Archive for March, 2011

The Real Economic Problems

Thursday, March 31st, 2011

At the moment all the political argument is about the cuts and their effect. Arguments break out about this service or that. More police or less and so on. Yet the very large numbers marching through London at the weekend demonstrated real unease.  We ar now in the second phase of the cuts programme. The first phase was the announcement of the plan expressed in terms of percentages. This had broad public support. The next is the current phase, when the impact of cuts is spelt out in specific areas. This still retains majority support, but only just. The third phase will be when the axe actually falls on jobs and services. This is about to happen. The public mood will at best be sullen, if not  hostile.

To the extent that there is debate, it is very simplistic and far short of honest. Osborne, who is doing much better than most of the rest of the government, is a monetarist and cutting, axing and trimming suits both his philosophy and his temperament. Opposed by a more strident and confident Ed Milliband (where is Balls?), he still comfortably occupies the high ground from which he is able to proclaim there is no other way, he is backed by the international markets and agencies and, anyway, the whole thing is Labour’s fault. Labour says, but few believe, that there is another way; cut less over longer and it will not hurt so much. Oh, yes it will, because to do that requires borrowing more and paying more interest on the increased borrowing, which takes cash out of the economy, just like a cut, but leaves a bigger loan to repay. So long as voters are willing to see their own interests in tandem with the national interest, Osborne will prevail. If, in desperation, it becomes every voter for themselves, they will start to listen to Milliband, or even Balls (if he turns up).

Now is therefore the time to look to the heart of the matter, since that and that alone, can point the way forward. There is, in a portfolio of figures available which can be used to support almost any viewpoint or argument, one which is unusually compelling. It is the figure for external debt by country. There are 189 counties listed starting with the ones with the biggest debt. Top of the list is the U.S. with $14.3 trillion. This is 98% of U. S. GDP; the world average is 95%. Britain rides in at number 2 slot. The figure is $8.9 trillion (yes!) or 398% of GDP. Next comes Germany, then France, but our total is greater than their two figures put together. The U.K. economy is massively over borrowed at every level, national, corporate, personal. The good news is that things are getting better. The 2009 figures had us at 416%of GDP. 

Indeed such is the shambles of what was once a great manufacturing and producing nation, that the New Labour economic model ended up as an economy simply recycling borrowed money. Even the tax paid was sourced in borrowing. This is what the government now has to deal with. Cuts are a detail. The whole show is off the rails. 

The economy must become one which produces real new wealth, employing people in jobs which add value.  Because we have become addicted to the public sector, the burden of those salaries and pensions is now and will become even more, unsustainable. Borrowing must reduce as a percentage of GDP at all levels. People and the government must spend earnings, not borrowings, save more and pay down debt. Housing cost must reduce still further until the average price is no more than 3x the average earnings. Business start ups must rely more on investment and less on loans. Bank lending must remain cautious. Inflation must be contained soon and asset inflation must be curbed by restrictive borrowing. Fiscal discipline must become a national habit at all levels.

To achieve all that, cuts will have to feature. So far, the government is right on strategy. There are good signs. Manufacturing output is increasing at record levels and debt and new borrowing are reducing. As to the detail of the cuts, I think it may have been a mistake to go for an across the board percentage. Some sectors were already under resourced, while others should be drastically curtailed or even shut down altogether. More charges could and should have been introduced for NHS treatment on the lines of prescription charges and paid by the same groups. This is already the case with dentistry. There are loads of ways of dealing with this and not all were explored. There will be scope for adjustment still.

But at the end of the day the job has to be done and the sooner the better. The coalition is sound on the economy, has taken brave decisions and in the case of the Lib Dems, manifestly put country before party. Labour remains in denial. By their method it would take more than half a century to sort this out and even then the state sector would be too big for the private sector to fund. So what would happen? Yes, more borrowing.

Libya Mission

Wednesday, March 30th, 2011

This blog has always had misgivings about this and now repeats an important principle of statecraft. Never intervene in a civil war. The reasons for this are many. Wars begun never end as expected. If a people take to violence upon each other whatever the apparent suffering, it may well get worse if others join in, however good their intentions. Intervention by third parties provides a rallying cry for oppressors. In the end the best way to help is with humanitarian aid, mediation and reconstruction.

America knew this. It suffered one of the most savage civil wars in history. It is still the fact that more Americans have been killed by Americans than by all the country’s enemies combined. Whilst the battles raged, Britain and France agonised over whether to recognise the Confederacy, but managed to remain neutral. Yet the treatment meted out to the civilians of the South by Grant and Sherman was, according to Lord Palmerston, without precedent in warfare. Of all wars, civil wars are the most brutal. This is why Obama hesitated and Gates dismissed ‘loose talk’ of intervention in Libya. They had their national folk memories as well as more recent experience.

Cameron, who in the eyes of this blog has ruined his premiership and shown both naivete and lack of judgement, when rebuffed by the U.S. turned to an eager France. This was the silver lining of the moment, because it brought two natural allies together in an alternative diplomatic force to the reluctant U.S. France’s position was unambiguous. It recognised the insurgents and laid military plans. Then, joined by Britain, it engineered a compromise in the UN leading to the passage of UNSCR 1973 with fair-weather backing from the Arab League and with silent disapproval from Russia and Germany. It was ready to launch an immediate air strike on Gaddafi’s column advancing on Benghazi to deliver an assault without mercy, reducing it to a line of scrap and saving the rebel capital from a terrible retribution. At this point it would have been wise to take stock.

Britain, now back in its familiar role as the U.S’s junior partner was firing cruise missiles, launching air strikes and talking in terms that were outside the UN 1973, about targeting Gaddafi. In fact the Fox and Hague were hinting at it, but Gen Sir David Richards, the head of our military, was emphatic that such a plan would be illegal. Once again Britain is at business in the Middle East saying one thing and planning another, unaware, apparently, that in that and other theatres of the Muslim world it is, like the U.S. (which is self-aware) something of a busted flush.

Things are now going wrong. There is disagreement in NATO about what 1973 entitles them to do, the Rebels are a military shambles and the Gaddafi forces are not only remarkably resilient to air strikes, but are getting better in both tactics and implementation. As this post is in preparation the rebels, whose fortunes vary almost by the hour, are in headlong retreat and may be about to lose everything but Benghazi. Ideas that Gaddafi will pack his bags and walk into the hands of the international criminal court are simply ridiculous.

So now what? Arm the rebels?  That is manifestly against UNSCR 1970 and 1973, has been dismissed by the Secretary General of NATO and would do little good, because  not only are they untrained, but we do not even know exactly who they are or what they stand for and therefore into whose hands such armaments would finally go. France has gone back to its former position of distance from the U.S and Britain and talks of another resolution being required in the U.N.

This is exactly the kind of mission confusion which was warned about at the beginning. We no longer know where this is going. As the Tory MP Rory Stewart, who knows more about this whole theatre than any member of the government, has warned, bending the spirit of 1973 to make it mean something different and licence more than those who voted for it thought, would damage Britain’s credibility for more than twenty years ahead. 

Libya is now not just a crisis for its suffering  people, but it is en route to becoming a crisis for the British government. When Cameron took office this blog had hopes that he would turn out to be one of our best Prime Ministers. That opinion is now revised. He is at risk of becoming one of the worst.


Wednesday, March 30th, 2011

The introduction of the cheaper and more restricted (the spin word is targeted) edition of EMA has once again opened up an alarming fissure in the ideal of free education for all and the ability to provide it. Michael Gove had waiting in his in tray two priorities when he took office. The first was to introduce rigour to the curriculum and restore responsibility to the teaching profession. The second was to get better value for every pound spent because of the state of the public finances.

The first is well under way. The Baccalaureate restores focus on the outcome with a discipline absent since the disappearance of the old Matric. At last a connection is made between youth unemployment and what youth has been taught. National prosperity in the future hinges on these outcomes. This is why it is  calamitous that fewer than half of all  students finish state secondary education with a pass in basic Maths and English. This inhibits them from acquiring skills and communicating ideas. It excludes them from science. It is also literally unforgivable that there are twice as many job vacancies for young engineers than there are young people qualified to fill them, so employers have to look and sometimes actually move their business, overseas. This is education failure on a critical scale.

Various measures are in hand to respond to this farcical situation, including more focused primary eduction, phasing out modular A levels and so on and Gove is to be congratulated on grasping the nettle, in defiance of the shrill cries of those dangerous academics, who are prisoners in their world of fads and fancies, in denial that there is a real world as well.

When it comes to the money, the report is less enthusiastic. The tuition fees saga has been one of the worst policy mishaps of the government thus far. The EMA changes have been judged of the same stripe. Nothing has done more to undermine voter confidence, that the words of politicians are ones upon which reliance may safely be placed.  The impact on the Lib Dems is almost terminal and recovery will be difficult. Clegg’s reputation is in tatters. Yet the Tories have not come out well. Whilst extolling the need to create an economy which does not rely on borrowing and requiring hardship and suffering from everybody to reduce the deficit, this schizophrenic government ensures that every educated person, not from a wealthy background, begins their working life in debt.

Mixed messages never convey what is required. Add to that, the tinkering with structures, conversions to Academies, Free Schools etc are interesting ideas, but now, when so much else has to be done, is not the time.  The Education Department begins to look like a muddle prone to U turns and gaffes. At the heart of it all is the fundamental belief of the post war social settlement which defined our country, that eduction, including higher education, should be free and available to all. Neither Labour nor the Conservatives have, over the last thirty years, a good record here. Education is the future of the country. Michael Gove has a tremendous opportunity to make a difference. To make a real and worthwhile difference he will have to do better.

At the end of the day education has to be paid for out of taxation. To charge people, as in further education, money they do not have, so you lend it to them, is morally corrupt. To have to borrow the money to lend to them, is fiscally unsound. In combination the whole thing is economically flawed. Gove needs to talk to Osborne. There is confusion between tax rates and tax flow. The former are too high, the latter is too low. Notwithstanding that, the best way to pay for higher education is out of income tax. It offers a virtuous circle. The better your education the more you earn. The more you earn, the more tax you pay. There is no better way.

Three Political Hotspots

Wednesday, March 30th, 2011

There are now three political hotspots involving the U.K government. The Cuts, Education and Libya. Each makes headlines and provides endless commentary from those for and those against. This blog believes that the arguments are now drifting from the core principles driving them, creating flaws in both the policies themselves and the arguments against them.

The next three posts will therefore examine each of these issues beneath the surface, in an attempt to offer a more robust foundation for debate.

Cuts, Growth and the Cost of War

Saturday, March 26th, 2011

It is not surprising that people, fearful for their jobs and incomes, join a protest march in large numbers. What is surprising is that they are led by those who claim there is another way, but do not say with clarity what that way is. This is because they dare not say the truth. Slowing the cuts means borrowing more. If it also prevents the re-modelling of the economy, it means another crash later.

Manufacturing is growing at its fastest rate for over two decades. House prices are stable and falling in real terms. Personal borrowing is falling. Saving is increasing. There is an understanding dawning that money cannot be made, it must be earned. There is now a demarcation line between real jobs which contribute and silly jobs which drain. There is a lot more to do and times will be difficult before there is a real sense of renewal. A lot that this coalition government does is foolish ( including military adventures ) but it is on the right track. It needs to get on with the job, if possible without distractions of its own making.

On this last point I have heard on the media and in the street acid comparisons between the cost of missiles set against care for the vulnerable or funding pensions. When Blair blew his political legacy on Iraq, the cost was not an issue, because Brown had told everybody we were in a boom and there would be no more bust. Now we are in the bust that was not supposed to happen and every time news is broadcast about a missile strike, the viewers at home set its cost against their pension prospects. This is a new political dimension which could prove very difficult for the government.

If the Libyan adventure has not come  good  by the time of the local elections in May, the coalition parties could get a very nasty surprise. The voters, having been told so often what we cannot afford, may form an opinion of their own. They may take the view we could not afford another war.

Rebels Advance

Saturday, March 26th, 2011

It is is beginning to look as if, whatever UNSCR 1973 says, Britain, France and the U.S. are interpreting it more proactively than some of its supporters expected. It is now clear that precision firepower is being directed at pro Gaddafi forces, so as to alow the rebels to advance. Moreover, after initial hesitation, this is what they have begun to do. How far they can get without a proper military command structure, training or heavy weapons remains to be seen. This is a step beyond protecting civilians by the allies, who are now coming clean and essentially saying that the very existence of Gaddafi is in itself a threat.

To all but the naive this is regime change by another route. To judge whether the mission is a success for the allies, three things must be achieved. Regime change, a transfer to a democratic government and no terrorist reprisals afterwards. This is quite a list. It goes somewhat beyond UNSCR 1973, but if no ground troops are involved, it will be accepted by a relieved international community. However if Iraq style chaos develops, things will take a nasty turn for Obama, Sarkozy and Cameron. For them it will be a political end game.

Chain Of Command

Friday, March 25th, 2011

The wrangling appears to have ended in a fudge, which General Sir Mike Jackson has aptly described as less than ideal. Nato is to command the no fly zone, but Britain, France and the U.S. have to go it alone with the attacks on military infrastructure and formations threatening civilians. In other words the three allies are left with the part that smacks of colonial aggression, whatever the arguments employed, whilst Nato takes the balancing part which is both neutral and humanitarian.  The three allies are clearly partisan and favouring the rebels, whom one, France, has already recognised as the legitimate government of Libya. 

This project is en route to becoming a muddle. Meanwhile the rebels’ military capability falls far short of the ability to make use of the opportunities allied strikes offer them. They may even be losing support among the population, who are growing tired of fighting and want life to return to normal, even if this means Gaddafi carries on. Of one thing there is no doubt. Gaddafi is now stronger politically than before the operation was launched.

To put it bluntly, even though his forces are being mauled, Gaddafi is winning. There are many in Washington who mutter that this is exactly what they feared. Britain and France need to come up with something fast which restores credibility and makes sense of this mission. Gaddafi himself perhaps? But then that is against the rules apparently.

Libya: Military Necessity or Adventure?

Thursday, March 24th, 2011

On the face of it the military operation sponsored by Britain and France, with America as reluctant partner and the Arab league a somewhat fair-weather supporter, is going well. The technology is working well, the weapons appear far more accurate than in the Iraq war and civilian casualties appear minimal, in spite of the claims of Gaddafi T.V. The advance on Benghazi was stopped in the nick of time. Armoured columns have been turned to cinders. The no fly zone is in place. Yet all is far from over.

Worse, nobody knows what over is, when it happens. There is disagreement at every level of command as to who should be in charge and what the mission goal is. Within this confusion the military are doing a very good job, sticking rigidly to the letter of U.N. 1973. But, if stuck to, 1973, as a narrow  military mission,  is without a political objective, an exit strategy or even a coherent purpose. As has been said here before, you cannot engage in a civil war to stop killing as a narrow aim. You can engage on one side against the other, but then you are sucked into the maelstrom. The rule is you never engage in other people’s civil wars. You can send volunteers, as we did to the American and Spanish civil wars to both sides, but you stay neutral. Likewise, the Congo and Nigeria. Remember Katanga and Biafra?

The problems now are these. Unlike initial appearances, the rebels have no military capacity to win a civil war. They need help to hold onto what they have. It is not clear whether they have a sustainable political system, or even who they actually are. One moment army units are defecting to them, next this military backbone has melted away. Meanwhile organised into infantry units embedded into towns they have recaptured, Gaddafi forces are proving difficult for the Allies to dislodge, without civilian casualties. To shift them would require some considerable degree of bombardment with collateral damage of innocent lives, or ground troops. Both are a no go.

So what happens? The rebels are too weak to win. Gaddafi is too strong to lose. Is it to be two Libyas? The Allies hope that Gaddafi will jack it in or fall victim to a cruise missile while taking his evening promenade. Even then there is no guarantee that there would not be chaos to follow with rival factions forming militias and fighting all over the place. The truth is that hatred of Gaddafi has clouded judgement and hijacked statecraft and common sense. Obama and Gates could see this coming. This is why they held back. This is why America, having shown willing, wants to hand over command.

Amid the argument raging as to who this new commander should be, one question rises above all others. Command of what exactly? If Cameron comes out of this well and does not end up looking a fool, he will be one of the luckiest politicians in history.

Budget Questions

Thursday, March 24th, 2011

David Mellor was right to say that governments cannot deliver growth; growth comes from the ambition and the enterprise of the people. This is very true, but not quite complete. Governments can certainly introduce policies which inhibit and restrict growth. Conversely they can create conditions where growth is more likely. There is a third way, favoured by Labour. Governments can manufacture false growth by creating pointless jobs. This is the human equivalent to printing money. It can work in given circumstances for a short period, but like printing too much money, or manufacturing and then stockpiling cars that will not sell, too much of it leads to disaster.

It is this disaster which is at the heart of our national crisis. Labour binged on public sector employment using borrowed money to pay for it, creating a state which was too big for the private sector to sustain. Had there been no world crash, this domestic crash would have happened anyway. What makes Osborne’s job difficult is that he has two problems to resolve; economic growth and remodelling the economy. This cannot be done without a slow down, any more than a bus can take a corner at speed. However after the corner, speed can be built up again quickly, but only if on the right road. Without getting bogged down in detailed figures, which can always be argued at budget time, the central question is this. Is the budget leading the country in the right direction? Yes it is. Will it end the pain? Not yet.

Labour is trying to claim that under the Brown government recovery was well under way and the Coalition is ruining it. This is a delusion. The same one which believes money printed has the same value as money earned or that stockpiled cars are as good as sold. The only way to increase spending is to borrow more. The hope is that somehow the higher level of economic activity will pay for the extra borrowing. It is a lovely idea, but time and again it has not worked.

Meanwhile the government is trying to reduce the state, reduce housing costs by halting excessive house price inflation, switch the engine of the economy from services to manufacturing, increase saving and reduce borrowing. After the pain, a far more viable economic model will emerge and recovery will be on a firm foundation. Labour’s road is founded on sand. Soon or later it would become uneven, then lumpy then finally collapse. Not every detail of Osborne’s budget is right, but the shape and purpose is.

The biggest cloud now on the horizon is inflation. It is true that inflation erodes the value of debt. It is also true that it soon prices inflating economies out of world markets. At the moment China’s economy is inflating at 5% p.a. Some of this inflation is being exported to us. Commodities, energy and taxes account for most of the rest. We are not yet in the grip of wage inflation and because of this the Bank of England hesitates to act. It must not delay much longer. Inflation is like fire. If not dowsed early, it suddenly gets out of control.

Britain and France

Monday, March 21st, 2011

Historically perhaps the most important aspect of the war on Gaddafi, is the fact that the driver is not the U.S., but Britain and France working together.  The two combined represent a very significant military powerbase with their fleets of surface ships, submarines and air forces. The most technologically advanced outside the U.S., their total deterrent capability, with their combined eight  MIRV armed nuclear submarines, is enough to stop anyone. It is also a very strong hand in nuclear reduction negotiations.  

It is not, however, the military power of such an alliance which is its potential, but its diplomatic authority. For too long the West has been dominated by America, whose writ was the law of policy. Obama, intellectually the strongest President in many decades, is gradually pulling the U.S. back from this dominance. The effect is to re-energise the U.N. and make Europe engage more in formulation of   policy, post cold war. No longer is it West or East. Thus action on Libya arose because of Britain and France pushed for a no fly zone. French influence brought the Arab league on board at the U.N., but Germany went with Russia in abstaining. All of this is very good for the health of international dialogue and will open up issues to wider participation.

Whether the intervention in Libya will turn out well or badly is yet too early to tell;  more especially since the aims are not clearly defined. The new combination of Franco British authority may not survive this engagement, but if it does and it would be good if it did, it could be more productively used with Israel and Iran. In both cases it could make a real difference. The U.S. is getting nowhere with either.