Thursday, 22 December 2011

So what did 2011 teach us?

Well, it's the end of a long year. I'm about to go on leave, and I'm exhausted. But I thought I'd leave you with what we might have learnt from this year - about economics, history and public policy. Which is, after all, the point of this blog. I guess I'd sum it up like this:

You can't deflate your way out of a crisis. You'd think, with all those clever advisers - including expert on the Great Depression and Chairman of the Federal Reserve, Ben Benanke - that politicians would have learned from the lessons of the 1930s. Don't all try to devalue. Don't threaten trade wars. Don't cut spending to try to gain a competitive advantage that others can just seize from you again with a fresh wave of spending reductions - a trap that circulates, round and round, until all semblance of forward motion has drained from the system. But do they listen? Do they hell. The US Congress, mightiest of legislatures, remains gridlocked and likely to stumble its way to some of the biggest spending cuts since the Depression. Good idea, guys.

Confidence does matter. Not many people listen to Ministers that much. Only policy wonks watch Newsnight and pore over the Financial Times. But when you cut through to the voters, you had better make sure you watch your Ps and Qs. UK Chancellor George Osborne neglected to think about this when he talked up (and up) the country's fiscal crisis in order to blame it all on Labour. What happened? Consumers took fright. And they kept taking fright until British consumer confidence bumped along near an all-time low. Governments have made this mistake before - notably when Labour took office in 1964 - but never with such deleterious consequences.

Good public policy takes time and a sense of historical change. I have, of course, gone on until I'm blue in the face about the failure of the British Government's new policy for Higher Education in England. It abounds with unintended consequences or half-guessed-at longer-term endpoints, not least the not-unlikely privatisation of the Russell Group elite over the next ten or fifteen years. What did Ministers need? They needed a Royal Commission. They needed a sense of the delicate balance of a very successful part of the economy. They needed a synoptic vision that saw the links between student visas and our general well-being. They needed both policy and history - something that's far from easy to achieve.

The West still does rule - for now. That's nearly the title of a fairly good book on this topic, and I think it's an important reminder. No matter how many dollars and how much gold builds up in Beijing's coffers, and no matter how fast the less developed countries' economy grow, each Chinese and Indian citizen remains far, far poorer and far, far less able to exert their views than does each American or European. In the 1960s, 'experts' thought that the Soviet Union would overtake the West; then, in the 1970s, it was the oil-producing Middle East; then, in the 1980s, Japan. All those models failed. India's and China's are experiencing extreme growing pains and will soon falter as they hit structural limits to their exponential growth - environmental and educational, to name but two. They may emerge triumphant in the end, but that's by no means a done deal.

So that's it then. I'm a whole new book, a whole new edited book, what I think is a really good article, two PhD completions for my students and two Third Year Special Subjects further forward. So it's time for a break. But I'll be back in the New Year.

In the meantime, Merry Christmas and a Happy New Year!

Wednesday, 21 December 2011

What's going to happen to the Euro in 2012?

People often say to me: okay, what does economic history tell us about the future? What's the point of a skills set and a big bag of knowledge that doesn't help us divine what's likely to happen next?

I'll have a go. There's a health warning, though: don't invest any of your money based on what you read here. We live in strange and uncertain times. The level of turbulence we face is unprecedented since 1945. Just about anything could happen.

Start with this: the odds are higher than 50% that Greece will indeed fall out of the Euro. There are all sorts of risks involved. But an economy that has shrunk by 50 per cent over the last few years just can't take any more. Observers from Left and Right know that much the best thing would be for the Greeks to leave. Sure, that's no panacea. Greeks might lose all their savings - not that they're going to have any if we go on as we are. There might be a very sharp rise in inflation - though it's hard to see how the citizens of that country could be made much poorer than they're going to be anyway. A black market might develop if Greece's new currency isn't trusted as a true carrier of value.

But they're probably going to go anyway. Think that a democratic state can stand up to basically taking modern prosperity to pieces and taking living standards back to 1950s levels? Think that Greek public sector workers - nurses, teachers, doctors - who did absolutely nothing wrong whatsoever, are going to bear the pain that others have loaded on them? No? Then Greece has to leave the Euro.

What will happen then? The crisis won't be over. The doubts, the risks and the speculators will move on. To Portugal and Ireland. To Spain. And to Italy. There's no way that those countries will leave unless they are absolutely, absolutely forced to. And almost certainly not in 2012 or 2013. So it'll be a slow-motion agony, with the citizens of those countries forced to swallow cut after cut after cut (and tax rise after tax rise) with not much effect on markets that won't be impressed anyway.

Brits will suffer too. The Eurozone's economy will slow. British growth will be dragged down. If the Chancellor is as good as his word about paying off structural debt in this Parliament, he'll need to add to the £18bn or so extra cuts he said were required in the Autumn Statement. If there's no growth at all in the next two years, that's probably another £50bn in cuts. So £80bn plus £68bn equals £148bn - all of education and defence added together. And then some. Or more than the entire NHS budget. Now I know it doesn't work like that, partly because many spending reductions are already in train - and the latest news on the deficit is actually a tiny bit better than predicted. But it's a good indicator of the challenge before us.

It's gloomy. You didn't expect anything else, did you?

Tuesday, 20 December 2011

Vaclav Havel and the art of the impossible

The death of Vaclav Havel (above) this week has robbed Europe of one of its most impressive and visionary political thinkers - if not always its most effective actual ruler. His passing brings to mind one of his most famous speeches - his New Year Address as President of the new Czech democracy in 1990.

What was it that he said? He evoked the memory of Jan Masaryk, the country's Foreign Minister in the 1940s and often looked on as the father of his nation. You can read the full text here, but the key passage runs:
Masaryk based his politics on morality. Let us try, in a new time and in a new way, to restore this concept of politics. Let us teach ourselves and others that politics should be an expression of a desire to contribute to the happiness of the community rather than of a need to cheat or rape the community. Let us teach ourselves and others that politics can be not simply the art of the possible, especially if this means the art of speculation, calculation, intrigue, secret deals and pragmatic maneuvering, but that it can also be the art of the impossible, that is, the art of improving ourselves and the world.It's a tremendous ambition, and one that calls us to imagine what our politics might be like - not the art of the possible, but of the seemingly impossible. As his obituaries note, Havel was preparing the way for the future of Europe while western diplomats, supposedly 'realistic' but actually with their heads in the sand, were projecting a future in which the Soviet dictatorship in Europe went on and on.

What would we look for today in this 'art of the impossible'? I suppose I'd try the following:

A truly democratic world financial and payments system. Too much of the world's monetary infrastructure is governed by an alphabet soup of the unelected. The IMF. The G10. The G20. The EU. The WTO. And so on. And on. One of the reasons for the present reaction against our leaders - our un-politics, as it were - is down to this fact. Can we make our global economic system more transparent, more responsible, more accountable?

A permanent and a concrete politics. Our elective politics is similarly mired in mistrust. This is in part due to excessive focus grouping, convergence and 'triangulation' - the art of getting so close to your opponent that you can steal as many of 'their' voters as possible. But this has long come to seem stale, second-hand and outdated. Very few politicians are now able to 'cut through' to citizens and speak in anything close to any authentic language. Can our leaders start to talk to people in a way that they understand without testing their ideas to destruction beforehand?

A distributional economics of the future. Too much of our present economic thinking is 'present-orientated'. It doesn't think about the future. It doesn't accept that the future can't (in the jargon) be discounted as much as we've often posited. Without thinking about the effects of our actions a long way ahead - in terms of housing need, for instance, which is desperate in the UK right now - we are going to get stuck with the problems I've listed under our first and second categories here.

Impossible? Maybe. But wasn't the destruction of the Czech tyranny and the Berlin Wall impossible too?

Thursday, 15 December 2011

European conference triumphs often turn sour

David Cameron bestrides the British political landscape today. If a week is indeed a long time in politics (apologies for that cliche), he's just lived through one of the most important. Going into the European Summit where he wielded his veto, his position was weak. His backbenchers were restive. He was going to struggle to get a new Treaty through the Commons. His economic plans were falling apart.

Now? Boosted by public approval of his 'strength', 'patriotism', 'decisiveness', as well as by his sure-footed obliteration of his political rivals, his stock rises ever higher. He would probably win a General Election held tomorrow, even in the teeth of the Great Recession.

But wait a moment. Conservative Prime Ministers have a habit of coming back from Europe with claims of diplomatic triumph. It often doesn't last long.

Benjamin Disraeli (above) claimed 'peace with honour' after restraining Turkey without war at the Congress of Berlin in 1878. Within two years his government had come apart over a nasty and expensive war in Afghanistan.

Though this column would never be so crass as to compare Mr Cameron to Neville Chamberlain (unlike the Prime Minister's own backbenchers), that Conservative leader's piece of paper turned out to be absolutely worthless after the Munich Conference with Hitler in 1938. He was out of office two years later as well.

John Major came back from Maastrict in 1991 claiming that it was 'game, set and match to Britain' after securing an opt-out from the Euro and the Social Chapter of the new Treaty. He then went on to win the next year's General Election. Within three years he was totally at odds with other European leaders, he was the second most unpopular Prime Minister on record, and had to resign his Party's leadership just to get his MPs to back him.

Triumph? For now. But hold your horses. History says: wait and see.

Wednesday, 14 December 2011

UK debt: don't worry, someone will buy it

One hears lots of arguments expounded in favour of Chancellor George Osborne's debt strategy - basically, going hell for leather for cuts and hoping that the debt stocks falls (er, it won't).

One of the most common goes like this: we have to cut to keep our credibility in the bond markets. Otherwise investors will flee, interest rates will rise and the monetary side of the equation will be hurt as badly as the fiscal-public spending side is bleeding. British debt prices have been falling (above) - pretty much the only good news the Treasury has had for months.

I don't believe this one. Low bond yields are a sign of depression, not recovery. And they threaten the health of the banks that hold them just as much as they lighten the debt load on the taxpayer (a little). I don't believe any of them, actually, but this one's a bit of a red herring that looks convincing on the surface. So it's important to address.

And preventing any steep rise should be child's play at the moment. Start from the position that investing in bonds is a relative decision. It's British sterling-denominated debt or something else. Not nothing or nowhere. Not under your bed. Where would you put your money? In euro-area debt? Er, no. In the bank? Not at these interest rates. In companies via shares? Too risky at the moment.

So the present monetary crisis may well present the British with an opportunity - to reduce the pace of their deficit reduction programme while still keeping the money rolling in.

It would be a bit like the American debt situation, which is puzzling some people. American bonds are continuing to do really well, even though the economy is strengthening and there should be the usual flight from safety as investors take more risks. You won't be surprised to hear that they don't want to take any risks, don't want to put any more money in the Eurozone, and don't want to place their bets on the 'real' economy - even though it's been strengthening for months. So the American public debt position is a little better than it looks, at least in terms of the short- to long-term.

You know what I say? People's money has to go somewhere, as this incredibly detailed but I think important London Met Working Paper demonstrates. It'll now flood into sterling pretty much whatever happens.

The worse the Euro-crisis gets, the more room there is for a Plan B which involves borrowing more than we planned. I wouldn't call this exactly luck. But it might help us to weather the storm.

Tuesday, 13 December 2011

Coalition makers: listen to historians!

Well, you can't say that I didn't tell you so.

Chiming in with what I said on Friday, most commentators now suspect that the coalition's days are numbered, and among Cameroons as well as those on the Left. Maybe it's a big number. One year. Two years. But very few serious commentators now think it'll last until May 2015. It might. But the odds are now against. The Lib Dems are drifting Labour's way - too late to save themselves, in all probability, but maybe soon enough to save something, anything, from the wreckage.

What did I say back in December 2010? That the likelihood of coalition for the Liberal Democrats was 'acrimony, split, electoral defeat'. After their leader's extraordinary stay-away from one of the most important and historic Westminster debates in years, and his obvious profound pain at the destruction of lifelong dreams and goals, can you gainsay that?

What did I say back in May 2010? That 'Nick Clegg would be crazy to go into a formal coalition with the Conservatives'. Given that he now seems to be trapped in the most neo-liberal and right-wing government the UK has had in the modern era, does anyone fancy debating this one? I can't hear you at the back.

The lesson? I'd listen to public policy historians before you take fateful political steps, if I were you.

Friday, 9 December 2011

A truly, truly historic day

The word 'historic' gets bandied about far too much. Historic this, historic that, you hear - normally about stuff you can't quite remember a few years later.

But today is a truly historic day. The day Britain wielded its veto at last. The day that British Prime Ministers have struggled to avoid ever since they turned their minds to joining the European 'project', in some form, during the 1950s. They day she was excluded from the inner core.

Unprecedented. Momentous. Defining. Symbolic. Historic. Choose your word. None of them will be big enough.

It's set Britain on the fast track to an outer ring of European states, along with perhaps Sweden and the Czech Republic. She will not be able to exercise much influence on the course of events from that position. All the hard-won gains of the past fifty years - in terms of Britain's voice in Europe - might now dribble away.

It's earned Westminster and Whitehall the enmity of France and Germany, who blame her 'Anglo-Saxon' economics for the whole mess in the first place. If we see fight after fight about the powers of the 'ins' and the 'outs', the inner core of 23 might well now insist on the UK leaving altogether.

And it's emboldened the Eurosceptics in the Conservative Party to call for full British withdrawal. They're not going to go away. They're going to get stronger and stronger, and louder and louder. They feel vindicated. They long to throw off the Coalition mantle, govern on their own and withdraw into an 'association' with the EEC, rather than full membership. They may well get their way - though only after fighting another General Election.

So what does today mean?

The failure to agree a treaty probably makes the breakup of the Euro, or at least the creation of a 'hard core' at its pinnacle, a little more likely. Bond markets will be unimpressed that the 27 could not stitch up a deal. Who is to say that 23 will do any better?

The UK Coalition government has probably had its span of days fixed - for remember that the great Victorian and Edwardian Liberal Party was originally shattered over great questions of peace and war in 1914-22. This is a set of principles that they have to hold on to. If they don't, their existence as a separate party is in doubt.

The British government has made its choice. For many years, at least since Edward Heath signed the Treaty of Accession in 1973 (above), the British have been uncertain. Were they atlanticists, citizens of the world, or were they truly Europeans? Now they have chosen. They are not Europeans.

The die is cast. An entirely new political landscape, even a new idea of what Britain is and is for, is being forged. No-one knows what it will look like - but it will be utterly different from the Britain we have known.

Thursday, 8 December 2011

Why is Thomas Cromwell like Forrest Gump?

So I've just finished Wolf Hall (above), the first part of Hilary Mantel's masterpiece about the 1530s and the rise and fall of Thomas Cromwell. OK, I know I'm late on this one, but I've got a lot to do, all right?

It's been showered with awards. Critics loved it. Historians have said how it opens up the character of the King's first minister, Thomas Cromwell, after years of seeing him as a robotic business machine through his letters, or - worse, with the Victorians - a villain to set alongside the saintly Thomas More. Cromwell emerges into the light from the dark.

I loved it. It was dense, sensitive, empathetic, powerful, dangerous, subversive. All those things. But as the book wore on, I tired of Cromwell. It's harder to paint a character sympathetically when you're portraying their period of power, I grant you. Earlier in the book, when Cromwell is caught up in the fall of his mentor Cardinal Wolsey, it's easier to feel for him. When he's running the country and basically ordering people's deaths, it's harder. But I felt that somewhere, deep down, Mantel couldn't let go of More, his obstinate silence and refusal to obey the King becoming gradually something sneakingly admirable. And she couldn't hide the rage and the revenge that she felt lurked deep down in Cromwell's soul.

Anyway. What did this remind me of? Forrest Gump.

No, stop, don't navigate away.

There, too, we were presented with a very ambivalent 'hero' - someone praised as embodying the American dream like a President (no less), but who in fact often looked much more like 'a pitiful stooge' in many ways, running across the continent and taking part in inane sports for no reason whatsoever that we can see. I laughed myself silly at this incredibly successful satire while other Britons were nonplussed by its apparently simple-minded celebration of Americana.

Perhaps I'm just partisan. I would have regretted the passing of Catholic England (since you ask). But I felt that Cromwell's darker and darker glimmerings may have played a trick on the readers just like Gump played on its audiences. Celebrate him? Rediscover him? Reader, it's not as simple as that.

Wednesday, 7 December 2011

Which Europe should we choose?

Sometimes I'm hard on governments. Especially this one. It has little sense of history, little sense of the value of what it has inherited, and little strategic sense beyond hacking away at a deficit they should probably take a knife to rather than an axe.

But it's getting painted into a corner on Europe, and I'm a bit more sympathetic than usual. It's a corner we've been in before - under Harold Macmillan, Harold Wilson, Margaret Thatcher and John Major.

Prime Minister David Cameron (above) faces an unenviable balancing act. There'll probably be a new Union Treaty in the new year. But his party don't want much to do with federalist schemes that would basically create a European budget, a European chancellor and a European economic policy. The public aren't that keen on the idea either - to put it mildly. Both party and voters would like him to repatriate at least some powers.

But on the other hand, he faces the most pressing crisis of all: the overriding need to prevent the Euro crashing and dragging the world economy (and, incidentally, his premiership) down with it. So he can't sit there and ask for a long list of concessions. He'd be ignored - or worse, thrown out of the room while the Euro-17 discussed an entirely new structure, with perhaps a new executive council or board. He's going to have to be constructive.

It's exacty the same dilemma that Macmillan and Wilson faced when their entry to the European Economic Community was barred by General de Gaulle. They wanted 'Europe' to become an economic and a military entity that could punch its own weight in the world; they wanted to boost world trade and secure world payments while plugging the UK economy into one of the most productive and efficient economies in the world. But they didn't want to get absorbed into a 'superstate'. They couldn't convince enough Europeans (or de Gaulle) that they were on the side of the European 'project'.

So the Brits went on, through their referendum, through the Thatcher rebate years when she banged the table and demanded her money back, and then onto the disasters of the Major premiership, when the Conservatives tore themselves to shreds over the Maastricht Treaty. All the while they told themselves that they'd solved their dilemma - that 'their voice being heard' in both Brussels and Washington made it all right.

Perhaps they were deluding themselves.

Will they face their dilemma head-on now? I doubt it. The government has painted itself into a corner. It can't leave. It can't even threaten to leave. So it's going to have to let the Eurozone members do what they like, while grabbing some sort of fig leaf about a 'threat to the City of London' that probably never existed.

Then we can all go back to forgetting our real dilemma. Are we fully paid-up Europeans, or aren't we? And if we're not, can we let the others go ahead as fast as they might like, even though that might hurt our interests?

Sunday, 4 December 2011

Historical perspectives on the Government's shock 'poll lead'

There have been some sharp intakes of breath this week at opinion polling showing the Conservatives taking the lead.

You can almost hear commentators wondering: 'how can this be?' The Government's economic policy has just come spectacularly unstuck. They have just a tiny, tiny bit of wiggle room about their key pledge - to see Britain's debts falling as a proportion of GDP this Parliament. It's part of the Chancellor's 'fiscal mandate' that's set in concrete and that he can't nuance or massage - unlike his five-year rolling horizon on the deficit.

Does anyone actually believe they'll manage it? No, not really. So all that pain? It'll push us forward precisely, well, not a single inch.

But yet they lead in ICM's monitor - the most reliable poll of all for many years.

Perhaps voters are holding tight to nurse for fear of something worse. Perhaps the fact that the pain is mostly still to come shelters the Government's rating. Labour is certainly blamed by the electorate for 'spending all the money' - an economically illiterate untruth that the party is unlikely to slough off under its present Miliband-and-Balls economics team.

But I'd like to look at this a bit more historically. We're now eighteen months into this Parliament. How have governments fared at this point after a change in the governing party since 1945? Well, there's no real pattern. Suffice to say they've usually looked quite good. Only the Conservative government of 1979-83 did worse than the present one, which on most measures is probably still two or three points behind Labour. And that took a massive and more sudden manufacturing catastrophe, and sharply rising unemployment - and an unpopular pre-Falklands Margaret Thatcher as the Conservatives' leader.

On average (and I know this is skewed by Tony Blair's extraordinary electoral honeymoon, that lasted well into 1999) governments in the post-war era have been about two or three points behind at this stage. Harold Wilson's government managed to be eleven points ahead, going into a new and early General Election, despite having been buffeted by financial crisis and at least two rounds of spending cuts.

So you know what? This isn't unusual. It seems strange, but new governments often get the benefit of the doubt. Nothing is predetermined. Only what happens next in politics and governance that will tell us whether the main two parties' balance of polling terror will last.

Saturday, 3 December 2011

Oh, this is going to hurt. A lot.

One of the most depressing, eye-watering, head-in-hands and indeed terrifying facts to emerge from last week's economic policy debacle is the fact that we're all about to feel a lot poorer. And I mean a lot.

Take a look at the chart above (worked out from Institute of Fiscal Studies figures). It's the rise or fall in average disposable household income over the next few years, expressed in per cent terms, using forecasts from the spring and from last week.

The first thing that jumps out is that, on this count as on so many others, the numbers just got much worse. Real incomes rose a bit more than we thought last year, but they're going to fall quickly this year and next, before starting to rise in a paltry way we won't even feel in 2013 and 2014. As growth hopes fade with every new official report, so do future incomes.

In fact, the 'average' household (and yes, I know that's a construct that doesn't really exist) will be no richer in 2015/16. This has just never happened before. Economic historians such as Jim Tomlinson rightly point out that we've had the brakes slammed on before after periods of prosperity - most notably, in the mid-1970s, when real household disposable income fell by two per cent between 1974 and 1977.

But nothing on this scale - a near-five per cent fall between 2009 and 2012 - has happened before. Certainly not since the Great Depression, and probably not since the 1870s and 1880s. We're basically in uncharted waters for a modern, developed, 'progressive' and dynamic society. Everyone's going to have to tighten their belts in a way that neither they, nor their parents or grandparents, can remember. We're in uncharted waters.

The IFS does point out that the downward revisions to household income made by the OBR are mostly to non-labour incomes - profits, for instance. And that's likely to weigh most heavily inside the richest households, which of course can take relatively more of the burden.

But that's only because the new figures on investments and profits are so much worse than they were before. Figures for wage income increases are still scarily low - it's just that they were already grim.

Trust me, this is going to hurt. And it's going to hurt a lot.