Economics
I had this on Labour Uncut a few weeks ago.
The Labour front bench might not welcome advice from retirees, no matter how dignified. But they’ve got some. “Be a little bit more interesting”, said Peter Mandelson, in response to a question at a recent Progress event. National recovery from the major economic crisis of recent years requires big, bold ideas. He wants Labour to rise to this challenge.
This is the stuff of pragmatic radicalism on economic rebalancing. Pragmatism demands workable solutions to national concerns. The support that politicians, of all parties, proclaim for rebalancing the economy indicates that this is such a concern. The persistence of the imbalances in our economy – between domestic consumption and exports; finance and manufacturing; the south east of England and much of the rest of the UK – attest that this support is inadequate to purpose. A dash of radicalism is needed, for not only rebalancing to be achieved, but for Labour’s arguments to cut through the white noise of mainstream politicians professing support and delivering so little.
Many more elected city mayors are the stuff of this radicalism. Our top heavy state is a drag on economic performance. Elected city mayors are the next step on the devolution journey begun by the last government. The centre for cities and the institute of government recently called for their powers to be beefed up – through, amongst other things, chairing integrated transport authorities and co-chairing local enterprise partnerships. The common sense of people in cities voting for their leaders and retaking command of their destinies should be a truth loudly proclaimed by Labour – as should be the common sense of rewarding hard work.
The tax system can further help to make us into a nation of grafters. This means less tax on income and more on wealth. A land tax could form part of this transition. It would do something to dampen the British tendencies towards property speculation and bubbles. It might also form part of a Labour drive towards tax simplification. Because taxation of land is simple, it would be difficult to avoid.
Labour could win friends from UK uncut to the CBI with a considered drive towards tax simplification. UK uncut should appreciate simplifications that make tax harder to avoid and the CBI should value simplifications that support economic growth. A land tax offset by reductions in taxation on employment would reduce the capacity of the rich to avoid taxation and increase the extent to which everyone keeps the fruits of their hard work. Tax simplification should not be owned by the right. Nor should backing for dynamic financiers and entrepreneurs.
Labour should insist that the Vickers review ends with rock solid retail banks. These, and an expansion of our credit unions, are needed to support household saving. This isn’t just important for households themselves, but to generate funds to be recycled by financiers as investment in firms. Alongside this we need a flourishing of nimble financial services firms prepared to provide capital to enterprising SMEs. Such small businesses must be developed in green manufacturing but they will be more likely to do so if a credible price for carbon can be established.
At the moment this price comes from the ineffective EU emissions trading scheme (EU-ETS). Its failure merits much stronger condemnation, which should come from Labour. It either needs meaningful reform or replacement by a carbon tax. Either approach should be taken forward at the EU level, rather than in the form of the cack-handed move towards a carbon price contained in budget 2011. The likes of Bill Cash bar sensible policy from David Cameron on this. The prime minister is unable to lead in Europe but securing a robust carbon price should be part of the more tightly focused Europe that Labour champions.
Most immediately, the eurozone needs to face up to the tough choices of its on-going crisis. The EU also needs to recalibrate itself to our Asian century. The turbocharged development of the BRICs (Brazil, Russia, India and China) and similar does much to explain the expectation of Gerard Lyons, chief economist at standard chartered, that the global economy will at least double in size between now and 2030. Europe, though, will be in the slow lane unless trade links deepen with the rapidly developing world.
This means more EU activity where it can add value – a properly functioning EU-ETS, completion of the single market in energy, and a sticks-and-carrots offer to all Mediterranean countries equivalent in ambition to that given to eastern Europe on its transition from communism – and much less where it provides little but muddle and duplication. Subsidiarity needs to be taken much more seriously. Not just in terms of Brussels deferring to member states, but to regional and local bodies, such as elected mayors, and, in turn, to communities and individuals themselves.
This hard edged devolution would be driven by a sense of mission. This is what fires the best of the private and public sectors. It’s making Apple great that motivates Steve Jobs. The profits are a by-product. The Steve Jobses of a reformed British state have to be Labour politicians. The government are u-turning themselves into an ever decreasing circle of failed reforms and unfulfilled ambitions, and not least among these is their commitment to economic rebalancing.
Labour can do better. And we will be very “interesting” indeed when we do so.
This is a shortened version of an essay that appears in the new Pragmatic Radicalism publication.
Jonathan Todd is Labour Uncut’s economic columnist.
Here is something I had on Labour Uncut about banking reform.
It’s only when politicians have bored themselves through repetition that their message begins to hit home with their audience. I’ve heard this dictum attributed to both Gordon Brown and Peter Mandelson. Its genesis is of less practical consequence than the reality that Labour’s message of too deep, too fast is now hitting home.
The debates around the causes and management of the deficit are complex. The simplicity of Labour’s message overcomes this. The arguments to which today’s publication of the interim report from the independent commission on banking will contribute are also highly technical. Labour requires a straightforward, powerful line that resonates amid this detail.
This should be that we are for the whole country, not just the city. We’re not banker bashers. We’re with Kitty Ussher on the short-sightedness of that. But the financial sector isn’t presently delivering to the extent that it could for the rest of the country. It’s one of the few sectors in which the UK can claim true global leadership. Labour recognises and celebrates this success.
However, unlike George Osborne, we do not interpret this prowess as a carte blanche for the sector. What is in the best interests of the city of London is not always in the best interests of the UK economy. The flawed assumption that these interests are aligned has driven policy since Margaret Thatcher and Osborne cannot see beyond this.
President Eisenhower asked the president of General Motors, “Engine Charlie” Wilson, to become secretary of defence in 1953. At his senate confirmation hearing he was asked whether he could make a decision in the interest of the US that was adverse to the interest of GM. Wilson reassured that no such conflict could arise.
“I cannot conceive of one because for years I thought what was good for our country was good for General Motors, and vice versa”.
Osborne is a later day Wilson. Blind to competing interests between one sector and the country as a whole. Of course, for the most part, but not always, what was good for GM was good for the US. Profits for GM meant jobs and wages for Americans. At the same time, finance does many things that are in the interests of the UK. Dorset, for example, is very grateful for J P Morgan, its largest private sector employer.
Labour doesn’t deny these benefits. Likewise we don’t deny the need for public sector cuts. But there is a world of difference between prudent fiscal management and an ideological assault on the state. Similarly, acknowledging the benefits of finance is quite different from not asking the questions that Osborne doesn’t want to ask: have our banks both ceased to be too big to fail and been reformed such that they will not again need state bailouts? Are large bonuses indicative of excellence or a lack of competition? Is competition adequate to ensure the best service to households and businesses? Are we maximising the extent to which the banking sector complements the rest of the economy?
It is this final question that allows us to pivot from today’s report to the growth debate. Both the banker-bashers and Osborne offer different kinds of either/or approach. Either we bash the banks to pieces or they will eat us, in the first case. Either we leave the banks alone or we’ll kill the goose that laid the golden egg, in the latter.
Both these extremes are false choices. The golden egg, for one thing, isn’t so golden when the goose can only be sustained by enormous subsidy. For another, the goose will stop laying any eggs if it is bashed to smithereens. The eggs on which we are keenest are those in the form of industries able to be new sources of comparative advantage in our Asian century. Little will be more important to our long-term growth prospects than our development of firms able to trade with and tap into the rapidly increasing wealth of Asia.
We need to stop thinking of Asia as somewhere that we outsource to and start seeing it as somewhere that we sell to. UK PLC needs a major reorientation. The financial sector should be greasing the wheels of this transition to the fullest extent possible. For government, out of deference to the city, to fail to apply whatever policies best encourages this would be for government to succumb to producer capture. Exactly the same vice as bedevils Andrew Lansley’s NHS reforms.
We want to put the patient, not the doctors, first in the NHS. Equally, the interests of the bank’s customers should always be a higher policy priority than those of the banks themselves. Only then will government be acting for the whole country and not just a sectional interest.
Truth is finally beginning to be told to the Murdoch empire. To which Jeremy Hunt will doubtless remain tone deaf. Another set of vested interests and concentrated power may have also reduced Osborne. But today we demonstrate that we are neither producer-captured nor bank bashers, but in touch with the real needs of households and business.
I had this on Labour Uncut last week.
There is a piece of land registered on Landshare in every postcode in the UK. If you stacked every film shipped weekly by Netflix in a single pile, it would be taller than Mount Everest. The value of goods traded annually on ebay is more than the GDP of 125 countries. Bike sharing is the fastest-growing form of transportation in the world.
Something is going on here. And Rachel Botsman and Roo Rogers think they know what it is: collaborative consumption. Defenders of the big society have latched on to the decentralised, networked mega-trend that Botsman and Rogers describe in their book, “what’s mine is yours – how collaborative consumption is changing the way we live.”
After Botsman gave a version of her stump speech at the RSA last month, I asked whether this trend contains any lessons for Labour. She was, understandably, reticent to politicise her baby. The big society shouldn’t be owned by any political party, nor should collaborative consumption, she told me.
Of course, she’s right. The civic institutions that are supposed to make up the big society were around long before David Cameron tried to destroy them. And collaborative consumption is too nebulous a concept for any politician to convincingly declare it their passion. I’m not even sure that it adds up to a unified idea. There are, however, elements of Botsman and Rogers’ argument that hit upon some truths that Labour should absorb.
They claim that people are sharing again and creating three distinct kinds of consumption: product service systems (PSS), redistribution markets and collaborative lifestyles. Both what we consume and how we consume are changed by these systems. But do not worry. We are not all turning into hippies. Self-interest remains the prime driver, with improved social outcomes a mere by by-product.
Netflix is a popular PSS model because people want to watch films, not collect DVD boxes. Access is the privilege; ownership is the burden. As Robin Chase, founder of Zipcar, another PSS variant, says: “It’s the car your mother said you could never have. When you are not using it, it is someone else’s problem, and who cares”. As well as being more fun, access tends to reduce carbon emissions. Think of the carbon saved from all the DVD boxes not manufactured for Netflixites and cars un-owned by Zipsters.
Ebay, freecycle and craigslist are well-known illustrations of redistribution markets. It is the desire to buy, sell and swap used goods which creates these markets. But, as this occurs, carbon is saved that would otherwise be emitted in manufacturing new goods. These markets also build trust amongst strangers, because market participants know that their behaviour today will affect their ability to trade tomorrow. Ebay buyers, for example, want to buy from sellers with positive feedback ratings, so negative ratings limit the ability of sellers to trade.
TimeBanks USA, an enabler of collaborative lifestyles, has been described by its founder as “a time machine taking us back to an age when we knew each other and trusted one another”. Time banks exist all over the world and all apply the same principle. For every hour you spend doing something valued by someone in your community (cleaning their gutters) you earn a credit to be banked at an online portal and spent on things you value (Spanish lessons). Participants are incentivised by accessing something they want. But 72% of time bankers report that participation gives them a stronger sense of community.
Irrespective of the collaborative consumption model, people are sharing because it serves their self-interest. Our bread should never depend on the benevolence of bakers. Enhanced sustainability, trust and community spirit can, however, be achieved, as people follow their self-interests through consuming collaboratively. This isn’t to say that people are completely uninterested in these social outcomes, as the MyBO activity tracker illustrates.
This tracker was designed by Chris Hughes, a co-founder of Facebook. He only works on projects that will have “far-reaching social and life-changing impact but that are also fun, modern and smart”. Those who opened trackers shared a belief in a particular outcome: the election of Obama as US President. But they also wanted the fun of the interactive game that was enabled by the tracker. The more fun they had the more campaigning they did. If we want to change the world, we may not succeed unless we make the journey fun, modern and smart (does this sound like your latest Labour party meeting)? Total abstinence and a good filing system were never the right signposts.
Labour is increasingly winning the argument that the big society cannot fill the gaps left by the government’s cuts. We are right to stress that it isn’t an either-or choice between state and society, but a question of what state and society can achieve together. However, to fully win this argument we need to paint a more vivid picture of the kind of reformed state we favour.
Such a state would harness the tools of collaborative consumption and direct them towards our Labour goals. Libraries could incorporate hubs for time banks. Transport authority websites might put driving commuters in touch with others making the same commute and interested in car sharing. Sure starts could host markets for exchanging used children’s clothes and toys. Local authorities might open up public land to community groups through Landshare.
Many small changes of this sort will be required to make the state fun, modern and smart.
I had this on Labour Uncut last week.
“Is not the lesson from the noble Baroness Thatcher that, when you have set an economic course, you should stick to it – ‘there is no alternative’”?
So asked Jacob Rees-Mogg at PMQs recently. The IFS cautions “a Plan B might be needed, potentially involving some reduction in the size and pace of cuts in the structural deficit”. But David Cameron knows best. He did not demur from the insufferable Rees-Mogg.
But for what did Thatcher think the grinding unemployment and dislocation of the 1980s was a price worth paying? Low and stable inflation. The NUM was, she thought, the enemy within and the wage/price spirals of the 1970s were part of the damage they wrought. She was right that high inflation is no basis for a dynamic economy. But her policies didn’t deliver this. In his memoirs, Nigel Lawson concedes that he should have raised interest rates in 1986. Instead, with a general election looming, he offered tax sweeteners. Inflation topped 8 per cent by 1988.
It wasn’t until Labour took politics out of monetary policy by making the Bank of England independent that the inflation dragon was slain. Now politics is back at the Bank and so is inflation. Not that Mervyn King’s grovelling praise for George Osborne’s ideologically-driven deficit reduction strategy has caused inflation to be persistently above target. But that that is not his job. The governor’s remit is to run monetary policy to defend this target. It isn’t to provide cover for Osborne’s politics.
The George and Mervyn show threatens to reprise the Ken and Eddie show, that 1990s classic. In the governor’s defence, the role afforded to him in this show reduces him to a bit part. It must be tempting to seek relevance by commenting from on high on fiscal policy. This used to work for Vince Cable.
King has been so reduced because four times he has written to Osborne to explain why inflation is above target and four times replies have been sanguine. Nominally, Osborne continues to set a target for King. But does Osborne really want King to take the steps necessary to meaningfully defend this target? Of course not. But how can Osborne be unmoved by hard working families seeing ever more of their modest wages – no higher now in real terms than they were in 2005 – stretched ever further by the weekly shop?
Because Osborne sees nothing besides what is needed to continue in government. To which the successful execution of his deficit reduction strategy is central. Osborne wants to be able say that he applied the tough medicine that the patient needed after getting drunk with the Labour rogues; and that the medicine has worked so well that the patient can now be afforded some tax sweeteners.
It stretches credulity that things will go this smoothly. Osborne’s plans require, as Liam Byrne has noted, record export and business investment performance in each of the next three years. Do you feel like you are living in a record breaking economy? We might be breaking records for youth unemployment and for length of time above inflation target. But, with the rest of the EU hardly best placed to suck up our exports and consumer confidence shrunken, exports and business investment seem unlikely to break the records Osborne seeks.
Things would be even less likely to go to plan had King acted to retain credibility in the target that Osborne purportedly wants him to defend. This would have meant following the recommendation of Andrew Sentance, a member of the monetary policy committee (MPC), and to have already begun raising the interest rate. Obviously, this hasn’t happened.
Mike Wickens, an economics professor at York University, “suspects that behind the scenes the chancellor has indicated that he doesn’t mind the Bank not keeping to its remit”. No shit, Sherlock. And, yet, as obvious as this seems, it remains shocking. The target is drained of credibility and the Bank sapped of independence on the altar of Osborne’s general election quest.
Yes, much of our inflation is imported (although, this is partly a consequence of a deliberate strategy on the part of the government and the Bank to allow the pound to drop in value to make our exports more competitive, which has had limited effect to date). And, yes, fiscal tightening (cuts) would still be happening if Labour were in government, which makes it more problematic than it otherwise would be for the Bank to be taking the actions required (raising interest rates) to defend the target. It would, however, be less problematic for the Bank to do so in the context of Labour’s fiscal consolidation than the government’s programme. This is because Labour’s cuts would have been less deep and fast than those of the government.
While our deficit reduction strategy would make it easier for the governor to do his job, we don’t need his endorsement. What the nation needs is for him to stay out of politics and do his job. Unless and until he admits that he is already redundant.
The real lesson of history is that low and stable inflation is hard won. It shouldn’t be squandered on something as squalid as Osborne’s election strategy.
I had this on Labour Uncut recently.
Francis Fukuyama is best known for confusing the period between the falls of the Berlin Wall and Lehman Brothers with the end of history. This was to be defined by the global triumph of liberal democracy and market economies. He recently conceded:
“The most important strength of the Chinese political system is its ability to make large, complex decisions quickly, and to make them relatively well, at least in economic policy”.
China is neither liberal nor democratic, but its state-directed model of capitalism is reshaping markets across the globe. Nonetheless, everyone from George W. Bush to Will Hutton is confident of the model’s limitations. It is thought that history hasn’t ended yet, but that it will, and on the lines that Fukuyama proclaimed.
“Trade freely with China and time is on our side”, said Bush. These economic freedoms will, ultimately, it is argued, require political freedoms. This is because per capita western incomes depend upon what Hutton calls the “enlightenment infrastructure” – pluralism (multiple centres of political and economic power), capabilities (rights, education, private ownership) and justification (accountability, scrutiny, free expression).
Hutton made this argument in a debate with Meghnad Desai in Prospect just before the credit crunch. Desai scoffed: “For you, there is only one road to capitalism – the Western one – and only one political system – ours”. The crunch must place at least a question mark next to Hutton’s Whiggish confidence.
Perhaps the most important way in which 11 September 2001 changed the world was in making more apparent what few had already perceived: the ambition of Al-Qaeda’s threat to the west. Similarly, the significance of China’s rise wasn’t widely understood before the financial crisis. Now it is more obvious.
Zhu Min, special advisor to the international monetary fund, coined the phrase “three-speed” recovery in the opening debate at Davos this year. This involves emerging economies growing at more than 6 per cent in 2011, the US by 3 per cent and Europe by less than 2 per cent. Negative growth in the fourth quarter of 2010 puts the UK in the slowest of the slow. China is among the quickest of quick. It isn’t a global crisis anymore. It’s a European crisis.
While Fukuyama applauds the efficient rapidity of Chinese decision making, the Eurozone is sluggish to confront its big choices. Not that the UK should be smug. We’ve allowed banks “too big to fail” to morph into banks that increasingly seem “too big to save” – without correcting the causes of these banks becoming too big to fail. We’re also guilty of failing to match lofty rhetoric on climate change with effective policy and of drifting towards dependence on Gazprom in an ever more resource-stretched world. To say nothing of our geriatric-paced policy response to demographic change.
Yes, a plan for growth is essential. But for this to be meaningful it needs to chart a trajectory for the state to stop being a featherbed for bankers and start being a catalyst to a more energy-efficient and innovative economy.
All of this is painfully clear, as is the inability of David Cameron to offer anything like an adequate response. All politicians are in the gutter, but Cameron isn’t staring at the stars. Hu Jintao is. Mark Leonard in Renewal credits him with leading a campaign of “asymmetric warfare” against the west: “finding and exploiting the enemy’s soft spots”.
After international financers, like George Soros, humbled the “Asian tigers” in 1997, Chinese intellectuals, Leonard notes, pondered: “If a lone individual like Soros could unleash so much destruction simply for profit, how much damage could a proud nation like China inflict on the USA with its trillion dollars of foreign reserves”?
China and America’s condition of mutually assured economic destruction means this theoretical proposition is unlikely to be soon tested. It does, however, expose the vulnerability of the west, particularly if the uber-pragmatists of Jintao’s generation are succeeded by a more assertive cadre. That the question is even asked shows that Chinese leaders are capable of doing what our leaders struggle to: coldly assessing strengths and weakness and, given these strengths and weaknesses, ruthlessly pursuing objectives.
Al-Qaeda are world leaders in asymmetric warfare as it is conventionally understood. Guantanamo Bay and Bagram are the weakest parts of the west’s response, because they compromise our defining values. Privatising the upside of banking, while socialising the downside, also rejects the fundamentals of capitalism. Chinese-style, forensic assessment of the West’s strengths and weaknesses would rank our values – the “enlightenment infrastructure” – as our greatest strength and anything that belittles them as corrosive weakness.
Leadership is required for this betrayal to be averted – most pressingly in relation to Egypt. True leadership would also see it as analytically inadequate and careless with the hopes of millions simply to presume that Hutton is right and Desai is wrong. Hutton is right insofar as the “enlightenment infrastructure” is the richest inheritance and the seed of the innovation that can allow the West to prosper in a century in which China will be much more globally consequential than before.
However, in addition to this infrastructure, leadership will be necessary for the west to so prosper. Real leadership isn’t just about rhetoric or grand promises to be fulfilled years hence, but about the policies that will concretely advance these promises: the prose as well as the poetry. In respect of the key challenges that confront them – banking, energy, climate change and ageing – western leaders provide little of either. In particular, they struggle with the prose, which comes so easily to the Chinese. This needs to change if history is, after all, to end.
