Category: Politics and economics

Keir Starmer’s vision is lukewarm about principles

In a pamphlet published by the Fabian Society, Keir Starmer lays out a series of policies and priorities.  There are brief – very brief – genuflections in the direction of child and pensioner poverty, though the only policy I can see that is related to either is the fleeting suggestion that there has to be a reduction in poverty-related lack of educational attainment.   On benefits, Starmer offers us this:

We would replace universal credit and reimagine our social security system to ensure that work pays. We want low-paid people to keep more of the money they earn, so that having enough money to raise a family isn’t the
preserve of the better-off.

Apart from replacing Universal Credit, that looks a lot like some standard Conservative pledges: make work pay and cut taxes.    On the first, there’s a simple problem: making work pay is done by making work pay, not by changing benefit systems.  On the second, while it’s true that low earners have important problems, the central issue is not  about money deducted from earnings.  For low earners, the most obvious problems are income security, the costs of housing and child care.  However, most people on benefits are not earners.  They’re pensioners, they’re sick, they’re full-time carers, or they’re unemployed.   Politicians in both major parties have fixated on the relationship of benefits to the labour market; it’s only a small part of what benefits do.

If Starmer’s priorities are not about well-being, or poverty, what are they about?  What he has to say about public services looks like this:

we must face the future. That means a new settlement between government, business and working people. It means completely rethinking where power lies in our country – driving it out of the sclerotic and wasteful parts of a centralized system and into the hands of people and communities across the land. It means banishing the culture that unthinkingly accepts public services not keeping up with the sort of advances we have come to expect in the private sector.

In what respect are our public services inferior to the private sector – apart from funding?  Who thinks our NHS is wasteful – seriously? How can it be acceptable to focus on “government, business and working people” – the corporatism of the 1970s – when a quarter of the population are not part of any of it?    There is nothing in this pamphlet I could relate to disability or the dispossessed.

This is not an argument for Labour’s former regime – I’ve previously commented that the 2017 manifesto  was ‘pretty feeble stuff’ and the 2019 manifesto was mainly reactive.   Labour may not have lost its way completely, but the lack of an agenda for public services, well-being or disadvantage doesn’t help to dispel the impression.

At the risk of being doggedly unfashionable, let me go back to Anthony Crosland in The Future of Socialism. Socialism was, Crosland explained, ‘a set of values, or aspirations, which socialists wish to see embodied in the organisation of society.’  Those values included empowerment, the  progressive removal of disadvantage, and mutual responsibility: the ‘Liberty, Equality and Fraternity’ of the classic left.   Many modern-day socialists would want to add the core principles of democracy and human rights.  The Labour Party is a party of values, or it is nothing.

 

 

Shortages were predicted.

The shortages that have followed Brexit are no surprise; we knew they were coming.

The most basic principle of international trade, ‘comparative advantage’, depends on the idea that people and countries can be better off if they specialise in the things they do best.   The European Union was founded on that basis.   Specialisation also increases mutual dependency, and that is a good thing; it makes war more difficult.  However, it can also have negative consequences.  As countries and regions build on their strengths, there will be a certain amount of disruption – what free market economists like to call ‘creative destruction’.  The European  funds – the Regional Fund and the Social Fund – were designed to compensate and offer some protection to the people and areas which would be displaced as local industries focused more on local strengths, and moved away from those activities where it made more sense for that work to be done somewhere else.

It was clear, for a long time before Britain joined the EU, that a range of Britain’s longest-established industries – coal, textiles and heavy engineering – had largely ceased to be sustainable as competitors entered the field.  When Britain joined the EU, there was further displacement in a wide range of other areas, such as agriculture, car production and electronics.  Conversely, the British economy came to depend increasingly on fields of activity where the UK was relatively successful – areas such as  finance, scientific research, education and culture.

Currently, there are shortages in a wide range of areas.  Some are obvious, and should have been predicted, like the shortages of HGV drivers or agricultural workers; some less so, such as the shortage of phials for medical samples or building materials.  Our expertise in theatre or banking  was never going to be an effective substitute. What was evident from the outset was that there was always going to be a wide range of activities which the British economy no longer had the capacity to do, and would have to import until a home-grown industry could develop – if it ever does, because there are things that can always be done more effectively somewhere else. It’s built in to the nature of international trade.

 

‘Greed is good’, revisited

Boris Johnson’s claim that the vaccine programme is a triumph of self-interested ‘capitalism’ has been roundly condemned; I don’t think I need to explain why it’s simply not true in this context.  It has spurred me, however, to come back to the broader argument, that we owe our prosperity and living standards to private enterprise.  That argument has been vigorously restated in support of Johnson, for example by Rod Liddle in the Sun: “this is what brings about progress in society”.

It’s an argument that goes back at least to Mandeville – private vice leads to public benefit – but it’s most often cited from Adam Smith:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”

That much is clearly true, as far as it goes; I do not want to take anything away from it. However, it’s only one aspect of our current standard of living in the UK.

If we look back at the things that have made our lives better than it was in Adam Smith’s time,  there are a few other things to consider besides butchers and bakers.  First, there’s the fabric of public space: roads, drains, pavements, street lights. Second, there are the standards and services that govern our private space: housing standards, sanitation,  sewerage, waste disposal, water supplies, and energy supply.  Third, there are the services and facilities which shape our daily lives: education, health, social security, and housing.   (The last one on the list deserves a reminder: we built six million council homes, and most of them are still standing even if they’ve been privatised or transferred to new management.)

It’s become commonplace for the advocates of free markets to claim that we owe everything to private enterprise.  That claim is false.  In some cases, governments paid private enterprise to provide goods and services; in some cases, such as agriculture or energy supply, they kept services going that would have collapsed otherwise; in some cases, they produced the goods directly.  All of the examples I have given were, at least to some degree and in some cases predominantly, the result of collective social action.  Not private enterprise, not self-interest, but government.

Is it time for a stimulus package?

I write this, not knowing the answer.  One view is that as the pandemic quietens, the economy will spring back into life – not, perhaps, the ‘V’ shaped recovery that the Bank was hoping for last summer, but at least a climb out of the canyon.   Another possibility is that those people who’ve been saving during the lockdowns will have pent-up demand to release as soon as the opportunity arises, and that this will translate into inflationary pressure, for example in housing.  In either of those scenarios, we don’t actually need to inject resources into the economy.

On the other hand, there are some disquieting economic trends.  The pandemic has already closed some businesses, and there will be more.  The continuing lockdown in other countries will reduce demand in Britain further.  Brexit  means that some existing trades selling to Europe (and some to Northern Ireland) will not be viable – for example, small shipments of agricultural produce have become prohibitively expensive and tied up in bureaucracy.    And people have incurred debt, serious deprivation and in some cases destitution.

The case for a stimulus package, of the sort that Biden is introducing in the USA, is that it is only by increasing demand that the economy will get moving again.  But the British economy is not like the US; it’s much less self-contained, much more dependent on trade, services  and complex international supply chains.   I can’t tell, then, whether a major increase in expenditure is actually justified.

However, there is another option.  The position of the people who have suffered most can and should be protected; that implies redistribution and transfer payments, which are the other side of the Biden plan.   If we take resources from people who have been able to save and move the same resources to those who have little, that would probably have a marginal stimulus effect, without running any serious risk either of overheating the economy or of inflation. It’s possible that some sectors would suffer ill-effects, but as great as my respect is for the people running foodbanks, I could stand to see them being put out of business.

Economically, France has not fared badly; maybe we could learn something from them

Looking over a digest of recent news, a comment from last week’s Sunday Telegraph caught my eye. The government, they argued,”must begin a root and branch overhaul of public spending to cut billions. It cannot keep assuming that grands projets and government direction will propel Britain upwards: if it were that simple, France would have enjoyed a multi-decade economic boom.”

There are two parts to that.  First, there is the proposal to cut billions off public spending during a major slump.  There’s not much to say about this, beyond the obvious comment that it’s economically illiterate.  Taking demand out of a depressed economy is a recipe for a major slump.  The second part, which is rather more interesting, is the idea that the French approach doesn’t deliver.  France did, of course, have a ‘multi-decade economic boom’ after 1944, which they call the trente glorieuses.  Then they were hit, as we were, by the oil crisis.  The graph below, which I hope will show up on your screens, compares GDP per capita in Britain and France since 1980.  There’s not much to distinguish them: Britain did gain a marginal advantage in income per capita from 1997 to 2008, but that apart, the two economies are a lot like each other. The French approach doesn’t have a clear advantage over the British, but it doesn’t have a clear disadvantage either.  And at least France has had the benefits of major  infrastructure projects, which Britain could have done with.

Universal Credit is not ‘spending’; it’s a transfer payment

At the risk of generating more fog than light, I’ve just tried to squeeze a complicated little argument into a tweet. Benefits are commonly presented, in public accounts and in the media, as a form of public spending.  That’s not strictly true.  Benefits are technically a form of ‘transfer payment’.  The government doesn’t actually spend the money; they pass the money to the people who receive benefits (pensioners, families and so forth) so that they can spend it.

This has one of two effects.  If the transfer is paid for by personal taxation – that’s not the only way for governments to raise money – then benefits are simply redistributive.  On the face of the matter, redistributive transfers are economically neutral  – they have very little effect.  If they do have an effect on economic activity, it’s because people on lower incomes may well spend their money differently from people on higher incomes.   Typically, they save less (so the money is used more) and they spend more on food as a proportion of their income.

If the transfers aren’t paid by personal taxation, the situation is a little more complex.  If the cost can be tracked to a specific form of finance, that may imply a different pattern of economic behaviour, and the transfer payment may not be so neutral.  However, government finance doesn’t work to a strictly balanced budget, and it’s quite possible that the money will simply have been created, like ‘quantitative easing’ or ‘helicopter money’.  In the present circumstances, there’s a very strong argument for government to maintain a flow of money in order to shore up economic demand.  Quite apart from that, of course, the case  for protecting people on low incomes while that happens is strong in its own right.

European citizenship: a broken promise

I had accepted, eighteen months ago, that European citizenship was ‘a promise that will never be kept”.  I’m disappointed, but not surprised, by a judgment in the French Cours de Cassation   that dismisses the rights of British expatriates in France as “inopérants” – ceasing to apply on the UK’s departure from the EU.  Steve Peers, a Professor of EU Law at the University of Essex,  has consistently argued that this would be the case.

Why did I think differently?  I’d point to four reasons, none of which has been persuasive to lawyers.  First, there was the Charter of Fundamental Rights of the European Union, the promise by the EU to its citizens that their rights were ‘fundamental’.  ‘Fundamental’ rights don’t disappear because a member state removes itself from the consideration; only membership rights do that.  Second, there was precedent – when Greenland left the European Community, the rights of its citizens were preserved on request.  Third, there was what I had understood about the nature of European citizenship. This comes from Wheare’s classic work on Federal government (OUP, 1946).  A federation, he explains, is:

“an association of states so organised that powers are divided between a general government which in certain matters … is independent of the governments of the associated states, and on the other hand, state governments which in certain matters are, in their turn, independent of the general government. This involves, as a necessary consequence, that general and regional governments both operate directly upon the people; each citizen is subject to two governments.”

That describes the structure of the European Union precisely – apart, it now seems,  from the last seven words.

Lastly, there was the description of European citizenship in the Treaties, which said that EU citizenship was ‘additional’ to citizenship in a member state, and does not replace it.  There is an ambiguity here.  In the French version of the treaties, the wording is this:

Est citoyen de l’Union toute personne ayant la nationalité d’un État membre. La citoyenneté de l’Union s’ajoute à la citoyenneté nationale et ne la remplace pas.

S’ajouter can be read here as ‘attached’ or ‘supplementary to’, and that, it seems, is how it’s been read in France. A “supplementary” citizenship seems to me to offer much less than an “additional” one.

I think there’s room to cavil about this, because if the term ‘supplementary’ was intended, it could have been said – and if the clause meant that European citizenship was supplementary, the last part, that it would not replace nationality of a member state, clarifies nothing, and could have no meaning or effect.  The caveat only makes sense if European citizenship was being considered as a form of citizenship in its own right.

I have no choice but to bow to the decision, but I persist in thinking of this as a promise broken.

Thinking collectively

Policy Press have contacted me to say that three of my books are now available on their online service, Policy Press Scholarship online.  This is subscribed to by many institutions – I have access by way of the National Library of Scotland.  The books are, in order of publication, Reclaiming Individualism (2013), Thinking Collectively (2019) and The Poverty of Nations (2020).

If the books were being written now, I’d need of course to take account of the current pandemic; but oddly, there’s little in the intellectual content that would need to be changed.  In Thinking collectively, I review a range of moral arguments for collective action, and competing conceptions of the ‘common good’.  The common good might be understood as the sum of particular interests, such as economic development; on interests which are shared with other people, like the arguments for clean water; on interests which we share as members of a collectivity, such as defence or foreign policy; and, beyond that, the process of collective action, such as democratic participation.  The response to Covid-19 is – or should be – an example of aiming for the common good in every sense.

‘Sovereignty’ doesn’t mean that a state can do whatever its government pleases

Arguments for ‘sovereignty’ are prominent in several disputes, around the world.  For many of the governments using the word, notably China and the UK, ‘sovereignty’ seems to be about independence and the absence of foreign interference.  The term has been used for centuries in international law, apparently going back to the Peace of Westphalia in 1648, which ended the Thirty Years War.  In that narrow context, a sovereign state has exclusive authority within its territory.  But sovereignty means much more than that.    A study of the Westphalian peace (D Croxton, 1999, The Peace of Westphalia of 1648 and the Origins of Sovereignty, International History Review 21(3)) brings together some helpful explanations of the term: sovereignty is

‘the idea that there is a final and absolute political authority in the political community … and no final and absolute authority exists elsewhere’ … By this definition, ‘sovereignty is not a fact. Authority and power are facts …[Sovereignty] is an assumption about authority.’ Hence, as John Ruggie states, sovereignty ‘signifies a form of legitimation’.

Exactly the same principle applies to domestic law.  The legal theorist John Austin argued that

Every positive law, or every law strictly so called, is set by a sovereign person, or sovereign body of persons, to a member or members of the independent political society wherein that person or body is sovereign or supreme.

There are reservations to make about both these presentations, but it is important to draw out what they have in common.  All of these explanations of sovereignty are concerned with legitimacy.   The ‘sovereign’, whoever or whatever that may be, is the source of legitimate authority.   If legitimate authority springs from a particular source, it follows that

    • a sovereign government can make laws
    • a sovereign government can make treaties, and
    • a sovereign government can act collectively to exercise authority within its legitimate sphere of influence.

The first reservation to make is that sovereign authority is not ‘final’.  Sovereignty is where authority starts, not necessarily where it finishes.  We know, when a sovereign body makes laws, that they are laws – that they satisfy what Hart called “rules of recognition” (how we know that a rule counts as law) and “rules of change” (how we know that new rules have been created, or abolished, or added to).  But after the sovereign has acted as the fount of authority, others may draw on that legitimate authority in their turn – e.g., the laws passed by devolved administrations, or the extensive use of statutory instruments in social security.   The second reservation is that sovereign authority is not “supreme” authority, because it may well be subject to other authority in turn.  The US constitution divides authority between a range of actors.  The authority of the UK Parliament is undivided, but governments in Parliament can be voted out or corrected by the courts. In modern states, the courts usually have the power to review whether actions are legitimate.  Nor is sovereignty necessarily ‘exclusive’.  Many states share sovereignty internally – in federations,  between states and the federal government – or externally, which is the position of the European Union.

And so to the dispute between the UK and the European Union.  The EU is not simply the product of a set of treaties: it is a body that makes laws, independently of the legal systems of the Member States.  That means that every member of the European Union shares sovereignty with the Union.  There have been some legal challenges to this principle – most recently in Germany, where it was successfully argued that German Basic Law takes priority  – but the central premise, that EU law has a direct effect on governments and citizens within the EU’s areas of exclusive competence, has been established for nearly sixty years.   It is correct, then, to say that the members of the EU have given up some sovereignty to become part of the Union; and it is also correct to say that the UK, on leaving the EU, will be able to act as a sovereign state.

Clause 38 of the UK Act on the withdrawal agreement states:

It is recognised that the Parliament of the United Kingdom is sovereign.  … nothing in this Act derogates from the sovereignty of the Parliament of the United Kingdom.

Nothing in that was incompatible with the Withdrawal Agreement, or likely to give the EU pause.  It is simply a statement that the Parliament of the United Kingdom is the primary source of legitimate authority for UK legislation: to which the obvious response is, of course it is.  The EU was relying on that legitimate authority to be used to resolve the terms of withdrawal.

What the clause doesn’t say is that the EU has no further authority, either delegated or determined by treaty.  It doesn’t say, either directly or indirectly, that the EU can have no influence in decisions made by the UK government.  It does not say that the UK is not to be bound by the Withdrawal Agreement, its most recent treaty with the EU.  In short, the assertion of sovereignty simply doesn’t mean what some of the most ardent Brexiters wish it to mean.

Tax rises won’t pay for the deficit – but they might help to make Britain fairer

The central fallacy behind the strategy of ‘austerity’, so-called, was the assertion that the deficit had to be made up by cutting public expenditure. The policy was built on two key mistakes: that the deficit was something that mattered in itself, and that the belief that cutting public spending would make the books balance. Governments can’t cut their way out of a slump, because the very process of cutting increases the size of the hole the economy has to fill. The argument for paying off the debts incurred during the pandemic is open to the same objection: now is not the time to take money out of the economy.

There seems to be a general consensus, on both right and left, that tax rises would make our economic situation even worse. It’s generally true that tax takes money out of the economy, and that’s not what we ought to do when the economy is depressed. The same is true, of course, of cuts to public services, which are not just bad economics, but bad for well-being.

Does it follow, however, that tax rises have to be avoided? I think that has to depend on what kind of tax rises they are. One of the peculiarities of the way we’ve come to record ‘public spending’ in the accounts is the treatment of every form of expenditure as if it all had the same kind of effect on the economy. When people are taxed, money is taken out of the economy; when people receive benefits, money is put back in; and so, it seems, the two sides of the process have different effects on economic activity. If we look at the finance of benefits, however, we find that there is a direct relationship between tax and spending, and that in some cases it makes no visible difference to the performance of the economy. The National Insurance Fund, which took in £109bn in 2019, is an example. State pensions aren’t, properly speaking, a form of ‘expenditure’ at all. They’re a transfer payment: money is taken from one group of people (workers) to move to another (pensioners). If there are any economic implications of a transfer payment, it has to do with the possibility that the two groups will treat the money differently – they may have different patterns of spending and saving.  However, the initial assumption has to be that, unless there are reasons to the contrary, transfer payments are economically neutral.

That implies, in turn, that there are different implications of raising  different types of tax, depending on the use that the money is put to. Some tax which represents a withdrawal from the economy, and some other tax doesn’t, because the same money goes straight back in to the economy in the form of a transfer payment. The objection to raising taxation, that it will take money out of a depressed economy, only belongs to the taxation in the first category. If taxation is increased to pay for benefits, the same doesn’t apply. There may be other objections to doing that – though some of the objections, such as arguments around incentives for very highly paid people, are pretty iffy – but the effect on the economic activity overall wouldn’t be one of them.

The implication is that taxation can be used directly for redistribution without any evident damage to the economy. If, for example, we want to increase taxation to pay for the pensions, the costs of social care, benefits for disability or Child Benefit (which was developed from a combination of benefits with tax reliefs), we should be able to do that. By extension, it should also be possible to pay for some services, providing only that there is a direct equivalence between transfers (for example, wages) and the level of tax raised.

So – why don’t we do that? There are many political objections which defend established rights to property, which is at least a moral principle, even if it is one that I disagree with. By contrast, the economic arguments seem particularly thin. They are that the economy is too complex to be tampered with, and there may be unexpected effects (the argument made by Hayek); that public expenditure devalues the currency, an argument that is not applicable to transfer payments, because the amount of money they put in circulation is the same as the amount taken out; and that public expenditure needs to balance the books, which is probably wrong but doesn’t apply to transfer payments anyway.

There is one practical issue to consider, too, which is also a political obstacle: our public accounts don’t allow for it. We don’t have hypothecated taxation, which means that we can’t tie taxation to specific expenditure, and we don’t distinguish transfer payments from public expenditure used to pay for things. We can do things differently; these are conventions, and not very helpful ones. We should take transfer payments out of the public spending figures altogether, and account for them in their own right.