Politics and Economics

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Labour Pains

Two emotions contend with each other when I think about what has been happening with the Labour party over the summer, depression and exasperation.

We live at a time when inequality is spiralling out of control, when technology is providing a challenge to employment way beyond what any self respecting luddite could have dreamt of, when the demographic time bomb has stopped ticking and started exploding and when climate change threatens the existence of the planet. Worse, in 2007/08 we had an object lesson in the frailties of neo-liberal orthodoxy when the financial markets imploded.

Given all this it is astounding the main party of opposition cannot engage the public with an effective narrative of the need for radical change. Why is this? I think there are some deep-seated issues but also some very practical matters. Starting with the latter.

Why was the Tory rewrite of history not contested after the last election? How did the massive increase in public debt become a result of Labour profligacy and not the complete failure of the banks due to a combination of derivative hubris, non-existent governance, inappropriate risk management, avarice and downright law breaking?

The tone and seriousness of the Tory position was set from the moment the Liam Byrne letter was released and used in a carefully crafted and constantly repeated barrage of misinformation. Perhaps an exhausted administration felt opposing the line given by a newly elected government might alienate voters for the future. It was a mistake, as trying to oppose a picture, which has had 5 years to sediment into the popular mind, is very difficult if not impossible.

But what are the more deep-seated issues to be addressed. This is more difficult and no doubt there will be theses written on this in due course however there is clearly a problem with the level of engagement with the core labour vote. One picture of this is that floating voters are scared of “the left” and “socialism” and in order to win and be able to do anything at all it is important to tack away from policies perceived as “extreme”.

Mr Mandelsen and other New Labour adherents talk about the need for “grown up” politics where the focus has to be on the need to win an election. It is difficult to disagree with that. On the other hand if the focus is on winning as an end in itself then it may actually become the biggest handicap to achieving success.

From a distance unfortunately it looks like a London centric cohort of Labour leaders are so busy trying to suppress the radical agenda of yesterday they have failed to notice that there is the need for what might be an even more radical agenda for today.

Much of Jeremy Corbyn’s agenda might be caricatured as old left. It has however excited and engaged many who have been turned off by politics and politicians. It perhaps says something about their appetite for something more than the half digested and regurgitated pap that is the stuff of focus group politics.

The spectre is raised that Labour will never get elected under Mr Corbyn. This may be the case, but what makes people think that Labour can get elected with leaders offering austerity-lite? Austerity–lite is always vulnerable to the charge that it is not austerity at all and if the country is convinced that austerity is the solution why vote Labour when you can have the party that does austerity really well.

There are a series of issues which have been evolving over the past 30 years, inequality, demographics, info/techno-automation, globalisation and perhaps most significant of all climate change. The responses to all these have so far ranged between inadequate and totally inadequate. They all raise profound economic challenges that go to the heart of the current model of capitalism. They are increasingly recognised by a wide range of economists, political theorists and social commentators far beyond the “workers revolutionary” fringe that some might try to imply.

Whether Mr Corbyn gets elected or not his success to date in galvanising a very broad spectrum of people needs to be recognised. The Labour party needs to rethink its policies across the board and consider whether it is addressing the needs of a) the people that have traditionally relied upon it, the poor, the weak, the powerless; b) those whose opportunities are starting to become more and more constrained, the 90%, and c) the population of planet earth.

If this sounds a touch apocalyptic it is meant to. We seem to be heading into the perfect storm at the moment with Mr Magoo at the helm. There is a very radical agenda to be addressed and articulated for the challenges of today. The Labour Party should be doing it. It has failed to do it to date. It needs to gain the courage of its historical convictions and do it now. Not because it is an election winning strategy (although I think it is) but because it is right.

Mr Corbyn, whether he becomes leader or not, may have acted as midwife to a reborn Labour Party. If he does then he has done us all a great service.

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What has changed? Reparations and Debt

The more I read John Maynard Keynes the more I think he must have been as humane as he was intelligent. His “Essays in Persuasion” start with a number of articles written in 1919 criticising the Treaty of Versailles and specifically the proposed reparations to be paid by Germany to the Allies.

He starts by analysing the state of the German economy and what, with a series of optimistic assumptions, it might be able to afford as an annual reparation payment. He arrives at £100,000,000. But even in relation to this figure he says, “…I doubt if Germany could be made to pay this sum annually over a period of 30 years…”.

Taking this figure he then computes the current value of the thirty years of payments and arrives at a figure of c£2bn as a “safe” maximum figure. Again he qualifies this  by saying that whilst it is a theoretically possible number it would actually be unlikely to be achieved. He then goes on to challenge how proposals for what would amount to £8bn or even £5bn could be sustained. He castigates the Treaty however not only for being economically impossible but also for being morally repugnant and dangerous. As he puts it:

“The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe.”

His words in 1919 were incredibly prophetic as is now well known. The Treaty and its impossible terms fed into a process which would once again unravel Europe in the most shocking way.

I appreciate that most of the above is well known but it is interesting to call it to mind in the current circumstances and the quote above is certainly worth reprising.

By 1921 the mood had changed and it was becoming clear that the Reparations Chapter in the Treaty of Versailles was beginning to crumble. In one of the essays of this period Keynes talks about the way “inside opinion” had accepted from the beginning the main conclusions he had set about the Treaty. In this context he challenges the lack of political leadership. He sets out what he takes to be the modus operandi of politicians in a democracy as follows:

“It is the method of modern statesmen to talk as much folly as the public demand and to practice no more of it than is compatible with what they have said, trusting that such folly in action … will soon disclose itself as such, and furnish an opportunity for slipping back into wisdom.”

There are many times one thinks this might be the explanation for an inexplicable political position. I can think of no other reason Harriet Harman would say the Labour Party should vote in favour of benefit cuts to working people and perhaps this is what Angela Merkel’s defence would be in relation to Greek debt forgiveness.

Back in 1921 Keynes distinguished the inside and outside opinion. The outside opinion is that of the public, voiced by politicians and the newspapers, whereas the inside opinion is that of politicians, journalists and civil servants expressed in limited circles. In other words the former was the folly the public demanded whilst the latter was what the politicians and others really thought. The belief being that such outside views would prove impossible to implement and therefore eventually the public would come to wisdom on the issue.

In Keynes view this was a dangerous mistake and meant that the outside view was simultaneously given too much attention and too little. Too much because it was regarded as unchangeable and impervious to rational argument. Too little because it assumed because its policy proposals were impossible they would ultimately create no harm. Failure to challenge the outside view when it is wrong is a mistake. It was in 1921 and it is now. In 1921 it sustained an iniquitous approach to reparations which were clearly impossible to maintain, now it is creating untold harm to a nation with an outside opinion that the Greeks will pay back the Debt.

 

 

 

 

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Economics After the Crash

After the director of research at the London School of Economics explained to Queen Elizabeth the origins of the 2007/08 credit crunch she asked “..why did nobody notice?” A simple question, but one which challenges not just failures of individuals but systemic failures of the science of economics. There have long been jokes about the uncertainty of economics but the failure of the profession to provide any indication of the scale of the problem that hit the US and then the rest of the world in 2007/08 challenged the very foundations of the subject.

Since then there has been a lot of rethinking and indeed some identification of trends which preceded the crisis that suggest a new “normal economics” which may render standard fiscal and monetary responses to recessions inadequate. Close to the heart of the crisis was Lawrence Summers,  as Director of the Economic Council for President Obama he shaped much of the policy response to the Great Recession. In late 2013 he reintroduced the concept of “secular stagnation”  originally coined in 1939 by Alvin Hansen in his address to the American Economics Association. Hansen’s argument was that certain factors (the lack of technological innovation and population growth) had created a context where low rates of growth would be the norm going forward.

Whilst a war and the reconstruction of Europe proved Hansen wrong there is real concern similar issues are now in play and set to create a new low growth norm. The issues around secular stagnation have been explored in a series of essays brought together in “Secular Stagnation: Facts Causes and Cures”. Whilst there is a variety of positions taken this collection of essays does contain some consistent themes.

Aggregate demand is seen as weak and with interest rates at the zero lower bound there is not much scope for monetary policy to stimulate investment. Demography with population growth slowing and life expectancy increasing the dependency ratio is set to increase across the world. In other words the number of those being kept by those who are working is set to increase.  High levels of public debt support austerian policy positions limiting the scope for debt funded public investment. Limited potential for technological innovations that are truly generically transformative like the steam engine and electricity.

Clearly each of these is subject to debate and argument. An additional one is the issue of inequality. This is seen as having been on a dual path. Internationally, levels of inequality have been declining as developing nations, notably China and India have integrated into the global economy. Intra-nationally, however, inequality has been increasing across the world. Wealth and income has become ever more concentrated in the hands of the 1% indeed even more so in the hands of the 0.1%.

It is not moral concerns of fairness that are the principle issues under discussion. Consumer capitalism needs consumers. If wealth is too concentrated then effective demand in the economy may be undermined. Added to this economic concern is one about the extent to which a modern democratic society can operate effectively if wealth starts to dominate the body politic. Stresses may start to build which the political process does not seem to be able to deal with, leading to dissatisfaction, cynicism and ultimately disengagement.  Democracy may not be the best system of government but it is the best system to avoid getting the worst system of government.

Economics as a subject is in as much a turmoil as the phenomena it studies. There are many who think the global financial system created over the past 30 years is inherently unstable. If this is the case there is much to fear in the future as it is this system which animates an underlying economy which itself now appears to have a series of structural challenges to overcome. One ray of hope is a renewed interest in the notion of political economy. A view point which does not think The Economy is “a thing”subject to laws of rational agent utility maximisation. Rather it is a space which is rational and irrational to shifting degrees. Where different groups contest for power and advantage and where  today’s orthodoxy can quickly become yesterday’s prejudice. Perhaps most important of all it is an area susceptible to rational policy interventions. It is not and should not be ruled by the TINA theory because there are alternatives.

“Secular Stagnation: Facts Causes and Cures” is an excellent review of key current issues in economics. It is available on line at:  http://www.voxeu.org/content/secular-stagnation-facts-causes-and-cures

 

 

 

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What is good about the UKIP results?

For the main UK political parties the 2014 UKIP local election results are a challenge which they are unsure how to deal with. Do they cast UKIP as racist and risk being attacked as out of touch with the problems of ordinary people. Or do they attempt to recognise the valid concerns UKIP is thought to have identified? When asked about UKIP politicians from all the main parties choose their words with the same level of lawyerly care that Bill Clinton did when asked about his relationship with Monica Lewinksy. They also look about as comfortable as he did.

Crudely one might ask whether UKIP has tapped into a rich vein of base racism which they transform into a respectable concern about the strain on public services and dilution of British culture? Clearly they do seem to have found a mother load of electoral support however I believe it is more profoundly driven than a concern with too much immigration. I fear there is a much deeper malaise in British society, one which is connected to global as well as national trends where fears about immigration are symptoms not causes. Trends which are making life more and more uncertain for millions of people.

For something  over thirty years now there has been a process of growing inequality in the UK. Thomas Piketty’s recent book charts what he sees as a global process concentrating wealth and income in the hands of fewer and fewer individuals. This has largely been at the expense of the middle classes whose living standards have at best stagnated over this period of time.

One of the processes which is seen to have contributed to this concentration is the development of the “winner take all” model in more and more areas of life, and the growth of the “super managers” particularly in the financial sectors of the economy. In  the 1970’s the top 1% of earners captured 10% of national income in the US, now their take is around a third.

It is, of course, this highly paid cadre of super intelligent financiers who developed the sophisticated financial instruments which were intended to diversify away risks on securitised loans. Collateralised Debt Obligations, Credit Default Swaps and such like. For those of us that did woodwork the clue was in the names of these instruments – “debt” and “default”. At bottom if you lend money to people who cannot afford to pay it back the wheels are going to come off however complicated the financial alchemy is you build upon that foundation.

When the wheels did come off in 2007/08 the groups who had to pay the price were the taxpayers, by that I mean the PAYE tax payers and more specifically the ones without an army of lawyers and accountants between them and the inland revenue. Western economies were brought to their knees, hundreds of billions of pounds had to be provided to bail out financial institutions and the term austerity was elevated to a policy reigning back the welfare state that had done so much to improve equality over the 20th century. Contrition amongst those who were most responsible was thin, accountability virtually non existent. No sooner had the crisis been stemmed than bankers were telling us that we needed to “move on”. “Moving on” meant getting back to annual bonuses equivalent to the lifetime earning of those on the average wage.

Even as it became clear that the people who had created these financial weapons of mass destruction had failed to consider the “black swan” risks that might be associated with them, and those that had allowed them to be applied at scale had very little understanding of what they were or how they worked, the level of public outrage appeared strangely muted.

Since the credit crunch scandal after scandal has come to light as we discover that LIBOR, Forex and Gold markets were rigged. Unnecessary insurance products sold to millions of people, sophisticated interest rate swaps sold to businesses which were then driven into liquidation by the rising costs of the products and in some instances, it is claimed, bought at distressed values by the very banks that sold them the swaps. Banks were even found to be laundering the money of drug barons!

Even after all this the impetus for re-regulation of the banks is being undermined by arguments about the need to protect one of our most important industries, we must not kill the golden goose. Beggar-my-neighbour tax reductions for corporations and those on ultra high salaries we are told will reward talent, inspire innovation and attract jobs to the UK. Whilst it is rarely challenged in the popular press it should not be assumed that the population miss the fact that whilst rich people need more money to be motivated poor people need less. And it is strange that lower taxes should inspire companies to come to Britain when they arrange their affairs so that they don’t even pay them.

One might think that the public are suffering from shock fatigue. You worry that if financial analysts were found to be discerning the trends in the markets from the entrails of freshly sacrificed babies it would generate no more than a weary shake of the head. The stoicism with which the cuts to the welfare state have been accepted must have surprised even George Osbourne. The limited challenge that has been mounted to date should not, however, be seen as acceptance. These issues are moving the tectonic plates of public opinion. On the surface little may appear to be happening but deeper there are strains building which will at some point be released.

Ukip have created a fault line. They speak to the pain that the population are experiencing now and the deep unease that they feels about the future. For the elderly it is the fact that their savings are being eroded by effectively negative real interest rates, for the middle aged the date they can retire is receding, for those who work in the public sector redundancy looms, for those in the private sector their terms and conditions worsening with zero hour contracts,  all are finding their incomes declining in real terms, and young people if they can get a job certainly cannot get a house in large parts of the country.

To change my metaphor, there is a lot of tinder lying around and Ukip are providing a spark. Furthermore I think the major parties should not assume that the first past the post voting system for the 2015 general election will douse the Ukip torch. People are hurting and want out and Ukip seem to be offering them a route. Ironically they are tapping in to precisely what Nick Clegg tapped into 4 years ago.

This is not just an issue in the UK. It might seem strange to put UKIP, Occupy Wall Street, the Tea Party, and sundry proto fascist and extreme left groups on the continent together but they are all expressions of growing frustration with the way the economy is being shaped and the social and political consequences of this. The catalyst may be immigration but as I have argued the causes are far more pervasive and deeply rooted. Unless these are addressed closing our borders will provide a temporary and unedifying distraction. To be clear Ukip does not have the answer indeed they are not even addressing the right question.

Technology and globalisation are setting life defining challenges for us. Some argue that these are forces which it is pointless, indeed counterproductive, to try to shape. They accept they can often cause “dislocation” but go on to argue that the evidence from the industrial revolution and the developing economies is that eventually everyone is better off. Unfortunately, there are increasing signs that innovation is not always tied to productivity increases nor grow to the increase in new quality jobs.

One example,  I accept crude, of the future we may face is provided by Citigroup. They have advised clients to structure their investment portfolios around the growing consumer power of the super rich. They think “…the world is dividing into two blocks – the Plutonomy and the rest.” They see the economy as an hourglass with a smaller and smaller number of super rich consumers of luxury items,  (yachts and jets) at the top. And for a the rest…? The future is Poundland.

This picture of the future is not good for anyone. What we lack are politicians that have the nerve to articulate a different vision. One which challenges some very powerful vested interests and indeed at times contradicts some of the bar room certainties of public opinion. To be clear, I believe, a future which needs to remain committed to a free market system with private property rights and inequality of rewards. However, inequality within bounds that are rationally debated. The clock is ticking for a considered and structured response to these issues the alternatives are in no ones interest.

Back to where I started, what on earth can be said in favour of people voting for Ukip?  Grasping a positive from this it shows that, despite regulations and laws being made which seem to be tailored in the interests of the minority, despite the obscene salary levels being paid to an industry that nearly destroyed the western economy, despite the frailties and venality of some of todays politicians some people still have faith in democracy.  From what I have said it will be clear that I think the faith in Ukip is totally misplaced however the recourse to democracy when you are hurting is something we must strive to support.