative political years) I have felt it to be an sham concept, used by armchair commentators. Either you enter into an honest negotiation about matters that need fixing, or you are going back on your promises; you should be honest about which it is. The difficulty is that our existing treaty terms are a carefully balanced whole, and if you change one bit it unbalances others. The favourite Eurosceptic idea of opting out of the social standards bits we don’t like, and then use this to give British businesses a competitive edge over their foreign rivals, has a rather obvious flaw as a negotiating stance. What’s in it for them? The country’s European partners would mainly rather have us in than out, and we do have a trade deficit with them, but this does not add up to a strong negotiating position. Mr Cameron might simply do what Mr Wilson did: get a few token concessions and try to big them up. That would be risky for Mr Cameron’s reputation, though he might still win.

But Mr Cameron has set quite a long time frame for his negotiation. In that time it is quite likely that the EU will want to alter its treaties to make the Eurozone more stable. Under Britain’s “referendum lock” legislation this could trigger the need for approval by referendum in the UK anyway. If Mr Cameron can tie these treaty changes into his “renegotiation”, and then use his in/out referendum to endorse it as a package, then he does have something to negotiate with – and can paint himself as doing the EU a favour. The transfer of powers between EU institutions and the UK might actually be two-way traffic. If he pulls that stunt off, his political legacy will be secure, in my book anyway.

Hopeless in Gaza

The Gaza Strip isn’t a big place. You can walk across it in an hour or so. I know because I’ve done it. That was in 1979.

I had just graduated, and a group of us from Cambridge were volunteers at Kibbutz Be’eri on the edge of the strip. The kibbutzim largely ignored their neighbour, but we were curious, and talked about visiting it. One of the local Israelis suggested that we’d have our throats cut, but mainly I think the reaction was “What do you want to do that for?”. We dithered. Then one morning two of the girls in our group had enough and went on by themselves to the checkpoint nearby to walk into Gaza City. Half a dozen of us others decided that that was where they had gone, and that we had better follow them. And we went to the checkpoint, and walked all the way up to the beach, finding the two girls as we did so.

We were made to feel welcome, including the Jewish lad amongst us who did not conceal his Star of David pendant. I don’t remember much about what the Palestinian locals said, but we did meet at least one radical PLO type. I remember most clearly a lad on the beach asking me to “Tell them at home how it is here.”

How was it? It was a forgotten corner where stateless people lived, largely in poverty, and without much hope. But they were human beings like us. A lot has changed since, but not those essential characteristics.

I didn’t really fulfil that young man’s wish, certainly not in public. I have avoided saying much at all about the Arab-Israeli affairs. Opinions are so polarised that few would care to hear what I was actually saying, just try to decide whose side I was on.

Whose side are you on? That’s where the Israeli narrative starts. The world is divided between an “us”, the Western societies of Europe and America of which Israel is a part, and a “them”, assorted Arabs, Iranians and other Islamic nations, who wish “us” ill, and with whom we share little in terms values, culture and outlook. I’m sure that’s how most Israelis see the world, excepting those for whom “us” can only be Jews. It’s a view that seems to be accepted in America too. In Europe we struggle with it, having learnt, the hard way, that model of the world really won’t do.

And after that we get into a tangled web of claims and arguments. The Israelis ask, quite understandably, “What would you do if a neighbour kept firing rockets at you?” We have very little conception as to how we answer that question. It’s of quite a different order to the various terrorist threats we have faced in our own countries. Kibbutz Be’eri lives on, but under constant threat. In 1979 security was very discreet, and the sense of threat only in the far background. These Israelis did not gratuitously flaunt their weapons, as so may Israeli and Arab men do, then and now.

The rockets aren’t pocket terrorist weapons, they require a degree of state organisation to support, especially the bigger ones. Israelis must feel that Gaza civilians are to some extent complicit in allowing this to happen.

And the Palestinians point to a long history of injustice, which passes completely unrecognised in Israeli political life. They feel that all means of progressing their cause other than violence have been blocked. The Israels just want them to keep quiet so that they and the rest of the world can forget they are there. Again we can have no idea about the depth of frustration they are feeling – just as we cannot understand how random violence against the innocent is any way to progress your cause.

Both sides are in a bind. Hamas is spoiling for a fight, and they seem to be daring the Israelis to invade, so that they can bog them down in a horrible war. The Israelis know that a military solution requires just such an invasion. Both sides may draw back, but no ceasefire will tackle the fundamental issues that divide them.

Both sides seem addicted to the use of violence as the way to solve their problems – which only reinforces that conviction in the other side. Any individual leader, on either side, that tries to break free from that logic risks being undermined by those that disagree. I am a political optimist generally. But not here.

The US election -why does the world hate the Republicans?

I do not advise citizens of other countries how to vote. It’s very bad manners. But there’s something very striking about viewing today’s US elections from outside that country: how few foreigners support the Republicans.

This is unsurprising amongst my own contacts and Facebook friends – they are largely Liberal Democrats, with the odd Labour supporter. In the US these would be well within the Democrat family, with an outlok that largely fits the American understanding of the term “liberal”, a dirty word to Republicans. But a number of opinion polls show that support for the Democrats is widespread right across the world. In this instance Britain is very much at one with the rest of Europe, rather than part of some Anglo-Saxon block that some Britons suppose exists.

It is not immediately obvious why this should be so. It is true that Republicans are generally more socially conservative that those outisde America, or those that are politically aware, anyway…but that really is the Americans’ own private business. Mitt Romney is a perfectly intelligent and plausible presidential candidate, when looked at objectively, with much much more experience in getting things done than has Barack Obama, in the public sphere as well as in business. Furthermore, the Republicans believe in strong U.S. armed forces, something that the rest of the world has been free-riding off for a long time, though we might not like to admit it.

So what’s the problem? Perhaps it is economics. The Republican attitude to the US financial state defies mathematics – to think that its massive fiscal deficit and national debt can be tackled without rasing taxes. But I’m not sure how much people in other countries understand this debate. Something deeper does lie behind it though: the belief that the state should provide a minimal social safety net if anything. The idea of a welfare state is pretty much consensus in Europe, so this is a clash. Republican Americans are convinced that Europe is a basket case as a result – though things look different to us. To the extent that we think about the US, we would worry about the breakdown of social cohesion as a proportion of the population gets stuck in an underclass. But I don’t know how troubled Europeans are about this really. And non-Europeans may well be more sympathetic to the Republican view on this.

I think there is soemthing bigger going on. We associate the Republicans with a particular world view that combines a sense that the US has a wider mission in the world with an almost wilful ignorance of what is actually going on. Many Americans feel that it has carte blanche to interfere in other countries’ affairs to protect their interests and advance their view of civilisation. But that does not seem to imply making any attempt to understand the complexities of what is happening in the rest of the world: simply dividing the world into good guys and bad guys. Everybody will have some example of how this paradox has led to injustice and suffering. It might be George Bush’s “War on Terror”, or the Iraq war and, especially, its aftermath. Or else it is an unquestioning support for Israeli government policies, on little more than the idea that they are “people like us”…a situation that is drawing the world ever closer to a war with Iran.

Democrats get credit for trying a bit harder to understand to understand and respect the rest of the world. Bill Clinton and Mr Obama stand in clear contrast to George Bush Junior. Mr Romney’s campaign has not reassured non-Americans that he is any better than Mr Bush – though I personally believe he is head and shoulders above him.

There is an asymmetry about all this. America appears on our TV screesn and cinemas every day. American news is world news. A lot of people outside America feel that they know about America, even if they actually know a lot less than they think. But it is not true the other way around. Few Americans seem to care about the world outside their country, except to the extent that it is a nest of vipers posing a threat to their wellbeing. Fewer still will care what the rest of the world thinks about their election.

And yes, I too hope that Mr Obama will win, though I’m not as scared as many are of Mr Romney. I also hope that the Democrats will hang on to the Senate, and do well in the House of Representatives. Except that a small part of me wants the Republicans to win all three elections, and so have nowhere to hide from the impossibility of their policies, so that a t last America can start to move on.