Politics and Economics

by

Who are the “enemies of the people.”

When I was at university a book was published entitled “The Politics of the Judiciary” by JAG Griffith. It was immediately recognised as a classic work and indeed a new and revised 5th Edition was published in 2010. I though the book was brilliant because it played directly to my prejudices about the judiciary as being a part of the repressive apparatus of the state. Indeed the book does look at where the judiciary are drawn from and it is pretty clear they come from the upper echelons of the British class system.

screen-shot-2016-11-06-at-13-51-42A more balanced reading however reveals a complex story about the relationship between the judiciary and politics and particularly between the judiciary and the government of the day. At times judges appear to have acted as tribunes of the people, defending the little man against the might of the state, and at others intent on implementing the repressive spirit of legislation rather than simply the literal meaning of its letter.

What Mr Griffith’s book does is describe in a measured and authoritative way how the law and politics collide. It is an excellent rebuttal of the notion that judges somehow live in Olympian detachment from the affairs of mankind and bring to their deliberations minds free from all prejudice. This is a good thing. Judges, like all members of society are fallible and have all manner of irrational assumptions about the way the world works just like everyone else.

Because of this there are many ways in which the judiciary could be reformed to ensure a wider range of backgrounds and experiences are represented in its ranks, so that the frameworks of reference through which the job of interpreting and developing the law is widened. There are many organisations working at this and some progress has been made. That progress is painfully slow, for example, here we are, well into the 21st Century, and out of 106 High Court Judges in England and Wales, 22 are women. Mind it wasn’t until 1919 that women were allowed to enter the legal profession at all!

All of this is by way of introduction to the main issue. I hope to have indicated that I have moved from a position of seeing judges as lackeys of the bourgeoise state to a slightly more balanced view. One which recognises the legal system is not perfect, however also recognises that society needs an authoritative way of arbitrating the meaning of laws. The English legal system is the way we have all implicitly agreed that should be done. We might not always like the outcome and we may work to overturn the outcome in various ways through the democratic process. However, it is the basis of the rule of law that the judges interpret what the law says.

The judges have not said that Brexit does not mean Brexit. They have simply said that a law which was created by parliament cannot be revoked by plebiscite. Mrs May may be hopping mad that the court has not simply told her whatnews-papers she wants to hear but as Prime Minister she should have led the political condemnation of the attacks on the judiciary by the press. The Secretary of State for Justice and Lord Chancellor, Liz Truss, simply had her Department issue a statement which an A Level British Constitution student could have written. Of all people, serving politicians, should support the institutions of liberal democracy not collude in their undermining. And to be clear there is a huge difference between reforming and undermining.

In truth Mrs May should actually be thanking the judges for clarifying the issue now. We are already in one almighty mess created mainly by her party but what would it look like if Article 50 was exercised and then challenged in the courts? We are already destined to spend years trying to negotiate ourselves to a position which will probably be worse than we were in pre June. That aside, what would it be like, and what would it do to the credibility of our political system, if every step of the processes were bedevilled by questions of legality.

I am opposed to Brexit, indeed I hope we can still avoid exit from Europe. However, if the supreme court decides the court of appeal was wrong and Mrs May’s approach to the process is legal I will not be casting the judges as enemies of the people. Democracy is currently under threat, the rule of law is a key part of democracy. Those who suggest the judges are getting in the way of the people are undermining the rule of law. If they were to get their way the road is open the kind of demagoguery we are getting from the United States now with threats to use the legal system to put opponents in prison.

The legal system is imperfect, it does favour the status quo and it is implemented in the main by people from a very small part of society which enjoys many of the benefits of that status quo. But it is what we have at the moment to maintain the rule of law. We undermine its authority and legitimacy at our peril. It is those that collude in this which are the real enemies of the state.

by

Makers and Takers – Rana Foroohar

Ms Foroohar is a Time economic columnist and CNN global economic analyst who has written one of the most scathingscreen-shot-2016-10-31-at-15-14-50 books about the American finance industry I have read. It addresses the process of financialisation, a process as ugly as its name. In essence it is about the transformation of the banking sector from something that sustained Main Street businesses in a solid, if slightly boring way, to something which now dominates and, more importantly, sucks the lifeblood from the very businesses it previously supported.

One point which is worth stressing from the outset, Ms Foroohar is not anti-capitalist. She is one of a growing number of people who are supporters of free market capitalism but who are very concerned with the way it is evolving. As she states at the outset, Ms Foroohar is “…not in favour of a planned economy or a move away from a market system. I simply don’t think that the system we now have is a properly functioning market system.”

She begins by considering the way finance has expanded dramatically over the past 40 years and particularly how it has shaken off the shackles of post 1929 depression. One example is emblematic of the way banking has moved away from a highly regulated sector is a piece of legislation called Regulation Q. This prohibited banks from paying interest on current accounts and controlled the level of interest that could be paid on other accounts. Its purpose was to “prevent banks from competing too vigorously with one another … which might in turn push them into the sort of risky investments that had precipitated Black Tuesday in 1929.” The aim of this and other regulations like Glass Steagall was to ensure banking remained a “safe boring utility”.

This regulatory framework remained robust and effective throughout the 30’s, 40’s and 50’s. In the 1960’s however things began to change. Ms Foroohar illustrates the shift of the sector through the history of National City Bank which ultimately became CitiCorp, the classic too big to fail bank. Specifically she charts the career of Walter Writson the Chief Executive of Citibank/Citicorp from 1967 to 1984, one of the most influential commercial bankers of his time. In essence he wanted to move banking out from being a low risk, low profit, highly regulated sector to something much more glamorous.

Writson’s actions, in terms of challenging regulation, dreaming up increasingly complex products to get around the rules, increasing the leverage of the bank and changing the compensation structure were things that would be repeated across the sector undermining the commitment to regulation so that bit by bit it was repealed with Jimmy Carter deregulating interest rates (Regulation Q) in 1980 and then critically Bill Clinton repealing Glass-Steagall in 1999.

The result was an explosion in banks turnover and the development of increasingly sophisticated financial products and derivatives. This led to increasing  profit levels which in turn drove a series of behaviours to protect and develop those profits which were more or, increasingly, less legal. Even the activities which were perfectly legal changed the risk profile of banking and its relationship with the businesses it was supposed to be encouraging and generated enormous systemic risk which exploded in 2007/08.

Whilst the inherent risks of fractional reserves and complex debt instruments like Collateralised Debt Obligations, made famous by the credit crunch, are important, the less legal side of the industry should not be overlooked. It is a staggering fact the  industry paid £139bn in fines between 2012 and 2014 for: rigging Libor, insider trading and a great deal more (and of course this is just banks within the USA in a 3 year period!). In the massively profitable finance industry however the view seems to be that fines are simply another cost of business.

Over the period that the finance “takers” were in the ascendancy at the same time the business “makers” were under attack. The growing importance of finance was leading to the development of what some have called “quarterly capitalism”. This meant that stock price was everything and it had to move upwards every quarter. The heroes of shareholder value, like Jack Welch of General Electric (Manager of the Century according to Fortune magazine), came to be seen as the models for business leadership. These were people whose interest in engineering was more financial than mechanical. Ruthless cost cutting, getting rid of jobs and reducing investment in R&D to feed the ever demanding stock market.

Those businesses which did not employ the right staff to do this internally were targeted by what used to be called corporate raiders but are now more politely called “shareholder activists”. These individuals, like Carl Icahn, buy sufficient shares in companies to replace existing management with more aggressive mangers who will take the “hard decisions”, cut cost and increase shareholder returns. They may also sell off valuable assets or break up the company to extract value.

This might be seen as the kind of process that Schumpeter described as “creative destruction”, getting rid of the dead wood. However, a growing body of evidence suggests that the stripping out of value is actually undermining the economy not making it more efficient. Evidence is emerging that private companies, i.e. those that have not gone to the market and become public have better track records of investment in R&D, staff and capital and more critically long term profitability.

Public corporations are bizarrely now borrowing to fund shareholder dividends and share buy backs thus artificially pushing up the value of the remaining shares. Why borrow to do that? Like Apple, to avoid having to bring the massive pile of cash from profit you have made abroad back to the States where you would have to pay tax on it.  According to Foroohar corporations have invested around 10% of every dollar they borrow into their company and 90% into shareholder payouts. This means the role of stock markets has reversed. Instead of wealthy individuals investing in new productive capital, rather, companies have been making payouts to the wealthy individuals. This might be morally objectionable but more importantly it does not provide for sustainable capitalism. This is cannibalistic capitalism, its eating itself.

Over the years another phenomenon has emerged consistent with the old adage, if you can’t beat them join them. GE probably the most significant engineering company in the world, decided the finance department should become a profit centre. It created GE Capital which was to all intents and purposes a bank but not registered as one. Not just any bank, in 2013 the Financial Stability Oversight Council declared GE Capital to be a systemically important financial Institution and thus subject to Federal Reserve oversight. What could have made them come to this snap decision? Because in the 2007/8 crash it was bailed out by the American taxpayer to the tune of $139bn.

Ms Foroohar’s book explores the way “financial speculation is playing a greater and greater role in fueling volatility in commodities…”.  Since 2000 there has been a fiftyfold increase in dollars invested in commodity linked index funds. Several things are pointed to as having pushed this: Goldman Sachs creation of a commodity index fund; deregulation of commodity markets; the credit crunch that scared people out of stocks; and the $4.5bn QE exercise. This financialisation means that businesses now have to compete with their banks for commodities. If this sounds weird it’s because it is and one example makes the point.

Goldman Sachs bought up thousands of tons of aluminium which it then controlled the supply of. By doing this of course they were able to control the price and thus increase the value of their investment and any commodity trades that they had done in relation to aluminium. Whilst this was an issue for Coke Cola, in that it put up the price of their cans, the wider speculation in commodities had much more significant effects.

In 2003  big investors were putting $13bn into commodity index trading, by 2008 it had risen to $260bn. Over the same period the price of 25 commodities including cattle and heating oil increased by 183%. When asked whether institutional investors were contributing to food and energy price inflation the unequivocal answer given by Michael Masters, a hedge fund manager was “Yes”. This means speculators were gambling with products that meant people ate or starved, and many starved.

Ms Foroohar addresses the fact that many of the people and institutions that have been involved in this process of financialisation have benefited spectacularly with astronomical reward packages and profit levels. She goes on to review how they spend hundreds of thousands of dollars to avoid paying tax on their enormous earnings. She also looks at the phenomenon of the “revolving door”. This is the process whereby elected officials and appointed civil servants, charged with regulating the financial sector, move into their posts from the very sector they are regulating and move back into the sector when they retire from public life. She suggests the opportunity to sit on the Board of a large financial institution may colour the view of regulators whilst they are doing their job in the public sector. Whether this is true or not is increasingly beyond the point. Many Americans think it is true and that is what matters.

Financialisation is  one, if not the, most significant trends that has occurred over the past 30-40 years. Ms Foroohar’s claim is that it has sucked the lifeblood out of Main Street America, undermined investment in innovation and productivity and thus the future of the nation. Putting finance back in its place will not be easy. It means empowering the makers which would involve a genuine and major shift of power. Ms Foroohar sets out a sensible programme of reform. My concern is that people rarely give power back it is usually taken from them and the result of that is not always sensible. Lets hope this time it will be different.

 

Takers and Makers: The Rise of Finance and the Fall of American Business: R Foroohar. Crown Business 2016

by

“Martial Aid”

Given the nature of their engagement in “diplomacy by other means” it is perhaps not surprising that the most sensible comments on what ought to be the direction of foreign policy in the Middle East has come from a retired United States General. John R Allen was President Obama’s Special Envoy to the Global Coalition to Counter ISIS. Before that he commended NATO and US forces in Afghanistan from 2011 to 2013.

His analysis of the current situation in Syria, and the wider Middle East, sees victory over ISIS as a necessary response to an immediate threat. However, he believes military success on the battlefield will yield no lasting peace. Battlefield war will simply evolve into terrorism, or “war carried on by other means”. Worse, for those in the West, is that this might mean more atrocities on the streets of London, Paris and New York.

At the moment the major part of the conflict is elsewhere and the vast bulk of the resources of ISIS and their backers is devoted to a military campaign for territory. If that territorial battle is decisively lost will the leaders and ideologues of militant Islam give up? Will they recognise defeat and accept the status quo ante?

General Allen’s view is this is highly unlikely. Much more likely is a terrorist diaspora. Battalions of soldiers will go home or to some other part of the world and become dispersed cells of terrorists along the Al-Qaeda model. What is happening in Syria at the moment is a battle, which ISIS may well be losing. If they do lose the battle however, we should not think we have won the war. The problem will not go away it will simply relocate. This might be in the west or it may be elsewhere in the region causing another round of death, destruction and dislocation. The result of this will be even more people fleeing the region creating greater tensions in Europe as they attempt to find a safe haven.

The citizens of Europe and the United States are fed up with the endless turmoil in the Middle East. More they do not want to expend blood and treasure trying to solve what looks like an insoluble problem when they are being told they must accept another half decade of austerity. This general opposition is reinforced by a wholly reasonable belief that when it comes to wars in the region our political leadership are incompetent or duplicitous, or both.

It is clear that the Bush/Blair invasion of Iraq had no thought to what needed to happen beyond a successful campaign on the battlefield. Similar criticisms were levelled at Mr Cameron’s unclear war aims when he proposed the intervention in Syria in 2013.

The reality the region remains one, which has strategic importance for the west and will continue to do so for years to come. Clearly the supply of oil is a major consideration with more than 25% of the world’s annual oil production coming out of the area. Significant disruption of this would have an impact on the global economy and the living standards of millions of people.

The populations of the region are unlikely to stop in their struggle for political freedoms and, perhaps more importantly, economic progress. This will result in more conflicts, population disruption and emigration to regions perceived as safer and offering more opportunity.

The option of ignoring the problem, therefore, is not a practical one. However, continuous forays into the region to shore up one regime or change another is not a viable long-term strategy either. General Allen made the point on the Today Programme on 22 October 2016 that what is needed is a radical, long-term plan of engagement with the region. He recognised the challenge of securing this. He felt however that until we “embrace the enormity of the newness of thinking” required we shall be condemned to “interminable conflict” in the region which we can neither ignore nor avoid being dragged into.

What new thinking was he proposing? In essence something like the Marshall Plan. This was the provision by the United States of something in excess of $12bn (circa $120bn in today’s money) to help rebuild Western European economies after the Second World War. The ambition of this is not lost on General Allen. However, you can see that without something along these lines, which helps establish a dynamic economy in the region benefiting the vast bulk of the population peace is likely to be a pipe dream.

Clearly progress needs to continue to be made on the military and diplomatic fronts however a prerequisite of effective democracy is social cohesion and that is only possible when people have a stake and a future in the society they live in. This can only happen if there is a functioning economy which provides gainful employment to the majority of the people.

Recent years have seen massive destruction of cities across the Middle East. They need to be rebuilt. As Lord Stern makes clear in his recent book “Why are we Waiting” the next twenty years of infrastructure development are going to be absolutely crucial to determining whether the world meets its targets of constraining global warming to less than 1.5 degrees C.

It would make sense for the West to work together to help fund the reconstruction of those cities and to treat it as a demonstration of what can be achieved in terms of low-carbon development, management and maintenance of urban centres.

All this may sound hopelessly idealistic but we should keep in mind that between 2003 and 2009 the Iraq war cost the UK alone £8.4bn. Whatever happens we and the rest of the West are going to be spending large amounts of money trying to stabilise recurrent conflicts in the region. Eventually we will either reconcile ourselves to perpetual war and the insecurity this generates or face the need to try a radically different approach. There is no doubt this would require political leadership in the West of the highest order and to be fair that doesn’t look likely to arise any time soon.
General Allen has pointed a way forward. He recognises this is a generational strategy not a tactical deployment between elections. Investing in this would support building the economies of the region, create employment and save millions of lives from the blight of war. It might also contribute to saving the planet. It must be worth a go.

by

Why is Trump so popular?

Ok maybe his star is waning. Maybe he has crossed one norm that alienates him from the majority in the United States, commitment to the democratic process. However it cannot be denied that, for a bombastic, demagogue who has cornered the market on phobes, (Zeno, Homo, Islama etc.) and has all the charm of a lounge iguana, Trump has tapped into a genuine and substantial vein of discontent.

The 2016 election may well come to be seen as a portent of things to come. Two years ago the idea that an avowed socialist would give Mrs Clinton such a run for her money in the Democratic primaries would have been laughed at. Similarly, who thought Donald Trump could become the Republican nominee, and what is more, run Mrs Clinton a tight race despite a whole number of increasingly outrageous comments.

I suspect after the race if Trump loses there will be analysis to demonstrate that he was never going to win given the basic demographics of the States. Even if this is true there is no denying his popularity amongst a large swath of the American public. More, his radical agenda might have got even more traction, including amongst traditional Democratic supporters, if he were not such a bafoon.

Mrs Clinton made the mistake of consigning half Trumps supporters to the “basket of deplorables”. This was not just a tactical, PR mistake it was a theoretical error. Whilst I have every confidence some of his followers are thoroughly objectionable people, his popularity goes well beyond that small substratum of society. There is genuine depth to his support, a depth which has been generated by tectonic shifts in America’s political economy that have been happening over decades, perhaps half a century. Each year, a small, almost imperceptible, but definitely detrimental, change in the position of the American Middle Class, and specifically, blue-collar workers.

It is a process which Ryan Avent claims began sometime in the 1970’s and is not about the periodic cycle of economic boom and bust. It is a secular decline in the relative position of labour in the distribution of income and wealth. The post war era was a boom time for the vast bulk of the American population. Between 1947 and 1972 real wages in the US rose by between 2.5% and 3% per annum.

From the 1970’s however, the rate of increase of real pay declined to an average of less than 1%. Up to the 1970’s workers pay rose broadly in line with the increase in productivity. From the 1970’s onwards however productivity growth slowed. Pay however, faired even less well, between 2005 and 2014 productivity increased by about 1.4% per annum, about twice the rate of real pay increases.

Avent goes onto make the point that even the poor performance of mean average real wages does not capture the reality for many Americans. “Median wage growth, or growth in wages for the American in the middle of the distribution, did far worse. Indeed, since 2000 the real wage for the typical American has not risen at all. Looking further back does not much improve the picture either; since 1980 the median real wage is up by only about 4%. Not per year, but over the whole period. And if you then focus in just on the real wage of the median male worker, the duration of the stagnation extends back into the 1960’s”. (1)

The picture painted by Avent of stagnating incomes for the majority of the population has been well documented in a range of book over the past few years. Robert Stiglitz(2) , Hacker and Pierson(3) and, of course, Thomas Picketty(4) have screen-shot-2016-10-23-at-14-58-44all pointed to this phenomenon and its role in increasing the levels of inequality in America. Typical is the “U” shaped graph showing Income inequality in the United States 1910 – 2010 in Thomas Picketty’s book Capital in the 21st Century. This charts the high levels of inequality in the first 40 years of the 20th Century followed by the dramatic reduction in inequality from the period after the second world war, then an accelerating growth in inequality since the 1970’s to levels not seen since the late 1920’s.

Given this gradual but enormous change in the position of middle class America it should be no surprise that people are frustrated and angry. The frustration arises out of the narrative that says this process is an inevitable result of progress. Opposing it is a luddite response to the course of history and in due course a whole load of new jobs will come along to take up the slack. The problem is the new jobs that have come so far are low skilled, low paid and very precarious.

At the same time people can see corporate and financial leaders taking enormous salaries, many multiples those of their predecessors at a time when GDP growth is lower than it used to be. Worse the people that take these enormous salaries seem to be able to secure them through location rather than performance. Whatever the results of the company the salaries of those in the C suite go up.

Worse yet when exceptionally highly paid people in the finance industry bring the economy to its knees, costing thousands of jobs and homes they are bailed out by the very people whose lives have been devastated, the tax payers. The people who arrange these bailouts as public officials later move on to work in the very institutions that have been saved. In these circumstances you can understand why the ordinary American is highly cynical about the ability of the existing political system to bring about change in their favour. This is why Mrs Clinton is struggling. She is perceived as too close to the traditional political machine and worse, Wall Street.

America may have averted a tragedy if they avoid the election of Donald Trump but they should not think they have avoided a crisis. It is not going to be politics as usual even if Mrs Clinton secures the White House. Radical change is needed in the States. There are a number of systemic problems that need to be addressed which would involve a real shift in the distribution of power. If Mrs Clinton can achieve this she will go down as one of the great US Presidents. If she cannot, and I am not optimistic, America, and therefore the rest of the world, are in for a very challenging time.

 

 

 

 

(1) Ryan Avent The Wealth of Humans: Work and its absence in the Twenty First Century. Penguin Random House 2016

(2) Joseph P Stiglitz The Price on Inequality Allen Lane 2012

(3) JacobS Hacker & Paul Pierson Winner Take All Politics Simon and Schuster Paperbacks 2011

(4) Thomas Piketty Capital in the 21st Century Harvard University Press 2014