Notes on the present discontents

Some interconnected thoughts on the financial and economic crisis that have struck me in recent days:

1.  The media pundits (including the lead story in the FT of 25-26 April) and opposition spokespersons have all been crowing triumphantly over the dreadful GDP figures for the first quarter of 2009, claiming that they demonstrate the absurd over-optimism of Alistair Darling’s assessment of the extent of the shrinkage of the economy and his forecast that the economy should start to grow again towards the end of this year.  But on an inside page of the same FT Chris Giles records some major reservations:

There is a big risk, however, of adding two and two together and coming up with five. The first quarter of the year was truly terrible but Mr Darling was braced for it to be bad.

The Treasury’s failure to spot just how dire official figures would be was shared by all City economists. And for all these mistakes, the bad quarter does not translate mechanically into worse figures for the rest of the year. The chances of recovery by the end of 2009 are not dented by the size of the first-quarter contraction. …

The bigger point that the Treasury was making last night was that the growth figures do not necessarily mean worse public finances.

One bad quarter will make almost no difference to the £175bn borrowing in 2009-10, nor the path of consolidation thereafter. This is far more dependent on years of public spending austerity than on rapid growth. If anything, the Budget was an attempt by Mr Darling and the Treasury to get all the bad news on borrowing out of the way well before the election.

It was much more pessimistic on borrowing than the Institute for Fiscal Studies, the International Monetary Fund, the City and all but the most pessimistic of external forecasters.

What a pity that other right-wing commentators haven’t been making the same points!  But they no doubt take the view that there’s no need to spoil a good political bash at the government by giving half the game away in the process.

2.  I find worse than distasteful the confident repetition by Cameron, Osborne and the right-wing press that the government is responsible for the financial crisis.  The massive spending by the Blair and Brown governments since 1997 on, especially, health and education was made urgently necessary by the disgraceful under-investment in those vital services under preceding Tory governments:  and even the Tories accepted that.  Gordon Brown’s ‘golden rules’ — borrowing only for capital expenditure, ensuring that recurrent expenditure would be matched by revenue over the economic cycle — were self-evidently sound, even if they left some waggle-room for adjustment of the dates of the cycle.  And I don’t recall the Tories denouncing the government’s regulation of the investment banks and other financial institutions for being too light:  on the contrary, they were constantly clamouring for even lighter regulation.  Anyway, blaming the government for failing to regulate the disastrous behaviour of the bankers, even if they could (see next item), is a bit like blaming the police for a burglary.  The burglar bears the prime responsibility for the burglary:  the crime might (or might not) highlight some procedural, structural or operational failing on the part of the police, but that’s a separate issue.

In the Punch-and-Judy world of British politics, I suppose it’s inevitable that the Conservative Loyal Opposition will exploit every opportunity offered by the economic crisis to discredit the government generally and the prime minister in particular.  It just seems a pity that in the greatest national crisis since the second world war, the opposition lacks the statesmanship to offer the government its support in doing what plainly needs to be done, reserving its criticisms for issues where ministers have clearly transgressed or adopted seriously questionable policies.  If they had chosen that more responsible and constructive path, the Tories would still almost certainly win the next election hands down — and then find themselves in a much better position politically to tackle what’s bound to be a pretty poisonous inheritance, as well as then having earned the right to ask for Labour Party support for their essential remedial measures.

3.  It’s obviously right, with hindsight, to review now the structure of the regulatory system introduced in 1997 by Brown as Chancellor of the Exchequer in the light of what has happened.  But it’s also legitimate to question whether even the most efficient and stringent regulatory system would have stood much chance of pre-empting the bankers’ determined march to self-destruction.  The financial system is now so extensively globalised that only a global authority, effectively meaning a world government, would have been able to control it in the global public interest.  The system is now beyond the control of any single national government.  Yet when the G20 were preparing to assemble in London to debate what action to take, and Gordon Brown and a few other national leaders proposed a new international regulatory system, the Americans in particular and many other countries’ leaders took fright at this idea of sacrificing an iota of their national sovereignty in the interest of the prosperity of the whole world, and the idea sank almost without trace.  No foreigners are going to tell Uncle Sam what to do! All that could be agreed was some form of future consultation among the main national regulators. So when the taxpayers of the world have pumped enough of their own money into the banks to induce them to start doing their job again, we shall return to the old arrangements for regulating them on a national basis, and the global-scale banks will have us all over a barrel once again.

4. World government, although plainly desirable in principle — not only to regain democratic control of the globalised economy — is clearly out of the question for as far ahead as it’s useful to look. But there may be lessons to be learned from the unique experiment of the mis-named European Union. For all its faults, the EU represents a novel and extremely ingenious compromise between, at one extreme, all-out untrammelled national sovereignty for each member state, and at the other extreme, a European supra-national super-state with all the attributes of a standard sovereign state. EU members voluntarily surrender elements of their sovereignty to the EU centre for the common good, in areas where the whole EU working collectively can be far more effective than the individual member states working on their own. One of the EU’s great virtues is that this new form of internationalism may become a model for a much wider form of international co-operation, going far beyond Europe. Such a control structure may become essential if the planet is to be saved — even more important than preventing another economic disaster.  It’s a pity that hostility to the EU in Britain is so widespread, and so intense, that commentators are deterred from pointing out most of its great merits.

5. Once we all begin to emerge from the worst of this crisis, almost all governments are going to have to choose where to place the main emphasis in their recovery strategies: higher taxes, or cuts in government spending. Of course both will be necessary. But David Cameron has already made it clear that a Conservative government in Britain will be looking chiefly to impose stringent cuts in public expenditure, perhaps even accompanied by reduced taxation, although he’s so far been extremely coy about where the cuts will fall.  (Certainly the Tories have exhibited very strong distaste for the new 50% marginal rate of income tax on the very highest and richest earners, even though it has attracted strong majority support in the polls.)  Any Labour government, as last week’s budget shows, will instinctively prefer to raise taxes on the rich rather than attacking the essential social services on which the most vulnerable people in society depend so heavily. It looks as if this distinction may open up an ideological gap between left and right in British politics of a kind that we haven’t seen in decades.  Perhaps politics will begin to focus on policy differences again, rather than the ad hominem and trivial point-scoring attacks that disfigure the national dialogue at present.

6.  Two factors that have contributed heavily to the crisis:  huge house price bubbles, especially in the US and the UK;  and the massive trade imbalance between the US and China, with China in effect lending the US colossal amounts of money to finance both private and government over-spending.  The British government could, and with hindsight should, have acted to rein in mortgage lending to borrowers unlikely to be able to service the debts, by regulating the size of permissible mortgage loans in relation to income:  but this would have been highly unpopular in a situation where there’s a sharp shortage of low-income housing, largely thanks to Mrs Thatcher’s misguided destruction of local authority housing provision.  But no British government could have done anything about American sub-prime mortgages, the US house price bubble, or the China-US trade imbalance, all of which helped to make the global economic collapse inevitable.  It’s questionable, too, whether as a matter of political reality any US government could have done much if anything about those three doomy phenomena.  But former President GW Bush clearly didn’t need to make them even worse.

7.  In all the bleating from the billionaires and their media apologists about the 50% marginal rate of tax on very high incomes, and the angry accusations that it represents a reversion to 1960s tax-and-spend Labour Party socialism (we should be so lucky!), the key word ‘marginal’ tends to be conveniently overlooked.  The bleaters are happy to reinforce the widespread belief that the new rate will mean those earning — or at any rate raking in — over £150,000 a year having to pay half of that £150,000+ back in tax each year, whereas of course the 50% rate applies only to that part of income which exceeds £150,000.  The idea that such a tax will drive hundreds of otherwise decent, hard-working, socially responsible citizens into exile seems on the face of it barmy.  Anyway, if it drives out some of the avaricious financiers who helped to visit this economic disaster on the rest of us, so much the better.  Few of those who lose their homes, their jobs and their savings because of it will shed many tears for them.


4 Responses

  1. Peter Harvey says:

    Your praise of the EU (point 4) is extremely welcome but bank regulation, like regulation of other big industries (road, rail and air transport, power, and telecoms for example) is still firmly in national hands — and the dangerous, nationalist Eurosceptics, encouraged largely by the British (but with a little recent help from M. Sarkozy), are in danger of getting even more of what they want than they already have. Heaven help us if the Lisbon Treaty fails in Ireland and/or the Czech Republic.

    Brian writes: Or indeed in Britain! Mr Cameron was reported today to be reviving his and his party’s demands for a referendum on what he persists in calling the EU constitution — which, as the LibDems correctly point out, would to all intents and purposes be a referendum on UK membership of the EU. To stoke up that little bonfire on top of the raging fires of the climate change threat, the economic collapse and now the looming swine flu pandemic, is really all we need. All these matters self-evidently need to be handled at a supra-national level both by Europe and globally. If we don’t hang together, we shall assuredly hang separately (who said that? Answer: here).

  2. Peter Harvey says:

    The sight of the UK leaving the EU would gladden the hearts of not a few people in Europe. The question is whether it could do more harm from outside than from the inside. Or whether it is better for it to be outside the tent pissing in or inside the tent pissing in (and who am I paraphrasing, talking about whom?)

    I suppose that the Tories, once in office, might realise that the negotiations to leave the Union would be infinitely more complicated and politically fraught than they imagine. Where for example, would the many people like me end up? Would I, being British, lose my right to live in Spain as an EU citizen? Would the many EU citizens resident in the UK lose their right of residence and be treated as immigrants? The idea that the UK would get a sympathetic hearing in such negotiations is highly improbable. If it tried for membership of the EEA (like Switzerland, Norway and a few others), it would be exchanging obedience to EU regulations with influence over how they are made for obedience to EU regulations without influence over how they are made. If it wanted total independence outside the EEA, it would have to negotiate its trade relations from scratch. And, of course, there is at present no method other than the massive task of renegotiating all the relevant treaties by which a member state can leave the EU. It is, ironically, the Lisbon Treaty itself that provides a straightforward mechanism for doing so.

    What would happen in a referendum if an identifiable part of the UK, Scotland, Wales, Northern Ireland, Cornwall, or wherever voted to stay in while England as a whole voted to pull out? What price the ‘United’ Kingdom then?

    The problem with Ireland is that it wants to stay in the Union while messing things up for every one else, and as such it has surprised many people and made itself far more unpopular than it could ever have expected.

    You may remember that I have discussed the question of Ireland and Lisbon on my own blog here:
    and here:
    Poland once had a parliamentary assembly that required unanimity from all members; not surprisingly, it failed to do anything. It is to be supposed that those who support the right of Ireland to block the rest of the Union are acting out of malevolence.
    Who said that about all hanging together? Some BF or other.

    Brian writes: Of course I agree that it would be catastrophic for the UK either to leave or to be excluded from the EU. But I don’t think that’s an immediate prospect. Even a now highly Eurosceptic Tory party with its Europhobic shadow foreign secretary (Hague) is against leaving the EU. The trouble is that a referendum on the Lisbon treaty (presumably Lisbon Mark II, to justify a second attempt in Ireland) would be exploited by the Europhobic cave-dwellers to whip up opposition to the treaty (i.e. to maximise the No vote). If that were to leave the UK as the only EU member state voting against the treaty, our position in the Union would certainly look perilous. There would probably have to be another referendum, this time on whether to leave the EU, but it’s unlikely that such a proposition would be approved if put starkly to the vote with all the dire consequences of leaving spelled out. Probably none of the three main party leaders would support it. But even if a referendum on leaving the EU were to be lost, the attitude of the rest of the EU to yet another negative Lisbon treaty referendum result (following Ireland’s) would be a major problem. Personally I doubt if many of the more serious EU governments would actually want Britain out, and my tentative guess is that some sort of compromise would eventually be agreed whereby Lisbon II would be introduced for everyone except the UK which would be left in limbo for a while before being discreetly assisted to climb back on board.

    My own view is that Cameron has been deeply irresponsible in quite unnecessarily re-igniting this debate inside Britain, and that it reinforces one’s sense of dread at the prospect of Cameron heading a Eurosceptic, possibly even Europhobic, government in just about one year’s time. The irony is that the LibDems, probably the most Europhile of the three parties, seem to be moving under Clegg into a position where they are quite likely to agree to support a Tory government if there’s a hung parliament next year. But as of now, the Tories look set to win a comfortable overall majority, so they probably won’t have to depend on LibDem support even if it’s available.

    I too have written on exactly this subject on this blog: see —

    — which quotes a letter of mine in the Times making exactly the same point, published on 24 October 2007. That blog post attracted 20 comments at the time, some of them strongly opposed, and including three from you, Peter.

  3. Peter Harvey says:

    I thought that the UK had ratified the Lisbon Treaty and taken all steps to present and confirm it, so that a referendum would be legally meaningless whatever political effects it might have.

    my tentative guess is that some sort of compromise would eventually be agreed whereby Lisbon II would be introduced for everyone except the UK which would be left in limbo for a while before being discreetly assisted to climb back on board

    The UK already has more than enough opt-outs and the new members, who have no choice about accepting the whole acquis communautaire, are unlikely to allow any more.

    In countries where minority governments and coalitions are not unusual, there is a rule of thumb that you don’t support a party that has just been rejected by the electorate, though individual cases may vary of course. I well remember the tense weekend in February 1974 when Heath lost and the Liberal leaders were negotiating with him. They had the whole of their party against them and in the end they reached no agreement.

    Brian writes: Yes, the UK has formally ratified the existing Lisbon treaty. I assume, though, that if Ireland is to be asked to have another referendum, there will have to be some minor changes to the treaty designed to address Irish concerns last time round, so as to persuade enough Irish voters to switch their votes to get it through this time. I have used the shorthand ‘Lisbon II’ in my earlier comment to refer to a cosmetically enhanced version of the treaty — which all 27 members would presumably have to [re-]ratify. If Cameron is UK prime minister at the time, he will undoubtedly have to (and, inexplicably, will wish to) put that [re-]ratification to a referendum, with the likely consequences discussed above.

    I don’t think there are any binding precedents in the UK for how a minority party holding the balance of power in a hung parliament should behave, as between supporting the party which has won the most seats (probably the likeliest course), supporting the party which has won the most popular votes (not necessarily the same thing, but probably without constitutional validity), or simply not supporting the party which has just been ‘rejected’ (would winning the most seats but without an overall majority constitute ‘rejection’?). Quite a lot would depend on which of the two main party leaders would be the first to be invited by the Queen to try to form a government — almost certainly the leader of the party that has won most seats, although she would probably take into account any formal agreement between any two of the three parties if that would give the two combined an overall majority. If there’s no such formal agreement (and such an agreement looks unlikely), and the Queen first invited the leader of the biggest party in the Commons, there would presumably then be secret negotiations (aka horse-trading) between the three party leaders in which the LibDems would auction their support to the highest bidder. Not, in my view, a very palatable outcome to a democratic election. But it seems unlikely to happen next year, anyway.

  4. Peter Harvey says:

    As far as I know, there is no change to Lisbon that would require a whole process of reratification by each member state. I think there has been a slight fudge over the date when the new (smaller) commission comes into effect, which deals with one of Ireland’s problems; but apart from that, it is a case of telling the Irish people what their own government so spectacularly failed to tell them last time round: that Lisbon will not prejudice Irish neutrality and will not prevent them banning abortion if they so wish.