Friends, enemies - and Gove

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With friends like Michael Gove, the Prime Minister really doesn’t need many enemies.  In his anything but enthusiastic support for the doomed Chequers proposals, he said at the weekend that it was the best arrangement for the time being but that any future Prime Minister could change it.  This can be interpreted at three different levels by three different audiences.

At one level, he’s merely stating the obvious; it’s a fundamental principle of the UK constitution that no government can bind a future government irrevocably. 

At a second level, the target audience is the Brexiteers who are being given a message that they can agree to anything now in order to drag the UK out of the EU by the Article 50 end date; it doesn’t matter because it can all be changed later.

But at the third, most damaging level, it is telling the EU that the UK isn’t really negotiating seriously and intends to renege on any agreement made as soon as the ink has dried.  But, from an EU27 point of view, what’s the point of putting time and effort into negotiating an agreement when the party with whom they are negotiating is telling them that they plan to tear up said agreement?  If this is Gove ‘helping’ May, wait till he decides to stop helping.

Borrowing and investment

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Yesterday’s Sunday Times carried what appeared to be an almost blow-by-blow account (paywall) of who said what in a crisis meeting of the Cabinet last week called to discuss Brexit.  The extent of the leaking of what are nominally ‘confidential’ discussions (the paper claimed at least six different cabinet sources just for its reporting of what the Chancellor said) shows how power and influence are ebbing away from the Prime Minister, with her underlings keen to parade their credentials in the inevitable battle to succeed her.

But if the leaking in itself showed an increasing detachment from any idea of collective responsibility, some of the proposals apparently made look like desperation is setting in.  One example was the claim that the transport secretary put forward a proposal to give everyone in Britain a Brexit bonus of £200.  Given the fact that any suggestion of there being a Brexit bonus has been well and truly debunked many times, it is unclear where he thought this money was coming from, but bribing people with their own money doesn’t look like honest government. 

One minister, Andrea Leadsom, reportedly did come up with a proposal to raise some money: the government should sell ‘Brexit Bonds’ to get people ‘investing’ in the government. (And of course, if each of us ‘invests’, say, £200, the government will have enough money to give us all a ‘Brexit bonus’ of £200 – the sad thing is that some might even be taken in by that one.)  ‘Selling bonds’ is something the government does all the time.  Whether labelling them as ‘Brexit’ bonds would make them any more saleable or attractive is doubtful, but we do know that the government can, at the moment, sell as many bonds as it wants to; people and institutions are queuing up to buy them.  It is one of the main routes by which government raises money, although it’s more usually called ‘borrowing’ - because as any accountant or book-keeper will be aware, anything that looks like an investment to one party will look like a loan to the other.

Calling on people to ‘invest in the government’ may have a nicer ring to it than ‘the government should borrow more’, but it amounts to exactly the same thing.  I welcome any recognition in government that they can and should borrow more to invest in services and infrastructure; I just wish they weren’t in a position where they have to do it to pay for the folly of Brexit, let alone in order to try and trick us into thinking we’re getting some sort of bonus.

Promises, promises ...

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In the grand scale of things, whether we will have to pay roaming charges for using mobile phones in the EU after Brexit is a fairly minor issue.  Sometimes, though, it is the apparently minor issues which can highlight the scale of a problem.

The EU legislation which abolished roaming charges is based on capping the amount which mobile operator A in one state can charge to the customers of mobile operator B from another state, but it does not apply to states which are not party to the agreement, so that operator A is free to charge a great deal more, if it wishes, to customers from third party states.  If the UK fails to strike a deal which keeps the UK in the Digital Single Market, (and the UK Government has made it clear to date that it wants to leave the single market) then it becomes a third party state for the purposes of that agreement, leaving the EU operators free to reintroduce higher charges for UK operators whose customers travel within the EU.

Will they do so?  At first sight, there’s no necessary reason why they would choose to do so - if the choice is entirely up to them.  Life isn’t as simple as that, however.  There is potentially a problem for EU-based mobile operators if they want to treat one third party in a different way to other third parties; it could be seen as an unfair trading practice leaving them open to legal action.  In the absence of even a more limited agreement on the specific issue, that fear may lead them to seek to charge UK operators on the same basis as other non-EEA members, which would mean an increase in costs for UK mobile operators when their customers travel to the EU.  Conversely, of course, the UK operators could charge EU operators in respect of their customers travelling to the UK; any net increase in cost therefore depends on the net difference in travel between the UK and the EU.  That difference is likely to work in favour of the EU operators.

UK mobile operators can choose not to add roaming charges to our bills, of course (the big operators have already said that they won’t); and the UK Government can in any case act, as it has promised to do, to legislate to prevent them doing so or limit the extent to which they can do so.  But UK legislation can only control how any charges levied by EU operators are passed on to end users, not whether they are levied at all.  If UK operators face increased charges, they will undoubtedly pass them on to users one way or another; if not through roaming charges, then through a more general increase in bills.  Any government ‘promise’ that roaming charges will not be introduced is only part of the story; they are simply unable to make any promise that the costs of using mobile phones will not increase, one way or another, as a result of Brexit.

As I said at the outset, this is apparently a very minor issue, but the complexity serves to underline how little real work has been done on the detailed implications of the decision to opt out of the single market, and government attempts to pooh-pooh any suggestions that there will be problems demonstrate an alarming level of either complacency or a refusal to face facts.  It is the UK which has decided to leave the single market; continuing to demand that the EU treats us as though we are a member whilst not being bound by any of the obligations is leading us into a wholly unnecessary state of chaos.  And this one small issue is multiplied many times over in a whole range of other fields.

More fantasy from the ERG

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Yesterday, the Brexit Tories finally produced their ‘plan’ for handling the Irish border after the UK leaves the single market and the customs union.  As I read it, there are four elements to the plan:

1.    There will be a hard border, but we’ll pretend that there isn’t by doing all the border checks somewhere that isn’t at the border at all.

2.    We will use technology which hasn’t yet been devised to control the border.

3.    The government in Dublin and the one in Belfast that doesn’t currently exist and to which the relevant powers have not been devolved will work together to come up with a more detailed plan.

4.    There shall be a good sprinkling of pixie dust, generously applied, to ensure that 1-3 above can work in practice.

Actually, I made up the fourth - which is a great pity because it’s just about the only thing that would make the other three into feasible propositions.  The only reason that this is being given any credibility at all is because of the strange notion that ‘balance’ requires fantasy to be treated as the equal of hard analysis.

Theory and fact

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There is one key element of the economic arguments put forward by Brexiteers with which I entirely agree, and that is that almost all economic forecasts are, ultimately, wrong.  Predicting the future is extremely difficult, not least because that future depends on an agglomeration of millions of individual decisions taken from individual perspectives by people who can learn from the past and therefore change what they do rather than following what economic theory says they should do.  And that’s without even factoring in completely unforeseeable events.  But the fact that the basic point is correct does not mean that all economic forecasts are valueless or equally wrong.  And it especially doesn’t mean that the one which gives you the answer that you want to hear can or should be given more credence than any others.

As we saw yesterday, it’s easy enough to produce a report showing that Brexit will be brilliant news for the UK.  But what matters in assessing the value of such a report isn’t the conclusions which it draws but the premises and assumptions on which it is based and the methodology applied to those premises and assumptions.  And to say that both the premises and the methodology have been strongly contested would be an understatement.  The proposal for something called a ‘World Trade Deal’ has been described by Jonathan Portes (quoted here) as “quite, quite mad”, who added that “… it's not a "World Trade Deal", it's unilateral abolition of all UK tariffs *and non-tariff barriers* - ie removing UK health, safety, environmental, emission standards on all imports”.  That abolition of standards is something which the Brexiteers have long been keen on.

Some LSE economists have looked in some detail at the underlying assumptions and have debunked many of them pretty effectively.  One of the points that they make is that the model showing how brilliant Brexit will be depends on an assumption that “all firms in an industry everywhere in the world produce the same goods and competition is perfect”, which is far removed from the truth.  It doesn’t matter, though because under this type of model, if the observed facts don’t fit the theory, it is the observed facts which must be disregarded.  And when it comes to the forecast derived from the model that a no deal Brexit would be worth £1.1 trillion to the UK economy over the next 15 years, well, I can’t put it better than Tom Peck in the Guardian, with his “There is not a single figure in the government, the Treasury or the economics analysis department of any major bank or investment firm who considers this to be anything less than deranged”.

And yet…  It doesn’t matter how effectively or comprehensively a report is demolished, the headline will persist in the minds of the true believers, who will trot these figures out time and again to justify what they want to do.  And the underlying truth of the inaccuracy of most economic forecasts remains.  Given an infinite number of economists with an infinite number of models and assumptions, one of them would produce a precisely accurate forecast for the future; but that’s a product of chance, not science.  What’s missing is a general understanding that that does not mean that all forecasts are equally likely to be a correct assessment of the outcome.  Whatever economists may claim, economics isn’t a science with clear and unchangeable laws.  But that doesn’t mean that selecting an outlier which is based on an obviously defective set of assumptions (and which also depends on ignoring any facts which don’t fit the theory) as a basis for decisions is equivalent to depending on a consensus view using more generally agreed and tested assumptions which fit the observed facts.   And the Brexiteers must not be allowed to get away with pretending that it is.

Sharing the benefits

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It’s more than 60 years since Parkinson came up with his famous law that "work expands so as to fill the time available for its completion".  I’m not sure that it’s ever been scientifically ‘proven’, but for most of us it seems to have a ring of truth about it in many workplaces, in offices at least.  The underlying problem that it highlights is the difficulty in measuring the productivity of many activities.  In essence, productivity is simply output divided by input, and in a widget factory it’s fairly easy to measure both and thus assess productivity – it’s simply the number of widgets produced divided by person hours to produce them.  (In passing, it’s worth noting that that isn’t quite the way in which overall productivity of the economy is calculated, but that’s for another day.) 

In an office environment, however, measuring ‘output’ is a great deal harder to do, which is why many lazy employers don’t even try.  Instead, they put their efforts into managing the input side of the equation: controlling the hours put in by employees, managing sickness absence, dealing with a lack of punctuality.  There’s an underlying and unstated assumption that if they can maximise and control the input then the output will take care of itself.  It’s an invalid assumption, and in some cases over-controlling the input side of the equation leads to a disempowered, or even demotivated, workforce which feels, rightly, that management don’t trust them to get on with the job; and the probable impact of that on output (and thus productivity) is more likely to be negative than positive.

That’s something of the context within which the TUC this week called for a move towards a four-day week rather than a five-day one.  The BBC report tells the story of one company which switched to four-day working and found that they were achieving as much as they had before.  From simple observation over the years, I suspect that would be true of many workplaces.  ‘Presenteeism’ is a growing problem, and the number of employees who believe that they should be seen to turn up before the boss and not leave until after (s)he has gone home is far too prevalent.  It leads to some people working long hours involving what is often unpaid overtime, but I’m not at all convinced that it adds anything to output.  Instead, the Pareto Principle applies: staff achieve 80% of their overall impact in 20% of the available time; the remaining 80% of their time is taken up by often trivial activities having little overall impact.  Presenteeism merely adds to the time used for not particularly productive activity.

It’s not clear yet to what extent automation will replace much of the routine work undertaken by staff in offices.  Again, it’s easier to see the impact of automation in a widget factory.  I suspect, however, that most people are underestimating the extent to which technology will be able to replace much of the work currently done, as well as underestimating the rate at which that change will be upon us.  The TUC talk about sharing the benefits of technology with the workforce; reducing the length of the working week is one way of doing that.  It strikes me, though, as a wholly inadequate response to the impending changes which technology will bring.  The challenge is not just about sharing the benefits in the workplace, it’s about sharing those benefits more widely across society.  I suppose it’s close to inevitable that an organisation composed of the representatives of working people will be prioritising the interests of those working people; but there are a lot of people in society who aren’t in that category who will also be affected.  And that number is likely to grow.

Some politicians talk about automation as though it’s similar to changes of the past, as a result of which many jobs disappeared but were replaced by new jobs and new types of jobs which hadn’t even been imagined previously.  They may be right, and if they are I may be worrying unduly.  I have a feeling however that the change we are now facing is of a different nature – even if new types of organisation supplying new types of services emerge, the potential is there for many of them to be automated too.  In theory, those who own the machines can produce goods and services with little dependence on employees, and the benefits of automation accrue to the machine owners.

Things aren’t quite that simple, however, and the advance of technology highlights the underlying problem with the capitalist economic model.  For those organisations adopting the technology first and moving away from dependence on human employees there are potentially huge advantages.  But if everyone does it, and there are no employees left, who has the money to buy the goods and services?  What looks good for an individual capitalist simply doesn’t work when applied to the economy as a whole.  That has always been the flaw in the model but continued economic growth has disguised it.  I paint an extreme picture to make a point, but unchecked automation with all the benefits flowing to the automators ultimately fails.  The TUC are right to argue that the benefits of automation should be shared more widely; if anything, their proposals strike me as being rather timid.  What they are suggesting is in the interests of the capitalists as well as the workers, but I don’t expect the capitalists to recognise that just yet.  There is a wider political question as well – what are politicians going to do to ensure that the benefits are shared rather than accruing to one group alone in the short term?  Merely assuming that there will be new jobs to replace the old looks is not just complacent - it’s more a dereliction of duty.

Trashing government economic policy

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Since Cameron was first elected in 2010, the orthodox economic policy of the Conservatives has been that the budget deficit must be first eliminated and then turned into a surplus so that the national debt can be repaid.  This is one of the few things on which they have been entirely consistent from the outset – the only changes to the policy have been in relation to the timescale.  The glorious days of surplus are continually pushed further and further into the future.  The Labour Party, partly out of fear of being branded financially irresponsible, but mostly because they suffer from the same version of economic dogma as the Tories, have supported the same aim of deficit reduction differing only at the margins on issues such as the balance between tax rises and spending cuts.  They share the same key aim of deficit reduction as the Tories.

Whilst there is a sensible argument to be had about what the appropriate level of deficit (and debt) should be in relation to GDP, and about the timescale over which any change in that ratio should occur, the underlying assumption (that the government should aim to ‘balance the books’) is, and always has been, complete nonsense.  As history shows, a budget deficit is the norm, and depending on the rates of growth, interest and inflation, a continuing deficit is entirely sustainable.  Indeed, since (as all accountants will realise) the net level of borrowing in the economy must effectively be zero, a public surplus can only be financed by debt elsewhere.  And it is noticeable that, as the public deficit reduces, household debt is – as one would expect – increasing.  What looks to the government like debt appears to those of us with pension funds to be investment, and there is still a queue of people lining up to lend their money to a government which is increasingly unwilling to take it.

The deficit fetishism of Tory and Labour alike is what leads to the policy of so-called ‘austerity’, and, as ever, it is those at the bottom in economic terms who suffer most, whilst those at the top are able to protect themselves or even further enrich themselves.  It isn’t the only possible approach, no matter how many times they argue that ‘there is no alternative’.  In an attempt to regain the momentum which his leadership campaign has so carelessly thrown away, Boris Johnson has this week suggested what is presented as an alternative approach, namely to slash taxation drastically.  He doesn’t say, of course, how he would pay for this, but his comparison with the Trump tax cuts in America at least suggests that he is supporting a huge increase in public debt.  If that’s what he really proposes, then it really does trash the policy which he and his party have been supporting for the last 8 years.

Whether it would work or not is another question entirely.  For some the jury is still out; the US economy may appear to be booming, but the extent to which that is down to the tax cuts is arguable at the least.  What we do know is that corporations and the wealthy have benefited tremendously.  It’s a policy which treats ‘trickle-down’ – the idea that if the wealthy have more money, then everyone else will also benefit eventually – as an article of faith rather than depending on any evidence of wider benefits.  It does, though, benefit the likes of those who advocate such a policy and those who move in their immediate circles; they have a large personal incentive to be true believers.

But, if reducing the deficit quickly and immediately is not the absolute priority as which it’s been painted, there are other ways of managing the economy.  Portugal is an interesting case in point.  Instead of following a policy of cutting spending, the Portuguese government has chosen to follow a policy of investing more in public infrastructure.  Not only has it boosted the Portuguese economy, it has also provided another route to deficit reduction as well as reducing inequality and promoting economic growth.  Those who consider all state spending to be inherently a bad thing start with an ideological perspective which blinds them to the possibility.  But state investment can, ultimately, generate more in benefits and revenue than it costs.

It’s a lesson that I don’t expect the Tories to ever be able to learn, and even Labour seem to be struggling with it.  There is also another lesson here for Labour in particular: Portugal’s membership of the EU hasn’t prevented them from following an alternative path.  The EU’s rulebook does not preclude the sort of state action which they have taken, yet the belief in some Labour circles that the EU places such constraints on member states is what leads them to support Brexit.  It’s an idea which is as divorced from reality as deficit fetishism itself.

Problems and opportunities

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According to the Brexit Secretary, a ‘no-deal’ Brexit will offer us plenty of opportunities.  It sounds to me as though he’s been on the same course as an ex-manager of mine who was telling us all one day that we needed to be more positive; “there are”, he said, “no problems, only opportunities.  We should see every problem as an opportunity.”  One bright spark at the back chipped in with, “Yes, but what do we do when we come across an insurmountable opportunity?”.  It seemed like a good question to me, and I suspect Raab is about to demonstrate to us all, in fairly spectacular fashion, what the answer looks like.

Changing who pays the taxes

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In the economic plan which he has produced as part of his pitch for the leadership of Plaid Cymru, Adam Price has put forward a number of ideas for change.  The media coverage has concentrated, perhaps unfairly, on just one of those, his proposals on taxation, with the headline suggestion of a significant cut in income tax.  I find it a little strange that a proposal for an overall increase in total taxation has been seen by some as a tax-cutting proposal (the proposed new land tax would raise more income than the proposed tax cuts), but it is an interesting proposal nevertheless.

There’s a long history to the idea of a land value tax, which is the cornerstone of the proposed changes.  It’s an idea which has been espoused in the past by a range of economists.  There are some practical problems (one of the reasons why it is not widely implemented across the world) which need to be resolved at a detailed level, but in principle it’s an idea I’d support.

As suggested earlier, moving tax from income to land doesn’t per se reduce the total tax take from the economy, but it does, to an extent at least, change who pays the tax.  When it comes to those who own the land on which their house is built, whether income tax or land tax is more favourable to them as individuals depends on the detail and the rates at which taxes are set; there’s no inherent reason why one form of taxation would leave them better off than the other.  But the key point is that, whilst some individuals would be better off and some worse off, overall the suggested plan (given the extra 1p on income tax to fund education) is for an increase in tax, albeit distributed rather differently.  And given the problems facing Wales, I wouldn’t oppose an overall increase in taxation anyway.

In that context, I was more than a little surprised to see the claim being made by Adam that “…cutting the basic income tax rate even to 11% will provide a major economic boost to the Welsh economy through increased spending”.  This strikes me as a very strange claim, since any boost to the economy generated by a decrease in one tax is likely to be more than matched by a hit to the economy generated by an increase in another.  The total amount of money in non-state hands which is available for spending actually reduces under these proposals.

Even supposing that there were to be a net increase in the money available for people, rather than the government, to spend, an assumption that people spending it rather than the government doing so boosts the economy is open to challenge at the very least.  If the government spends £1 billion pounds, that provides exactly the same boost to the economy as if millions of individuals each spend an extra £1 billion between them; at macro-economic level, there is no difference between the impact of private and public spend.  The goods and services being purchased are essentially the same, regardless of who purchases them.  And actually, it might be worse than that; the theory that more money to spend = more spending only really applies in a theoretical world.  In the real world, people who have gone into debt or run down their savings may prefer to pay down that debt or top up their savings rather than spend.  And even those who do spend may opt for an extra foreign holiday, providing a boost to someone else’s economy rather than Wales’.  Such factors mean that, in practice, government spending may well provide a bigger boost to the economy than private spending under a particular set of circumstances.  And it would certainly be on different priorities.

I can understand a political desire to present the proposal as a tax cut for working people, but that doesn’t strike me as an entirely honest presentation.  I simply don’t accept the premise that leaving people with more money in their pockets after tax can, of itself, provide an economic boost; the other changes have to be taken into account as well.  There’s a danger that it provokes a political debate about who can keep taxes lowest rather than about who should be paying which taxes and on what basis.  Taking a basically sound idea and presenting it in a way which plays to the Tory agenda of low income taxes doesn’t look particularly radical to me and misses an opportunity to debate who should be paying which taxes in order to raise the revenue required to provide government services.

We can't decide for others

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The pro-Brexit Daily Express got itself quite excited yesterday about the apparent hint from Michel Barnier of a super-duper extra-special Brexit deal for the UK the like of which has never been seen before.  It seems however that they have just not been paying attention – as the Guardian reported, this is nothing new, he’s been saying the same thing all along.  The EU27 have been keen from the outset to maintain strong links with the UK and have always been willing to negotiate a bespoke deal.  What they have not been willing to do, however, is to change the single market rules to suit a departing member; the obstacle to that super-duper deal isn’t in Brussels, it’s in London.

That fact was underlined by the attempt by David Lidington, effectively the deputy to the Prime Minister, to issue an ultimatum to the EU27 – agree to what we want or we walk.  Ultimatums have never been a particularly brilliant way of negotiating anything, and when they’re being issued by the weaker party to the stronger, and when following through on them damages the weaker party more than the stronger, then the stronger party can surely be excused for scratching its collective head and saying ‘OK, go on then’.  The ‘ultimatum’ amounts to a demand that the EU27 not only give the UK all its current benefits, but also start dismantling key aspects of the single market in order to do so.

That’s something to which they were never and are never going to agree; a deal is on the table any time the UK is prepared to drop its red lines.  Whether that is ‘proper’ Brexit or not is another question, but it would at least buy enough time for the UK to decide what it really wants (and offer an easy way back in if sanity is ever restored).  But the underlying reality – that it is the UK which has made the decision to leave, and it is the UK which must bear the consequences of that – was neatly summed up by the President of France, Emmanuel Macron, when he said that Brexit “…is what the British people have chosen for themselves, not for others …”.  That encapsulates the problem at the heart of the Anglo-British nationalism driving the Brexit project – the belief that a vote by the UK electorate not only binds the UK government, but also somehow mandates the rest of the EU to comply with whatever the UK wants.  The old-style imperialists still don't understand the modern world.  Ultimatums, like gunboats, belong to the diplomacy of the past, not the present.