Sunday, April 29, 2012

How to avoid compromise

So Sebastian Mallaby comes up with the usual 'why don't they compromise' story in the FT (Forget euro woes – brace for taxmageddon - FT.com). The US is set to embrace fiscal chaos because of the likelihood that the November elections will maintain current legislative gridlock. If only the two sides would 'compromise'.

Rudimentary game theory would suggest that to compromise only makes sense if the other side is willing to give anything up. The Republicans have made it pretty clear that lower taxes for the only groups experiencing income growth is a non-negotiable condition for any deal. Oh, and don't let the government touch my Medicare.

Actually what the Republicans have managed to do is pretty clever. Imagine a centre-left and a centre-right party who need to 'compromise' for problems to be solved. How do you ensure the compromise benefits you? By adopting a more extreme position, and persuading the other side to agree to the mid-point between the two. That way you get more or less what you wanted, and the other side gets next to nothing out of the 'compromise'.

Compromise in the current US climate means that the Democrats sign up to the Republicans' ideal policy of 20 years ago. This strategy works for two reasons: first, the press doesn't call them on it, and people like Mallaby buy the 'why don't they compromise story'. Second, the Republicans have so many nutters in the party that they have a credible commitment to extremism, leading responsible Democrats to give up on the idea of any real compromise. You could throw in a third: the Democrats are themselves reliant on support from the super-rich, which further disinclines them to force the issue.

This is a strangely relativist type of politics. Policy reflects the mid-point between two positions, no matter how crazy they are. The fact is that the US has the most expensive healthcare in the advanced world and the lowest taxes, but Republicans insist that nothing should be done about either. That's your deficit. If the media refuse to address this, then disaster is the only possible outcome. The FT shouldn't be part of this.

Friday, April 27, 2012

Politics against markets - again


With the imposition of technocracy in the Southern periphery of the Eurozone and the challenge from extreme right parties in France and Holland, commentators are starting to notice that there is a legitimacy problem in European politics (for instance, Tony Barber Europe must confront crisis of legitimacy - FT.com). Political parties were accepted by mass publics in the postwar period because they guaranteed economic progress and security through the welfare state; the turn to austerity breaks this pact and throws the party system into disarray.

To which I might add - welcome to the real world. The crisis of legitimacy in mainstream party politics is not a novelty, but represents trends that have been present for quite a while (even a quarter of a century in some cases). Parties are challenged because of two parallel and inter-related trends: the decline of mass participation through political parties, and the success of an economic theory that was inimical to the idea of popular intervention in economic policy. Markets would provide individuals with choices, but collective action to shape markets should be minimized, and where possible, eliminated.

In response to the depoliticization of economic policy through institutions like independent central banks, fiscal rules and European-level regulation, demands for popular participation in the management of the economy could no longer be articulated through the mainstream parties which had, almost without exception, bought into the new model. Not surprisingly, voters that were unhappy with the new arrangements turned to 'outsider' parties, and outsider parties, again unsurprisingly, tended to be populist and often extremist. A common theme in the populist turn, above and beyond the ignorant racism to which they often appeal, is the demand for an end to the 'cosy cartel' of the mainstream parties, and protection against markets (usually in the form of opposition to globalization and immigration).

So the trend towards populism has old roots, although the crisis and the absurd reliance on austerity to respond to it has thrown fuel on the fire. In dire economic times, governments tend to be thrown out. If oppositions offer no alternative to incumbents, then populist success is to be expected. If anything, it's surprising that Marine Le Pen won only 2-3% more votes than her father had in much happier economic times a decade ago.

All this points, at least for me, to one conclusion: that the attempt to take the politics out of economic policy has failed. It has failed economically, that much is obvious, but it has also failed politically, by alienating people from a political process that they sense is designed to ignore their views. The crisis is not just the result of reckless greedy private bankers, it is also a failure of the central bankers who were protected from democratic pressures because that was supposed to allow for better policy.

We need new economic institutions, and we need to build popular support for these new institutions. Politics and markets have got to be made to coexist.

Tuesday, April 24, 2012

Wednesday, April 11, 2012

European democracy?

So, a busy week next week. First up, a conference on the Euro crisis at Brown University. I'm going to be on a panel entitled Can Europe survive the Euro? I thought it might be an idea to write down a few ideas beforehand, so here they are:


Being British is not usually a qualification for balanced comment on the state of the European Union and, particularly, the Eurozone. However, UK nationality and residence does provide an interesting vantage point on the Euro’s problems, particularly for those of us who are instinctively pro-European. Unlike in more traditionally pro-integrationist countries, supporters of the EU have had to try very hard to justify pro-European arguments to a largely sceptical population. Ignoring the risks and costs of EU membership has never been an option.

Tuesday, April 10, 2012

The politics of tax cuts

One of the most interesting features of politics in the UK and US over the past few years has been the politics of tax-cutting. Thatcher and Reagan appeared to make big political gains out of it, and here New Labour was so spooked by the tax issue that they committed to not raising income tax. The interesting point is that tax cuts play well politically even though they are, almost by definition, regressive. The personal allowance change in the last UK Budget is a wonderful illustration of this. By raising the tax threshold, the Conservative-Liberal Democrat government was able to claim to be taking low-income families 'out of tax'.  In a sense, this was true (although only in a sense - income tax is only a small part of the tax burden of the low-paid). But, if we take the bigger picture into account, it is no longer true in any reasonable sense.

The first point about all this is that tax cuts tend to benefit every taxpayer proportionately, which means that their effect is regressive - high income groups pay more tax, and if there is a proportionate tax cut, most of the cut will therefore go to them. In the case of the UK budget, there was an adjustment to higher rate tax thresholds to limit the benefit to higher-rate taxpayers, but the raising of the tax threshold otherwise benefited all income tax payers.

The second point is that poorer families tend to have fewer taxpayers than wealthier families. The poorest, of course, generally have no taxable income, whilst lower paid workers often are the sole taxpayer in the household. So the benefited of the threshold change has tended to go disproportionately to the middle income household, as the Resolution Foundation show in this chart:


(chart tweeted by James Plunkett of the Resolution Foundation, 21 March)

The third point is that the poorer families tend to consume a bigger proportion of government spending, and the opportunity cost of tax cuts is cuts in government spending, which affect wealthier families far less on the whole (although probably more than they think).

So overall, an apparently progressive measure is in fact rather regressive (and politically astute, since it concentrates gains in the middle-high income group whilst rhetorically evoking help for low paid workers).

What can the left do about this? It's a tricky one. The point is that most people have no real understanding of where government money goes, and therefore underestimate the costs to them of cuts in government spending to pay for tax cuts. People also fail to understand how much most voters are actually subsidized by the wealthy through higher rates of tax - it's in the interests of most voters to vote for higher taxes, provided they are not regressive, yet the appeal of a tax cut is always strong.

So the left has got to dream up ways of making the benefits of tax and spending clearer to people. One thought is the government's recent suggestion to give voters a breakdown of how government spends tax money in their tax demands. Actually, I think that's a great idea! Information about spending, if extended to show exactly how much redistribution people are actually getting through the tax system, could help justify more government interventions. The left has got nothing to hide from voters having more information, since most voters gain from centre-left policies. So my proposal is an estimate of how much government spending people get in their various activities (health, education, pensions, etc) alongside people's tax bills. There must be some neat way of doing it that would get the idea across.

Sunday, April 8, 2012

How to win over the squeezed middle: subsidize first time buyers, tax landlords

Labour have benefited a good deal from the Tories' ill-judged budget - the latest polling gives them a ten point lead, although this is largely a function of the Tories' loss of preferences rather than Labour gaining much. Ed Miliband still inspires little confidence in voters, but it's interesting to see that the sheen is wearing off David Cameron at last.

Anyway, what Labour needs is redistributive policy ideas that are easy to sell, and can win over voters in both richer and poorer areas of the country. So here's one. Why should landlords get a tax break on their second, third, fourth mortgages, but hard-pressed homeowners get no tax breaks on their mortgages? This is simply crazy. Sure, many people have invested in buy-to-let as part of their financial planning, and they will protest at this, but are they really an electorally significant bloc, and in particular, are they the kind of people that Labour are likely to win over?

I've not done the numbers, but my guess is that some kind of tax break for new homeowners (easily done, has to be first mortgage after some cut-off-date), paid for by reducing or removing entirely the tax break for buy-to-let landlords, could be a real vote winner, especially in wealthy areas (where the tax break would, of course, be proportionately worth more). I think removing mortgage tax relief for first homes was probably the right thing back in the 1980s and 1990s, but what has happened is that whole generations (basically anyone much younger than me) are being excluded from the housing market, whilst current taxation asks nothing of people whose homes have gone up in value. Now asking older homeowners to pay higher tax on their paid-for properties is political suicide, so my plan focuses on making a small, generally wealthy group pay instead. If we want to be conservative about it, we could leave some of the landlord tax breaks intact - for instance allowing mortgage interest deduction just on one buy-to-let mortgage. And we could phase it in so that big investors would have time to adjust their portfolios and not get bankrupted by the change (though quite why they need such protections is a fair question).

An obvious difficulty here is that tax breaks for homeowners will, all else equal, push prices up and negate the beneficial effect. But if the change to buy-to-let rules is gauged properly, it would lead to people getting out of letting and releasing properties onto the market. In high cost areas this would be particularly likely, so it would also have the effect of opening up the housing market in the areas where there are most labour shortages. Done right, the net effect might leave prices roughly stable whilst redistributing access to the market from buy-to-let investors to people in the squeezed middle who are currently forced to rent.

So, Ed and Ed, what are you waiting for?

Saturday, April 7, 2012

My London vote

This could swing the election...

Right, given that the London vote is quite a bit more complicated than a parliamentary election (ie, which candidate has the best chance to beat a Tory, right I'll vote for him/her), this requires a little bit of thought.
We have effectively four votes (it's explained - not terribly well - here), and this gives us a bit of scope to present a more nuanced account of our preferences. So here goes.

Mayoral vote: here we have two shots, a first and a second preference. My first preference is probably for the Green Jenny Jones, since the main area that the mayor has power over is transport, and the Greens have the only reasonable transport policy (in another words, one that doesn't push everyone that isn't in a car out of the way). But given that she can't win, I'll give my second choice to Ken, as the realistic candidate to beat Boris (I'm assuming Brian Paddick's association with the desperately unpopular Lib Dems, and his attempt to cover up racism in the Met back in 2004, makes him an unlikely winner). Oh, and I am a Labour Party member....

For the Assembly vote, we have a more complicated arrangement, where we vote for both constituency and PR members. My constituency vote is for Labour, since my guess is that in Enfield and Haringey it will be a straight Conservative-Labour fight (again Lib Dems presumably damaged by their serial errors and spinelessness in government). My PR vote is again Green, since they're sure to get some representation under PR, but unlikely to win a constituency seat. The official website doesn't explain if there is any compensation for constituency losers in the PR vote (as in Germany, Scotland and Wales, or Italy 1994-2006), but I don't think there is, and in any case I would give Green representation higher priority than Labour representation in London, given the importance of transport issues where the Greens are in my view the only serious party.

So there you have it, the people have spoken.

Friday, April 6, 2012

The ECB's inflation target explained to credulous teenagers

Yes, the ECB has decided that now it has mastered the art of depression-prevention (OK, it was Ben Bernanke that said that, but whatever) it can turn its attention to educating the public at large about the dangers of having inflation higher than 2%.


ECB: Price stability - why is it important for you? from Euro Challenge on Vimeo.

Thursday, April 5, 2012

What education is really about

When you're tired of the Gradgrinds and bureaucracy, along comes Noam to remind you why you became an educator in the first place. Watch and enjoy (preferably with a mug of tea).

Wednesday, April 4, 2012

Spain, again

Now that Greece is off the front pages for a few days, we all turn our attention to Spain (Spanish bonds hit by poor auction - FT.com).

Spain's problems are rather different from Greece's, and those differences are now widely understood: Spain had a balanced budget and a small public debt before the crisis, but ran up a crazy amount of private debt, largely backed by a property bubble in a largely saturated housing market. The result is that Spain has a British-style deleveraging recession, which is starting to become a sovereign debt crisis too as investors wonder whether it can sustain high budget deficits in the absence of growth.

The irony of all this is that the markets now that austerity won't work, but insist on it anyway. What do I mean by this? That investors want some kind of guarantee that deficits will be reduced so that the state debt burden will be sustainable, but know perfectly well that retrenchment now will make the recession worse, making everything less sustainable.

So what indebted governments need is a mechanism for convincing the markets that deficit reduction will come, but not yet. This mechanism has to be some kind of credible European-level institution, that can commit to both sovereign solvency and growth. The current German obsession with punitive deficit reduction strategies is the last thing we need, since the alternative - euro exit and default - is in no-one's interests, yet may end up happening anyway because of the impossibility of everyone deleveraging at once.

Sunday, April 1, 2012

The UK's Conservative Government: An Apology

It's no good, I have to admit defeat. Despite four years of increasingly desperate blogging in favour of Nordic social democracy, Keynesian macroeconomics and Hull City AFC, I have reluctantly come to the conclusion that all three causes are lost. Hull have lost their last four games and are now five points off the playoff places. Let's check the evidence on the other two.

When David Cameron became Prime Minister, I confidently predicted that his deficit reduction programme would be socially divisive and economically counter-productive. The deficit, I claimed, could get bigger if public spending cuts crushed demand and therefore economic growth. And loading most of the strain onto spending cuts, rather than balancing that out with progressive tax increases, would punish the most vulnerable and increase poverty and inequality. Cameron, with the misguided support of Clegg's Lib Dems, was burying Britain in a self-perpetuating slump which would make recovery impossible, tear apart the fabric of society, and leave the deficit just as high as before. Moreover, the Tories' proximity to the wealthy and the financial elite in particular would mean that the effect of policy would be deeply regressive, leaving the City's government subsidized bonus culture intact whilst no serious effort would be made to get the rich to pay their fair share.

In view of the experience of the two years since the last election, there's no escaping the fact that I was completely wrong on all counts. The brave measures taken in the budget to help hard-working job creators whilst drawing a line on excessive pasty-eating, and the courageous decision to pre-empt the bullying of Labour's union paymasters by emptying the nation's petrol stations beforehand, simply confirm that fact. I humbly apologize to the Conservative party and promise to support them for the rest of my days.