Bank Regulation: the answer is transparency

If you haven’t seen yesterday’s epic rant by Paul Mason, Channel 4′s economics correspondent, do now.

But there’s a problem with regulation: it doesn’t work. 

Regulators are never as well-resourced as the banks. So they can’t afford to employ the smartest people. Or not for long, anyway – a good career move is to spend a year or two working at a regulator, then move into compliance with a major bank. Gamekeeper turned poacher.  When you work in compliance at a bank, you’re not a policeman – you wouldn’t last long if you kept on preventing profitable deals (the ones that in the end go to paying your salary).  Your job is to provide the whitewash.

So there’s a brain drain from the regulators to the banks. What’s more,  much of  the young talent working in the regulators has an eye on this career path so won’t do anything to mess it up.  Like get involved in pursuing an enforcement case against a possible future employer.  And the regulators really don’t like pursuing enforcement cases, particularly not criminal ones. The lawyers are lining up on both sides to take their fees, and the banks won’t skimp on paying for the best. If the regulator loses, there’ll be questions asked in Parliament about the waste of taxpayer’s millions, and the banks will be saying “we told you we were perfectly innocent”.  If the regulator wins, the bank puts the cost down as a routine cost of business and fires the compliance officer for failing to apply enough whitewash.

And what were the auditors at RBS doing? Who appoints them? Duh.

There is an answer, though. Less regulation, more transparency.  Much, much more transparency.  So much transparency that it completely changes the way the City works.

No secret deals.  A secret deal is a dodgy deal, so make unenforceable any deal that has any element of secrecy. 

Publish everything IN REAL TIME.

Let us be the auditors with a GoogleBot.

If I can’t find out everything about a deal as it happens,  from my smartphone in the cafe over the road, it’s not transparent enough.

It’s how it used to be.

Well, not quite. But trading was much more public when it was by open outcry on public trading floors. Deregulation and electronic trading came in at about the same time.  Before then, honour – “my word is my bond” – and as much transparency as the technology of the time afforded kept all but the most egregious cases under control.

(And read Stiglitz).



Monetary and Fiscal Policy for 2015 onwards: Seven Years Too Late

Better late than never

It is clear that we have been doing something wrong. I have no doubt what it is: fiscal austerity.  “But the debt, the deficit, the debt!” cry the bankers and the Germans.  Their fears are misplaced (at least, the Germans’ are. The banks cannot be regarded as impartial).

The Bank of England has been practising QE to ease monetary conditions and in so doing has taken a lot of public debt onto its own balance sheet.  It needs to continue to do this, effectively printing money for the government to finance the deficit.  Yes, I know, breaking every rule beloved of dear Prudence.

The Government, on the other hand, should be pushing forward fast with major infrastructure projects, principally the development of offshore wind power and the associated industrial capacity to install it. We should be world leaders in this technology (we are already in installed capacity).   It should also take on the development of more nuclear power stations, not by making ridiculous unit price promises (tying us in to paying well over the odds for new nuclear electricity)  but by commissioning contractors to build them. Put money into nuclear research and developing prototype novel reactors under the management of university physics and nuclear engineering departments – let them teach practical, as well as theory. Not just nuclear research, by the way, but really back our scientific base so that a career in science makes sense.   Better rail links – don’t just talk about HS3 for the north, build it now.  Home Insulation projects – not the weaselly Green Deal, but a programme of grants focussed particularly on social housing. Talking of social housing, build some. Build a lot. That’s what we should be doing with the money printed by QE.

Now this will, eventually, trigger some inflation and in so doing it will devalue the debt and peoples’ savings. QE has already been devaluing people’s savings, for no apparent benefit other than papering over deep deflationary cracks.  In the 20th century, big national debts have only ever been repaid by inflation, which doesn’t really repay them.  It will probably be the way today’s debt is repaid, but if we have a truly growing economy (unlike today’s phoney growth) there is a chance that some of the money owed to us – most of the government debt, by the way, is owed to us, we the people, the pensioners, the baby boomers –  will be paid for real. And this programme of managed government investment will pay us back.

A good deal of this government investment will generate a return. Offshore wind farms and nuclear power stations can be sold, or kept so we earn from the electricity they sell. Social housing capital can be recycled through Right-to-Buy (need to look at those discounts though, currently far too generous).  For others  the return will be less direct.

Osborne almost gets it

I have very little time for George Osborne but he does understand that infrastructure spending matters. He didn’t cancel Crossrail, for example.  But he didn’t go nearly far enough in boosting infrastructure spending in the recession.

Keep a lid on current spending

Current spending does need to be kept under control.  The overall budget does need to be in surplus across the economic cycle but cutting current spending in a recession is completely counterproductive.

Rebalance taxes

This is very important. The ConDems’ actions in increasing tax thresholds are, mostly, to be applauded, but they have been much more expensive than they needed to be.  They should have been balanced by an increase in rates.  For every penny off average tax rates for those on less than median earnings,  a penny more on average rates for those above the median.  Increasing allowances without an increase in the basic and or higher rate reduces average rates for everyone.  It doesn’t have much effect in making the tax system more progressive. But allied to an increase in tax rates – even the basic rate – it does make it more progressive.

I have clear views on simplifying the tax system and ultimately I think Income Tax should be scrapped, replaced with a CashFlow Tax that wraps up the benefit system as well and provides everyone with a Basic Income.  But in the meantime it is important to keep it gently progressive, by which I mean simply that the average tax rate paid should increase for higher incomes.

The German Concern

Germans are terrified of hyperinflation brought on by excessive government spending using paper money; rightly so, since it triggered the economic collapse of the Weimar republic out of which came Hitler. But Weimar would never have been in that state had it not been for the war reparations it had to pay. It was the reparations, not the deficit, that did for Weimar. Now, in the Eurozone as a whole, German reluctance to tolerate monetary expansion is keeping the entire zone barely above the deflation level. Europe needs the same medicine as the UK and the US: monetary and fiscal expansion.

The Bankers

QE was supposed to have provided banks with the liquidity they needed to start lending to small businesses to get the economy growing.  However, they really needed it to fix their balance sheets and weren’t about suddenly to start lending to enterprises without customers.  Banks aren’t in the business of providing equity capital or of taking entrepreneurial risks in the real economy; it’s not in their DNA.

Banking continues to need reform. Bankers need to be held accountable to politicians, and politicians to the electorate.  Nowaday’s its backwards: politicians are firstly accountable to bankers.


Election Season

I know it’s nearly six months away, but election fever is beginning.

This post is about UK politics, and next years’ election is the most open for a long time. We seem to be moving towards five or even six party politics. Despite the disaster of the ConDem coalition, we may yet get another five years of it, or worse –  a Con-UKIP coalition.  Since it is also likely that we will enter a period of extreme economic difficulty, globally (see my last post), perhaps the younger talent on the left thinks that 2015 is a good election to lose. Perhaps, but  that is a selfish view and I am not sure that the country can afford another five years of plutocratic larceny, or the risk of leaving the EU that the in-out referendum of 2017 presents.

It should be clear by now that my sympathies lie on the left; I consider myself a progressive but find that Labour’s reluctance to embrace progressive politics, as well as its refusal to admit its failings when last in office, deter me from giving them unequivocal support.  When I participate in online surveys of parties I should support, based on my opinions, the Greens invariably win, and I have voted for them in the past.  They are the only party that has consistently, sane, left-of-centre policies; but I cannot give them my wholehearted support for two key reasons:

Firstly, their policy on genetic modification: (scroll down to the section starting FA710).

It is true that most commercial GM is used for the purposes of simplifying industrial monocultures: Monsanto’s Roundup Ready glyphosate-tolerant crops being the most egregious example, and there is little doubt that industrial monocultures are damaging for biodiversity. But GM is potentially an enormously positive technology, harnessing the huge strides we have made in genetic science.  It is far better controlled than other methods such as cross-breeding.

Secondly, their policy on nuclear power.

I have changed my mind on this issue several times in my life: originally, strongly in favour; then, after Harrisburg-TMI coming to the conclusion that it wasn’t worth the risk, a view that the Chernobyl disaster reinforced, and most recently, after Fukushima-Daichi coming once again to the view that it is a manageable risk: because, despite the scale of the disaster, the number of global premature deaths it caused or is likely to cause is minimal. It hit the headlines, but more than 10,000 Japanese people died in the tsunami. Not one from radiation. Most of all, I think it is tragic that public opposition to nuclear power (including mine) stopped suitable research funding taking place. Heysham C will be the same type of reactor that failed at Harrisburg (a pressurised water reactor): much safer, not doubt, as a result of the lessons learned since then, but not one of the many potentially-safer designs such as molten-salt reactors, thorium cycle reactors etc – none of which has been developed even to prototype stage let alone commercial viability because the research funding dried up.

Disguising deflation

A deflationary world

This is a post about the conventional world economy, particularly the USA and the UK.

Both economies have been suffering from low-wage employment growth. Unemployment, normally a clear indicator of a failing economy, has fallen; and so have wages.

Both have had major financial crises and both governments have had to stage bank rescues.

The Eurozone and Japan are also primarily in sync with this movement. The Eurozone has suffered worse because it has had less QE.

There are a few differences, cultural, institutional, but essentially, the whole developed world has been stagnating since at least 2008, with the underlying malaise probably starting as much as a decade earlier.

The facts are that despite the key commodity (oil) being at well-above-average real price levels for most of that time, inflation has remained low and wages have fallen. We have, essentially, been living through deflationary times, saved only by quantitative easing.  Without the actions of both the Federal Reserve and the Bank of England, things would have been much, much worse over the last six years. Unfortunately, QE could not solve the underlying problems and now it is being withdrawn, they are likely to emerge with a vengeance next year.

I could be wrong; I often am and in this case I  really hope so. But I  don’t think so.

Classical economic theory (on all sides of the fence) says that recessions are the consequence of inadequate demand. Keynesian analysis says that the way to deal with that is for government to increase spending and/or reduce taxation during a recession, thus putting more more money in people’s pockets and increasing demand.  These two things aren’t, however, equivalent. On the liberal right, tax-cutting is the preferred mechanism because it lets people, not governments, decide how to spend the money and determine where the demand goes; the interventionist left favours more public works (the Mersey Tunnel, the Tennessee Valley Authority, re-arming for the second world war).  Intervention means that the money is actually spent;  individuals and companies, as is their right,  don’t always choose to do so, particularly when there’s deflation about.  The monetary authorities (central bankers) respond to this by devaluing money, making real interest rates negative. This is normally a strong incentive to spend, after all, why keep the money in the bank losing value? One of the problems of today’s global economy is that consumers, and particularly companies, haven’t been spending their money.

Quantitative Easing (QE): blowing bubbles

QE is a emergency lever used by central bankers to devalue money when the interest rate lever has come to the end of its range.  Global interest rates have been near-zero since the crash.  The central bankers create money to buy bonds from financial institutions. Creating money without creating a corresponding amount of stuff inevitably devalues it, which is the point of the exercise. However, QE has operated at a scale far beyond that originally intended.

The problem with QE is that it is used to buy assets: government securities, commercial paper, and in the US in particular the toxic securitised debt that had triggered the first crisis. This has the result of pushing up asset prices.  Suppose a bank holds $1bn of toxic debt, which it sells to the Fed. The result is that it has $1bn of cash instead of the toxic debt. That needs to go somewhere; held as cash, it will decline in value. So it spends it on other assets. Up to a point, this is a good thing. For related reasons, banks have been under great pressure to “strengthen their balance sheets”, since many had to be rescued during the crash.  New international rules on capital adequacy have come into force and QE has helped them meet the requirements, most clearly in the USA. German refusal to let the ECB do much in the way of QE, allied to the Eurozone’s structure, means that some Eurozone banks have found it harder to pass the new stress tests.    But beyond a point, it is a bad thing: it pushes up the price of assets, creating asset bubbles. There are lots of these around the world, fuelled mainly by dollar QE.  London property is one.  If the bubbles are relatively local, they can burst without bringing the system down.  The market for luxury property in Istanbul – definitely a QE bubble –  has been hit by regional unrest. But the collective effect of asset bubbles bursting is that investors lose money and the effect of the QE evaporates.  A significant factor here is the way insiders offload inflated assets just before the bubble bursts, thus passing off the losses to schmucks, or retail investors as they are more politely known.

The underlying problem is much more serious and none of the actions of the authorities since 2008 have done anything to address it.  It is structural,  based on continued weakness of real productive industries outside the newly-industrialising countries.  Growing income inequality creates a large class of people able to afford only the most basic goods and another, much smaller class of super-rich people with nowhere to put their money. Together, these two groups’ spending isn’t enough to support a prosperous middle-income, working class.  Making money by making useful stuff has been eclipsed by making money from inflating assets. Austerity policies have exacerbated and prolonged the structural problems.

I continue to believe that QE was, perhaps is, a necessary evil, but not a sufficient response to the structural failings of the global economy.  On its own, all it has done is  disguise the intrinsic deflationary phase; that needed addressing by significant state intervention on capital infrastructure projects.

The end of QE without solving the underlying deflationary nature of the economy threatens to bring deflation out into the open. That’s what I’m worried about for next year, although I believe that it’s more likely that central bankers will resume QE to prevent that particular disaster. I really don’t think they have a choice; it’s governments who need to act.

Repairing the NHS after HASCA2012

The health and social care Act of 2012 is, according to certain Tory cabinet insiders, the biggest mistake the Tories made in government.  It was a direct contradiction of their manifesto pledge not to impose any top-down reorganisations of the NHS, and it wasn’t mentioned in the Coalition agreement. LibDem endorsement of it was a far greater betrayal of principle than Nick Clegg’s about-turn on tuition fees.

HASCA2012 continued Nu-Labour’s reform agenda, which bought into the unsubstantiated neo-liberal claim that cost savings could be made by outsourcing healthcare provision to private-sector suppliers. Another facet of the reform agenda was the use of PFI agreements to build new hospitals. These off-balance-sheet instruments made the public sector finance numbers look prettier in the beginning but were badly written, badly negotiated and have left today’s and tomorrow’s NHS facing payments they can’t avoid for services and hospitals they no longer need. Nu-Labour is as guilty as the Tories on this;  I will allow that they were more gullible schmucks than conniving predators, but the result is the same.

Anyway, back to the current (and future) problem.  Billions of pounds of NHS expenditure is going through outsourcing, PFI and other contracts to  private-sector suppliers, when in many cases the services can be provided more flexibly and often more cheaply by directly-employed NHS professionals working to a patients-before-profits, care-before-costs agenda.  The government, and in particular a future government of honour and integrity (we can dream) will be stuck with honouring deals done by the present bunch of thieves.  There are international laws and standards about not breaking deals your predecessors in government have done. Surprisingly some of these are human rights laws (Governments can’t deprive citizens of their property without compensation).

So what is to be done? What can a future good-Labour, Green or  NHAParty government do to unpick these deals and rebuild a fair NHS?  While the deals themselves can’t be undone, the context in which they continue can be changed.  It could make the legal, economic and tax environment too uncomfortable for the private sector contractors to continue, and it could provide a mechanism by which they could choose to give up or change the terms of their agreements.  However, such a change would have to be done without discrimination. A law directed specifically at NHS contractors would be open to challenge.

Naturally, I would make the case for a law about transparency as part of the mix.  Make it so that every government and public sector contract must be published in full. Plus information about the beneficial ownership, tax status and political affiliation of the contractor.  Let’s add to that a requirement that NHS trusts also publish their accounts in detail, leaving out only any personally-identifiable data – transparency is a good thing all round: the only thing that should be confidential in the NHS is patient information.

By pursuing the transparency agenda, the new government will make it more and more uncomfortable for the worst private contractors.  If the ownership paper trail ends up at a brass plate in Grand Cayman (as well it may), the Government can and should require the UK end to disclose the details or forfeit the contract.

This forced opening of contracts will allow teams of NHS supporters to conduct forensic analysis of the terms. It may be that some private-sector contracts actually turn out to be more efficient than keeping the services in house; if so, there are other things to worry about.

Help Solve the Housing Problem

Housing Benefit

The Tories are concerned that working age benefits cost about £100bn per year. About a quarter of that is housing benefit, and about 40% of housing benefit goes to private sector landlords – £9bn pa.  This public money pushes up house prices and is a factor in the distorted property market.  The real gainers are the said private sector landlords.

The Solution

Tax private rental income more. I can’t immediately find statistics for the size of the private rental market – what I’d like is the aggregate private rent paid – so I’m going to estimate. There are about 4m privately-rented homes in the country. According to the Valuation Office Agency, the average monthly rent for England is £720, which amounts to an annual rent of £8620. Assume for the UK as a whole it will be rather less because of the distorting London factor, so I’ll assume a mean annual rent of £6k. Multiply by 4m and you get an annual private rental market of £24bn.  Tax is already paid on some of that, but the net income is going to be substantially less after allowing for mortgage interest and other expenses including repairs and maintenance. I guess – though there may be treasury and HMRC figures to correct this – that the total income tax take from the sector is less than £2bn.  It’s certainly well below the £9bn paid to the sector in housing benefit.

My suggestion is that all Schedule A income from residential property should be taxed at the higher rate regardless of the taxpayer’s other income.  It could cover the cost of housing benefit.

Its impact

This will hurt a lot of private landlords. Do we feel sorry for them? Just a little. But in most cases, the reduction in their net income after tax will be easily absorbed.  Some private landlords will be highly-geared and will have borrowed substantially; it is possible that they will be forced to sell up and there will be cases of individual hardship (although hardship is probably too strong a word).  Others will find that property is no longer such a satisfactory place for their money and will sell up by choice rather than imperative.  This will release some private-sector rented property onto the market for owner-occupation and will tend gently to push down already-inflated house prices.

Impact on rents

Opponents will argue that it will push up rents as landlords try to recoup the cost of the extra tax through rent rises. This is unlikely; rents are determined by supply and demand, not by cost pressures. If anything, the result will be to lower rents because of the overall impact on capital values.

Administration and anti-avoidance measures

To make this work, HMRC should undertake to register all private tenancies.  Changes would be made to housing legislation, so that the landlords’ protection of an assured shorthold tenancy would be conditional on registration with HMRC. An unregistered tenancy would be automatically protected in favour of the tenant who would gain indefinite security of tenure, the right to a fair rent assessed by a tribunal and the right to buy.  The register would be publicly-accessible and would generate the necessary pages for the landlord’s tax return. The cost of developing such a register would be relatively small and substantially less than the annual revenue a new tax would generate; it is essentially a database.

Alternative Solutions

Restrict Housing benefit through caps and stricter eligibility criteria. Clearly this is what the Tories would prefer as it would hurt their kind rather less. It is, however, likely to be much less effective.  Fair tax on private rental income would have a much clearer and measurable impact on government finances.

A Speech for Mr Miliband.

Hasn’t he just blown his last opportunity before the election? Never mind, let’s get with it.

“In a few months, the people of the UK will be voting for a new Parliament and a new Government. We’ll be able to get rid of the ConDems, certainly the worst government to have run this country in my lifetime. They have been almost entirely without principle, apart from the principle that creates systems to award contracts to people and businesses who are natural supporters of and donors to the party.  The damage they have done to the NHS by allowing cost criteria to crowd out care criteria will take years to put right.  
The Labour Party is the obvious choice to replace them. But let’s not imagine that it will be the same as last time. 
This time will be different, because Labour is different. We are no longer New Labour, but neither are we Old Labour; we are just The Labour Party. 
I served in the last Labour Government, as did my colleague Ed Balls.  We didn’t get everything right, and we got some things  badly wrong. We won’t be doing those things again. 
The thing we got most wrong  our relationship with the financial services industry. We believed it was mostly doing good for the country; we needed the tax income it generated. But it distorted the economy in many ways. I won’t discuss detail here, but just look at the results. During our term in office, inequality rose and social mobility fell. The rich got  much richer, and while – for most of our time in power – most people got a little richer, the lions share of the benefits went to the rich.  You expect that under a Conservative government, and that’s what we’ve had for the last five years – only this time, not only have the rich been getting much richer, the poor have been getting much  poorer.  But on our watch, inequality still rose, and most of those rich people who got much richer were working in or associated with financial services. 
Now this matters to Labour because we are a party that has egalitarianism in our soul.  We are the party of aspiration, of the rising tide that floats all the ships. Inequality should go down when we’re in charge, but from 1997 to 2010 it didn’t.  The Tories are the party of the wealthy establishment; they don’t mind if the poor stay poor so long as their mates get richer.  But for Labour, it hurts. It hurts me to acknowledge that we didn’t do as well in reducing inequality as we should have done, and dealing with inequality will be top of our economic priorities when we are in power.
This is because it matters for the economy.  Not just for social fairness, the things that brought me and my colleagues into  Labour politics. They matter, of course – we forget those basics at our peril. But because too much inequality is bad for the economy.  There’s a growing body of serious economic research that shows for a developed economy, sustainable growth comes best when the economy is more equal.  You may remember a speech Boris Johnson gave last year when he celebrated inequality.  Obviously it suits him and his rich Etonian friends.  And don’t think that we want a system where everyone gets the same, regardless of how much work they do. That’s absolute income equality, and it’s just as undesirable.  We must each be able to get a little richer by working a little harder, and much richer by working much harder. Boris’s argument that because a little inequality is a good thing, a lot of inequality is a better thing  is an example of the drunk’s fallacy. 
This isn’t just about  redistributive taxation: increasing taxes on the rich, to pay bigger benefits, wage subsidies and tax credits to the poor. That is   the worst way of all to deal with inequality – It’s better than nothing and it will always be part of the mix, but no one should go into government with it as the only plan. It’s really a sign of failure – that we have an economy that has become so unequal, that we can only correct it by redistributive taxes.  We want an economy that rewards hard work from  the bottom up.
For much of our time in power,  inequality was made less bad by the property market. Many people who owned or bought property in that time have done OK. So much so that for millions, the “property ladder” was seen as the best way out of the rut of poverty. People made – and some still make – incredible sacrifices to get their foot on the property ladder, and those that have stuck with it have done OK. But it’s not sustainable, as we are now finding out. The children of those who got on the ladder in the nineties are now finding that the bottom rung is completely out of reach. 
That’s because it was always an illusion. The property ladder can’t help a whole economy out of its own mess. The only ladder that’s any use is the enterprise ladder, and it turns out that no one has really been looking after it properly.  We’ve patched it up, here and there, tried to fix bits of it, but it should be the centrepiece of our economy. It’s much more important than the property ladder. It should be accessible to everyone, and everyone needs to be keen to get on to it.  
So in government, we’ll need to make some changes. One, we’ll need to fix the ladder. We won’t repeat George Osborne’s mistake of trying  to fix  the property ladder. His Help To Buy scheme has made it worse anyway. We’ll concentrate on the enterprise ladder. We’ll look at all aspects of starting and growing businesses, we’ll deal with bank lending, we’ll encourage new peer-to-peer funding mechanisms such as equity crowdfunding, things that – as it happens – disintermediate much of the banking sector. We’ll look again at regulations, reforming regulations so that they help enterprises do better rather than hindering them with red tape. We’ll encourage more and more apprentices, making it easy for new businesses to take on apprentices, with schemes that encourage businesses to keep them on with a share of the business once their training is over.   We’ll make business rates cheaper for small businesses, and we’ll look at market for commercial premises.
We’ll make enterprise, not property,  the focus of a new generation’s aspiration.  For too long, we’ve had a situation where you needed to be on the property ladder to get on the enterprise ladder. As a home owner, you could give the guarantees lenders and landlords needed. That’s the wrong way round! We’ll make it so that the enterprise ladder is the way to the bottom rung of the property ladder. 
Many of the most enterprising people in the country are newer citizens. We welcome the enterprising drive that new immigrants often bring to the country, and we’ll encourage them to share it with those who’ve been here longer.  Integration is key to making a diverse society work, and the workplace is where we should be making it happen.  Let’s all learn from each other.”

OK, Ed – got it? Pity you didn’t manage something like this last week. Never mind, you’ll have other opportunities. But for god’s sake, do it.

- man up and admit to the failure on inequality when you were in power;

- Be clear that inequality is BAD FOR THE ECONOMY



Former care minister calls for open-book accounting in care homes

On today’s You and Yours, on BBC Radio 4, Paul Burstow the former care minister called – amongst other things –  for much greater transparency in the finances of care homes.

In particular, he called for open-book accounting so that residents and local authorities can know how their money is being spent and to understand the costs of providing housing with care. 

Care provision is going to be a growing cost for an ageing society and there have already been many abuses of the system. Underpaid and exploited workers have sometimes resorted to inflicting appalling cruelty on vulnerable residents. They have rightly been punished when found, but the problem is the lack of resources and a more serious problem of financial engineering which ultimately led to the collapse of the Southern Cross chain of homes a year or two ago. 

Of course, I’m delighted that any politician should be calling for open-book accounting in any sector, but it shouldn’t just be care homes. 

Politicians’ expenses, perhaps? Election expenses? Everything the government does on our behalf or with our money should be subject to full open-book accounting. 

Economics – what utter cobblers….

I am reading Thomas Piketty’s excellent book, Capital in the 21st Century. It deserves to be as influential as Keynes’ General Theory. 

I have also been following up some other research into the question of inequality, and have found some interesting work going back to the 1950s by influential economists such as Kaldor and Kuznets. The empirical data seems to be that a relatively low level of inequality is fairly well correlated with growth: see, for example, this IMF Staff Discussion Note by Ostry, Berg and Tsangarides, which was recently cited in a speech by Mark Carney. 

Citation-surfing led me to: The Tradeoff Between Inequality and Growth by Jess Benhabib, Professor of Economics at New York University. Benhabib was trying to show that the relationship is non-linear, a result I would expect. But when I read the paper….

That tenured academics are paid good money to produce such rubbish is incredibly depressing. In a social science, there is simply no point in such pages of algebra. So far as I can tell, not one of the variables in the reams of equations can ever be empirically determined. How can these theories ever be tested?  

I’m not great at maths, but I know enough to know that it has incredible beauty in its pure abstract depths, the more remarkable because the same abstract language describes reality so accurately. But this “economic modelling” does nothing of the sort. The “agents” to which it refers have no basis in reality. It’s not wrong, mathematically. It’s just pointless. It’s mathematical self-abuse, an abuse of mathematics – and if it’s the sort of theory that’s been used to inform real, public economic policy it’s hardly surprising we’ve made such a mess of things.

Gaza –

The continuing tragedy of Gaza is that the people most affected by it seem to have the wrong ideas about a solution.  Periodic ceasefires are imposed from outside, accepted at best grudgingly by both sides. Both democratic bodies (Hamas is democratically-elected in Gaza) enjoy popular support for their policies from their electorate. 

But, from here in London, both sides’ tactics seem bizarre, calculated to achieve nothing but perpetuation of the current misery. 

I have more sympathy for Hamas than for Israel, not only because of the one-sided tally of deaths; and I do begin to detect an acknowledgement by Israel that it has badly miscalculated global public opinion. Israel now wants a ceasefire not for its own domestic reasons, but to regain some support from the international public.  The Guardian has today run an obnoxious advertisement, paid for by Israel, to try and blame Hamas for the many child deaths. While Hamas rockets have not killed a single Israeli or Gazan child, it is telling that Israel feels the need to place the ad. It is losing the propaganda war. 

But the Guardian has also run some excellent balanced pieces by Paul Mason, including this one from a few days ago, in which he concludes that, despite everything, Gaza works.  Israeli politicians should read this and try to formulate a different strategy, continuing the logic of the withdrawal that was Ariel Sharon’s last significant act (That he was a war criminal, remembering Sabra and Chatila, does not change the fact that he was also a realist who came at the end of his conscious life to move away from the intransigence of Likud). It will be difficult and hugely expensive, but with the right will, there will be huge international support for it.  Besieged Gaza, isolated and impoverished, will always be a source of trouble for Israel. The inevitable logic of continuing to besiege Gaza is that Israeli public opinion will move closer and closer to calling for a final solution, the tragic irony of which cannot be lost on anyone with any sense of history. On the other hand, a prosperous and independent Gaza, relying first on massive aid and subsequently on tourism and financial services, will fire far fewer rockets and foment far less anti-Zionism.  An independent Gaza is achievable, even with Israel’s twisted internal politics,  because there are none of the intractables of settlements and Jerusalem.  This implies a three, not two-state solution as the end-game, reflecting in any case the divisions between Fatah and Hamas and removes one complication from the equation.  It wouldn’t be my choice (I think that a single, secular state with citizenship decided by birth not blood or faith is the only long-term solution and is the only way to solve the Jerusalem question), but it ought to be Israel’s short- and medium- term strategy. 

There is, of course, one huge problem: Hamas is ideologically committed to the destruction of the Jewish state, and Israel cannot therefore deal with it (and vice-versa). Well, Sinn Fein is ideologically committed to a united Ireland but manages to sit in government in a separate Ulster. It’s not directly comparable, but it shows that with the right turn of phrase and mutual incentives, such intransigent ideological blocks can be overcome. Parties can agree to differ, can acknowledge the other side’s view and disagree with it. Money makes a huge difference, but even so it will cost Israel less in aid than besieging Gaza costs in munitions, and the deal can be done this year. This month, even. Face as well as lives can be saved on all sides if:

- Israel accepts Hamas’ demands to lift the siege of Gaza (so Hamas can claim victory at home);

- Hamas undertakes to disarm (so Netanyahu can claim victory at home);

- Israel offers unlimited reconstruction aid, for which international assistance will be forthcoming;

- Gaza becomes an independent Palestinian city-state, with a secular constitution guaranteed by the international community including Israel and Egypt. 

September to sign the agreement in principle and start allowing some movement of goods and people. December to complete the lifting of the siege and disarmament. This time next year to celebrate Gazan independence and to mourn the martyrs on both sides. 


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