Paste your Google Webmaster Tools verification code here

Bereft of new ideas, Jeremy Corbyn’s Labour Party is dead set on sticking its head in the sand

Bereft of new ideas, Jeremy Corbyn’s Labour Party is dead set on sticking its head in the sand

One of the most dispiriting aspects of the Labour Party conference, which ended last week, is how deeply conservative the political left has become. Its remedies for Britain’s problems look to the past and not the future. Far from embracing new technology, the left is hostile to it.

This was not always the case. Labour under Harold Wilson won a closely contested election in 1964. Wilson’s key phrase – “the white heat of the technological revolution” – became the butt of parodies. But it encapsulated Labour’s appeal. Tony Blair, for all his faults, projected an image of modernity with his “Cool Britannia”.

Now, we have the grim pledge to turn the clock back and renationalise the railways. This was first done in 1948. But there is no sense that anything innovative will be done.

In fact, the old British Railways, as it was then called, was subsequently plagued by massive underinvestment in modern technology and equipment.

Ironically, given Labour’s attacks on the short-termism of the City, it was precisely in the nationalised industries that such behaviour was rampant.

If fares had to rise to fund new investment, the political incentive facing the Minister of Transport was to refuse the increase. Given the choice between political popularity in the here and now, and the longer-term benefit to the industry, guess which one usually won.

Labour argues that the profits currently being made by the private rail companies would be ploughed back to improve the service. The much more likely outcome is that the money will be used to featherbed jobs and boost the pay of those employed in the sector.

Let’s leave aside the fact that Network Rail, the one part of the railways still in public ownership, has shown itself to be unfit for purpose.

The problems started immediately after nationalisation 70 years ago. The historian John Bew published a magnificent biography of Clement Attlee in 2016. Attlee led the 1945-51 Labour government, by far the most radical in British history. Attlee himself served with great bravery in the First World War, was a fervent patriot and supporter of the monarchy, and stressed individual responsibility as much as individual rights.

An ordinary railwayman features in a snippet in the book. He had been a keen supporter of nationalisation, but six months after the event, he had changed his mind.

Why? Because “where there used to be one inspector, now there are two” – jobs for the public sector middle class. Little wonder that Corbyn’s Labour is so keen on the idea.

The left in general seems bereft of new ideas and lives in fear of new technology. They want to ban Uber and AirBnB. They want to bring Google and Facebook to heel not by innovation and competition, but by regulation. Their house journal, the Guardian newspaper, is filled with savage attacks by liberal arts graduates on “algorithms”.

To make a success of Brexit, we need to embrace innovation. As far as the future is concerned, Labour is just sticking its head in the sand.

As published in City AM Wednesday 3rd October 2018

Image: Jeremy Corbyn by Rwendland licensed under CC-BY_SA 4.0
Read More

Doublethinking or dim? Why the Labour party can’t be trusted with the economy

Doublethinking or dim? Why the Labour party can’t be trusted with the economy

Are members of the Labour Party frontbench experts in doublethink? The concept was invented by George Orwell for his novel 1984, written in the 1940s as a critique of the Soviet Union.

Masters of doublethink can hold, for purposes of political expediency, two opposing opinions at the same time, one of which might be complete nonsense.

The Leader himself set a good example during the general election campaign when he promised to abolish all outstanding student debt. Jeremy Corbyn rather backtracked on this after the votes had been cast, when it was pointed out to him that this would cost around £100 billion – over £1,500 for every man, woman and child in the UK.

His close ally, the Shadow Chancellor, followed this up on Sunday. Asked about the cost of Labour’s re-nationalisation plans, John McDonnell said that “you don’t need a number because you swap shares for government bonds”.

Independent experts put a provisional costing of around £500 billion on McDonnell’s plans. This amounts to over 20 per cent of GDP.

Imagine you want to buy a house for £10 million but have no savings. And imagine that you somehow persuade someone to lend you the money. True, you have acquired an asset worth £10 million and have a debt of the same size. Your net wealth position is unchanged.

But you face the problem of paying the interest on the loan, the terms of which may be very onerous, reflecting your credit risk.

McDonnell argues that nationalised industries will make a profit, which will take care of the interest payments.  Stretching credibility even further, Labour argues that because the interest on government bonds is currently only just over 1 per cent, the payments would not amount to much.

Yet it is obvious that the markets might want a much higher rate of interest to finance the plans of a Chancellor who wanted to add £500 billion to public debt.

Emily Thornberry, the Shadow Foreign Secretary, has also got in on the doublethink act. Challenged on TV to name any country where Labour’s policies of financing spending by issuing debt had worked, she finally came up with Germany and Sweden.

The Bank of International Settlements complies data on the ratio of government debt to GDP. There are several ways to do this, but on their preferred approach in Germany it is currently 73 per cent and in Sweden 44 per cent. In the UK it is already 116 per cent.

Much more plausible comparators are Italy and Greece, where the ratios are 150 and 173 per cent, figures which McDonnell would reach easily. In Italy, GDP is still 5 per cent below its peak level in 2007, a whole decade ago. And in Greece it is 26 per cent lower.

Are the top Corbynites cynical exponents of doublethink? Less charitable people might say they are just plain dim. As so often in economics, the evidence so far does not enable us to decide between the two hypotheses. But, either way, they are bad news.

As published in City AM Wednesday 22nd November 2017

Image: Corbyn and McDonnell by By Rwendland is licensed under CC by 4.0
Read More

The demise of Germany’s Social Democrats reflects the challenge for all liberal parties

The demise of Germany’s Social Democrats reflects the challenge for all liberal parties

The German elections on Sunday went pretty much according to the polls. Another victory for Chancellor Merkel.

Much of the commentary has focussed on the success of the far-right Alternative fur Deutschland (AfD) party. One of its leading candidates eulogised the German armed forces during the Second World War – a topic even more sensitive topic there than it is here.

The AfD took nearly 13 per cent of the vote and 94 seats in the Bundestag. This puts them within striking distance of the Social Democrats (SPD). The SPD share of the vote collapsed to just over 20 per cent, barely half the support it attracted only a decade ago.

The Social Democrats – the German equivalent of Labour in the UK – were annihilated not just in areas like Bavaria where traditional centre-right parties have always been strong. They lost very heavily in the old East Germany, where the AfD secured its highest level of support.

It is no accident that the rise of the AfD and the fall of the SPD go hand in hand.

A popular myth among the liberal elite in Britain is that our country has an exceptionally high level of inequality compared to the rest of Europe. This far from being the case.

The same forces which have widened inequality here have operated in Germany, in some ways even more powerfully.

The opening up of Eastern Europe in the early 1990s has had a strong effect. Employers soon realised that economies such as Poland and the Czech Republic possessed educated labour forces, whose productivity potential had been suppressed by the gross inefficiencies inherent in planned economies. German companies opened up new production plants in the old Soviet bloc countries in Europe rather than at home.

This has been combined with the impact of both globalisation and mass immigration.

The effect on wage rates of this increase in competition in the labour market has been dramatic. Christian Dustmann at UCL has examined the evolution of wage rates in the former West Germany.

The fifteenth percentile of the wage distribution is the level at which only 15 per cent of wages are lower. In West Germany, at the fifteenth percentile, real wages have fallen almost continuously since the mid-1990s.

At the fiftieth percentile, where half get more and half get less, the reduction has been less sharp. But the fall had set in by the early 2000s.

At the eighty-fifth percentile, we see the mirror image of the fifteenth: real wages grew strongly, reaping the benefits of the recovery of the economy.

In the states of the old East Germany, the problems are even worse.

The sharp rise in inequality is a key reason for the collapse in support for the social democratic parties across Europe. Their traditional voters have been the ones who have been hit the most by static or falling real incomes. They have not been defended by social democrat parties, which now represent the interests of the public sector urban professional classes.

The fact that Jeremy Corbyn’s Labour did not suffer the same fate as Germany’s SDP is a clear indictment of the Conservative campaign in the election.

As published in City AM Wednesday 27th September 2017

Image: Martin Schultz by Olaf Kosinsky is licensed under CC by 3.0
Read More

Less austerity will always mean more tax

Less austerity will always mean more tax

There is a great deal of discussion, following the election, of relaxing or even abandoning austerity.

There is an equal amount of confusion about this, because the same word is being used to describe two quite separate concepts.

The consequences of the government changing its policy on austerity are dramatically different, depending on which one it is.

One meaning of the word is what we might call “social austerity”. From any given pot of money available to a government, its supporters believe that, in general, tax cuts should be promoted rather than public spending increased. Opponents argue that public spending as a result has become underfunded. Local councils, education, and the NHS all need more money.

Social austerity can be relieved, as even the DUP and some Conservatives argue, by increasing spending appropriately, and funding it by increases in taxation. This was an important aspect of Labour’s manifesto, and the tragedy at Grenfell Tower has intensified the discussion around it.

The main risk is purely political. Are voters really and truly willing to pay more tax, rather than just wanting someone else to pay it?

There are some potential adverse economic consequences if the policy of higher taxation is pushed too far. Former French President Francois Hollande’s 75 per cent tax rate led to several hundred thousand skilled young people leaving France, mainly for the UK. If companies are taxed too heavily, they may choose to locate to another country. Both skilled labour and capital are geographically mobile.

But, within reason, social austerity could be relaxed without perhaps too many fears in this direction.

“Economic austerity” is quite a different matter. Opponents of this want to increase the gap between government spending and tax receipts – the so-called fiscal deficit. This is funded by issuing government bonds. So the deficit in any given year goes up, and the outstanding stock of government debt also rises.

Any relaxation of social austerity is paid for by higher taxes now. Any relaxation of economic austerity is paid for by borrowing more now.

But the debt has to be repaid at some point, and the interest payments on it must be met. So taxes in the future will be higher. Either way, less austerity means more tax.

John Maynard Keynes himself made it very clear that increasing public spending at a time of full employment would simply lead to more inflation. There are areas of the country where there probably are people registered as unemployed who genuinely do want to work – the Welsh Valleys, for example. But the rest of the UK is at full employment.

The number of people in employment is at an all-time high, at 32m. This has risen by 2.8m since 2010. Meanwhile the unemployment rate has fallen from 7.9 per cent in 2010 to just 4.6 per cent today.

Any major fiscal stimulus to the economy now would simply bid up wages, leading to higher costs and higher inflation.

The public mood on social austerity may have shifted. But the case for economic austerity is stronger than it has ever been.

As published in City AM Wednesday 21st June 2017

Image: People’s assembly by Peter Damian is licensed under CC by 2.0
Read More

Sorry Corbyn, consumers aren’t as sold on nationalisation as you’d like to think

Sorry Corbyn, consumers aren’t as sold on nationalisation as you’d like to think

One of the most remarkable features of the Conservative election campaign was the dog which did not bark.

There was no systematic attempt to undermine Jeremy Corbyn’s wholly implausible economic narrative. Magic Money Tree comments aside, Labour’s economic incompetence was allowed to pass almost unchallenged.

One part of Labour’s economic offer which really did strike a chord with the electorate was the promise to nationalise industries such as rail and water. To anyone with direct experience of the old British Rail or the Post Office (which made you wait six months to get a phone installed) this almost defies belief. But only those over 55 can remember.

The fact is that for a number of years there has been strong and consistent support in surveys for taking industries such as rail into public ownership.

In 2013, for example, the moderate Labour website Labour List commissioned an analysis by the poll company Survation. In terms of rail nationalisation, 42 per cent thought fares would be cheaper, compared to only 12 per cent who thought they would go up. Those believing the quality of the services would improve easily outnumbered those who thought it would get worse, by 38 to 14 per cent. There are many similar examples.

Economists are pretty dismissive of the results of surveys about hypothetical situations or choices. A key foundation of economic theory is the concept of revealed preference, to use the jargon phrase. Individuals are assumed to have reasonably stable tastes and preferences. These preferences are revealed not through answers to hypothetical questions, but through how they actually respond to changes in the set of incentives which they face.

In the National Passenger Survey, for example, 80 per cent of respondents routinely express satisfaction with their journey, compared to fewer than 10 per cent who are dissatisfied. But how does this translate into actual decisions?

Prior to rail privatisation just after the 1992 election, the peak number of passenger journeys made each year was some 1.1bn in the mid-1950s. Faced with rapidly rising road competition, the rail industry saw journeys fall steadily, to a trough of around 750m in the mid-1990s.

After privatisation, massive investment programmes have been carried out and, in the form of the train operating companies, there is now a distinct part of the industry whose priority is the consumer. Journey numbers rose, passing the 1bn mark in 2003, to the current level of 1.7bn, a figure not seen since the early 1920s, when road competition was weak.

So the revealed preference of consumers seems to be that they rather like the current structure. They actively choose to use rail in massive numbers.

Rather like a good Party member in George Orwell’s book 1984, the electorate seems capable of believing two contradictory things at the same time. This reinforces the importance of narratives in politics. Trying to treat voters as rational agents often ends in tears, as both Cameron and May have discovered.

As published in City AM Wednesday 14th June 2017

Image: Jeremy Corbyn by Garry Knight is licensed under CC by 2.0
Read More

Labour’s plans add up on paper, but that won’t translate to the real world

Labour’s plans add up on paper, but that won’t translate to the real world

The two main manifestos have been published. Initially at least, the Labour one seems the more popular. Many people are susceptible to being bribed with other people’s money.

Labour claims that their plans to spend an additional £49 billion have been fully costed. At one level, this is true. A set of tax changes and estimates of the additional revenue they will bring is presented. These numbers do add up to the same sum as the extra spending.

It would be pure nit picking to ask where the money is to come from to pay for the nationalisation of the rail, water and mail industries. Labour says the shareholders would receive government bonds in exchange for their equity. This extra borrowing would foot the bill.

Perhaps it would be even more trivial and tendentious to draw attention to the proposed National Transformation Plan, which will spend an extra £250 billion over ten years on infrastructure. This, too, would be financed by additional government borrowing.

After all, Labour says: “we will take advantage of near-record low interest rates”. Indeed, longer term UK government bonds are currently trading at a yield of around 1 to 1.5 per cent.

But this is the essence of the problem. In economics-speak, the bond yield may not be invariant to the size of the deficit. In English, if borrowing rises sharply, interest rates might also go up.

Keynes is often regarded as the intellectual inspiration of those who want to see government borrowing increased. He himself was far more cautious. True, in his magnum opus the General Theory, he did advocate higher government spending to try and solve the depression of the 1930s. But he was very careful to point out that the potential benefits of a bigger deficit could be cancelled out if, as a result, interest rates rose sharply.

This is not a mere theoretical abstraction. In the Mediterranean economies in recent years, interest rates have regularly risen to 6 or 7 per cent, and sometimes higher still, in one of the many crises in confidence in government prudence which have taken place. The idea that Labour could borrow hundreds of billions of pounds with no consequence for interest rates is stretching credibility to breaking point.

More generally, the whole of Labour’s manifesto is costed on the naive assumption that tax and spending changes would not lead to any changes in how individuals and companies behave.

An additional £23 billion is planned from the corporate sector. It is possible that the tax will be passed onto consumers and this amount will be raised. But it may well be that companies will be deterred from operating in the UK at all, and corporation tax receipts will fall rather than rise.

Ex-President Hollande in France raised the top tax rate to 75 per cent. As a result, large numbers of highly skilled young French people moved to London.

The Left is very good at drawing up well intentioned detailed plans. But they usually fail because people change their behaviour in response to them.

As published in City AM Wednesday 24th May 2017

Image: Labour Party General Election Launch 2017 by Sophie Brown is licensed under CC by 2.0
Read More