The Economist doesn’t mince it’s word this week in judgement on the Foreign Secretary. It says what must be said; “Britain’s foreign secretary isn’t up to the job” it declares. Indeed, Mr Raab, claims the august news-weekly is now known to his officials as ‘5i’s’; ‘insular, imperious, idle, irascible and ignorant’.
I know from personal experience that civil servants will occasionally – in extremis – brief against their minister. But this isn’t the reason Mr Raab should go. Rather his departure is required because his job to supply a foreign policy. And in this he has singularly failed.
The US departure is not some act of new American solitude. It’s literally American strategy. And in fact it is not that new.
Since Hillary Clinton’s tenure as Secretary of State, US policy has been to pivot – or rebalance – to Asia, and ever since there are plenty in the foreign policy community ready to point out that since the policy was declared, action has fallen short of words
“Ten years and two administrations later” wrote two well placed commentators in Foreign Affairs, “it is clear that the United States has fallen short.
“In speeches and statements, the Obama, Trump, and Biden administrations have all appropriately emphasized the singular importance of Asia to the United States’ future…But such rhetoric has often been disconnected from actual U.S. policies, budgets, and diplomatic attention…What matters more is what they actually do.”
Biden knows America is no longer the world’s great cloud-herder, the Zeus-like hyper-power of the post-Soviet world. He knows he must make choices. Choices, Biden knows, are key to the preservation of American power.
“The chaotic exodus from Afghanistan need not herald U.S. global decline in the twenty-first’ writes Chatham House director, Robin Niblett; “Power in international relations is always relative. And in relative terms, the United States has far more going for it structurally and societally than its two main geopolitical rivals’.
This is true. As long as America doesn’t try to do everything. So Biden knows he must make choices, backed as it happens, by plenty of political support for a ‘global America’ which is alive and well in the United States. Americans still hanker for leadership – as long as that leadership is shared; most Americans for example would support a defence of Taiwan despite supporting exit from Afghanistan.
So this is less Biden-retreat than it is Biden-re-aim and re-load at a different target.
America’s gameplan for Afghanistan – in place since the Obama surge – was always going to have a shelf life, regardless of whether it teetered on the razors edge. For the simple reason Henry Kissenger notes in the Economist this week;
“The United States has torn itself apart in its counterinsurgent efforts because of its inability to define attainable goals and to link them in a way that is sustainable by the American political process…. Such an enterprise could have no timetable reconcilable with American political processes”.
What is more, American analysts simply do not see Afghanistan and central Asia as the same place it was twenty years ago. They mark the risk of safe spaces for terrorism as lower (not non-existent) for the simple reason that Afghanistan’s neighbours are now far more concerned about stability.
‘Today, there is a regional order that can accommodate Washington’s absence’ wrote one expert ‘The United States’ enduring military presence also spurred China and Russia to develop their own rival institutions, norms, and practices, including security organizations such as the Shanghai Cooperation Organization (SCO) and the Russian-led Collective Security Treaty Organization (CSTO)
Which is why both Democrats and Republicans had targeted exit from the blood-fouled earth of Afghanistan as a priority.
But the reason we should have had better British planning is that the American exit was not simply an exit from occupation but the well-telegraphed advent of new tactics.
Plenty of the American security establishment is fairly confident that it has not perfected but certainly evolved effective counter-terrorism tactics that don’t require large scale occupations. As one author put it this week;
When defending withdrawal from Afghanistan, Mr. Biden made clear that he has no plans to give up counterterrorism. The infrastructure of drone and missile strikes and special forces raids is indeed ramping up again after the fall of Afghanistan, an antiseptic Frankenstein monster loosed even as the gory laboratory that birthed it closes down.
So a Pacific-America however is hardly a state secret. Which begs the question of why UK foreign policy has not adapted, especially given our efforts to stick as tight as a magnet as to our American cousins.
Once upon a time the brilliant historian Niall Ferguson coined the phrase Chimerica to illustrate the symbiotic relationship between the US and China.
But it’s RussChi that should command our attention today, and the corridor of chaos along Russia and China’s West and southern border from the Ukraine, to Crimea and the Black Sea, Syria, Iran, Kashmir, Myanmar and North Korea.
Can anyone tell us what is British grand strategy for this huge Eurasian market, the largest in the 21st century, the hottest conflict zone on earth and a space our two most important geo-strategic competitors are set to dominate? I can’t. Answering that question demands a foreign policy. We know Joe Biden’s. We know President Xi’s. We know President Putin’s. What can we say about a Britain’s? The best we can say is ‘there isn’t one’.
Since the creation of the Competition and Markets Authority in 2013, competition has stalled, big companies have got ever bigger, and productivity has flatlined.
In the spiritual home, of the free market this is a problem.
And for my constituents the problem isn’t theoretical.
For them, it’s meant higher prices and lower wages for much of the last decade.
In their extraordinary study, the IMF found markups, which are a good proxy for rising market power of leading firms, rose 38% across advanced economies – but by 60% here in Britain.
That’s why I think John Penrose is right to say, UK competition and consumer choice has weakened in the last two decades.
Now as we face a decisive decade ahead, packed with challenges, we need to fix our broken competition regime.
Today, I’d like to offer three thoughts about how the central challenge:
how does Brexit Britain stay in lockstep with the Biden White House and Brussels where new regimes will re-write the rules of the last fifty years for the markets of the West.
First things first.
We have to understand the basic flaws in the economic thinking that have characterised laissez faire economics for the last fifty years.
Just as behavioural economics helps us see how markets are inherently prone to bubbles so a re-appraisal of Joseph Schumpeter reminds us that markets also tend to monopoly.
Philip Aghion’s new book on the economics of Joseph Schumpeter is a timely reminder of the basic insight some forgot.
Everyone here will remember Schumpeter’s famous dictum that capitalism is driven forward by a process of creative destruction.
What people sometimes forget is the flipside of creative destruction that Schumpeter observed, is the destruction of competition.
And in fact that shouldn’t surprise us.
Just over 20 years ago I walked into my first strategy class at the Harvard Business School with renowned professor Michael Porter.
What we were taught in Michael’s class was not so much the celebration of competition, but how to destroy it – because that’s who firms maximise profit, and post super normal returns.
Yet Michael’s class wasn’t the most popular at Harvard.
That class was a class called ‘building information age businesses’.
I literally pleaded with the professor in a rainswept Cambridge car park to be admitted to the class and I wasn’t the only one.
Everyone wanted to know how to harness new technology to build the businesses of the future.
What everyone was trying to figure out was, as the famous HBR article how to ‘use architecture to win wars’.
We were trying to lock in customers in a way that maximised the value of the business that now had unparalleled scale and scope with next to zero marginal costs.
And in the 20 years since I left Harvard we’ve now seen a combination of the lackadaisical regulators in the west and the market Leninists in the east, create a global economy that is now dominated by what I’ve called Technopolies.
In China, the market Leninists became well practised at using a whole range of tools to shelter markets, support local firms, only to now watch those firms grow if anything, too powerful.
President Xi is now taking concerted action against Jack Ma or Didi to clip their wings.
And though western politicians rail against unfair Chinese competition the truth is the West was lax.
Our Technopolies use big tech, big brand and big data to dominate their markets and big balance sheets to buy-out the competition and lock-in customers.
Into these firms, like shovelling coal into a furnace, governments have poured hundreds of billions of pounds of free science and technology subsidies while in turn the firms poured hundreds of billions into brand-building, together creating the sort of barriers to new competition which would make Michael Porter proud.
Today, global spending on Research & Development is in the region of $2 trillion a year. But the world’s top 1000 R&D investors account for almost a trillion of that.
Brand spend multiplies the advantage.
The world’s firms spend around $618 billion on advertising. But, the world’s largest 200 companies spend $163 billion of this, over a quarter.
Amazon now spends $27 billion on both R&D and advertising. Google’s parent, Alphabet spends a combined total of $19 billion. How can any firm compete with that? The evidence suggests they can’t.
Worse, these firms were allowed ‘kill in the crib’ startup competitors which threaten the data monopolies the big firms aspire to build.
Google bought 215 businesses since 2000.
Facebook has bought 69 companies since 2007 including WhatsApp merger, which helped consolidate its data monopoly with a treasure trove of 1 billion users.
Our competition regime has been blown apart.
Now the wind is changing.
Now what we’ve heard in the reports of the last couple of years is an excellent debate about the scale, the scope, the speed and the sanctions needed by modern regulators.
John Penrose is surely right to say that it is time that we had a new competition act.
But before we get any further down the track, I want to flag three basic questions where we need a better consensus.
The first challenge is philosophical –
Andrew Tyrie proposes an overriding consumer interest duty for stronger regulator.
That’s not the new view in Washington.
There, we see a new debate that takes aim at the commercial power of the firm, not simply the consumer welfare enjoyed by the firm’s customers.
That a big shift from the philosophy of competition policy since Richard Bork’s 1978 book, [The Anti-trust Paradox], which argued rising prices signal harm – but if a company is lowering prices to consumers size is not a worry.
Lina Khan, the new chair of the FTC is leading this.
She’s leading what’s been called the ‘new Brandeis’ school of public policy, which recognises as Brandeis once said that
“far more serious even then the suppression of competition is the suppression of industrial liberty”.
In her 2017 paper [The Amazon anti-trust paradox] Kahn argued that harm is about more than prices.
If companies like Amazon use predatory pricing and data lock-ins to drive rivals out of business, consumers suffer from a lot of choice and competition. And so do workers.
I think this wider approach is wise because not least because it is so hard to quantify the impact of competition on better prices.
The CMA here in the UK estimates its work is worth perhaps £1 billion to consumers in an economy where we spend £1.4 trillion.
Crucially, this new philosophy welcomes us to consider broader questions of not simply monopoly but – monopsony.
The reality that in many parts of our country the predominance of certain firms in effect hold down wages in poorer communities.
Since 2000, in our country, output per hour is up 19% – but wages are up 15%.
Workers are producing more but not getting paid for it.
President Obama’s CEA was on the case;
‘There is increasing recognition among economists and policy makers’ it wrote ‘that employers often have some degree of monopsony power in labour markets”
These ‘superstar firms’ as economists like David Autor argue, drive down workers share of the national pie, hoovering up high profits and pushing wage share down.
Of course people say that if you don’t like the jobs on offer you can always move.
You can get on your bike.
But that ignores the reality that our broken housing market means people can’t afford to move.
It ignores the reality that our broken care system means that many families are tied to a place because they care for others.
In other words many workers have a Hobson’s choice – which is no choice at all.
Second we have to think about how we act faster.
When we confront firms that are determined to move fast and break things, we know that we need stronger upfront rules to police the marketplace.
Now we don’t quite know how Europe’s Digital Markets Act will settle down.
But we can see Lina Khan proposing new approaches to precautionary rule-making to prevent conduct that constitutes ‘an unfair method of competition’- especially when private litigation is unlikely to materialise.
Like for example the noncompete clauses in employment contracts that cover 28 million Americans and limit their employment options.
(See Lina Khan and Rohit Chopra, the case for unfair methods of competition rule-making).
This approach to precautionary rules based on good analysis of patterns of unfair behaviour seems to me a better approach than endless cases in courts that so many can’t access.
Now for the future, it is vital that the UK finds ways of collaborating closely with the United States and Europe to closely study – and quickly act;
To move quickly to revise rules against unfair competition that hurts consumers – or workers – backed by a strong political mandate.
This has two institutional implications.
First, we may consider whether for example, the OECD should take a much stronger coordinating role just as they have on questions of international tax.
Second we need to radically improve Parliamentary oversight.
Once upon a time we had select committees to study EU legislation. Mr Cash spent years on them.
It may now be time for specific select committee focused on competition rules.
This would allow Parliament to opine quickly on proposals which the CMA should lead, based on their scrutiny of unfair behaviour.
Finally, we will need to grip the nettle of industrial policy.
In Europe Commissioner Mellanox has already emerged as an advocate of stronger European champions. Many in Congress will make the case for American champions too.
Meanwhile, here in Britain, the government is clear that industrial policy, procurement policy, subsidies will all be more flexible – which means more available.
As we try to decarbonise the economy and solve new real-world challenges together with the private sector, the truth is that public investment will be needed to cover risky investments, that the private sector simply won’t make.
It won’t be long before we are debating unfair subsidies, or unfair contracts, or risky mergers and acquisition where important local firms full prey to foreign takeovers.
The appalling misbehaviour of Melrose closing down GKN in Birmingham is just the latest example of how today’s regime needs to improve.
Personally I don’t see good ways round this without new safeguards for the public interest.
In cases of intellectual property investments, this means the state retaining a share of the intellectual property we help fund so that the taxpayer gets a yield on the investments we make.
But on the other, we need legally in forcible obligations that by on directors personally in return four waving through mergers and acquisition is which we think pose a risk the jobs.
So let me conclude with this.
Many of these ideas are a departure from the thinking there was informed public policy for five decades.
But these ideas are not novel to economics.
Rather they seek to renew I’m much older tradition of the moral economy that once with the guide to lawmaking here in the House of Commons.
There is no better example than the debates we had here in parliament about the Limited liability Act in the 1850’s.
It was the founding act of modern capitalism.
It allowed shareholders to combine their capital without fear of liabilities when things went wrong.
It is what you might call the exorbitant privilege of companies.
But almost without exception parliamentarians who rose to speak in these debates rested their argument on how limited liability would help advance the ‘common good’.
Today, our competition isn’t working hard enough for consumer, for workers, and for citizens.
We need reforms to ensure that the privileges we grant two firms advance the good of all.
And that competition policy that actually works for the common good.
The BBC has woefully under invested in the Midlands for years. And as we hurtle into the Fourth Industrial Revolution, that’s not something our regional politicians can let continue. So: what should we be asking of the BBC for the future? South Korea, of all places, has some pointers.
The sheer scale of BBC under investment in the West Midlands since the closure of Pebble Mill is something to behold. Solihull MP Julian Knight, who chairs the DCMS Select Committee, castigated the Corporation last year after its annual report showed just 2.8% of the network television programming spend was in the Midlands. It spends 49% in London and 14% in the North of England. For me, the ultimate ignominy was having to travel to Manchester to film the BBC hustings for the West Midlands Metro-mayor. You couldn’t make it up.
The BBC now says it wants to change. It signed an interesting agreement with Create Central in April which could help turbocharge the new Digbeth creative quarter, and which could be home soon to Steve Knight’s new studio venture. But there’s no timetable for the BBC plan, or a budget and critical stakeholders like Equity and The Musicians Union seem frozen out of the dialogue.
This must change – and this is where we can learn from both our past and trailblazers like South Korea
THE story of the West Midlands Industrial Revolution – as I argue in my biography of Matthew Boulton – married both engineering genius and design genius. So the Soho Manufactory had both the greatest engineers – like James Watt, and the greatest artists. With that alchemy we changed the world.
Similar things are happening today. The infotainment system in a new Jag is worth more than the engine. There’s more code in an XF than in an Airbus. We’re marrying engineering brilliance – and digital design brilliance. ‘Content’ and ‘objects’ are fusing together. Those who succeed in doing this best – and I think South Korea is leading the way – will win out in the Fourth Industrial Revolution.
So, how could the BBC’s new investment help us? What does the BBC need to get right?
1. Set a ten year budget to scale up to spend 9% of the programme budget in the West Midlands. That would be about a quarter of a billion pounds. We’re about 9% of the UK population. Why wouldn’t we provide 9% of the programming services? This would be a huge demand side kick to the digital and content sector in the region
2. Create a BBC-sponsered University College trust to bring together universities like BCU with some of our great colleges and academies like BOA. Skills are the key to great content but we need to start earlier with a wider range of schools to transform the diversity of the industry which remains overwhelming white and male. A University – College Trust (as I proposed in Robbins Rebooted) would begin to create hard-wired pathways, to provide a clear line of sight into creative careers for children from a young age and fix the broken bridge between Levels 4 and 6 in our terrible skills system. Some of our institutions – like Birmingham Royal Ballets Dance Track programme or Birmingham’s training orchestras are interesting models to learn from, dropping in inspiration to primary schools.
3. Invest in artists and festivals. People create content – not buildings. So, creating a stable of aspiring young artists with small grants, investing in festivals and live performance and partnering with regional arts organisations to show case great content is essential. More of this live experience should be in our streets and squares and could help bring life back to city centres. Much as it is in America and on London’s South Bank.
4. Create a South Korean style Creative Content Lab with one of our universities. We should consider earmarking a big slice of the BBC investment to create a 4IR-Creative Content Lab. This could be modelled on Catalyst/ Catapult centres and bring together existing content players like museums, arts council funded institutions and the games industry to create new apps that exploit big data, AI and VR together with some of our great manufacturing names. The focus could be on both nurturing talent but also creating nurturing smaller firms for spin-out. This plays to our strengthes, push new areas like haptics and helps the BBC drive our broader industrial policy.
5. Help create better culture sector coordination in the region. The BBC is a big beast. It should be the head of the comet in the region. When I was writing our manifesto for Metro-mayor mayor, we found it harder than it should have been to coordinate with arts and culture organisations, unions, institutions and artists. As a result our culture-lobbying power is weaker than it should be. And a new, bigger BBC could help fix this.
So. There we are! Five ideas that I’ll be presenting to the IPPR’s roundtable with the BBC later. I’m looking forward to the debate – and below is a bit of the write up of my takeaways from South Korea.
Here’s my note on IKorea 4.0 back in 2018, and what I thought Labour could learn from it
iKorea 4.0/ D-N-A
1. S Korea is now overhauling its strategy for the future and focused squarely on the Fourth Industrial Revolution as its inspiration – or iKorea 4.0. As in the past, policy makers are focused on a series of enabling technologies rather that the more amorphous approach of Industry 4.0 seen in Germany (and the U.K.) and the country is set to replicate this approach with a couple of important twists in the years to come. They are fond of quoting Davos research which estimates 7 million jobs will be lost as the 4IR gathers speed over the next five years; ‘countries and individuals that understand the nature of the current changes and quickly adapt to them will flourish while others will lag behind and lost jobs’. (Davos, 2016)
2. The key enabling ideas are summarised as DNA – (big) Data; Networks and AI.
3. ‘Data’/ content. Alongside ensuring big data capacity, in practice a lot of the ‘Data’ element of the strategy will be driven by a much sharper focus on content as the driving force for demand of 4IR services.
◦ Their strategy explicitly states: ‘the content industry is the driving force of Industry 4.0’ that creates jobs and promises unlimited possibilities for growth’. It’s already an industry with £66 billion in revenues up, 1.7x in the last ten years. Around 1/3 is publishing and broadcasting. Content exports are now $6 billion – up fourfold in 10 years and dominated by gaming (over half of exports). The country’s goal is to be one of the world’s top five content powerhouses, up from 8th today. It’s market size is currently around half of the UK’s.
◦ Today’s plan draws on the infrastructure created by the the Cultural Industry Promotion Act in the 1990’s which knits together broadcasting, gaming, cartoons and stories.
◦ The new programme backed by $500M aims to (j) nurture talented people working to knit together new technology and creative content; (ii) enrich through support this talent with facilities like campuses that bring together equipment and incubator space through a national network of 10 Korea Content Labs; and (iii) support exporting.
◦ What’s fascinating is the way one agency KOCA has oversight of broadcasting, gaming, culture, content and digital business – and is therefore is a good position to help sponsor businesses which are driving the fusion of these industries.
◦ The big data industry will always be slightly hamstring by the security risks around storage as it faces dedicated, long term cyber-espionage challenges from North Korea (which took down the banking and social security system a couple of years ago) and China. Equally the country lacks an Estonian-style e-ID system; there are widespread digital signatures but there isn’t much trust in Government, recently dominated by dictatorship, and at risk of foreign cyber attack
◦ S Korea already has ubiquitous fibre and three mobile networks at 100% coverage of 4G. The country boasts the fastest smartphone internet connection speed (we don’t make it into the top 7) and is the first country with low range wide area networks that allows internet of things device connectivity. Crucially the Network is good at home, at work and on the go – on metro and rail (which boasts networks strong enough to stream Netflix)
◦ Now: the S Korea aims to be the first country to commercialise 5G – expected in 2019, followed by wide scale roll out
◦ This is the backbone for commercialise applications. Samsung for instance is investing heavily in a suite of connected technologies (linked devices controlled through phone-based apps and screens) to create ‘smart homes’ (lots of domestic appliances controlled from your phone); smart classrooms (smart screens with educational material linked to tablets for students) and ‘smart shops’ (connected advertisements, ordering, paying and delivery).
◦ 5. AI. S Korean policy makers laud estimates which show AI May boost American productivity by 35% by 2030 and add 14% to global GDP over the same period.
◦ Here S Korea estimates it is a year or so behind the U.K. and allegedly looks jealously at our Turing Institutes. Samsung however recently decided to make its £45M AI centre in Paris. There was a moment of national shock in 2016 when DeepMind/ AlphaGo defeated the national Go world champion in four straight games. This has prompted a £1.45 Billion investment in AI, focused on a series of challenges;
Goal is to stretch life expectancy by three years, capitalising on technology like Lunit which has a much better success rate at picking up breast cancer tumours; AI based new medicine; and electronic exchange of medical records
The goal is to reduce congestion by 10% and accidents by 5% for instance by creating intelligent road signs near accident hot spots – recognising the live risks and then adapting warnings and smart roads
Improve crime arrest rates and reduce marine accidents; eg through use of intelligent CCTV
Defence and security
25% more unmanned guard and surveillance
◦ These challenges are aimed at clearing away a load of factors in the way of private sector investment in the sector including; regulation (creating regulatory ‘sandboxes’/ new safety standards for AI malfunction; clarifying property rights in AI networks; clarifying responsibility for Automated Vehicle accidents); lack of public procurement and support for startups. Equally the South Korean model has always been ‘perfect at home – and then export’.
Implications for Labour
There are a number of ideas that we can draw from S Korea and adapt for our programme:
1. Our overall story
2. Our infrastructure policy
3. Our content development story and use of the creative industries fund
4. Our approach to applied R&D in this area
Recommendations for discussion
1. Rather than position our plan as ‘Digital’ we should set out a bold, Fourth Industrial Revolution strategy. Our story then is simple: a party born in the first industrial revolution is determined to ensure Britain wins the Fourth Industrial Revolution. Only Labour is prepared to make the right, smart investments in the future and make sure everyone – not just a lucky few – is able to adapt and do well in these new times.
2. We should launch our draft infrastructure paper quickly – but rather than just pose the question of how much it’ll cost to accelerate a USO of 10 Mbt/ second, we should set a longer term ambition for ubiquitous 5G plus networks to support Internet of Things, and commit to develop a road-map for its delivery.
3. We should consider earmarking a big slice of the Creative Industries Fund to create a. National network of 4IR-Creative Content Labs. These could be modelled on Catalyst/ Catapult centres and form a network where we seek to bring together existing content players like museums, BBC, arts council funded institutions and the games industry to create new apps that exploit big data, AI and VR. The focus could be on both nurturing talent but also creating nurturing smaller firms for spin-out. It’s striking how Samsung is harnessing KandyKrush-style formats developed in the gaming industry to make its interfaces cool and fun.
4. Finally, we should consider whether a specialised 4IR Institute should be created within Innovation U.K. (the old Technology Strategy Board creates by David Sainsbury) to pull together 4IR strategy. The key question is this: how do we make a handful of big investments in strategic technologies where we have a competitive advantage, rather than the usual ‘little bits for lots of things’ approach that we typically take to this.
5. Finally, there is an annual U.K.-Korea Content Summit held in London in June for which they’re dispatching ministers. We should be a proactive part of it
The rows between No 10 and No 11 Downing Street are almost part of the constitution. And now they’re back.
In The Sunday Times this weekend, Tim Shipman lays bear the current episode; ‘”As the Chancellor recipes with the gargantuan bill for Covid” runs the stand-pull, “Boris Johnson has grown evermore addicted to making grandiose spending promises.”
But what does a government do when, as the phrase goes, ‘there is no money’? In this lovely little book by NIESR I set out the way we approached the Great Financial Crisis in 2009-10 (I’ve extracted my essay below).
It is the Treasury’s job to make sure the nation lives within its means. Hence the old tradition of private living notes from one team to the next, lamenting the lack of cash. It’s a tradition that goes back to Winston Churchill.
In the final years of the last Labour government it was my job, together with Alistair Darling, to try and put the budget back on an even keel after the Great Financial Crisis.
Pity the poor fiscal policy maker trying to steer the ship of state between the Symplegades of certainty and flexibility. On the one hand, voters – and bond markets – like the comfort of a plan for balanced budgets. On the other, politicians like to get re-elected. As I we used to say in 2010, ‘we know what to do, we just don’t know how to get re-elected once we’ve done it.’
After months of work, I had in fact negotiated across government a detailed blue print as part of Alistair’s plan to halve the deficit in four years and put debt on a the decline by 2016 – a better trajectory than George Osborne in the event managed to achieve.
Summarised in what was known as ‘The Sum’ our approach entailed a mix of underpinning economic growth (which helped bring down unemployment and out up tax yields), raise taxes by around £19 billion, and moving spending down by £38 billion, carefully protecting as we did it, frontline services, an approach set out at length in the Smarter Government White Paper that I wrote alongside No 10 colleagues. It was a balanced approach. Radically different to the Osborne plan that involved trying to go much faster and shifting over 90% of on the consolidation on spending cuts, an approach that triggered the double dip recession we were desperate to avoid – and pushing out his own self declared target for deficit reduction.
I got used to telling my colleagues in the long hours of patient negotiation as I sought to reduce their budgets, ‘I’m sorry, there is no money’…But the plan that emerged was far better than the Tories. We were obsessed about avoiding a double dip recession (like Japan) or seeing inequality rise. So we chose not to go to fast, to carefully weigh the right mix between spending cuts and tax rises and to take incredible care about reform of social security (to the great credit of both Yvette Cooper, who was Secretary of State for DWP at the time and Alistair).
But of course, we were conflicted about how to explain this to the public (investment vs cuts?) and in 2010, in the wake of my infamous note, we simply abandoned the field of argument, failed to set out the detailed alternative in the 2010 budget as a better plan (along with much defence of our achievements in office), and lost trust as a result.
Our challenge was different to the challenge today. Back on 2009 the world economy was basically having a heart attack as the financial system went into cardiac arrest.
There has always been such a strong link between financial globalisation and financial crises. While many nations have graduated from a troubled past repaying national debts, as Rogoff and Reinhart elegantly put it ‘so far graduation from banking crisis has proven elusive.’ In their masterful study of sixty-six countries since the Napelonic War, the pair point out that the world’s great finance hubs – the US, the UK and France have experienced some forty banking crises since 1800 and just four of the nations they studied avoided a banking crisis between 1945 and 2007. In eighteen of the twenty-six banking crisis since 1970, the financial sector was liberalised in the preceding five years sparking faster international capital mobility.
2009 was no different, as we watched some very familiar patterns repeat; financial liberalisation, faster international capital flows, and an asset price bubble. But the scale was staggering.
At the beginning of the 21st century the world was awash with huge cash piles building in countries running significant export surpluses like China and Germany and this abundance helped fuel an extraordinary asset price boom. As early as 2005, the Economist was warning of ‘the biggest bubble in history’.
Financial sector deregulation in the United States (especially President Clinton’s repeal of the Glass-Steagal Act) multiplied the risk as loans were offered to those who could ill afford them, creating a vast ‘sub-prime market’ which the Federal Reserve failed to stem. The US Financial Crisis Enquiry Commission later castigated this pervasive permissiveness as ‘the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages’. As a result, ‘trillions of dollars in risky mortgages had become embedded throughout the financial system as mortgage related securities were packaged, repackaged, and sold to investors around the world’. When the housing bubble collapsed, noted the US investigators, ‘a string of events…led to a full blown crisis.”
But when sub-prime lenders began going bust many were simply bought by bigger banks, concentrating the risk in the arms of fewer and fewer banks. And these arms were not strong because the Basel II safeguards had been relaxed after 2004 allowing banks to reduce minimum regulatory capital by around $220 billion. “Banks could [now] either expand their portfolios and take on more risk’ says Adam Blundell Wignall and Paul Atkinson, ‘or return the money to shareholders via dividends and buy-backs”. Worse, the relaxation of regulation on investment banks allow them to operate with capital ratios that were half the level of commercial banks – yet many were building funds composed of sub-prime problems.
The costs of any financial crisis are severe because they trigger secondary crises. The US financial crisis enquiry commission concluded “nearly $11 trillion in household wealth has vanished”. In the UK, one million jobs, and £400 billion of UK net wealth – most of it household wealth – would be destroyed.
‘The sentries [ie the Federal Reserve] concluded the US Financial Crisis Enquiry Commission, ‘were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves’.
Today, I feel right in saying Boris Johnson knows far less about economics than Gordon Brown. And Alistair Darling had a hell of a lot more experience of running Whitehall departments than Rishi Sunak. It’s going to be a bumpy ride.
It was Cicero who once said, ‘The sinews of war are infinite money’. So as Joe Biden squares up to Russia it might just be time for Britain do something practical to help, and actually slam shut the spigots of ill-gotten Russian cash that flow through the City of London.
As Tom Newton Dunn writes in an excellent piece in today’s Times, the City of London has long been the place where oligarchs bury their golden acorns.
Corruption flourishes in the dark and so one reason London is beloved is that it’s so easy to create shell companies without declaring who actually owns them. Behind this fog of mystery, company directors can get up to no good.
Now Boris Johnson claims he’s cracking down on this sort of thing. Really? In answers to my parliamentary questions a junior minister has slipped out that in fact over 11,000 companies have still not listed – as they are required to – a ‘Person of Significant Control’. And despite this only 119 convictions for the offence has been brought. Pathetic.
As the excellent Duncan Hames at Transparency International, points out, last week’s G7 communique yesterday recognised “the need for action on corruption, including… tackling the misuse of shell companies” (para 48). Yet there’s no legislation this session to implement the Companies House white paper reforms that would get a grip of this.
Biden is right to get tough. Boris should start backing him up.
Thanks to all those who came to my residents meeting in Ward End last night – especially colleagues from West Midlands Police. We’ll post a full write up later but the three key local issues raised were;
1. Speeding and dangerous parking – especially folks dropping off children at school. We had a long debate about why parents drive their offspring a few hundred yards down the road
2. Drugdealing – still seen as a problem especially by the shops on St Margarets Road
3. Impact of doubling the school size; this was on the whole seen as a good thing; but there was a real worry that parking was going to get much worse
We then had a long chat about Labours policy review and the things the government was doing wrong. Here’s what was top of residents issue-list;
1. Lack of jobs especially for young people
2. Prices especially petrol prices
4. Human rights and influence of judges
5. Europe – too much control of decisions lost
Again, we’ll write this up and make sure it’s part of our policy review work. If you couldn’t come and have a comment email me on byrnel@parliament.UK