thinking liberal – Page 61 – Matthew Green's blog

Prague: world city

From Dresden, we went by train to Prague. After Germany, it was a bit of a shock. Within minutes of arrival we had been ripped of by both the forex desk and the taxi drivers. We were driven through some seedy looking streets to a rather seedy-looking apartment. After a week of Germany, it felt that we had been dropped straight into the Third World.

Some of this was just lack of acclimatisation. The apartments soon looked characterful rather than seedy, being in a genuinely old building. And it had functional wifi, unlike both of our otherwise highly functional German apartments. Prague is not remotely German. The streets are untidy, but they were also bursting with life. It seemed like you could buy anything. Sex shops were common, and the food shops seemed to devote most of their space to booze.

Tourists were everywhere. The locals did not even attempt to speak Czech – and I’m afraid I didn’t either, not even a thank you in the local language, which I usually manage. Visitors crowded around the various outstanding tourist favourites: Charles Bridge, the Castle, and the Old Town Square. Beyond these they seemed more interested in eating, drinking, shopping and having fun, rather than taking in their astonishing surroundings.

Prague’s buildings escaped serious damage in the war, unlike Germany’s (or Poland’s, Hungary’s or Russia’s, to name a few). The Communists did not have the resources to do mass redevelopment. The result is that the city is left with a huge variety of old buildings. These cover a very wide range of dates. There are the medieval gates, and the 16th, 17th and 18th century churches and palaces. But also there are a lot of 19th century buildings, including many Art Nouveau ones from the late 19th and early 20th century. The sheer extent of these old buildings is breathtaking. Before the war, Prague was one of many beautiful old European cities. Now it gives you an idea of how much has been lost in that orgy of destruction.

Unlike the buildings, the people were not so lucky. The Nazi occupation was brutal, especially after the assassination of Reinhard Heydrich in the city in 1942. The previously flourishing Jewish community was mostly murdered or driven out. Quite by accident we found the Jerusalem Synagogue. We could not resist going in, where we found a display on the history of the Jewish community after the war. We need to remember that the persecution of Jews, up to and including further murders, did not end with the war. This was especially if they tried to reclaim their property. The idea that one of history’s great wrongs had been done to the Jewish people was slow to develop. The Communists continued to discriminate against Jews right up to the liberation. It may be that without the central focus provided by the Zionists and Israel the Holocaust would have been lost amid the many other appalling acts of the 20th Century. Though we gentile Europeans draw a rather different lesson from that crime than do the Zionists, they were right to raise our consciousness of it, and it has shaped the way we view ourselves and the world profoundly.

So Prague is a treasure trove of old buildings and artefacts from a lost age. But, like so many other European cities, it also reminds us of our chequered past. It deserves to be one of the most visited cities in the world. Perhaps it’s a shame that so many of them are more interested in shopping, sex and booze than in history – but maybe their money helps keep the memories alive.

Dresden: reclaiming old glory

In my post on Berlin, I suggested that the British bombing of German civilians in the Second World War might be considered a crime. The most cited case of egregious bombing by the British occurred with the attack on Dresden on 13/14 February 1945, which caused a firestorm, mass death and the destruction of one of the most beautiful cities in Germany. People still argue over the rights and wrongs of that event, but either way it hangs over the city that we visited after Berlin, at Easter time this year.

The Germans have done much to restore the city’s outward appearance. Most of the impetus came after German reunification. The Communists had a rather ambiguous attitude to restoration, destroying many historic sites to create a modern, socialist metropolis – though they did some restoration too. But what they build was mediocre. Now the classical facades have been replaced with modern imitations. Behind them are smart, modern shops and apartments; beneath them are underground car parks. And there are still whole blocks that are just holes in the ground. Some of the iconic older buildings have been restored inside and out to varying degrees. So we has the royal palace complex, and the Catholic Hofkirche, amongst others. Blackened stoneware from old buildings has not been cleaned, as in Berlin, to act as a reminder of the past. It is still recognisably the same city that was memorably painted by Canaletto’s nephew Bernardo Bellotto (who also used his uncle’s name). It has retained the open, spacious feeling, dominated by the Elbe river, of the old town, which acquired its character in Enlightenment times – it is not a modernised medieval city, like Prague (or London, come to that).

So there is much to see and admire – much more than you think has survived or has been restored from what we generally assume from accounts of the bombing. What is more the collections of the Electors and Kings of Saxony had been moved to safety before the attack, and have mostly been returned (they were largely in Russian custody after the war – so this could not be assumed). So the museums are well stocked – with wonderful examples of old art, porcelain and scientific instruments, as well as some important modern works. The locals are friendlier than in Berlin, too, and museum officials less officious. With two full days we left much to see for another visit.

Of course the bombing and reconstruction is a moving enough story in its own right. The most moving element of this is the story of the Frauenkirche. This magnificent edifice, the largest Lutheran church in Germany (and so the world?) was the city’s pride. It collapsed into a heap of rubble the day after the bombing, and was left as a pile of rubble until the 1990s. A massive restoration effort was completed in 2005, pretty much stone for stone. The old stones left blackened, the new ones are gleaming pale gold. The interior (pictured) is a wonder. Freshly painted and gleaming it perhaps gives a vision of what its 18th century creators intended – in a way that a building that had survived from that time would not. It is magnificent.

As we Europeans come to terms with our history, at times creating magnificent monuments and works of art, at others engaging in wonton destruction, Dresden is a good place for us to reflect on who we are, and, I hope, for non-Europeans to learn from our achievements and our mistakes.

Ukraine: as Russia wins the battle it is still losing the war

The picture from Ukraine remains as depressing as ever. Following the ouster of the kleptocratic President Viktor Yanukovych in February, Russia has taken the opportunity to destabilise the country, annexing Crimea and turning the east and south against the west and centre . The West, and especially the EU, has looked completely ineffectual. What are we to do?

Russia’s President Vladimir Putin is drawing a lot of kudos from this turn of events. He has outwitted his opponents at every turn. His main problem now is one of success. He might be forced to annex the eastern provinces of Ukraine into Russia, which will simply add an expensive headache to his country. Probably all he intended was to destabilise Ukraine and force it into a sort of Belgian federation that would cripple the western-inclined part of the country and prevent it from aligning with the EU and NATO.

Undoubtedly this state of affairs reflects Mr Putin’s tactical skill, and some finesse and tactical assurance from his security services. As a result he has attracted some admiration from fringe political figures in the West, such as Scotland’s Alex Salmond and Ukip’s Nigel Farage. Still, it is not too difficult for us over here to have a feel for right and wrong. Russia, with its oligarchs, mafias and overbearing security services, as well as old-fashioned prejudices, is not a country we would want to live in. The pro-Russian activists in their military fatigues and balaclavas, to say nothing of their tendency to beat up those who disagree with them, look like the paramilitary thugs we knew all too well from Northern Ireland, and not the voice of the people.

And yet Russia is clearly winning the war of hearts and minds in eastern Ukraine. The Ukrainian state has sunk to such depths that Russia looks like a better option. The state apparatus, such as its security services, was undermined to such and extent by Mr Yanukovych and the revolution that overthrew him that they cannot counter Russia’s intervention. Ukraine’s most effective supporters are its own oligarchs, who no doubt have their own problems of credibility. So Russia is going to end up by winning. An irregular referendum will drive a breakaway of the Russian-leaning provinces from the rest of Ukraine. The country will be able to hold credible country-wide elections, and the Western alliance will end up by having to pour in money to an economic basket case in the rump, a lot of which will under up in Russian coffers as it jacks up energy prices. The US and the EU seem to be helpless to stop this.

And there isn’t much they can or should do. Deploying armed forces is a non-starter. Tougher economic sanctions will probably be more pain than they are worth. The West needs focus on strengthening its strategic defences to counter future Russian adventurism. In particular Europe needs to invest in alternative energy sources to Russian oil and gas. It also needs to show that even if the principle of no military intervention applied to Ukraine, it does not apply to other potential flashpoints. And it needs to think about projection of propaganda to counter the Russian state-controlled media.

If it does all these things, Russia’s ruling elite will eventually lose out. Russia’s economy is running out of road. It badly needs productive business investment, but such investment requires reforms: to strengthen the rule of law, and to tackle large monopolistic businesses. Mr Putin’s regime lacks the clout and skill to do this, which means that the country will seriously fall behind both Western developed economies, and emerging Asian ones. His foreign adventures, based on yet more thuggery, simply reinforce his country’s weaknesses, making it a less attractive place to invest, whether you are a foreigner or a Russian businessman outside the favoured elite.

The West won the Cold War not through military confrontation, whatever some on the American right believe. It won because the Soviet Union and its satellites fell so far behind their Western counterparts in economic standard of living that their ruling elites lost the confidence to govern. Russia’s economic governance is much better than that of the old Soviet Union, but sooner or later its people, and people in places like the east and south of Ukraine, will start asking why things are so much better in the West.

The strength of the West, and especially the EU, is in the long game. That strength remains: we should have more confidence in it.

Berlin: Germany faces its history

I’m just back from an Easter break in Berlin, Dresden and Prague. I will post on each of these cities, starting today with Berlin.

This was my first visit to the city for 30 years – last time it was still divided by the wall. I hardly recognised it. We spent most of our time in the old east, staying in a done-up Communist-era apartment very close to the site of the wall, near the Brandenburg Gate. The old east is where most of the government and official buildings were, so it is no surprise that it is now where most of the tourist sites are. It is a bit of a building site, and still a little, well, without the bustle you would expect from such an iconic city.

What eastern Berlin does have is a lot of spectacular old buildings in the classical style being restored from shabby and decaying blackened relics, to smart and shiny wonders. This is most spectacular in the Museum Island, where a series of post 1871 edifices in stone veneered brick, and in classical style, are in the process of restoration. It is the site of spectacular exhibits of reconstructed elements of the Babylon gate and Pergamon temple – and, of course, the bust of Nefertiti (which lives up to all the hype – it’s my favourite thing to have come out of ancient Egypt).

As an amateur writer I am sorely tempted to turn this process into some sort of metaphor, something to do with Germany scrubbing its history clean, restoring things that were a bit fake in the first place, to show off pillaged treasures (not that we Brits can complain on that last score). But what the Germans are doing with their history is something much more interesting than any such trite metaphors can convey.

Berlin has a series of museums and monuments that exhibit aspects of German history. We saw the museum of the DDR, about the communist era. There is a very popular museum about the wall. We also went to the Soviet war memorial, which features a series of display boards at the back about the war and war memorials in general (a lot of men in uniforms, one of our party noted, with only one picture of women, grieving over the bodies of the murdered). The tone is relentlessly objective; nothing seemed to be particularly concealed or glossed over.

This process of facing up to a country’s history, treating it as a subject of objective examination and analysis, is very striking, and remarkable even in the modern world, though it is one of my major passions. Even in modern Britain, our Education Secretary, Michael Gove, seems to favour the teaching of a sanitised, propaganda version of British history… And as for Japan… or China… or Russia… Germany itself took quite a while to get there. Post war there was a tendency to gloss over awkward aspects, and to treat the country as more victim than perpetrator. But the county’s overwhelming desire, and need, to reconcile with its neighbours, and its own eastern and western zones, made such a stance unsupportable. So they are going for objectivity now.

This must be welcomed. I wish we all did this. But I can’t help noticing that this turns history into an object of curiosity, rather than something of meaning and passion. The Soviet war memorial used to be protected by soldiers and barbed wire (Soviet soldiers with British ones to protect them!), and drew protest marches. Now the soldiers are gone and children play on the old pieces of artillery. A powerful symbol becomes another stop on the tourist itinerary. I suppose this is for the better, but I do wish that history could both have meaning and be treated objectively. I nearly wrote “dispassionately” instead of “objectively” – which sums up the problem rather well.

But this isn’t quite fair. Near the Brandenburg Gate we visited a shrine to the murdered gypsies of the Nazi era; a simple circular pool. We did not have time to visit the memorial to the Jewish Holocaust victims, though we could see it from our apartment. That is a vast collection of stone blocks without words. These silent, wordless memorials are appropriately moving, and stir the deeper sort of thoughts that words cannot. As a permanent part of the centre of Germany’s capital city, they seem to say “We will not allow ourselves to forget”. If that diminishes Germany’s standing in one way, as the guilt is allowed to linger, on balance it strengthens it, by saying that “We are facing up to our history”.

It would be nice to have something like this in London to mark our own nation’s crimes. The African slave trade; the Indian famines and massacres; and dare I say the indiscriminate bombing of German civilians. But we are too proud to do this, especially the last. But Germany’s way is surely the path to a better future, and the only way that we can truly mark the modern age as being an advance on what went before.

Brexit: an own goal for the Eurosceptics

It must have seemed like a good idea at the time. A while back a right-wing think tank, the Institute for Economic Affairs (IEA), launched a EUR 100,000 prize for a blueprint for Britain’s exit from the EU, the “Brexit”. The winner was announced last week, to not very much fanfare. You can read it here: Brexit Entry 170_final_bio_web. It is not surprising that our mainly Eurosceptic media have given it a low profile. It exposes flaws that go deep into heart of the Eurosceptic case. Better to stick with Nigel Farage’s meaningless soundbites. No doubt the Europhiles ignored it as its thesis is still Eurosceptic. That is a pity. This piece of work deserves to be taken seriously by both sides of the debate.

First, though: credit where it is due. This piece of work is a breath of fresh air compared to most of what comes out of both sides of the debate. It is calm, factual and objectively reasoned. It reflects well both on its author, 30-year old diplomat Iain Mansfield and the IEA. Bar one or two articles in The Economist, it is about the best reasoned thing I have read on Britain’s possible exit from the EU.

The essay answers the question of what would happen if Britain voted to leave the EU. It considers the various negotiations that would need to be made, and what these should aim to achieve. It has a stab at assessing what the economic consequences would be. Along the way it explains a lot of the facts that impinge on this (such as what is the difference between the EEA and EFTA?). This is a welcome change from the airy hopes and assertions usually made by Eurosceptics – and the equally airy scorn poured on them by Europhiles.

Its central idea is quite a sound one. Britain would not bring up the drawbridge and retreat into “Little England”, as no doubt some older Ukip supporters would like. The UK would establish itself as an open nation, promoting free trade. This reflects the economic liberalism of most modern Conservatives. They feel that membership of the EU gets in the way of the country promoting a economically liberal policy agenda.

There is one big gap in this work as a review of Britain’s options. There is no sense of industrial strategy. British business would flourish in a less regulated environment; we would trade more with emerging economies. That’s about it. Where are Britain’s comparative advantages? Which industrial sectors would we rely on – and how would these be promoted after Brexit? And the gorilla in the room: what happens to international wholesale financial services (aka the City) in the brave new world? It is easy to see both positives and negatives for the City – but how would these balance out? If there is one thing that makes other European nations exercised about Britain, it is the financial industry. Surely they wouldn’t hesitate to use a Brexit to make mischief?

There is also a quibble. He says that Britain should gain a net £10bn per annum in net contributions – though not straightaway. He says some of this will have to be spent on building capabilities that we have delegated to Brussels, such as trade negotiation and antitrust, but mostly it would be a gain. And yet he freely suggests the need for agricultural subsidies, and a host of inducements to entice in foreign direct investment (FDI). That £10bn is unlikely to last very long.

But that’s a detail. Three big problems stand out from this study. Has the British public signed up to economic liberalism and deregulation? Is the Brexit strategy trying to have its cake and eat it? And is it worth all that effort?

There is common belief on the right that Britons are a nation of freewheelers, and that the inveterate regulators in most other European countries are anathema. We are more like the Americans. Leaving aside whether Americans really are such freewheelers (you need a licence to be a hairdresser in many states), this is not well founded. Britons love to whinge about excessive regulation, to the extent that “Health & Safety” has negative connotations, but attempts at deregulation usually fail. Mr Mansfield wants a “Great Repeal Bill” to roll back and replace a host of product and labour regulations. That promises to be the mother of all political battles, and its outcome is bound to disappoint. Britons have as much affinity with Scandinavia as America – and you can’t move for regulations there, not least in Norway, which is not even in the EU. Indeed the sort of new Britain that many Tory Eurosceptics seek is a kind of right wing dystopia so far as most Britons are concerned.

More serious is the strategy for European trade that lies behind the Eurosceptic economic case. For all his thoughtful detail and realistic attitudes, this looks like a strategic flaw in Mr Mansfield’s strategy. The idea is that Britain gets free access to most European markets (he rightly suggests this would be unrealistic for agriculture, though); but that our industry will be more competitive because it can avoid large areas of regulation, especially for labour. And he takes this a step further, by suggesting that, with the help of some extra incentives like low tax rates, the country can retain its popularity as one of the top European countries for FDI – so that these incomers can export to the EU. This is known as having your cake and eating it. This strategy requires the cooperation of the county’s EU trading partners, who have a name for it: social dumping. And the fact that Britain imports more from Europe than it exports to it does not, in fact, give the country a strong negotiating position, as many Eurosceptics suggest. To his credit Mr Mansfield does not mention this last argument, and describes the British negotiating position as weak.

Which leads to the next problem. When you get into the detail of what has to be negotiated, Britain will end up giving concession after concession. Mr Mansfield suggests that half or even two thirds of the aquis communitaire (the body of EU laws and regulations) would have to be retained by Britain. The scope is massive. The overwhelming impression I get from reading this essay is the sheer size of what would have to be dealt with in a series of extremely tricky negotiations. All for what? Mr Mansfield estimates a range of impacts on the economy from -2.6% to +1.1%, with +0.1% as “most likely”. He observes that the case is more political than economic.

In only one area might the general public, as opposed to right-wing politicians, think that this might be worth it: ending the free movement of people, and especially labour. We would still need quite a free flow, but it would be easier to manage – and it would be easy to establish inferior rights for European immigrants. I suspect that the whole case for or against the EU will turn on this – and Europhiles badly need to sharpen up on the subject.

At the end Mr Mansfield refers to the examples of Canada and New Zealand as being successful countries in spite of being separate from nearby behemoths (the USA and Australia respectively). Interestingly another study on the benefits of EU membership, reviewed in this week’s Economist, uses a comparison with New Zealand to suggest that British incomes are 25% higher for having joined the EU in 1973. New Zealand’s economic record, in spite of (because of?) being a bit of test bed for economic liberalism, has been pretty underwhelming. It has recently being doing better courtesy of massive exports of agricultural products to China. Well New Zealand is a small country far away from anywhere – so comparing it with the UK is a stretch. But at least it has a decent export engine based on its natural resources (as does Canada with its mineral wealth). Britain’s oil is fading (and mostly Scottish anyway); it has been in agricultural deficit for a century; it is not an option to despoil swathes of countryside to dig out minerals for the Chinese market. We have the City, and lots of management consultants. Is this enough to build big export industry with the developing world?

In recent article, Vagueness is a danger for eurosceptic demagogues FT columnist Janan Ganesh pointed out that the Eurosceptic case tends to fall apart when Euroscpetics try to spell out exactly what they think exit it all means. Mr Mansfield’s interesting and refreshing essay cannot hide this truth.

Does money really grow on trees?

A few months ago David Cameron, the Prime Minister, defending the government’s austerity policy said that “Money doesn’t grow on trees!”, a well used expression when discussing household budgets. The Financial Times economics columnist Martin Wolf responded that money did indeed grow on trees, and the money tree went was the Bank of England. Can Mr Wolf be right?

Mr Wolf was referring to the Bank of England’s policy of buying government bonds, known as Quantitative Easing or QE. One arm of the government, the Treasury issues bonds to pay for government spending; another, the Bank of England, buys them by simply adding to its reserves – creating money. Actually, the Bank doesn’t buy the exact same bonds, it buys others that had been issued earlier – but it amounts to nearly the same thing. The extra money ends up in the accounts of major investors such as insurance companies or pension funds, at home and abroad. Government spending has been financed by the creation of money. Hence money seems to grow on trees.

This type of financing is associated in the public imagination with disaster – such as the hyperinflation in Germany and Austria after the First World War, or more recently in Zimbabwe. In conventional economic theory an increase in money supply, if not matched by expansion of the economy, leads to inflation. But there is no increase in inflation in either Britian or the USA, which are both practising QE, and in Japan, where increasing inflation is actually a policy objective of QE, the increase in inflation is anaemic. So what is going on?

There are three problems with the conventional economic theory of money. First is that only trivial amounts of money are represented by notes and coins, whose circulation is controlled by the government. Instead we use bank accounts provided by commercial banks. Economists have tried to understand this type of money in equivalent terms to notes and coins. People bank money and the banks then lend it; the banks do not create money, though the central bank may. But further reflection reveals that this is not the way it works, as the Bank of England has recently admitted. It is the other way round: banks create money by lending it to people. With this more realistic idea of what money is, we can see that far from the money supply expanding with QE, it is shrinking as banks reduce their balance sheets after the boom years when they created money freely. You could then argue that QE is simply offsetting the shrinkage of credit from the banks, balancing the whole thing out. All will be well until the banks turn the corner and start creating money again.

But there is a the second problem. The overall supply of money, as far as it can be measured, does not strongly correlate with either the size of the economy or inflation, as monetary theory predicts. That’s because money doesn’t flow round the system at a constant speed. If you print banknotes, and people simply stuff the new notes under the their mattresses, the real economy doesn’t change. The electronic equivalent is people holding bank deposits which they don’t spend. That’s been happening a lot. Standard monetary theory, such as that put forward by people like Milton Freidman, is based on the idea that money circulates at a reasonably constant speed. But in fact people don’t behave that way.

But even if they did, there’s the third problem. Excess monetary expenditure does not necessarily lead to inflation; in fact in a modern developed economy it rarely seems to. Instead of people raising consumption which pushes up consumer prices and then pay, people spend it on assets or imported goods. Asset prices don’t seem to behave in a rational way, being subject to a price bubbles. In the modern globalised economy it is easy to import goods to satisfy any increase in consumer demand. And in any case the link between consumer prices and levels of pay has been broken. The wage-price spiral, at the heart of the way economists view the world, does not seem to happen in developed, globally integrated economies. Incidentally this is the problem that the recent aggressive monetary expansion in Japan (“Abenomics”) has bumped into; prices are edging up but companies remain reluctant to let wages follow suit, so that inflation simply makes people poorer. The concept of central banks targeting inflation as their main objective, the big idea of the 1990s, has simply led to complacency.

So the theory of monetary economics is in ruins. That does not stop usually quite economically sane publications. like The Economist, discussing whether central banks should adjust their inflation targets from 2% to 3%, or use nominal GDP as their reference point instead of inflation. This is rearranging the deckchairs on the Titanic (apologies for the over-used metaphor). Fortunately central bank professionals are highly pragmatic and they don’t seem to be letting the vacuum in economic theory lead them into being too dangerous, with the possible exception of Japan.

And the upshot is that in many developed economies, including the British one, governments can get away with the monetary financing of government spending, without much in the way of immediate adverse consequences. Money really does grow on trees! How on earth to understand this – and any not so benign consequences?

Well you have to recognise that money is simply a means to an end: a social construct to enable economic activity and regulate societal relationships. It often helps when thinking about an economy to take the money away and see what is going on in what economists call the real economy.

Let’s look at the real economic flows, which are at the heart of Mr Wolf’s analysis. The government is consuming more resources than it is receiving from taxation. This deficit must be supported from outside (you can’t print money in the real economy), and in general terms this is from two places: the private sector and outside the economy. The private sector, as a whole, is consuming less resources than it is producing and this surplus, in various direct and indirect ways is helping to support the government deficit. This is partly because people are working off their debts, but also because private businesses are hanging on to profits. Also the economy (in Britain and the USA in particular) as a whole is in deficit with the outside world: importing more than it exports. The government can safely run, or even increase, its deficit because it is balanced by surpluses by the private sector and the outside world.

But this is not sustainable in the long term, because persistent deficits lead to excessive debts, and the monetary economy breaks back into the real one. If the government has cleverly got out of financing its deficit with debt, it is simply passing on the affordability problem to somebody else. The assets being accumulated by the private sector and foreigners are not worth as much as they think. The government has avoided the risk of a solvency crisis by increasing the risk of a currency crisis or an asset price collapse. This may be localised, or it may be part of a gathering global financial crisis.

But if by running a deficit the government is staving off a wider economic disaster, or even bringing the country back to the path of economic growth, it is opting for a lesser evil. Mr Wolf argues for continued government deficits, financed by QE if necessary, on just these grounds. Austerity will simply precipitate the economic crisis rather than buying time to fend it off. He has a strong belief in a “trend rate” of economic growth of about 2% per annum which can be readily unlocked and get us out of jail.

That’s where I disagree. That trend rate may sound a small number, but it is in fact a very large one for an economy that is fully developed (China can grow faster because it is catching up). A special set of circumstances combined in the period 1945 to about 1990 or 2000 to make it seem normal – but we are in a slow growth world now.

So keeping government deficits going using QE to bypass the bond markets caries risks. The main priority for governments is to reduce their countries’ vulnerability to future crises and improve their resilience. That means rebalancing. Between public expenditure and tax; between rich and poor; between imports and exports; between financial engineering and productive investment; between young and old; between environmental degradation and restoration.

Government deficits may or may not play a role in this rebalancing process. For what it is worth I think the British government has it more or less right in terms of its overall austerity policies. QE may or may not be helping. But any money plucked from trees will, to mix metaphors, go off if it isn’t spent wisely.

Why Labour are losing the election in 2015

According to press chatter, there is mounting worry amongst those that surround Ed Miliband, the leader of Britain’s Labour Party. I don’t know anybody in this elite circle, and I can’t offer an opinion on whether this is true. What I can say is that it should be. After ducking hard choices when the going was good, he is now in real trouble.

The immediate cause of the Labour wobble, if that is what it was, was the poll bounce for the Conservatives after the recent Budget by the Chancellor, George Osborne. The previously secure Labour lead simply vanished. This poll bounce disappeared as quickly as it came. Clever charts showing that it was part of a longer-term trend look premature. But it did show that Labour support is not solid, and that the Tories are not quite as terminally unpopular as many suggested.

But what really convinces me that Labour are in deep trouble is this exclusive piece in yesterday’s Independent, highlighting an article Mr Miliband had written for the paper. Here’s the first paragraph:

Ed Miliband has promised to rescue Britain’s struggling middle classes by boosting their living standards as he warns that the “cost-of-living crisis” will last for at least another five years.

This seems to be part of a bid by Mr Miliband to rebuild his electoral standing; today he is launching a policy about devolving more power to “super-City” regions, building on a policy developed by the Liberal Democrat leader Nick Clegg, as he will not say.

This political drive builds on two themes that Mr Miliband has been developing. The first is “the squeezed middle” – a deliberately vague reference to people who feel they are neither favoured by government handouts, nor part of the rich elite. It is interesting that this seems to have migrated to “the struggling middle classes”, when it might just as easily refer to working classes (if you get beyond the bureaucrats’ tendency to use the term “working class” to refer to people who are not working, and entitled to state support, as an alternative to the word “poor”). The second idea is “the cost of living crisis”, referring to the fact that for most people incomes have not increased as fast as prices over the course of the last government.

No doubt Labour’s polling shows that these ideas cover a large swathe of generally unhappy people, who might therefore be sceptical of the government’s record. The problem is how to appeal to them. Almost by definition, these people are out of the scope of state benefits. In fact they tend to resent the size of the state benefits bill, apart from the old age pension, whose cost they tend to underestimate. They are not employees of the state, a separate and distinct constituency, even if they share some of the same problems). So how to address their standard of living? There are two ways: tax cuts and a stronger private sector economy. On both counts Labour’s credibility is behind that of the Coalition.

The best sort of tax cut to reach the squeezed middle is a cut to personal allowances, i.e. the point at which people start to pay tax (including its National Insurance equivalent, something all parties seem happy to ignore). But the Coalition has already been increasing this quite aggressively, mainly at the expense of higher rate tax payers, some of whom are now claiming to be part of the squeezed middle too. Worse, it is one of the few policies that is closely identified by the public with the Liberal Democrat part of the coalition, which Labour is extremely keen to denigrate – they have picked up a lot of ex Lib Dem voters. They have floated the idea of a 10% tax band, which is just a less efficient way of delivering the same policy – and has uncomfortable echoes with one of the last Labour government’s policy mistakes.

There is an even bigger problem with taxes. Labour has to convince voters that it will not put taxes up to pay for an expanded state. That means signing up to a series of things, like a cap on benefits expenditure, that will be unpopular with core Labour voters, and not even particularly sensible from the point of view of economic management.

But tax cuts are a fairly minor palliative. What would really cheer voters up is the prospect of incomes rising in the private sector. The trouble is that Labour has done nothing to dispel its reputation for being anti-business. Quite the opposite. Mr Miliband’s view is that there are good businesses (“producers”) and bad ones (“predators”). Wages are being squeezed by the predators to benefit their top managers and shareholders. So his anti-business policies are directed at these predators (banks and energy companies to the fore), while helping the producers. This argument is not entirely without merit, but it is a tough sell. And in practice it is pretty much impossible to create policies that discriminate successfully between the two classes of business, and all those that inhabit the grey zones in between. The result is that Labour’s policies designed to address this problem, such as the devolution to the cities, don’t look as if they will deliver much of a boost to wages in the short term – even if they are perfectly sensible. And sensible policies are liable to get matched or pinched by the coalition parties anyway.

The Conservative counterattack to Labour will point to the fragility of the current economic recovery, and say “Don’t put all this at risk”. Of course one thing that could put the fragile recovery at risk is the Conservative plan for a referendum on the EU. But does Labour want to go out with all guns blazing on that issue? Perhaps I underestimate Mr Miliband, and that is his plan. But so far he is happy for Mr Clegg to take the lead on the issue. In fact you could not inaccurately describe Labour’s emerging strategy as “I agree with Nick”. A liberal, centre-ground stance that wants more devolution from Westminster, but with a strong attachment to the EU.

So Labour is embarking on an impossible task to convince the electorate that it can out-do the coalition parties at their own policies. This won’t work. But what it will do is to de-motivate their core constituencies of public sector workers and the squeezed bottom, as I might call the voters suffering from benefits cuts.

The trouble is that Labour hoped to get the best of both worlds after Mr Miliband was elected. That they could adopt a “Blair-lite” strategy that allowed an appeal to the centre ground, while at the same time harnessing the wave of anger from their core voters at the government’s austerity policies, which, incidentally, allowed them to harvest a lot of Lib Dem voters. But Blair-lite lacked credibility as soon as the economy started to revive. There was a choice to be made for either Blair II, an unashamed dash for the middle ground, including an apology for the record of the last government’s economic policies (though that would have been too much for Mr Blair himself). Or they could have gone for unashamed social democracy, making a case for higher taxes, a bigger state, and less aggression on cutting the deficit (isn’t going for a balanced budget just willy-waving after all?). The first of these two choices might well have destroyed the party, given the depth of anger over “The Cuts” – but the second choice was never properly debated or confronted. It would have been perfectly respectable and courageous – even if expanding the state back to the size it was in 2008, or even 2010, would have taken a very long time.

The Conservative General Election campaign has not got started yet. They will allow Ukip their moment of glory in this year’s Euro elections, then quietly mug their voters by stoking up fears of Labour. Labour’s credibility will fall apart, and they will have increasing trouble fending off Tory attacks and keeping their core supporters loyal.

If I was advising Ed Miliband, I would be worried.

Reinventing liberal economics

In a recent post I expressed frustration that conventional economics seems to have survived the meltdown of 2008 almost unscathed, as evidenced the chatter around the discussion of monetary policy. I mentioned one book, George Cooper’s Money, Blood and Revolution, that sought challenge it. On the strength of that the publisher sent me a review copy – and I have read it. It is interesting because the paradigm shift Mr Cooper advocates gives coherence to the idea of liberal economics, after its original conception turned out to mean libertarian economics.

Mr Cooper’s main thesis is that economics is a science that is in crisis (as opposed to the alternative view that it should not be considered scientific at all). He compares it to four specific cases of sciences in crisis: astronomy before Copernicus, anatomy before William Harvey established the principles of blood circulation, biology before Darwin/Wallace’s idea of evolution by natural selection; and geology before the acceptance of continental drift. Nearly a third of the book is devoted to developing this idea, before he gets to the discipline of economics itself.

The geology example is close to my heart. My father is a geologist, and I studied it at my first stint at university, at Cambridge in 1976-78 (I studied History in my final year – another story). My father had accepted the idea of continental drift – the notion that the continents are moving across the surface of the earth – by the 1960s, before the scientific establishment completely accepted it. By 1976 the idea of plate tectonics was conventional wisdom, and continental drift was treated as an obvious fact. What had made the difference (actually not mentioned by Mr Cooper) is that mapping of the ocean floor showed that the oceans were spreading, neatly illustrated by stripes of different magnetic polarity, following reversals in the earth’s magnetic field when the ocean crust was formed. It was new, killer evidence. Mr Cooper rather suggests that it was looking at existing evidence in a new way that led to the revolution. But that is a minor quibble – there was growing opinion behind the continental drift idea before the oceanographic evidence emerged.

The book is not a heavy read. It is less than 200 pages and it goes at quite a clip. It is well written, apart from a couple of quibbles. He uses the word “experimental” in place of “empirical” for real-world evidence. Perhaps his publisher advised him it was more accessible, but in my book experimental means carrying out experiments. There is a branch of experimental economics, but it is tiny. Empirical evidence in economics is gleaned from examining the shape of the real world, only rarely with controlled studies – a bit like astronomy, geology and evolutionary biology, in fact. His use of “principle” when he means “principal” looks accidental but I counted two instances.

This lightness of touch has advantages and disadvantages. It will help him with general readers; it will leave professionals picking holes. His focus is on the former since he judges that the demand for a paradigm shift is likely to be strongest from those outside the discipline. But we still need people in the discipline to flesh out the new ideas.

Moving on from the idea of scientific revolutions, Mr Cooper then explores the state of current economics, describing all the main schools of thought, each with ideas incompatible with others. I found this section illuminating and enjoyable. He could perhaps have brought out more the capacity for professional economists to engage in double-think – for the same people to hold incompatible ideas in their own heads, never mind the presence of warring factions who look on the same facts in different ways.

But Mr Cooper rightly says that it is not enough to prove the existing ideas wrong; you have to replace them with new ideas that work better. He outlines a new system of thought, based on two new concepts: competition and circulation of wealth.

Economists have much to say about competition, but it turns out that what they mean by the word is an artificial, anaemic version of the concept, operating within tightly constrained rules, where the object is to maximise individual welfare. The real human competition that drives human behaviour is about survival and status; it is about getting ahead of the other guy and staying there. Crucially it is about relative position and not absolute wealth. If competitive behaviour dominates, then human society will tend to stratify into a feudal system with a hereditary elite maintaining its dominance by force. Since such feudal societies are very common, including in newly developed social systems like that of North Korea, it is clear that such competition often dominant. It undermines the idea of libertarianism, which advocates minimal government and regulation, since these last two are required to counteract the tendency to feudalism.

Cooper’s second idea, that of circulation, stems from the observation that feudal societies are economically inefficient (look at North Korea again). Once the ruling elite have secured their status, they hold the rest of society in a static position so as not to present a threat. Economies are drained of vitality because the poor have no spending money, and the elite tend to hoard their wealth rather than spread it around. Democratic societies, on the other hand, have developed institutions, like progressive taxation, universal welfare and so on that recycle wealth from the wealthy to the rest, and competitive elections that ensure that political elites are recycled too. This creates a productive tension. Competition gives people the motivation to build successful businesses (and political careers) and innovate; governments recycle the wealth thus generated to prevent it from stifling the system.

This is a very liberal view. The right sees only a limited role for government and taxes, and does not accept that the presence of a very wealthy elite stifles the wellbeing of society. The left thinks that competition is destructive and tries to stifle it through excessive government. Liberals understand that people must be free to compete, but that government institutions are required to prevent all the power accumulating to the wealthy.

What does that mean in policy terms? Mr Cooper is particularly critical of the idea of monetarism – the management of the economy through regulating money and credit in the economy as a whole. He thinks this idea is largely to blame for the crisis, and it won’t help us out of it. The extra spending power it creates goes to the wrong people, i.e. the very wealthy. They either let the new cash fester unspent, or use it to create an asset bubble. Spending power needs to go the other end of society, which means Keynesian stimulus, focusing especially on productive investment. This sounds quite sensible. I am personally deeply sceptical of monetarism, though I don’t take the argument quite as far as Mr Cooper does.

How to take this new paradigm forward? It is starting to happen. Politicians and economists are talking a lot more about the distribution of wealth; this needs to be put back at the heart of macroeconomics – as it was two centuries ago with the ideas of Thomas Malthus. The publication of and interest generated by Thomas Piketty’s Capital in the 21st Century is big step in the right direction. This adds a lot of flesh to the high level analysis, and may provide the first evidence of magnetic stripes on the ocean floor.

But there is a problem at the heart of economics which Mr Cooper barely considers, and which has to fixed. It is the public’s insatiable desire for economic forecasts, both to gauge the general economic weather, and to answer what-if scenarios (such as global warming). So far the only practical way of delivering these is through the use of neoclassical models using the ideas of independent, rational agents, optimising behaviour and equilibrium. The whole infrastructure of these ideas has to be taught to economics students to satisfy this demand. It is no use just saying that forecasting is going to be more difficult. If the discipline is to be regarded as a science, then new methods must be developed. I suspect that economics has much to learn from weather forecasting – another system that is never allowed to achieve equilibrium. Weather forecasts require very big computers which are able to model complex interactions between many component parts. Work is needed on something similar – massive multi-agent models, using insights into real human behaviour.

Beyond that, I would like to see ideas on human behaviour, such as tendencies to cooperation and competition, developed in a much more realistic and nuanced context, harnessing the disciplines of anthropology, sociology and psychology – replacing the rather crude Darwinism that Mr Cooper advances.

That said, liberals everywhere should take Mr Cooper’s ideas seriously.

The European elections are a victory for proportional representation

They look like a colossal waste of effort. Elections to the European Parliament take place every five years, and turnout in Britain, as in much of the rest of Europe, is dismal. Few understand what the European Parliament is for. But last night’s debate between Liberal Democrat leader Nick Clegg and Ukip’s Nigel Farage shows that things are going in an interesting direction. These elections are contributing more and more to the wider process of politics in this country.

The most important thing about theses elections is that they are held using proportional representation (PR). Parties in practice need to get over 10% of the vote in a particular region to get represented – but that still gives parties with a broad but thinly spread appeal a much better chance than parliamentary and even local council elections. The vote share won by the two parties that dominate conventional elections, the Conservatives and Labour, is dismal. This is adding a new dimension to the political debate because it offers voters a greater choice.

The conventional way of politics in the UK is to tell the voters that the real choice is between just two parties. Which two varies depending on where the election is being held, but mostly it is between Labour and the Conservatives (though Scotland is a big outlier here). This serves to close down political debate to a few carefully chosen swing issues that appeal to marginal voters in marginal constituencies. Minority views are dismissed as being irrelevant. But this line of campaigning does not work with PR. And the European elections are the only ones held under PR for most English electors (Scottish, Welsh, Northern Ireland and London Parliament/Assembly elections are held under PR).

The most obvious beneficiaries of this have been to the Lib Dems, the Greens, and, above all, Ukip. Ukip is a right wing insurgent party that represent political views that are as far away from mine as you can get while still being a respectable political party (unlike the openly racist BNP, for example). But it speaks for an important minority of mainly English voters who feel oppressed by the current political system, and ignored by the main parties. The EU is an important focus of that discontent, as is what is seen as excessive immigration. As an aside it often draws its strongest support from areas that are relatively unaffected by immigration – but that does not stop it being a popular scapegoat. The issues are linked: free movement of people is a vital plank of the EU project.

The Conservative and Labour parties would rather these issues were suppressed. They represent inconvenient divisions within their own ranks and put their internal cohesion under stress. And that led to last night’s debate. Ukip and the Lib Dems take clear sides, and are quite happy to slug it out in public. And the public gets to hear a proper debate. That is a very important part of the democratic process. Floating voters may not have learnt much from the verbal slugging match, which I judged to be a score draw (with plenty to please both sides), but it at least would have drawn them into the issues.

Where is this heading? In the great scheme of things I don’t think the direct European Parliament elections are a great success in closing Europe’s democratic deficit. I think its original configuration as a forum for delegations from national parliaments was a better one. But for as long as it is the only national election held under PR, it is serving a useful purpose. The right answer is to use PR for national parliamentary elections, but alas that aim remains very distant. PR for local elections may be a more realistic intermediate step.

Meanwhile it will be very interesting to see if the interest stirred by these debates will affect turnout at the elections. But even if they do not (I will only believe it when I see it) they are doing something to close Britain’s democratic deficit.

French lessons for British social democrats

Opposition has brought a certain coherence to the British left. There is nothing like a hate-figure being in power to bring about a sense of unity. And the idea that runs through the left’s thinking on the state is social democracy. But last weekend’s electoral disaster for the French Socialists, and the rise of Marine Le Pen’s National Front should give them pause. The left is becoming is becoming disenfranchised from the working class.

What do I mean by social democracy? It is the coming together of several elements. The first is the conventional understanding of western democracy and the rule of law – in contrast to a more radical revolutionary style. The second is a grudging acceptance that the private sector is the primary motor of the economy – but heavily managed to prevent its excesses damaging society, including strong protection for employees’ job security. Next is strong, national government, setting standards that apply across the whole country, rather than the chaotic and inconsistent approaches that come from bottom-up policy. Then there is a faith in large public services, covering health, education, railways and much more. A strong social, state-funded safety net is added to it. And it is all funded by high levels of taxation, with a strong progressive element.

In Britain I have noticed that a historical narrative has built up around this idea. Social democracy’s breakthrough moment was the Labour government of 1945 (after the perceived success of the country’s state directed war effort). Something like a consensus built up around it, as economic growth allowed the scope the social democratic system to be extended. Then disaster struck in 1979, when a new breed of politicians, the “Neoliberals” were allowed to take over. Mrs Thatcher’s government started to dismantle the social democratic apparatus. Tony Blair’s Labour government wasn’t much better. But at least Mr Blair’s public sector “reforms” were balanced by Gordon Brown’s creeping extension of the scope of public services. In 2010 the Tory-led coalition of Tories and the neoliberal wing of the Liberal Democrats has continued the dismantling process. But the neoliberal ideology is a demonstrable failure – leading to the financial crisis and escalating inequality. The new Labour leadership, under Ed Miliband, has shown interest in reviving the old social democratic system, but it is being urged to be more radical. Social democrats within the Lib Dems hope that the party’s current leadership will be up-ended and the party will never again be associated with Tory government.

My aim here is not to challenge this flawed narrative, though I choke when I’m told that privatised industries like energy, telecoms, water and even the railways all better run when under public ownership. I want to draw parallels between this social democratic vision of society and France. For surely the country where these ideas have been carried through most thoroughly is France. Of course the Left would rather talk about the Scandinavian countries, Denmark and Sweden especially. But these are small, homogenous countries which do not make good parallels – and never mind the often rose-tinted spectacles.

But France is a big, diverse country like Britain. It’s anti-capitalist attitudes are deeply embedded. It combines a very efficient private sector with a strong central government run by a very well-educated and brainy elite. More than half the national income is paid in tax. And in 2012 the Socialists were swept back into power in a landslide. But now the economy is sliding and the Socialists are deeply unpopular. The working classes are defecting en-masse to the anti-establishment, anti-immigrant, anti EU National Front. What are the lessons?

But first a word of caution. It is commonplace for Anglo-Saxon commentators to write the French economy off as a basket case. It is not. Slow growth is probably an affliction that all developed economies will have to deal with. It was no accident that France weathered the 2007/09 crisis better than most developed economies – and just how secure is the new growth in Britain and the USA? Still, it has some big problems.

There are important lessons for the left in both strategy and tactics. Strategically the toughest lesson is than not all neoliberal inspired ideas are rubbish. The world economy is changing, thanks to trade and, above all, to technology. National economies must adapt to this. Developed economies are already highly dependant on global trading – shutting it off would mean a step backwards and reduced living standards. Accepting it means that industry has to reshape, causing job losses in obsolete industries. The neoliberal approach of letting market forces shape the change, by allowing struggling business to go bust and not getting in the way of new industries to take their place, is the quickest and cleanest way of adapting to this change. Fighting it means declining tax revenues, which means putting pressure on the public services and the social safety net. By pretending that there is an alternative to the globalised market economy, all the left does is build up false expectations about what can be achieved. That is the first cause of the Socialist failure in France. Too many on the British left don’t understand this basic, strategic problem.

The tactics are just as important. In France the Socialists have become part of a distant elite, remote from struggling working-class communities. They are full of clever intellectual answers, but they don’t feel the pain. Hence the appeal of the National Front. The British left too is too attached to its own intellectual sphere, sustained by Westminster think-tanks, and various left-wing publications – as well as intellectual cells in universities and (to a lesser extent) insulated public services like schools and hospitals. Strategy is set by using opinion polls and focus groups, not by politicians in the hard grind of finding solutions for hard-pressed local communities.

There is a tactical blind alley here. The focus group approach is telling politicians to respond to working class (and much middle class) anger by taking a tougher line on immigration, the EU and so on. To be fair on the left, they are resisting this temptation. But it isn’t just the pollsters and focus groups that are pulling politicians in that direction: any politician who spends serious time with the public understands that the pollsters aren’t making this up. The problem is that pandering to this anger also leads to false expectations; for very good reasons the politicians can’t deliver, and if they did the public would not like the result.

How to win back working-class communities while staying true to liberal instincts? Well you won’t find the answer in grand reforms and new laws promulgated in London or Paris. It isn’t about crafting the right sort of attack material to wound the right. It is about politicians winning trust by getting out into their local communities, meeting people and facilitating solutions that people can see. The choice of the word “facilitating” is important. It is about helping people to help themselves, not creating new government schemes (though these have a place). It is about mediating between different interest groups, not stoking up fights. People are much more realistic than many give them credit for. They appreciate honest facilitators and mediators more than people who just stoke up anger. But they are suspicious of elites that would rather talk to focus groups than their local electors, or who want to make their name with some new national reform – rather than helping to sort out a local housing estate, or bring together local ethnic groups.

It’s a hard road, but it is one the left must embrace if they are to avoid the fate of the Socialists in France.