Friday, 5 August 2011

The Constant Legislator - Reforming everything in one parliment

Too much too soon?

The Coalition’s reforms on a menagerie of policy areas may leave it prey to attack.
Across the Atlantic there is often a certain amount of jealously towards the British incumbent’s power to legislate and turn policy ideas into real reform. The White House is often found lamenting the partisan divide in congress and the political deadlock caused by a powerful opposition and its ability to deter government plans in the senate.
This aspect of Britain’s political system is often seen as highly valuable, allowing the government of the day to shape policy in line with the mandate voted for by the people; yet the downside to this seemingly stream line system and the upside to Washington’s comparatively slow and cumbersome system is that policy needs to go through more lines of approval thus preventing excessive reform and political change, a landmark of any democracy and a necessary curtail on executive power.
The co-alition government appears to be fighting on too many fronts. Major upheavals in education, the NHS and now voting reform,- all of which individually would seem substantial for any one government to undertake in one parliament - are being implemented this parliament; not to mention the deficit reduction plan which is about to come into full effect. The idea that this government is only interested in cutting the deficit may now look misplaced, but the excessive range of policy risks diluting government’s ability to respond to criticism and hold disparate parts of the coalition together - socialist Lid Dems have watched as tuition fees have been increased and government departments slashed on their watch.
The problem for the government is not necessarily any one reform, but the sheer volume. Tackling the deficit is a necessity, education has long needed reform as Britain slips continuously down the OECD rankings and welfare has long been in need of a major upheaval to make work pay. Individually, these reforms have substantial backing, but the government’s attempt to do so much in such a short period of time has left it exposed to attack as it struggles to defend such a diverse range of policies, for instance, Michael Gove’s free schools have suffered from a lack of support. Serious reforms have been further scuppered by the unnecessary kicking of the metaphorical bee hive by reforming the running of forests. There may be little evidence which suggests governments run forests better than the national trust but when there are substantially more important battles to fight its probably better to stay away from the ideologically sensitive unless completely necessary.
Core policy suffers
Reform over such a wide spectrum has left the government incapable of defending policies which were supposed to be at the centre of a new conservatism, notably, the big society. A weak defence by government of a sound concept of devolution to local authorities and voluntarism has made the policy look like a timid attempt to counter budget cuts. It has also left the government open to accusations from the left and worse still, from the public at large who increasingly are sarcastic towards the idea.
Cameron’s pet project is not the only policy which has been poorly implemented; NHS reforms have received little backing from health service professionals and tuition fees have been vehemently and vociferously protested. Doomsayers reckon that the excessive level of diversity in policy threatens to drag the co-alition apart as disparate groups forced together by the electorate in 2010 begin to pull apart under ideological disagreement amplified by contrasting policies; Notably the right wingers over AV and the socialist side of the Lib Dems over almost everything else.
The White House may complain over a lack of ability to ‘get things done’, here in Britain however the government could well benefit from a little focus on core policy and a movement away from such radical reforms on such an extensive scale. 

Tuesday, 2 August 2011

Is now a bad time to be young? The burden on Britain’s youth.

The cause of tomorrow's concern?

This question is unfortunately becoming increasingly prevalent here in the U.K as a range of problems seem to be stacking up for the country’s young. For instance, consider the predicament facing half of all young people today at Britain’s universities; a student under new government policy can leave university with £40000 worth of debt having done a 3 year course. This debt is to be paid back from an average graduate salary of around £19000. Oh, and don’t forget to buy a house, get a mortgage, start a family, and invest in a pension.
It may seem like the laments of a lazy generation but according to the Intergenerational Foundation, Britain’s young really are under pressure. For instance, the state pension which everyone is entitled to is set to rack up almost £3 trillion worth of government debts. This is compared to current total official debt of only £1 trillion. The £3 trillion is unaccounted for as it is a future projection of costs and is therefore not currently impacting on government spending. But rest assured, or thoroughly un-assured as the case may be, these costs are real and almost completely unaccounted for.
The cost of pensions is merely one of a menagerie of problems facing today’s young. Buying a house is set to become a thing of the past. This truly frustrating quote from Angus Hanton of the Intergenerational Foundation illustrates the point;
"Let's take my own house [which] I bought 16 years ago for £160,000. It's in south-east London. It's now worth about £1.15m...So I've gained a million pound windfall to which I do not feel entitled, and that windfall, at the moment, is tax-free. Were I to sell [the house], there's no tax on that gain. It may appear very lucky for me, but the reality is when I sell, it will probably be to a younger person who'll be getting a mortgage and spending most of their working life paying off that windfall which went to me”

Unfortunately for today’s youth, not many baby boomers share Mr Hanton’s concern for their plight, if anything, those approaching retirement age are likely to be the main obstacle to reform. Intergenerational inequality and animosity is set to become an increasingly prevalent issue for the developed world, changing demographics make it inevitable.
The current economic issue is how to tackle today’s debts, those of you in your 20s will face the task of tomorrow’s gargantuan debt mountain. That is likely to dwarf today’s problems.

 Those of you looking to learn more should visit

Sunday, 31 July 2011

Putting public interest before party interest, Sir Robert Peel

Sir Robert Peel - Possibly Britain's greatest Prime Minister

In 1841, Sir Robert Peel assumed the position of prime minister for the second and final time. Sir Peel had decided to do something many modern politicians claim to do but rarely truly do, put national interest above party interest.
Sir Peel found himself at odds with his conservative government over what would become the famous “Corn Laws”. A harsh winter and recession had made it a bad time to be working class and English, even worse if you were Irish where famine tragically became common place.
Sir Peel had a choice to make, he could either lower import tariffs on key crops or he could keep the protectionist policies in place. The status quo sat well with the conservative party, land owners benefited from high crop prices and were in no mood to allow cheaper imports into the country. Yet it was becoming ever more obvious that the case for protectionism was looking increasingly thin, this was especially true for Sir Peel, a convert to the Ricardian theories of free trade which would become the cornerstone of British economic policy. The problem was that repealing the Corn Laws would potentially be political suicide.
And so it proved to be. Sir Robert Peel managed to repeal the Corn Laws to the dismay of his own party and supporters by winning support from the Whigs and radical liberals of the day[1]. Soon after this triumph Sir Peel was forced to resign and would never again be involved with high politics[2]. He had repealed a law which his party detested and those who would benefit from such a law, the poor, couldn’t even vote; hardly a sensible strategy for political longevity.
There are many lessons Mr Clegg can learn from Sir Robert Peel, as he has faced similar choices to the great man. Choosing between forming a coalition and leaving the Tories to govern with a minority, Clegg choose a strong government. Yet he leads a party composed of an eclectic mix of liberals and socialist, a problem Sir Peel would have sympathised with as he led an assortment of traditional protectionist and liberal conservatives. Mr Clegg’s typical supporters feel he has stabbed them in the back by supporting, “tory cuts” yet one wonders what would happen had this government not been formed[3].  
Though history may favour him for cajoling his disparate party into establishing a strong government in times of uncertainty; his party and the electorate may not see recent political events in quite the same manner.
 Sir Peel lost the support of his colleagues as the party splintered under those who believed in free trade and those who didn’t. It would take the transformed conservatives 28 years to recover. Mr Clegg and the liberal democrats could well face something similar as those infamous tory cuts begin to bite.

[1] The vote passed 292 in favour against 210 against.
[2] Indeed, he died 5 years later
[3] An interesting proposition put forward by some labour supporters was the hilarious, “rainbow coalition” a hodgepodge of nationalists, socialists and goodness knows what governing together. One wonders how the debt markets would have rated that hypothetical government’s ability to control the deficit. 

Friday, 29 July 2011

Plan B is for bankruptcy: Ed Balls misses the point with his plan for a VAT cut.

The office for national statistics (ONS) revealed on July 26th that the British economy grew by an anaemic 0.2% for the 2nd quarter; add this to the 1st quarter’s 0.5% growth and the economy has grown a miserable 0.7% for the financial year.
Unsurprisingly, this has been jumped on by Ed Balls, the shadow chancellor, as evidence that the Tories are cutting, “too far too fast”. This is the typical labour chant on government economic policy and it is becoming almost as annoying as Tory ministers constantly bringing up the deficit to legitimise every government action[1].
It would seem therefore that both parties are often guilty of using the dyer state of the British economy to put forward ideologically driven remedies. One of the most consistent and vociferous defenders of the, “too far, too fast” camp is Ed Balls the shadow chancellor. He may feel vindicated by the figures published by the ONS, yet it may turn out that Mr Balls has mistaken a correlation for causation.
Mr Balls has long believed that reductions in government spending will prevent the economy from growing and that the conservative deficit reduction plan will lead to a contraction in demand and thus weak growth. So far, so left.  
Mr Balls’ solution? A reduction in VAT from the current 20% to 17.5%[2]. In order to understand why this is the wrong tool to fix the economy, one needs to look at the fundamental reasons as to why things are so bad.
Under Labour, the economy became dependent on consumer spending, public spending, construction and of course high finance and hence grossly unbalanced. Once the credit crunch hit and the tax revenues dried up from the city, government spending became unfunded. Consumer spending, once so strong, dropped off a cliff as access to easy credit evaporated along with consumer confidence. This was further exacerbated by the huge debts consumers had racked up on credit cards which would have stopped even the most profligate of consumers in their tracks. Finally, the housing market tanked, those individuals who believed they could always sell their homes at a profit found that they were now tied into high mortgage repayments for assets which were losing value.
This isn’t to say that the Tories would have done any better; it may be surprising to know that in 2006 the debt to GDP ratio was merely 55%, similar to Germany. It was the credit crunch and the brief premiership of Brown which truly messed up the public finances[3].
Reducing VAT, a tax on the price of stuff we buy, wouldn’t solve the mess as it doesn’t tackle any of the underlying problems highlighted above, it merely exacerbates them. Three main issues spring to mind:
1. A VAT reduction would encourage further consumer spending as products become cheaper. This is hardly desirable. Private sector borrowing, i.e. the amount we borrow as individuals when we buy cars, houses etc. is at 500%! Further increasing consumer spending would give a short term boost with long term ramifications, very much like the current ones.
2. VAT does not rebalance the economy. If the U.K economy is to grow then it needs to focus on selling its produce abroad. The reason for this is that the U.K consumer is, for lack of a better phrase, “maxed out”, whereas emerging markets have an expanding middle class just waiting to enter the world of consumerism. A reduction in VAT in no way helps make British firms more competitive abroad.
3. Finally, although the conservatives are guilty of bringing it into every political debate, the state of the public finances does require fixing. A reduction in VAT would have to be financed by an increase in taxes elsewhere, probably on income tax which is already at 50%, a level which is higher than France and double that of the U.S. Furthermore, a reduction in VAT could potentially send the wrong message to the markets at a time when they are very jittery about lending to governments. Thus Osborne has declared the VAT reduction plan as, “a plan for bankruptcy”, polemical but broadly fair.
Unfortunately, the frustrating truth for Britain is that slow growth may be the new norm. After years of excessive private and public sector borrowing, consumers and governments are in no position to increase demand. The lack of an export sector means Britain is unable to capitalise on emerging market growth. Expect a long slow recovery after the government and ourselves as consumers; try to shake off the debt hangover. A reduction in VAT won’t change that harsh reality.

Graph showing GDP growth since 2008
The start of a miserable trend...

[1] Most peculiarly, but somewhat impressively, a junior minister recently appearing on question time managed to bring the privatisation of forests into the debate over the deficit. Citing that although the conservatives didn’t want to privatise national parks they were compelled to due to the state of the public finances. The audience didn’t buy it but I guess it does show a commitment to the government line.

[2] Hence a product priced at £100 would go from £120 to £117.50 under Mr Balls’ plan.

[3] Thus as that old Etonian Prime Minister Howard Macmillan used to say in response to what undid his government, “events dear boy, events”. You can’t plan for a recession. Just like Cameron couldn’t plan for the phone hacking saga.

Monday, 25 July 2011

“A few right wing nutters…” well said Vince Cable

Dr Cable appearing on the Andrew Marr Show, Sunday 25th, responded in his typical frank fashion to the question “what is the biggest threat to the global economy” with the comic and characteristically candid comment, “a few right wing nutters in the US congress”; this offended the Tory establishment but it certainly had some truth to it. If the Americans can’t agree on fiscal policy and raise the debt ceiling by the 2nd August then all sorts of bad things could come to pass.
So why can’t they agree? Two reasons spring to mind: Firstly, the nature of congress means it is harder to pass bills (i.e. policies) in the American congress than in the U.K House Of Commons as members of congress can quite easily vote against a bill and stop government working; in Britain, the incumbent government has a voting majority for the five year parliament, hence any number of laws can be passed as long as the government MPs vote with the government; a likely possibility. Secondly, the recently elected republican congressmen hail from the far right tea party movement, this part of the Republican Party has a fetish like obsession with not raising taxes and cutting spending; thus these individuals are refusing to vote on a bill which would raise the debt ceiling and taxes.
This doesn’t sound too ridiculous until one considers the gravity of the situation. If congress fails to vote for an increase in the debt ceiling then the US has to decide who not to pay: pensioners, public servants or debt holders; a truly horrid choice. The worst choice would be to stop servicing debt. However if this were to occur then the ratings agencies would have no choice but to devalue American debt from its AAA status, it could even be classed as a technical default. The tragic irony for the tea party would be that by adamantly opposing a rise in the debt ceiling, they would actually cause a rise in debt as the increased risk would be reflected in the price of treasury bonds. And besides, the raising of the debt ceiling is to pay for spending already accounted for, not for new spending as is popularly misconstrued.
Probably not but it goes down well with the tea party
Standing from afar, it seems most baffling that common sense and arithmetic do not prevail. According to The Economist, “America’s tax take is not high either by international or historic standards”, worse still, tax cuts in a country already divided by huge inequality, inevitably impacts on the poorest hardest and most infuriatingly for the non-partisans amongst us, the tax cuts for the rich don’t even have as much impact on economic growth as spending on the poor. For instance, it is hard to argue that food stamp recipients are part of the ‘undeserving poor’, according to The Economist, “about 50% are children, 8% elderly and 18% have no income at all”. Furthermore, Moody’s Analytics assessed different forms of stimulus and found that food stamps were the most effective; raising economic activity by $1.73 for every dollar spent, followed a close second by unemployment insurance at $1.62. This contrasts with tax cuts which yield, “a dollar or less”.
The republicans are counting on Obama taking the blame for a debt default, after all, he is the one sat in the oval office refusing to lower taxes and decrease spending. However, the republicans’ main argument is that Obama is enforcing a socialist regime on an unsuspecting American nation, the reality is that the republicans are using the spectre of default to enforce their own radical ideology on the American people and this is without winning control of the White house, the senate, and most of all, the argument. 

Further information on food stamp recipients can be found at:

Sunday, 24 July 2011

Porn King or Media Mogul? I would choose Murdoch everytime

The Times under Richard Desmond?

Is Rupert Mudoch evil? Does he have an empire which truly shapes British politics?
Rewind a month or so and politicians where falling over themselves to meet Rupert Murdoch, now it seems they are falling over themselves to do quite the opposite, condemn Murdoch and his “evil corporation which has spread it's tentacles throughout British politics”.
I guess in modern day Britiain, as a career politician, it would be most unwise to go against the grain on this one. Public opinion is so repulsed by the hacking of a dead school girl’s phone that any positive analysis of News Corp is tossed aside as hogwash and the voice of special interest. Yet the angry mob baying for blood is as fickle as the news of the world journalist. (Indeed mob comes from ‘mobus’ in Latin meaning ‘fickle crowd’, seems etymology may be worth studying. Thank you Bill Bryson).
So here I want to stand back from the noise and ask two important questions: 1.What would be the fate of The Times had Murdoch not purchased the paper and who would buy it now?  2. Is breaking the law an inherent part of investigative journalism or something only Murdoch papers do?
1. Murdoch’s news corporation loses $50 million a year in order to prop up The Times newspaper. The mogul has such an interest in newspapers that investors talk of a “Murdoch discount” on the share price eluding to the fact that the mogul refuses to divest The Times despite it losing millions yearly. How many other individuals can claim such a passion for newspapers? One might assert that another individual would have saved the paper. When Murdoch purchased The Times the two other potential buyers were the Daily Mail – Yes that fine periodical sensationalising everything remotely related to Muslims – Had the Daily Mail succeeded they would have certainly shut The Times down in an attempt to expand their own market share. (Closing down a company which loses $50 million a year is fair enough I guess). The other bidder was Robert Maxwell and one can only imagine how that would have turned out…
But enough of the past, what about the current situation ? Maybe the Murdochs will decide enough is enough and leave this island all together who will step in to purchase The Times? Apparently Richard Desmond is interested, the Daily star and television X CEO. I wonder how many people would cheer that.
2. Don’t act Holier than thou. That’s exactly what comes to mind when reports from other papers  proclaim that News Corp publications are guilty of hacking and other shady techniques in efforts to acquire information. The line goes; ‘News Corp papers break the law in the pursuit of stories’ Lets consider for a moment some decent stories which were acquired in not necessarily legitimate or legal manners: The Telegraph – MPs expenses scandal. Thanks to some excellent investigative journalism and the stealing of a disc with MPs’ information on it, The Telegraph broke a great story. The infamous Watergate scandal in America was only brought to light after all manners of illegal work  was undertaken by the Washington post. I could go on.
If investigative journalism sometimes leads to rule breaking then so be it. The sleaze which comes in the red tops is a necessary evil to allow the serious papers to hold our politicians to account. In a representative democracy, where we vote once in five years, it is the press which holds politicians to account and influences public opinion. Would Richard Desmond, owner of Television X and the Daily Star, hold up the standards of journalism to the same level? 

Saturday, 23 July 2011

History repeats itself, The Euro and The Gold Standard

After setting out on a grand political project of closer integration it turned out that the debt owed and austerity required to maintain the project led to it's inevitable end.
The Euro starring Greece?  Actually I am referring to the Gold Standard starring the U.K.  Winston Churchill in typically eloquent fashion proclaimed in September 1925 that, “a rising tide lifts all ships” and that Britain’s adoption of the Gold Standard would, “boost international trade and give Britain a seat at the top table”. This may have been so, but some issues unfortunately came up.
Firstly, I should explain what the Gold Standard is. Essentially all countries ‘peg’ their respective currencies to gold. So, if you needed $10 to purchase some gold where as you only needed £5 to get the same amount; then it follows that £1 is worth $2. Get it?
Like all economic problems there is usually some political issue at their heart; Britain, in one of it's more arrogant moments, decided to enter the Gold Standard at a high exchange rate. This was presumably done for political and psychological reasons; (it looks kind of bad if your currency isn’t worth much gold relative to your rivals’).
Unfortunately, this had some unexpected and unwanted consequences for Britain; as the pound was strong relative to it's main trading partners, exports started to lose competitiveness and the economy moved towards domestic consumption and non-tradable goods (i.e instead of selling cars we switched to cutting hair). This led to a consumption boom as borrowing and spending became easier due to the pound’s strength and the economy expanded, though unsurprisingly this turned out to be quite unsustainable.
1929 came along and the Wall Street crash leads to the end of easy credit and the onset of the great depression. Now Britain faced a dilemma, the Gold Standard had made Britain’s goods expensive and now the recession was hitting, domestic consumers couldn’t pick up the slack, Britain started to lose its tax revenues as the economy started to spiral downwards. In this situation it would be a good idea to lower one’s interest rate as this allows business to start borrowing and thus invest again, but it also lowers the price of the currency as lower interest rates lead to more money sloshing around in the economy. This is obviously incompatible with a set exchange rate, as was the case with the Gold Standard, thus all Britain could do was grin and bear it.
Everyone knew that Britain wanted to drop the interest rate and devalue, but they couldn’t without leaving the Gold Standard which would make the country’s leaders look like, well, chumps. This was especially true of Montague Norman the Head of the Bank of England, the George Papandreou (Greece's Prime minister) character of his day. Norman had to put up with intense public anger over the whole saga especially as he was credited with being the one responsible for the somewhat peculiar name of ‘austerity measures’; incredulously Norman  would often go away for five or six weeks on yachting holidays to escape from it all. One wonders what would happen to Mr Papandreou if he did something similar today.
In September 1931 the inevitable occurred and Britain left the Gold Standard. Sterling fell by 30% which instantly made Britain’s exports more competitive and led to its debt to fall substantially. The great political win was that although wages had fallen by 30% relative to other currencies, the political fallout was nowhere near as big as it would have been had Britain tried an actual wage cut. (It is a lot easier to devalue your currency to make your workforce more competitive than it is by cutting 30% of wages; even if this is essentially the same thing.)
Unfortunately, there wasn’t much planning to this or to the U.S leaving the Gold Standard under Roosevelt not long after. Germany obsessed with inflation control unsurprisingly stuck with the Gold Standard. This created a sort of two tier system in world trade and when those trade disputes turned ugly, well we all know what happened next.
So what can Greece and Mr Papandreou learn from today’s history lesson? If leaving the Euro leads to currency devaluation and a decrease in debt, whereas staying in it condemns the country to austerity measures such as cuts in wages (rather than the somewhat cheekier and less politically hostile way touched upon earlier of devaluation) then maybe accepting the inevitable return to the drachma isn’t such a bad idea. Hell, maybe if it all gets too much, he could take Norman’s advice and take a 6 week yachting holiday.

A bad graph, an even worse situation, Greece owes 120% of what it makes!
Not as bad as Japan, but still bad

Those interested in the comparison can get more on Radio 4