A Radical Political Manifesto for 2017

If you have not read the Labour manifesto I commend it to you. It is about tax and spend, just like all the other manifesto’s. That is what governments do, they collect taxes and pay for vital services such as defence, health and education, oh and filling the holes in the road. In relation to tax and spend the Labour manifesto differs from the Tory one in this respect only, that it is better costed!

The Labour manifesto is radical in that it has made the “hard choice” to raise taxes, what is more, it has made the “hard choice” about who is going to pay those higher taxes. Normally when you hear a government minister talking about “hard choices” you think someone is about to get a kicking. Often it is a group of citizens or workers distinguished by their weakness. But not always. The past decade has seen governments of all persuasions talking about the sacrifices that are needed by the majority in order to “balance the book”, “deal with the deficit”, “live within our means” and a range of other cliches raised to the status of policy. Certainly, the hard choices of the Cameron administration were very much about that.

The Labour manifesto addresses all the issues you might expect but critically in relation to care, education, health and industrial strategy it does not talk about how they will be improved by greater efficiency, more competition, delivering more with less or even moving the deck chairs in some complex restructuring exercise. There are some elements of this but bottom line is they say they need more money. And despite the automatic response of the government to any criticisms of its actions, that “Record amounts are being spent on [insert service of your choice]” the reality of most people’s experience is things are getting worse. Services are deteriorating. The “record amount” going into the National Health service is so effective the government does not want the figures for Health Trust deficit’s to be published before the election.

So the Labour Party manifesto is a radical document, it marks a real shift in thinking. It is not constrained by a mindless mantra that nationalisation is necessarily bad because experience seems to show that privatisation is certainly not necessarily good. What is more the risk of nationalised industries gong wrong and thus costing the tax payer a whole pile of cash is not such a powerful criticism when we discover that if private industries, say finance, go wrong they cost the taxpayer a whole pile of cash and more.

Having said all this I suspect in time the Tory manifesto will come to be seen as the most radical of all the current manifesto’s. For the past thirty to forty years there has been a growing consensus structured around a neoliberal economic model of the world which has been about lower taxes, a smaller state and weaker trade unions. The rationale for this is that such actions will lead to improved productivity and greater economic growth. The rising tide of wealth this will create will lift all boats.

Unfortunately, so many boats seem to be stuck in the mud of increasing debt, insecure employment, deteriorating services and, oh, ever more pot holes in the road. A growing sense of frustration with the mantra of jam tomorrow and ever increasing inequality today has permeated the political mantle. The pressure building in the electoral tectonics is palpable and making itself felt in what has become labelled as a popular revolt.

This popular discontent across the whole of the West cannot be dismissed as the irrational response of the “basket of deplorables”. Firstly, there is a growing academic literature raising concerns about inequality and the negative impact it is having on the economy. Whilst some of this is from academics with radical or left wing leanings, it is not all. There are voices from the right who are concerned that the market is rigged and the “invisible hand” is cuffed to the interests of the very wealthy.

To her credit it seems as if Mrs May senses all this and sees something needs to be done and the solution may not be “the market”. The manifesto talks about governing from the mainstream, and states, “We must reject the ideological templates of the socialist left and libertarian right and instead embrace the mainstream view that recognises the good that government can do.” (my emphasis)

The manifesto contains a number of straws which suggest the wind is changing. There is of course a huge difference between rhetoric and reality. The rhetoric could be dismissed as a cynical attempt to attract traditional Labour voters with empty promises. After all this is the government that has promised to get immigration down to tens of thousands, eliminate the deficit and indeed reduce the national debt. It was also Mr May who made very strong comments about workers representation on boards which is being diluted as we speak.

What’s more, excitement at some more progressive comments by the leader of the Tory Party needs to be set against the reality of a  lot of very powerful people whose interests will be directly damaged by a rejection of the neoliberal orthodoxy. They are not going to be persuaded because we have a politician who sees there are genuine issues in relation to inequality and opportunity and they will fight to maintain the common sense view of the world that suits, very well, their personal interests.

The common sense view of the world which has evolved over the past thirty years sees the market as an impersonal and efficient allocator of investment, goods and wealth. A view of the world which sees people as rational utility maximisers who have perfect knowledge of the market, and exchange goods, services and labour freely. The reality of most people’s lives is not like this. The twenty first century market bares no comparison to that of the eighteenth, nineteenth or indeed most of the twentieth century. Putting that aside, the bowdlerised version of this model, which is at the core of the libertarian neoliberal view, is even further from the reality.

The Conservative manifesto seems to recognise this. It is a breach in the orthodoxy. It is a chink in the armour that has defended an increasingly indefensible world view. Whatever the outcome of the election the framework of political common sense is starting to change. At the moment it is about opening up areas of debate that have been closed for decades. It will take time for this to crystalise into clearer manifesto’s of change and change itself. However, better there is an increasingly conscious and rational debate about the way in which opportunity and wealth is managed and ditributed in our societies than the alternative.

For the avoidance of doubt, whilst I think the Tory manifesto may prove to be the most radical of the 2017 election I will be voting Labour. The radicalism of the Tory manifesto lies in its implicit recognition that some of what Jeremy Corbyn says about wealth and power is true.

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Time for a new model pension fund rescue — FT.com

Whatever the solution, the problem is critical. If rising bond prices and poorly designed pensions are not to create yet more inequality, poverty and anger on the part of those who feel abandoned by capitalism, it is more vital than ever to work out a model for pensions that is fairer than DC, and more practical than DB.

Source: Time for a new model pension fund rescue — FT.com

The Rise and Fall of American Growth

This is a work whose central thesis is relatively straightforward but of immense significance not just for the United States but also for the rest of the world. In essence Mr Gordon argues that the growth rate of the American economy, which for so long has driven much of the world economy and transformed the lives of its citizens has its best days behind it. This is not because of a loss of entrepreneurial flair or lack of self-confidence. Rather, more substantive structural issues relating to an unprecedented and unrepeatable period of innovation mean that the levels of economic growth achieved over a period from 1870 to 1970 are unlikely to be recovered in the foreseeable future i.e. the next 25 years, or perhaps ever.

The book analyses economic growth in the States over three historical periods, first 1870 to 1940, then 1940 to 1970 and finally 1970 to 2014. For someone who has sat through more strategic planning meetings than I care to remember which have been peppered with phrases such as “the pace of change is unprecedented”, “learn to love change”, “change is here to stay”, it is absolutely fascinating to have pointed out how truly revolutionary was the first of the periods Mr Gordon addresses.

Part one of the book covering the period 1870 t0 1940 considers what people ate, how they dressed, how they got around, what their heath was like, how illness was managed, what their homes were like, how they communicated, and what working conditions existed. Each area is addressed in exhaustive and, one feels, loving detail. The book is a treasure trove of practical illustrations about how America has evolved over the past 150 years.

If we take the homes Americans lived in in 1870, they were lit by candle or paraffin lamp, which was inefficient, dangerous, required significant maintenance, and smelly. Water was provided by wells or other external sources. It had to be brought in and taken out of the home by hand, predominantly women’s. Human waste was deposited outside of the home in pits. Heating and cooking was mainly by open fire and centered on the main room of the home the kitchen/dining/living and occasionally bathing area.

To say life in such a home was “mean brutish and short” may be an exaggeration however compared with the home of the 1940’s not much of one. In a powerful use of language Mr Gordon describes the homes of the 1940’s as having become “connected”. I know that if our home lost its connection to the internet my youngest son would think the world was about to collapse and to be fair I would not be far behind him. However, it would be interesting to see how important the internet connection would be if it had to be traded off against connection to clean, running water, an effective sewage system or electricity.

One of the great things Mr Gordon’s book does is make visible the incredibly transformative function of advances which are now so ubiquitous in developed economies they are “invisible”.

One example from the book is the calculation of what a typical North Carolina housewife had to do to provide the home with water in 1886. She had to carry water 8 to 10 times a day meaning that over the course of a year she toted more than 36 tons of water over 148 miles. Washing, boiling and rinsing a single load of washing would require 50 gallons of water to be brought in and out of the home by hand. Running water and effective sewage were, of course, not just about convenience. Their impact on public health and urban development was immense.

In area after area a similar picture emerges. In 1870 transport was powered by horses or steam trains the internal combustion engine transformed this so that by the end of the period cars, trucks, electric transit systems and, even more spectacularly, airplanes were the norm. The germ theory of medicine and antibiotics extended average life expectancy significantly by reducing the high levels of infant mortality commonplace in 1870. Clarence Birdseye perfected the process of freezing food thus transforming the diets of the population. Electronic communications moved on from the telegraph to the phone to the radio, to the silent movie and by 1939 the release of The Wizard of Oz and Gone with the Wind.

The changes that occurred were overwhelmingly the product of the general purpose innovations of the second industrial revolution specifically the application of electricity to lighting and other uses, and the invention of the internal combustion engine. These reached into every aspect of peoples’ lives revolutionising how they lived.

Many of them were quantum shifts which were subsequently refined and developed but cannot be repeated. The provision of the first motorcar is such a paradigm shift. In the space of a few decades it meant the horse, which had effectively been the only mode of personal transport for millennia, was made redundant. This had enormous implications for areas as diverse as urban design, allowing suburbs to be “invented”, and public health with the removal of literally tons of animal waste from the streets of cities.

The productivity increases of the agricultural revolution and the growing application of steam power to production of the first industrial revolution were supercharged with the inventions of the second industrial revolution leading to the rapid and massive process of urbanisation. In every area productivity was increasing at a spectacular pace and the whole of the environment within which people lived was being transformed.

The Depression and the Second World War threatened all this and there was a fear that after the hot house of planned military production the post war period would lead to a collapse in productivity rates and a return to the stagnation of the 1930’s. What happened could not have been further from the truth. The period from 1940 to 1970 saw the rapid expansion of consumer capitalism as wartime production facilities were turned to peacetime white goods creation.

The era from after the war to the early 1970’s some have labelled as the Great Compression because of its redistribution of wealth transforming blue collar workers into what became, up until recently, the middle class bedrock of American politics. Trade unionism flourished, redistributive taxation with higher rates of 70% and 90% enabled the federal government to investment in infrastructure projects to do things like bring electrification to the South, establish social programmes such as Medicaid and Medicare and mount a war on poverty.

Whilst innovation continued it was largely about the more effective exploitation of the technologies that had been created in the earlier period from 1870 to 1940. Nothing was discovered that had the all purpose transformative power of electricity or the internal combustion engine.

Finally, we move to the era from 1970 to 2014. The story in this era is far less positive. The newly created middle class, who had experienced nothing but growth with living standards effectively doubling every 30 years, began to find their incomes stagnating or declining in real terms. Inequality began to grow and the pace of economic growth began to slow down.

This process was punctuated with the third industrial revolution around information and communications technology (ICT). This had a significant but relatively brief impact on productivity growth in the decade from the mid-1990’s to the mid-2000’s. There is a famous quote by Robert Solow, the Nobel prize winning economist that “You can see the computer age everywhere but in the productivity statistics.” This encapsulates what has become known as the “productivity paradox”, the fact that spectacular improvements in computer technology have had little impact on the overall level of productivity growth in the economy.

In essence Mr Gordon believes the period 1870 to 1940 saw a scale of transformation that is very unlikely to be repeated in the medium term and possibly never again. What it enabled was a period of economic growth unprecedented in human history. The speed of that growth was spectacular but has been in decline for over 30 years. If we take the annualised growth rate of output per hour in the period from 1870 to 1920 it was 1.79% per annum. In the period from 1920 to 1970 it was a very impressive 2.82%, but in the period from 1970 to 2014 it fell back to an average 1.62% per annum and of course this included the decade of growth between 1995 to 2005 associated with the ICT revolution. If this is stripped out the average growth rate in this period is 1.38%.

However Mr Gordon identifies four critical “headwinds” that might undermine even this rate and may mean “the future growth of real median disposable income will be barely positive and far below the rate enjoyed by Americans dating back to the nineteenth century.”

The headwinds he identifies are a) growing inequality which means that increasing amounts of whatever growth does occur is captured by a tiny fraction of the population; b) a faltering education system where the poor enter the system late and at a massive disadvantage leading to their early exit with all the negative career and income implications of this; c) a demographic shift with baby boomers retiring over the next twenty years reducing the supply of labour and increasing the dependency ratio; d) government debt to GDP ratio will inevitably increase as a result of these demographic changes and lead to the need for action in terms of cuts or tax increases to reduce the fiscal imbalance.

Taking account of the potential economic consequences of these headwinds Mr Gordon estimates that real GDP per person may grow at around 0.8% per annum over the next 25 years. This is a third of the rate achieved in the period 1920-1970, and barely half the rate achieved in the period 1970-2014. If the success of Mr Trump is in any way connected with the stagnation of the blue collar / middle class standard of living over the past thirty years what might a future of lower growth and more extreme inequality hold for politics in the States?

Mr Gordon ends his work with a number of policy prescriptions to mitigate the worst of the slowdown in economic growth. These include, a much more progressive tax system, a higher minimum wage, increased earned income tax credits, drug legalisation, improved pre-school education, a move away from the current property tax based system for the funding of education, increased but targeted immigration.

I suspect Mr Trump has not read this book, for if he had I am sure we would have heard the howls of condemnation from across the Atlantic. It is impossible to get across the quantity or quality of information contained within it nor the humane tone with which it is suffused. It is an important book that deserves to be debated widely amongst policy makers on both sides of the Atlantic. If even only partially correct its implications are profound for the economic, social and political future of the United States.

Further, one suspects the thesis has traction in the UK and Europe. This may mean any assumptions about future growth solving the UK’s current fiscal problems may be completely misplaced.

“The Rise and Fall of American Growth: The US standard of living since the civil war.” Robert J Gordon. Princeton University Press. 2016.

What is good about the UKIP results?

For the main UK political parties the 2014 UKIP local election results are a challenge which they are unsure how to deal with. Do they cast UKIP as racist and risk being attacked as out of touch with the problems of ordinary people. Or do they attempt to recognise the valid concerns UKIP is thought to have identified? When asked about UKIP politicians from all the main parties choose their words with the same level of lawyerly care that Bill Clinton did when asked about his relationship with Monica Lewinksy. They also look about as comfortable as he did.

Crudely one might ask whether UKIP has tapped into a rich vein of base racism which they transform into a respectable concern about the strain on public services and dilution of British culture? Clearly they do seem to have found a mother load of electoral support however I believe it is more profoundly driven than a concern with too much immigration. I fear there is a much deeper malaise in British society, one which is connected to global as well as national trends where fears about immigration are symptoms not causes. Trends which are making life more and more uncertain for millions of people.

For something  over thirty years now there has been a process of growing inequality in the UK. Thomas Piketty’s recent book charts what he sees as a global process concentrating wealth and income in the hands of fewer and fewer individuals. This has largely been at the expense of the middle classes whose living standards have at best stagnated over this period of time.

One of the processes which is seen to have contributed to this concentration is the development of the “winner take all” model in more and more areas of life, and the growth of the “super managers” particularly in the financial sectors of the economy. In  the 1970’s the top 1% of earners captured 10% of national income in the US, now their take is around a third.

It is, of course, this highly paid cadre of super intelligent financiers who developed the sophisticated financial instruments which were intended to diversify away risks on securitised loans. Collateralised Debt Obligations, Credit Default Swaps and such like. For those of us that did woodwork the clue was in the names of these instruments – “debt” and “default”. At bottom if you lend money to people who cannot afford to pay it back the wheels are going to come off however complicated the financial alchemy is you build upon that foundation.

When the wheels did come off in 2007/08 the groups who had to pay the price were the taxpayers, by that I mean the PAYE tax payers and more specifically the ones without an army of lawyers and accountants between them and the inland revenue. Western economies were brought to their knees, hundreds of billions of pounds had to be provided to bail out financial institutions and the term austerity was elevated to a policy reigning back the welfare state that had done so much to improve equality over the 20th century. Contrition amongst those who were most responsible was thin, accountability virtually non existent. No sooner had the crisis been stemmed than bankers were telling us that we needed to “move on”. “Moving on” meant getting back to annual bonuses equivalent to the lifetime earning of those on the average wage.

Even as it became clear that the people who had created these financial weapons of mass destruction had failed to consider the “black swan” risks that might be associated with them, and those that had allowed them to be applied at scale had very little understanding of what they were or how they worked, the level of public outrage appeared strangely muted.

Since the credit crunch scandal after scandal has come to light as we discover that LIBOR, Forex and Gold markets were rigged. Unnecessary insurance products sold to millions of people, sophisticated interest rate swaps sold to businesses which were then driven into liquidation by the rising costs of the products and in some instances, it is claimed, bought at distressed values by the very banks that sold them the swaps. Banks were even found to be laundering the money of drug barons!

Even after all this the impetus for re-regulation of the banks is being undermined by arguments about the need to protect one of our most important industries, we must not kill the golden goose. Beggar-my-neighbour tax reductions for corporations and those on ultra high salaries we are told will reward talent, inspire innovation and attract jobs to the UK. Whilst it is rarely challenged in the popular press it should not be assumed that the population miss the fact that whilst rich people need more money to be motivated poor people need less. And it is strange that lower taxes should inspire companies to come to Britain when they arrange their affairs so that they don’t even pay them.

One might think that the public are suffering from shock fatigue. You worry that if financial analysts were found to be discerning the trends in the markets from the entrails of freshly sacrificed babies it would generate no more than a weary shake of the head. The stoicism with which the cuts to the welfare state have been accepted must have surprised even George Osbourne. The limited challenge that has been mounted to date should not, however, be seen as acceptance. These issues are moving the tectonic plates of public opinion. On the surface little may appear to be happening but deeper there are strains building which will at some point be released.

Ukip have created a fault line. They speak to the pain that the population are experiencing now and the deep unease that they feels about the future. For the elderly it is the fact that their savings are being eroded by effectively negative real interest rates, for the middle aged the date they can retire is receding, for those who work in the public sector redundancy looms, for those in the private sector their terms and conditions worsening with zero hour contracts,  all are finding their incomes declining in real terms, and young people if they can get a job certainly cannot get a house in large parts of the country.

To change my metaphor, there is a lot of tinder lying around and Ukip are providing a spark. Furthermore I think the major parties should not assume that the first past the post voting system for the 2015 general election will douse the Ukip torch. People are hurting and want out and Ukip seem to be offering them a route. Ironically they are tapping in to precisely what Nick Clegg tapped into 4 years ago.

This is not just an issue in the UK. It might seem strange to put UKIP, Occupy Wall Street, the Tea Party, and sundry proto fascist and extreme left groups on the continent together but they are all expressions of growing frustration with the way the economy is being shaped and the social and political consequences of this. The catalyst may be immigration but as I have argued the causes are far more pervasive and deeply rooted. Unless these are addressed closing our borders will provide a temporary and unedifying distraction. To be clear Ukip does not have the answer indeed they are not even addressing the right question.

Technology and globalisation are setting life defining challenges for us. Some argue that these are forces which it is pointless, indeed counterproductive, to try to shape. They accept they can often cause “dislocation” but go on to argue that the evidence from the industrial revolution and the developing economies is that eventually everyone is better off. Unfortunately, there are increasing signs that innovation is not always tied to productivity increases nor grow to the increase in new quality jobs.

One example,  I accept crude, of the future we may face is provided by Citigroup. They have advised clients to structure their investment portfolios around the growing consumer power of the super rich. They think “…the world is dividing into two blocks – the Plutonomy and the rest.” They see the economy as an hourglass with a smaller and smaller number of super rich consumers of luxury items,  (yachts and jets) at the top. And for a the rest…? The future is Poundland.

This picture of the future is not good for anyone. What we lack are politicians that have the nerve to articulate a different vision. One which challenges some very powerful vested interests and indeed at times contradicts some of the bar room certainties of public opinion. To be clear, I believe, a future which needs to remain committed to a free market system with private property rights and inequality of rewards. However, inequality within bounds that are rationally debated. The clock is ticking for a considered and structured response to these issues the alternatives are in no ones interest.

Back to where I started, what on earth can be said in favour of people voting for Ukip?  Grasping a positive from this it shows that, despite regulations and laws being made which seem to be tailored in the interests of the minority, despite the obscene salary levels being paid to an industry that nearly destroyed the western economy, despite the frailties and venality of some of todays politicians some people still have faith in democracy.  From what I have said it will be clear that I think the faith in Ukip is totally misplaced however the recourse to democracy when you are hurting is something we must strive to support.

 

The Price of Civilisation – Jeffrey Sachs

This is an excellent book by someone with the pedigree to be taken seriously. He is currently the Director of the Earth Institute and Professor of Health Policy and Management at Columbia University. He has been named by Time magazine as one of the 100 most influential leaders in the world.

The book provides a critique of the  economic crisis facing the USA at the moment. He sees this crisis having a moral root in “the  decline of civic virtue amongst America’s political and economic elite.”  Sachs documents the declining prosperity of middle America and the scale of growing inequality with a wealth of statistics. At a time when one in eight Americans depends on food stamps the wealthiest one percent of American households enjoy a higher total net worth than the bottom 90 percent. In relation to incomes the top one percent of earners receive more than the bottom fifty percent.

Sachs provides a critique of the demonisation of taxation and big government by successive administrations. This radical liberal position meant that other key issues were neglected specifically the rise of the internet; of a new economically dynamic Asia and an evolving ecological crisis. The book charts the shift in US policy over the course of the 20th Century away from a belief in the potential for positive intervention by the state as evidenced by the New Deal in the 1930’s and the War on Poverty in the 1960’s to a situation where Washington was seen as the enemy. Cutting back regulation, privatising public services, cutting taxes. These were the new orthodoxy pursued by governments of both Democratic and Republican persuasion.

Sachs refutes some some of the key assertions of the extreme liberal consensus about, for example, the negative effect of high taxation. He points out that in the period 1955-1970, the top marginal tax rate in the US was 82% and GDP growth was 3.6% whilst in the period 1981-2010 the top marginal tax rate was 39% and the growth in GDP was  2.8%. He claims that the causes of the relative decline in the position of the US has been more to do with the process of globalisation than the processes of allegedy big government.

The book describes the growing polarisation of opinion in the states between the Sunbelt and Snowbelt. Sachs points to the irony of the fact that the states most opposed to big government are, in fact, net recipients of Federal spending.

Sachs, identifies a number of forces which have undermined the effectiveness of the political system. Weak national parties, the corporate financing of the political process, a process of globalisation which has undermined the power of labour groups. All these have led to the rise in power of what Sachs calls the corporatocracy unchallenged by either of the two main parties. Challenge by the citizenry is undermined by the advent of the media saturated society where people spend their working days tied to a computer screen and then come home to spend their leisure time glued to a range of leisure screens creating  a “…technology-rich, advertising-fed, knowledge poor society.”

Having analysed in some details of the problems of contemporary America Sachs goes on to provide a programme of change to renew American democracy and and redistribute wealth to pay for civilisation. It is not a revolutionary programme of confiscation, rather he proposes that overall tax rates in the states be raised so that they are comparable with overall tax rates in Europe. This increase in taxation should be accompanied by a shift of resource away from the federal government towards the individual states to support increase investment in education, early childhood development, infrastructure and a range of other headings to improve productivity.

In parallel with the fiscal reforms he proposes a series of reforms of government to overcome the problem of “corporatocracy” which he sees as the capture of the state by big business. His proposals here would make some blanch, things like, public funding for political parties; free media time allocated according to criteria other than who can pay for most; statutes to prevent Federal employees from taking lucrative jobs in the private sector for a minimum of three years after they leave office and banning campaign contributions from lobbying firms. The aim being to transform America from being the best democracy that money can buy to a political system with its roots in a thriving and diverse civil society.

Sachs might be seen, in some quarters, as a hopeless idealist however it is clear that the US has a number of long term issues which at some point are likely to force radical change. Its political system is paralysed by a polarity, the vehemence of which is incredible given the substantive areas of agreement. Its inequitable distribution of wealth which is getting worse and worse. The state of its public infrastructure. As critique and proposal Sachs’ book is well worth a read.

The Price of Civilisation – Economics and Ethics After the Fall. J Sachs. Published by Bodley Head 2011.