Tuesday, 29 January 2013

What to do about pensions?

As the public debate is gathering pace about who may win the election in 2015, academics are starting to look back to the events leading up to the last election in 2010. The distance to events may afford them some objectivity and a collection of papers in the British Journal of Politics and International Relations gives a good snapshot of several takes on the matter.

One of the most interesting contributions is by Matthew Watson. Essentially, he argues that New Labour instituted a welfare to work policy that was informed by the principle of individual responsibility. Whilst the electorate was largely supportive of this, Blair and Brown then transplanted this approach to other parts of the welfare state, in particular to pensions. Individual responsibility in the field of pension provision however did not quite match the largely simple equation that could be applied to work readiness schemes for two reasons.

First, saving for pensions is a more complex behaviour with multiple incentives. Second, the shift to individual pension investments meant that pension provision moved from state funded welfare to the financial markets. Critically, those were outside of governmental control, so that when the financial markets collapsed, Brown's government had to underwrite private market institutions with massive state funding (supplying the banks with cheap credit) which ultimately increased state expenditure more than any pension increase would have done. In essence, by favouring individual pension schemes, the government gave up control over an instrument of welfare policy, and gained a disaster in return.

Watson calls this the 'paradox of responsibility', indicating the conflict between the original motive of New Labour to introduce individual responsibility into welfare provision, and ending up (irresponsibly) propping up unpredictable financial markets.

There is much to be said for this argument it seems to me. However, the main question remains largely unanswered. Could New Labour have plausibly resisted the shift from universal state funded benefit provision to more individual responsibility in welfare? This has been a global rather than an isolated national change. The German government under Gerhard Schroeder introduced the 'Riester' pension scheme, essentially a state backed pension fund that invested the payments in the stock market. So, New Labour's reform of the pension system was by no means unique.

The loss of governmental control over welfare policies is also one that is mirrored in other areas. National governments' ability to 'steer' behaviour is not just squeezed by ill-fated attempts to outsource pensions to financial market investment products. Welfare provision as a simple re-distributive exercise had long become unsustainable due to the demographic changes in all Western countries.

So the search for a better solution continues. At the moment, neither the current government nor the opposition has developed viable proposals to deal with welfare expenditure (especially pension and social care costs) in the long term.

Thursday, 24 January 2013

Cameron calling the bluff of the other parties on Europe

Cameron is enjoying some good headlines in the newspapers after years of more or less open hostility from the press. Yet, the real issue he sparked off with his Europe speech is how the other parties will position themselves to the referendum call.

Labour leader Miliband has chickened out already. Nothing else to be expected from a largely timid leader of the opposition who is party leader only at the behest of the trade unions.

Yet, Cameron has also called the bluff of the Liberal Democrats and they are fuming. The former leader of the LibDems Charles Kennedy, struggled to keep his composure during an interview with Andrew Neill at the Daily Politics show yesterday when asked whether he would support a referendum on Europe. The background to this question: Kennedy vociferously demanded an in/out referendum for the last 20 years. Alas, he could only do so since the LibDems were never in government so they had no chance to get their wish.

Now, things are different. If Kennedy had the mettle he always pretended to have, he should join Cameron in his call for a referendum on Europe. It seems the chickens are coming home to roost.

Wednesday, 23 January 2013

More or less Europe, that is the question

The wait is over. After several delays, Cameron has finally delivered his lecture on Europe. He sketched the main parameters of Conservative European policy for the time after the next election. The shopping list is long, including the repatriation of powers from Brussels to the legitimate home of democracy, Westminster; and an 'in-out' referendum, once the new contract between Britain and the EU is drawn up.

Was this worth the wait? The lecture was certainly what most Brits expect their politicians to tackle: the nauseating interference of European bureaucrats in the daily life of British people, a flood of directives and laws from an unelected and illegitimate European Commission, and a promise to finally give people a say in the way in which Britain negotiates its relationship with Europe.

Whilst some of the reactions from abroad have been hostile to say the least, few politicians in Germany or France understand the real motives of Cameron. Most observers note that Cameron's chances to be re-elected depend on defeating the challenge from the right, that has emerged from some of his own back benchers and UKIP.

But the real motivation for Cameron's determination to re-negotiate the British bargain with Europe lies elsewhere. It is his deeply felt belief that European institutions lack legitimacy and have so for some time. This may not bother German or French politicians. Thomas Nipperdey, a German historian, wrote eloquently about the view of Germans to see 'the state and national bureaucracy as a true and impartial agent of freedom' (Nipperdey: Arbeitswelt und Buergergeist, p.592) as opposed to party political dispute which is widely perceived by Germans as bickering and an expression of narrow self-interests.

In other words, Germans may see European bureaucrats as the paragon of political altruism, where British people only see illegitimate and unelected pencil pushers. I have previously argued here that the Euro-crisis may force German politicians to think hard about the lack of legitimacy of the European Commission as it takes on budget-reviewing and monitoring powers. Yet, in any reform effort, the key element would have to focus on the weakest component of European institutions, the European Parliament, which hardly deserves the name given that its members are often elected with fewer votes than the local yacht club treasurer and have no power to hold the European Commission to account.

But a reform of the European Parliament would require political resolve from national politicians to transfer even more powers to an institution that has hardly left any positive impressions over the last 30 years. Such a move would be tantamount to political suicide. And so we muddle on.

Only, that Cameron has now put a stop sign up. He has clearly signaled that muddling through is not an option anymore for the British electorate. His courage to force the issue is to be commended. And although Labour is carping from the sidelines, even the leader of the opposition rushed to announce that a repatriation of some powers would be in order. The real question is whether Cameron has enough political capital in Europe to re-negotiate Britain's relationship with Europe. He will need strong allies with a similar agenda. Yet, of those there are very few indeed. It may be a sign how isolated Britain is with its wish for less integration. But then, you have to stand up for what you believe, and Cameron is about to do this.

Tuesday, 15 January 2013

Budget fight - round 2

The US treasury is taking in $100 billion dollars less every month than it spends and the national debt is pushing $16 trillion dollars. Yet President Obama has identified the main enemy of the American people: too little spending!

In his press conference he used the usual strong language that comes natural to him when he backed himself into a corner . Forget compromise and talk about consensus! He told Congress that if they don't raise the debt ceiling by end of February, nurses and firefighters will go unpaid.

What he didn't say is that he could have ensured that it is not nurses and firefighters but the bureaucrats in Washington who go unpaid. Yet this is a president who loves to spend money. More than $900 billion dollars went on bailing out car makers that are now producing too many cars for a vastly shrunken world market. The (second) stimulus which his government pushed through Congress in 2008 did not even make a blip in the unemployment figures for more than three years, yet wiped the triple A rating off the US treasury.

Perhaps we shouldn't be surprised about all this. Apart from his rhetorical skills, Obama had little to offer in the way of executive experience. And he appointed Timothy Geithner to the position of Secretary of State in the Treasury.

Sadly, in the end, the US taxpayer will have to foot the bill for a president who has shown little hesitation to spend money he does not have. As the fate of Gordon Brown has demonstrated, history wont be too kind with politicians who like spending other people's money.

Monday, 14 January 2013

The malaise of the Left

Despite the public outrage about banker's bonuses and pay packages of chief executives, the political Left has not become wildly popular with European voters so far. In Britain, the government is introducing radical reforms of welfare and the (English) health sector, frequently bungles the presentation of its policies and yet, Labour struggles to get more than 8 points ahead in the polls. That's not a winning margin by any count.

In Germany, the radical Left (the former Communist Party) is engaged in a vicious internecine struggle (as Communists always seem to be), reducing its poll numbers down to the critical 5 percent nationally. It risks not entering the Bundestag for the first time in more than 20 years. On the other hand, the German Social Democrats have just managed to appoint as their leading candidate for the September general election somebody who is liked and respected amongst Conservatives but universally disliked by his own party. It has not helped his standing amongst his own comrades that he has a relaxed attitude to making money, or as Harry Enfield said 'loadsofmoney', through well paid lectures and company directorships.

In France, the Socialist Party has won the presidency but the hapless Hollande has managed to drop in popularity faster than the French could say 'solidarity'. His proposal to tax the rich 75% of their annual income has been cancelled by the French constitutional court and he seems to have run out of policy ideas before his ministers have even warmed up the seats of the government benches.

So, what's going wrong with the Left? Why are they struggling to capture people's imagination or their votes?

The answer lies in a fundamental dilemma that goes back all the way to the late 1970s. All Western countries embarked on a large expansion of the welfare state up to that time. In the 1980s demographic changes started to shift the fiscal basis for high state expenditure and some governments started to row back. However, there was still some considerable room for manoeuvre as governments managed to tap new sources of finance in the developing countries through the 1990s and early 2000s. As production facilities moved to the East and South, finance flowed back into the pockets of Western governments through cheap loans. The West was still thought to be a rock for short and long term investment. This allowed Western governments to continue to fund an overstretched and unviable welfare system.

Interventionist government requires plenty of finance and that in turn needs cheap credit. This was, for example, the foundation of Britain's New Labour policies. Welfare expenditure rose from £80 billion in 1998 to more than £200 billion in 2007 in Britain. Labour's Chancellor Gordon Brown confidently (and wrongly) proclaimed the 'end of boom and bust' in a time of seemingly unending plenty.

And then the tsunami hit. Although there were many different reasons for the economy breakdown, the biggest long term problems are the demographic changes in Western countries and the low competitiveness of their economies. Since their welfare systems were financed from capital flows from developing countries that now started to hold on to their money, the foundation of Western finances imploded and left little more than rubble and huge deficits.

It is this complex of reasons that poses a bigger dilemma to the Left than to the Right. The Left needs a time of plenty to fund the expansionist welfare state that we have all come to expect. If Labour does not  stand for more equality through state intervention, what is it for?

The responses of the Left to this crisis have been unimaginative to say the least. French Socialists want to tax more, and British Labour wants to, yes, tax more. The dilemma however is this: the cost increases of health care and welfare (the two largest items in government expenditure) are such that no amount of additional tax revenue can ever catch up with them. The cost dynamics of welfare and health are outstripping tax revenues at a staggering rate. That means tax rises will never again be able to cover state expenditure as it did in the past.

So, if the Left wants to create a more equal society it has to look elsewhere. State intervention through tax credits and additional expenditure wont deliver it anymore.

Saturday, 12 January 2013

'Rip off' Britain?

The Labour leader has a new favourite term: 'rip-off'. Over the last months he has railed against energy and train companies 'ripping-off' ordinary customers. Now he also talks about 'rip-off' landlords. The overall narrative is clear: the common man on the street is at the mercy of vicious companies which are led by greedy CEOs pocketing multi-million salaries. All potential rofits are being passed on to evil shareholders whilst customers are squeezed with ever higher prices.

There shouldn't be much surprise about why the Labour leader chose to attack train and utility companies. They fit into his picture of capitalism as the evil mechanism that exploits ordinary people up and down the country. Yet, his worldview seems a simplistic one, and one that he didn't seem to espouse when he was the transport secretary himself. So why now?

Steering Britain towards a more energy efficient future and one with effective public transport takes a lot of investment. To be precise: £18 billion over the next 6 years to upgrade the transport network alone. This money cant just come from the tax payer. It will mainly be sourced from investment companies which expect a healthy return. That much was clear to Miliband when he was still in government.

Now, sitting on the opposition benches in the House of Commons, the world looks rather different. The main task of Miliband as the leader of the Labour Party is to take it back to power. Which boils down to attracting new voters. Opposition parties hence often have the unappealing tendency to cast their net into fishponds they wouldn't have considered when still in power. That's where Miliband's rhetoric about 'rip-off' Britain comes from.

Miliband is smart enough to know that utility companies operate within a regulatory framework that is set by the very government in which he served. The terms of reference are defined in such a way as to attract sufficient investment for future infrastructure development. There is nothing 'rip-off' about making billions of pounds from selling gas, power or train tickets to customers when at the same time these companies are requested to spend billions on upgrading their infrastructure to make it fit for the 21 st century.

In other words, accusing companies of 'ripping-off' customers is opportunism pure and simple on the side of Miliband. He will come to regret this language if he ever makes it back on to the government benches and will have to conjure up the billions of pounds of infrastructure investment that keep the water flowing, and the lights on in Britain.

Tuesday, 8 January 2013

Solidarity in action - why the highest earners pay more than enough

As the debate about spending and tax rises still rages in the US, it may be useful to have a quick look at the specific income tax rates that apply to working people. In Britain, the view is that US citizens pay far less income tax than we do. The US, so the story goes, is a low tax country.

If one looks at the marginal tax rates for individuals that apply to their taxable income, nothing could be further from the truth. The New York Times has helpfully published a graphic detailing the marginal tax rates and how they developed over time.

(you can find the graphic HERE)

The graph is revealing. Despite the incessant news about rich people avoiding tax, the tax rate for top earners in the US ($350k plus) is similar to that in the UK. The rate is 39.5 per cent. That is only 5.5 percentage points lower than the top marginal tax rate in the UK. In fact, it is only 0.5 percentage points more than the tax rate Labour had levied (40%) on the highest earners from 1997 to 2010.

On top of that, people working in the US of course also pay local taxes, which adds to the burden. This picture throws a different light on the argument that 'tax rises can pay down the debt' of the US or the UK. The fact is that the highest earners in either country already contribute about half of all income tax revenue. Their tax burden is already a multiple of what the lowest earners contribute to the treasury. That's solidarity in action.