Quietly and surreptitiously Osborne is marking out his pitch for the leadership, The trouble is, it’s thoroughly bad pitch. By denigrating opponents of privatisation he has set his face against the 70% of the population who earnestly want rail re-nationalised, a proportion so large that it must include nearly half who’re Tories. Osborne must assume that the case for privatisation of rail, as for every other takeover or outsourcing of public assets, is done and dusted and nothing more now needs to be said. If so, that is a very arrogant assumption, easy to make if like Osborne you don’t listen to what people are really feeling. Rail privatisation in 1996-7 was an ideological exercise, never justified on the evidence. A former Tory MP described it as “the poll tax on wheels”. UK rail fares are now the most expensive in Europe by a measure of 40% and rail privatisation is now costing the UK taxpayer £4bn a year in subsidies, more than a third of the net cost of the EU to the UK. And half of the UK taxpayers most heavily hit are Tories! Well done, George.
It is extraordinary that not long ago the Tories were seen as the party of pragmatism and flexibility, and Labour was the party of ideology. That has completely reversed. The Tories now have an obsessive fetish with contracting the State, regarding the use of UK public funds for investment in British industry as taboo (though not paying Chinese and French State companies handsomely for investing in British industry), generating the biggest white elephant of all time at Hinkley C because of their ideological aversion to renewable power.
There are other pitfalls that will come back to haunt Osborne. He has shown no concern whatever, and frankly no pity or compassion with what he has already inflicted on a third of the population through 5 years of grinding austerity, whereas Thatcher’s Ingham did at least have the grace to apologise for the desolation she caused in the north. But increasingly it is the middle class and Tories who are also now being hit – consultants, doctors, services for the elderly and infirm.
Then there’s the all-important issue of austerity as the government’s guiding principle. Public opinion is clearly changing on this – it probably changed a long time ago, but Osborne’s tin ear blocked it out, and only the Jeremy Corbyn massive convulsion brought it to light. If Osborne doesn’t now change his position on this, which will be seen as a deep political humiliation, he’ll be in serious trouble. If he does change, the prospects for bringing down the budget deficit will all but collapse. Over to you, George.
The real root problem with regulating the banks is that the politicians are hand in glove with them. The Tories don’t even want to regulate the finance sector so long as it provides them with half their annual income year after year, not just the banks themselves, but the hedge fund billionaires as well. Worse still, no attempt whatever has been made to deal with the fundamental point of corruption – that whatever the big 5 banks do, they will be protected by the ‘implicit guarantee’ that the government will save them from themselves and bail them out because they’re ‘too big to fail’, too valuable an asset to lose, too crucial a part of running the State, etc. Risk-taking at a bank that will always be saved is like playing Russian roulette, but with someone else’s head.
The problem is not what the State does, but that its hand is forced. Knowing that governments must bail out banks means parts of finance have become a one-way bet. The IMF recently estimated that the world’s largest banks benefited from implicit government subsidies worth a total of $630bn in one year alone, 2011-12. This perversely makes debt cheap, and promotes leverage. In America meanwhile there are proposals for the government to act as a backstop fir the mortgage market, covering 90% of losses in a crisis. Again this pins risk on the public purse – it’s the same old pattern, socialise the losses and privatise the gains
Removing the subsidies banks enjoy will not only mean that debt becomes more expensive, so that equity holders will lose out on dividends and the cost of credit could rise. Much more importantly it means seriously tackling the need for the re-introduction of ‘moral hazard’, i.e the awareness that there will in future be no guarantee of State bailing-out or reimbursement for reckless or incompetent lending. It is inconceivable that that this will happen when the political establishment is so so deeply enmeshed in the finance sector. The evidence for that is the bail-out to the tune of £68bn, the failure to take any effective regulatory action against the banks for the last 8 years, the postponement of raised capital buffers under Basel III till 2019, the ditching of Martin Wheatley the attack-dog chief of the FCA after heavy bank lobbying, and now the imposition of the deadline of 2018 for any further claims for the 10m customers who were illegally mis-sold payment production claims they neither wanted or needed.
This will only change when that cosy, collusive, symbiotic relationship between State and finance is peeled away, made transparent, and transformed into a proper arm’s length working partnership. That requires a fundamental shift in the power structure, and the rise of Corbyn is the best hope in the last 50 years that this might be achieved.
The basic reason why UK wage growth has been virtually flat for a decade, at a level still 6% below pre-2008-9 levels, is Osborne’s relentless squeeze on benefits, tax credits, low pay and public expenditure. But there are two other very important contributory causes. One is that the proportion of our national income which we invest each year rather than consume is far too low. Since the onset of the crash in 2007 UK investment as a proportion of GDP (excluding R&D) has fallen from 18.2% to 14.5% now. Not only is this a drop of a fifth, which is a very serious shortfall, it is also barely half the world average which remained at 25.5%. As ONS figures show that depreciation of existing UK assets is running at about 11.5% per year, only 3% of the current total of 14.5% is left, which is not even enough to keep up with our population growth of at least 500,000 a year, let alone sufficient to build up our total assets per head of the population.
Crucially, also what little we do invest does not go to where it will produce the highest returns. Only just over a quarter of our total investment (28%) goes to manufacturing. Almost all the rest is devoted to other forms of investment – roads, schools, hospitals, industrial and commercial buildings, housing, ports, airports, etc. – all of which are important, but almost none which provide anything like the total return to the economy which comes from manufacturing. Again, ONS figures show that much the largest contribution to increased Gross Valued Added – 26% – came from manufacturing, even though it accounted for just under 12% of GDP over the period..
Ever since the Industrial Revolution it has been the combination of mechanisation, the application of technology and the efficient use of sources of power which are the key factors in increasing output per head. So how do we overcome these problems? Clearly we have to invest a higher proportion of our GDP and then devote a higher share of what we do invest in the future into manufacturing. We have to produce conditions which make it profitable for investment to be undertaken in a wide swathe of manufacturing, including low and medium-tech industries, where because at present they are unable to compete internationally investment in them is so low. That immediately raises another key issue. The UK exchange rate is far too high, making it far more expensive to produce most products in the UK rather than elsewhere. Only if we get manufacturing back to around 15% of our GDP rather than the current 10%, will we be in a sustainable position both to pay our way in the world, to avoid endless deflationary balance of payments problems, and to attain a reasonable growth rate and steadily rising wage levels.
The public has never been supportive of privatisation – it was forced on them, not chosen by them – but even business has begun to have second thoughts. Not of course for the right reasons, but even in terms of their own narrow interests. Their concerns are to treat privatisation as a money machine, but they’re finding out the profits are draining away. Thus the sharp rise in NHS outsourcing 2012-4 has now come to an abrupt halt after a whole series of failed or botched contracts dented confidence in the private sector. Serco has decided to pull out of healthcare services in the UK after it manipulated data on GP services in Cornwall and was accused of poor performance on a £140m contract to run community care services in Suffolk. The same is happening at Peterborough in Cambridgeshire. This has led to the stopgap measure of hiring more expensive temporary staff, the worst outcome possible – with their cost rising by a third to £3.4bn last year. And the number of mega-tenders, where the private sector is given control of entire hospitals, has also shrunk.
Carney is now warning that the risk of ‘stranded assets’ shows why investors should divest from fossil fuels. Again that’s nothing to do with the proper and necessary reasons for divestment, but it’s still happening anyway. Even the Bank of England now accepts that if the world is to meet the 2 degrees target, the carbon budget amounted to between a fifth and a third of the world’s proven reserves of oil, gas and coal, leaving the vast majority of reserves ‘stranded’. It won’t make money any more. For the same reason Shell has finally abandoned oil exploration in the Arctic, not because it is the last pristine wilderness in the world, but because having spent a staggering $8bn with nothing to show for it but a dry well, they have had to accept the economic inevitability.
Perhaps most significant of all, the chair of Lloyd’s of London has pronounced at an assembly of top financiers that extreme executive pay and malpractice by by big business are undermining confidence in global capitalism. That was obvious a decade or more ago, but even the business elite are now recognising that there is a “definite shift in the attitudes of populations round the world towards business”. The Corbyn project may not find the resistance in the City and the FTSE-100 as entrenched as many critics expect, and the tide may be starting to go out for Osborne and the Tory press.
The reason that the British people are sceptical about being told that Labour will ensure that the country always lives within its means is that they were told by the Tories five years ago that Labour caused the economic mess, and since Labour never denied it, it has stuck in the public consciousness ever since, despite being the absurd lie it is. If people are told endlessly over the last 5 years that Labour caused the economic mess, and Labour never denied it, most people will then believe it. What makes this so unbearably frustrating is that it is terribly easy to refute it by simply reciting the economic record. Prior to the financial crash in 2008-9, the largest budget deficit under the Blair-Brown governments in the 11 years 1997-2008 was 3.3% of GDP; the Thatcher-Major governments however racked up a budget deficit bigger than that in 10 out of their 18 years. Moreover the Thatcher-Major governments secured a surplus in 2 years, whereas the Blair-Brown governments got a surplus in 4 years. So which party was profligate? Which party were the over-spenders? It’s a no-brainer.
This argument can be extended robustly in several different ways. If the Tory case is that Lbour caused the financial crash (when obviously it was caused by the banks and the international recession), how come then that the same financial crash crippled every other country in Europe and beyond? If the Tory charge is that New Labour (Blair) installed a ‘regulation-lite’ regime in the City of London – which was certainly a far-reaching and serious mistake caused by Blair’s desire to suck up to the financial and corporate elites – why is it that the Tories wanted to go further and have virtually no regulation at all? If the Tory accusation is that Labour’s bailing out of the banks left a huge budget deficit, which it did, why is it that Osborne before 2010 signed up comprehensively in support of Labour’s policy?
The combination of these arguments is wholly compelling that the Tory attempt to dump the blame for the economic collapse on to Labour is pure mischief and a brazen lie, but astonishingly effective in planting a big seed of scepticism in the mind of most of the public about Labour’s economic credibility. That well of scepticism has not gone away. It takes a lot more to remove it than a statement issued from the lectern at party conference that Labour has learnt its lesson and it will all be different in future. If the evidence which justifies it with watertight certainty is not supplied at the same time, and repeated in spades over the next 5 years, Labour may well not escape its elephant trap in 2020 as in 2015.
Osborne has always had an overweening arrogance as he plots his path to the premiership before 2020. But his calculation is beginning to desert him. It is extraordinary that he has spent a week sucking up to China, accompanied by six ministers in his retinue, when everyone else is fleeing the country as being in deep economic trouble. The idea that hooking up to China today puts Britain in prime economic position is absurd – what China is exporting is not the world’s manufactured products, but deflation risk – domino devaluations, layoffs and recession. Cosying up to China in today’s conditions is not a smart idea.
Then there’s the lack of reciprocity in Osborne’s dealings with China. He seems prepared recklessly to throw open Britain’s doors to any Chinese company for investment in almost any sector. By contrast China closes off many industrial sectors to foreign investors and imposes limits on ownership in many others. It leads to the farce that a foreign state is welcome to invest in British industry, but British state investment in British industry under the Tories is strictly taboo.
Then there’s the question of undermining UK national security, a charge which Cameron has been quick to throw at Labour, but which with much more substance his own chancellor is guilty of. By pleading with the Chinese to cut the deal over Hinkley C, Osborne is making a double mistake. He is allowing Chinese companies to operate at the heart of Britain’s nuclear industry, he is certainly putting at risk UK national security in the future. He is also subsidising the biggest white elephant in modern politics. Hinkley, if it is ever built, will be far and away the most expensive nuclear plant ever built. It will be more expensive than Crossrail, the London super-sewer and the Olympics all combined. It will be subsidised up to the hilt by the taxpayer to guarantee EDF a 10% return on capital into the indefinite future, and there will be contractual protections again underwritten by the taxpayer against any unpredictable downsides throughout the ;life of the plant. The idea that Osborne and the Tories can be trusted for efficiency and cost-competitiveness is blown sky-high by this shibboleth alone.
Then there’s austerity. Osborne has so far got his way over this because New Labour colluded with the government in pretending that there was no alternative. Now that the Corbyn revolution is making clear that there is a much quicker, more efficient and better way to reduce the budget deficit, Osborne may now begin to encounter heavy resistance if he tries to force through the huge welfare and public expenditure cuts he’s promised. He will either have to back down, which would be a huge political humiliation, or he will find deficit reduction – the centrepiece of his economic programme – in free fall.
It is one thing for those who opposed the election of Jeremy Corbyn as leader to make their concerns and objections known and to argue for them within the Big Tent which is the Labour Party. It is quite another thing, when a new leader has just been elected with 60% of the vote (higher than Blair’s 57% in 1994), for a well-known Labour public figure to openly incite insurrection to have him promptly overthrown. When the party has spoken with such unprecedented decisiveness, such behaviour is coming close to traitorous. The Labour party has a rule, introduced by Blair himself, that anyone who brings the party into disrepute can be expelled. Many would think that Mandelson, who no doubt was deeply involved in the machinations behind the new rule designed to get rid of inconvenient left-wing activists, has now put himself in a position to be hoist on his own petard.
What is so objectionable about Mandelson’s pronouncements is that it betrays his view that the Labour party isn’t a democratic party at all, but simply an instrument for his own clique to gain power and retain power. He sees it as his own personal or factional fiefdom which somehow he has a God-given right to control as though that were the natural order of things. Any deviation from this is a perversion that is not acceptable. What is really ironic is that the Blairites have only themselves to blame because they were so confident of their impregnable dominance that they ceased to listen to the party and indeed regarded the party as an inconvenience except for money-[raising and door-knocking. Now they are in a state of denial. But what they cannot do, and Mandelson cannot do, is bring the party into disrepute because they cannot get their own way.
It is also worth noting that so much of the reporting since Corbyn’s elevation on the 12th has been misplaced. The media has framed the differences of policy between the leader and an opposed majority within the PLP as a contest in negotiation in which somehow the demands of the PLP will have to be satisfied. But that is not the role of the PLP at all. The members of the PLP are there to represent their constituents and party members, not to act as a force in their own right detached from the views of the wider party. That is not to say that there cannot be frank exchanges and impassioned argument on both policy and the democratic structures of the party, but once the party as a whole has spoken it does not give the right to the PLP to defy the leader and seek to enforce on him policies which have just weeks before been soundly rejected by the wider membership.
John Whittingdale, secretary for DCMS, thinks “It is important to look at the impact the BBC has on commercial rivals”. So even Tories want to rig the markets when it suits their interests. And since Murdoch has always been a much-sought-after ally at No.10, and his ambition has always been to replace the BBC by Fox in Britain, Whittingdale’s words carry considerable influence. Indeed he went further when he also asked Ofcom to carry out a ‘health check’ into the terms and conditions determining how the BBC treated independent producers. The key principle in all this is of course competitiveness, and it is absurd to apply this to a world-beating news organisation like the BBC as though it were on a par with makers of widgets or icecream.
Nevertheless it does open up useful new angles for industrial policy. If the BBC must not be allowed to harm or diminish the commercial prospects of its rivals in the market place, why should countries that mis-sell (i.e. palm off at a price) things that customers don’t want, rig Libor or the forex or gold markets to the disadvantage of unknowing customers, or swindle the nation out of billions in tax evasion/avoidance, be allowed to get ahead of those who are honest and play by the rules? Why should those companies which hugely damage the environment in defiance of international rules or knowingly take on workers on near-slavery terms and conditions be allowed to undercut more scrupulous employers? And if a Right-wing government can intervene to fix the market rules to get the results they want, why shouldn’t Left-wing governments also fix the market rules to achieve their aspirations of protecting the environment, improving labour standards, calling corporate power more effectively to account, etc?
After all, it was Adam Smith who in his The Wealth of Nations who chose the East India Company as a case study to show how monopoly capitalism undermines both liberty and justice, and how the management of shareholder-controlled corporations invariably ends in “negligence, profusion and malversation (corruption)”. Smith’s vision entailed firm controls on corporate power, and subsequent history, both then and now, has shown how absolutely right he was. If it is to contribute to economic progress, the corporation’s market power has to be limited to allow real choice and prevent suppliers being squeezed and consumers gouged. That suggests much more rigorous controls on over-dominant market share in several sectors. Its political power also needs to ne constrained if it is not to rig the rules of regulation so that it enjoys unjustified public subsidy or protection. Internal and external checks and balances must curb the tendency of executives to become corporate emperors. That was written in 1776, but it’s horribly relevant today, and just as Adam Smith insisted, the enforcement should be carried out, now as much as then.
It’s fashionable among the economic scribes to deride Corbyn’s advocacy of what he calls People’s Quantitative Easing (PQE) as though it were somehow illiterate. In fact it is an entirely sensible policy. Conventional QE operates via the central bank buying bonds in the financial markets, thus transferring newly-created money to banks, hedge funds and other investors. The effect is therefore to boost the prices of bonds, shares and other assets, making the rich richer. The theory then is that this wealth effect should stimulate the economy as the investors who have been enriched by selling assets at high prices to the Bank of England spend some of their profits on the high streets or employing servants or investing in new businesses. It is clearly a very indirect and extremely inefficient way of stimulating an economy. Both Tory and Labour governments have spent £375 bn in using this device with very little to show for it since we still have the slowest recovery for over a century.
A better alternative – though not the best – would be ‘helicopter money’. Or slightly more realistically, send cheques of £20 a week to every man, woman and child as a sort of reverse poll tax. Technically, if £375 bn were spent this way, these cheques could continue to be sent out every week for nearly 6 years since £375bn is roughly £6,000 per head when equally divided among the 64 million people of Britain. That would indeed be a far, far quicker way of stimulating economic activity. Since neither dropping money from helicopters or sending cheques every week to every household in Britain is very practical, a third alternative is to bypass the banks and, after full and detailed consultation with the CBI ansd TUC, invest directly in key industrial or manufacturing projects.