Monday, December 27, 2010

Pe ll'aria fresca, pare gia' na festa....

Two and half years ago Silvio Berlusconi proudly announced that the refuse emergency in Naples was over, contributing to his huge popularity in 2008. The Prodi government had struggled to resolve the problem sufficiently quickly and Berlusconi's successful election campaign made much of his promises to clean up Naples, using his entrepreneurial drive and mafia connections famed ability to get things done. Indeed, the piles of rubbish in the streets of Naples were removed, or at least most of them.

Now, at the end of 2010 and halfway through another triumphal Berlusconi mandate, the rubbish is back. The old man is clearly starting to teeter, as is indicated by his desperate narrow escape in a motion of censure last week. Allies are beginning to take their distances and his popularity - although indescribably high for most foreign observers - is on the slide. It can only be a matter of time now, especially since Berlusconi's 74 year old body is finding it hard to keep up with the pace of events - much has been made of his recent tendency (signalled by Wikileaks dispatches) to fall asleep at inopportune moments.

What's next? It's very hard to know, since the main opposition, the PD, is doing just as badly in the polls. Only the populist Northern League is gaining from Berlusconi's decline, and they can't be expected to take a central role in forming a government. My guess is that there could be another big game of musical chairs on the Italian right about to start.

In any case, Berlusconi's resignation (preferably in handcuffs, but let's not overdo it) is high on my wishlist for 2011. Along with Hull City's return to the Premiership, a split in the Lib Dems, serious financial reregulation, the orderly separation of the peripheral Eurozone from the core, the rerouting of the Piccadilly Line through Crouch End, the abolition of mortgage interest relief for landlords, 20 mph speed limits everywhere in London, the restoration of the Net Book Agreement, and the cancellation of the Royal Wedding.

And a pony.

Tuesday, December 21, 2010

Wherefore art thou, median voter?

Just been reading a pamphlet on attitudes to inequality in the UK by the Joseph Rowntree Foundation, published last year. It makes fascinating, if slightly frustrating reading. People in Britain have mixed, not to say incoherent views about inequality.

On the one hand, people seem relaxed about high incomes if they are 'deserved' because of hard effort or particular talent. And on the other people are often very critical of the poor if they are heavily dependent on benefits. All of this sounds pretty bad for redistribution.

However, there are some interesting caveats to this conclusion. First, respondents in the JRF research had an interesting view on what constituted a 'deserved' high income. In fact, when asked whether earnings of £150,000 were in most cases 'a fair reflection' of an individual's contribution only 28% of respondents agreed, whilst around 50% felt this was not true in most cases. This suggests many people are unaware that £150,000 is a fairly standard remuneration for high status jobs in finance, business, the law and medicine (especially in London), rather than the kind of figure mostly reserved for successful entrepreneurs or football players. Interestingly, just short of half of respondents felt £150,000 was not a morally justifiable salary, since anyone should be able to get by with less.

Second, respondents were more willing to support welfare benefits if they were more available to people on average incomes rather than being simply targeted at the very poor. There was broad support for progressive policies on tax and welfare, but resentment at those who appeared to be playing the system and not taking opportunities for work.

Finally, even though a representative sample was taken with respondents from all income groups, the vast majority regarded themselves as being in the middle of the income distribution. People seem to have no sense of where they lie in the economic hierarchy. This point is confirmed by other research, revealing widespread ignorance of what particular professions usually earn, almost always underestimating the average salaries in professional jobs. The reason for this is most likely because people know the kinds of salaries earned by people they know, and most of the time this means salaries in a similar ballpark to theirs. Therefore, middle income voters don't know that much about how much the rich make, or for that matter the poor.

This has all kinds of implications. First, a useful corrective to the Meltzer/Richard model - if median voters don't know what the income distribution is, they can't correctly estimate their net benefits from redistribution. Ironically, in a very divided society median voters may be even more ignorant about the distribution, and therefore less capable of perceiving the worth to them of redistributive policies. This could offer some insight into why the model is less successful in explaining preferences in unequal societies than in more equal ones.

Secondly, it has implications for social democratic strategy. In particular, Labour should set about making the welfare state more universalistic, to the extent that it can. The current arrangements leave the median voter pretty much out of the welfare net, but very often average earners perceive welfare recipients as relatively advantaged despite their workless status. In fact, in high cost areas people can be better off not working, and that is clearly a policy designed to irritate median voters.

Of course, this is not easy when there is no money around. But there are good reasons for reducing welfare targeting, not the least of which is people's increased willingness to pay for benefits when they think they might receive some. Increased tuition fees and removing child benefit from high-rate taxpayers move in the opposite direction - Labour could regain some popularity by promising to reverse them.

Thursday, December 16, 2010

Did inequality cause the financial crisis?

Neat review post by Edward Glaeser assessing the evidence. He finds it inconclusive, but largely because he seems to be focusing on deltas rather than absolutes - it's true that increases in inequality prior to the crash were not that stark, and that the link between reckless borrowing and increases in inequality is not robust.

However, the biggest financial collapses were in countries with high inequality: US, UK, Ireland, Greece, Spain... whilst egalitarian Sweden is doing OK. Of course, there may not be a direct causal link -  it could just as easily be that inequality and financial recklessness are both the result of something else: like an obsession with market liberalism, for example.

Incidentally, this seems to be a problem with the economists' preference for fixed-effects models. The stable cross-national differences that seem to account for outcomes end up getting missed.

Wednesday, December 15, 2010

When doesn't inequality matter?

... when it doesn't lead to financial meltdowns, according to Tyler Cowen.

Cowen - who blogs at Marginal Revolution - has written a provocative article for The American Interest called 'The Inequality that Matters'. A title which, of course, implies that some inequality doesn't matter.

I have no problem with Cowen's analysis of the risks of financialization, which allows a small minority to become super-rich by making leveraged bets whose downside is covered by... well, the rest of us. This is the 'inequality that matters'. I am puzzled by his resigned conclusion that there is not much we can do about it - after all, if governments could save the world financial system from meltdown through unorthodox measures this suggests there might be some levers of power the state still retains. But the way this analysis links inequality to economic failure is compelling.

I'm less convinced by the rest of the article, which argues that we should be relaxed about the other dimensions of inequality. Cowen seems to think that rising inequality is - outside the financial sector - basically the result of globalization and new technologies allowing the talented greater scope to exploit their abilities to make money. And the talented can be anybody. And middle and lower income Americans don't mind if people have worked hard to earn their money. And anyway, it's only really the top 1% that are getting so much richer, for the other 99% everything is pretty much stable. To illustrate the point, Tyler Cowen is getting along fine, despite the fact that he doesn't have as much money as Bill Gates.

I think there is an important point in there, but a lot of complacency too. The important point is that people don't develop political views about the justness of income distribution by calculating Gini coefficients and looking at national or international income distribution data. The result is that people actually don't know quite how much they are being fleeced, and therefore can't be counted on to react with outrage if Gini coefficients get higher. This is true - there is a good deal of evidence that people are likely to think that they are in the middle of the income distribution even if they are not, and to underestimate the incomes of people in the top portion of the distribution. To that extent, understanding political reactions to inequality requires us to understand how people experience it, in their various locations, social cultural circles and occupations.

The rest of the argument is less insightful. How much of the accumulation of vast wealth at the top is due to talent having its day? Well, social mobility is in decline in the US, for a start, so the people making out like bandits are increasingly likely to be heirs to other successful people (Bill Gates is a good example of this). So if 'talent' gets inherited, that seems less reason to accept it as a justification of great wealth.

The other point Cowen seems to miss (despite presenting some numbers precisely on this point) is that if the rich are getting a bigger share of the pie, then everyone else must be getting a smaller share. And this does matter, if people are working hard to grow their slice of the pie and finding that most of this growth goes to a small group of already satiated people. Now, of course Americans are richer than a century ago, and even the poor are well off compared to their ancestors, but still: how happy can people really be about the fruits of their effort being denied to them?

Maybe Cowen is right, and Americans really don't care. But if he is right,  you've got to wonder why the angry party seems to be doing so well.

Tuesday, December 14, 2010

Rational fools

I've spent a lot of time recently pondering the Meltzer/Richard model, which (correctly over time, but inaccurately across space) predicts that competitive elections will lead to redistribution because redistribution benefits the median voter. Democracy is associated with a steady growth in the size of the state - and hence the extent of redistribution - over time, but a secondary prediction of the model - that more unequal societies would demand more redistribution - turns out to be flatly wrong. Unequal countries, such as the US, actually seem to resist greater redistribution, even though the logic of the M/R model should push them to demand it.

US voters challenge the logic of the Meltzer/Richard model by supporting policies - such as the Bush tax cuts - which largely reward very rich taxpayers and penalize middle income groups, who end up with fewer public goods  in return for a meagre tax break. More recently, the blogosphere has been alive with liberal Americans wondering why, in the midst of a desperate economic slowdown, the hard-pressed median voter supports candidates who long to reimpose the Gold standard and cut government spending.

But Jeff Frankel has inadvertently provided an answer to the conundrum. In his blog he outlines the various ways in which Republicans have talked the talk of balancing budgets and securing price stability, whilst opening gaping budget deficits and bullying central bankers to unleash demand whenever they get the chance. Eureka! Maybe American voters have understood something liberal commentators assume to be beyond them - that Republican talk of responsible economic policy is pure bull****. By voting for balanced budgets and an end to quantitative easing, Joe the Plumber understands that what he'll get is actually the biggest deficit since Bush I and red-hot printing presses down at the Fed.

OK, that does leave the irrationality of opting for the least stimulating kind of deficit and allowing the rich to bail out of social solidarity altogether, but... give me time, I'm still working on trying to rationalize that one.

Monday, December 13, 2010

Wolf on Assange

In case you were wondering what to think about Julian Assange's arrest and likely extradition to Sweden, Naomi Wolf has a pretty compelling analysis here. Wolf's argument rests on the indisputable point that rapists are rarely prosecuted even when the evidence against them is far more damning than in this case, and that the only plausible explanation of the rush to extradite is that Assange has mortally offended the most powerful government on earth.

Of course, if Assange is guilty he should face the full weight of the law. Pity that this principle is rarely, if ever, taken quite so seriously by the courts.

Lib Dem success

Michael Crick points out that with the latest polls, the Liberal Democrats have finally achieved a form of proportional representation - their vote share is now exactly proportional to their number of seats in the House of Commons (about 9%).

Friday, December 10, 2010

Anarchy in the UK

Revolting stuff.

You do wonder though exactly how people are supposed to respond to what's happening. After all, we just had an election, and certain politicians 'pledged' not to increase fees, and after the election, decided to increase them threefold. This is stretching the 'trusteeship' idea of political representation a bit too far, especially since we all knew how big the deficit was by the middle of last year.

Are students expected to pay up and wait to have their say in four and a half years time? And hope that next time they won't have voted for a con artist?

One thing is certain anyway - there will be no hurry to enact the 'recall' reform the Lib Dems were banging on about before the election. The last parliament may have fiddled expenses, but it was a good deal more honest about the real business of politics than this one.

Thursday, December 9, 2010

The helpless left

Interesting take on the crisis of the left by John McTernan - essentially voters perceive that, in his words, 'voters are moving beyond the claim that 'you're all the same', to an absolute certainty that nothing could make things better'.

This may be a key point. After all, the left is about changing things, and most of the big institutional, intellectual and structural changes of the past quarter century have made it much harder for the left to do that. There is a certain helplessness about left discourse - things are terrible, but there's not an awful lot we can do except alleviate some of the worst effects. Clearly not the kind of thing that will inspire confidence, which is necessary for any left administration which wants to make any real changes.

This is an intellectual crisis and a crisis of democratic politics. Intellectual, because the left is losing its ability to diagnose problems and its sense of purpose in dealing with them. Democratic, because people are losing faith in the political process as a way of making our lives better.

Woe is me.

Wednesday, December 8, 2010

Having a Laffer

I guess it was inevitable, but the new Republican-dominated Congress and the Republican-fearing President have decided to deal with the failures of fiscal stimulus by extending the Bush tax cuts. My usual sources of analysis on these things - Krugman, DeLong, The Baseline Scenario - are tearing their hair out over this.

In short, the Republicans talk tough on the deficit and criticize TARP and the stimulus, and then as soon as they can pass a $800 billion tax cut, mostly for the very rich who got most of the benefit of the TARP anyway. They'll either save this money or, worse, use it for leveraged bets in the still-unreformed financial markets. God help us.

Anyway, at least any pretence that American conservatives are really bothered about the deficit as such, rather than using it as an excuse to push their nihilist agenda, has now been dropped so we know where we stand. There is genuine class war going on here - is there no limit to the American voter's willingness to redistribute to the rich?

Monday, December 6, 2010

State of Emergency - I missed my flight!

Zapatero was always over-rated. But by invoking a state of emergency (estado de alarma), for the first time since the democratic constitution passed in 1978, over an ATC strike of all things, he's really lost any shred of credibility. Que desastre.

Saturday, December 4, 2010

Who pays?

Somewhere along the line, we all have to pay for the financial black hole that our banks have made for us. Just how that pain gets shared out, though, is a political choice.

There is a great article by Michael Pettis (via Edward Hugh) outlining the likely dynamics, linked below:

The rough politics of european adjustment

Friday, December 3, 2010

De Madrid al cielo

Spanish air traffic control is currently in the hands of the military and most of the air space shut after the AENA employees walked out.


In case anyone had any illusions that people will grind away at paying off the bankers' debts in euros for the next 10 years, this should remind them that sound money presupposes social order. People will put up with a lot, but if pushed too far strikes, protests and civil disobedience can bring down governments and reverse policy. So maybe Eichengreen is right after all (except for the US...) - democracy and liquidationism don't mix.
And the US is probably less an exception than it appears if we take the Republican success in the mid-terms as a simple expression of voter anger and frustration, rather than an unlikely preference for deflation. So there's going to be more of this.

Printing euros

Maybe monetization is the way out of the sovereign debt problem. Trichet is buying crappy sovereign debt in the Eurozone periphery and it's working (at least today - yields are down, Euro is up).

Interestingly, while in the US the political mood has shifted from expansionary to contractionary responses to the crisis, in the Eurozone it's going the other way around. Maybe because Eurozone governments, who have at least some understanding of what is at stake, have to respond to their electorates for the economic situation, whilst in the US Republicans can win Congress and blame all the problems on the President. The transmission belt of popular anger through to economic policy is working in different ways in the two contexts, telling us something about how democracy conditions policy response.

Interesting times indeed. Help!

Thursday, December 2, 2010

Cast-iron logic

Economics at its best brings the power of mathematical logic to the analysis of the messy real world. Here's a great example from Dean Baker:

economic-theory-predicts-that-we-would-not-have-very-good-economists

Vice and virtue

German banks are exposed to Irish banks to the tune of €139 billion, or 4.2% of German GDP, Simon Johnson tells us.

Just how virtuous is it to lend too much money to fragile economies so they can buy your stuff?

How Big Government Saved the Rich

Lest we forget.... as we contemplate the full force of the crisis bearing down on the weak and vulnerable, all this started because the super-rich all of a sudden needed Big Government. As the FT puts it 'Wall Street Owes its Survival to the Fed'. $3,300 billion's worth of corporate welfare.

Ireland, meanwhile, is paying the price for the decision back in 2008 to guarantee the banks that had made stupid upside bets on property markets that were grossly over-fed by any standard, turning a bank insolvency into a sovereign insolvency.

Funny how over here we seem to have decided it was all Gordon Brown's fault for running a 3.5% budget deficit for a couple of years. Somebody please remind everyone that the banks, not the state, made the wrong bets.

Wednesday, December 1, 2010

Eurobonds

Well, just when I was saying that the ECB wasn't smart enough to save the Euro by pooling sovereign default risk, Trichet hinted he might do that. Or at the very least, he 'refused to rule out' issuing common Euro-area bonds.

Nice idea. Otherwise welfare states are going to have to pay to bail out investment banks. Maybe we can just roll it in with QE and pretend it's nothing to do with fiscal policy at all...

I'm in debt, maybe I need to work less

The essential message of what I am now getting used to calling the liquidationists is just that - the world got over-leveraged, and the recession (in other words, the fact we're working and producing less) is the logical result. In other words, the logical result of getting too much into debt is to work and produce less.

This point is brilliantly made by Karl Smith (via Brad DeLong). Sure, it is not so simple: too much debt makes investment problematic and dampens consumption leading to a decline in output, so there is a reason why a burst bubble results in a downturn. But the basic point remains: this downturn amounts to getting people to work less in order to pay off their debts, and government needs to act to get us out of this individually rational but collectively bone-headed scenario.

Having a decent-sized public sector is one way - it didn't stop Sweden posting record growth last quarter. Stimulus is another. And yes, there are fiscal sustainability issues in some countries, but they could in principle be dealt with through international cooperation. After all, markets need some government debt to invest in, and global bond yields are at historically unprecedented lows. This could be done with the right institutions.

Something tells me the ECB, the Fed and the Bank of England aren't the right institutions.

It's official: George Osborne lightweight and inexperienced

These Wikileaks cables are really producing some big surprises. First we learn that Berlusconi is 'feckless', that Ahmadinejad is a lunatic, and now that George Osborne is a lightweight. What's next? Gordon Brown has poor social skills? Tony Blair was not really a socialist?

Tuesday, November 30, 2010

Printing money is good for you

James Surowiecki in the New Yorker (thanks to Ken Shadlen).

What's wrong with printing your way out of a debt problem? At the moment neither the banks nor consumers can manage without this kind of help, and if fiscal stimulus is impossible, the only alternative is to sit on your hands and hope we can enjoy deflation Japanese-style (ie with social peace and low unemployment - good luck with that).

I'm wondering how the whole liquidationist line plays politically this time around. After all, people with capital clearly prefer sound money, but a big chunk of our economic elite is also heavily leveraged. How does this play out? Is QE the way to keep the financial game going whilst the unemployment price their way into work? After all, if Ben Bernanke is doing it it is probably not going to lead to hyperinflation.

Ci siamo anche noi!

Italians must have been wondering why bond markets took so long to worry about a large Eurozone country with a 100% + debt to GDP ratio, massive structural problems, and a Prime Minister accused of misdemeanors ranging from false accounting all the way through to child sex abuse.

Anyway, now here we are. Italian bond yields are starting to jump just like Spain's. So, at the moment we have Ireland, Greece, Portugal, Spain and Italy all in trouble, with just a hint of Belgium. Meanwhile Sweden (albeit outside the euro) had the highest economic growth on record last quarter. I wonder what the default risk countries might have in common?

Amongst other things, they all were running current account deficits, and all had high inequality in the mid-2000s. There are a bunch of possible explanations for this relationship (which is pretty strong, and not a quirk of the data or a historical accident), including one which relates equality and trade to strong unions, wage compression and high skill levels.

Anyway, whatever the explanation, it pretty much nails the idea - articulated by Arthur Okun and reproduced in any number of Economist editorials - that inequality is the price to be paid for economic efficiency.

Monday, November 29, 2010

That's not important right now

Farewell, Leslie Nielsen. The star of many Zucker brothers spoofs and comic genius (albeit after 30 years of struggle as a serious actor). He made a guest appearance on this blog as Gordon Brown. But that's not important right now.

The Guardian has a great retrospective with clips from his serious and then spoof career. In this I found out that his brother was deputy Prime Minister of Canada for a while. Maybe Nick Clegg will end up as a trivia question in the same way.

Ok, please disperse, nothing to see here.

Saturday, November 27, 2010

Liquidate me! (again)

Brad DeLong is also puzzling over this. Why, if we understand more about how the economy works than in 1931, and if investors have more to lose from a slump than in 1931, and more workers have the vote than in 1931, we are still heading the same way we headed back in... you get the idea.

Two basic components to the answer. 1. Economists (or at least some of them) may have figured out what a slump entails and how to deal with it, but the vast majority of citizens don't have a clue what's going on. There is an intellectual deficit extending to a wide range of opinion leaders, never mind of ordinary folks who have never heard of Keynes. So, when someone comes along and tells you that it is wrong to print money because it causes inflation, look at Zimbabwe, then you have no defences.

2. The second part of the story is that the victims of all this may have the vote, but they are not mobilized and do not know what to do with it. There is no anti-liquidationist political party (although maybe Ed Miliband is planning one, we'll see), there are weak trade unions, and, compared with the 30s, there are less victims of the slump. After all, we all still have mobile phones and something to eat.

In a world of relative material comfort (compared with 1931, and indeed most of the rest of the world now), with a rich elite willing to take a shot at rolling back the welfare state, and an ill-informed, disorganized citizenry, it's not so hard to understand why all this is happening.

The Unbearable Lightness of Keynesian Macroeconomics

is my poetic description of this post by Paul Krugman, which he more prosaically calls the 'Instability of Moderation'.

Krugman's argument is that the intellectual holes in Keynesian economics - the inconsistency of assumptions between micro and macro - has undermined the stability of the resulting policy paradigms. It's a great piece but my feeling is that most of the people engaged in trashing Keynesian economics have no idea what he's talking about. They are either simple-minded fanatics who've taken liberalism too literally, or people who've got lucky in the market and want to make sure they don't have to share their good fortune with anyone else.

In other words, it's politics, not theories of human behaviour. How do the rich manage to persuade the middle to overthrow the political economy that did so well for the non-rich majority? That's the question we have to answer, and in the end it's not really about whether we believe in inter-temporal optimization or not. 'Moderate' policy, as Krugman calls it, is about collective action - it requires labour unions, left parties, mass commitment to pooled risk and sharing. All of that is achievable but unstable, as three generations of post-Olsonian research reminds us.

Are you, or have you ever been, a socialist?

Apparently Ed Miliband, leader of the Labour party, has admitted his own dark secret: he is a socialist.

This is truly terrifying. If the experience of that other radical socialist, Obama, is anything to go by, the middle classes of this country need to start making plans to relocate. France is nice, I've heard - my friends Giles and Daphne have a place there.

If I'm understanding this right, Ed is trying to redefine the middle ground, as people in 'the middle of the income distribution', as he - almost tautologically - described it on the Today programme.

This radical idea - that the middle class consists of people on average incomes, rather than wealthy North London professionals, which is what most journalists seem to think it means - has common sense on its side. But more than this, it opens up British politics to the possibility of a redistributive coalition containing the median voter, thus paving the way for a new centre-left majority.

Social democracy has always been about bringing the middle class into the progressive camp, persuading them that collective provision and redistribution can benefit them as well as the poor. It's an ambitious project, but the current crisis and brutal reduction of state provision brings an opportunity for this kind of realignment.

Wednesday, November 24, 2010

The cuts aren't working? More cuts please

So Ireland is going to raise taxes and cut spending, again, in response to the bond markets' fears. But wait a second, wasn't Ireland everybody's favourite example of how to do the fiscal consolidation thing?

Even the markets have now cottoned on that fiscal retrenchment doesn't get them their money back. Yet Ireland still needs to show its willingness to bear pain, just so we know they're serious. It's like the ritual of some kind of weird cult.

This is starting to look like Argentina circa 2001. But without the exit option.

Tuesday, November 23, 2010

Who cares about income inequality?

Not Nick Clegg, apparently.

Achieving income inequality is the goal of 'old fashioned progressives'. 'New' progressives, on the other hand, 'focus on the power and freedom of citizens'. Which obviously has nothing to do with income inequality.

Clegg wants to redefine himself as a proponent of equality of opportunity rather than of income. This is a game try, but I'm not sure it's going to get him very far. The harsh fact is that equality of opportunity is impossible when you have high levels of income inequality. Opportunities accrue to the rich, and they accrue more sharply when the rich are more advantaged compared to the rest.

After all, look at the three party leaders: each in their own way the product of a highly privileged background, both economically and educationally. John Prescott, who pulled himself up by his bootstraps at Ruskin College, was vilified for his Northern accent and mangled grammar throughout his time in mainstream politics.

Of course, this British tradition of class warfare is not Nick Clegg's fault. But how can the huge advantages of the rich over the poor be reduced if we can't even contemplate maintaining a 50% tax rate for incomes over £150,000, a Labour policy dismissed by the LibDem leader as 'political posturing'?

What is Nick Clegg's fault is signing up to the tuition fees capitulation, which saves the state very little (not much more than has been raised by the much derided 50% tax rate) and will almost certainly terrify many young people from low income families into giving up on higher education. Quite how he sells the coalition as a vehicle for social mobility with that particularly calling card is a fascinating question.

Eichengreen on the Euro

... and while we're on Eichengreen, here's an interesting discussion of the Euro, and break-up scenarios, with the man himself.

Things are starting to look like autumn 2008 again, only this time it's the sovereigns that are collapsing. Can Germany be sovereign to the rest of the Eurozone? Fingers crossed.

Monday, November 22, 2010

Liquidate me now!

Barry Eichengreen developed a much-cited argument that democracy changed macroeconomics forever, because governments would no longer be able to enforce brutal adjustments on the population for the sake of monetary orthodoxy. A recent post by Brad DeLong evokes this democracy/policy relationship.

The classic Eichengreen view is starting to look a bit incomplete. The missing part of the argument must surely be that the population needs to have some understanding of what the implications of policy are. At the moment there is a populist backlash in the United States against fiscal stimulus and monetary expansion, on the grounds that it's not reducing unemployment fast enough and threatens higher inflation. But this populist backlash could lead to a policy that would be far worse for the populace.

So we need to revisit the argument about democracy and policy. It could be, of course, that the population is no longer mobilized around a 'working class' interest, so that the views that really count are those of comfortable centrist voters, who could well benefit from liquidationism (especially if there are retirees who own their own homes and have adequate pensions), or at least think they would. In which case Eichengreen's thesis works as long as there is working class mobilization, but if the poor are not organized, orthodoxy can be imposed.

Or it could be that Eichengreen's thesis presupposes that the population has a clue about what is going on. After all, if you have an inadequate understanding of what's happening in the world and current policy is not quickly producing miracles, you may well believe someone who comes along and says (the contemporary equivalent of) 'bring back the Gold Standard'.

Of course, the Tea Party is a funny kind of populism, with its close links to hugely wealthy interests. But this doesn't alter the argument if it is successful in winning popular support. The last couple of decades have shown us that democracy isn't enough to stop elitist interests getting their own way. Mass interests need organization and mobilization if they're to take part in the game.

Sunday, November 21, 2010

The seagulls and the sardines

I've been wondering for a while when some kind of radical reaction to the current crisis would emerge. Maybe this is it...

Friday, November 19, 2010

Relax! Mortgage rates are at record lows!

Yes, it's truly amazing, but after all the Conservatives' desperate efforts to look as though they understand that some people are having a hard time of it - no quaffing champagne at the party conference, Camo's wife wearing Marks and Spencer dresses - some idiot still manages to put his foot in it.

This time it's Lord Young, who recklessly suggested that in the middle of the worst recession since 1931, in fact some people have 'never had it so good'. This, because if you still have a job and have a variable rate mortgage, your disposable income has gone up. This of course is true. In hard times, some people are better off. In theory I'm one of them. Never mind that the pile of bricks which secures my mortgage is worth rather less than I paid for it - I am indeed paying less for my mortgage than I was before the world financial system collapsed. Silver linings, eh?

Of course Lord Young is getting on a bit - in fact I wasn't even sure to be begin with that it was the same Lord Young Mrs Thatcher famously praised for 'bringing her solutions when others only brought her problems'. With rusty political reflexes he may have just made a misguided remark without realizing the likely consequences.

Or, alternatively, he may be a multimillionaire who, in a conversation with a Daily Telegraph journalist in a restaurant frequented by other millionaires, talked frankly about the world he inhabits. This is a world in which a recession means that your seven figure mortgage suddenly gets way cheaper. What's not to like?

This may sound like 'old-fashioned class envy', but I'm convinced that a government full of very rich men is not well placed to understand the society they are trying to govern. I predict disaster.

Sunday, November 14, 2010

Hope springs eternal

Most new governments in Britain have a 'honeymoon' period in which people extend them a line of political credit as a reward for winning an election.

Doesn't seem to be happening this time. Today's YouGov poll makes interesting reading.

Labour 41%, Conservatives 39%, Lib Dems 10%

Let's remember that the election gave us:

Labour 29% Conservatives 36% Lib Dems 23%

The Lib Dems are being crucified here, not unreasonably given that their flagship policy has been not only reversed, but turned into the one thing that nobody could have imagined in their wildest dreams that the Lib Dems would have supporetd. Can they survive?

It's hard to see how they recover from this. Abolishing tuition fees was not just their policy, it was just about their only policy. Tripling tuition fees is the last thing any Lib Dem voter could have expected to happen with the Lib Dems in government for the first time in the best part of a century. The deficit is no excuse, by the way: since the government has to put up the money for the requisite student loans, there will be no government saving in the short to medium term. All that is happening is that government funding is being removed and students will have to make up the difference. And given that the £9000 cap the government will impose still leaves universities barely adequately funded, it is surely only a matter of time before fees in the UK approach US levels.

I don't agree with Nick.

Never waste a good crisis pt 2

Tories do it better. The collapse of free-wheeling financialized capitalism gave the left the opportunity and the means to reshape our political economy: the most powerful business elites - the hyper-rich investment bankers - were insolvent and begging for government help, which could have been extended by the simple expedient of taking ownership (which in extreme cases, such as RBS, is what the UK government did).

But TARP and quantitative easing, the main tools of government intervention used so far in western countries, essentially consist of printing money (or taking it from taxpayers) and giving it to bankrupt financial institutions so that they can rebuild their balance sheets. Unsurprisingly, the banks are making use of this facility to make money, most of which they redistribute back to themselves. Governments feebly exhort them to lend money to businesses and consumers. They sit on their hands, knowing there is no ultimate sanction.

Along comes the resurgent right, with the following message: free-wheeling financialized capitalism has failed, because it was held back by the welfare state. So, to solve the problem we dismantle the welfare state, not only by cutting subsidies to the poor, but by undermining the very core of western welfare capitalism: public provision of education, health and pensions to all but the hyper-rich.

Even though the Conservatives failed to win the election, winning the support of only 23% of the total electorate,  thanks to the Lib Dems they are being allowed to take on the welfare state in a way Margaret Thatcher could have only dreamt about. Cuts to unemployment benefit, housing benefit, education at all levels, reorganization of the NHS, removal of elected local councils from the management of local schools, the list goes on. No mandate for any of this: none of the more radical measures were presented to the electorate before the vote, and much of it directly contradicts what the Liberal Democrats actively campaigned on. A government of 18 millionaires removing benefits from the workless in the middle of a recession. Can this really be allowed to stand?

If this country has any life left in it, the coalition should last no longer than a couple of years. If it lasts a parliament, I'm outta here.

Friday, November 5, 2010

Stop press: Politician lies to get elected

This is the extraordinary finding of the UK's 'election court' - which I'd never heard of - which has ejected Phil Woolas from parliament for, basically, demagogically slurring his opponent. While not quite from the manual of ethical politics, what Woolas did doesn't actually seem too far removed from the everyday nastiness of competitive electoral politics. Since it is not credible that Woolas is the only politician in 99 years to have unjustly cast aspersions on his opponent's character, this suggests a new electoral activism from our judges.

I'm now looking forward to the High Court invalidating the elections of the entire parliamentary delegation of the Liberal Democrats for lying about abolishing tuition fees.

Sunday, October 31, 2010

Who's side are you on?

The Tea Party is a fascinating movement. First of all there is the question of whether it is a movement at all, or simply a charade set up by billionaires with an eye for 40-something home-makers (an 'astroturf' movement). Second, there is the appalling lack of ability to speak coherently and knowledgeably displayed by some of the candidates (listen to Sharron Angle on healthcare reform here). Third - how will they do? Will people's fury at the economic crisis be translated into simplistic anti-government rhetoric?

We'll see. But if frustrated Americans respond to the Tea Party's appeal in large numbers, it will once again raise lots of questions about why Americans vote against most reasonable assessments of their interests by promoting tax cuts for the super-rich and limiting redistributive government spending which would benefit most people in US society.

Somehow, people have trouble recognizing their interests. Part of the reason for this is, of course, that it's not always that easy to figure out what your interests are. Very often people make their political choices by simply taking sides, rather than analyzing complex issues - after all, why should voters spend time getting informed? They only have one vote. So instead, they identify. And for a lot of people, a middle aged woman with conservative values (Angle) looks far more like 'their kind of person' than an aging politician who has spent too long in Washington (Reid). Given the difficulties of figuring out how health care reform is likely to work, a 'mom' like Angle who talks about 'getting government out of your life' rings bells with a lot of people. Certainly more than an over-educated black guy who has lived in Indonesia and, someone told you, wasn't even born where he said he was.

There is a lot of instinctive, emotional behaviour in voting. Poli sci hasn't done a great job of understanding this kind of behaviour so far.

Friday, October 29, 2010

Never waste a good crisis

Rahm Emanuel dixit. And promptly, did exactly what he said one shouldn't do (although I would agree that Obama hasn't been nearly as disappointing as many commentators think).

But Cameron and Clegg are not wasting this crisis. In fact, under the guise of emergency measures to save us from the terrifying vengeance of the bond markets, the current Con-Lib coalition government is actually recalibrating British public spending in fundamental ways. Labour increased public spending in a range of areas, including health, education, pensions and some benefits for the low paid and workless.

But the coalition is not reducing spending in ways proportionate to Labour's increases. Instead, in fact, they are freezing health spending - by far the biggest beneficiary of Labour's largesse - and cutting areas where Labour barely increased spending at all.

In fact, therefore, we are witnessing a major redistribution of spending as well as cuts. And it is a redistribution which will largely favour the elderly - health and pensions spending will be safeguarded - and harm mostly the poor, and especially poor children. The hardest hit will be children - mainly in London - who will have to move house and change school when the housing benefit cap is implemented.

The housing benefit system is clearly disfunctional. But is the only way to deal with it capping benefits and forcibly relocating beneficiaries? The real winners in the housing benefit game are private landlords, already incentivized with colossal tax privileges, and whose windfall gains due to the housing market bubble have yet to be touched by the coalition.

The pretence that deficit reduction has anything at all to do with fairness is wearing thin after only a week.

Friday, October 22, 2010

Clueless dorks

Brad DeLong describes Cameron, Clegg and Osborne thus:


'Shame on David Cameron. Shame on Nick Clegg. Shame on George Osborne.
Their shame would not be quite so great if they had a theory about what elements of spending will grow to offset their 9% of GDP planned fiscal contraction. Is the pound supposed to collapse and are exports than to surge? Is the prospect of rising unemployment in the U.K. supposed to greatly enhance business confidence and trigger a surge of private-sector investment? Is the 30-year gilt yield supposed to fall from 4% to 1% and that reduction in the cost of capital cause a surge of capital formation throughout Britain?
Cameron, Clegg, and Osborne don't tell us.
They don't tell us because they are clueless dorks.
They don't even have a theory about how the economy will avoid a double dip.
They hope that--somehow, some way--Mervyn King will save them from themselves.
But if they actually carry through with their policies, I don't see how he can.'

Apart from the fact that I share this pessimism about the prospects of the squeeze, the most depressing thing is that I have no confidence that Cameron, Clegg or Osborne could give any kind of coherent answer to the questions DeLong poses.

A desperate gamble

UK Polling Report has the results of a YouGov poll for the Sun newspaper carried out after the announcement of the Spending Review. Interesting reading. First, 47% of those polled felt the deficit crisis was the fault of the last Labour government, and voters had little faith in Labour to deal with the problem. But the good news for the coalition ends there.

Fully 49% felt the government was cutting too fast, and a remarkable 81% expected public spending cuts to increase overall unemployment, suggesting that growth-friendly fiscal consolidation is not a theory accepted by British voters. Only 34% agreed with the statement that 'the coalition had brought the country back from the brink of bankruptcy', the line pushed incessantly by government since Wednesday (45% disagree).

Most impressive is that fully 55% agree with the statement that the spending cuts are 'a desperate gamble with people's livelihoods'.

All in all, the British public feel that Labour left a terrible mess, but have little confidence in the current government's approach. The upshot in party political terms is that Labour are up on 40% to the Conservatives' 41%, whilst the Lib Dems languish at only 10%. In other words, the Conservatives seem to be getting all the benefit from the coalition, with the Lib Dems taking the strain. Centre-left Lib Dem voters, one can only assume, have been 'smoked out' as more left than right, and are moving back to Labour. How sustainable this will be is hard to guess, but Nick Clegg has work to do, and Ed Miliband has an extraordinary opportunity to place Labour firmly back in position as the dominant party of the centre-left.

Thursday, October 21, 2010

Let's inflate! No, really!

From Jacob Viner in 1933, via Milton Friedman via Brad DeLong (no, I'm not joking):

"it is often said that the federal government and the Federal Reserve system have practiced inflation during this depression and that no beneficial effects resulted from it. What in fact happened was that they made mild motions in the direction of inflation, which did not succeed in achieving it....
[If] a deliberate policy of inflation should be adopted, the simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks..."

No Plan B?

Glad I didn't vote Lib Dem

The Institute for Fiscal Studies has made its first assessment of the Spending Review, concluding that it was broadly regressive, with the exception that the top 2% of the income distribution will end up contributing the highest proportion of their income of any group. However, it is worth pointing out that the main reason the top 2% contribute more is that Labour introduced measures, chiefly the 50% tax rate, which the Con-Lib coalition has not removed.

In sum, the IFS shows that the best guess for the distributional impact of the spending cuts and tax changes is that they will affect families proportionally more as we go down the income scale (indeed, it is hard to imagine how any deficit reduction plan based chiefly on spending cuts could do any different).

What is a little alarming is the aggressive nature of the government's response to this assessment by a respected, non-partisan body. Clegg called it 'distorted nonsense' and claimed, rather tenuously, that the IFS was failing to take into account the progressive effects of policies such as the 'pupil premium'.

Odd that a government whose policies are informed by the view that throwing money at a problem doesn't work should imagine that a redistribution of a couple of billion to schools in poorer areas will counteract the effect of the various benefit cuts announced yesterday. After all, hadn't Labour got us into this mess by its misguided profligacy in the name of social engineering? Similarly misleading comments came from Cameron, who claimed the budget was progressive because people paid a greater proportion in tax as you move up the income scale. Sure, unless he was thinking of cutting higher rate tax to 20%. The argument is not that the tax and benefit system is not progressive at all, it's an argument about how much more or less progressive you make it.

Yet another example of double-speak is the bizarre accusation (in Osborne's speech) that Labour is at once a party of 'deficit-deniers' who would not cut the deficit, and at the same time a party whose plans would have meant greater spending cuts than the current government is proposing. How exactly does that work?

My guess is that the only way to push through such brutal medicine is to launch a campaign of mass disinformation. Something tells me they might be getting some assistance on that: Rupert Murdoch has come out in praise of the coalition, arguing amongst other things that 'the financial crisis must not be used as an excuse by governments to roll back economic freedom'.

Chance would be a fine thing.

Wednesday, October 20, 2010

Austerity bites

Nice debate in the New York Times about Britain's new austerity mood. The most interesting point, Andrew Lilico of the Policy Exchange explaining the obsession with deficit reduction in the following terms:  "we have this internal fear of losing control of our deficits and having foreigners telling us what to do. There is also a sense that deficits of this scale are morally lax".

I've heard of a lot of reasons why the deficit should be reduced, but moral laxity is a new one.

The Old Politics of the Welfare State

George Osborne's spending review has, as trailed in the days leading up to today's announcement, taken an axe to a swath of government activities. Cuts of £81bn over the parliament, out of a public spending bill of just over £700 bn, take a huge chunk out of the state, particularly if we consider that the biggest ticket item - health - was (apparently) spared any cuts at all. The strain is taken by the welfare bill - something in the region of £11bn altogether, including cuts on social housing, disability benefits, and help for children. Indeed, undermining help for children seems to be the leitmotiv of government policy, kicking off with the cuts of child benefit for high earners, through to the cuts to Sure Start, childcare credits for lone parents, and, of course, schools (whose capital budgets are decimated).

This is truly horrible. The gusto with which this administration has taken to rolling back the state is alarming - you get the clear impression that this is what they wanted to do all along. We'll see what the political response is, but it would be truly amazing if this passed without major social upheaval, even if the government's macroeconomic gamble pays off and growth resumes in spite of the squeeze. And if this pushes us back into recession, with an estimated million jobs lost and no-one hiring...

One headline today talked about the 'deepest cuts in government spending for 90 years'. Anyone remember what happened last time?

D-day

Today the government's Comprehensive Spending Review will be announced - we'll find out exactly how the pain will be distributed. The Bank has prepared the terrain by hinting at an expansion of quantitative easing to try and compensate for the blow to demand implicit in the spending cuts.

Mervyn King yesterday suggested that the coming decade would be a 'sober' one. The hint is that we have overdone it and need to dry out. The funny thing is, just as the party that ended in the gutter was getting going, Mervyn was talking about a 'Goldilocks' economy, and developing his 'Maradona theory ' of monetary management. I have no particular animosity towards King, but I am left wondering why, given his past record, we should believe his prediction that we are heading for sobriety, rather than despair.

Sunday, October 17, 2010

Inequality, again

Nice op-ed by Robert Frank, stating the obvious which is seemingly non-obvious to many - article here. Bizarrely, substantial numbers of voters are still opposed to tax increases at the top in the US. Why? Well, they may buy the line that this will reduce incentives and make everyone worse off (economic ideology). Or they may think one day they too will be rich (false consciousness). Or they may simply not know the facts about where all the money is going, and how the super-rich are contributing less and less. Or they may think 'tax cut - yey' and happily accept the crumbs while ignoring the cake ('Homer Simpson gets a tax cut' in Larry Bartels' neat metaphor).
Either way, free market capitalism and the concentration of power around a narrow elite is looking pretty healthy considering what's been happening in the last 3 years.

The Todd Henderson story

I got to this one a bit late... Anyone who missed it is encouraged to read here, here and here. It's a pretty instructive story about the times we live in (as well as the risks of blogging...). Henderson is a Professor at Chicago Law School, and blogged on Truth on the Market that he could barely afford the tax rises advocated by Barack Obama on people earning $250,000 p.a. (tax rises which are unlikely to happen anyway by the looks of things). Between private school fees, nannies, cleaners, gardeners, two cars and the morgage on his $1 million house, Henderson and his wife (an oncologist) had no money left at the end of the month and therefore couldn't afford to contribute more to government finances.

A real 'let them eat cake' moment.

The fascinating thing about this - apart from the blinkers Henderson wears as he goes about his life - is just how difficult it is for even exceptionally wealthy people to feel comfortable these days. As Brad Delong points out, instead of looking at those worse off than himself,


Instead, Mr. Xxxx Xxxxxxxxx looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.

In other words, Henderson is dissatisfied because he knows people way richer than he. This is grist to the mill of Wilkinson and Pickett, who in The Spirit Level argue that very unequal societies have costs to everyone, even the wealthy. This is clearly true - Henderson makes a fortune (at least double what a Law Professor of similar status would make in the UK), and yet he feels hard done by because of the even greater wealth available to others in his social circle. Academics are notorious for this - well educated people who are very well paid by the standards of the vast majority, but who are also disproportionately likely to have bankers, hot-shot lawyers or simply heirs to substantial wealth amongst their acquaintances.

But there is more to this. Henderson feels stretched to the limit by costs which at least in part come about because of the individualization of risk and lack of social solidarity in the United States. He has to pay huge private school fees, because public schools in Chicago's South Side are not good enough, and the main reason they are not good enough is because they are populated by poor Americans, and better educated Americans abandoned them a long time ago. Two cars are a necessity because mass transit is not an option for daily life in a deeply socially divided city (admittedly, Chicago is not really the best example of this). Health insurance is a big expense, and various investments to save for a pension - given the relatively ungenerous coverage of Social Security - is another pressing need.

In short, Henderson is well off, and doubtless griping largely because of his inability to look around him. A quarter of million bucks a year should be more than enough for anyone, and Henderson is either too ignorant or too self-absorbed to realize quite how much money that is for the overwhelming majority of Americans.

But there is an objective reason for his dissatisfaction. Even relatively high incomes just don't provide quite enough security in a deeply divided society.

Friday, October 15, 2010

How to revive the economy by closing down universities

Robert Skidelsky has a nice article making the argument against fiscal retrenchment (alternative link here). At least someone is making the argument. Whether or not Ed Miliband will sign up to to a real opposition view is still an open question: in a sense he doesn't have to: if the Con-Dem cuts destroy the economy, he will benefit anyway, because he was proposing slower cuts. But this does mean that almost no-one in public life (except Skidelsky and a couple of other FT columnists, in fact) is making the case that cutting government spending could make both the recession and the deficit worse.

Today the newspapers were trailing a leak suggesting that 80% of the government's funding for university teaching could be cut. It's to be hoped that this doesn't happen because either we will have to give lectures in football stadia, or most current students will have to drop their studies and seek work. An 80% cut is simply insane, unless..

Unless they are planning to simply withdraw government support as they roll in the new tuition fees arrangement. Quite who is going to explain to students that they will have double the debt for (at best) the same quality education, is not clear at the moment.

But back to macro. The Guardian education supplement is usually 10 pages longer: the total block on recruitment in British universities simply means that unemployment amongst aspiring academics will explode. Fewer students will gain the training needed to become productive workers. How exactly is that going to help the economy recover?

This is getting desperate. Either the government is playing mind-games with us (which is what I hope), or they're committing to a 'liquidationist' approach to the crisis. It didn't work so well last time it was tried.

Foreclose the banks

There is a big row in the US over foreclosure. It turns out that some banks have been over-eager in taking back properties from defaulting mortgage-holders, including one case where a house was seized from someone who didn't even have a mortgage.

The fascinating thing is how big finance is reacting. According to the Wall Street Journal, a typical view on Wall Street is as follows:

"Talk about a financial scandal," a Wall Street Journal editorial this weekend joked. "A consumer borrows money to buy a house, doesn't make the mortgage payments and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine?"
"The problem is they don't deserve to be in that place. They probably deserve to be there less than they used to," the source continued, referring to incomes lower now than they'd been when the loans were made in the first place. "You do need to foreclose, and you need to go back to people living in houses that are consistent with their income levels."

This is outrageous on so many levels.

First, who sold the mortgages to these consumers in the first place? Did prospective buyers have to twist the banks' arms to get them to finance purchases at ridiculous asking prices? Anyone who has bought a home in the UK or the US in the last decade knows that banks were throwing money at potential borrowers like there was no tomorrow. Other people's money. Let's remember what a financial institution does. It takes money from savers, and invests it in the hope it will grow and make a profit for both the bank and the investor. The money the banks lent out to homebuyers was not their money - it was money they were supposed to invest to make a profit for someone else. If the mortgage-holder defaults, then the bank has not done its job - it has cheated the investor. People will surely go back to living in houses consistent with their income levels if banks limit themselves to making realistic loans.

Second, hang on a second, didn't the banks come very close to their own foreclosure, before they were bailed out with $700 billion of TARP and an ocean of cheap money? How can they get high and mighty about what a defaulting mortgage-holder 'deserves', when they themselves would have been closed down two years ago but for a dose of state socialism? I'm sure most homeowners would have stood a better chance of staving off foreclosure had Ben Bernanke lent them money at 0% to tide them over hard times.

That'll do for now. But in case anyone was deluded into thinking the people who work in finance had any clue about what has happened to us since 2007, this should remind them that the oligarchs have no intention of saying sorry for anything.

Wednesday, October 13, 2010

Browne and out

So, it looks like tuition fees are heading up again.

This is a hot political potato, in much the same way the child benefit cut is proving - governments cut the wealthy's entitlements at their peril. The apparent proposal actually ticks many of the same boxes: it requires the upper income groups to contribute more, and is therefore bound to provoke deep opposition. In this regard it is interesting that a Conservative government should propose it, and even more interesting that the Lib Dems will have so much trouble over the issue, since they even opposed the introduction of much lower fees in the late 1990s.

Of course, this opposition, when made on principled grounds, is legitimate and probably right. Why should higher education be different from all other kinds of education, which are provided basically free at the point of delivery? It is true that the beneficiaries from higher education on the whole take most of the benefit for themselves, but surely this is true for lower levels of education too. Yes, the majority do not receive higher education, but these days around 40% do, so it can't really be argued that the majority end up subsidizing the minority. After all, the educated minority will end up paying multiples higher taxes over their careers than most of those that do not go to university, so in a sense they pay for it already. Why not completely socialize higher education? After all the externalities in terms of more productive workers and innovation through research accrue to society as a whole.

There is a very strong argument for a free market in tuition fees, with no up-front payment and subsidized and partly means-tested loans. This is basically what we have already, but with no real market, since the fees cap is set too low. This means that Oxford University charges the same as the University of Central England, which doesn't look like such a good deal for the student who takes on a loan of 10s of 1000s to go to UCE. With higher fees, Oxford graduates will have to pay back higher loans which will reflect in part the fact that they get a more valuable service.

The problem is political: New Labour never actually managed to convince people that fees and loans were ultimately in the interests of most graduates. Prospective students, and more importantly, their parents, do not equate a personalized debt (no matter how heavily subsidized) to an equivalently sized tax liability. This is important because a key part of the argument for loans was that graduates would still end up paying a large amount in extra taxes if the government had to pay for everything, and that universities would also be of lower quality because they would be starved of investment by short-sighted  politicians. But very few people actually look at it that way, and the argument has therefore been lost. '£90,000 to put two children through university' roar the headlines, as if graduates earning too much too much to claim child benefit for their kids were in any sense still their parents' responsibility.

So, this policy may well be right, or at least not much less wrong than the various policies that came before. But this doesn't matter, because the political argument is an impossible one to make, and will probably destroy the coalition.

What's wrong with English football part 4

Last night's 0-0 draw at Wembley has got to be one of the dullest games I've ever seen - in fact after an hour I started doing email and wasn't looking when the Montenegrins hit the bar. Fabio was refreshingly honest to point out that England were lucky to draw.

Not there is anything surprising about England failing to break down a team full of unknown former Yugoslavs. The former Yugoslavia is one of the most successful parts of the world for producing sports stars, with an enviable record in tennis and basketball as well as the beautiful game (see Why England Lose by Simon Kuper). Montenegro - a country with the same population as Leeds, as the ITV commentators pointed out - has a wealth of players with basic technical ability, ability that the vast majority of English footballers lack. That, added to a good basic tactical sense, gives them every chance of holding off a team like England which relies essentially on headers from deadballs. And they were missing their best player, Vucinic.

The England players are unable to pass the ball  with sufficient precision, and can't control the ball adequately under pressure. These are basic technical flaws, hidden when they are partnered by more talented foreign players in their club teams. It's back to the drawing board: teaching kids to kick the ball properly would be a start. Given the FA's reluctance to invest in coaching, this looks unlikely to happen.

Saturday, October 9, 2010

Let's inflate!

Big output gap, no prospect of devaluation solving the problem for anyone, large deficits to deal with without completely suffocating the economy through cuts, lots of hard-to-move debt on household balance sheets.

So here's the idea. The central banks should announce an inflation target of 7% (a figure accepted by many economists as creating no real problems provided it is stable - which of course it often isn't), and print as much money as they can to achieve it (presumably buying up all the government debt needed to keep deficits running). If it doesn't work, we're still where we are now. If it works too well, there is interest rate cuts and deficit reduction to push it back down.

Now I may have missed something obvious here, and I'm not trying to argue that high inflation has no risks. But, the current situation is unsustainable - who's to say the costs of a bout of inflation would be higher?

Just a thought.

PS Declared interests: a big mortgage on a devalued property and a collapsing pension fund.

Friday, October 8, 2010

Welfare reform in hard times

The debate around the proposed welfare cap gets more surreal by the minute. Everyone (just about) can agree that there is something absurd in welfare recipients getting more than an average family's income from paid work. But the moment you look into the details, the whole thing falls apart. Essentially, the only reason anyone can receive large amounts of welfare benefits is if they have several children to look after. So the 'undeserving' poor can only be punished (or incentivized) by effectively withdrawing financial support aimed at their children. Who of course, cannot be blamed for their predicament.

As a result, the coalition is in a big mess over this. Lord Steel, this morning on the Today programme, was cornered by Evan Davis into suggesting that the cap would not apply 'retrospectively' - ie to people who already have children. This is clearly not what the government is planning. However the only way a Liberal Democrat (or indeed anyone in possession of human empathy) can make sense of the policy is to deny that it will actually involve removing welfare support from real live children. So, like the child benefit cut, the coalition will probably end up cack-handedly finessing the policy so that it doesn't have the intended effect. So, no money saved, no reform.

The academic literature on welfare states has generally stressed how 'sticky' welfare institutions are and how difficult it is to cut back on spending. After all, the pioneer of the 'new politics' thesis in welfare state studies - Paul Pierson of Berkeley - developed his argument by studying the US and the UK in the 1980s, where determined efforts to cut the welfare bill were actually made. If Mrs Thatcher couldn't reform housing benefit or remove the poor's incentives to have children rather than work, why should we think that touchy-feely Cameron and Clegg will manage it?

The government looks like it doesn't know what it is doing. After all, IDS does not give the impression of being a man who has seriously analyzed the causes and dynamics of poverty in Britain. So what will happen? Well, probably a few high profile changes which sound impressive but only have marginal effects. Either that, or rioting in the streets.

Wednesday, October 6, 2010

The Deserving Poor

Cameron's speech today opens a Pandora's box, by suggesting that fairness involves what people 'deserve'. This is, on a superficial level, obviously attractive and intuitively right. But the moment you delve into the policy detail, it unravels pretty damn quick.

The Tory spinners were insisting tonight that the removal of child benefit for high earners and the cap on welfare payments reflect this notion of fairness and merit. So it is not fair that a 'man' (in Cameron's example) works long hours to pay taxes to sustain a family of welfare dependants next door. So fair so good. But what do you do about it? The welfare dependants will normally be receiving large amounts of benefits because they have children to support. But how can children be undeserving (as Jeremy Paxman pressed an uncomfortable Jeremy Hunt on Newsnight)? Similarly, it is intuitively sensible that families dependent on welfare should not receive four-figure sums in housing benefit to allow them to live in central London, when hard-working taxpayers have to commute miles to go to work. But if you cut their housing benefit, families (again, nearly always with children) will be forcibly relocated to different neighbourhoods, or even cities, leaving behind their schools and whatever social relations they may have built and creating ghettoes in the cheapest areas of our cities.

The notion of the deserving poor is therefore back with us. The sad thing is that we are talking about children here. The non-working poor without children receive very little from our welfare system (Jobseekers Allowance is £66 a week, which would barely keep my Oystercard going). So any serious cuts to the welfare system will penalize parents and children. Cameron's idea of fairness sounds great until you see homeless children out in the rain.

Tuesday, October 5, 2010

Please don't give me a pay rise

Will be the cry of parents currently earning £43874 per annum. The IFS lays down the incoherences of the Child Benefit cut here. As they put it: "a one-earner couple with an income of £43,875 would need a pay rise of £2,975 or more to ensure they were no worse off after paying income tax and national insurance and losing child benefit".

Don't touch my tax allowance

So now it turns out that since cutting child benefit for high earners is unpopular, the Tory high command has dusted down an old idea - the married couple's tax allowance - to try and win back favour. Won't do the trick with me I'm afraid: I'm not married.

This is a genuine policy mess, and they've only just announced it, which must be some kind of record. First, none of this was in the election manifesto. Sure, there is a big deficit, blah blah blah but we knew that before the election, and there is no serious case that the deficit has proved any worse than expected: if anything the numbers are improving. So why no mention of cutting higher rate taxpayers' child benefit, or capping welfare at £500 a week? Philip Hammond stammered on Newsnight that they are 'in a coalition', but the Lib Dems are not on record as having asked for either of these things, so I'm not sure that is a ready excuse (and given the reception of these ideas in the press, I'm sure the LDs are hiding behind the curtains on this one).

But worst of all, policy is informed by a combination of confusion and malice. Confusion because cutting child benefit for higher rate taxpayers may be simple to administer, but will produce real injustices, since a couple earning each below the threshold will keep their child benefit, whilst a family with one earner marginally over will lose it. I can imagine salaried workers pleading for pay cuts here. Malice because even higher rate taxpayers struggle with the colossal costs of bringing up children, with nursery fees in London routinely above four digits a month. With one child, CB is a nice top-up for a high income family, but with 2 or 3 it starts to look like real money -  £2500 a year for 3 kids. And to remedy this, the Tories are thinking of introducing a married couple's tax break which, if extended to higher rate taxpayers, would eat up all the savings of the CB cut.

All very amusing, no doubt, to higher rate taxpayers with no kids, who can continue spending their post-fisc income on skiing trips and Mini Coopers. The Conservative policy seems to be: don't have children. Accompanied, of course, by a cap on immigration. If you want to raise money from higher-rate taxpayers, there is a simple, efficient and equitable way of doing it: raise the higher rate. Making it 41% would not change anyone's life, and the pain would be shared precisely in line with ability to pay. It's called progressive taxation.

Monday, October 4, 2010

Don't touch my child benefit!

After hearing George Osborne's speech, announcing cuts to child benefit for higher earning families and a £500 per week ceiling on welfare payments, I went to pick up my daughter from her North London school. I estimate the majority of families whose children attend the school will be penalized by these policies: first, of course, because these are policies that almost by definition affect families rather than the childless. But second, because of the social mix of most London neighbourhoods. Parents at our school divide into two main groups: high-earning professional families in which at least one parent is a higher rate taxpayer, and low paid or non-working families who receive child tax credits and housing benefit, which in London can very easily go beyond the £500 cap. As things stand, pretty much all the parents will take a hit.

By far the most serious, of course, is the benefit cap. Let's think about this. If a family with no earnings have to rent in the private sector, than hardly any families with more than one child can stay in London. The government presumably hopes some of these people will find work (family-friendly work?). But in times of recession, who wants to employ the long-term unemployed? But this also raises the crucial question of how the cap will actually be applied: will families be forced to move, taking their children out of school and ending up in neighbourhoods or towns outside London where they have no family or friends? Or does the government hope they will just disappear? Moreover, the projected savings are only around half a billion pounds, which underlines just how little Britain actually spends on benefits: the vast majority of benefit recipients already receive a good deal less than £500 per week, which is not a lot of money to bring up a family with if you have to pay the kinds of rents typical in the South of England.

These policies have in common that children will suffer to pay down the deficit. In the case of higher rate taxpayers the suffering is relative. But even here, the better off are being discouraged from having children, which is already a hugely expensive adventure. There must be better ways of raising a couple of billion quid. A couple of pence on higher rate income tax, for instance?

Friday, October 1, 2010

Red Ed and the press

I've got a bit irritated by some of the press coverage of Ed Miliband, implying that there was something radical and sinister about his politics, and that Labour would have been bound to win back power under his brother's leadership. This suggests that most of the media find anything left of Tony Blair to be beyond the pale.

Philip Stephens, normally a good bet for helping us make sense of the world, gave a simplistic account of the electoral dilemmas facing Labour in Tuesday's FT. Here's my response.

It's still a bit early to say what Ed's strategy will be. But either way it is likely to be much punchier about social justice and how to regulate capitalism than anything New Labour has come up with in the last 16 years. The main point I was trying to make in the letter to the FT is that the centre-ground doesn't have to mean slavish adherence to neoliberalism: middle income groups don't have any obvious interest in deregulating finance or trimming public provision. The trick Ed has to pull off is bringing poor and middle together in a social coalition in favour of fairer capitalism. The point that fairer capitalism doesn't have to mean less efficient capitalism is only controversial in the UK and other English-speaking countries, it seems to me. I make these points in an interview to the Italian newspaper (formally the paper of the Italian Communist Party) L'Unita' here.

The other interesting development of the week is the collapse of the Irish austerity plan. Ireland did everything they were told to do very early on, and now find themselves on the brink. Meanwhile in the UK, gilt prices went up on the news that the Bank of England was considering further quantitative easing. This suggests that markets are coming round to a Keynesian view of the prospects for the next few years. My guess is the Con-Dem coalition will be smart enough to seize the opportunity to ease off on the cutting (which of course has barely started).

Tuesday, September 28, 2010

Ed's first speech

Well, I've no idea what's in it, because it hasn't happened yet. Couple of thoughts about what he needs to say though.

A lot of the comments about Ed's election, especially from the mainstream and right-wing press, have implied that the choice for Labour is to be either left-wing, and focused on redistribution and poverty, or electable, and therefore more pro-market and friendly to the middle-class. This is certainly the view of the world that informed 'New Labour' (which amusingly, now sounds 'old'). But does this dilemma really exist?

The interesting thing about Ed that gives me some hope is that he has clearly read and digested The Spirit Level. The whole point about Wilkinson and Pickett's argument is that there is not an exclusive choice between helping the poor and helping the middle class. Many of the things that trouble the middle-class (especially if we interpret 'middle' to mean people around the median income, rather than London-based people on six-figure salaries who know journalists personally) are precisely the result of poverty and inequality - crime and disorder, problems with schools, high house prices, unpleasant public transport and traffic queues. The trick is make it clear to people in the middle of the income distribution that they are better off too if the poor are less downtrodden.

Of course, this is not an easy trick to pull off. It is so easy to present things as binary choice - protect the interest of the poor, or protect the interests of everyone else. Particularly because the initial measures taken will appear to penalize the middle to no obvious gain for anyone except the poor (redistribution through tax and benefits, making schools more inclusive, restrictions on private traffic). So convincing people in the middle that we are all in this together requires a herculean political leadership, capable of developing a political rhetoric that 'mobilizes bias' (to use Schattschneider's term) around the kind of policies that the vast majority of people below the top 10-15% will benefit from.

Achieving this would be close to miraculous. But failure to attempt it would condemn us to alternation of Cameronite conservatism and Blairite-style government, and ever greater levels of popular frustration and apathy.