Eagle Eye

"How about that apology?"


The UK is now growing faster than France and Germany. The latest Office for National Statistics report suggests that UK GDP expanded by 0.3 per cent in the first quarter of 2010. Meanwhile, new Eurostat figures suggest that Germany expanded by 0.2 per cent and France by 0.1 per cent over the same period.

So can we expect a comment from David Cameron on this disparity? If the Prime Minister is consistent, we will get one.

Remember when economic figures last August showed France and Germany had exited recession with growth in the second quarter of 2009 of 0.3 per cent while the British economy contracted by 0.8 per cent? The Tory leader leapt on this as a significant moment and one full of political meaning.

He argued that: "In contrast to France and Germany, Britain is still shrinking and this shows how Gordon Brown has been getting it wrong on the economy."

So should we expect a comment from the new Prime Minister graciously admitting that Gordon Brown didn't do such a terrible job on managing the economy after all? Don’t hold your breath.
 

The rewards of passivity


The distinguished University of Chicago economist, Raghuram Rajan, has a partial defence of bankers' bonuses in the Financial Times today.
 

This is his answer to why the system so manifestly broke down with bankers taking vast bonuses - a considerable proportion in cash (see this research) - for deals which eventually turned bad.

"Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets. The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans. And the willingness of the Fed to stay on hold until jobs came back, and indeed to infuse plentiful liquidity if ever the system got into trouble, eliminated any perceived cost to having an illiquid balance sheet."

As Paul Krugman has often pointed out, the argument based on the Congressional push for cheap home loans to low-income families is a canard. Why was there such a bubble in commercial real estate if political pressure was the driving force of the US property boom?

So we're left with the influx of foreign capital from China and the Greenspan "put" of low interest rates as the "political forces" which, in Rajan's view, fatally distorted the system.

The trouble with this argument, it seems to me, is that it absolves the bankers' of any personal responsibility. In this world, bankers are merely passive players, unthinkingly responding to the distorted signals from the market place. But wasn't one of the great claims of these bankers in the boom years that they justified such fantastic rewards because they were brilliant at managing risk? Indeed, hadn't they invented a wonderful new system of securitisation whereby risk would be distributed to those most able to bear it? But no, they were just dumb pawns, pushed around by mighty political forces. Whatever happened to those omnipotent and omniscient Masters of the Universe?

A smart point from David Cameron at PMQs in response to Harriet Harman's probing over marriage tax relief.

The Prime Minister pointed out that the previous Government itself "recognised" marriage in the tax system when it legislated  in 2007 to permit individuals to claim their late partner's inheritance tax allowance.

"If recognising marriage in the tax system is such a good thing for the better-off", asked Mr Cameron to Commons cheers, "why do we not do it for the less well-off?"

A nice way to puncture Labour's hypocrisy. But it was interesting that Mr Cameron argued that inheritance tax cuts benefit "the better off". As I recall, the Tory rhetoric on this has been that cutting inheritance tax is all about encouraging "aspiration" for all, rich and poor alike. Isn't this an admission that, at heart, it's just a bung to the already wealthy?

Mr Cameron has shelved the pre-election Tory plan to raise the inheritance tax threshold to £1m. But if it ever resurfaces, perhaps today's admission should too.

 

The Queen's Speech contained a bill to scrap ID cards. So where were all those former Labour Home Secretaries to condemn this folly? David Blunkett? Charles Clarke? John Reid? Jacqui Smith? Alan Johnson? The silence has been deafening.

Perhaps they will raise their voices in protest when the bill is published. Let's hope so. Because if they don't I'm afraid a lot of people are going to be left wondering whether these former ministers ever really believed in the merits of ID cards in the first place.

Two sharply contrasting views on Ireland's economic future from two of its top economists quoted in an excellent Guardian feature today.

John FitzGerald, an economist at the Economic and Social Research Institute, "forecasts annual growth zooming up to as much as 5% between 2012 and 2015, before falling back to what he calls 'boring, European' levels". FitzGerald also argues that "leaving the euro would be lunatic".

David McWilliams, a former Irish Central Bank economist and someone who warned that the Celtic Tiger's bust was looming, regards all that as "horseshit", and laments the fact that "the establishment view is that we need more of the same".

Well, they can't both be right.

Watch this one closely. Ireland was the poster child for the neo-liberal right in the boom years with its weak regulation of finance and its ultra-low corporate tax rates. It's been the poster child for the right in the bust too, with Dublin's savage and early fiscal retrenchment. The right desperately need Ireland to bounce back quickly to validate their initial economic prescriptions for growth and also to support their arguments about the virtues of slashing public spending in the teeth of a recession.

Incidentally, Simon Johnson, of the Baseline Scenario, has a good analysis here showing why Ireland's status as a tax haven puts its public finances in an even worse state now.

"Roughly 20 percent of Irish gross domestic product (G.D.P.) is actually 'profit transfers' that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland’s potential tax base. A more robust cross-country comparison would be to examine Ireland’s financial condition ignoring these transfers. This is easy to do: a nation’s gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are near-identical, but in Ireland they are not. When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009"

The return of Yes, Prime Minister to the scene is timely. For the loudest sigh of relief this month came from Whitehall. Not so much for the Con-Dem Nation assumption of power, though contrary to some New Labour ministers in 1997 the British civil service does look forward to a new government if only because a change can be as good as a rest (and new ministers can be putty in a grizzled mandarin’s hands). No, the almost palpable sense of joy emanating from senior civil servants can be encapsulated succinctly: ‘We’re back!’

The civil service was once thought of as the fourth service of the state after the navy, army and air force. For three decades after 1945 it enjoyed huge prestige, slyly embodied by Sir Humphrey Appleby and described by Rab Butler as ‘like a Rolls-Royce – you know it's the best machine in the world’. But British decline in the 1970s damaged the bureaucracy greatly.

Few people ever accused Mrs Thatcher of being a Trotskyist (certainly not to her face) but in terms of civil service reform she ushered in an era of perpetual revolution. Her wish to see it ‘deprivileged’ led to constant efficiency reviews, sackings and dismemberments which were enthusiastically followed up by her successor John Major. But it took the New Labour era, specifically the first two terms of Tony Blair, to drive the civil service down to its lowest ebb in the modern era.

There was an increased turnover of cabinet secretaries which saw Blair having four during his decade of power (Lord Butler of Brockwell, Lord Wilson of Dinton, Lord Turnbull and Sir Gus O’Donnell, right) compared to only six (including Butler) throughout the period 1945-1997. This was in some part due to Blair and his ministers’ deep frustration at the pace of change in the public sector.

For Blair tried to fundamentally change the role of the civil service from the traditional one of policy advice to project manager. The old idea that senior civil servants should be brilliant at writing beautifully structured policy documents (and complete the Times crossword in record time) but lacked the entrepreneurial skills necessary for the delivery of world class public services, was to be swept away with a new breed of bureaucrat. As Blair said in 1999, he bore ‘the scars on my back’ of attempting public service reform – ‘People in the public sector are more rooted in the concept that if it’s always done this way, it must always be done this way than any group of people I’ve come across.’

While it was understandable, indeed laudable, for Blair to try this, there was a crucial misunderstanding at the heart of his reform agenda. The civil service has always had the role of delivering public services – but it has also been the guardian of the constitution. In the absence of a codified constitution, we should be relieved that they have a ‘it must always be done this way’ mantra. To seek to dismantle the second role was misguided and dangerous. The stasis of civil service reform during the ‘events, dear boy, events’ Brown premiership was not entirely unwelcome after the hectic years of Blair.

Senior civil servants have resumed their role as the ‘continuity girls’ of the British constitution, ably and discreetly dispatching their duties making sure that the Queen’s Government carries on by providing high level secretarial support during the various negotiations along Whitehall. Furthermore, the whole political and economic scene was calmed before the election by the wise action of Sir Gus to agree and publish previously controversial conventions as to when a prime minister must resign after a hung parliamentary election. The ‘golden triangle’ of Cabinet Secretary, Prime Minister’s Permanent Secretary and the Queen’s Private Secretary proved their worth. Crisis was averted, the markets were stabilised and the civil servant’s thrill of non-recognition was preserved.

There may be greater thrills ahead. We now have coalition government between two parties who were just days ago describing each other as ‘jokes’. This will present its own stresses and strains but ones the civil service will relish. Providing the supporting processes for a coalition government will require both ingenuity and strength of character.  Making sure that all ministers in the coalition feel like they are being treated equally will of course be a task for the Prime Minister and his Deputy – but the civil service will also need to play a key role in ensuring the mechanics of the coalition process deliver equal treatment, or at least the impression of it.  There is little or no relevant experience in Whitehall of coalitions. The mandarins in the Scottish Government know the necessary intricacies and may well be a useful source of advice for their southern colleagues.  But the generation of civil servants who have joined under the relative stability of New Labour and huge parliamentary majorities will be particularly stretched.  The Cabinet Secretary and his permanent secretaries will need to show the sort of invisible visible leadership to their staff that only senior civil servants can.

This is what many, if not all, officials joined up for, to be at the centre, advising and serving ministers, right at the heart of government (as opposed to learning the ins and outs of a Job Centre+ in Teesside). As one senior official put it, coalition is going to be a ‘nightmare’ – accompanied with a wry smile.

Photo: DAVID ROSE

Jon Davis is Executive Director of the Mile End Group and Lecturer at Queen Mary, University of London.

I saw the debate on Newsnight between Shami Chakrabarti and Lord Carlile yet came away with a different interpretation from my colleague John Rentoul.

Chakrabarti's essential argument was that if there is insufficient evidence to charge these two individuals they should be set free. Is that such a "shameless" position? I thought it was the basis of the British criminal law, whereby a person is considered innocent until proven guilty in a fair trial.

She also argued that if the police and the intelligence services still consider these individuals to pose a potential threat, they should be closely monitored. Again, is that a "shameless" position? If so, it's a shamelessness in which the police already acquiesce when it comes to non-terror cases. Sometimes the police suspect people of being involved in criminal conspiracies, yet they lack the evidence to charge them. What do they do? They put them under surveillance and attempt to gather that evidence with a view to eventual prosecution.

According to John, surveillance for foreign terror suspects would be either prohibitively expensive, intensely intrusive or ineffective. Yet what is the alternative? Should they be imprisoned indefinitely on the say so of the police, the intelligence services and Lord Carlile? Should they be put under the quasi house arrest of control orders? Should they be deported to face possible torture from the security forces in their home countries? All those options look pretty shameless to me.

Ed Miliband says Labour needs to "face up to the scale of defeat" in the general election.

His brother David says: "we lost, and lost badly".

The clear implication is that Labour had no moral right in the eyes of the public to continue in power.

I think it is now incumbent on all those Labour-friendly commentators who were demanding a Lib-Lab coalition last week to either explain why the Miliband brothers are wrong, or to admit that they were advocating something that would have been inherently unstable and politically illegitimate. If we get silence we can presume the latter.
 

My colleague John Rentoul asks on this blog, "what about the newspaper's campaigns against banks charging for the services they provide, and against supermarkets for selling things that people want to buy cheaply and efficiently?". His implication seems to be that in this "age of change" The Independent should drop its campaign against penal bank charges on customers who go overdrawn and its concerns that supermarkets are using their market dominance to squeeze suppliers unfairly (see here for an example).

I don't know precisely what  "age of change" means but if it means turning a blind eye to the abuses of powerful oligopolies, if it means accepting that everything done by the private sector is virtuous simply because it is the private sector, then, as Samuel Goldwyn once put it, include me out.

Here's an astonishing thing doing the rounds: type 'David Cameron side profile' into Google's image search, and have a look at the first result. Then have another look. Rub your eyes, look away, then look back. Pinch yourself; you aren't dreaming.

If you can't be bothered with that, the picture is below. I don't want to spoil your surprise, so I'm making you click the 'read more' bit.

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