Not seeing is believing

Last week the world was abuzz with the story of how Gatwick Airport had been closed due to sightings of a drone dangerously close to the runway. Cue social media outrage that something must be done. Get the military in to shoot them down! I even read how Dutch airports are training eagles to take out rogue drones. The general tone, even from the more sober elements of the media, was that the government’s credibility was somehow damaged. All pretty depressing stuff.

So imagine my surprise that it now transpires no one in authority has actually seen the drone in question. According to the police, there was “always a possibility that there may not have been any genuine drone activity in the first place.” There were no pictures or video of the drone incursions into the airspace around Gatwick; there was “no available footage and [officers] are relying on witness accounts.” I was not one of those affected by the disruption and my sympathies go out to those that were. But you have to see the funny side, particularly at this time of year.

After all, we tell our children that a portly gentleman dressed in red manages to park a sleigh driven by nine reindeer onto the roof of our house, drops down the chimney and delivers unsolicited presents. Strangely we never hear him. Nine reindeer on the roof! Coming down a chimney! And although he is such a great house breaker, he never takes anything away. Indeed, he leaves stuff behind! No wonder we celebrate at Christmas: the guy is a phenomenon.

Santa Claus is testimony to the power of belief. As children we are willing to suspend our critical faculties because the payoff is so good that it pays to be a believer. It gets harder to suspend our critical faculties as we get older but people are still able to do it. After all, if it weren’t for the belief in an invisible Deity, we would not be celebrating Christmas. But Santa Claus today has competition in the form of Amazon, which is able to deliver goods to virtually anywhere in the world. Better still, they operate all year round whereas the man in red operates on one day only. There again, I would rather have Santa dropping down my chimney than Jeff Bezos.

The power of ideas is one of the most powerful of human forces. So let’s not knock those who thought they saw a drone at Gatwick last week. Maybe they did. Maybe they did not. Or maybe this was Santa doing a bit of drone testing in order to keep up with the competition. After all, reindeer are expensive costing around USD 2000 per year in upkeep. That’s a decent outlay when you are a pensioner working one day a year for free and who gives stuff away.

Increasingly we have to suspend our disbelief at the events unfolding around us. So I’m going to give the benefit of the doubt to those who thought they saw a drone at Gatwick last week. Just because you can't see it, doesn't mean it wasn't there - after all, they laughed at Einstein. It just remains for me to wish you and yours a Merry Christmas and may you continue to travel safely in 2019.

Thinking out of the box

Some months ago I came across a book entitled Radical Markets: Uprooting capitalism and Democracy for a Just Society by Eric Posner and Glen Weyl which proposes that in order to organise markets for the good of everyone, we should be less concerned about curbing market power than giving them free rein to operate. Given that one of the motivations for this blog in the first place was to highlight that markets do not always deliver optimal social outcomes, in contrast to much of the conventional thinking amongst policymakers, the ideas in this book caught my eye. Admittedly, most of them are bonkers and will never be implemented, but at the very least the authors force us to look more closely at the ills within our current economic system. On the basis that if you can diagnose the problems you might be able to find a cure, this is a useful service.

One of Posner and Weyl’s key ideas is that property rights confer a monopoly status that prevents markets from operating properly.  Take the example of land: A landowner can extract a very high price from someone who wants to put the plot to a more productive use. They pose the question whether it is socially just that the landowner can extract rent at the expense of wider society. Their solution to this problem is brilliantly ingenious, albeit impractical. All members of society assign a value to each and every asset that they own and are taxed on the basis of their declared wealth. But the twist is that if someone offers to buy the asset at the value which the owner declares, they are legally obliged to sell it.

In a world of perfect information, asset holders would be able to value their assets at a sufficiently low price to minimise their tax bill but high enough to deter potential buyers. But because we do not inhabit such a world many asset holders will overvalue their assets, in which case society benefits from the additional tax revenue that results. Similarly, many will undervalue their assets which will allow wealth to be redistributed throughout the economy. As an intellectual thought experiment, I was very much taken by the idea. Obviously it would never work in practice because the ultra-rich would simply acquire the assets of the less well-off and we would end up with more concentrated ownership of wealth. But at a time when there is evidence of increased industrial concentration, with a smaller number of firms accounting for a rising proportion of sales in most economic sectors (think Amazon or Apple), this is brave attempt to force the concentration problem onto the agenda.

The authors also propose solutions to the problem inherent in democratic systems whereby the rights of minorities have to be protected, but equally minority interest groups cannot be allowed to block the progress of a wider agenda. Posner and Weyl use the area of environmental regulation as an example but we might even apply it to the Brexit problem, where the actions of the DUP and the ERG have thwarted plans to move things forward. Posner and Weyl’s solution is to abandon the principle of one person one vote and instead give individuals a fixed supply of credits which means that if they expend them on one issue, their blocking power in other areas is correspondingly reduced. In the authors’ words, “a vote can tell you only whether a person prefers one outcome to another, but not how much the person prefers the outcome … we need a way of determining whether the intense preferences of the minority outweigh the weak preferences of the majority.”

On a day when the UK government has issued its immigration White Paper which I found a profoundly depressing and economically illiterate document, based as it is on pulling up the drawbridge, it should come as no surprise that Posner and Weyl weigh into this subject. Their analysis on this area is pretty weak but it boils down to the idea that citizens should be allowed to sell a visa to an immigrant  worker, to whom they provide financial support until such times as the immigrant is able to stand on their own two feet. The rationale is that society benefits from the additional income which flows from immigration, though I struggle to see why those who are not prepared to sponsor immigrant workers should be allowed to free-ride on the additionally generated income.

But mad as many of the proposals are, and unlikely as they are to be implemented, the authors at least have a go at identifying many of the problems which have exercised voters across the western world. The question of whether society could or should accept the undermining of individual property is more troublesome. However, many of the cases highlighted in the book demonstrate that in theory, individuals can better express their preferences by giving up their rights. In a year when The Economist has called for the liberal agenda of free trade and free markets to be redefined in a bid to enhance living standards, the book is suitably thought provoking.

As a final thought, until 1917 just four major countries permitted universal suffrage and it was not until 1971 that all cantons in an enlightened country such as Switzerland allowed women to vote. What was once unthinkable is now commonplace. Just because we cannot imagine how some of Posner and Weyl’s solutions might operate does not mean that they should be dismissed out of hand.

Negotiating with the EU: A practical guide

Following Theresa May’s abortive efforts to persuade the EU to change its mind with regard to offering some form of Brexit concessions, and as the Italian government’s spat with the European Commission continues, it seems like an opportune moment to reflect on how to negotiate with the EU. Based on a recent article by the Neue Zürcher Zeitung, which looked at the lessons Switzerland could take away from its EU negotiations, I set out a framework for the likes of Poland and Hungary, who might soon find themselves on the wrong end of the Commission’s wrath, based on the past experiences of Greece, Italy and the UK. 

1) Know what you are trying to achieve 

The British clearly failed on this score. The referendum result merely expressed a wish to leave the EU, not how it should be implemented. Nine months after the referendum, the UK invoked the two year Article 50 procedure without any clear objective in mind other than to leave the EU. Without having done any preparatory work beforehand the British started their negotiations from a position of weakness and things never got any better. As a consequence, the British have spent more time arguing amongst themselves than engaging constructively with the EU. Last week, when Theresa May went back to Brussels to plead for more concessions in order to raise the chances of the Withdrawal Agreement passing through parliament, she was repeatedly asked to specify what she wanted. And she could not do so.

2) Everyone has their own domestic policies 

Many of those members who get into difficulties with the EU often find that they ignore the domestic sensibilities of other members. When faced with the Troika’s proposals to allocate more funds to Greece in the summer of 2015, the Greek government called a referendum in which the Troika’s terms were rejected by a majority of 61% to 39%. But EU member governments were having none of it and offered liquidity on the same terms, which the Greek government was subsequently humiliatingly forced to accept. The tactic employed in parts of the Greek press of portraying Angela Merkel in terms of a previous, less enlightened, German Chancellor clearly did not play well in Germany and hardened the resolve of the EU. The UK finds itself with similar difficulties: It cannot continue to ask for exemptions from the EU rules that everyone else has to abide by. At some point, someone is going to cry foul. 

3) Don’t paint your red lines too deeply 

One reason why Theresa May finds herself in her current position is that she set red lines on issues such as immigration, ECJ involvement and leaving the customs union without accounting for the consequences of her actions. As a result when faced with the draft Withdrawal Agreement, both Leavers and Remainers can rightly argue that she has not reached an agreement that anyone can sign up to because the PM has been forced to compromise so much. The Italians find themselves in a similar position today. Having refused to countenance any cuts to outlays, the European Commission instituted excessive deficit proceedings in an action that was totally avoidable. If nothing else, the EU is built on compromises and it is normally possible to find some form of accommodation – so long as you don’t paint yourself in a corner to start with. 

4) Don’t mess with the family 

It was (rightly) argued long before the Brexit referendum that the EU had no interest in giving a generous deal to the UK. Its primary interest was to defend the interests of its members and ensure that no country could leave on favourable terms in case others decided that they also wanted to depart. The EU27 have thus closed ranks and spoken with one voice regarding the terms on which the UK could leave. Like any family, the EU is quite capable of quarrels – even feuds – but when the chips are down it usually pulls together. Ironically, Britain has never really felt like one of the family. It was twice refused membership in the 1960s thanks to President de Gaulle’s view that the UK was a Trojan horse for US interests and would undermine the vision that many members shared for the EU. De Gaulle may not have been wholly right but he was not totally wrong either and sometimes the UK has felt more like a lodger than a full family member. 

5) Might is right 

It is unfortunately one of the rules of life that larger and more powerful nations dictate terms to the smaller ones.  This is not new: Larger tribes have been pushing the smaller ones around since ancient times, but at least the EU is underpinned by a series of rules that afford some rights to the smaller members. However, the Greeks learned to their cost in 2015 that it was impossible for a nation of 11 million people to go against an economic superpower of 314 million, particularly when their case is relatively weak. Greece reckoned that ultimately the EU would cave in and offer more favourable terms but the Germans, particularly Finance Minister Wolfgang Schäuble, were adamant that the only choice Greece faced was take the terms or leave. They took the terms! The Irish can tell a similar story about how they were forced to accept the terms of the EU bailout, which many claim even now was primarily designed to support the EU banking system rather than Ireland. So when the UK goes into the conference chamber as one government facing 27 others, with Germany and France arraigned on the other side of the table, you don’t have a strong negotiating position.

The UK, like Greece before it, has failed to understand the basis of its negotiating position vis-à-vis the EU which goes a long way towards explaining its current predicament. However, many of these pitfalls were avoidable and it speaks volumes that the British tried to placate domestic opinion rather than that of its EU negotiating partners. I would like to think that Polish and Hungarian officials have taken these lessons on board as they brace for heightened tensions with Brussels. But somehow I have my doubts.

May's day turns out OK

 

To say that this has been a tumultuous week in UK politics is like saying you can get a good suntan in the Sahara. It is a statement of fact that simply does not do justice to the magnitude of events. At least we did get one meaningful vote – just not the one planned. Following the postponement of the parliamentary vote on the Withdrawal Agreement, we were treated to the spectacle of the civil war within the Conservative Party being fought in the open as rebellious Tory MPs tabled a motion of no confidence in Theresa May. Although her margin of victory was widely viewed as insufficient (200-117), she obtained 63.1% of the vote which is a larger share than in any of the 8 contested ballots in the past 43 years, bar John Major’s 66.3% when he challenged backbench rebels to unseat him in 1995 (chart).

Nonetheless, the impression remains of a prime minister who is in office but not in power. But Brexit is quite simply an undeliverable policy. Worse still, it has been hijacked by various interest groups seeking to further their own interests, all of whom have irreconcilable positions. Brexiteers simply refuse to accept that it is impossible to leave the EU on the terms that they desire, despite all the evidence to the contrary (see here for the journalist James O’Brien’s coruscating denunciation of their views). Remainers don’t always give the impression that they fully took on board the message of the 2016 referendum. Then there are the opportunists in the Labour Party who are simply using the chaos of the current situation to push their call for a general election.

Meanwhile, the world looks on aghast as the extraordinary events in UK politics continue to unfold. It has not been an edifying experience for a nation which prides itself on its constitutional stability and I have lost count of the number of times I have been asked what is going on in your country. I cannot explain it, but it was perhaps best summed up in a letter to The Times yesterday by Robert Blackburn QC, Professor of Constitutional Law at Kings College London, who wrote: “The political class has brought the present crisis over Brexit on itself by continuing to ignore the now urgent need to repair the creaking Victorian infrastructure through which our rulers continue to govern the country ... The use of an ad hoc referendum on a constitutional policy question of immense complexity, with no detailed prior examination and public dissemination of its implications across UK public life … and no parliamentary process for its approval, has exposed to the world the curiosity and embarrassment of a post-imperial unwritten political and governmental structure in turmoil.” In other words, a governmental system that is not fit for purpose.

He concludes that we need to enact the recommendations of a House of Commons Committee which “set out the case for a written codified constitution, one fit for the modern democratic era with a process through which popular deliberation and constitutional change should take place.” At the very least such an approach might act as a pressure vessel to contain the worst instincts of anti-EU populists who have infected the Conservative Party.

But now that the genie is out of the bottle it is difficult to see where we go from here. The leadership election has not resolved anything apart from drawing attention to the kindergarten antics of the inaptly named European Research Group which: (i) hates all European political ideas; (ii) clearly does no research and (iii) is a collection of disparate individuals rather than a coherent group. It is thus likely that we will continue with the plan announced by Theresa May on Tuesday in which parliament will be allowed to vote on the Withdrawal Agreement sometime before 21 January 2019. But in the absence of any significant amendments – and there is no sign that the European Commission is in any mood to reopen negotiations – MPs are likely to reject it.

But whilst nothing good will come out of Brexit, nor is there anything to be gained by calling for a second referendum any time soon let alone withdrawing the Article 50 notice. All three policy options will be hugely divisive, which is why I maintain that an extension to the Article 50 period is the least worst option. One complication which gets little airplay is that an extension of the deadline will cut across the European Parliamentary elections, scheduled for May 2019. It has long been assumed that the UK would be out of the EU by this point and will not be required to send MEPs to Brussels. If the UK is technically still a member of the EU this could cause some problems, though I can envisage a scenario in which the EU and UK arrange a fix whereby the UK is assumed to leave before the end of the parliamentary term and would thus not be required to elect MEPs.

Such a policy will buy time. But how much time will the UK need in order to pull itself together? Probably a lot more than the EU27 is likely to grant. However, I recall suggesting some time ago that one option would be to keep EU associate membership without actually leaving until public opinion has changed sufficiently to suggest that a second referendum is clearly winnable either way, thus decisively confirming or rejecting the Brexit decision. It is more than evident that politicians cannot decide what to do and unless Brussels comes to Westminster’s aid I am struggling to see how else this plays out.

Unless the Conservative Party can sort itself out, however, this issue is likely to periodically erupt every few decades. Thirty years ago, when Labour was in thrall to the left wing of the party, a series of leaders embarked on a modernisation programme which resulted in the expulsion of many of those viewed as extremists. The policy was successful in as much as Labour tacked to the centre ground and laid the groundwork for Tony Blair to claim three successive election victories with handsome majorities. Despite the current vogue for extremist policies, elections are largely won by capturing the centre ground. The Conservatives would do well to have a similar root-and-branch reform and rediscover the brio which allowed them to set the political agenda.

Plus ça change ...

Whilst the focus on this sceptred isle has been very much on the shenanigans of Brexit, the rest of the continent is focused on its own troubles. The most prominent issue, which has captured newspaper headlines across the continent, is the wave of public unrest in France where the gilets jaunes have been demonstrating against higher fuel taxes in particular and the rising cost of living in general. 

This reflects concerns expressed around the world that “the system” is not working for the average voter and that more of the same just won’t do. This in turn reflects a complex series of issues which have come together all at the same time to create a Gordian Knot of such complexity that no politician can reasonably be expected to resolve them. Environmental challenges, technological change and a shift in the geopolitical tectonic plates are big enough challenges on their own. Trying to deal with their implications at a time when we are still recovering from the biggest recession in 80 years magnifies their impact.

Looking more closely at the French government’s plan to raise fuel taxes, the French electorate appears to be as concerned as anyone about the problem of global warming and climate change, if opinion polling data are any guide. It is not unreasonable, therefore, for the government to conclude that consumers will appreciate that they have to pay more if they wish to continue emitting greenhouse gases in the process of burning fossil fuel. But they are not having it: Having been squeezed for so long, French voters just see this as another attack on their living standards.

Indeed, this demonstrates the problem of getting consumers to buy into the social changes which will inevitably have to come, and highlights the challenges for policy makers who have to wean the electorate away from certain types of behaviour. This requires an adjustment that people are not prepared to make – at least not now. However, history shows that although democratic societies frequently resist big changes at first, only to subsequently accept they are inevitable, this often occurs only after considerable social unrest, as anyone who lived through the Thatcher era in the UK will attest.

But there is another issue at work in France. Outside observers (such as me) look at the current French situation and realise we have been here before. The reform agenda set out by prime minister Alain Juppé in 1995 met with huge resistance and the general strike it provoked only ended when the retirement reform plan, which amongst other things eliminated the rights of railway workers to retire aged 55, was dropped. These strikes, which were the biggest public demonstrations since 1968, were repeated in 2010 when the government was again forced to modify its plans to reform public pensions. Given this experience, the initial reaction of the Macron government is understandable: Do what previous governments have done and suspend the tax changes in a bid to cool public unrest.

However, Macron has now gone much further than this. He appeared on TV on Monday promising to take the concerns of rural and suburban France more seriously, offering higher payments to pensioners and a rise in the minimum wage, all of which amount to additional outlays around €10bn. Having originally planned a budget deficit of 2.8% of GDP in 2019 – which is higher than the much-contested Italian plan – the budget minister now admits that in the absence of offsetting measures, the deficit will rise to 3.4%.

There are a couple of problems with this strategy. On the one hand, the French government has now done what many of its predecessors have done by kicking the can further down the road rather than engaging in the structural reform that Macron knows is required. This will only invite further protests when the government has to revisit the problems again, but the challenges in future will not get any easier. In addition, it gives cover to Italy’s position and will stiffen its resolve not to back down in the face of the European Commission’s fiscal concerns. Given that the EC has already started excessive deficit procedures against Italy, how does it intend to deal with France?

Against that, we could argue that European countries are once again rediscovering the joys of fiscal policy after years of wearing the hair shirt. But whilst across the euro zone as a whole the cyclically-adjusted budget deficit has averaged 1.3% of GDP over the period 2012-2017 (chart) and Germany has averaged a surplus of 0.5%, France has run a cyclically-adjusted deficit of 3.1% (versus just 1% in Italy). France is certainly less well placed than other EMU countries to provide a fiscal stimulus. 

Another casualty of this policy approach will be Macron’s attempt to move Europe forward. Admittedly his fine words last year were exactly what Europe needed to hear as he attempted to prevent the EU from ossifying as the messy compromise into which it had evolved. But his words did not get a particularly good hearing on the other side of the Rhine. Given the German fixation with keeping deficits down, it is unlikely that his stock in Berlin will have risen.

Whilst there is nothing wrong with judiciously using fiscal policy to nudge the economy forward when circumstances demand, the French – and the Italians – are increasing their fiscal deficits to buy off the electorate. And it may even work for a while - after all it is voters' money. But hard choices sometimes have to be made. I have long argued that the UK has overdone the degree of austerity and I understand why Macron made his choices. But I cannot help feeling that somewhere down the line this might be a policy that backfires.