Jonathan Todd

“The best books … are those that tell you what you know already”, wrote George Orwell in 1984. While, pace the likes of Henry Porter, our country isn’t Orwellian, there is a lot of truth in this line. And so it was when I read Martin Wolf on Iceland last week. He powerfully and intelligently argues for that which I have always instinctively felt about events there.

The British and Dutch governments are seeking agreement with the Icelandic government for the repayment of debts, which now amount to 50% of Icelandic GDP, owed to British and Dutch savers in now collapsed Icelandic banks. If we attempt to see things from the Icelandic perspective, this observation from Wolf is particularly striking: “In the UK context, this would be equivalent to a demand for £700bn. It is not hard to imagine how far Mr Brown would get with a suggestion that the UK should accept such a debt to refund depositors in foreign branches of bankrupt UK banks.”

We most probably do not have to fear the rise of Nazism in Iceland, (though, Icelanders do have unnecessary misery and Brits needlessly lost goodwill to fear), but Wolf’s analysis seems as persuasive and prescient as J. M. Keynes’ The Economic Consequences of the Peace proved to be on the Versailles Conference.

“Do Iceland’s taxpayers have a moral obligation to pay this loan? My view is: no. The delusion that finance was the path to riches was propounded by countries that should have known far better. I cannot blame Icelanders for succumbing. I certainly do not want generations of Icelanders to bear the cost.”

Iceland has many things going for it. However, not so many that more measured approaches from the British and Dutch governments could not considerably improve the prospects of Icelanders for many years to come.

“The final and, in truth, most important question is whether these demands are reasonable. After all, in every civilised country it has long been accepted that there is a limit to the pursuit of any debts. That is why we have introduced limited liability and abolished debtors’ prisons. Asking a people to transfer as much as 50 per cent of GDP, plus interest, via a sustained current account surplus is extraordinarily onerous.”

Not only is it extraordinarily onerous but it is only justified if we accept that several generations or more of Icelanders should pay the full price for the follies of a small Icelandic elite. What would the likes of the Labour Party argue in similar circumstances in the UK? Surely, we’d argue in favour of the many and not the few? So, why should we think any differently about an event in Iceland?

Let’s take a deep breath, step back and extend a modicum of decency to a fundamentally decent people, who, incidentally, were amongst the first to get aid to Haiti this week. If Icelanders can do the right thing by Haiti, Brits can do the right thing by Iceland.

Recently Hector Sants, head of the Financial Services Authority (FSA), said:

“The question of the size of individual payments is not one for financial regulators. That is one for politicians and society as a whole. If politicians wish to take a view on that, then they should say so, but they should not be asking the regulator to carry out a pay policy”.

Politicians should step up to this plate. So, it is welcome to read reports that Alistair Darling, the Chancellor, is considering means of doing so.

Any nervousness that might be felt in relation to this should be quelled by reflection that Martin Wolf, Raghuram Rajan and Paul Krugman were arguing for this long ago. Of course, we should, as ever and as the Times argues, be wary about unintended consequences. But the Times – hardly a bastion of red blooded socialism! – proposes a sensible way ahead:

“Only a small fraction of a bonus should be paid at once. The rest of the payment would follow only if subsequent years of good performance confirmed that the profitability was sustainable. In this way, the incentive to make short-term profits with very risky transactions might be avoided. It would be reasonable to penalise banks that did not comply by requiring they offset the risk by holding more capital”.

Deferred compensation schemes seem the way forward.

The point of Roger Casale, which I highlighted in my last post, seems all the stronger in light of an observation made by Martin Wolf today.

“The relationship between the US and China will become more central, with India waiting in the wings. The relative economic weight and power of the Asian giants seems sure to rise. Europe, meanwhile, is not having a good crisis. Its economy and financial system have proved far more vulnerable than many expected. Yet how far a set of refurbished and rebalanced institutions for international co-operation will reflect the new realities is, as yet, unknown”.

It is towards global institutions, like the IMF, the World Bank and the UN, that we must first look for the refurbishment that our Chinese century requires. However, Wolf’s comment – along with the criticisms of Charles Clarke, Wolfgang Münchau and Helmut Schmidt that my last post also noted – would seem to suggest that the EU too is also ripe for some refurbishment.

In absence of such refurbishment – or at least an improved claim upon output legitimacy – Europe can expect to drift ever further from the real crucible of global politics as this century progresses. The seeming addiction of Europe’s body politic to navel-gazing and nation-centric politics – exemplified by the current EU elections in which anything other than EU issues are being discussed - is corrosive in its inability to rise to the bigger global picture as set out by Casale. The longer Europe persists with this inward-looking, complacent, arrogant attitude the more likely this global picture is to take a form that is displeasing to European values and interests.

China is ascendant and hardly seems to have an excessive respect for the Copenhagen criteria. India may be closer to satisfying such criteria but Russia and Iran seem likely to increasingly feature amongst the global picture and the stuff of the Copenhagen criteria are as much of a joke to them as the idea, pace Francis Fukuyama, that history has ended.    

History moves on. But the EU seems increasingly left behind, as its poor response to the economic crisis well illustrates. The Copenhagen criteria embody the kind of values with which Fukuyama presumed that history had ended and so, in this sense, they seem more univeral than European values. Nonetheless, the way that history has developed since Fukuyama made this claim would suggest that, perhaps, these values are not necessarily quite so universal after all – at least not yet. The EU needs to raise its game if these values are not to become not so much universal as the preserve of Europe and north America.

Barack Obama may have granted his first UK interview to the FT. But, may be, he should read the FT a little more carefully. In particular, if he had of been following Martin Wolf’s column more closely, then he may not have stalled when responding to the question that Nick Robinson put to him yesterday.

“Unfortunately, no consensus exists on the underlying causes of this crisis or on the best ways to escape from it”, as Wolf notes. Robinson suggested to Obama that one’s views on the underlying causes of the crisis go a long way to determine one’s views on the best way to escape it. France and Germany are supposed to blame the crisis on “Anglo-Saxon capitalism” and so see its solution in a new global architecture of regulation. The UK and the USA are the citadels of “Anglo-Saxon capitalism” and are taken to be more attracted to fiscal stimulation. Thus, Robinson asked Obama to comment on the dividing line that he constructed between France/Germany and the UK/USA.

However, perhaps, if Robinson wanted to construct a dividing line he may have found a more solid foundation for it in the Pacific, rather than the Atlantic. Hamish McRae argues that the real summit has been between the USA and China. China runs the world’s biggest current account surplus and the USA runs its largest deficit. The massive imbalances between surplus and deficit economies are at the root of our economic malaise, while correcting these imbalances is also the key to future prosperity.

“In 2007″, writes Wolf, ”three countries ran current account surpluses of $835bn (€629bn, £585bn). Logically, counterpart deficit countries must spend that much more than their incomes. Yet today deficit countries have run out of willing and creditworthy private borrowers”. The credit cards of the deficit countries have been more than maxed out but the surplus economies will continue to decline until they find sustainable, alternative sources of demand. It’s easy to chide the excessive spending and sub-prime mortgages of the USA. Yet more domestic spending in China is part of the long-term solution. Just as much as the USA needs to get closer to Chinese levels of saving, so too the Chinese need to get closer to American levels of spending.

It’s hard to see how “Anglo-Saxon capitalism” can actually be the great evil in this context; nor is the dividing line really to be found in the Atlantic. But there is something of a dividing line in that ocean, as Germany is a leading surplus country. Indeed, there is also a dividing line in the British channel as the UK is a leading deficit economy. Wolf paraphrases Angela Merkel’s position as being: “The rest of the world needs to find a way of absorbing our excess supply, but sustainably, please”.

Merkel may point a disapproving finger towards the deficit countries of “Anglo-Saxon capitalism” but Wolf thinks that some of the solution is to be found zu Hause. “The answer lies partly in changing the policies of surplus countries”. We still seem too far from realising this. However, another part of Wolf’s solution was moved towards at the G20: special drawing rights. So, thankfully the G20 moved somewhat in the direction advocated by Wolf, even if Obama might read his FT more vigilantly. To be fair to Obama, though, so could Robinson. As could Merkel.

Richard Reeves is typically thought provoking in the current Prospect. He quotes an interesting line from a recent Liam Byrne speech. Labour’s “mantra should be really simple. We want a country of powerful people”. Given his excellent biography of John Stuart Mill, I wondered whether Reeves also found this line evocative of a famous line from Mill: “with small men no great thing can really be accomplished”.

“On the one side” of the Labour Party, argues Reeves, “stand those for whom the economic crisis demonstrates the need for a more muscular state; on the other, a diverse group”, including Byrne, “who want to use the state to give more power to individuals”. Similarly, Jesse Norman has previously divided Labour into Trimmers, Romantics and Deniers. Remarks from Matthew Taylor and David Miliband are said to define the Trimmers. “Instead of a Government-centric model of change in which we assume our rulers should be given the blame for what goes wrong and the responsibility for making it right”, claims Taylor, “we need a citizen-centric model in which we reinstate ourselves as the authors of our own collective destinies”. In other words: we want powerful people.

Norman associates Jon Cruddas and Tony Woodley with the Romantic tendency. “They regard New Labour as a tool of neo-liberal capitalism, which has deliberately betrayed its working class roots in order to appeal to the middle classes”. Polly Toynbee and Ed Balls are offered up as Deniers. “They argue that the growth of the state under Gordon Brown has been benign, and should be continued and extended”. If we collapse the Deniers into the Romantics, then Norman’s characterisation of the Labour Party exactly parallels that of Reeves. To mix the terminology of Taylor and Norman, the Trimmers favour a citizen-centric approach, while the Deniers and the Romantics advocate a Government-centric model; precisely the distinction proposed by Reeves.

Certainly, Toynbee – “the high priestess of Denial” - appears to continue to defend what might be described as a Government-centric model. While Neal Lawson and John Harris, both closely associated with Compass, like Cruddas, recently argued that “the government’s responses to changed times have been either too timid or, on the few occasions ministers have still affected to be radical, based on the very ideas that are now part of history … running through the supposed remedies for the financial crisis is a discredited belief in light-touch regulation”. Thus, Deniers and Romantics unite behind ”a more muscular state”.

This side of the argument, observes Reeves, has “the upper hand, and understandably so. The government is bailing out banks, car firms, homeowners and charities … A new corporatism is being hailed”. Compass are certainly keen to move UK politics on from the “ideological vacuum” that Howard Davies sees it as being played out in. “Both Labour and the Conservatives need to find a new way of talking about the government’s role in a stumbling market economy”, contends Davies. The left’s response to Davies’ call for “a British version of Gaullism” might come from the likes of Compass, while the right’s may come from Phillip Blond’s red Toryism.

Davies hears that “within government a debate is under way between those who wish to present the state’s new role as a regrettable short-term necessity and others who think a positive long-term redefinition is required”. The Deniers and the Romantics offer up the positive long-term redefinitions of the left, as the red Tories provide the positive redefinitions of the right. At this stage in the economic and political cycles, all of the energy – the “big mo”, as Americans say – is behind these redefinitions. Those who prefer citizen-centric models to a positive long-term redefinition of a more muscular state, such as Trimmers on the left and compassionate conservatives, like Norman, on the right, now lack the big mo.

“Compassionate conservatism”, argues Norman, “seeks social renewal through the devolution of power and responsibility to people and local institutions, through greater personal freedom from bureaucracy and regulation, through breaking up state monopolies to improve public services, and through a renewed emphasis on the rights of the citizen and the rule of law”. This was very trendy in the early part of David Cameron’s leadership but red Toryism seems more in vogue as concern has shifted from “social recession”, once a key concern of compassionate conservatives, to economic recession, now a massive concern for everyone.

Broadly speaking, compassionate conservatives offer a citizen-centric model that demands a much reduced role for the state and Trimmers provide a citizen-centric model that requires a smarter state. But citizen-centric models are offered from the right and the left; just as the Gaullists – Compass and the red Tories – offer competing Government-centric models from the left and the right. Some future trends point towards the Gaullists continuing to hold the big mo but others point in the opposite direction.

The Gaullist ascendency seems confirmed by the inevitability that Martin Wolf now attaches to banking nationalisation. “In 1978, Alfred Kahn, an adviser on inflation to President Jimmy Carter, used the word “depression”. So angry was the president that Mr Kahn started to call it “banana” instead … We are painfully learning that the world’s mega-banks are too complex to manage, too big to fail and too hard to restructure. Nobody would wish to start from here. But, as worries in the stock market show, banks must be fixed, in an orderly and systematic way. The stress tests should be tougher than now planned. Recapitalisation must then occur. Call it a banana if you want. But bank restructuring itself must begin”.

However, the warning from Steve Bundred of the Audit Commission to brace ourselves for huge public spending cuts augers against the Gaullist ascendency. If Wolf thinks that bank nationalisation is inevitable, then it must be a very real possibility. Equally, who am I to argue with Steve Bundred? And what conclusions should be drawn from the conflicting implications for the Gaullist ascendency offered by Wolf and Bundred?

It seems that there may well be some areas of policy – banks, most obviously – where Government-centric models are unavoidable. This does not mean that Gaullist delight should be unconstrained, however, as the finite nature of public funds means that the more public funds are consumed in these areas of policy the more citizen-centric models become unavoidable in other areas. Put simply: Government-centric models, by definition, tend to make larger calls upon public funds, which reduces the level of public funds available to use on other areas of policy, requiring more attention to focus in these areas upon citizen-centric models that typically make smaller calls upon public funds.

The realities of public budgets are not, though, the only reason for advocates of citizen-centric models to have heart. Let’s consider the full quotation from Mill that Byrne brought to mind. “The worth of a State, in the long run, is the worth of the individuals composing it – a state which dwarfs its men, in order that they may be more docile instruments in its hands even for beneficial purposes – will find that with small men no great thing can really be accomplished”. We all wish that Fred Goodwin has long ago been made a docile instrument but no real solutions to climate change, anti-social behaviour, obesity and much else besides are likely to be offered by either docile instruments or the state – no matter how benign or enlightened – that renders them so.

Instead, argues Taylor, “for society to progress relies on citizens acting more often in ways which match their values and aspirations and doing more for each other than simply obeying laws. To have the society we want, we need to agree to give more back. This is particularly obvious” – even after the credit crunch and the Gaullist ascendency – “in relation to four current public priorities: protecting the environment, improving public services, living together as strangers, maintaining a sufficiently strong democracy and civil society”. Responding to climate change requires citizens to change the way that they live; not simply change in government policy. The NHS needs active citizens to take responsibility for the future health of themselves and their family; not simply a reaction from NHS staff after a health issue has developed. The response to youth crime includes citizens volunteering at youth centres, as well as government initiatives like anti-social behaviour orders. And, ultimately, citizens get the politics that they deserve. Cynicism about politicians is the default position of our times but if the best citizens do not bother to stand for election, where will this leave democracy?   

As much as all of this stands against the Gaullist ascendency, it seems rather trite and common-sensical. Citizen-centric models, as with so many things, perhaps move further beyond the realms of glib cliche when concrete examples are provided. Here I volunteer personalised budgets. Of their application to adult social care, Demos report: “it changes people’s attitudes towards themselves and their role in the service. People who were recipients, whether passive or complaining, became participants in planning and commissioning the services that support them. The service users that we interviewed said that they became less isolated, depressed, dependent and more optimistic, energetic and confident”. They argue that “this participative approach delivers highly personalised, lasting solutions to people’s needs for social care, education and health at lower cost than traditional, inflexible and top-down approaches”.

In short: making people powerful delivers better and fairer outcomes at cheaper cost. I can’t argue with this. Equally, I draw more Gaullist in relation to the banks with every passing day. Yes, I feel citizen-centric in relation to some things and Government-centric in relation to others. Does this make me a bad or mad person? I should hope not. But call me a cross dresser, if you want. Call it being it favour of what works, if you insist.

The debate about the proper role of the state is certainly getting more interesting. But the least helpful response to this debate is to offer the same answer in every context. Just because bank nationalisation seems more inevitable, it does not follow that Government-centric responses are right in all contexts. Nor does the success of personalised budgets in adult social care mean that citizen-centric models are always the best approach. The challenge is when to go Gaullist and when not to.