Economics
I wrote this for Labour Uncut a few weeks ago.
Labour modernisers have been largely pro-European since Neil Kinnock made them so. The role of the EU in advancing Labour’s goals has often, however, been vaguely defined. As UK relations with the EU head towards various crunches, this seems likely to be inadequate.
The issues that are most important to people will determine the next general election: the economy, jobs and public services. Nonetheless, debate about the EU is going to get hotter. As this happens, the connections between EU policy and the things that people care most about are likely to become more apparent.
Most immediately, the European Union bill, over the short to medium term the euro-zone crisis and the longer term need for the UK to adapt to the rise of Asia could all bring UK/EU relations to the boil. The first of these pressure-points diminishes UK influence in the EU at the same time as the second poses not only an existential crisis to a currency to which we don’t belong, but a union to which we do and our largest trading partners.
Either disintegration of the euro/EU or consolidation of the euro as both a fiscal and monetary union seem more likely outcomes of this crisis than perpetuation of the status quo. Either way, British business has only just begun the adaptation that it must undergo to prosper in a world whose centre of gravity lies ever more firmly to the east.
Liberal Democrat MEP, Andrew Duff writes of the European Union bill, which is being taken through Parliament by the government of which his party is a part: “The blunt truth is that if this bill becomes law, no future EU treaty revision will be possible if the UK remains a full member of the Union.” This could yet create serious splits within and between the two parties of government, which Labour should encourage by robustly opposing the bill and reaching out to pro-European Lib Dems and Tories (who may have died off in the Commons but still exist in the Lords).
At some stage in the management of the euro-zone crisis, irrespective of what finance ministers may insist, haircuts for bondholders and state debt restructuring seem virtually inevitable. Because some euro-zone members are too over extended; the bailout facilities available to them too finite (the largesse of even the IMF must know some limits); and the austerity that follows these bailouts too terrible (the wretchedness of all of Ireland is increased for the sake of sparing bondholders any pain, as Fine Gael, the likely winners of the national election expected in March, argue).
While she may be concerned with German interests, rather than troubled by the austerity misery that seems set to extend beyond Greece and Ireland, Angela Merkel appears to understand this. It was market recognition of this understanding, and fears of Germany imposing haircuts on Irish bondholders, that weakened the Irish such that they had to accept a bailout and austerity. An attempt will have to be made to confront the necessity for haircuts while minimising the fever of market reactions to this confrontation.
If German politicians wish to minimise their fiscal transfers to the rest of the euro-zone, their officials may be discretely working on the details of such an attempt. French leaders appear increasingly sanguine about the consummation of such a fiscal union and much greater co-ordination of economic policy by members of the euro. To Germans this may seem like France trying use German money to pick French “winners”, which could make any fireworks between the Tories and the Liberal Democrats appear relatively tame.
Undoubtedly, economic turbulence will persist in the euro-zone until some massive political choices are faced. The UK must act responsibly and avoid gloating. The short to medium term interest of the UK is minimisation of this turbulence and our longer term interest is in whatever kind of Europe best enables us to adapt to our Asian age. This means, if Germany is as determined to keep the euro together as it claims, encouraging Germany to face the full consequences of this, which probably requires both a convincing plan for haircuts and an enduring framework of some kind for fiscal transfers within the euro-zone.
It is easy for George Osborne to say that Ireland will be the only euro-zone member to be bailed out by the UK – a position that will come under considerable pressure as the turbulence endures and which won’t be strictly true once the IMF are in Portugal. But it is harder for him to engage with Germany on the steps that ought to be taken, as they would probably necessitate treaty change and, under the European Union bill, according to Duff, an end of full EU membership for the UK.
While defending UK membership of the EU, Labour should demand an EU best equipped to enable us to adapt to Asia’s rise. As Asia gets more serious about curbing carbon emissions, for example, we should be selling them the green manufacture that enables this. However, innovation in green manufacture will be undermined so long the EU-ETS remains as ineffective as it is in establishing a carbon price. Labour should seek to provide the leadership to change this and have the EU focus more intently upon areas such as this where it really can add value. Rather than devoting its energies to less controversial policy areas in which the added value of the EU is much less clear.
I had this on Labour Uncut last week.
Tony Blair made adaptation to globalisation a Labour leitmotif. Yet the existence of the “squeezed middle” is a symptom that he did not finish the job. Today’s globalisation is more about the rise of Asia than was the case when Blair became party leader. Easing the squeezing requires better adaptation to this Asian age.
It will take more than David Cameron hawking UK PLC from one rising Asian power to the next. The prime minister is listless in the face of power seeping from the over-indebted West to the resource-rich East, so neatly encapsulated by FIFA’s world cup decisions. His PR smoothness is no substitute for leadership in urgent debates about the architecture of globalisation. It seems that his only reason for attending the G20 was, unsuccessfully, to press the flesh for England’s world cup bid.
Perhaps Cameron confused diary entries, and we lost the world cup after he confronted FIFA president, Sepp Blatter, on macro-prudential regulation. After all, the Tory-Lib Dems’ bail-out of the Irish demonstrates that we live in an interconnected age. It exposes their myth: that our economic predicament is solely Labour’s fault.
While Cameron cannot afford himself a robust response to Asia’s rise, leading centre left thinkers are looking at the bargain Labour struck with globalisation. On the one hand, it was relaxed about the filthy rich. On the other, it recycled tax revenues into public services and redistributions, like tax credits, at unprecedented levels. But the most striking feature of this economic model is its dependence upon secondary redistribution. The middle is squeezed because we have not got to a more equitable distribution of market rewards.
John Humphrys may find it bizarrely incomprehensible, but the squeezed middle is not just a British phenomenon. In the US, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973. It used to be middle-class aspiration that Labour needed to tap into. Now the middling sort across the whole of the West is anxious. It is even possible to understand the tea party movement when you realise that at its core is anxiety, not guns and bibles.
Tea partiers, like Essex men, are more focused on keeping what they have than wanting more. They want to take their country back, not look for answers from the great beyond. They are resentful of any perceived threat. Whether that is losing their health insurance to Obamacare or their jobs to the oilfields and factories of the East.
Politicians across Europe are increasingly willing to bemoan minorities and immigrants, other governments and Brussels. There are many corners of foreign fields that seem forever Mrs. Duffy. Tackling the squeeze is a precondition of curbing this.
Globalisation will only go into reverse if an open currency war follows banks and states defaulting. Almost any amount of squeeze for the middle and anxiety for Mrs Duffys is worth it to avoid this 1930s scenario. And the more squeezed the middle becomes, the more politicians will struggle to resist protectionism and competitive currency devaluations. These would be the seeds of a cataclysm of 1930s proportions. We cannot sustain globalisation without improving social justice both domestically and internationally.
In the UK, we must recognise that income distributions that are skewed towards the rich minority are a practical menace, as well as morally questionable. Countries with lower Gini-coefficients (a measure of the inequality of a distribution – the higher the score, the more unequal) are more likely to increase consumer demand in sustainable ways. This means that median workers will not find their wages squeezed, and their maxed-out credit cards will not create booms and busts. Labour must find ways of achieving this while scaling back government to control the deficit. Here – after the public spending largesse of the Blair/Brown years – we start with a blank piece of paper.
Even if social democracy means that the state consumes an ever-larger slice of GDP, it cannot mean it now, in such fiscally straitened times. That states, as well as markets, fail should not leave social democrats bereft of hope. It should inspire a radical pragmatism for whatever truly works. A pragmatism never abashed by cross dressing or reformers and one unafraid to deploy state or market wherever it is best suited.
Advancing social justice internationally won’t be achieved by Cameron’s glad handing. His G20 failure, which Brown would have avoided, was far more of a dereliction of duty than his failure to deliver, in contrast to Blair, a global sporting event. Not least thanks to Brown, world leaders were quick to come together effectively in the early stages of the global crisis.
The extent to which the fundamental causes of this crisis have been addressed is debatable. Global leaders must maintain their engagement in order to tackle these causes. Not just applaud what good chaps Prince William and David Beckham are. Cameron offers vapid PR stunts instead of leadership. Whereas Labour must find practical ways of advancing social justice here and internationally. Only then can the globalised middle end up slightly more eased than squeezed.
I wrote this on Labour Uncut recently:
Labour has to be the party of optimism. Which should include being optimistic about the ingenuity of business, especially when combined with extraordinarily lax monetary conditions and a low pound. George Osborne anticipates Labour pessimism on this and we should deny him.
We know that the cuts are too deep and fast. We know that the best government response to economic challenges isn’t brutally to minimise government, but strategically to target the state’s resources to maximum effect. Having emphasised these points, we can be confident that the public know that we know this.
But in stressing these points we should avoid creating a blind spot: that our only economic expectation for coming years appears to be unremitting disaster. This would have us seem to be talking the country down, which is never a good thing, and undermine our claims to optimism. Also, if this expectation turns out to be false, it would leave us – to apply Peter Mandelson’s one club golfer analogy – on the 18th green of this parliament with only the driver of big government in our club bag.
Of course I’m not endorsing Osborne’s masochistic cuts. I’m not convinced that they will lead to a sustained, job-creating recovery. I am, however, stressing the first point of futurists: in an uncertain world, it isn’t a case of the future but the futures. And a future exists, while not the most likely future, in which low interest and exchange rates, as well as possible further quantitative easing, more than compensate for the loss of output and employment wrought by the cuts.
The existence of this future was hailed by Fraser Nelson after the CSR as Osborne’s secret master plan:
“Here’s something you won’t read in the papers: in the fiscal consolidation of the Major years some 700,000 jobs were lost in the public sector (way more, note, than we’re discussing now). But two million more jobs were created in the private sector. The 3-1 ratio worked in Britain last time, and there’s every chance it will do again. But Osborne, I suspect, doesn’t want us to know about this strong likelihood. It would spoil his wee trick. Ruin the surprise.”
The government was hardly hiding its faith – and it is a faith – in this future. The first page of its White Paper on local growth stated:
“We have good reason to be confident that the private sector can lead the recovery. When general government employment fell by more than 0.5 million after the 1990s recession, following a period of transition, private sector employment added almost 1.5 million jobs in four years.”
The Tory-Lib Dem government is playing political-economic poker. Osborne has all his chips on this version of the future. It’s a huge gamble. In this future he’ll be able to argue that his gamble was calculated not based only on his weak hand – the deficit-burdened British economy – but his faith in the cuts and the vigour of business.
While I doubt his vision of the future, there is rarely only one possible future. Given this, it would be as unwise for us to have all our chips on the reverse position.
We avoid this by nuancing our position and giving proper weight to various economic risks. Yes, if we cut too deep and fast we risk withdrawing vital stimuli from a tentative recovery. Osborne’s chips are positioned to place no weight on this whatsoever. However, there is also a risk that if fiscal consolidation were to procede too slowly it would push up interest on government debt. This would raise interest rates across the economy, making it harder for businesses to access credit and households to service mortgages. All Osborne’s chips seek to counter this risk in anticipation of being credited with leading a robust private sector recovery.
We, too, should keep faith in the private sector, acknowledging the importance of monetary conditions to business and the interdependence between fiscal (controlled by the treasury) and monetary policy (determined by the bank of England). This means, in addition to warning about the pace and depth of the cuts, having a strong account of how we would reduce the deficit – recognising that fiscal discipline helps interest rates remain low and that businesses and households benefit from this.
Without this, we risk the perception that we see fiscal stimuli as the only motor of growth and monetary and exchange rate conditions as irrelevant. In opposition, we can only impact how we are perceived, not policy outcomes. So, as well as raging against iniquity, we should kill this perception now.
I wrote for Labour Uncut with Alison McGovern about how Liverpool FC is a Big Society.
As Ed Miliband was unveiled as Labour’s leader in Manchester ten days ago, Liverpool were drawing with Sunderland 30 miles away. Which disappointing result was of secondary concern for many compared with protesting against the club’s misrule by Tom Hicks and George Gillett.
Yet even with the possibility of administration hanging over the club, Jeff Stelling of Sky told the protestors to “concentrate on what’s happening on the pitch.”
But this “let them eat cake and drink warm lager” attitude misses the point.
As the clock ticks down to the club effectively being publicly owned, we should ask whether David Cameron has a better grasp of the issues at stake. In spite of the ownership bid from New England Sports Ventures, Robert Peston continues to see control of the club by the Royal Bank of Scotland (RBS) as a live option. RBS, 84 percent publicly owned, could assume ownership on 15 October when loans taken out with them expire.
While it may be that RBS avoids this outcome by finding new owners capable of servicing the debt in the next week, an RBS takeover is close enough that questions must be asked about how they would conduct themselves as custodians of the club. A publicly owned bank taking on such a role raises new issues.
These issues are larger than the club; even than a club as great as Liverpool. They cut to the core of what we want our post credit-crunched country to be.
There is a worry that the practices which contributed to our troubles may be returning to the financial sector. This concern undermines the hope that there may be opportunity in the financial crisis; opportunity to re-evaluate what kind of economy and society we want to be and to recalibrate ourselves accordingly.
This spirit has inspired calls for the Northern Rock to become a mutual. Co-operation is an entirely different ethos from that which led Northern Rock to become involved with some of the rummest practices of recent years: frenzied property speculation, securitisation, rewards for failure.
Of course, government shares were taken in banks – invariably in the teeth of opposition from George Osborne – to avert the collapse of a sector upon which the whole economy depends. These shares should not be relinquished, however, until this sector and the way it interacts with the wider economy has been recast. There are a range of important considerations: containing systemic risk; preventing banks being too big to fail; increasing competition between banks; and creating a financial sector that is most complementary to manufacturing and other industries.
This isn’t about banker-bashing, but about creating an institutional architecture for our economic life that works for as many of us as possible. The Conservatives have appealed to the national interest in their conference slogan this week, but there is no greater national interest than this.
We’ve also heard much from David Cameron this afternoon of the “big society”. But he does not realise that Liverpool’s has met at Anfield at 3pm on most Saturday afternoons for over 100 years (and similar groups meet at Goodison and Prenton Parks). It is a society which, to paraphrase Edmund Burke, is a partnership not just between the fans and staff – whether players, coaches or burger flippers – of today but the players and staff of yesterday and the players and staff of tomorrow.
Arbitrary power was seen by Burke as the gravest threat to the health of society. If Liverpool FC is simply a business then Hicks and Gillett are guilty only of poor business practice. If, however, the club is its own Big Society, then they have used their arbitrary power to wreak violence on this society. In legal terms, it is the former. But that view would not be accepted on the Kop: a culture with rhythms and rules quite detached from any on the statute book.
It is cultures such as these which must be embraced and their power tapped into if the Big Society is to mean anything. Conservatives find it easy to embrace civic groups, which incubate these cultures, and argue that they are more effective than the state at tackling social problems. But to tap into their power and fulfil their promise does not require simply a diminished state. What is needed is that the state act intelligently and as a partner to civic society.
As, effectively, an extension of the state, the question to be asked of RBS is whether it is capable of acting in this way.
If the publicly owned banking sector really were so behaving, it wouldn’t just be Northern Rock that would be mutualised. It would also be Liverpool FC. That this seems unlikely says much about how hollow and inadequate is David Cameron’s understanding of the big society and the challenges facing post-credit crunch Britain.
On 11 September 2010 I made this comment on Labour Uncut:
“George Osborne won’t say this but the only “plan B” that he seems to have is to look to the Bank of England for more monetary easing, which will have to come in the form of quantitative easing (QE) given how low interest rates are. We live in very uncertain times and it is hard to say where any of this is going. But further quantitative easing on the scale which may become necessary due to Osborne’s early and deep cuts would make it more likely that the “ketchup in a bottle” theory of inflation becomes a reality: all the money that has been printed suddenly catches up with us in the form of inflation. If we were to have double dipped, this would leave us with negative growth and inflation. That’s right, stagflation. Osborne might think his macroeconomics takes us back to Thatcher’s 1980s but stagflation is, of course, the curse of the 1970s.”
I note that 19 days later the Economist reported:
“If the economy stutters … the current plan B relies on monetary policy. The Bank of England is expected to resume the quantitative easing (QE)—injecting money into the economy by buying financial assets—which it stopped earlier this year.”
The Economist concurs with me on the nature of Osborne’s plan B. As he has given himself no room for fiscal manoeuvre, his plan B is to abdicate management of the economy to the Bank of England. They share my concerns about what this plan B may mean for inflation:
“Pumping more money into the economy might jolt up inflation expectations, given that inflation has been above the government’s 2% target for most of the past four years.”
They are also doubtful about the effectiveness of further QE as a stimulus:
“The bigger worry is that, while banks remain so reluctant to lend, more QE will prove inadequate to counter fiscal austerity.”
The Economist goes on to suggest that Osborne may not want to proceed with fiscal tightened at quite the pace he has proposed:
“The overall fiscal consolidation is tilted towards spending cuts, which will account for three-quarters of the deficit reduction by 2014. But next year, tax rises will make up nearly half of it. The main rate of VAT, a consumption tax, will rise in January from 17.5% to 20%, and national-insurance contributions will also go up in April. Depending on what the data show in the coming months, a temporary reprieve on tax rises might be a good idea.”
I’m pleased that my reading of Osborne’s strategy is shared in so many respects by the Economist. We’ll have to wait and see whether he sticks to the dangerous course on which he has embarked. I fear that George may not be for turning.
