No-one is above the law

Since early 2016 the well of public debate has become increasingly poisoned by rising levels of mendacity. It had been occurring before that, of course, but the Brexit referendum campaign brought out the worst in the political class with both sides – but especially the Leavers – making increasingly outrageous claims. One of the lasting consequences of the referendum is that public figures have realised that since there are no sanctions for lying in public debate, this tactic can be repeatedly applied. At some point, however, the lies begin to catch up with you. This week marked such a point with the government apparently intent on trashing its international reputation with its blatant willingness to break international law in order to secure the Brexit deal it wants. 

What happened? 

Earlier this week the UK government presented the Internal Market Bill (IMB) which, as a government minister admitted to parliament, would “break international law in a very specific and limited way.” That is a bit like saying a criminal charged with theft could claim that since they were not charged with murder, they breached only a limited part of the law in a specific way. The legal profession was quick to point out that the Attorney General’s defence of this action was “risible”. The shadow Attorney General noted: “The rule of law is not pick and mix, with acceptable laws chosen by the home secretary or an adviser in Number 10.” Such was the strength of feeling within the civil service that the head of the UK government’s legal department resigned. Clearly this action flies in the face of the image that the UK has tried to project for decades that it stands for the rule of law, and has prompted warnings from three former leaders of the Conservative Party that it threatens to undermine the UK’s standing on the world stage. So why has the government taken such a stance? 

What is the government trying to do? 

The government’s biggest concern is that the Withdrawal Agreement, drawn up by the UK and EU in October 2019 and passed into British law in January 2020, draws a border between Britain and the island of Ireland which runs down the middle of the Irish Sea. This has significant legal and economic consequences. One of those consequences is the treatment of state aid which underpins the enforcement of the European single market. In the Northern Ireland Protocol of the Withdrawal Agreement, Article 10 makes it very plain that “the provisions of Union law [relating to state aid rules] shall apply to the United Kingdom.” In other words, the limits on state aid which were in force when the UK was a member of the EU will also apply in the event that the Withdrawal Agreement comes into effect.

In the IMB legislation presented this week, the Bill states that “Regulations … may (among other things) make provisions – (a) about the interpretation of Article 10; (b) disapplying, or modifying the effect of Article 10”. Clause 45 of the IMB goes on to say the provisions in the bill “have effect notwithstanding any relevant international or domestic law with which they may be incompatible or inconsistent.” In other words the government has given itself carte blanche to take actions which are unlawful. This is not “a very specific and limited” breach of the law. The government intends to drive a coach and horses through it.

What is the point of such action? 

A number of well-placed sources have reported that the UK has taken specific exception to state aid rules because it wishes to provide support to the tech industry as the economy repositions for the digital age. Ironically, the UK has traditionally been opposed to state aid to support particular industries. According to the EU’s State Aid Scoreboard the UK share of state aid spending in 2018 was 0.34% of GDP versus an EU average of 0.76%. It could thus double its support and not be out of line with the rest of the EU. Without knowing exactly who in government is pushing the idea, we know that Dominic Cummings, Boris Johnson’s key adviser, is passionate about all things tech. According to Cummings: "Countries that were late to industrialisation were owned/coerced by those early (to it) ... The same will happen to countries without trillion dollar tech companies over the next 20 years." 

But the UK’s efforts to back industrial winners over the last 70 years have been abysmal. British Leyland, the former state-owned car giant, was a microcosm of all that was wrong with state-backed capitalism: Management which did not know how to manage organising a labour force which did not want to work to produce cars for a public which did not want to buy them. Previous efforts to back tech companies include ICL, formed in 1968 to create a British computer industry that could compete with major world manufacturers like IBM - an experience that did not end well. ICL was sold to Fujitsu in 1990. Nor did the Conservative government raise any eyebrows when ARM was sold to Softbank in 2016. In any case, for all the noises about generating tech titans to compete on the world market, the UK will not be able to develop one if it is unable to sell into the European market. And that is precisely what will happen if the current spat results in no trade deal between the UK and EU. 

Implications 

It is worth noting that the agreement which Theresa May’s government reached with the EU did not envisage a border in the middle of the Irish Sea. In her words to parliament, “no UK Prime Minister could ever agree to” such a plan. Her government therefore reached an agreement with the EU which created a UK-wide ‘single customs territory’, avoiding the need for customs checks between Great Britain and Northern Ireland although the province maintained regulatory alignment with the EU. But Northern Irish politicians objected because it would have introduced differences in regulation between Northern Ireland and the rest of the UK, even though a majority of the population were in favour. Hardline Brexiteers (including Johnson) objected because it would have meant the UK remaining in a customs territory with the EU, removing the UK’s ability to vary its tariffs. Therefore the plan which the Johnson government signed up to allowed the UK to vary tariffs but in return reintroduced the sea border. 

For anyone in government to argue that they did not understand the implications of the plan is disingenuous. This was a plan the Johnson government negotiated and signed up to in October 2019; sold to the electorate during the election campaign (“Our deal is the only one on the table. It is signed, sealed and ready”) and was passed by a majority of 331 to 231 in the House of Commons on 9 January. Johnson owns this – there is no getting away from that fact. So why undertake such a stupid act? 

Perhaps one of the objectives is to prompt the EU to walk away from negotiations, thereby delivering the no-deal Brexit which some in government appear to want. With the EU rather than the British government withdrawing, the government could then blame the adverse economic fallout on the EU. But the experienced EU negotiators are smarter than to fall for that trick and have instead called for the UK to withdraw its plans to override the Withdrawal Agreement by end-September or potentially face a legal challenge. The US has also applied pressure with Nancy Pelosi, speaker of the House of Representatives, warning that if “Brexit undermines the Good Friday accord, there will be absolutely no chance of a US-UK trade agreement passing the Congress.” The Johnson government is thus looking ever more diplomatically friendless. Going ahead with a policy which jeopardises a trade deal with both the EU and the US would be the height of stupidity.

As to how all this ends, the next few days will tell. The IMB may fail to pass the House of Commons if sufficient MPs rebel against the government. It may be blocked in the Lords where by convention manifesto commitments are not blocked (the Salisbury Convention), but a policy which contravenes promises made to the electorate is likely to promote significant resistance. It may even be passed into law! However, I maintain that there is still a Brexit deal to be done but the limits of what the EU will tolerate are being tested. Whatever happens, this is a government which is rapidly losing the trust of large parts of the electorate as well as unsettling the international diplomatic community. At a time when it is drawing up new measures to combat the spread of Covid-19, it would do well to remember that they will only be successful if people comply with the law. And as last year’s legal challenge made clear, even the government is not above the law.

Trust me. I'm a politician!

The importance of trust

One of the qualities which a politician in a democratic society must possess in abundance is trust. Without it, it is almost impossible to repeatedly go back to the electorate in order to ask voters for their support. There does not appear to be much trust around at the present time however. Trust in the British government has recently fallen sharply as dissatisfaction with its handling of the Covid-19 crisis has mounted. But this is more than about Covid, as evidenced by the recent riots on the streets of the US. 

Trust is the basis of our economic system. It is the foundation upon which contracts are drawn and on which trade takes place. To put it even more simply, in the absence of trust many value-generating transactions would simply not take place. The basis of trust in western democracies is rooted in governments: They draw up the legal framework upon which our economies operate and it is therefore important that we continue to have confidence in them. The basis of that trust began to fray in the wake of the 2008 financial crash when governments assured their electorate that a return to normality would occur sooner rather than later. When that did not occur, populist voices began to make themselves heard in countries as disparate as Greece, Italy, the Philippines, UK and the United States. Voters stopped believing that the system was helping them and the perception became entrenched that it was biased in favour of others, be it the rich, foreigners or those from a different ethnic background. As a result, the US elected Donald Trump as President and the UK voted in favour of Brexit as these were solutions which it was promised would look after the interests of voters.

... And how to lose it

But the roots of populism do not run deep. Neither the Johnson government nor the Trump Administration have a coherent plan of what they want to do, other than deliver on the populist platforms on which they were elected. Trump’s America First strategy has resulted in conflict with China and undermined the institutional framework which has supported the global economy for the past 70 years. In the UK, the Johnson government continues to believe it has a duty to deliver a full departure from the EU by the end of this year, irrespective of the fact that the landscape has changed since the December election, and irrespective of the economic costs that the current policy orientation is likely to inflict.

Indeed, based on his past performance Boris Johnson is the least trustworthy occupant of the Prime Minister’s office in modern history (it is one of history’s great ironies that the British electorate trusted Jeremy Corbyn, his opponent in the 2019 general election, even less). Johnson was a brilliant cheerleader for Brexit but never once has he stopped to consider its economic consequences. The Covid-19 crisis has called his judgement further into question. Although Johnson gained considerable personal sympathy following his brush with the coronavirus, and for a time his polling ratings surged, the fact that Britain has the highest death rate in Europe has raised a lot of questions about the government’s handling of the crisis. 

We should reserve judgement until such times as a deeper investigation of the crisis is conducted but we can draw conclusions from the government’s handling of the Dominic Cummings affair. The overwhelming consensus of opinion is that Cummings, who is Johnson’s most trusted adviser, broke the lockdown rules. One of the more unedifying aspects of the whole affair was the way in which the Attorney General risked the independence of her office by aligning with the government. As Murray Hunt from the Bingham Centre for the Rule of Law put it the most important aspect of this issue “is what the episode reveals in general about the mutual dependency of the rule of law and public trust.” 

Impossible to trust the UK government on Brexit

Anybody who was already concerned about the government’s position on Brexit will not be assuaged by recent events. I have never been convinced that Brexit is about improving the wellbeing of the British people – there is, after all, no evidence to support this position. Efforts by the Johnson government to go so far as proroguing parliament to drive it through should wake people up to the lengths it is prepared to go to make this ideological project a reality. If the electorate increasingly distrusts its own government, it should come as no surprise that EU negotiators are not prepared to take the Johnson government at its word. The recent spat between the UK’s Sherpa David Frost and Michel Barnier makes clear that the two sides remain far apart as we move closer to the point at which the UK will have to make a decision on whether to extend the transition period.

There is some substance to the UK’s criticism that the EU is treating the UK differently to other parties seeking to do a trade deal, but it is disingenuous to claim that the proposals represent anything other than those outlined in the Political Declaration signed last October (as Barnier hinted without saying so explicitly). We thus find ourselves returning to the vexed issue of trust. There is an increasing sense in Brussels (and indeed elsewhere) that the UK has no intention of reaching a trade agreement with the EU by the end of this year, despite the fact that the Political Declaration suggests “the Parties envisage having an ambitious trading relationship on goods on the basis of a Free Trade Agreement, with a view to facilitating the ease of legitimate trade.” Nor is it prepared to seek an extension of the Transition Period, which implies that the UK will fall back to trading on WTO rules at the start of 2021.

As the tide of globalisation ebbs, there can have been no worse time in the post-1945 period to embark on a trade policy based on WTO rules. Many economists (including me) have made the point that failure to reach a trade agreement will impose significant economic costs on the UK. But what has changed in the interim is that the global economy now faces its deepest recession of modern times. A rational government would immediately have declared force majeure and asked for an extension. But the Johnson government has long since adopted an economically irrational approach to Brexit and I cannot determine whether its stance represents a crazy bargaining ploy in a bid to force more concessions from the EU or whether it means what it says about a no-deal Brexit.

You do not have to be as cynical as this jaded economist to believe that the government is prepared to hide the costs of a no-deal Brexit behind the smokescreen of a Covid-induced recession. After all, they say you should never let a good crisis go to waste. But the actions of this government over recent months with regard to fudging the rules (the Cummings case) and blurring the evidence (the selective use of data in reporting the UK Covid-19 outbreak) are consistent with the Albert Einstein view that “whoever is careless with the truth in small matters cannot be trusted with important matters.”

Reflections from snow-topped mountains

One of the main strands of Donald Trump’s appeal to the American public is that he is an outsider. Of course, that is not true – and never has been.  As the president said in a speech in Arizona last year, “I was a good student. I always hear about the elite. You know, the elite. They're elite? I went to better schools than they did. I was a better student than they were. I live in a bigger, more beautiful apartment, and I live in the White House, too, which is really great.” So it probably should not have been a great surprise that he became the first sitting president in almost two decades to attend the World Economic Forum’s jamboree for the great and the good in Davos[1].

Not surprisingly, Trump was the star of the show and the positive message Europe heard was that “America First does not mean America alone.” But he also pointed out that the world "cannot have free and open trade if some countries exploit the system" and that Washington "will no longer turn a blind eye to unfair trade policies." The WEF’s annual report indeed highlighted that the risk of some form of conflict was high on the list of issues which could derail the current friendly economic environment. The WEF notes that “charismatic strongman politics is on the rise” that has hastened the move away from the rules-based multilateralism which has underpinned the peace and prosperity of the post-WWII economic system. The US has blocked appointments to the WTO’s seven-member Appellate Body during Trump’s tenure, and two seats are currently waiting to be filled. A weakening of the WTO’s ability to resolve disputes does nothing to assuage concerns that trade tensions between the US and China could yet become a major problem.

But one of the biggest curiosities of the Davos bash is that it should happen at all. One of the reasons why “strongman politics” is on the rise is that many millions of ordinary voters feel left behind by the advance of the global capitalist economy, which appears to benefit the very few at the expense of the many. Two weeks ago BlackRock CEO Larry Fink distributed a letter addressed to the CEOs of global companies arguing that “society is demanding that companies, both public and private, serve a social purpose.” Economists such as Milton Friedman would not agree. Writing in 1970, Friedman argued that a business executive who exercises social responsibility in the course of their work “must mean that he is to act in some way that is not in the interest of his employers”. Businesses which do anything other than maximise profits were “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades” and were guilty of “analytical looseness and lack of rigor.”

Arguably Friedman’s view is flawed because it fails to distinguish between short-term and long-term profit maximisation and ignores the non-pecuniary benefits which flow from social activities. Companies which simply attempt to maximise profits each year, whilst failing to treat their customers and employees with respect, will fail. But that is a different proposition to suggesting that companies exist to serve a social purpose. In any case, many large firms have long since taken ideas of social responsibility on-board in drawing up their corporate sustainability programmes. Corporates do have a duty to act responsibly, of course, and those which fail to do so are held up to scrutiny. The problems faced by Volkswagen following the revelation that it falsified diesel engine emissions highlights that there are costs associated with acting in a non-socially responsible manner.

But the more I listened to what Fink had to say, the less I was convinced by his message. Another of his Davos pronouncements was that too many people are excluded from the workings of financial markets as a result of financial illiteracy and more work has to be done to ensure “they don't feel frightened of moving their money into long term instruments.” Given that Fink is the CEO of a primarily passive investment fund, there is a certain irony (to say the least) in his desire to get more people involved in financial markets. His point that a lack of involvement ultimately hampers efforts to generate decent retirement incomes was valid. But at a time when many people are finding their incomes being severely squeezed, they simply do not have the excess resources to devote to financial investing – a problem the likes of Fink do not have.

I have no doubt that Fink’s views – and those of his fellow grandees – are motivated by a genuine concern that the system from which they have benefited is under threat, and that they believe there is a strong case for redistributing some of the wealth. Perhaps they not aware of how their argument in favour of caring capitalism comes across – it does sound like a ‘let them have cake’ view.  Many people simply feel that they are being screwed and want a piece of the pie. That said, when it falls to the rich to talk about solving global inequality problems, it is small wonder that the ordinary voter has little faith in governments.

---

[1] In the interests of disclosure, I should point out I was not there. I assume my invitation was lost in the post.

We'll settle for either strong or stable

Anyone looking at the UK from the outside can be forgiven for wondering what has gone wrong with a political process that the British like to think spawned the Mother of all Parliaments (there again, many natives are wondering the same thing). The government is weak and divided – in office but not in power – whilst the political establishment has been rocked by allegations of sexual misconduct. All this is happening against a backdrop of the most critical set of negotiations since 1945, which require the government’s undivided attention – but which it is unable to give for the reasons just outlined.

The obvious answer is that Brexit is the culprit. According to Philip Stephens, writing in the FT, “Brexit has broken British politics." There is certainly a lot of truth in this. As Stephens notes, “a majority of MPs think Brexit is a mistake but feel obliged to pursue it lest they be accused of defying what the tabloids declare to be ‘the will of the people.’” Quite what the “will of the people” might be is hard to discern from a referendum result which produced a near 50-50 outcome. Consequently, and unsurprisingly, treating the result of a (legally non-binding) referendum in the same way as a winner-takes-all election was always going to polarise already-inflamed opinions.

But a less obvious answer is that the Brexit vote was itself the manifestation of something deeper. Arguably – and I am in speculative territory here – it was the result of dissatisfaction with a political establishment which has failed to adhere to the rules and standards which it expects others to abide by. More worryingly for an economist, there has been a steady erosion of rules- and evidence-based policy making which has contributed to hugely sub-optimal outcomes. We can go back to 2002 and the case which the UK government made for involvement in a military invasion of Iraq which was not sanctioned by the United Nations. The UK Prime Minister Tony Blair put his name to a document that argued the government of Saddam Hussain had developed weapons of mass destruction, despite the fact that international observers on the ground found no such evidence. Trust in UK politicians was further eroded by the 2009 parliamentary expenses scandal in which many MPs blatantly ignored guidelines on the use of public money in reclaiming expenses. There were rules in place but they were routinely flouted.

A more economically relevant case is the flouting of the fiscal rules enshrined in the Maastricht Treaty, designed to prevent governments from running a deficit-to-GDP ratio in excess of 3%. Moreover, the criteria for entry into the single currency in the first place was that “the gross debt total of the general government should not exceed the reference value of 60 percent of GDP or, if it does, it should be sufficiently diminishing and approaching the reference value at a satisfactory pace.” With both Belgium and Italy showing debt ratios above 100% at end-1997 (the reference date for entry into EMU), it’s safe to say that they were nowhere near achieving this goal. Of the original 11 members Austria, France, Ireland, Netherlands and Spain also missed the target.

I did point out in 2003, at a time when investors were concerned that countries were routinely missing the 3% deficit target that “by failing to force governments to comply more strictly with the 60% deficit:GDP ratio prior to the start of Emu, the fiscal playing field has not been levelled sufficiently to allow some countries to easily meet the Stability and Growth Pact deficit criteria. In simple terms, the debt targets were simply not taken seriously enough.” This is not to say that the euro zone debt crisis could have been avoided, but had debt ratios been closer to the required thresholds in the first place, some of the smaller countries would have had more fiscal headroom to cope with the storms which subsequently blew in.

The banking crisis, which resulted in many financial institutions requiring government support, is another case in point. The public’s view is that the taxpayer has carried a heavy burden without those responsible for causing the problem ever being held properly to account. Again, this could be seen as a failure to apply rules – or at least the failure to apply natural justice.

Each of the examples outlined here was avoidable. Had one occurred in isolation, arguably we could have coped better with the fallout. But failure to consistently apply the rules erodes policy legitimacy and invokes greater challenges to the status quo, producing an ideal breeding ground for political discontent. The academic literature in this area explains how policies which are initially not popular (such as Brexit) can find broader acceptance as the public taps into various aspects of the policy (see the introduction to this paper from The Quality of Governance Institute at the University of Gothenburg).

The authors of this paper also make the point that “public opinion changes as a result of policy implementation.” Given the UK government’s abject failure to get its act together on many aspects of policy, this raises serious legitimacy issues. Not only did successive UK governments fail to deal consistently with the conditions which provoked the Brexit backlash, but the current administration is failing to deal with the consequences. Theresa May once promised to deliver strong and stable government. Right now, many people would settle for one or the other.