Two recent developments have tickled this cynical old veteran of office work. There was a successful trial of a four day working week. And there is general excitement at the latest thing in Artificial Intelligence – ChatGPT (generative AI, apparently). Both seem to point to improved productivity. But if that’s true it doesn’t follow that economic growth will result.
To my cynical mind office work can be divided into two broad categories: problem-solving and bullshit. The latter seems to take up most of people’s time: talking about solving problems rather than actually solving them. In any office-based environment remarkably few people in organisation actually seem to be productive problem-solvers. The others supervise, communicate, convene meetings, make calls, write presentations, set deadlines, monitor project plans, strategise and so on. Doubtless a lot of the activity I am describing as bullshit contains an element of necessary work, but it often doesn’t feel that way.
So it’s no surprise that some businesses have found that they can reduce office hours without impacting adversely on output when implementing a four-day week. The saving seems to have been in the region of four hours in a five-day week – four eight-hour days making up for five seven-hour ones, for example, though that’s a saving of three hours. ChatGPT, meanwhile, automates the production of bullshit. It manufactures a lot of plausible but unreliable verbiage that you would be unwise to stake much on. Since producing such verbiage is what so many people spend such a lot of effort doing, it’s not hard to see why people are getting so excited. Both ideas offer ways of spending less time doing pointless things. So productivity should improve.
But, of course, it is much harder to see how either invention increases the production of useful things. The idea of a four-day week isn’t to give people the time for side-hustles. The idea is that people get more time for unpaid domestic things (“leisure” is probably an mis-description of this). The study reported high levels of improved wellbeing among employees – which was seen as the main benefit. As for ChatGPT, it’s not meant to solve tough problems or make hard professional calls – the things you most want service providers to do for you – or provide the warmth of human company, though doubtless some people hope that it will help robots to do that job, it sounds a poor substitute.
Doubtless I exaggerate. But there is a more substantial point here. A lot of improvements made to workplace efficiency – improved productivity in economic speak – won’t have much impact on the sort of economic growth you can measure in money and tax – the holy grail for economists and politicians. But that doesn’t mean that people won’t be better off. Wellbeing and per capita economic income or consumption are quite different things. Some people have been saying this for quite a while – Professor Richard Layard for one, and he still is. I met him when I was part of a Liberal Democrat policy working group looking at the issue more than a decade ago. Lord Layard’s big idea is to use self-reported wellbeing as a measure of progress. I am more sceptical – I don’t think the measure is robust enough to do heavy lifting, though it is interesting nevertheless. Still I wish politicians would take up the mantra of improving wellbeing a lot more. The Lib Dem policy paper I co-authored was adopted as official policy and then forgotten. But people are voting with their feet. If growth is slowing because people are opting out of the money economy and improving their health and wellbeing, then that’s to be celebrated. Economists rarely consider this possibility, though. And Conservatives who advocate cutting taxes don’t suggest this so that people can afford to work for fewer hours – though this could be the result. Indeed they think it will increase GDP rather than reduce it.
In my youth I remember a story of some western development experts and going to an African rope factory. They gave them a machine that improved output per poker ten-fold. A year later they returned and were surprised to find the factory empty. “Why aren’t people working,” they asked. “Well, we finish the production in an hour, and then everybody can go home,” was the replay. Doubtless the original story was play on African stereotypes, but even at the time, we weren’t clear the the joke was supposed to be on.
The goal of advancing wellbeing while economic growth remains lacklustre is a perfectly feasible one. Improvements to workplace organisation and continued automation have their part to play. But public services and infrastructure can be better directed towards this goal too. And political reform to reduce the feelings of powerlessness will also help. This remains a long way off – but eventually public pressure will force it. If the four-day working week starts to take hold, it will be a major step forward.
I was going to title this blog “A very British failure”; this follows a lot of the political commentary here in England on the Scottish First Minister, after she announced her resignation. She has been one of the most successful British politicians of this century so far, and she is leaving on her own terms. She has taken the Scottish National Party from its defeat in the independence referendum in 2014 to complete political domination north of the border. Her communication skills have won her plaudits across the whole country, especially during the Covid-19 pandemic, putting to shame occupants of 10 Downing Street. This can hardly be called failure.
And yet. There are two clouds on Nicola Sturgeon’s reputation. The first is that she has not succeeded in winning a second referendum on independence, let alone victory at that referendum. The British government has refused, and there does not seem seem to be majority demand for it in Scotland either. And the problem is a bit deeper than that, so far as independence is concerned – there is no clear majority for the move. Younger voters are in favour, though, so this may just be a matter of patience. The second cloud is that she and her party have made no progress on improving public services north of the border. For people (like me) who advocate decentralising public services, Scottish (and indeed Welsh) devolution provide no support. During the pandemic Ms Sturgeon may have been an excellent communicator, but the outcome, including the death rate, was no better than England’s. The Scottish NHS is beset by the same long waiting lists and overstretch as England’s; Glasgow has one of the worst drug problems in the developed world; Scotland’s school standards trail England’s.
It can be no surprise that Ms Sturgeon’s record on delivery is a weak one: she is a pure, careerist politician. She was active with the SNP from a young age; she did train and qualify as a solicitor, but by 29 she was a full-time member of the Scottish Parliament. In this career path she is little different from most other British politicians. And the situation appears to be getting no better. Those vying to succeed her are of the same ilk. With little flair for actually running things, such politicians gravitate to what they are good at: politicking and communicating. For Ms Sturgeon that meant elevating the issue of independence to be of all-consuming importance – though without properly addressing the practical questions that arose from it. In England the issue of EU membership has been similarly elevated, as a distraction from administrative competence, or as a way of undermining those in power. Culture wars play a similar role in America. In Scotland, the government has also placed a lot of energy into changing the law on transgender issues, partly at the insistence of their Green allies. This is the sort of “values” issue that professional politicians favour – though there are administrative issues there too, but these tend not be well dealt with.
In Scotland, the SNP has devoted much energy to consolidating its hold on political power by, for example, disempowering local government. Meanwhile it has not taken on the vested interests in public services as vigorously as it should. They did push through a major reform of policing (to centralise it); this did have some merit, but it did not go well, or not at first. I find the lack of progress in education standards the most shocking, though, perhaps because I know about what this entails. It isn’t rocket science: what is required is rigorous accountability down to school level, measuring the progress of every child. The techniques are well-established, and huge progress has been made in England, though some areas have made more progress than others. But this is unpopular with teaching unions, and the Scottish government seems to have been unwilling to take them on.
The SNP, of course, has a ready excuse for its poor track record: it’s the fault of the union with Britain. But this is unconvincing. It is hard to see how an independent Scotland would have access to more money for public services, especially now that North Sea oil and gas is in decline, and politically tainted because of climate change. If the Scottish government wants to show some of the administrative flair of its nordic neighbours, such as Norway, Sweden or Denmark, why doesn’t it try and get started now, rather than waiting for independence to arrive? Wouldn’t that make the case more convincingly?
And yet we can’t be too hard on her or the SNP, because all Britain’s political parties are like this. Scotland is mired in a very British set of problems. And yet breaking away from the United Kingdom offers no escape from the country’s essential Britishness.
The third anniversary of Britain leaving the European Union caused of a spate of comment in the media a couple of weeks ago. For me it was a moment of great sadness, but I’m trying to move on – though I still wish political destruction on every politician that advocated it. But it is as good a moment as any to reflect on what has happened.
Opinion surveys show that people who voted to stay in still think they were right to do so. They think that the arguments made in favour of staying in have been borne out. Some of those who voted to leave feel they made the wrong choice, though. But mostly they don’t – they think that it is too early to tell, or that the opportunities have been mis-handled, or they are actually happy with they way things have unfolded. What unites most from both sides is a sense of gloom, and a lack of confidence in the government. Another thing that seems to unite both sides is a wish not to reopen the debate.
In terms of the economic statistics it is very hard to isolate any economic effect of the change, especially when the Covid pandemic, the war in Ukraine, and the escalation of energy prices is confuses the picture. There is abundant anecdotal evidence that smaller British businesses have given up exporting to the European Union, or indeed to anywhere. But the aggregate trade statistics don’t paint such a clear picture. Investment has fallen since the referendum result: Brexit is an obvious culprit but it would be hard to prove it.
But if we step away from the economic statistics, some things are becoming clearer about Brexit. It isn’t too early to look at how the reality is working out against the vision. There never was a single vision, though. I can see three main ones: the globalist case, the isolationist case and the socialist case. The globalist case is the closest to the one the government espouses. This regarded the EU as a barrier to trade and free enterprise, for two main reasons. Firstly it entailed a substantial regulatory burden, covering not just products, but the way they were made (for example labour and environmental standards), and this raised costs. And second the EU raised barriers to trade with countries outside the union, which included rapidly growing markets in Asia in particular. Britain could be a country of free-wheeling (or even buccaneering) enterprise. Sometimes this was called “Singapore on Thames” – apparently by people who had little idea what of Singapore actually is – though doubtless an authoritarian, technocratic one-party state with a taste for intrusion into private life actually appealed to many of them.
It is becoming clearer by the day that this idea is nonsense. British people draw comfort from regulation, and every attempt to lighten the burden is met by howls of protest. And it is far from clear that changing regulation will have an economically beneficial effect in more than a few limited areas. Indeed it seems to many that life outside the EU involves more red tape, not less – for imports and exports, travel and immigration. Meanwhile almost all trade deals so far struck with countries outside the EU are little different from what the country had inside. The exceptions are Australia and New Zealand, which will have little impact, and probably not much that is positive for British businesses (but maybe better for British consumers). Doing deals with China, India and America – the big prizes, has proved much harder than envisioned. Brexit supporters are now talking darkly of a conspiracy of Remain-supporting establishment types undermining progress – but a lot of the trouble comes from their on side (especially so far s reactions with India and China are concerned). But the logic never was very convincing. The kindest suggestion is that it is 20 years too late – perhaps there would have been more to play for when globalisation was going full throttle, rather than in its current gentle retreat.
But it is unlikely the most people who voted for Brexit shared this vision. They were drawn to an idea of Britain that was less integrated with the world around it, not more. This was focused on one idea in particular: “control over our borders” – limitations to immigration, rather than the free movement within the union. Supporters of this idea, like Nigel Farage of Ukip and the Brexit Party, did not point to any other countries as a model: Britain was one of a kind. Perhaps some people thought of Australia, a fiercely independent Anglo-Saxon heritage nation, with strict immigration rules. Suggesting an “Australian-style points system” to manage immigration received widespread approval, even though few people understood it or its implications. Another model might be Japan. Japan is an island that trades with its giant continental neighbour, China, but emphatically maintains its distance politically. It limits immigration, and, whisper it, prides itself on ethnic homogeneity (unlike modern Australia). It is also a highly successful country, that scores well on many indicators of quality of life. Economic growth in the last thirty years has been anaemic, but that only invites the question of what economic growth is for.
How is Britain doing under this isolationist vision? Free movement of people between Britain and Europe is now gone; many people from other European countries have left, and immigration from there is is now a trickle. All immigration is now subject to bureaucratic controls. If labour shortages have resulted, then this may simply be a first step towards giving local workers more opportunities. On this vision, things are going much better. There are three problems, though. One is an influx of refugees and others arriving in small boats on the Kent coast. I don’t think anybody had expected this to be so much harder to manage outside the union than within it; but the country can’t simply deport people back to France as it could before. This has turned into a major headache, especially for the authorities in Kent, and there are no convincing solutions that don’t involve doing a deal with the EU, which would involve accepting many more refugees legally, and undoing one of the perceived benefits of Brexit to isolationists. It is possible to take a bigger view of this: even allowing for this influx the country is taking fewer refugees than before. Unfortunately for the government, people supporting the isolationist view tend not to get such things in perspective. It is undoubtedly disorderly – though chicken feed to what Italy or Greece have to deal with.
A second issue is that, notwithstanding the hurdles, immigration has not reduced overall. Instead of people arriving from the EU, they are coming in from elsewhere. Fortunately for the government, the public seems much less stressed by this than by the boats. It is a relatively orderly flow of people after all, and by and large they are going into better-paid (or “high-skilled”) jobs that the economy needs, or paying extortionate student fees. But it does complicate the scorecard. The government can’t claim reduced immigration as a Brexit achievement. Indeed, every idea for reducing numbers, like cutting back on foreign students, looks like self-harm.
The third problem is that real wages are in steep decline, as inflation runs ahead of increases in pay. And the government is aiding and abetting this by putting maximum pressure on public sector pay. Brexit was supposed to increase wages by stopping low-skilled immigration. Perhaps supporters of the isolationist case, often retired, aren’t so bothered. But it is a long way from the case made for Brexit at the time of the referendum.
All this is indicative of a hole in the heart of the isolationist case. Australia has abundant natural resources it can exploit (or pillage, if you prefer – sustainability is not high on the Aussie agenda); Japan has a manufacturing industry that is still world-beating. There are world-beating bits of the British economy, but not enough. Nostalgia won’t bring back Britain’s once world-class manufacturing industry. Coal, oil and gas are in steep decline, if not dead. And some of the successful bits of the economy, like global financial services, benefit few, in the wrong parts the country, and have a distinctly dark side (the country was very popular with Russian oligarchs for a reason). The country has been running a current account deficit for over two decades, and, notwithstanding the depreciation of sterling, it isn’t getting any better. This turns out to be more sustainable than many economists thought – in the sense that it does not seem to be leading to the sort of financial instability that other deficit countries (like Argentina or Turkey) have suffered. But it does seem to be affecting the country’s terms of trade – though it is statistically hard to pin this down. According to one calculation the country’s real effective exchange rate is 83% of what it was in 2005 (i.e a fall of 17%). British people can buy less foreign goods and services with each hour’s earnings than used to be the case. There isn’t enough high-productivity, export-generating industry in the country. This problem has its roots in the relative industrial decline of the 1950s to 1970s, and the hollowing out of the the manufacturing economy under Margaret Thatcher. This largely pre-dates membership of the EU, and arguably was made worse by it. But somehow it was easier to cover the cracks within the Union.
The third case for Brexit I mentioned is the socialist one. This case has not yet been tested. According to this the EU is a capitalist-designed, anti-democratic system that prevents governments for taking their economies in a socialist direction. Not all (or even most) socialists followed held this view – hoping to reform the union from within – but its logic is solid enough. Holders of this view are fiercely defensive of national sovereignty – their aim being to take democratic control of the country, and drive through radical reform from there. Their economic reform ideas are not particularly popular (though perhaps not that unpopular either), but their ideas about national sovereignty are widely shared. Ironically, since the main advocates of Brexit were at the more aggressive end of capitalism, it is perhaps socialist policies that present the main national opportunities after Brexit. These will not fix the country’s export problem – export industries, other than mining or drilling perhaps, tend to need capitalist leadership succeed. But it may set in train a fairer distribution of income and wealth. I suspect that there is a hybrid of modern socialist and liberal ideas that could lead to a thriving society – and perhaps it is easier to pursue that path outside the EU, though I doubt it would make all that much difference. Other European citizens would be at least as interested in such ideas as the British are. Alas there are too few people anywhere who are pushing in that direction.
UK Treasury: Picture by Carlos Delgado, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=19020165
Last weekend former British prime minister Liz Truss reentered the public sphere with an essay in the Sunday Telegraph, and an interview with The Spectator, publications that are both relatively sympathetic to her cause. This has occasioned much derision in the wider media. While I share much of this derisive view of her, I’m not going to join the chorus – it’s been said too well by others. Ms Truss has simply reminded most people why they dislike her so much. I want talk about the issues she raises, both in terms of economic policy, and how it can be implemented in Britain’s institutional environment.
Ms Truss’s starting point is what is widely seen as the UK’s dismal economic performance since the great financial crisis of 2008-09. Economic growth has been dismal, and if Britain has been able to maintain the pre-crisis trend of growth, then, according to Tim Harford in the Financial Times, it would be a staggering 40% better off. She attributes this to policy mistakes – a view that seems to be widely shared, even if not many agree on what those mistakes were. Personally, I differ from this – I think that the lack of growth is a reflection of adverse economic conditions, which started before the crisis – principally demographics and a changed world trade environment, made worse by Britain’s lack of a strong manufacturing industry. Liz Truss’s solution is to go back to policies popularised by the US president Ronald Reagan in the 1980s, and often attributed to Britain’s Margaret Thatcher too, though in fact she was much more cautious. These are mainly a matter of tax cuts, especially for businesses and the well-off, and deregulation. What she particularly favours is to proceed with tax cuts without regard to short-term effects on the public budget deficit, in the belief that an expanding economy will make things good in the longer run. She was always reluctant to talk about cutting public spending, and in the case of defence, advocated a substantial increase.
Her views on tax are largely magical thinking. Tax cuts might directly stimulate growth by increasing demand, but not as efficiently as many other policies, such as more generous state benefits, and not at a time when inflation is running riot. Lower corporate taxes might attract inward investment – but they are not widely thought to be a major factor, especially when the country’s politics seem so unstable. To her credit, though, apart from tax cuts, she advocated supply-side reforms that stand a much better change of promoting growth. These included easing immigration rules and making it easier for parents of small children to reenter the labour market. These weren’t popular in her own party, though. In her speech to the Conservative Party conference she decried an anti-growth coalition – which it struck many observers as being mostly her own party. However, her supply-side ideas had nothing like the heft to make more than a small difference to the country’s growth rate. Tax cuts (or forgoing tax increases) were her only big idea.
She has a second huge blind spot: inflation. She does not appear to understand that this usually arises from excess economic demand – and therefore that taming it requires deliberately crimping economic growth. She persistently seemed to think that inflation was somebody else’s problem – in particular the Bank of England’s. I find it astonishing that somebody whose degree course included economics (PPE at Oxford) can have thought this way. Everything interacts with everything else, and if you are the head of government, you are ultimately responsible for all the tools of macroeconomic management. What individuals do with their personal time may not be government’s problem; what public institutions do most assuredly is, even if they are run at arms length.
But amid all this foolishness and and failure to understand how things actually work, she did touch on something that is true. She railed against the “economic establishment” (the Sunday Telegraph unhelpfully added “left-wing” to this in their headline, but she neither said that nor meant it). She was particularly vehement about Treasury orthodoxy, which she saw at first hand in two years as a Treasury minister. The power of this orthodoxy undermines, usually fatally, any attempt to implement policy that contradicts it. That included her fiscal policies. They didn’t have her back when things got rough, and they forced an about-turn on most of them. What is a bit less clear is how Ms Truss fits the people controlling the world’s financial markets into this orthodoxy. She and her supporters are trying to blame the derivative based policies used by many pension funds for creating an unstable situation, about which nobody warned her or her Chancellor, Kwasi Kwateng. The Bank of England, also part of the orthodoxy, should have handled this better, they suggest. Rather interestingly, when she describes these polices as allowing the funds to invest more in businesses rather than bonds, they sound like just the sort of pro-growth idea she should be supporting. Of course the real problem here was the imperious arrogance with which she and Mr Kwateng treated financial markets. And as for the Bank of England, it was widely known that it was struggling to manage markets because inflation had caused a reversal of its loose-money policies, especially Quantitative Easing, upon which markets had come to depend..
I have some radical economic ideas of my own, though quite unlike Ms Truss’s. These are that Britain is far too centralised, and that responsibility for the many trade-offs required in financial and wider policy need to be radically decentralised. It’s not surprising that people oppose housing or industrial investments in their local area, when they will not be accountable for the benefits. The tough decisions are made in Whitehall, leaving with nothing else to do but complain. But this is part of the Treasury orthodoxy too – they don’t want a chaotic decentralisation, with corrupt nobodies taking decisions without the Treasury having ultimate sign-off. When the government wanted to distribute funding for its “Levelling Up” agenda, it didn’t distribute funds for disposal by the city regions and councils, it made these institutions put in bids for the imperious mandarins to pick from. To be fair, government leaders seem a bit embarrassed about this, and say there will be changes in future. But how did they allow this in the first place? And what credibility do their promises to do things differently next time have? The Treasury will undermine any effort they make to reform things. It is now reported that the Treasury is refusing to authorise any capital projects proposed by the Department for Levelling Up. The Treasury isn’t all in the wrong here: the levelling up funding was originally envisioned by former prime minister Boris Johnson as a politically directed slush fund to help win marginal constituencies. The power of the orthodoxy is that it is often right.
So the “economic establishment” would undermine my ideas for reform just as surely as they did Ms Truss’s. It’s a real thing. Any serious attempt at political reform therefore has to take on the orthodoxy and beat it. It can be done. Mrs Thatcher did it, and, to some extent, so did Tony Blair and Gordon Brown for Labour in the early 2000s, especially with their radical expansion of health funding (and it required both of the double-act to do it). It took these leaders years and all their political skill. The remarkable thing about Liz Truss is that she thought she could break the Treasury in an afternoon, based on a mandate she had won from 100,000 or Conservative Party members.
And that is the point. We need political leaders who understand the orthodoxies and how to challenge them – people with political skills high and low. The current government possess few, if any, people of that description. Do Labour? I really don’t know. I haven’t been that impressed with Sir Keir Starmer, their leader, or Rachel Reeves, his Shadow Chancellor. But I could be wrong – they are becoming more effective. One opposition politician I am sure has the necessary heft and skill is the Liberal Democrat leader Ed Davey, having honed those skills as energy minister in the coalition government of 2010-2015. Perhaps he will get another chance.
My reviews of the war in Ukraine are becoming less frequent. Thee war just goes on. At the start I spent quite a bit of energy thinking about how it might end. And yet the prospect of an ending is receding. We must resign ourselves to several more months of death and destruction, and probably many more after that. What will happen in that time?
It is hard enough to tell what is happening now. Both sides are wary of releasing information, and it’s always for a purpose. The Institute for the Study of War (ISW), which is one of my main sources, now has extensive commentary on Russian attempts to manipulate what it calls “the information space”, both internally and in the wider world. Interesting as this may be, it reminds me of the story of the blind man looking for his keys under the street lamp: not because that is where he dropped them, but because that is where the light is. Beyond that there are formulaic reports of clashes along the three or four hotspots, which may be nothing more than aggressive patrolling, along with the endless artillery pounding. The Ukrainians are anxious to put out the story that the Russians are gearing up for a major offensive, using troops mobilised last autumn, along with, perhaps, a fresh mobilisation. The Russians seem to be dropping hints of this too, so it is probably true. Stories that Ukraine is preparing an offensive of its own come and go.
Much of the media kerfuffle in recent days has been over the supply of (relatively) advanced “main battle” tanks to Ukraine by its Western supporters. What to make of this? At the start of the war, Russia suffered desperate casualties amongst its armoured vehicles, and the idea that such things were obsolete in the age of drones and hand-portable antitank missiles Tok hold. After this came a gruelling war of artillery, and the usefulness such vehicles became more apparent. But their use seems to be a world away from the Second World War, which still shapes how many people view warfare. The Ukrainians clearly decided that they needed these tanks. Equally important, I suspect, are lighter “infantry fighting vehicles”, such as the US Bradley, which can transport troops – a cross between an tank and an armoured personnel carrier – a concept first developed by the Russians in the Cold War. These were promised to Ukraine by several countries (not including Britain, whose IFV is a bit of a failure) without much fuss before the tank row blew up. There is a lot more symbolism in the tanks, evidently. The whole episode was portrayed in the media as a show of disunity amongst the Western allies, and dithering by Germany. Well, there was certainly dithering – but such time the taken over important symbolic acts often makes them more solid. It is of the nature of alliances that they have arguments over strategy, as each participant has its own objectives. But often this helps improve the quality of decisions. It is possible to look on Germany as a foot-dragger – but it is the lynch pin of the alliance and has shown astonishing resolution, in spite of having much bigger problems thrown at it than the other allies.
Will these weapons transform Ukraine’s prospects, as the BBC seems to be reporting as fact? That is very hard to tell. A lot depends on logistics and finding the right tactics. The weapons were designed for a different type of war – but they are more capable than anything the Russians have. The Ukrainians have shown facility at both tactics and logistics, so we can expect them to make a difference. Still, transformative sounds too much.
What of the coming Russian offensive? They have refreshed their manpower, and will be able to employ large numbers, by modern standards (but not by mid-20th century standards), at the pressure point. This is likely to be in the Donbas region, where the biggest political imperative lies, as well as the easiest logistics. The Russians have learnt a lot from their earlier mishaps, and have developed much more effective tactics. Still, they face three considerable obstacles. Firstly, the Ukrainian forces are much better prepared than they have been. We’ve heard a lot about how Russia has superior numbers, but this is misleading. Russia has huge manpower potential, but Ukraine can dig deeper on its resources, and has been doing so for the last year, building up and training large forces. Second, the supply of Russian munitions is not as plentiful as it was. The Ukrainians report that Russian artillery fire has slackened recently; doubtless this is because they are conserving stocks for the offensive – but it indicates that there are limits – and artillery is central to current Russian tactics. And third, Russia lacks experienced officers and cadres to lead its freshly mobilised forces. This is usually regarded as central to the effectiveness of any army. Still, the Russians have surely thought all this through, and there may be surprises.
And the Ukrainian offensive? If the new Western supplied armour is to be part of it, it does not look as if they will be able to pre-empt the Russian one. It will have to come later, assuming that the Ukrainians have the strength left. There is some rather wild talk of seeking to recapture Crimea (for example in The Economist). Militarily this is not quite as absurd as it sounds – if Ukraine can advance south of the Dnipro River, then that would put it in a position to isolate the peninsula. Politically, it sounds like a bad idea, though. Russian claims that Crimea is somehow more historically Russian than Ukrainian is their usual nonsense. But in 2014 it had a substantial population that looked to Russia, and many anti-Russian elements (such as the Tatars) have doubtless largely left. Ukraine would acquire a grumpy province that would be hard to secure, as well as delivering a massive humiliation to Russia.
But that opens up the question of how on earth this war is supposed end. It looks as if Russia will talk about it if the annexation of Ukrainian territory is on the agenda. That would obviously include keeping Crimea, but surely also large parts of the four oblasts that they formally annexed last September and now partially occupy. That is so far inconceivable to Ukraine – the war has cost them so much that they want more to show for it. We might objectively argue that such a deal would not be so bad – Ukraine has consolidated its moral hold on the rest of its territory, and its place in the “West”, including as this expression does such countries as Finland, Poland and Bulgaria – but this is far from the psyche of the men doing the fighting, and the citizens enduring Russian bombardment. What would be decisive is the withdrawal of American support from the country. If that comes it will be seen as a huge betrayal. We will certainly have to see how the bloody events of this spring and summer play out first. I don’t think Joe Biden’s hopes of being re-elected as president in 2024 would survive such a retreat.
Could Russia’s resolve weaken? There have been plenty of examples of despots hanging on for years while their countries go to the dogs (look at Syria or Venezuela). Russia has already endured massive losses. A big test will be if the regime goes for a further wave of mobilisation, of which there is already much talk. Last autumn’s wave was clearly politically costly. Meanwhile the economy weakens, as war priorities take over, and many men are conscripted or have fled the country to avoid that fate. But economic hardship will not weaken its leader, Vladimir Putin, who sees his mission in terms of historic destiny, and who has so much personally tied up in the war. His war has failed its original objectives, but he cannot afford to admit defeat. Perhaps a coup will carry him away. But this would be done by Kremlin insiders, who are also committed to the war – there would be limits as to how much such people could concede. Mass unrest that would cause the collapse of Russia’s internal security apparatus looks vanishingly unlikely – though it is conceivable that another wave of mobilisation could provoke it.
The outlook is very gloomy indeed. The war presents as clearly as ever the main lesson of war: never start one. But there was plenty of evidence for that before this misadventure began.
Last week’s Economist led on the dangers of changing political attitudes to world trade. The paper suggested that the rise of “zero-sum thinking” threatens capitalism, liberal democracy and the livelihoods of many. But we live in a world were the conventional wisdom of economists is being challenged – from inflation to interest rates to economic growth. The conventional wisdom on trade needs to be challenged too: not because the economics is wrong, but because the context has changed.
There are two central foundations to economists’ understanding of the benefits of trade. One is the logic of comparative advantage, one of the first insights of modern economics when it got going more than two centuries ago. What matters when resources are constrained (as they almost always are) is opportunity costs, and not absolute costs. It is more efficient for for a less productive supplier to produce goods, if the more efficient one is better able to produce other goods that are in short supply. It is one of the first things economics students are taught, and one of the most important challenges to “zero-sum thinking”, which suggests that imports are bad because they put local people out of work. Those people can be redeployed to make things things more productively in world terms, meaning that everybody can benefit.
The second foundation for the economic benefits of trade is economies of scale and the benefits of specialisation (or economies of scope). Industries may not have critical mass in their own market – but through trade they can access bigger markets, benefiting everybody. This idea can work alongside comparative advantage (the concentration of watchmakers in Switzerland presents economies of scope and scale, which in turn leads to comparative advantage, for example). That makes them easy to muddle. Economies of scale and scope do not necessarily lead to comparative advantage, and you can have comparative advantage in a particular area without economies of scale or scope. This needs to be picked through with care – which alas The Economist seldom does. Now let’s step back and look at how world trade has evolved in the last 40 years or so.
The massive explosion in global trade in the 1990s and 2000s is mainly explained by comparative advantage. The thing to understand about comparative advantage is that it is driven by differences in economic structure, which create differences in opportunity costs: it is a function of difference. China, the largest driver of this surge in global trade, was a very different place to the developed countries it traded with in 1990. A vast number of people were still employed on the land, in highly inefficient agriculture; in the developed world the agricultural workforce was nearly insignificant, while producing much more food than it could consume. By shifting workers from agriculture to manufacturing in China, a lot more manufacturing goods could be produced, with any shortfalls in agricultural production made up for by developed world production with a negligible increase in workforce. This meant that Chinese manufactured goods were dirt cheap, while its agricultural produce was expensive – a colossal opportunity for world trade, even if Chinese manufacturing productivity was much lower than in the developed world. The process worked something like this: low agricultural productivity ensured low wages; low wages meant cheap manufacturing products, even with low manufacturing productivity. The picture was a lot more complicated than this – it wasn’t actually a case of China importing grain while exporting washing machines (they imported more capital goods than food) – but comparative advantage was the driver.
That is all Economics 101. But while economists understand how comparative advantage works in principle, they are surprisingly ignorant of how it works in practice. It has improved impossible to model the dynamics of comparative advantage in a way that produces the detailed results and predictions that are most economists’ day job. So, after they have completed their undergraduate studies, few economists think much about it. If they did they would me more alive to the issue of convergence. The Chinese economy, like the Japanese and South Korean economies before it, did not stand still. Productivity shot up, especially in agriculture, and the agricultural workforce rapidly diminished, while that of manufacturing and services rose. Convergence with the developed world happened at astonishing speed, and as that happened the differences that drove comparative advantage diminished. Developed countries started to find Chinese products becoming more expensive. The incentives for long range trade between China and the rest of the world diminished. This hurt developed countries much more than it did the Chinese – as the Chinese benefited directly from increased productivity and rising wages. It is, I believe, one of the reasons for sluggish growth in the developed world since the great financial crisis of 2007-09, though it is almost never mentioned as a factor (and certainly not by The Economist), in spite of the great economist Paul Samuelson drawing attention to it.
This is where the second factor can come into play – economies of scale and scope. In Europe, for example, the leading economies converged in the late 19th and early to mid-20th centuries. Comparative advantage diminished. But, after the Second World War, trade within the continent flourished, so clearly something else was behind it. Why, for example, did Germany, France, Britain and Italy all have substantial car industries, all with a lot of cross-border trade? This shouldn’t happen under comparative advantage, unless the cars each country made were somehow very different from each other. In fact the economics of motor manufacture meant consolidation into larger and larger firms was required to be competitive. Cross-border trade gave consumers more choice, and the other benefits of competition, if their own country only had room for one or two car firms. As Europe developed its single market, economic benefits flowed – but on nothing on scale that flows between more diverse economies. There are two sorts of benefit here. The first is that the benefits of economies of scale lifting productivity; this can work in quite a similar way to comparative advantage, with some countries specialising and others happy to have cheaper products (the aero industry is a bit like this). The second derives from good old fashioned competition between businesses in different countries. This is very different, as this only works if multiple countries are making similar products. We must also bear in mind that as the gains or more limited, it requires a level playing field to work; if one country suffers a systemic disadvantage, such as high transport costs because they two oceans away, then the benefits of trade diminish. That is one reason that Europe had to develop detailed rules for free trade, while the Asian economies’ rise was based on much cruder arrangements, such as World Trade Organisation (WTO) rules.
The important thing to realise about economies of scale and scope is that they are dependent on technology and not any iron logic of economics, as is the case for comparative advantage, although you wouldn’t think it from the way many executives from large businesses talk. And technology changes with time. The late 20th Century was particularly good for economies of scale, but that is changing. And that is for two reasons. The first is the rise of technologies that diminish the costs of short production runs and individualisation (indeed the same edition of The Economist featured this in its business section – a new theory of the firm – one of the articles featured on the cover). The second is the diminishing importance of manufactured products in the economy as whole, compared to services, such as healthcare, which are largely untradeable. All this points to reduced benefits from trade, especially between big geographical blocks like America, Europe and East Asia, as opposed to within them.
Where does that leave the current debate on trade? The first point is that I don’t think the benefits of trade are diminishing because of political obstacles; I think those political obstacles are arising because the benefits of trade are diminishing. The second thing is that, for developed economies, there is no great box of goodies that can be unlocked through trade liberalisation to help flagging growth along. Doubtless there are further benefits to be had – and especially with less developed countries if done in the right way, but not on the scale that saw the economic transformation of the 1990s and 2000s.
Now let’s look at biggest specific issue bothering The Economist – the problem of US government subsidies for green industries. Europeans are worried that this will make their own industries uncompetitive. That is a legitimate worry, but if Europeans match those subsidies with their own, the damage will be limited – and, indeed, it might hasten the transition to clean technology, with the benefits that will flow from that. The Economist worries that it will lead to inefficiency and, horror, duplication. And yet duplication is a prerequisite of competition.
Still, trade remains integral to the modern way of life and deserves continued political attention. For some things, the importance of both comparative advantage and economies of scale and scope remain undiminished. Only a few countries have direct access to metals such as cobalt and lithium, which play a critical role modern industries. And serious economies of scale or scope remain in others, such as the mining of iron ore (Australia has unmatched scale economies), or the manufacture of advanced microchips (Taiwan leads in scope economies). But the key the issue is not just economic costs, it is the potential for serious dislocation if supplies are interrupted. The modern economy contains many bottlenecks. We have to balance the benefits of short term cost savings with the risks of natural disaster and conflict. Alas the solutions are likely to make manufactured products yet more expensive.
The reason for the rise of “zero-sum thinking” is that the economics of trade is moving in that direction too, though the benefits of free trade remain substantial. It is not surprising that other issues loom larger than trade freedom, such as security of supply and the need to accelerate the transition to clean energy. It is easy to understand why The Economist wants to turn the clock back to the days of easy trade gains and steady economic growth – but it does not help prepare its readers for the hard choices ahead.
Picture: Randy Browning, US Fish & Wildlife Service
Uncharismatic politicians are gaining the ascendency. In America Joe Biden bumbles away in public and looks his age, and yet his record of achievement in difficult political conditions is remarkable. In Germany, Chancellor Olaf Sholz is hardly more impressive in public, and yet his awkward three-way coalition government looks solid and is managing stresses that could hardly have been imagined when it was formed. Meanwhile in France the charismatic Emmanuel Macron is not out, but he is down. In Britain the Leader of the Opposition, the dull Sir Keir Starmer, is looking getting stronger by the day.
Sir Keir has caused a lot of frustration among Labour supporters, along with anybody that wants to see the back of the Conservative government. He seems unable to spell out a compelling vision of what Labour stands for; as a speaker he is uninspiring. But Labour’s poll ratings are sky-high, and his own public approval ratings are higher than they have ever been. These ratings may not be decisively better than those for the prime minister, Rishi Sunak, (though one recent put them on that path) but the steady upward trend is what is remarkable. Usually politicians start by sparking high hopes, and then gradually disappointing. Sir Keir is achieving the opposite.
Partly this reflects the chaos stalking the Conservative party, to which Sir Keir’s colourless Labour party presents and appealing contrast. Boris Johnson had bags of charisma, but no grip. Liz Truss lacked charisma but did communicate a clear vision effectively – but people found it detached from reality, and she could not control her parliamentary party. Mr Sunak presents a favourable contrast to these two, but he struggles to reassure voters about the state of his party, and doubts grow.
But Sir Keir’s performance has been more assured of late too. He remains extremely cautious about putting clear policy proposals out into the public domain. Instead he and his team have put out two much vaguer themes in early 2023. These build on the theme developed in 2022 of placing a high priority on environmental sustainability, and the goal of “green growth”. The first of these was developed by Sir Keir himself: when he made an attempt to hijack the Brexit slogan of “Take Back Control” to promote the idea of greater devolution to the nations and regions of the UK. This is cheeky, not least because Britain has little tradition of devolved power, so the slogan is suggesting people take back what they never had in the first place. That is forgivable because the idea is the right one: decisions need to be taken closer to the people affected by them, and people need to have a greater sense of involvement in them. Whether Labour proposals will actually deliver much that is worthwhile is open to doubt. The party has a tradition of being highly centralised, and Sir Keir has batted away more radical ideas like electoral reform. It is hard to think that he will go down the road of a local income tax, for example. I’m unconvinced that anybody in the Westminster ecosystem really “gets” what would be involved in the sort of reform that would make more than a minor difference. Still, the verbiage is better than nothing. It is more worrying, if unsurprising, that Labour spokespeople have not tried developing the theme since Sir Keir flew the kite in the New Year.
The second idea to be developed this year comes from the party’s health spokesman, Wes Streeting. The NHS needs radical reform, he says, not “sticking plaster solutions”. Unlike the “take back control” idea, this one has been regularly repeated by Labour since. The idea seems to be that a reformed NHS can deliver better results without requiring an “open cheque book”, as sir Keir put it. At one level this looks like muddle and nonsense. Currently the NHS is suffering an emergency as it fails to cope with demand, following a decade of under-investment; this demands urgent solutions and not reforms that will take much longer to deliver benefits. The NHS badly needs sticking plaster right now, and lots of it. And radical reform has been tried before, and the results have almost always disappointed – most recently with the coalition government’s attempt in the early 2010s. To make a real difference, some kind of open chequebook will be needed, alongside sensible reforms – including to social care. Meanwhile Mr Streeting is vague about what reforms he has in mind – beyond tearing up the contract for general practitioners (GPs) – which came as a surprise to GPs. Still, politically these words make more sense. Labour does need say something about the NHS, and not just throwing money at it. Perhaps it is the inverse to 2010. Then the Conservatives promised that there would be no radical (“top-down”) reforms to the NHS, and then promptly broke their promise by embarking on a huge reform programme. Labour are probably promising radical reform but planning to deliver sticking plaster with spin.
Tactically this is all very shrewd. My feeling is that Labour will manage to consolidate their advantage over the Conservatives, which still has a certain fragility – polls show few people making a switch between the parties, and many more former Conservatives abstaining or supporting the Reform party of radical Brexiteers. It is the race of the tortoise and the hare. The hare lacks the attention span to win.
But there is a dark side to Sir Keir’s progress. In his campaign to party members to win the leadership, he promised to stay true to the party’s broad policy agenda, developed under his predecessor, Jeremy Corbyn. He has broken this promise. according to Stephen Bush, of the Financial Times and formerly of the New Statesman, this isn’t because he was deliberately misleading. He just didn’t understand the implications of his words, and found that when the time came he was unable to keep his promise. What he said was driven by the political exigencies of the time, without having been properly thought through. This is surely true of his emerging policy agenda now. Britain’s many problems can’t be fixed except with additional public spending, and this must be done when adverse demographics, among other things, mean that there will be little economic growth. Meanwhile Britain runs a substantial current account deficit. To my rather conventional mind, this means that there will have to be higher taxes, and the sort of taxes that will crimp domestic demand – income tax, VAT and National Insurance. Whether or not this is so in theory, Ms Truss has surely shown that it is true in practice – the government needs a degree of confidence from financial markets, which like to see a degree of prudence in public finance. Sir Keir will not say this, but once in power he will surely be faced with the need to raise taxes.
Two other areas worry people about Sir Keir’s caution. One is relations with the European Union. He avoids talking about Brexit, and has set his face against rejoining the Single Market or customs union. With the electorate slowly but surely coming to view Brexit was a serious mistake, surely he has the opportunity to be bolder, while forcing the Tories to defend a sticky wicket? Actually in this case I think Sir Keir’s judgement is sound. Re-integration with the EU brings with it awkward choices, surrendering sovereignty while acquiring little influence. Besides, the EU itself will be sceptical. And though the public may be regretting Brexit, they show little appetite to reopen the debate.
The second issue is electoral reform. Labour members support this, but Sir Keir is ducking and weaving, and is committing to nothing. This is disappointing because it is hard to see the British political system changing for the better without it. British politics has got itself stuck in an awkward groove, which in effect disenfranchises most voters, contributing to a huge sense of frustration. Of course countries with other electoral systems suffer problems too – but Britain’s are deep. Sir Keir’s caution is understandable though. I suspect many Tories think that Labour adopting electoral reform would be a gift to them. It gives them a chance to change the subject from their own record, and to awake the innate conservatism of the British electorate, with all sorts of lurid stories as to what the implications of reform are. Still, I don’t think it would work for them. Maybe Labour can promise electoral reform at a local level, as part of their “take back control” agenda. That would be a worthwhile step.
None of which takes away from Sir Keir Starmer’s relentless rise. It is a striking political achievement that deserves wider recognition.
British public services are flagging – even without the wave of strikes provoked by the government’s attempt to force below-inflation payrises. Many are assailed by staff shortages – health services in particular. Backlogs mount in health, the courts and the processing of immigrants. The police seem to be dealing with a diminishing proportion of crimes. The government seems to have little idea how to address this.
What is the cause? There are three obvious ones. The first is the austerity policies in place since the great financial crash of 2008/09, ratcheted up by the coalition government of 2010-2015, and intensified by the Conservatives alone from 2015 to 2017. The second is more demand for services from an increasing population of elderly. On top of these came the disruption of the covid-19 pandemic, which caused many backlogs. These have all doubtless contributed, but the problems go deeper, and will require a new mindset to fix. Take the issue in hospitals of patients who cannot be released back into the community, causing a shortage of beds. This problem goes back a very long way. I remember people talking about “bed-blocking” thirty or more years ago. Or the bullying, racism and misogyny that are rife in the police and fire service, and doubtless elsewhere. Most of us thought that these problems were being stamped out after the 1960s – it is shocking to see that they are unchecked in this day and age. This bespeaks generations of weak management, fending off the modern world with defensive strategies, like extra bureaucracy, rather than true problem-solving. Every time that one or other service says that lessons will be learned after some failure (and it happens more than weekly), you can guarantee they mean that some extra rule has been layered onto the existing thicket of unmanageable procedures.
A lack of leadership, from senior politicians down, is clearly part of the problem – though more in some services than in others – in fact there are many pockets of excellence. But this problem results from institutions being trapped by a system that constrains initiative and crushes rather than rewards enterprise. This arises from how the work is organised – which leads to two related problems. First of all the system is heavily biased to fixing problems rather than preventing them. The best way of stopping health service backlogs is for people to be healthier, after all. Secondly almost all the difficult problems, and especially those that focus on prevention, require multiple agencies to cooperate without adequate structures to ensure that cooperation is effective. Somebody on the radio recently listed all the agencies that had to come together in a criminal trial (courts, police, prosecutors, defenders, the prison service, the probation service, and so on); it’s no wonder that they don’t work efficiently. No wonder, but also nobody’s responsibility.
Problems with public services are nothing new. People have been wrestling with it for as long as I can remember. The Thatcher government of 1979-1990 had the big idea of privatising large swathes of services, which then included many public utilities. In many cases this was very successful – in telecoms and energy, especially. But it soon became clear that there were limits. Privatising prisons, for example, may have solved some problems, but created many others. The next major push came from the Blair/Brown government that took power in 1997. They had two main ideas: establishing quasi-independent agencies in a sort quasi-market economy (academy schools and NHS Foundation Trusts, for example), an idea more closely associated with Tony Blair; and close performance management, with the use an array of performance targets, and managers being disciplined if they were not met, an approach more closely associated with Gordon Brown. For convenience I will call these the Blair and Brown approaches, though both men supported both approaches to some extent. We can learn much from what became of them.
The Blair approach had easily the best press – praised by many right-leaning think tanks and journals like The Economist. They were picked up, and in places turbo-charged, by the coalition government that followed Labour. They had one important success: university education in England. This was linked to a dramatic increase in student fees, linked to a student loan system that works like a graduate tax. This gave the universities a degree of operational independence. Problems continue, but Britain’s university system remains world-class; rationing of university places, as required by Scotland’s directly-funded system, has not been required, with the result that a higher proportion of the population can attend. Elsewhere the reforms are being quietly buried. Much success has been claimed for academy schools, and there have been success stories – but the main thing that can be said for them is that they have not made things much worse. They have been linked to the waste of public money, however, with senior management overpaying themselves. In the NHS the system is being quietly dropped, as it entails much bureaucracy, while doing little to address fundamental performance issues, like integration of care or patient safety. In both health and education, the services were linked to massively complicated and prescriptive funding models, which failed to work like commercial tariffs in the way the designers hoped. This is one way in which it differed from the university reform.
The Brown model, on the other hand, received a much worse press. People complained of complex targets, misaligned incentives, and macho sackings of senior managers – creating a climate of fear that undermined creative problem-solving. All of these criticisms were well-founded, but the system had some notable successes. The Labour government oversaw a dramatic improvement in the quality of teaching in schools, and especially in London. The new academies were part of this success, but local authority schools did just as well, if not better. As a primary school governor, and chair of governors, I saw this improvement happen at close quarters. There was some rather crude top-down management from the ministry, but the professionalism of school and local authority leaders by and large rose above this – and pushed through dramatic improvements. I have seen a quality of management that easily matches what happens in the private sector. Four things stand behind this success. Firstly, schools already had a huge amount management autonomy compared to other public agencies, as their services are relatively self-contained; second standards were enforced by an independent standards agency, Ofsted, which carried out regular inspections of schools and local authorities, and used well-designed metrics to act as benchmarks; third, local authorities proved effective intermediaries between central government and the schools; finally funding was increased, which gave managers more ability to achieve change. Interestingly the coalition government, while pushing the largely irrelevant academies initiative, picked up were Labour left off, by sharpening the focus on quality of teaching, and dramatically improving the funding system with the (Liberal Democrat) pupil premium system, and its attendant focus on disadvantaged pupils. Since the coalition, the focus has been somewhat lost, and funding squeezed; Ofsted went off the boil (doubtless thanks to funding cuts) by easing pressure on top-rated schools.
The Brown model was applied to the NHS too, and the quality of NHS services drastically improved over the Labour years. But this is mainly attributed to an equally dramatic increase in funding. The easiest thing to say about this is that the combination of extra funding and close scrutiny of results achieved much more than either of these would have alone. The Brown government, towards the end of the Labour period, did try to address some of the problems with the performance management system. I remember a new system called “team around a child” which aimed to bring multiple agencies together to address issues around individual cases. But it wasn’t clear whose job it was to knock heads together. Most of this was swept away when the Labour government ended.
Over the last decade or so, the Conservatives have adapted rather than overturned the previous Labour government’s approach, with the important difference that they have squeezed funding relative to demand. They have revived and extended an older idea too: tendering and outsourcing to outside agencies, be they non-profit enterprises or commercial providers. This has been disastrous. The aim has been to save money, and this has meant redefining the services as a skeleton of what they should be to play a fully functional role. The outsourcers then duly cut the service back, by, for example, replacing skilled professionals with less skilled recruits following standard scripts, and who are unable to to make proactive interventions or prevent difficult cases becoming “frequent flyers”.
The problem is that none of the various things that governments have tried in the last forty years have addressed the fundamental organisational problem – which is that responsibility is divided among so many agencies, which in turn are managed at national level. The system is centred around specialist service provision, and not people. Crime, housing, mental health, physical health and family dysfunction are all closely linked together. We may find all these contributing in a particular serial offender, say, who causes multiple agencies to commit resources. But instead of the agencies coming together to find a solution, the system encourages them to continually pass the parcel.
So how to progress? Public services need to be more focused on their users, and services intermediated by professionals empowered to bring different elements of service together. This means more localised control of services, so that those intermediaries don’t have to escalate issues far up the chain of command in order to resolve blockages. It means a local political leadership able to focus on the needs of particular people, and accountable for the overall results in a particular locality. That, inter-alia, means substantial devolution of political power to regions and local authority areas. That is necessary but not sufficient. Scotland and Wales have just as disappointing record on public services as England, in spite of substantial devolution. We need more specific policy reform ideas.
Interestingly Labour’s recent proposals on constitutional reform (proposed by Mr Brown) show that there is a political consensus around further devolution. However the narrative is based more transport infrastructure and economic growth, rather than making public services more effective. I’m not sure if many politicians grasp what is needed to improve public services. Still, in the dying days of the coalition a deal was done make a more substantial devolution of public services to the Greater Manchester Mayor, including some NHS and social care services. As I recollect this was criticised by Labour at the time. According to this study, it has been a modest success, with a slight improvement to life expectancy.
Still the forces of conservatism are powerful. It is always tempting to try and make the current, departmentally bound and centralised system work, rather than undertaking risky reforms – especially ones designed to give credit to regional and local politicians. But politicians need to improve the effectiveness of public services urgently – and through the extra effectiveness reduce demand by solving problems. This needs a huge change in political culture, but once one area starts leading the way, that should generate momentum. With Scotland distracted by the debate on independence, the most promising place to start looks like Greater Manchester. we will probably have to wait for the next government, though.
I’m not reviewing this book, but title reveal the left’s attitude to austerity
As a Liberal Democrat I’m often described as being on the political left. One word shows that this is far from true: “austerity”. To people on the left, especially in Britain, this word brings up a visceral reaction. To them austerity is the quintessence of evil: the crushing of all attempts to promote the public good, perpetrated by a brutal government out to protect the interests of the rich. But to me austerity is a government policy that is often necessary – and is part of a healthy tension that keeps the state efficient. Still, I always like to understand the arguments of people I disagree with, and when I saw a link on my New Statesman email to an article by William Davies entitled Fascism’s liberal admirers, I thought I’d take look. The sub-title was Austerity is a fiction designed to uphold capitalism– and it has a dark history. The pretext (I would not call the article a review) for the was a book by Clara Mattei called The Capital Order – How economists invented austerity and paved the way to Fascism. The subheadings demonstrate what I mean about the left’s attitude.
Which is why I was expecting a lot of nonsense – and by and large that is where the article ended up. But along the way it constructed a narrative that was fr from nonsense. The book is about the rise of Fascism, and how the pre-Fascist government in Italy in the 1920s was being pressured by Britain (as a creditor nation) to adopt austerity policies. The British ruling establishment had taken on the austerity narrative after the First World War, and was delighted when the Fascists in Italy followed through with these policies after they took power. Ms Mattei’s and Mr Davies’s point is that this narrative came about as a reaction to a socialist narrative that the success of war economies showed that there was an alternative to market capitalism, with economies led by, and substantially owned by, the state. Revolution was in the air. The capitalists needed to stamp this thinking out, and they aggressively promoted pro-market policies and a rolling back of state intervention. It was not a narrative based on economic necessity, but one developed to protect vested interests. It is but a short step for Mr Davies to suggest that this is what has been happening in the 21st century, following the financial crash of 2008, and now – with the fall of the Liz Truss government. That, historically, support for austerity led capitalists to embrace Fascism shows how they will turn on democracy to protect their interests, and economics is just camouflage. The fight against austerity is the fight to preserve democracy.
There’s something in this. Pretty much all economic policy, whether capitalist, socialist or anything else, is a conspiracy of vested interests: people try to persuade the public at large that their ideas are for the public good, using any argument that they think might gain traction, spurious or otherwise. That is how large, complex societies get anything done. Truth is incidental. And, though I’m not an expert, I think that the British ruling establishment over-reacted to the prospect of more socialist ways of working in the 1920s, and their arguments in support of the package of policies that Mr Davies calls “austerity” do not stand the test of time (though economies in the 1920s swiftly moved to growth after austerity – and it was not until the depression of the 1930s that the narrative seriously came to be questioned). After all they did something quite different after the next war, and capitalism (and wider society too) has never flourished more. It is a stretch to say that the same applies to 21st century episodes of austerity in Britain and the Eurozone, but there is a case to answer. Many of the justifications put up by the supporters of austerity policies were nonsense. So if you want to believe that austerity is always and everywhere economic nonsense promoted by self-interest, you will always find plenty of evidence. That is the insight I gained by the article. Evidence, but not proof.
The resources required to make an economy work are always limited. The bottom line is that economic policy will always be limited by resources, and that the more efficiently those resources are used, the more successful an economy will be. There are times when it pays a government to spend money to do things that are useless. Keynes wrote of getting people to dig holes and fill them in again; Hitler ramped up spending on armaments. That is when the economy is running slack and needs pump-priming. The people digging holes or making tanks spend their wages buying other things, creating a virtuous circle of job creation. Austerity is a bad idea at such times. But when the economy is running at close to capacity, or overheating (as is the case in most developed economies in 2022) then that logic disappears. If anybody, anywhere is employed doing things that don’t enhance society, it is means that the economy is running less efficiently than it should. If the government is running inefficiently, then austerity policies can be justified to cut waste, and move people from doing useless things in the public sector to being more useful in the private one. That is the basic intellectual case for austerity. And it is why governments of all economic stripes, capitalist and otherwise, will often carry out austerity policies. For example, Cuba’s socialist government after Soviet subsidies were withdrawn in the 1990s.
It goes deeper. All human organisations have a tendency to become complacent, and settle into inefficient ways of working to minimise internal conflict. In private enterprise this tendency is tempered by the need to compete, and by downturns in the business cycle. I well remember this from my work days. Things would seem to be going well, and then there would be a crisis. Savings had to be made, usually, eventually, entailing job losses. Workers were disappointed and often angry; but the overall effect of this stop-start was a more healthy, efficient and focused organisation. Some good things might be lost in the process, but that was outweighed by the reduction in waste and follies curtailed. The public sector is generally insulated from such commercial pressures, and so has an even greater tendency to become inefficient. Bouts of austerity act as a check on this, and force managers to focus on what needs to be done – though they won’t thank you for it.
But the timing is often difficult to decide. It is not always easy to tell if an economy is running slack or close to capacity. There is an argument to be had about that in Britain in the 2010s. But the real problems happen over resources transferred between countries. Economies are often sustained by using resources provided by other countries. But this creates international obligations – as well as the temptation to profligacy. If people in one country supply resources to people in another one, they do so because they expect to be repaid in some shape or form, usually profitably. If it turns out that poor economic management (or any other problem) puts the repayment in jeopardy, then the creditor countries will often insist on austerity. This is not always the right thing to do, but the basic premise that the debtor country is consuming more resources than it is producing, and needs to adjust to something more sustainable. This can be a capitalist conspiracy, but it doesn’t have to be. The politics around it get messy with truth, as usual, a casualty; creditors accuse debtors of profligacy – debtors accuse creditors of gratuitous cruelty. Some governments practice austerity simply to prevent getting into this sort of situation – the socialist president of Mexico, Andrés Manuel López Obrador, is an exemplar of this.
All this is common sense. Austerity – and this is best understood as cuts to government spending, rather than raising taxes – can simply be about the management of finite resources in a changeable environment, and doesn’t have to be ideological. So why do the British left react so violently to the idea? I’m not sure how deep the history goes. The New Labour of Tony Blair and Gordon Brown of the mid-1990s embraced austerity, but they were hardly of the left – but the left seemed happy enough to keep in tow. I think the issue originated from the coalition government of 2010. In the five or so years before this, the state payroll, direct and indirect, had expanded considerably. Many parts of the state had become very inefficient. At the time I could see this in both education (I was a school governor) and health (I was following health affairs closely, as I was looking for a job there). In both areas I could see over-complicated management structures and performance grids, and lightweight policies implemented to placate some lobbyist or other. Capital funding was tied to a bidding process that required the use of consultants on both sides. The bidding process was a matter of verbiage – the trick being to find the right trigger phrases. I read my borough’s bid for primary school expansion (which was successful), and it seemed to carefully saying nothing at all – but it was the work of many senior people, with external advice. In the NHS, funding was driven by something called “World Class Commissioning” – a vastly over-engineered superstructure designed to provide employment to consultants and middle managers. I could go on. The writing was already on the wall before Labour lost the election of 2010, as the crash put government finances under strain, but the government had been slow to apply austerity. Not so the incoming Conservative-Lib Dem coalition. They put in place a vicious programme of spending cuts. Suddenly a whole class of public sector employee found their livelihood at risk – and worse, political leaders were suggesting that their endeavours had all been a waste of time. That triggered an angry backlash. And just as the right tends to be controlled by the interests of capitalists, the left tends to be controlled by the interests of state employees.
By and large the angry people were university graduates trained to look for abstract principles to make sense of events. So instead of just protesting against the concrete adverse effects of particular cuts, they spied an abstract idea to focus their anger on: austerity. Austerity was evil; the cuts were not necessary but ideological. Many economists criticised the cuts as excessive, causing a needless recession and economic wasted resources – and this was seized on as evidence of the evils of austerity. As this line of thinking developed in the usual echo-chambers of social media and friendly journals, it morphed into the idea that austerity is always and everywhere evil. Mr Davies’s article shows how entrenched that thinking remains.
And that is a problem. The left seeks to achieve political power, and to do so democratically they must persuade people that they can be trusted. But most people’s attitude to austerity is pragmatic: sometimes it is required. Most people probably have their own hobby horse of perceived government waste that austerity could be used to sort out – though there will be no general agreement on what these actually are. A class of politicians that cannot let the idea that austerity can ever be justified pass their lips are going to find it very hard to win that trust. And yet it is more than easy to campaign convincingly against specific cuts – at a time when so many public services are wilting under pressure, and the public safety net is obviously inadequate in many places. The politically sensible thing to do is to allow for austerity in theory, but oppose it in the here and now: or to follow the example of Gordon Brown who advocated austerity in the mid 1990s, but once in power and having established public trust, launched the expansion of the British state.
The left are part of the Labour Party, but do not control it. The Labour leadership understand well enough the politics of all this. Polls show that they are maintaining credibility on economic management. The left’s obsession with austerity in the abstract undermines their political influence. Which means the advocacy of any good ideas they have is weakened. In a world when many long-held beliefs are being challenged, the left should challenge this shibboleth.
Labour shortages mean that the pay of refuse workers is advancing
It turns out that the leaders of Britain’s Conservative and Labour parties agree on quite a lot. The latter, Sir Keir Starmer, gave a quite a weighty speech to the Confederation of British Industry this week – which did much to help his gravitas as prime-minister-in-waiting. What has drawn most attention is his opposition to excessive immigration (not clearly defined, of course) and commitment to making Britain a high-wage, high-productivity economy. This was one of the main planks of Tory policy in at least the last two general elections, and still is – in contrast to integration with the European Union’s labour and product markets. Many in the CBI want a more flexible approach to immigration (to say nothing of more integration with the EU) – but they weren’t getting it from either leader.
The politics are obvious. Immigration is a touchstone issue in Britain, as it is in much of the world. The public thinks that the ruling elite were too relaxed about immigration and this was one of the main factors behind the populist backlash of the last decade, and the Brexit referendum result in particular. Labour are less trusted by the public on the issue, and so need to show a visibly firm line, or they won’t win back the voters that have deserted them since their last election victory in 2005. And the idea that choking off cheap labour from abroad will raise living standards is superficially plausible. In fact it was one of the more plausible claims made by the supporters of Brexit. And having done Brexit, I can understand how mainstream politicians feel the need to try and make the idea work.
But how does political necessity fare against reality? Most people seem to have very little idea of how the high-wage economy is actually supposed to work. It’s a bit like the “Australian-style points system” to manage immigration, which most people think is a jolly good idea, without having much clue about what it actually is, and how it compares to alternatives. The main target audience for economic policy ideas seems to be property-owning retired folk in the English North and Midlands (and in the English South and Wales, to be fair), who have little direct stake in a modern, functioning economy – which is all somebody else’s problem. Meanwhile they insist that there is “no room” for more immigrants – and fear that it erodes English national culture. There is therefore no particular need to explain the actual impacts of policy.
The overall economic theory is clear. If we can raise economic productivity, there is more money per head to go round to support higher wages. By choking off the supply of cheap labour from abroad, employers will be forced to use the available resources, i.e. local workers, more productively. There are two basic problems with this line of argument. The first is that higher income per head on average does not guarantee higher income for everybody. An imbalance of power in the labour market leads to high pay for the powerful at the expense of the powerless. The hope is that cutting immigration strengthens the bargaining power of less powerful. Academics argue about whether it is true – but it is not hard to find anecdotal evidence of just this. A shortage of lorry drivers following Brexit has recently driven up their pay – and with it incomes workers in related fields, like refuse collection. Still, we shouldn’t forget, as Tories sometimes do, that better wages depend on the bargaining power of workers.The second problem is that productivity is only part of the equation – the proportion of working people, or working hours per head of the total population, is critical too. In fact in a modern developed economy it is probably more important – and it has been falling due to demographic pressures, the propensity of older workers to retire on their savings, and (perhaps) lack of access to health care for longer term and mental conditions. Immigration raises the ratio of working people in the short and medium term – which is why so many people think it is a good idea.
Still, let’s put these problems aside, and try to imagine what a high-wage society looks like. It is in fact not too hard to find such societies. They are usually located in spots in the developed world with a low population density. These are often tourist hotspots and it is mainly as a tourist that I have visited them: in Australia, New Zealand, Western Canada, Norway and Switzerland. The first thing you notice is that there aren’t many workers. If you are on safari in Africa, you will get a tour guide and driver as a minimum. In Canada and Australia the same individual does both roles. Go into a shop and there are few people to serve you. And there aren’t many shops. At hotels you carry your own bags. You get something of the Tesco automated checkout phenomenon. Self-service amounts to higher productivity for Tesco, but all they are doing is making you do more work for yourself. An experienced cashier is much quicker. In a high-wage economy you may find yourself eating at home instead of at restaurants – or inviting friends for drinks at home rather than trying to find a bar. The cost of services involving human contact is relatively higher.
So where are the workers? Not so many in the tourist spots, though there will be people delivering high-end products or services at quite a cost. They are mostly somewhere else, delivering highly productive goods or services. In Australia and Canada there is mining; in Norway there is oil; in Switzerland there is sophisticated manufacturing (chemicals and such) and banking. These are linked to exports, so that high-wage countries tend to be high-exporting ones, usually running trade surpluses.
Here’s the key. Some gains to wages for the less well off can be made by reducing profits and cutting top-level pay. But not enough and not sustainably. A large proportion of workers need to be employed in highly productive fields. If businesses simply raised prices to pay for higher wages, we end up where we started by putting so many things out of the reach of less well-off workers. But high productivity industries in the modern era are very productive indeed. They don’t employ many workers and usually need exports to to be sustainable.
And so we can start to see the characteristics of a high-wage economy. Workers must have strong market bargaining power, generally by being in short supply. There must be a strong, highly productive core to the economy, generating a substantial export trade (overall trade doesn’t need to be in surplus in theory – though in practice this often seems to be the case). And most people will have to put up with doing more things for themselves, as the price of services is high – and especially in rural areas. Taxes are also likely to be quite high to to support public services such as health and education – as a strong state underpinning of these, and an effective social safety net, is all part of the ethos – and supports the strong bargaining position of workers generally.
In Britain the problem is obvious. Labour shortages are improving the bargaining position of workers. We are moving towards a self-service economy as these labour shortages sweep through the hospitality industry amongst others. But what of the highly productive core? Here we are faced with a fleet of ships that have sailed. Fossil fuels are depleted and anyway a problem in the zero-carbon future. The country’s manufacturing has been hollowed out – the trade deficit is of very long standing. Financial services provided a lot of punch in the earlier years of the 21st century, but are going through rough patch in the 2020s. Brexit is widely blamed, but in truth the problems are wider. A lot of the strength of the mid-noughties turned out to be fictional – and it was very centred on London. The country needs to look to the future, and not try to recreate old glories. Here the parties do differ a bit. There doesn’t seem to be a coherent Conservative strategy at all. Their basic idea is to create fruitful conditions for investment and sit back and wait. Liz Truss, Mr Sunak’s predecessor, did lend some coherence to this approach. She wanted to create a low-tax, low-regulation haven for footloose international businesses. This idea quickly collapsed, leaving Mr Sunak plying platitudes about innovation. His government looks increasingly paralysed by internal divisions and unable to implement any decisive strategy.
Labour’s big idea is the green economy (something promoted by the Lib Dems and Greens too). This entails a massive investment programme designed to transform the country’s infrastructure as well as develop export industries. This is a good idea, but a lot of the work involved (home insulation for example) is not high-productivity. And there is intense competition for the rest – batteries and wind turbines for example. Still, it doesn’t do to underestimate British inventiveness, and public-private partnerships in this area surely provide part of the answer. Also renewable energy does offer high productivity, without the need for exports. There are other ideas. I have often talked about health care and related services, where Britain has a promising base – and where the NHS offers world-class data for developing new treatments – as the covid episode showed.
But there is a gorilla in the room that the politicians don’t want to talk about. This isn’t Brexit (though they don’t want to talk about that either). This has created problems for developing export industries – but other EU members are further down the path of developing exports and British industries struggled to compete with them in the single market. Britain’s trading problems got worse within the EU, after all, even if there were compensations. The gorilla is public sector pay – especially if we include the issue of social care. High wages mean high levels of pay in the public sector. Not all public sector jobs are badly paid, but the pressure of a tight labour market is putting public services sector under pressure. Staffing shortages are rife in many parts of it. Meanwhile part of the government’s anti-inflation strategy is to hold back public sector real pay levels – which is making matters worse. The answer is either to shrink the public sector or to raise taxes. Of course the politicians hope that an explosion of high-productivity private sector jobs (with associated tax revenue) will come to their rescue. But it won’t happen in time, if it ever does.
This is a tough place to be in, so it’s no surprise that our politicians are slow to confront the truth of it. I have to admit that it is forcing me to rethink some of my assumptions. But I do think that the vision of a high-wage economy is worth pursuing. The main alternative being offered by those interested in social equity is a universal basic income paid by the state. I am deeply uncomfortable with that idea for a number of reasons. Given that, here are two things to be thinking about.
The first doesn’t involve any great rethinking on my part, but remains politically toxic. We need higher taxes. This is not just on various soft-spots and loop-holes in the wealthier parts of the economy – schemes that are predestined to disappoint. Higher taxes need to affect most people. This is because public spending will have to rise to accommodate higher public sector pay – and we need to manage down the level of demand in the rest of the economy to help stabilise it, to say nothing of limiting the need to borrow money on world markets. Of course public sector productivity can be improved (though I prefer the word “effectiveness” to “productivity” – as a lot of the solution is lowering demand by forestalling problems), reducing the need for spending. But our political class, our civil servants, and the commentators and think tankers that critique them, have almost no idea how to achieve this. They are stuck in an over-centralised, departmental mindset. What is needed is locally led, locally accountable, cross-functional, and client-centred services – an idea that is so alien to British political culture that most people can’t even imagine it. So we can’t count on that idea and must settle for replacing the dysfunctional with the merely mediocre, with no cost-saving.
The second idea is even more contentious, and I haven’t properly thought it through yet. It is that inflation is an essential part of the process of readjustment, and we have to tolerate it to a degree – provided that the source of that inflation is a rise in pay for the less well-off. As somebody who grew up in the 1970s, I hate inflation. I think it undermines trust between the state and the governed. I have never subscribed to the view of liberal economists that it can be a tool of economic management. But there have to be exceptions. One example was Ireland in the 2000s, as that country worked through its economic transformation as it integrated with the EU economy, which did involve a spurt in productivity. Wages rocketed, driving inflation up. Ireland was in the Euro, so there was no ability for the currency to appreciate to ameliorate the effect. This was the only way for the country to reach the sunlit uplands – which didn’t stop the European Central Bank from criticising it – something my economics lecturer at UCL said was absurd.
Britain’s position is different from Ireland’s. We haven’t had that productivity spurt. There is nothing to drive an appreciation of the currency. But we want wages amongst the less well-off to rise. Price rises are part of the adjustment – with inflation acting as a tax on the wealthy, as part of a redistribution process. Meanwhile we need to drive capital investment – most renewable energy is very capital intensive, for example – as are most of the ideas for developing higher productivity. That means keeping interest rates low. Which won’t happen if interest rates are jacked up to combat inflation. And, as suggested already, to the extent that inflation needs to be managed, higher taxes are a better way to do it.
This is quite a progression in my personal thinking (and thank you to regular commenter Peter Martin for helping me along the way – though doubtless we still disagree). But trying to get to the fairer, more sustainable society we seek is going to require many of us to change our thinking – and put up with some things we don’t like.
