Labour – Page 16 – thinking liberal

It’s time for the Lib Dems to grow up

I had wanted to include the phrase “growing pains” in the title of this post, but growing is not what is happening to the Lib Dems at the moment. Not in the sense of membership or votes, a small summer bounce in both notwithstanding. It is about becoming a more mature political party – and becoming more mature is always painful.

I am going up to the party’s conference in Birmingham tomorrow; I don’t know what I’ll find. Evidence of pain is everywhere. There was a moment in April 2010, after the first party leaders’ debate when we dared to hope for something spectacular. And this wasn’t just a media frenzy – it was palpable on the doorstep and in the streets. It has been downhill ever since, apart from the brief thrill of seeing the party enter government – though this left the voters unmoved, as opposed to party insiders.

Last May’s local election results were a massive trauma. Many of the party’s activists were in the process of winning the country over “one ward at a time”. They thought that by being relentlessly local, and doing a good job for their local voters, they would be insulated from the national tumult – something that has been by and large true in the past. So it was a really rude shock. Many blame the party’s MPs as shameless opportunitists who are out of touch with the voters and activists. And of course, it showed the party that oblivion is just around the corner.

And there’s everything else. Endless criticism on the papers; being the butt of comedians’ jokes (and worse) on the radio and TV. Taking responsibility for unpopular reforms in the NHS and education. I have an email today from a very long standing member who is about to resign because of the NHS bill.

And yet. These are all vicissitudes that Britain’s two most successful political parties, Labour and the Conservatives, (leaving aside the SNP for now) have long learned to take in their stride. It is part of being a grown up political party. It is part of mattering. At members’ meetings one of Nick Clegg’s favourite stories is what happened when the party went back to talk to the many voters that slipped out of the party’s grasp in last week of the General Election campaign. It amounted to, “These are tough times, and we need a grown up political party.” Enduring this type of pain is a necessary step to breaking through to the next stage of the party’s advance.

The trauma could kill the party, of course. But if you are part of it you need to be positive, and ensure that it doesn’t. The opportunity is palpable. Neither Labour nor the Conservatives are flourishing. If the party can hang on to something like its current number of seats, especially in a smaller parliament, then another hung parliament, and coalition opportunity, is odds on. Who needs electoral reform?

And the whole nation is in trauma. The good times just aren’t coming back. The apparent economic achievements of the last decade are proving hollow. Property prices will not rise endlessly to make everybody rich. We haven’t got the money for the public services we used to have – just as the demographic challenge is about to get much worse. Labour still haven’t come to terms with their failure, and seem to be stuck somewhere between anger and denial. The Tories are riven by divisions between a rampant but lunatic right, and the leadership’s more paternalistic vision.

If the Liberal Democrats can get their story straight, there is all to play for. There are signs that the party is slowly addressing this. The conference motions don’t really do this, with the Facing the Future motion on strategy (with its 17 priorities) a particular disappointment. The Quality of Life and Community Politics motions offer some light, though. But behind the scenes there is a furious discussion over the party’s narrative. Some good ideas are emerging.

Labour’s vision of a benign and overpowering government, aligned with rampant capitalism, has let the country down badly. The Tories are chasing after a fantasy of a little England run by an unfettered middle class. The Lib Dems can offer a sustainable future based on real empowerment of the people, in a proper international context. Go for it!

Affording the NHS

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

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

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

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

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

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

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

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

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

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

Who is to blame for the UK’s economic mess?

As time passes it is clear that the UK’s economic crisis is amongst the worst of the major developed economies, though Japan may beat it on some measures. It’s not in the league of some smaller economies, like Ireland or Greece, although a comparison with Portugal may be more nuanced. Some people (notably Labour politicians) struggle to accept just how bad things are; others don’t get much beyond railing deficits and the National Debt. It’s worth pausing to consider what went wrong, and to try and attribute responsibility.

What happened? Until 2007, the UK had an astonishingly consistent record of economic growth. This started with the departure from the European Exchange Rate Mechanism under John Major in 1992, and continued until early 2008. Economists had taken an average annual growth rate of 2.5% for granted. Unemployment fell, and most people felt better off, though the very wealthy did much better than the rest. Public expenditure rocketed, with massive investment in the NHS in particular. A recent study by the Institute for Fiscal Studies (IFS) shows that poverty was reduced, largely because of increased benefits and tax credits.

And then bang! GDP shrank by 6% in a year, stayed flat for the year after that, before struggling to a bit under 2% growth in the year after that (taking the year to the 1st quarter from the ONS). Forecasts are for consistently anaemic growth. This is striking. When economies hit a recession due to a temporary shock, they bounce back quite sharply, as temporarily unused capacity comes back on stream; this is what has happened in Germany this time. Not for us; a good 7% of the economy has vanished never to return. What makes this particularly bad is that this 7% produced an awful lot of taxes, while public expenditure carried on regardless (with benefits increasing due to the extra unemployment and hardship). This has left the country with a “structural deficit” of about 8%. This is the excess of public expenditure over taxes after you strip out temporary factors; the actual deficit was much larger (it reached 11% and has now dropped to 10% per annum). Now I’m not sure how we ended up with an 8% structural deficit after losing just 7% of GDP, of which presumably no more than half would will have been taxed. The government was already running a bit of a deficit when disaster struck; I think that capital taxes must account for the difference, now that the property boom has disappeared.

What this comes down to is that a lot of the pre-crisis growth was not for real, and government finances were built on unsustainable foundations. What was happening? This phantom growth seems to have been related to a boom in personal borrowing to finance property purchases and good old fashioned consumption. Symptoms included an over-sized finance industry (in earnings if not jobs) and unsustainable levels of consumption.

Who was to blame? The three commonly cited answers are everybody-and-nobody/events-beyond-our-control, bankers, or the Labour Government. Some Labour politicians still seem to subscribe to the first idea. It was an international storm (I never want to hear the phrase “perfect storm” again) and we were caught in it; nobody was seriously criticising government policy before the crisis. As the economy has failed to bounce back, this has become unsustainable; why are we having so much difficulty when other countries caught by the crisis are having an easier time? Of course some try to say this is because of Coalition policies over the last year. But almost all of the many critics of the Coalition policies accept that we were in a terrible mess in the first place.

So the critics shift to another target: Britain’s bankers. These are an easy target, paying themselves handsomely while their organisations required government bailouts. There is also a widespread conception that the bailouts cost a lot of money, and that this is one of the reasons that government debt is a problem. Actually the government has largely got away with it, for which Gordon Brown and Alistair Darling deserve some credit (contrast the terrible hash that the Irish government has made). A lot of government money was put at risk, yes, but the banks were charged for it, and the money lent will largely be repaid, and the guarantees not called on. Where the bankers were culpable was in rampant lending, supporting excessive consumption and a property bubble. But the lending was nothing like as reckless as in the US (or Ireland for that matter). If the government had awakened to the idea that consumer lending needed restraint, something could have been done. Let me be clear; the banks were reckless; we need to regulate them much better – but they were not the fundamental cause of the crisis. We had a narrow escape.

Could the government have seen the vulnerability of the British economy? There were not many prominent critics at the time, though Vince Cable was clear enough, for exactly the right reasons. But it was a matter of undergraduate economics to see that economic policy was on an unsustainable path. Literally. As a second year economics undergraduate at UCL in early 2007 my macroeconomics lecturer, Professor Wendy Carlin, used the UK economy as a case study to illustrate her model for an open economy. It was also used as an exam question. Was the UK’s strong economic performance due to increasing economic efficiency or excess aggregate demand, she asked. It was clearly the latter: the giveaways being the appreciating real exchange rate, and a large current account deficit (the economy as a whole consuming more than it was spending).

What should the government have done? The first thing should have been to raise interest rates and tighten monetary policy much earlier. Unfortunately this was genuinely difficult, because this was the Bank of England’s main target was inflation, and not the general standing of the monetary system. And the inflation rate seemed benign (thanks in large part to the overvalued pound). The second thing would have been to regulate the banks harder, to restrain lending. This was the FSA’s job, although the degree of independence of this agency is less strong. Finally the government could have tightened fiscal policy to reduce the level of demand in the economy, through expenditure cuts or tax increases. Nominally the government’s policy was to run a zero structural deficit, but it chose to fiddle with the statistics on the economic cycle so as to argue that it did not have to do anything. The government was not egregiously profligate, as Coalition politicians like to suggest, but it was pushing the wrong way.

What comes over, above all, is a failure of leadership, especially from Gordon Brown, as a formidably powerful Chancellor of the Exchequer. The tripartite arrangement for managing the financial system (between Treasury, Bank of England, and FSA) did not help, but it is very clear that if in doubt it was the Treasury’s job to lead. They didn’t. They could have leant on the FSA and Bank of England, as well as tightening fiscal policy directly. But Mr Brown either refused to recognise the gravity of the situation, or his political courage failed him. Given his constant level of denial about the seriousness of the crisis, I suspect it was mainly the former. He could not face admitting that so much of economic achievement was unsustainable. It is invidious to blame one man, when the hands of many were involved. But Gordon Brown had the authority; there was enough evidence for him to act on; and he made things worse not better. A career in the Treasury that had started so brilliantly ended catastrophically.

My next topic on the economy: is the Coalition economic policy making matters worse or better?

How would AV change UK politics?

In my post last week I explained why I am supporting the Alternative Vote (AV) in the forthcoming UK referendum. This case was based on principle. We have a system of single member constituencies. First past the post (FPTP) carries a high risk of unrepresentative candidates being elected. Of the various systems in use around the world to counter the weaknesses of FPTP (primary elections in the US, run-off elections in France, AV in Australia), AV seems to fit the British situation best. I avoided asking what the impact of any change would be: just that the system is more democratic. But there are pragmatic types out there for whom the likely impact of the changes is more important than first principles. Today’s post is for them. It will help show them why it is best to think about principles.

The trouble with most analysis of this in the UK is that it is based on looking at past FPTP results, supported by some opinion polls on second preferences, and then predicting how the outcome would have been with AV. This runs into two problems. First is that the next election is going to be quite unlike the last few, if for no other reason than that the current government is a coalition. The next problem is that AV will change voting behaviours, and the campaign pitches of the political parties. The usual conclusion is that the Lib Dems will benefit quite a bit, Labour marginally, and the Conservatives would lose out. None of these effects would have been enough to change the outcome of elections except maybe the last one. Extra seats for Lib Dems and Labour might have made the current coalition impossible, and even a Labour-Lib Dem one on the cards. That’s enough for most Conservatives. If we had had AV last time, Gordon Brown might still be PM.

The Lib Dems should benefit. About time many will say – since the party is badly under-represented in parliament. More pragmatic types worry that this would give a smaller party too much influence in the choice of coalition partners. But the Lib Dems do face a problem. In order to benefit their first preference votes need to get past either the Labour or Conservative candidates (in England – it’s more complicated in Scotland and Wales). They might then attract second preference votes from whichever of these parties gets knocked out. And yet the classic Lib Dem campaign technique is to persuade voters to vote for them because one or other of the major parties doesn’t stand a chance; this argument has much less resonance under AV. Voters will say that they will simply give the Lib Dems a second preference, and give their first preference to their most preferred party. As a result Conservative or Labour candidates currently in third place might sneak into second, knocking the Lib Dems out. The Littleborough & Saddleworth seat at the last election was a Labour seat that people count as vulnerable to the Lib Dems under AV; but the Conservative vote was strong and under AV they might well have pushed past the Lib Dems into second place, which would, in fact, have made the seat safer for Labour. This could be a big help to the Labour Party in the South West. In Australia the two party system is entrenched (one of the “parties” being a coalition in an electoral pact). The Lib Dems will be desperate for first preference votes under AV, and in the long term it cannot be taken for granted that the party would flourish.

Labour has less to fear. It might help them pick up in areas where they are in third place – now great swathes of England. They may not do so well from picking up second preferences from Lib Dem voters next time – but only because they will have done such a good job of persuading them to vote Labour as first preference. They get some insurance against those voters drifting back. It is a moment of truth for Labour supporters who believe that there is a “progressive majority” – a majority of voters for whom the Conservative Party is toxic. If so the system ensures that the Conservatives never get a majority.

And that is the challenge for the Conservatives. It will be much more difficult for them to sneak in a majority government against the votes of the a majority of the electorate. But many Conservatives believe in something like a “silent majority” – the opposite of the progressive majority. There are lot of people sympathetic to their policies that do not say so, and will not give them a first preference vote. If so, they may pick up a lot of second preferences. This could be particularly helpful to them at the next election, when both UKIP and the Lib Dems will be trying to pick off their voters. If Labour succeeds in pulling past the Lib Dems in South Western seats, then this will make a few seats a bit safer for them, since they will get more second preferences from Lib Dem voters than Labour ones.

For the smaller parties AV is ambiguous. It is difficult to see that extremist parties, like the BNP, will make any headway, since other voters will gang up against them. Their best hope of an MP is under FPTP in a split seat. But UKIP and the Greens may well think they can pick up a majority in favoured seats by scooping up enough second preference votes. In the UKIP case they need to push past the Conservatives, either in what would now be very safe Conservative seats, or in Lib Dem held seats where they can hope to scoop up some Labour voters too. For the Greens the game is to push past the Lib Dems, and scoop up enough of their votes to push past Labour (or the other way round), to mount a challenge on the Tories. In both cases these are long shots, but you need a deal of optimism in politics.

In sum, the impact of AV is very uncertain in the UK. The Lib Dems could assert themselves with a permanently larger block of seats, alongside a scattering of seats for the greens and perhaps UKIP. Or the two party system could reassert itself, with the other parties finding it more difficult to pick up enough first preference votes. But the outcome is uncertain for a good reason: electoral politics will be more competitive. Who knows what voters would do?

Cuts: where will all the anger go?

Today the TUC is orchestrating a big demo in London against the cuts. Yesterday the Labour party hosted a “People’s Policy Forum” on the cuts. The focus of both events is anger. The idea that the cuts are unnecessary is actively promoted; all that’s needed is for the rich to pay their due in taxes. The Economist’s Bagehot gives an excellent description of Labour’s forum. The anger is palpable, but where will it all lead?

The Guardian’s Polly Toynbee thinks this will be a turning point, leading to the complete rejection of government policy by the majority of British people. After all, the cuts have hardly started to bite yet. An alternative view is that the anger will transmute into depression, in the classic pattern of grief. And from the depression will come a new consensus about the role of the state in our society.

I am reminded of a change management course I went to as a manager. I was taught that any serious change initiative had to go through four phases: denial (a muted initial reaction as people think the change applies to somebody else), anger (the moment when indivuals realise that the change really does affect them), chaos (the dysfunctional early phases of change) and finally renewal (you finally start to make headway). It is a mistake to think you can jump straight into the renewal stage. Anger is a good sign, because it means you have got beyond denial; and, indeed, it may even help to provoke it a bit (though be careful, as this may prolong the chaos phase). The art of change management is to get through denial quickly, and manage the anger and chaos phases as well as you can. Having to put through a number of change programmes myself, I found this advice very helpful. I would add that it is usually a good idea to take the time let the anger burn out before attempting anything complicated; that way the chaos phase is shorter and less damaging. The fact that the anger is burning bright now is not an unhelpful sign for the government.

The problem for the cuts-deniers is that there is no way out. Taxes on the rich have already been jacked up to beyond the point of sustainability (the 50p tax rate, capital gains tax, reforming pension taxes, the banks tax). It is absurd to think that we can pull in much more from clamping down on tax evasion; if it was that easy, Gordon Brown would have done it ages ago. Jacking up corporation tax will do nothing for jobs. The Keynesian argument may bring in Nobel prizewinners, but it doesn’t offer much comfort either. This runs that if the impact of the cuts is slowed down, the level of unemployment in the transitional period will be less, and this in turn will be less wasteful to the economy as a whole. The same cuts have to be made, only more slowly. Unless a private sector renaissance comes to the rescue, in which case extra taxes come in, which will stop the need for some of the cuts. That seems completely infeasible. It is a wonderful irony that those fighting the cuts are largely anti-capitalist, and yet only capitalism can save them. The fact is that either the “squeezed middle” gets squeezed even harder for more taxes, or the public sector has to suffer some fairly drastic cuts.

And here’s the political problem for Labour. To turf out the government they need the squeezed middle and the outraged public sector workers to gang up – but their interests are opposed. Nothing will stop the cuts. Not even a shock Labour victory in an unscheduled election later this year. The anger has to turn to depression.

And it is not a given that this will rebound on the two governing parties. For most voters, the world won’t end. Labour’s credibility problem will be cruelly exposed in any election campaign. If they want to restore the cuts, they will have to answer who is paying? If they don’t, they will be saying that the coalition was right all along. If the economy flags, as it well might, and the government doesn’t manage to cut the deficit as much as it plans, Labour’s dilemma will be all the more acute. They might be able to say “told you so”, but they won’t be able to restore the cuts.

Labour are trying to recreate the anger of the 1980s against Margaret Thatcher’s government. But this government is nothing like so reckless. Unemployment is still much lower – there no swathes of closed factories and coal mines. And Mrs Thatcher won.