Pétards have their uses

Tweet

 

A pétard was, apparently, a small bomb, used mostly for breaching the gates and walls of fortifications. When improperly used, it could result in the user blowing him or herself up, or being ‘hoisted’ into the air. But the word originally derives from the Latin for fart, so being ‘hoist by your own petard’ really means being propelled in an unwanted direction by an expulsion of internal wind. The latter, more literal, definition seems, somehow, more appropriate for the situation in which the Tories have found themselves in the last week. Twice.

The first was the fire being directed by some Tories at the Office for Budget Responsibility at the way in which its interpretation of the numbers is restricting the ability of the Chancellor to ‘adjust’ the numbers in order to deliver a fantasy tax cut in today’s budget. Those with an attention span longer than that of a gnat will remember that establishing the OBR was a cunning plan by George Osborne to fix financial orthodoxy into law by having an ‘independent’ group of experts consider proposed budgetary changes and report on whether they complied with that orthodoxy. It was to act as a deterrent to any Chancellor who thought that he or she could simply fiddle the figures. It was intended, of course, to nobble the Labour Party if it should ever be re-elected – the financial orthodoxy was very definitely a Tory version of orthodoxy. It was never designed to constrain the actions of a Tory Chancellor, yet that is exactly what it is now doing. Truss found a way around this inconvenient obstacle by declaring that her mini-budget was not a budget (Sunak is not the first Tory to attempt to redefine facts) in order to avoid the requirement for an OBR assessment but, as things turned out, the absence of that assessment was an even bigger problem as those in the financial markets asked themselves just what Truss and Kwarteng were trying to hide.

The second is the backlash from the extremists in the Tory Party to the proposals by Sunak to try and outlaw extremism. They have realised something that Sunak obviously did not – that in outlawing extremism he may end up criminalising a fair chunk of his own party. Some might call it a form of poetic justice, others might see it as the law of unintended consequences. Either way, it highlights the extent to which the PM doesn’t understand the implications of his own words and actions – let alone how far his party has fallen through the looking glass. Back in the days of John Major, it might have looked like a deliberate ploy to rid himself of some of the bastards in the cabinet, but from Sunak it just looks like incompetence and an astounding lack of awareness.

So, that loud ripping noise you might hear from time to time is nothing to worry about. It’s simply the explosive release of intestinal gases from a Tory Party busily ‘hoisting’ itself into oblivion. Almost reassuring.

Controlling the parameters

Tweet

 

One of the great successes of the Tories in recent years – since the days of Thatcher, effectively – is that they’ve managed to persuade people that the government’s finances should be treated in exactly the same way as a household’s finances. It’s absolute nonsense, of course, but it has established the perimeters of political debate for other parties.  They feel obliged to follow the Tories’ example of setting a ‘fiscal rule’ for government spending, and Labour is this week reiterating its own commitment to that ideological viewpoint.

In practice, I don’t think that the Tories have ever stuck to any rule that they’ve laid down. The rule is for show, not for obeying. In economic terms, they don’t need to abide by the rule, and they know it. For them, aided and abetted by their friends in the media, the main purpose of the rule they so carefully lay out isn’t to constrain their own actions so much as to put limits on the ambitions of any opposition parties. And that’s where we see the real extent of their success: they’ve managed to hamstring the main opposition party into declaring it will follow a set of rules which the Tories themselves never follow, and thereby make it harder to propose radical alternatives. 

The Tories have effectively seized control of the parameters of the Overton window of political debate. An opposition party which was serious about wanting change would never allow itself to be suckered in such a way; fortunately for the Tories, their main opposition party doesn’t meet that criterion. The result is a Labour Party which is, without spelling it out, more committed to following the fiscal policy which led to austerity than the government itself.

It's about politics, not finance

Tweet

The news of a huge boost to NHS spending is something to be welcomed for two reasons.  The first is that it is clearly badly-needed.  The NHS has been struggling for years, and at least part of the problem has been caused by government spending restrictions.  It’s not just a question of money, though, and simply diverting an arbitrarily-agreed extra lump of cash won’t necessarily be any sort of panacea, given that the sum has been arrived at more through political calculation than from any assessment of actual need.

But in some ways, the second reason for welcoming the extra cash is the more important, because it is the implicit recognition that so-called ‘austerity’ is – and always was – a political choice, not a financial necessity.  Nothing fundamental has changed in the UK economy – indeed, if anything, the economy has weakened since ‘austerity’ was introduced; yet suddenly the government declares that it can somehow find an extra £20bn a year for England with corresponding increases for the devolved administrations.  The simple truth is that if they can do this now they could have done it last year, or the year before – or indeed at any time since being elected.

The Prime Minister claims, of course, that this is the redirection of what she calls the ‘Brexit dividend’.  The idea that any such dividend exists has been well and truly debunked many times, including by an MP from her own party who described the claim, quite rightly, as ‘tosh’; and even if there were any such dividend, it would not become available until after the period in which the spending is to be increased.  She was, unsurprisingly, vague about where the money will actually come from, not because she doesn’t know, but because she doesn’t want to admit it.  It will inevitably come from a combination which involves taxation, borrowing and, of course, the ‘magic money tree’ which she knows exists but whose existence she continues to deny.  The same methods used for all government spending, in fact.

It’s not yet an explicit admission, but it’s certainly an implicit one – the government are publicly recognising that we can have the health service that we need; it’s solely a matter of political will.  Or, perhaps, in the Tory case, of political fear of the consequences of not doing something.

Sharing the eggs between the baskets

Tweet

Last week, the leader of Cardiff Council told us that the City of Cardiff is ‘Wales's best economic asset’.  As is ever the case, such terms need more precise definition before being accepted uncritically, but in the sense that Cardiff and the area around it is the wealthiest part of Wales and contributes most to GVA, then I agree with the statement.  That isn’t the same as agreeing with the conclusion, however, which seems to be that Cardiff should therefore receive a disproportionate share of future investment to make it even more successful and wealthy.  There are two main reasons for rejecting that conclusion.

The first is that it ignores, or overlooks, the question of how that situation has come about in the first place.  There is nothing inherently special about Cardiff which means that it has become wealthy while the rest of Wales has not (in the same way as there is nothing inherent in being Welsh which dooms us to being one of the poorest parts of the UK).  One of the reasons for Cardiff’s greater success has precisely been that it has already received a disproportionate share of past investment.  Imagine for a moment replacing Cardiff with London, and saying ‘As the result of previous wealth concentration, London is the UK’s best economic asset, therefore future investment should be concentrated there’.  As a statement of current UK government policy, it looks pretty accurate, but most of us in Wales would reject that as a basis for determining future investment strategy.  Why would we want to simply replicate that in Wales?

The second is that, ultimately, such an approach amounts to seeing the future economic growth of Wales in ‘average’ terms.  That is to say that Wales, as a whole, looks better off if the average GVA per head increases, and the easiest way of achieving that might well be to put the investment into those areas where GVA growth is potentially the fastest.  But improving the ‘average’ GVA per head isn’t the same as making everyone in Wales better off.  Indeed, it is perfectly possible in mathematical terms to increase the average whilst decreasing the actuals across most of the country.  And sometimes it even looks as though government policy is to attempt to prove that mathematical theorem in practice.

That isn’t to say that Cardiff shouldn’t receive a ‘fair’ proportion of future investment (although defining ‘fair’ is a major topic in itself, far more complex than mere headcounts).  But any Welsh government which was serious about sharing prosperity would be looking to a strategy which improves life for all the people in Wales.  And that can’t be measured simply in averages.

Of chickens and eggs

Tweet

There is much that I can agree with in the picture of Wales in 2030 painted by Adam Price in his reported speech at Plaid Cymru’s Spring Conference last weekend.  I’m very sceptical about the one part which the Western Mail used to headline its story – the idea of Wales having its own national airline – and I’ll come back to that tomorrow.  But the rest sets out a vision of a Wales significantly different from the one in which we live today.

In his analysis of the conference on Monday, the Western Mail’s Chief Reporter suggested that the vision “exists in a vacuum, robbed of any real political context”, not least because it didn’t really seem to take into account the impact of leaving the EU, or the unlikelihood of Plaid winning two terms in government in the Assembly in order to implement the proposals.  I thought that a fair point to make, but it wasn’t really addressing the most important question for me.  I’d certainly agree that one of the probable effects of Brexit in the short and medium term is that the degree of growth in the UK (and therefore Welsh) economy will be lower than it might otherwise be, but that isn’t the same as saying that there’ll be no growth at all.  It constrains, rather than prevents, investment in building a different future.  And it’s certainly true that the prospects of Plaid being called on to deliver seem more than a little remote at this stage.  That shouldn’t, however, prevent a party from setting out a vision of what Wales could become given the will, and this is a better vision than any of the other parties are currently offering.  It’s a change from the managerialism of recent years, when the message from all parties has seemed to be simply that ‘we’ can run things better.

The suggestion of an independence referendum in or after 2030 is also welcome, although I wasn’t entirely sure whether putting it in those terms was an attempt to put the question back on the agenda or an attempt to kick it so far in the future as to make debate unnecessary in the short term.  It can be interpreted either way.  It’s still a step forward from the position of recent years where Plaid basically supported the position of the unionists that Wales couldn’t afford independence, but it will take a lot more to undo the damage of that particular aberration.

The most important question for me, though, was the ‘chicken-and-egg’ one: is what Plaid is proposing achievable within the current devolution settlement, setting Wales up for independence at a later date, or does it actually require independence as a pre-requisite to deliver such an ambitious programme in so short a timetable?

One of the key differences between an independent state and a subordinate parliament operating entirely within the parameters set by its superior is that the latter is obliged to balance its budget and spend within its revenue, borrowing only within defined limits and obliged to repay those debts in full.  Independent states in control of their own currency, on the other hand, have no such constraints – they can create money as they wish, borrow as much as they like, and very rarely actually repay the money that they borrow.  The prime limitation on their freedom isn’t a set of rules defined by others, but the actual or probable inflationary effect of their actions.  (An EU state within the Eurozone falls somewhere in between those two positions).

When I look at the vision outlined by Plaid, I don’t see a programme which I believe can be delivered within the current powers and finances of the Assembly.  As a vision for what Wales could be in a fairly short period after independence, it works for me, and is the sort of longer term view which our politicians have been failing to provide.  But in the form in which it seems to have been presented – a vision of what we can achieve before independence – I doubt that it is realistic.  And there is a danger that suggesting that we can have many of the benefits of independence without actually becoming independent is not only a variation on Brexit cakeism, but also raises a negative question – if we can do all that without independence, why do we need independence at all?

Differences between theory and practice

Tweet

In recent days, the Welsh Government has been busily producing economic strategy documents.  Some of what they say is a welcome change, some rather less so.  The original idea of having specific target sectors for economic development was basically sound, but undermined by the peculiar Welsh insistence on leaving nobody out, which meant that all sectors were target sectors.  And, as the old saying goes, if you have more than two priorities, then effectively you have none.

The bigger problem than the content of the strategy however is whether any strategy is actually deliverable in practice.  The record is not good; fine-sounding words rarely get translated into effective action.  No doubt at least some of those in the Assembly would argue that it’s a question of powers – the Assembly / Welsh Government simply don’t have control over the main economic levers and their influence is therefore limited.  I agree with that, but if it’s true, then what exactly is the point of spending time and effort on producing strategies which you know you can’t implement?

The question of the extent of devolved powers isn’t the only issue though.  In theory, all those missing powers reside in Westminster, but the record of effectively setting an economic strategy isn’t much better.  The real powers over the economy don’t reside with government at all – in Cardiff or in London – they have been outsourced to the owners and managers of capital.  And unless governments are prepared to tackle that stranglehold of economic power, they will continue to have minimal influence on the real economy.

And there are those who even challenge whether the government should be making any attempt to spread prosperity more evenly.  This report suggests that if the goal is to improve productivity in the economy, then investment should be chanelled to those areas where the wealth already resides.  I don’t like the conclusions; such an approach leads to a concentration of investment and growth in some areas at the expense of others which simply provide the labour force and suffer the loss of young people stemming from that.  But if the objective is to improve the overall productivity of the country as a whole, and the overall average GDP per head, then I tend to agree that it’s the most effective strategy.

That is, though, a very big ‘if’.  For those of us who believe that the success of economic policy should be about more than overall averages, there is a trade-off here.  Increasing the average in this way might look like ‘success’, but it is success bought at the expense of increasing inequality and deliberate abandonment of more rural and far-flung areas.  The problem is that, for all the fine words from the Welsh government about strategies for spreading growth across Wales, their actions look more like implementing the approach laid out by the iea author – concentrating investment and growth in the south-east of Wales.  Actions speak louder than words.

All models are wrong - and some aren't even useful

Tweet

On Monday, the Tory group leader in the Assembly demanded that the First Minister dissociate himself from Corbyn’s policies, claiming that they would result in around £4,000 of extra debt for each person in Wales, and that the UK would end up paying around £5.8 billion a year in additional interest payments if Labour’s plans were implemented.  It’s the stuff of good political knock-about, but without a lot more information on how they’ve done their sums (and the Tories don’t exactly have a brilliant record when it comes to financial arithmetic), it’s difficult to know what, if any, relationship exists between his figures and ‘truth’, in the mathematical sense of the word.

But, for the sake of argument, let’s suppose his figures are accurate ones.  Is it really the economic disaster as which he paints it?  Of course, £5.8 billion sounds like a very large sum of money to be paying in extra interest every year, but that’s in absolute terms.  And it makes a number of unstated but implicit assumptions.

The first comparison that has to be made is not, as the Tories effectively claimed, with the status quo, but with what the outcome would be over the same period with a Tory Government.  The implicit assumption in what Davies said is that Tory spending plans would not lead to a similar outcome, but given the way in which out-turn has varied from predictions over the last few years, and the way in which much of the (uncosted) Tory manifesto has been ditched, that looks to me like an invalid assumption.  If there is a gap between the likely outcome under a Corbyn government and the likely outcome under a Tory government (and even that is a significant ‘if’) then it is probable that the gap would be much smaller than Davies is suggesting.  All the signs are that the Tories will also increase borrowing to pay for their programme; the honest question is not how much Labour would need to borrow, but what is the difference in borrowing levels between the two.

The second question is about what proportion of GDP the debt would represent, and what proportion of expenditure any extra interest payments would represent.  Both of those are dependent on a range of assumptions and guesses about the likely level of inflation, economic growth, and interest rates.  Given the propensity of all involved to get such estimates wrong, it would be a very brave person who would claim to know the correct value of any of those variables over a five-year parliament.  But in principle, simple mathematics shows that a debt which increases in absolute value by a smaller percentage than the rate of economic growth will end up reducing the ratio of debt to GDP, which is why the absolute value being used by Davies is irrelevant.  The same mathematics also demonstrates that when interest rates are lower than the rate of inflation, paying more interest in absolute terms can still result in a reduction in the percentage of government income committed to paying interest.

What we do know is that, as things stand today (and I accept that’s a very important caveat), the UK Government is effectively borrowing money interest-free.  It’s costing us, in real terms, absolutely nothing, and given the demand from people who want to lend money to the government, there is no immediate problem in borrowing more.  Indeed, some would even argue that increasing government spending actually generates more tax income than the amount spent: the calculation all depends on the value assigned to the infamous ‘multiplier’.

Now of course it is true that different economists will give different answers to questions such as these, but that merely serves to underline that economists base their predictions on models rather than on absolute truths, and there are a number of different models available.  As the famous statistician, George Box, said, “All models are wrong, but some are useful”.  It’s a point worth bearing in mind that when politicians state categorically what the outcome of a particular policy will be for the economy they are depending on a model of some sort, whether they admit it - or even realise it - or not.

As I said at the beginning, this sort of guff from Davies is all good knock-about politics, but it’s really froth; he has no more clue than do I about the accuracy of what he says.  The real question is why one particular model – the idea that the government is like a giant household, which is used by the Tories when they come out with this stuff – is taken as gospel truth by a media which regularly demands that politicians from other parties explain themselves in the terms mandated by that model.  It would be more useful to political debate – let alone to economic policy – if the idea which underlies much of what they say was challenged more forensically rather than being simply accepted.  And it’s a shame that more opposition politicians don’t appear to have the understanding or the confidence to do that.

Trashing the (recent) past

Tweet

It seems like only yesterday that Cameron and Osborne were telling us that cutting the deficit was an absolute priority, and that we really had no choice.  The rest of the Cabinet duly fell into line, parroting the same phrases on a daily basis.  I don’t remember this imperative being predicated on any particular set of economic or political circumstances; indeed, they even wanted to make it a legally binding requirement on future governments.

Within days of the referendum, the date by which this absolute imperative has to be achieved had been postponed, and now we learn that the Chancellor is planning to cut the government’s income by slashing Corporation Tax (although who knows whether he’ll still be in post long enough to implement the change?).

In the meantime, Stephen Crabb, one of those colleagues who have sat around the Cabinet table with him and duly repeated the mantra about needing to reduce the deficit, has proposed borrowing an extra £20 billion a year for five years – increasing the national debt by £100 billion – to fund infrastructure projects if he is elected as party leader and prime minister.

I don’t actually disagree with the Crabb proposal at all; and in principle, I don’t disagree with cutting Corporation Tax either (my reservations are to do with whether there are adequate controls to make sure that the monies saved are reinvested in expansion and job creation rather than taken out as higher salaries and dividends; something which isn’t at all straightforward to achieve).  The point is, though, that the way in which they can so easily backtrack confirms what some of us have said all along – deficit reduction is an ideological imperative, not an economic one.

There is not, and never has been, a problem with government borrowing, and there is not, and never has been, a magic number at which point borrowing becomes unsustainable.  Sensible pragmatic economic policy borrows when rates are low; it is ideology which dictates that borrowing is inherently bad.  National budgets are not like household budgets.  I’d like to believe that they’ll stop spouting nonsense about repairing roofs while the sun shines or maxing out the national credit card, but that might be a bit too much to expect.  We’ll have to settle for the tacit admission that they were just plain wrong all along.

Supporting British jobs

Tweet There seem to be few people in Wales supporting the construction of the HS2 rail link, most of them preferring to argue that Wales should have its share of the money and use it for other purposes.  I disagree – not because I expect Wales to get any benefit from HS2 itself, but because, unless we are going to prevent people from travelling at all, the alternative to better and faster rail links is more runways and aeroplanes.  So I’d prefer to see Wales making the case for HS4 (we’ve already missed the boat for HS3 which is likely to serve Scotland) so that we become part of the high speed network rather than whinging on the side-lines.  And the only way that HS3 and HS4 will happen if they are treated as part of a UK network rather than seeing the three projects as entirely self-contained.

Where I find myself more in line with mainstream opinion in Wales is with the idea that infrastructure projects (of which HS2 is one) are a good way of boosting a flagging economy, and that investing in them can create economic growth and jobs, as well as boosting skills and knowledge in the economy.  It was in that context that I was astounded to see that on his trade mission to China, the Chancellor has urged Chinese firms to bid for construction contracts on the project.

‘Scope creep’ is one of those things which can all too easily happen on any project, but for it to lead to the mission becoming the opposite of the original intention is a rare achievement.  Osborne went to China to drum up business for British companies, with the stated aim of China becoming the second biggest customer for British companies.  There is currently a significant gap between the level of the UK's exports to China (at around £16.7 billion), and imports from China (t around £37.6 billion) - see Figure 2 here, so his aim of increasing UK exports to China is a wholly reasonable one.   But, instead of that, he’s ended up trying to drum up business for Chinese companies in the UK.  Even if the Chinese companies would employ local workers to carry out the work, the profits (and the tax on them) would still end up being syphoned out the UK economy rather than reinvested here.

It’s another take on being ‘business-friendly’ I suppose – it’s just other countries’ businesses that he’s supporting.

Conceding the narrative

Tweet Amongst the more useful things that I’ve learned over the years are that that which is obvious isn’t necessarily true, and that that which is true isn’t necessarily obvious.  Assuming the obvious to be true is a common mistake, but in this election the failure to challenge the ‘truth’ of the obvious has allowed the Tories to frame the debate and win the argument on economic narratives.  To describe that as disappointing is an understatement.

When it comes to the budget deficit, all three of the main UK parties are committed to the view that it needs to be eliminated; any disagreement is solely about the method by which that is achieved and the timing.  Even the self-styled ‘anti-austerity’ parties, despite calling for an increase in borrowing to fund infrastructure in the short term, seem to have bought into the ‘truth’ of the ‘obvious’ need to eliminate the deficit.  In her piece for the Western Mail on Saturday, Plaid’s leader said “The Party of Wales wants to see the fiscal deficit eliminated”, going on to argue that it just doesn’t have to be done so quickly.

Deficit elimination as a necessity is a narrative which the Tories, aided by their friends in the media, have set, and which has gone unchallenged.  It is, after all ‘obvious’ that a government cannot run a deficit forever.  But is it true?

As the chart on this page shows, deficits have been the norm over a very lengthy period.  Where there have been surpluses, they’ve been short-lived and very much smaller than the deficits.  The simple conclusion is that countries are not like households; the budget really doesn’t have to be balanced, even over the long term.  Governments really can run deficits more or less indefinitely if they choose, however counter-intuitive that may seem.  And because it’s so counter-intuitive, it’s a point which simply hasn’t been made effectively during the election campaign.

The extent to which it’s possible to run a deficit indefinitely depends on a number of factors, most notable perhaps inflation and the level of economic growth, although it’s important to remember the importance of international comparisons as well – relative security of funds is more relevant than absolute security.  That’s why a more useful measure than the existence of a deficit per se is the relationship between that deficit and the overall size of the economy over time. 

If they’d all talked about ‘reducing’ the deficit, rather than eliminating it, I’d be a good deal less critical, because there probably is an upper limit to the size of the deficit.  However, I don’t know what that limit is, even if I suspect that the UK got closer to it than was wise.  But here’s the thing – neither does anyone else know what that limit is. 

For sure, any number of different economists will tell you with apparent certitude what the limit is, and justify setting it at that level by reference to all sorts of economic theories based on what’s happened in the past.  But none of them can be, whatever they may say, certain.  In effect, governments can go on borrowing until people won’t lend them money any more – not a sensible thing to do, but the only way anyone will ever know what the limit is.  Everything else said about the deficit is simply opinion, not fact.

One of the few things which are certain is that the existence of a deficit per se is not a problem – which is precisely the opposite of what all the politicians are telling us.  It’s clear enough why the Tories are telling us the reverse of the truth.  Using the ‘obvious’ comparisons with household debt or ‘maxing out the credit card’ provides them with the cover they need for an ideologically based desire to shrink the state and further redistribute power and wealth from the many to the few.  What’s a good deal less clear is why the rest of them have allowed the Tories to get away with this unchallenged.

Two dubious truths, and one whopper

Tweet The Sunday Times treated us to an essay by David Cameron this week.  There’s much in it with which I’d disagree (so what’s new?), and I won’t attempt to go through the detail.  There was one passage though which particularly struck me as a classic example of the way in which a politician can select ‘truths’ which suit him, and by an apparently logical process arrive at a wholly unsubstantiated conclusion.

Talking of Ed Miliband’s wish to follow the example of the French president on economic policy, Cameron said, “Unemployment over the Channel is almost twice what it is in the UK.  Our economy is growing seven times faster than France’s.  Imagine if Miliband had been free to pursue his French dream: the fallout would be felt in catastrophic job losses, falling living standards, eye-watering debt, and fast-diminishing hope in our future”.

Now the first two statements of that passage are ‘true’, up to a point.  They depend on a snapshot comparison at a point in time, of course.  And whether that comparison is valid depends on a range of factors.  What we can say, with rather more certainty and validity, is that, over the long term, the growth trajectory of both economies bares a remarkable similarity.  However, I’m prepared to accept that, in the very limited short term context of a snap shot view at a point in time, both statements are true.

Whilst the third sentence appears to follow on from the other two, it simply doesn’t by any process of logic or rational argument.  It’s like an answer to a maths problem in an exam; without showing the workings, it’s impossible to see where exactly he went wrong.  There are though at least three unstated and almost certainly invalid assumptions being made, namely:

·         that the differences between France and the UK are the result of government policies,

·         that Miliband’s economic policies are more similar to those of the French president than to those of Cameron himself (especially bearing in mind Balls’ statement that there is nothing in the budget that he would change), and

·         that the consequences listed would have been replicated in the different circumstances of the UK had the same policies been followed.

Still, who needs truth or logic?

Credit stealing and blame avoidance

Tweet For those who will fill the jobs generated, there is no doubt that Wales’ reported success in attracting inward investment is good news.  It’s not clear how many jobs there really are however.  There has been a tendency in the past to overstate the numbers, and I’ve long been sceptical about claims that “n” jobs have been “safeguarded” and would otherwise have been lost.  When the organisations giving the grants or aid and the organisations receiving them all have a vested interest in presenting the highest possible numbers, there is obviously a potential to, shall we say, ‘use the most optimistic forecasts’.  And some of the jobs will not arrive for 3 to 5 years, which leaves ample scope for ‘changed circumstances’ to lead to a revision of the numbers.

I’m not sure what it says about the Welsh Government’s economic policy.  I had thought that the emphasis was moving away from attracting inward investment in order to concentrate on growing and developing indigenous businesses; not least because of experience.  Whilst some inward investment into Wales has created some sound long-term employment, there are plenty of other examples of a short-term presence which moves on when the grants run out.  In effect, policy often seems to be whatever is happening at the time; events drive policy rather than policy driving events.

Political reaction has been predictable.  The Tories point to every failure in economic policy as being down to the Welsh government and claim the latest news as a success for UK policy; whilst Labour point to every failure as being the fault of the UK government, and claim the news as a success for their policies.

They can’t both be right of course – but that doesn’t mean that they can’t both be wrong.  I don’t simply mean that the policy pursued by the UK government would have been much the same if Labour were in power (although it would have been) or even the same thing in reverse in Cardiff Bay (although it’s easier to conceive of a Labour UK government than of a Tory Welsh government).  I mean rather that economic policies pursued by governments at both ends of the M4 might actually have had a negligible impact on the outcome.  Governments like to pretend they’re in control when things are going well, and pretend that things are out of their hands when things are going badly.  I suspect they’re right on the latter, but simply deliberately understate the applicability of that conclusion.

Selfishness isn't enough

Tweet One of the more depressing aspects of what passes for debate in Wales about membership or otherwise of the EU is that it concentrates entirely on how much money and how many jobs Wales does or does not get as a result of membership.  It’s a very narrow and selfish way of looking at membership of any organisation.  Worse, it in some ways concedes the argument to the antis.

Whilst it’s true that many jobs in Wales ‘depend’ on the EU, that is saying little more than that extant employment patterns ‘depend’ on the status quo.  But that would be true for any ‘status quo’; and if the status quo changed, so would the employment patterns.  I seem to have a vague recollection of claims being made prior to entry into the then EEC that UK jobs ‘depended’ on trade with the rest of the world and would be damaged by membership.  It’s equally valid as an argument.

When it comes to Regional Aid, the antis are entirely correct when they say that, if the UK wasn’t making large payments to the EU, then it would be able to spend even more on regional policy within the UK.  Whether any UK government would actually do so or not is another question entirely, and the history of UK regional policy doesn’t give me much faith that they would.  But an argument in favour of membership of the EU based primarily on scepticism about whether any UK government would be as generous to Wales doesn’t seem to me to be a particularly well-based one.

And what if, by some amazing miracle, the situation in Wales were to be transformed, such that Wales became a net contributor to EU funds?  If the only argument in favour was that we get more out than we put in, then the logic flows the other way – which is pretty much the position of UKIP and Tory sceptics at a UK level: 'it costs us more than we get back'.  The point is that membership of any club requires a subscription, and if one of the aims of the club is an element of redistribution, then some members will contribute more than they get back, whilst others contribute less.  Every winner has to be matched by a willing loser somewhere else.  There has to be a better reason for joining any club than an expectation of benefiting at the expense of others. Universal selfishness leads, ultimately, to poverty for the majority.

And that gets us to the real economic debate about the EU, which is hidden behind claims about how much regional aid we get or how many jobs depend on membership.  The EU is a club which aims to enmesh and equalise the economies of Europe, through economic co-operation.  Redistribution is a key element of that (which is the underlying reason why the EU is more dependable than the UK in this context), but co-operation and redistributive policies are close to anathema for the Tories and UKIP; they want only a system of competition where the strong get stronger and the weak go to the wall.

That argument about co-operation, which is also about keeping the peace on a continent which was torn apart by war for centuries previously, is one which supporters of the EU seem unable or unwilling to put; but by failing to put it, they are in danger of conceding one of the basic points of the antis, which is that the only thing that matters is narrow economic self-interest.  There’s a lot of things that I don’t like about the way that the EU has evolved, and much that I’d like to change (although that’s a great deal wider than a self-interested renegotiation of the terms of membership which is all the Tories seem to be interested in); but given the choice of European co-operation or competition, I choose the former.  However, it’s a choice which isn’t being widely articulated.

Plans A, B, and C

Tweet No surprise that the apparent upturn in the economy is being claimed by the government as a vindication of their economic policies.  What we don’t know – and can never know – is the extent of any causal relationship between Plan A and the outcome.  We can, equally, never know whether Plan B or Plan C might have led to even better results, although one would never detect even a scintilla of doubt in the government’s statements. (Or those of the opposition, come to that.)

Despite all the political huffing and puffing, I rather suspect – but can no more prove than can anyone else – that following Labour’s Plan B would have resulted in a very similar outcome.

In the first place, the differences between Plan A and Plan B were insignificant in the order of things.  And in the second, capitalism and those who run the markets have the real economic power, not governments.  The problem with both Conservative Plan A and Labour Plan B is that neither of them sought to change that essential power relationship.  Both are effectively hostages to those who wield the real power.

Insofar as there is a difference between them, it is probably that the Tories are even more enthusiastic about remaining hostages than Labour.  It’s not much of a difference – and it’s certainly no substitute for an argument for real change.

Right problem, wrong solution

Tweet In his New Year's message earlier this week, the Prime Minister said that the UK is competing against countries like China and India for jobs, and his implication was that those seeking the jobs need to bear that in mind and lower their expectations in terms of their pay and conditions. His statement demonstrated to me that he understands the underlying problem at some level, even if he's only dimly aware of that understanding; what he's unable to understand is that there is more than one way of responding to it.

The problem, which is implicit rather than explicit in his words, is that the current economic structures are simply unable to provide enough employment at a decent level for all those in the world seeking it. I agree; but it doesn't mean that the only response is some sort of a race to the bottom, that we have to compete with lower-wage economies for such employment opportunities as might be available.

If the pie isn't big enough to go round, fighting over the crumbs is far from being the only possible response. Indeed, whilst some might try to suggest that it is the only possible response, in the long term it's a response which helps almost no-one. Making the pie bigger would be a better response, and sharing the pie out more fairly would be a pretty good one too. Both are better than merely trying to redistribute the pie – particularly in the direction which Cameron seems to be proposing, whish is, on a global scale, from the have-nots to the haves.

Both of those alternative responses, however, require a co-operative approach rather than a competitive one towards the allocation of resources between people and countries. That's not an approach which we are going to see any time soon from politicians such as Cameron, unfortunately. Competition is almost a fetish for many of them; it's all that they understand. For the winners (and Cameron, like most politicians, is amongst life's winners), competition works of course. But it doesn't – and never can – work for everyone. A system based at its heart on allocating access to finite resources through a process of competition will always have more losers than winners.

And that's the problem with what Cameron said – his world view depends, ultimately, on most of us losing so that a minority can win.

Economic Responsibility

Tweet The article by Gerry Holtham in the latest edition of the IWA’s ‘Agenda’ magazine, reported in yesterday's Western Mail, does not make for cheerful reading.  It is, however, possible to agree with his sums without necessarily agreeing with his conclusions.  In essence, his argument is that the economic situation in Wales is such that we do not currently have the tax base to sustain our current standard of living as an independent country.  It is difficult to argue with that view.

There are, however, two major flaws in his conclusion that Wales should not, therefore, be pushing to follow the Scottish path, but should instead concentrate exclusively on improving its economic position.  Those flaws are political rather than economic and do not detract from his economic analysis.

The first flaw is that, as far as I'm aware, no one is actually arguing that Wales should become independent tomorrow.  Those of us who seek independence for Wales seek it as an endpoint in a process, which process is going to take some years. 

And the second flaw is to assume that the two things (i.e. constitutional progress and economic progress) are incompatible or even contradictory.  Such an assumption takes it as read that economic improvement requires the continuation of the union whilst it happens, and that raises the question about to what extent we believe that the economic problems can or will be addressed within current structures.

I suspect that the inter-relationship between the two propositions is rather more complex than that.  The idea that independence in itself solves Wales’ economic problems is as misguided as the belief that current structures will solve those problems.  The one is based on blind faith that doing it ourselves will necessarily be better, whilst the second flies in the face of decades of experience to the contrary.

The one thing on which I hope most of us in Wales can agree is that we do not want to see Wales continuing to work on the basis that its economic survival depends now and forever on fiscal transfers from elsewhere.  And it seems to me that getting us out of that mindset is as much about taking responsibility as it is about economics.  In that sense constitutional progress and economic progress need to proceed in step; it’s not about one having to precede the other.

Cardiff Bay Cargo Cults

Tweet The cargo cults on some Pacific islands reached their peak just after the Second World War.  Although they'd started earlier than that, the extent of contact between the natives living on those islands and outside civilisations increased so much during the war years that they gave a massive impetus to the cults.

It's easy enough to understand how people who did not understand the technologies which they were witnessing would have assumed that the planes bringing cargo were coming from the gods, and that they were summoned to bring their cargo from the gods by the strange rituals of the outsiders.  Many of them also believed that the cargo was really intended for them and had been wrongly purloined by the outsiders.

When the outsiders left, the islanders often tried to replicate the rituals which they had observed.  They built their own rough airstrips, wooden control towers, and even wore headsets carved out of wood and the best imitations of American uniforms that they could make.  The planes didn't come though.  Whilst aeroplanes needed airstrips and control towers, the mere presence of those things and the associated rituals was not in itself sufficient to bring the planes back.  (And that would have been just as true had the towers been filled with the latest fully operational technology rather than mere wooden imitations.)

In essence, the cults are just an example of a common fallacy - usually referred to as ‘Post Hoc Ergo Propter Hoc’.  It's a fallacy to which we are not immune here in Wales; and sometimes I wonder whether our politicians’ approach to economics is really that much different from a cargo cult, based on observing the rituals of others and then copying them.

One of the old chestnuts is the regularly repeated demand by business and opposition leaders for the Welsh government to invest more in ensuring that we have a trained and skilled workforce available.  I wouldn’t argue against having a highly skilled and trained workforce of course, but it will never be enough to bring the planes and their cargo.

Similarly, much of the debate around the electrification of the railway seemed to be based on a belief that shaving 15 minutes off the journey time between Cardiff and London would bring about some sort of economic miracle.  Again, I wouldn’t argue against electrification; but it is not a solution to anything very much in itself.

I could add superfast broadband, or city regions, an M4 relief road, or even last week’s call for reduced energy prices.  Some I'd support; some I would not, but all of them seem to be geared to a belief that performing the right rituals will bring the planes and their precious cargos to Wales.

And, just like the Pacific islanders, when our politicians do divert their attention from their ‘demanding infrastructure’ rituals, it is usually to criticise those wicked outsiders who have diverted the planes which the gods clearly intended for us, and stolen the cargo.

There’s nothing wrong with infrastructure building per se, and it’s easy to see why politicians concentrate on that.  It’s under their control, and it is (comparatively!) easy for them to control.  But it’s about facilitation rather than action; it is built on the assumption that the solution lies with others whom we need to appease, rather than with ourselves.

One of the more interesting suggestions in the Offa’s Gap paper which Plaid produced last week was the “creation of publicly-owned Welsh enterprises” to bid for contracts.  Another lies in the creation of more co-operative and social enterprises.  Neither is particularly original, although they've fallen out of favour in recent decades.  Neither is as simple or straightforward as complaining about what others are not doing.  But both are about taking some responsibility for action ourselves – and that has to be a better starting point than performing rituals or criticising others.

Decisiveness isn't just for others

Tweet

Yesterday, Gordon Brown came out strongly in support of David Cameron’s position on the Euro.  The former Labour Prime Minister and the current Conservative PM are united at last in demanding decisive action from someone else – Germany, apparently – to bail out the Euro zone. 

I’m sure that it’s far from being the first time that they have agreed – after all, their economic policies presented at the last election were almost identical – but they usually manage to avoid saying it, and somehow pretend that there is a huge gulf between them.  But then, Gordon Brown isn’t the only former PM to seek to wear the mantle of statesmanship after losing an election, even if the garment doesn’t fit him any better than it has fitted its previous wearers.

That decisive action is necessary is, as far as it goes, difficult to disagree with.  It does, however, rather gloss over the analysis of cause which should precede that decisive action.  And most of all, it glosses over the UK’s rôle in the Euro crisis.

Any financial crisis of this nature has two elements which combine to impact on its seriousness.  The first is the financial problem itself.  On that score, there can be little doubt that Greece, the centre of the current crisis, has got itself into something of a self-inflicted mess after, to all intents and purposes, having doctored the figures to qualify for Eurozone membership.  That is not to excuse those who could and should have spotted the doctoring, such seems to have been the scale of it, but the root cause lies with Greece itself.

If the crisis were limited to that, I don’t doubt that it would be manageable with good will on all sides, but then the second factor kicks in – the reaction of the ‘markets’.  The way this factor is usually treated, one might think that market reaction can be treated as though it were a rational phenomenon; a group of people taking a long hard look at the financial fundamentals before coming to a considered conclusion about the prospects, and setting interest rates accordingly.

The reality bears little resemblance to that.  It is more a case of a group of wild animals stampeding in a particular direction because one of them got spooked and the others are afraid of being left behind unless they blindly follow.  It is often irrational and subject to a herd mentality.

And that brings me back to the UK’s rôle in all of this – for where is the pre-eminent European habitat of these wild herds if not in the City of London?  And how have they been allowed such free rein to bring down whole economies in the interests of pursuing their own narrow financial interests if not for the deregulation – or studious lack of regulatory action - by the last five UK Prime Ministers, Labour and Tory alike?

We undoubtedly need some decisive actions, but two of those are in the hands of the UK PM himself.  The first is a firmer regulatory control over the speculation and gambling in the City, and the second is the financial transaction tax which both parties in government have so firmly rejected.  Neither of those actions would do anything to touch the underlying problems, but they might help, at least a little, to stop the exacerbation.

But the UK Government seems intent on doing exactly that of which so many accuse (with some justification) the Welsh Government – criticising others as a substitute for acting themselves.

Not much different

Tweet

Apparently, Cameron is worried that the election of Hollande in France might give people the impression that ‘growth’ is an alternative to ‘austerity’.  I can see why that might worry him – an alternative narrative is clearly proving attractive, and that attraction is not limited to France. 

Whether Hollande’s actions will live up to his rhetoric is yet to be seen; it’s not only in the UK that politicians exaggerate the differences between them at election times in order to do exactly the same once safely in office.  And whilst the rhetoric of the Labour Party in the UK might at times sound as though they are going to follow a similar narrative to that espoused by Hollande, the policy differences between the UK Government and Her Majesty’s Loyal Opposition are a great deal less significant than the rhetoric might suggest.

As I understand the Labour Party’s policy, it is that the cuts should be slightly smaller and made slightly more slowly – that’s a long way short of a positing growth as an alternative to austerity.  The real difference between government and opposition amounts to little more than tinkering on the fringes.  So Cameron is right to be worried electorally, but if he sincerely believes that the policies being followed are the right ones, then he probably has little to fear in economic terms from a change of government.