Thursday, December 26, 2013

The Art of Political Bullshit

I've been trying for a while to put my finger on what is distinctive and new about the Cameron coalition government, and I think it requires conceptual innovation. How much of this is down to the novelty of coalition for the UK, and how much to Cameron's mob being genuine political path breakers is a question for another day. But for now I'll settle for coining a new term for this way of making, or pretending to make, policy. And that term is: bullshit.

OK, it's not that new a term. I've taken inspiration from Harry Frankfurt's well known essay On Bullshit, that didn't claim to address political life in particular, and whose arguments are not perfectly applicable to my concern here. The bits that I do think are relevant to the Cameron government are the wilful misrepresentation of reality, and of themselves. Of course, there is nothing new about politicians being economical with the truth, but what is distinctive about this form of political bullshit is that there is nothing very concrete underneath the deception and half-truths.

The key feature of the Cameron government is that there is no real aim to change anything very much, or at least anything that matters to the plutocrats that are this government's main audience. Things are rolling along just fine for this group, and the policy changes needed to keep them happy generally don't require much innovation. Backdoor privatisation of the NHS and blocking re-regulation of finance are tried and tested policies, and the Labour party is showing no real signs of attacking the government on these staples. It's business as usual.

What is new is the fodder served up for the rest of us. I've experienced two periods of government before this one - Thatcher-Major and Blair-Brown - both of which had an identifiable set of policy goals. The first probably made much more in the way of lasting transformations than the latter, but whichever way you look at it, there was a plan and there is a legacy. But this coalition's legacy will for the most part consist of the consequences of inaction on the one hand, and damaging policy confusion on the other.

Just a couple of examples will suffice to make the point. First, welfare reform. Iain Duncan Smith's Universal Credit has turned out to be an unworkable and expensive disaster, more or less as anybody who knows about social policy in this country predicted from the start. Other policies, such as the bedroom tax, are spiteful and nasty, but will not achieve their stated aim of cutting waste and avoiding overspending on welfare. In essence, what we have here is policy which isn't designed to achieve what it claims. Instead, it is designed to play well in tabloid newspapers, and fit in with a broad narrative about Labour profligacy.

The other obvious one is immigration. Immigration has made a big contribution to economic growth in the UK, it's unlikely that it has genuinely had much of an impact on wages or job opportunities for the British-born, and in the long run will help pay for pensions and rebalance the government accounts. Moreover, the policy levers available are ineffective, since the UK is bound by law to allow asylum seekers and EU citizens into the country. Immigrants are not a drain on the welfare state, and on average increase the skills base and educational resources available to the economy. Immigration will continue despite whatever the government does to make foreigners' lives difficult. Current government policy, based on the ludicrous objective of trying to hit a target which is a function of two barely controllable phenomena - immigration and emigration - is pure political bullshit.

There is a logic to this government being particularly prone to bullshit, because it was elected on a premise which was entirely at odds with the facts: that the financial crisis was caused by Labour increasing public spending by too much, and that the Conservatives could reduce government debt by targeting spending cuts on recipients of means-tested benefits. Given this starting point, there were two options: admit it was all nonsense, and change to a more sensible policy, or stay with the bullshit. The latter, of course, implies a further descent into the sticky mess, much in the same way classic situation comedies take small lies and magnify them into a chaotic and unmanageable web of whoppers.

The big question is, does bullshit work? A Conservative victory in 2015 would send a clear signal to the political class that bullshit is a winner, and make reality-based politics increasingly hard to sustain. The polls are not pointing to such an outcome, but the economic recovery - which deserves a book-length study of policy bullshit in its own right (for now, see Simon Wren-Lewis) - opens up some space for Tory optimism. We can expect an election campaign based on fantastical notions of 'making work pay', 'clamping down on migrants' and 'standing up for Britain in Europe'. After seven years of declining living standards, British voters will have the chance to call bullshit, or sink deeper into it. We'll see.



Tuesday, December 17, 2013

Bringing the State Back In. Really.


As we near the end of the fifth year of this economic crisis, there isn't much reason for optimism, despite the UK economy apparently reemerging from its austerity-driven slumber, and entering the usual housing-led recovery. The stuff I've been reading around the blogs in the last few weeks all points in the same direction: the postwar period of growth, shared prosperity and strong democracy has well and truly hit the buffers. And there is one conclusion that just about everybody is trying their best to avoid drawing, but that I think we'll probably get to in the end: the government needs to get a grip of the economy once again. Why?

First, after 1945 we, here in the advanced world of Europe and the Anglosphere, got used to economic growth as a kind of law of nature. There could be recessions, but the economy always recovered. Productivity gains could reliably be expected, giving us a trend rate of growth which allowed us to predict rising living standards into the future. Since 2007 that seems to have stopped. Many have argued that this is down to the wrong policy reaction to the financial crisis, but a recent debate has raised the possibility of an emerging 'secular stagnation', a permanent landscape of low growth because the natural rate of interest is below the zero lower bound. In this scenario, the capitalist economy can only generate growth and jobs through unsustainable bubbles.

Second, inequality has become a fact of life in the advanced economies. Increasingly, any income growth the economy generates is concentrated in the hands of investors and the managerial class, with the bottom 90%, or even the bottom 99%, largely losing out. Policy responses, such as tax credits for low earners and targeted investment in early years education to encourage social mobility, barely scratch the surface. Todays' economy, when it manages to create any income growth at all, simply directs it to an elite of super-rich individuals and those who think they have some chance of joining them.

Third, in these circumstances the social compact that allows democracy to work - a sense of shared fate and a sense that others can be expected to play by society's basic rules - starts to break down. Social classes and generations become intolerant and hostile to each other's demands, and increasingly the poor and ethnically distinctive are blamed for the broader problems of the economy and society. Extremist parties emerge and grab frightening shares of the vote, but even the mainstream parties adopt an increasingly intransigent approach.

Why on earth should anyone believe the government can provide any answer to these problems? After all, 2/3 of British voters believe political parties are corrupt, and satisfaction with the political system and its representatives is at all time lows in many countries. Government already spends around half of GDP in advanced democracies, and has little room to grow further.

This may be true, but I'm increasingly convinced we have no option. All the above problems require coordinated, collective action, and the state remains the only viable vehicle for achieving this. If the capitalist class cannot be induced to invest by market conditions, then government is the only one who can act, either by extending its fiscal role by taxing the wealthy, or even by simply exploiting the high demand for safe assets to borrow and invest. The Keynesian arguments for addressing the output gap through increased government borrowing are looking pretty healthy after the predictable failure of austerity to produce recovery. The 'secular stagnation' argument suggests we need to go further.

Current arrangements are also doing a lousy job of distributing income in a remotely balanced way, and here again government is the only answer. Redistribution through the tax and welfare system has a long and largely successful history, effectively banishing real poverty in the West after the Second World War. 'Predistribution' through a more interventionist approach to regulating the economy can also do a lot here. And even if you are skeptical this kind of intervention can achieve much, what is the alternative? Declining living standards into the foreseeable future for the bottom 90%, or more, of the working age population? Can democracy survive this in the long run?

By acting as the guarantor of coordinated action for the public good, government can revive democracy. The current trend towards technocracy and non-partisan expertise has not worked. Allowing government to act on behalf of the electorate, rather than committing it to abstract policy  rules designed by economists,  is probably the only way to revitalise the democratic process and overcome increasing hostility towards parties and politicians.

'Government' and the 'state' have become dirty words in the last few decades, but the alternative has failed. The evidence that state action never worked was always weak - the heyday of interventionism produced not only fairer shares, but also higher growth. Increasingly influential figures are arguing for a greater role for the state in the economy and society. There has never been a better time to make the argument.

Tuesday, November 12, 2013

A message from Germany: not my problem

Paul Krugman complains (again) that Germany's tough line towards the South fails to appreciate how much its own relative economic success in recent years is the flip side of the Mediterranean countries' failure. By refusing to allow a higher eurozone inflation rate, Germany is effectively denying the South the chance to realign its relative costs in the same way Germany was able to do in the first years of the Eurozone. As Krugman shows in his post, Germany's success in holding down its labour costs was spectacularly successful precisely because the South did not manage to achieve zero real wage growth, and therefore provided a ready market for German products (not to mention an outlet for German financial surpluses). Resolving the crisis requires Germany to return the favour.

I'm always puzzled, looking at things from the perspective of the UK and Southern Europe, how it can be domestically politically impossible to persuade Germans to spend money. After all, the easiest solution to the crisis has always been that Germans dipped into some of their trade surplus to enjoy the South's warm beaches and hospitality, or maybe even buy a few second homes on the shores of the Mediterranean. It looks like a win-win solution. Yet, the hair-shirted Prussians prefer to stick it all under the mattress, and invite Southern Europeans to do the same, even if this does actually shrink the economy and put German savings at risk.

This can be seen as a cultural or ideological problem. In many ways, the discourse of belt-tightening on the European level has a quasi-religious quality. We need to suffer, and those who have least should suffer particularly, since being poor they probably deserve it. The poor, Weber would say, lack a beruf (calling), whilst the parsimonious rich are blessed and will be rewarded in the afterlife. The crisis becomes a morality play. Easy answers, like inflation or fiscal stimulus, must be wrong, because the crisis is a clear sign we have sinned and must atone.

I can't help thinking that it would be easier to convince Germans to adopt a more constructive attitude if Southern Europeans didn't enjoy such an enviously pleasant climate and physical environment. Whilst Germans have to endure long cold winters, the South basks in sunshine  - no wonder they don't work so hard. Of course, as has been well documented by now, the average Southern European worker has a much longer working week than the average German, and savings rates are also actually quite high in the South:


The truly profligate are the Anglo countries, with clearly lower savings rates than continental and Southern Europe.

The morality tale of Southern Europe's decline doesn't really fit with the facts, but my guess is that it is simply easier to digest for Germans than the harsh truth, which is that European Monetary Union was designed and is being governed in line with German interests. In other words, the moralistic tone of the Eurozone policy discourse is a cultural problem founded on a very real set of material advantages.

EMU was an extension of the process of market integration in Europe, removing one of the last remaining barriers to trade - national currencies. By creating a single currency, competitive devaluations became impossible. The usual beneficiaries of such devaluations - the weaker currency nations of Southern Europe - were prepared to sacrifice this competitive advantage in exchange for the inflationary anchor provided by Germany's dominance of the new currency union. What they didn't perhaps anticipate was quite how exposed they would become to Germany's extraordinary capacity to control price and wage rises, and how little help they would get from the ECB, which shaped monetary policy around the needs of slow-growing Germany, leaving the fast-growing periphery to inflate itself into an uncompetitive real exchange rate. And now, the only way back for the South is a brutal internal devaluation which, as well as closing off the labour market to anyone below the age of 35, will make debt servicing next to impossible.

Despite recent optimism about financial flows returning to Spain, this process of internal devaluation is far from complete, and there are incipient signs of deflation across the South, hence the ECB's increasingly desperate attempts to use monetary stimulus to get the economy moving. Still Germany protests that all of this has nothing to do with them, and refuses to play any part in raising internal demand in the Eurozone. But politics has an awkward habit of raising its ugly head in these situations. There will be elections in Spain within 2 years, and almost certainly in Italy and Greece even sooner. The problem will not go away, and Catalan nationalists and left populists in Spain, the Five Stars movement in Italy, Golden Dawn and Syriza in Greece, are all waiting in the wings. Barry Eichengreen established that you can't run a gold standard in a democracy. Is Europe trying to test this theory to destruction?

Wednesday, October 16, 2013

Political Economy and the Logic of No Alternative

Colin Hay wrote a nice piece on the SPERI (Sheffield Political Economy Research Institute) blog last week, about economists and the study of political economy, the gist of which was that political economy has drifted too far towards being a branch of economics, and has forgotten that politics shapes the economy. Hay argues that we need to get back to looking at the political economy as the result of political processes and choices, and that economic forces alone don't explain all that much, because these forces act within a context shaped by politics. This fits in with Colin's long-stated positions on the nature of social science and the political economy, and his suspicions of the 'imperatives' deriving from a certain view of how the economy works, a view usually interpreted by economists themselves on the basis of an approach that overstates the importance of rationality and equilibria. The economist Dani Rodrik has also made similar points, arguing that the overbearing position of economics in political economy has emptied the study of politics of what makes it interesting.

This came to mind in a discussion at LSE last Monday at a meeting on the crisis in Southern Europe. There was a feeling of exasperation in the room at the lack of political debate about the crisis in the South of the Eurozone. Southern Europeans are suffering a tremendous economic and political crisis and yet still to see any kind of coherent popular reaction, although the heavy defeats of governing parties in elections suggests a desire for change. This absence of debate and limited political contestation reflects in part the fact that all of the mainstream political parties and organizations have signed up to the European project and see it as a national imperative (that word again) to remain within the EU and EMU, and to do so on the terms set by the Troika and the EU's leading countries. This, despite the heavy cost being paid by Southern Europe's citizens in unemployment, reduced wages, cuts in services and higher taxes, none of which can be credibly claimed to have helped resolve the economic crisis.

The point I want to make here is a very basic one, drawing on Colin Hay's argument. 'There is no alternative' is an idea - a theory which justifies a particular course of action. There are of course lots of alternatives to current policy, even within the constraints of the bailout memoranda and the European Monetary Union's rule-book. But more importantly, these constraints themselves are modifiable. For example, the European Union demands that deficits return to 3 per cent of GDP and countries must demonstrate that they have a plan to achieve this. But countries could of course choose to implement the plan with varying degrees of commitment to the stated aim. The decision to implement fiscal contraction is based on an assessment of the available alternatives. To say there is no alternative is simply not true.

What is true is that some alternatives could well bring unpalatable, even disastrous consequences. For example, failure to implement agreed deficit-cutting measures could lead to investors taking fright and pushing up the spread on the Southern governments' bonds. Conceivably, this could create difficulties in funding government activities, maybe even force a default, or lead to cuts in other areas of spending. The debt ceiling crisis in the United States is an interesting analogy here, because although the threat of default is entirely driven by domestic politics, the logic of considering alternatives in the face of a funding squeeze is quite similar. And what emerges from the US crisis is... well, actually, there are alternatives to raising the debt ceiling. Nobody really wants to test them out, but the rapid approach of the deadline for the government running out of cash leads to much inventive searching for... alternatives.

So when Europeans claim there is no alternative to certain kinds of policies, what they really mean is that they do not wish to countenance the alternatives they can think of. This is an entirely different proposition. It may well be that Southern Europe is better off sticking to the Troika's plan than tearing up the European rulebook, but in the end that is a political choice, based on an assessment of a deeply uncertain set of circumstances, and on an assessment of whose interests need to be protected first. That's actually what politics is usually about.

The usefulness of a more 'political' political economy is in the consideration of a much broader set of feasible scenarios than economists are prepared to model. It is ridiculous to claim that western democracies have no choices. The idea that there is no alternative is an idea, and what we need to understand is the politics of how that idea has trumped all the other ideas. This is the case even if we accept the notion that countries such as those in Southern Europe are better off sticking with current policy - after all, the study of politics is often the study of lousy decisions with terrible consequences. It's time we returned to studying why some political ideas win and other lose, instead of assuming that politicians do what economists say they are able to do. That is not only a scholarly surrender - it also means we are giving up on understanding fully how the political economy works.

Friday, August 2, 2013

To Catch a Thief: What the Berlusconi sentence tells us about Italy

So finally, after 52 trials the communist judges that have infiltrated the Milanese courts and ultimately spread through the system all the way to the Cassazione (Italy's highest appeal court) have got their man. Berlusconi is convicted at the third and final level of judgement of a tax fraud committed some two decades ago and receives a prison sentence, although for a variety of reasons (age, an amnesty law, the possibility of 'alternative measures') he will not set foot in any jail.

The response from the convicted criminal himself was predictable enough: he has long argued that he is innocent of all charges and that his many trials are the result of left-wing judges trying to use the law to achieve a political end of eliminating the most popular politician in the country. What amazes many people outside Italy, and particularly in Northern Europe and the English-speaking countries, is that so many Italians still support him. After all, in some democracies the merest whiff of legal trouble or sexual scandal is enough to end a political career - British politician Chris Huhne was recently jailed and his political career terminated for evading a speeding ticket. Why do Italians seem so forgiving?

Let's try and get into the mind of the Berlusconi-supporting voter. First, there is the traditional deference with which many Italians view the rich and powerful - even Berlusconi's opponents refer to him as 'Il Cavaliere', after the honour of 'Cavaliere del Lavoro' (similar to our knighthood for services to industry) was bestowed on him by his friend Bettino Craxi back in the 1980s. Berlusconi plays to this role of the rich benefactor, giving supplicants gifts such as watches, jewels, apartments or simply money in the style of the traditional 'notables' of pre-democratic times. Of course, his TV channels are very helpful in cultivating this image.

But let's not assume that most of Berlusconi's support comes from these quarters. If there is one thing you can say about Italians, it is that they do not like to play the sucker. And in a country with such a Baroque administrative and legal culture as Italy, obeying the law and paying your taxes is fraught with danger. At best, you can end up out of pocket knowing that many others are cheating on their taxes. At worse, you can find yourself penalized for doing the right thing, since tax law is complicated and unpredictable, and very often tax levels are set on the assumption that citizens will indeed not report their full income. Not surprisingly, an estimated 13.5% of income is not declared to the tax authorities. More generally, Italy's legal system is exceptionally complex, with a much larger number of laws and regulations than other democracies, many of which are in flagrant contradiction with each other.

So when Berlusconi talks of the injustices he has faced at the hands of judges and the state administration, this chimes with the experiences of most if not all Italians. And those most likely to sympathize with him are to be found in the very large section of Italian society that owns property or their own business, or is self-employed. Sure, many Italians believe that the best way to deal with the problem would be if everyone paid their taxes and respected the law. Others take the view that that will never happen, and therefore the law should be applied in the most relaxed manner possible. When Berlusconi talks of 'liberty', he effectively means 'impunity'. Since the state and the law don't work properly, punishment is illegitimate, verging on totalitarian. This fits in nicely, of course, with Berlusconi's strident anti-communism.

In the end the saga of the justice system is representative of the broader problem of the development of the Italian state. The Piedmontese nation-builders of the late 19th century attempted to create a unified Italy on the basis of a French-style administration, in which local resistance to state power would be overcome by the imposition of a systematic, uniform set of laws to be implemented by a centralized bureaucracy. Unlike in France, the Italian state never quite succeeded in turning 'peasants into Italians'. The state remains, for many Italians, an unloved and even loathed presence, tolerated for providing tangible benefits such as jobs in the public sector, state pensions, and healthcare, but not respected. In large sectors of Italian society the state has failed to establish itself as a necessary framework for civic coexistence or an efficient and fair economic system.

For this reason, we can get rid of Berlusconi (perhaps), but it is much harder to overcome berlusconismo.

Wednesday, July 17, 2013

The Will to Power

So a few interesting tweets and blogs set me thinking again about the role of external constraints and political will in achieving social change. The most puzzling feature of the last few years is how a colossal economic policy failure has been able to wreak havoc across the population over a sustained period of time with barely any real change in what elected politicians say and propose to do about the economy. If you read, for example, Paul Mason's neat account of the 2008 meltdown, you will see that it was a common view around that time that the crisis would put an end to the triumphal march of neoliberalism in western democracies and generate significant progressive policy change - as Mason put it, 'the end of the age of greed'. Five years on, I'm still waiting for the age of greed to end, and I'm getting less optimistic by the day. Ed Miliband's talk of predatory capitalism has given way to crude union-bashing, whilst the Tories have exploited the crisis to turn the tables on the poor whilst the bankers get what appears to be a free pass. Elsewhere in Europe things are no better, and in some places worse.

Depressingly, the mainstream left has almost nothing to say about the crisis, its causes, and how we can rebuild a fair economic system. In part, this is because it is still in the grip of third way thinking which sees globalization and the mobility of capital as a constraint which closes off most of the possible measures to redistribute income and protect the welfare state. But is globalization really the reason why more progressive policies can't be followed? There are plenty of reasons for doubting this, as the abundant literature on globaloney attests. Here are a couple of examples.

Richard Murphy describes the likely failure of Iain Duncan Smith's over-hyped Universal Credit to remove disincentives to work for low-earners, and laments the failure to deal with the problem of in-work poverty. His conclusion is that a more progressive tax and benefits system can be achieved with two pre-requisites - political will, and an abandonment of the punitive assumption that the poor prefer not to work. The point here is that although globalization has had important effects on labour markets in advanced economies, there are policies that can significantly mitigate these effects and maintain low levels of inequality, as countries such as the Netherlands and Denmark demonstrate. If we don't adopt such policies, it is nothing to do with globalization, and everything to do with the dominant political ideas that constrain us.

Another example is Hopi Sen's blogging on the housing crisis here. Sen is strangely convinced that there is not much we can do about housing, since it costs money to build houses, and we don't have any. Presumably the elusive bond vigilantes are the reason the money can't be found, but there is good reason for doubting their existence. In fact, housing is one area where globalization barely constrains governments at all. The UK government could perfectly well change tax, land and planning laws to free up the market, and if it doesn't that is nothing at all to do with external constraints. In fact, building new houses in a country with a huge housing shortage and plenty of empty space, as well as an economy running below capacity with large numbers of unemployed building workers, is as close to a free pony as you can get.

So why don't these policies happen? They don't happen because the parties that should push for them - the parties of the progressive left - don't have the will or the capacity to propose and implement them. So instead of worrying about globalization, it's about time we starting worrying about the impact that overblown theories of globalization have had on the thinking of progressive political elites. There is plenty of polling evidence that voters quite like progressive taxation and would be happy to vote for policies restraining the excesses of the banking system or making new housing available. If that doesn't happen, it is because the leadership of the left has given up on making the argument, not because the mysterious forces of international capitalism prevent them from doing it.

Friday, April 26, 2013

Bringing the state back in

Bringing the state back in is the title of a much cited volume edited by Peter Evans, Dietrich Rueschmeyer and Theda Skocpol back in the 1980s. The book complained that social science had lost sight of the state as an autonomous political agent in its own right, tending instead to see the state as an epiphenomenon, its dynamics driven by rational individual behaviour or social structures and conflicts. This was blamed on an Anglo-centric perspective which focused on the dynamics of liberal capitalist societies where the state appeared to have a less decisive role.

Three decades later, we can conclude that this appeal to consider the state has failed, at least as regards political science. Even worse, this intellectual neglect of the state has coincided with a political rejection of the state as a useful instrument for achieving social objectives, which has underpinned the liberalizing reforms of the past quarter century. Ironically, this anti-state bias hasn't actually reduced the power of the state all that much, rather it is shifted state priorities away from developing long-term social and economic objectives, and towards propping up the privileges and powers of favoured groups, as well as mopping up the failures of the neoliberal model. But intellectually and politically, the notion that the state could be a useful tool for solving social problems and improving people's lives seems quite dead.

It is striking to read descriptions of the activist states of the 1950s and 1960s, as I've been doing in the last few days (in particular, I've been reading about the state enterprises in Italy, a brief account of which can be found in Andrew Shonfield's masterful Modern Capitalism). In this period, probably naively and over-optimistically, the consensus view was that the state could achieve great things through interventionist policies such as public investment and control of the banking system, and state management and planning in key industrial sectors. Since the 1970s, the neoliberal counter-attack against these ideas - inspired by the 'public choice' school of economics - has won out, to such an extent that even now, with the catastrophic failure of laissez-faire approaches to pull the west out of a deep economic crisis, nobody is talking about the state as having anything much to offer.

So instead, we press on with doling out cash to privately owned and or/managed banks, who are free to decide how best to invest the abundant capital stored up by the winners of the economic changes of the last three decades. Britain's public infrastructure is threadbare, there are large reserves of unused labour, and there is a pile of capital that is looking for a return, and yet what do we do? As far as I can see, print money for banks to lend to speculative investors to buy up property in the few parts of the country where the economy is still alive. This is a coordination failure of massive proportions, and it has been delivered by private actors driven by market forces.

Somehow, we need to change the image of the state. Despite the fact that without strong state intervention there would probably not be an economy left by now, the notion that the state can actually actively contribute not only by kickstarting the economy but also by enhancing the prospects for economic progress into the future is still taboo. Yet looking around, all I see are coordination failures that are holding back growth (chief amongst them at the moment, the inability of the construction industry to build homes for people who are desperate to buy them). I am probably, like the Shonfields of the 1960s, way too optimistic about what can be achieved by concerted state planning and investment, but the least you can say is that the jury is out on the value of the current model. There is no strong intellectual reason for not considering active state involvement in investment and consumption decisions.

So there you have it. Instead of just stockpiling it in the banks, print money to buy government debt allowing the state to build, educate, train and back the people and organizations that will produce stuff in the future. And if that creates inflation, raise interest rates. It might not work, but what we are doing now is clearly not working either. It's worth a try.

Wednesday, April 10, 2013

Maggie and me

OK, I can hold off no longer. I will have to join the crowd of people compelled to say their thing about Margaret Thatcher. If Oscar Wilde was right that the only thing worse than being talked about was not being talked about, the Lady's life has been a triumph.

For someone of my age, MT loomed large over those delicate years of transition from childhood to adulthood. She was elected shortly after I'd started secondary school, and deposed shortly after I'd started my PhD. Margaret Thatcher changed my life in a sense - if it wasn't for my Dad yelling in apoplexy in front of the TV news every night as I started to become aware of life outside my street and my school, I may not have taken the interest in politics that ultimately led to me making my living teaching and writing about it. I'm sure I'm not the only one in my generation to be fully aware of how Margaret Thatcher's politics made a difference to how my life has panned out.

For the upwardly mobile classes, Thatcherism meant new opportunities to get rich, and many people of similar backgrounds to mine (lower middle/upper working class, state school, in a relatively prosperous area) have done pretty well, even without becoming bankers. So have I, by any reasonable metric. For those without the resources and access to opportunities, it meant a much worse life than their parents had had. The irony is that the social mobility people like me have enjoyed was in part the result of the social settlement Thatcher set out to destroy, and was therefore denied to those that came after. For many people in Britain now, social mobility is an aspiration but a practical impossibility. If you want to know why the lady polarizes opinion so much, the answer is not difficult to figure out.

This contradiction - dangling opportunity in front of people's noses, whilst omitting to mention only a few will get it - is both the secret of Thatcherism's success and the key to overcoming it. The story Thatcher told was an intensely appealing one to many people of low to middling social status. Coming from a family background of mostly middle to low incomes who almost all vote Conservative (out of my two dozen uncles and aunts, barely a couple vote Labour), I think I have an intuition about how this works. They see hard work giving them some reward (usually house price inflation), and are resentful towards those who haven't done so well and require help from the state. Maggie told them: don't feel any responsibility to those who didn't try as hard, you should be able to enjoy the fruits of your labours rather than sharing them out. They fail to make the connection between this self-centred view and the various social problems - crime, failing schools, stagnant real wages, growing costs of social care, traffic - which result from refusal to consider the needs of the collective.

The answer for the left is to develop a discourse which recognizes that people have a right to aspiration, choice, and personal consumption, whilst making clear that collective provision and pooling of resources is indispensable if these rights are to have any meaning. The language of the left has not managed to get away from the rhetorical drone of solidarity, uniform provision, redistribution, even though policy has moved on. We need a way of talking about things that gets us out of the trap of having to defend welfare payments of £60,000 to the Mick Philpotts of this world. That means emphasizing how collective delivery of services and sharing of resources is what allows the maximum number of people to have aspiration, choice, and - yes - cheap stuff. Quite how you do this I haven't yet figured out. I think I'm going to have to learn Swedish.

Sunday, April 7, 2013

Saving the Welfare State by Dealing with Housing

OK, some thoughts on the government's welfare reforms.

First up, most of it is nasty, reactionary, vindicative and driven by class hatred. But, there is one part of it which, although it will cause a lot of undeserved suffering, may have positive longer term consequences: the changes to housing benefit.

The Tory press like to portray Britain as having a generous welfare state, a 'soft touch' for welfare tourists everywhere. This is ******ks of course. Britain's welfare spending is around the European Union average, and that of course is an average that includes Latvia and Rumania as well as Sweden. Moreover, almost half of the 'welfare bill' of over £200 billion is paid to retirees, which most people would not consider to be 'on welfare'. Of the rest, around £12 billion goes on child benefit, which is independent of income except for higher rate taxpayers, and £29 billion on tax credits for working households (source: IFS). So the actual amount being paid in what most people think of as 'welfare' - cash transfers to working-age people who are not in work - is actually pretty small, as you would imagine given that Jobseekers' Allowance, the main form of unemployment compensation, is a meagre £73 per week.

But there is one big exception to this picture of a miserly welfare state, and that is housing benefit. Britain is actually a big spender on social housing, not only higher than average in Europe, but actually the highest in the OECD, both in terms of the number of recipients and the amounts paid out (source: OECD). The £23 billion housing benefit spend is anomalous amongst advanced democracies - so at least we are generous towards the poor in one respect. Or are we?

In fact the housing benefit spend doesn't benefit the poor all that much. They still tend to live in the worst accommodation, since housing benefit is payable only on properties at the low end of the rental market. The big winners with this spending are landlords, who get to benefit from the higher rents resulting from an injection of demand into the rental market that amounts to more than 1% of GDP. 40-50% of the housing benefit spend goes to private landlords, an estimated 1/3 of whom don't declare their rental income for tax. So this huge chunk of welfare spending turns out to be a big subsidy to middle class rentiers who on the whole contribute nothing to the productive economy.

Not only is this spending wasteful - it is divisive and politically toxic. Middle class left-wing intellectuals, safely ensconsed in their owner-occupied properties in nice neighbourhoods, probably miss the point that benefits recipients are competing, with taxpayers' money, for scarce housing against working people who are paying ever higher shares of their post-tax income for housing. The Guardian can scoff that only five housing benefit claimants received more than £100,000 a year in 2010, but the fact that anyone at all can receive such a sum should alert us that something is badly wrong. 

The problem is that reforming housing benefit inevitably results in suffering. The only way to reform the system is to reduce or withdraw the subsidy, and this will lead to evictions and disruption of family lives. For this reason no government - even Thatcher's - has had the heart to take these steps. But this government looks like it is going to. 

It will be nasty. But Labour needs to take a position on housing. The answer is not to spend public money on subsidizing middle class investments, but to spend that money on providing housing, which is what social spending on housing used to go on before the Thatcherite 'right to buy' reforms of the 1980s. RTB meant a shift in public expenditure on housing from capital investment (building houses) to  current spending (subsidizing rents). This needs to be reversed, and the Tories' cack-handed attempt at reform will create the conditions for fairer reform to happen. What kind of reform? I like this one.

Saturday, April 6, 2013

The Grasshopper and the Ant Revisited

Some interesting posts on debt from Antonio Fatas and Noah Smith which I'd recommend to anyone tempted to believe that debt is necessarily a bad thing (also Krugman herehere and here making similar points after David Stockman's rant). Noah Smith's post is headed by a picture of Aesop's fable of the Grasshopper and the Ant, a typical metaphor used by the debt phobic.

Just in case you want the short version, the story is basically that headline debt figures don't tell us that much about their consequences, and we have to consider two important variables: what the debt is actually spent on (Smith), and the ratio of assets to liabilities (Fatas). Put simply, getting into debt to finance consumption probably places a burden (in the form of lower than otherwise consumption) on future generations, but doing it to finance investment all else equal has the opposite effect.

Drawing on Smith's analysis, we can see that the remedy of debt reduction can end up being more damaging than the debt itself. The UK, for instance, has succeeded in cutting its government borrowing only by cutting government investment, which in the current climate means cutting investment in the economy generally (given the private sector's pro-cyclical reluctance to invest). This reduces the productive capacity of the economy in the future, reducing future consumption. In this case then, debt reduction, not debt itself, is what is placing a burden on future generations, since George Osborne is (rightly) preserving the current consumption of the growing elderly population, which constitutes the lion's share of social spending.

Fatas' point about balance sheets is another way of making the same point. Debt corresponds to assets; or as Krugman keeps pointing out, at the level of a whole economy debt is largely money we owe to ourselves. We can see that clearly enough by looking at Germany, whose headline gross debt number is actually pretty high, but whose net external investment position is comfortably in the black. Ignoring the assets that correspond to liabilities is like equating a student loan with credit card debt to pay for a holiday.

So the emphasis on debt is missing the point. It is investment that is important for future generations, not debt. And of course, by squeezing current consumption debt reduction in a recession squeezes current production, reducing the ability to pay off the debt without unnecessary pain. In the periphery countries of the eurozone, unemployment is driving the young - the future productive workers - to migrate, perhaps never to return, whilst the old - who are current consumers, but relatively unproductive - remain. In Aesop's terms, austerity kills the ants, leaving only the Grasshopper, sitting unhappily under a leaking roof. Why are we doing this to ourselves? Well that's for a future post.

Monday, March 18, 2013

The Euro crisis as "Cheese Touch"

My favourite scene in the first 'Diary of a Wimpy Kid' movie is the 'cheese touch'. A piece of mouldy cheese is left in the schoolyard, and the kids keep well away from it as it gets greener and slimier. Until, one day, someone touches it - and they are ostracised until they can pass it on to someone else who will get the same treatment. The cheese touch is passed around the school, creating horror and fear in everyone. It's kind of Camus' La Peste for pre-teens.

The euro crisis is starting to look a bit like the cheese touch. The banking crisis of 2007-8 created a financial blackhole, and at some point we are going to have to come to terms with the losses and start from scratch. But of course none of us want to take the losses ourselves. In the absence of some kind of sensible and credible agreement to spread the pain, each group/nation/individual has to try to protect themselves from taking a disproportionate share of the losses, and assume others will do the same. In short, we'll keep well away from whoever has the cheese touch. Today, it's the unfortunate small savers of Cyprus.

The answer has got to be that the burden of adjustment is shared. This is for moral, political and economic reasons. Morally, because, well, life isn't fair but it shouldn't be Mad Max. Politically, because unless we give up on democracy, the victims of adjustment will protest and remove representatives who impose unfair burdens. And economically, because the weakest groups politically tend to be the weakest groups economically, and they simply can't take the losses - witness the brutal yet futile welfare reforms in the UK.

Who decides how to share the pain of adjustment? In Wimpy Kid, the responsible adult - the school janitor - is also disgusted by the mouldy cheese and sweeps around it. The EU is probably our demotivated janitor. And in Wimpy Kid, the cheese touch's journey around the school ends when it lands on Dieter Muller, a German exchange student. Baffled by zey cheese touch, Dieter takes it with him back to Dusseldorf. My guess is that ultimately the euro crisis will end the same way.

Tuesday, February 26, 2013

The Italian Election: Why it's Actually Good News

So, with all the usual commonplace reactions to the Italian election: 'chaos', 'ungovernable', and so on - it's time for a contrarian view. In a number of ways this is a great outcome.

First, Berlusconi will be happy with the result for sure, because it gives him huge bargaining power - no majority in the Senate is feasible without him. But let's remember that his coalition won only 29% of the vote, down from 47% in 2008, and his party, the PDL, won 21%, down from 37%. So the worst expression of Italian corruption and conservatism took a battering in the polls. Italians are not as forgiving as we feared.

Second, the two parties that represented continuity in sticking to the absurd commitment to austerity - the PD and Monti's Scelta Civica - both performed way below expectations. Monti's result is hard to read as anything but a rejection of European technocracy and its perverse insistence on pain and sacrifice as the way to recovery. Greece and Spain have largely caved, Italy, the biggest and most important Southern economy, and probably the most self-confident despite its problems, has said 'basta'. This has got to be good for Europe - better we accept this now, then have to wait for Golden Dawn to win in Greece.

Third, Italy's venal and reactionary political class is obviously a huge problem, and the amazing performance of Beppe Grillo's Five Stars Movement - at 25% the most voted individual party - shows that many Italians, and especially the young, have had enough of their politicians. Again. Of course, Berlusconi himself emerged out of the ruins of the last exercise in eliticide, back in the early 1990s. He then proceeded to piece together a new regime of rent-seeking and policy paralysis which is responsible for Italy's long-term decline. Grillo may have no policies, but as a protest vote you can't get much better than that. If nothing else, Grillo sends a clear signal to the crooks that a large number of Italians have had enough of the stealing and incompetence.

Now, this does not mean I'm optimistic. But if we add this result to the steady shift in the debate towards the inescapable conclusion that austerity is a disaster (even Olivier Blanchard thinks so now), then perhaps Europe will edge towards some more sensible approach to preserving the euro. Will this solve all our problems? No. But if Merkel wants the euro to survive, she'll have to start listening to Southern European voters as well as her own.

Thursday, February 14, 2013

Why we hate parties

So Mariano Rajoy received dirty money (dinero 'B') from secret accounts controlled by the Partido Popular's Treasurer, accounts filled with kickbacks paid by construction companies in exchange for building permits delivered by PP politicians (read all about it here). Meanwhile, the likely winners of the coming Italian elections, the Partito democratico (PD), seem to have been closely involved in the decisions that have dragged Monte dei Paschi di Siena close to failure. In these circumstances, it's hardly surprising that Spanish and Italian voters view their political parties and elected representatives with mistrust and loathing.

They are not alone. Political parties are increasingly unpopular throughout the advanced democracies, calling into question the ability of elected governments to deal with the political fallout of the crisis. This is not a new phenomenon: political scientists have been discussing party decline for decades. But the evidence keeps mounting that parties are organizationally ever weaker, with fewer members, a smaller and ever less loyal electoral faithful, and less popular leaders. The crisis is brutally exposing the limitations of these parties.

Are voters right to distrust politicians? Yes, but unfortunately democracy makes it inevitable. Parties can please some of the people some of the time, but they can't please all of the people all of the time, and the disappearance of economic growth makes this more and more acute, since benefits can only be redistributed to one group at the clear expense of others. Not surprisingly, voters are dissatisfied with politicians' ability to solve their problems. But how exactly could politicians solve everyone's problems? One voter's problem is another voter's pay check. In the low growth scenario, politics is a zero-sum game.

At the heart of the problem is the increasingly individualistic way in which voters experience electoral politics. Electoral behaviour studies have moved away from the group-based paradigm of the post-war era (reflected in the work of Butler and Stokes or Lipset and Rokkan) towards a more choice-based analysis of voter behaviour, in which voters act as consumers of politics rather than as citizens. The consumer-oriented voter expects to receive what she wants in return for her vote, but is in competition with many other consumers who may want something quite incompatible. There is no way of the political market 'clearing', given there is no price mechanism. Everyone's vote is worth the same. Except...

Some voters count more than others because they can top-up their vote with something politicians badly need: cash. Political parties mostly organize on a national scale, and need to select candidates throughout the electoral territory, provide them with resources and help them campaign for votes. Yet the mainstream parties' turnover is a fraction of that of other nationally organized groups such as trades unions, churches or private companies. They need more money than the paltry state funding provides, and the obvious way to get it is to offer special treatment to well resourced organizations in exchange for cash or services in kind. If you're wondering why the Levesen recommendations are going to be ignored by the current UK government, this logic provides 99% of your answer.

So back to Rajoy. Is it any wonder that an organization which has huge responsibilities and a limited revenue stream should leverage its institutional power to raise a bit of money to help keep the show on the road? Hardly. In some ways the 'costs of politics' (to use a term deployed to spectacular effect by Beppe Grillo in Italy) are extraordinarily low, and we shouldn't be surprised if politicians look for ways to raise more cash. We also shouldn't be too disappointed if the votes that we get for free don't buy us exactly what we want. Democracy can't be 'consumed', it's made with our own engagement and involvement in the political process.

Tuesday, February 5, 2013

Breaking up is hard to do

James Kwak points out that Michael Lewis backs his position that the too-big-to fail financial institutions should be broken up. He also notes that, not only hasn't this happened, it doesn't seem likely to happen. Why not?

This is actually a pretty interesting conundrum for democratic politics. A whole set of factors would suggest that financial reform should happen. First, the consequences of not doing so seem pretty serious - not only has the systemic vulnerability of the financial sector not gone away since the meltdown of 2008, on some readings it has got even worse. Failing institutions were taken over by others that were also failing, but managed to hang on longer, thus becoming even 'bigger to fail'. And new technologies are potentially introducing greater volatility to the markets, opening up the possibility of staggering losses beyond market actors' control.

Second, if politics were at all driven by public opinion, then surely taking the axe to the financial institutions responsible for the crisis would be a huge vote-winner, and politicians would be queuing up to promise ever more swingeing measures to rein in the banks. The various median vote theories out there surely mean political parties would promise to deal with the financial sector, since the majority of  voters demand this, and only a tiny minority oppose it. And yet, as Kwak reports, the US Senate mustered barely a third of votes behind such a proposal.

So what is going on? Well, part of it is the usual story in public policy, that reforms often damage a small number of people disproportionately and immediately, whereas the benefits are spread out amongst many people and over time. The former mobilize, the latter don't. It was ever thus.

But surely we need more to explain this, or no policy measures benefiting the mass of voters would ever have made it through the democratic process. My guess is that politicians and their parties have become so ideologically and organizationally weak that they are now incapable of mobilizing popular opinion behind the production of public goods. To deliver policies that benefit the public, the public needs to be mobilized in such a way as to neutralize the efforts of the affected minorities. The more powerful and rich these minorities, the more parties have to do to convince voters of the need for policy change, and the better organized they need to be to mobilize support and get the vote out.

All of this is what political parties used to do, but no longer bother. Why risk annoying powerful people who can finance your reelection, when you could do nothing and blame someone else for the bad consequences of failing to deliver reforms? Postdemocracy, as Colin Crouch calls it. There will be no way out of the crisis without mobilizing social groups that have an interest in reform. The longer it takes for this to happen, the less likely it is that there will be peaceful outcome to this crisis.

Friday, January 25, 2013

New paper! The Trouble with Economic Reform in Southern Europe


The Trouble with Economic Reform:
Understanding the Debt Crisis in Spain and Italy
Jonathan Hopkin

Introduction
The ‘great recession’ of the late 2000s began as the collapse of the ‘Anglo-Saxon’ model of highly leveraged capitalism, but the countries that have suffered most have been the Southern European democracies, often referred to as the ‘PIGS’[i]. The transformation of what started as a banking crisis into a sovereign debt crisis has ended up engulfing countries who, for the most part, were not particularly associated with the financial excesses of the boom years, and has allowed debate to move away from reform of the financial system in the Anglo-Saxon countries to the sustainability of government spending in Europe, and particularly Southern Europe, and the future of the euro currency.

To read the full paper, click here.