Milton Keynes lies half way between Oxford and Cambridge, and is known to historians driving between the two universities for its succession of roundabouts, its concrete cows grazing beside the road, and huge distribution warehouses. If they think of history, it is Bletchley Park – the home of the wartime code breakers – that is subsumed in the new town. They hurry on to their idyllic destination with a sigh of relief that they do not live in this arid and soulless dystopia. But as Guy Ortolano shows in his outstanding book, Thatcher’s Progress: From Social Democracy to Market Liberalism through an English New Town (Cambridge Uniiversity Press, 2019) they should pause and reflect on what the development of Milton Keynes shows about wider political process in late twentieth century Britain.
Mrs Thatcher herself visited on 25 September 1979 to open Europe’s largest shopping center. After lunch, Denis Thatcher gestured to the center and remarked “Isn’t it wonderful what the private sector can do?” (Ortolano 253) – a muddle-headed response to an impressive state-funded, publicly managed development. Soon, the Thatcher government started to sell off council housing, to privatise public utilities, and to transfer public land to the private sector. Milton Keynes was no exception. Brett Christophers notes that about 18,000 acres was acquired for the construction of the new town and much of it was returned to private ownership through the government’s ‘right to buy’ public housing at a discount of up to 30 per cent. Social democracy was turned into market liberalism.
The initial idea for a new town in Buckinghamshire came from the county council and its planning officer, Fred Pooley. His vision of North Bucks New City was a new town for affluence, the motor car and modernity, with a free monorail system linking fifty or so neighbourhoods of 5-7,000 to central shops and leisure facilities. The ‘monorail metropolis’ would be planned for the motor car without allowing the car to destroy the city, and looked to Disneyland and Wuppertal. Pooley’s plans were accepted by Conservative-controlled Buckinghamshire County Council in 1964 which bought into a social democratic vision that was both inspired by and influenced international thinking. Pooley wanted to show that Britain, far from declining, could still lead the world. But his vision collided with the new Labour government elected in 1964.
Other new towns were the creatures of the central government and autocratic development corporations whose budget and membership were set in London – and the permanent secretary of the Ministry of Housing and Local Government, the imperious Evelyn Sharp, had no intention of allowing any exception. The great thing about development corporations, she insisted, was that ‘they can get on with their job without consulting public opinion’. (Ortolano 60). In 1967, control passed to a development corporation chaired by a socialist businessman, Jock Campbell, whose family fortunes came from sugar plantations in British Guiana – a different, indication of global reach. Campbell realised his fortune had been based on slavery, indentured labour and exploitation, and he aimed to redeem himself by a commitment to people over profits both in the empire and at home. The welfare state replaced the empire – and he was not alone, for ten general managers of new towns had been colonial officials. Campbell was joined by the planner Richard Llewellyn-Davies who sat on the Labour benches in the House of Lords and whose family was part of the ‘intellectual aristocracy’. Rather than Pooley’s vision of Brasilia in Buckinghamshire, Llewellyn-Davies’s vision was mini-Los Angeles – a motor city based on dispersal, mobility and open-ended planning or ‘indeterminate architecture’ of system of grids, roundabouts and parks that could be expanded in a flexible manner. His vision owed much to the Berkeley futurologist Melvin Webber who argued that urbanism must change in response to the rise in services, education, knowledge and affluence. Webber stressed that urban forms should be based on indeterminacy and networks, on ‘community without propinquity’. The planning of Milton Keynes was inspired by international thinking, and Llewellyn-Davies then took an international role for nationalised Britain. He opened an office in New York in 1967 and expanded into the middle east, above all in re-planning Tehran. And in Milton Keynes, the Development Corporation recruited modernist architects such as Norman Foster to build in ‘welfare state modernism’ of non-traditional materials and flat roofs, free from the constraints of the market.
This social democratic vision gave way to market liberalism that is captured in the shift from about 75 per cent to 25 per cent of housing being in the public sector. Ortolano shows the change was carried through by social democrats who did not necessarily change their minds but had to adjust their behaviour. Funding cuts after the IMF crisis of 1976 forced the Development Corporation to look for new ways of securing revenue – including creating a consultancy to advise on new towns in Saudi Arabia and Nigeria. Social democracy did not die; it remained dynamic in its response to market liberalism until, in the end, it internalised the priorities of market liberalism. The only way to continue the social democratic ambition was to encourage owner occupiers to come to Milton Keynes – and the only way to ensure the would-be purchasers had access to loans was to drop ‘welfare state modernism’ in 1981 for traditional, saleable housing acceptable to lenders and would-be purchasers. Architectural style reflected market liberalism, as the Development Corporation struggled to show success in the new metric of owner occupation. Social democrats struggled to succeed in the new world of Thatcherism and ‘the logic of survival transformed Milton Keynes into an avatar of market liberalism’ (0rtolano 200).
Ortalano’s book has wide implications for Britain’s post-imperial history as it struggled to find a new international role, for changes in urban form and architecture, for notions of community and affluence. It is a pleasure to read. Brett Chrisophers book on The New Enclosure: The Appropriation of Public Land in Neoliberal Britain (Verso, 2018) is more tightly defined and more engaged (even enraged). He shows that it was not only the public land of Milton Keynes that was sold – other land owned by public bodies from the Ministry of Defence to National Health Service changed hands. Although precise estimates are difficult to produce, Christophers plausibly suggests that public landownership after the Second Word War was around 12-14 per cent of the land of the United Kingdom which expanded to about 20 per cent – mainly as a result of purchases for social housing – by the time Mrs Thatcher assumed office. Since then, about 10 per cent has been transferred to private hands (Christophers, 96, 117, 248-9). This ‘new enclosure’ has led to surprisingly little scrutiny and protest, in part because it has been piecemeal, in part because it has reputedly benefitted former tenants of council houses and wider share-ownership in the privatised industries.
Christophers’ analysis lacks the subtlety of Ortolano’s nuanced account of the rise of market liberalism, but his account of the ways in which land has been transferred from public to private ownership since 1979 is compelling. His concern is not with the transfer of land as the incidental result of privatisation of, say, the National Coal Board or public utilities which accounts for about 20 per cent of the total transfer. Rather, he focuses on the privatisation of land qua land, and in particular from local authorities which accounted for around 60 per cent of the transfer, much of it through the sale of council houses. The case for privatisation of land was that the public sector had a surplus of land which was used inefficiently, and that if it were transferred to private owners, they would build more housing and encourage economic growth. Christophers shows that these propositions were not tested against land use by private owners, or by different criteria of social use than profit. Many councils did not wish to sell, or public owners might prefer to transfer land between themselves to meet the demand for new hospitals or schools or housing. Christophers convincingly shows how the central government closed down options by setting space utilization targets, creating registers to identity ‘surplus’ land, devising accountancy methods that gave public land a market value that prioritised sale, and then introducing constrains and incentives that made sale to private owners virtually certain.
The transfer has not had the promised desirable consequences of additional housing or growth. In Milton Keynes, 71 per cent of council apartments sold to tenants passed to private landlords, the highest rate in the country – and tenants of private owners receive more housing benefit than in the denuded social housing sector. The state now spends about twenty times as much on housing benefit as it does on building affordable social housing. The transfer of social housing to tenants did at least provide some benefit to workers: as Massimo Florio showed in The Great Divestiture: Evaluating the Welfare Impact of the British Privatizations 1979-1997 (Cambridge Mass 2004), it was the only privatization with any claim to have a progressive impact on distribution. He found no evidence that privatization benefited the consumer, workers or the taxpayer; the gains went to shareholders as a result of under-pricing and out-performance (in contrast to most public offerings which are over-priced and then under-perform) and to managers and financiers. Christophers finds a similar outcome in land transfers which have benefitted large property firms that are hidden behind opaque corporate structures. By contrast to the pressure on public owners to make their ownership transparent, the ownership of private land can only be discovered by assiduous investigative journalism such as Guy Shrubsole in Who Owns England? How We Lost Our Green and Pleasant Land and How to Take it Back (2019).
Christopher is writing in the tradition of great historians such as R H Tawney and E P Thompson on the seizure of monastic land and the enclosure of the common fields – something for our historian to contemplate as she navigates the roundabouts in Milton Keynes. And she should no deride the cows as she proceeds between the two universities. The Development Corporation aimed to build community as newcomers arrived, above all from inner London. The social development department met new arrivals with a cup of tea and a friendly face, and also embarked on ‘animation’. In 1977, Jack Trevor arrived as the first creative writer in residence, and animated the scene by suggesting the town need a creative psychiatrist, and that his aim was ‘to corrupt students’ so that imaginative four-year olds were not turned by the educational system into ‘pricks’. (Ortolano 167). Less abrasive was his neighbor Liz Leyh, the first artist-in-residence who arrived from New York. Children joined her in animating the new town with a huge giraffe, an installation inspired by the Wizard of Oz, concrete snowman, hippopotamuses, ice-cream cones – and of course, the cows that were her parting gift to the town. Her aim was ‘to define community arts as the participation of an artist with other people or an art form which enables different people to participate with each other’ (Ortolano 169). The cows now inspire derision from passing motorists who do not understand the cultural world in which they were created. Ortolano’s brilliant book allows us not only to grasp that cultural world, but more generally to appreciate how the construction of Milton Keynes illustrates fundamental changes in British society that allowed Dennis Thatcher’s mistake to be taken as truth.
http://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.png00Martin Dauntonhttp://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.pngMartin Daunton2020-12-29 14:10:032020-12-29 14:11:37Milton Keynes to Milton Friedman
A previous lecture delivered in Melbourne in May 2019 dealt with Brexit in the longer term – how relations with Europe changed since 1945, from ambivalence to membership and back to ambivalence. In this lecture, also in Melbourne, in November 2019 I turned to some major issues which have been opened up and need to be resolved
THE MEANING OF DEMOCRACY
A referendum is a form of plebiscitary democracy that is not
easily reconciled with representative democracy.
Until 1970s, a referendum was thought unconstitutional
because parliament was sovereign. The constitutional
lawyer AV Dicey argued in the later nineteenth century that judges know nothing
of the will of the people except as expressed in an act of parliament.
How is a decision reached on what is an appropriate issue
for a referendum? One view is that is
should only be used for a constitutional issue, which begs the question of what
is the constitution? In reality,
referenda have been used for tactical reasons related to party discipline, and
not really to show the will of the people.
When used, referenda could therefore only by advisory and
not binding – though in 1975 and 2016 executive decided that they would be
bound.
Referenda can work for a binary choice. I have recently experienced
three: one is the referendum on the EU in 2016, and the others were
Australia
2017: same sex marriage, yes or no
Switzerland
2018: should cows have their horns removed, yes or no
A simple binary vote was inappropriate for membership of EU,
for there was no clarity over what ‘leave’ meant. The choice was likened to vote: yes or no to
the question ‘shall we go to the cinema’.
When ‘yes’, a choice then has to be made whether the film is The Sound
of Music or The Texas Chain Saw Massacre.
An appeal was made to the ‘will of the people’ which MPs were
meant to carry out – even if that was true, how was one to interpret what the
‘will’ actually is? And is it the
overall vote (52 per cent leave) or that of the individual constituency or – very
importantly since devolution – the constituent nations of the United Kingdom?
Take the case of Dominic Grieve, the MP for Beaconsfield, a
leading supporter of membership and former Conservative Attorney General. To some, he was a ‘traitor’ for going against
will of people – but his own constituency voted 51 per cent remain. In any case, Edmund Burke is buried in Beaconsfield
churchyard, and he informed the voters of Bristol in 1774 that an MP was not a
delegate but a representative or trustee who served the public or national
interest: “his unbiased opinion, his mature judgment, his enlightened
conscience, he ought not to sacrifice to you, to any man, or to any set of men
living. … Your representative owes you, not his industry only, but his
judgment; and he betrays, instead of serving you, if he sacrifices it to your
opinion”. A trustee exercises his own judgment in making decisions about
what should be done. “You choose a member, indeed; but when you have
chosen him, he is not member of Bristol, but he is a member of
Parliament”.
Referendum mean setting this principle aside.
Another issue is the time scale for a referendum. Calls were made for a second referendum on
two grounds:
We would not know what sort of leave would be
offered until a deal was negotiated. One
would not buy a house if the survey found it had serious flaws; and a trade
union would put a deal to a vote after a strike
The electorate changes: younger and more
educated larger share of electorate, more in favour of remain
The view that the ‘will of the people’ can only be expressed
is in tension with democracy as a process in which the losing side can continue
to campaign. This disagreement is very
deep and dangerous. It also led to
hypocrisy, for Nigel Farage of UKIP said that if he lost 48/52 he could
continue to fight; when he won 52/48, calling for a new referendum was
treachery by bad losers.
Referenda are a sign of failure to handle complex political decisions. Difficult issues should be resolved by handling complexities with a continuum of views that are argued out within parties and parliament to reach a compromise that few would choose as their preferred option but which the largest number can accept as tolerable. Parties traditionally played this role as mediators between the state and citizens. Referenda stop this process and by-pass the political process of politicians accommodating the widest range of opinions by giving it to individual electors who have no reason to consider any opinion except their own, and which leads to a stark divide in which 48 per cent are no longer the British people but are portrayed as enemies/traitors/saboteurs. As one member of the public said on television, the vote on 23 June 2016 was clear and there should be no remainers left. In the opinion of Jonathan Sumption, the former judge on the Supreme Court, ‘This is the authentic language of totalitarianism. It is the lowest point to which a political community can sink short of actual violence’. More immediately, such views created difficulties for parliament as it turned to the messy business of compromise which was blocked by the outcome of the referendum.
THE CONSTITUTION
The British constitution is unique, for it is not written
other than eight words: ‘whatever the Queen in parliament enacts is law’. It is historical and not legal. There are no constitutional limits on the power
of parliament which is sovereign; the exercise of powers is a matter for
ministers answerable to parliament and ultimately to the electorate. There is no fundamental law that parliament
cannot repeal or alter at will. Is this
dangerous and open to abuse, for it relies on conventions which can be broken –
or is it a source of flexibility? We should
also note that English and Scottish parliamentary sovereignty are different: prior
to the Act of Union of 1707, the executive in Scotland was not accountable to
parliament so why should the united parliament of Great Britain only accept the
English principle?
Joining the EEC/EU did set a higher body above parliament
and in that sense the Brexiteers are right.
It was not really considered at the time, but it was apparent after 1991
that there was a shift from a historic to a legal constitution. Does it matter?
To some, it matters a lot: continuing
sovereignty means that a sovereign body cannot bind itself
To others, it does not mattera lot: self-embracing
sovereignty means a sovereign body can agree to bind itself.
Arguments over the ‘will of the people’ can lead to a claim
that the people are against the courts and against parliament. There were two
legal challenges to the role of the executive:
The decision of three judges that parliament
needed to vote to trigger article 50 (for departure from the EU) and could not proceed
simply by the executive sending a letter.
A Daily Mail headline 4 November 2016 called them ‘Enemies of the
People’.
Whether Prime Minister Johnson misled the queen
in proroguing parliament in September 2019: the High Court in England ruled it
was a political decision and permissible; the court in Scotland found it was
misleading advice. The Supreme Court of the
UK ruled against Johnson and stated that the act of prorogation never happened.
Both judgements cited cases going back to Charles I and
civil war and raised serious constitutional issues:
What is ‘justiciable’? What is the line between a political
decision/judgement and what the courts can decide? Sumption argued prior to the case that judges
had been intruding into political issues: they are unelected and unaccountable,
and should not intrude on political decisions which are, as we said earlier,
about reaching compromises. But the
night before the decision on prorogation, he remarked on BBC that Johnson had
taken a hammer and sickle to the constitution, and it was justiciable issue.
What is the role of the monarch? Sovereignty was vested in sovereign until 1688/9
when rules were introduced to limit the power of the monarch over parliament. The issue now is that the monarch has no
authority to take an independent judgement over executive and merely does as
executive says, as happened when the queen accepted prorogation until it deemed
never to have happened by the Supreme Court.
These issues are now open:
What form should the constitution take?
Is the solution a written constitution? Dominic Grieve thinks so. It would clarify the role of judges;
conventions only work if they are followed and not broken. Can we have a constitutional court as in
Italy (15 judges for 9 years, 5 appointed by president, 5 by parliament and 5
by judges)?
Or will it lead to inflexibility as in US? The unwritten constitution in the UK can
handle unexpected issues – a written constitution gives more power to unelected
judges and hampers the process of finding compromises. In US, the Supreme Court makes law by the use
of the Due Process clause of 14th amendment which can be used
illiberally (for example, to stop collective bargaining) or liberally (for
example, to approve abortion which has never been legislated on as in UK).
A political constitution is better than a legal
constitution.
What is power of head of state? Queen cannot express her own view, unlike president in Italy (as in recent decision over snap election) or Germany. The monarchy is likely to survive – in which case, should there be a constitutional court in place of the Privy Council?
The House of Lords is the largest second chamber in the world and is not elected (with the oddity of hereditary peers electing some of their number). The remainder are appointed by the PM. Would something like the German Bundesrat or federal council work, which has representatives of 16 Lander?
The failure of parties to reach compromises through the political process reflects a decline in membership from the post-war period when there were about 3m members of the Conservatives, a million individual members in Labour plus affiliated unions. Boris Johnson was effectively chosen as PM by 150,000 untypical Tory members voting on their leader. Possible solutions:
Proportional representation to give more voice to small parties so not excluded; encourage process of finding compromises. Almost came in 1918; the UK is now the only European country with first past the post elections.
Open primaries for the choice of candidates so that it is not left to a small number of members and entrists. Some Conservative candidates were chosen in open primary by all electors: Sarah Wollaston in Totnes was not even a party member (though she later defected to the LibDems).
DOES THE UNION HAVE A FUTURE?
I think the answer here is that it does not unless a new settlement is reached.
There is an Irony that the Conservative and Unionist Party
might lead to a destruction of the Union.
Let’s consider the situation in Ireland.
The Good Friday Agreement of 1998 is de facto part of the
constitution of the UK like the bill of rights of 1689. Now there is tension between leaving the EU
and commitments in the agreement. Tony Blair,
one of the architects of the agreement, has said that “It is a shame and an
outrage that peace in Northern Ireland is now treated as some disposable
inconvenience to be bartered away in exchange for satisfying the obsession of
the Brexiteers with wrenching our country out of Europe”.
In the 2016 referendum, the issue of the relation of Northern
Ireland with the republic of Ireland was not given much attention, and if
mentioned was dismissed as trivial. It
turned out to be the major stumbling bloc that reflected a lack of understanding
of both history and simple economics.
Astonishingly, Karen Bradley, the Secretary of State for Norther
Ireland in 2018/19 commented that ‘I didn’t understand things like when
elections are fought, for example, in NI – people who are nationalists don’t
vote for unionist parties and vice versa’.
She then added that killings by the army and policy were not crimes,
during the hearings on Bloody Sunday when the army fired on a crowd.
There is also the issue of the customs union: there are no
tariffs on goods within the customs union, and a single common external tariff
against the outside world. The Norther
Irish/Irish border then becomes a customs line, yet the Good Friday agreement
says that the island of Ireland is to be a single economic unit. Goods could enter Northern Ireland at
potentially lower tariffs than levied by the EU (or with different phytosanitary
standards) and move into EU via Ireland; could hormone injected beef from US which
is banned in the EU secure access? Boris
Johnson simply swept the issue aside.
But thee is a serious issue that when the UK leaves the customs union, a
hard border will be needed with Ireland that
breaches the Good Friday agreement. The
solution in Teresa May’s deal was a backstop which potentially keeps UK within
customs union so that it would not be able to strike its own trade deals and regulatory
standards. It was rejected. The alternative is a border down Irish Sea
which is not accepted by the Democratic Unionist Party since it cuts NI from
the rest of the UK.
The Northern Ireland Act, 1998, obliges the secretary of
state to call a border poll ‘if at any time it appears likely to him that a
majority of those voting would express a wish that NI should cease to be part
of the UK and form part of a united Ireland’.
How is the secretary of state to decide? Is it a majority in opinion polls; a Catholic
majority in census; a nationalist majority in the Assembly; or a vote by the
Assembly?
If the referendum is called, a referendum must be held in the
Republic on the same day on unification; and if both passed, a second referendum
is needed in the Republic on an amendment to the Irish constitution. What happens if the votes differ?
Then there is the issue of Scotland where pressure exists for
a second referendum on independence. Why should Ireland have ability to remain de
facto in the customs union and not Scotland?
A prediction is that unification of Ireland is very likely
and independence for Scotland is possible.
Regardless of what happens, the existing levels of devolution in Northern
Ireland, Scotland and Wales means that England constitutionally does not exist.
Local government is complicated and dysfunctional. There is a sort of quasi-devolution to mayors
in Greater London Authority and Greater Manchester, but it is all ad hoc. Could there be regional assemblies which
could then create something like the Bundesrat?
England is the only part of the UK without a separate voice. The West Lothian question of Tam Dalyell has
not been answered: an English MP cannot vote on health care policies in West
Lothian, but a Scottish MP can vote on health care policies in West Bromwich.
A new act of union is needed for a federal system
ECONOMIC RELATIONS
The issue of the customs union arose over Northern Ireland
and the issue still remains unresolved over what sort of trading environment
should be adopted.
One view is that close alignment is needed
because of integrated supply chains in the car industry; logistics of
drugs/food – most trade is with Europe.
The alternative view is that freedom outside
customs union is needed to make trade deals in a free buccaneering spirit with
growing economies. The suspicion of
opponents is that it is about deregulation – trade deal with US mean
chlorinated chicken, hormone injected beef, weaker environmental or labour
standards; threat to NHS.
There are problems here:
Constitutional issues: phytosanitary standards are devolved to Scotland and Wales, so they could refuse to accept chlorinated chicken even if it was agreed in trade deal with US.
Trade on WTO rules is seen as the solution – but the UK needs to secure a seat apart from the EU [it did in February 2020]. And why should a country of 66m be able to strike a better deal than a bloc of 508m? The EU-Canada deal took 5 years and the UK is a more complex economy.
Problems are already apparent:
A fall in inward investment.
Threats to integrated supply chains
Hit to universities in loss of European Research
Council grants
Costs of additional paperwork calculated by HMRC
as £15bn [gross saving from leaving by Brexit supporters put at £18bn]
Lack of attention to services/passporting rights
– what mean for financial services?
CONCLUSION
The real issues in 2016 did not relate to membership of the
EU and Brexit but to genuine grievances which must be addressed – the rise in
inequality, growing precarity for many workers, the impact of deindustrialisation
and austerity. Leaving makes solving these
problems more difficult. Brexit was an
answer to the wrong question – how to deal with people who were genuinely
aggrieved.
We do need a long hard look at constitutional arrangements
which require high level of statesmanship.
Talk of ‘getting Brexit done’ was likened by one female
journalist as saying ‘Let’s get child-birth done’ in order to return to sleep, reading
novels, and going to the cinema. But
like motherhood, it is just the start of negotiations of the details, with
another deadline at the end of 2020.
Four years after the referendum, much remains uncertain.
http://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.png00Martin Dauntonhttp://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.pngMartin Daunton2020-07-09 15:42:472020-07-14 19:12:38The future of the United Kingdom after BREXIT
Black Lives Matter has focussed on the removal of visible markers that celebrate slaveowners in London and Bristol. But there is also another pressing need: to make visible what is currently hidden. The ways in which slavery and its ill-gotten gains permeated British society needs to be addressed and admitted.
In the Cambridgeshire countryside, near Newmarket, the estate and house of Chippenham Park opens its gardens to the public to admire the display of spring flowers, and it is a popular venue for weddings. The website of the property says that ‘in 1791 the estate was bought by John Tharp, a hugely successful sugar baron’. A visitor might consult the entry in Pevsner to be told that ‘the village is exceptionally rewarding. It is what is known as a model village, that is planned in its main features’, with its semi-detached cottages and long gardens that were constructed around 1800. We are told that Tharp rebuilt the main house and that his lake survives. The display board outside the parish church informs the visitor about the cottages and about the village school that was built in the eighteenth century.
The mention of ‘sugar baron’ is a hint of where the money came from. John Tharp was, in the opinion of Trevor Burnard, the leading historian of Jamaican planters, ‘the largest slaveholder ever known to Jamaica’ (Mastery, Tyranny and Desire, 2004). Tharp died in Jamaica in 1804, and when slavery was abolished in 1833, his heir received compensation for ten estates on the island with 2,375 slaves, as indicated on the UCL’s Legacy of British Slave-ownership database. The residents of the model houses, and visitors to the seemingly idylic English village, were beneficiaries of brutal exploitation of enslaved people who are now rendered invisible.
Restitution should not only entail the toppling of statutes; it should involve a shameful realisation of how the spoils of slavery permeated British society.
http://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.png00Martin Dauntonhttp://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.pngMartin Daunton2020-07-09 10:09:272020-07-09 12:12:09Slavery and silence
Although
the policy response to the global financial crisis prevented a repeat of the
great depression, it left the global economy in a fragile state. How would it cope with the next shock that was
anticipated to arise from a renewed debt crisis in emerging markets, financial
difficulties in China, or tensions within the eurozone? The unexpected external shock from the
coronavirus brutally exposed the lack of resilience in the global economy a
decade after the financial crisis. The
policies adopted, and approaches ignored, after 2008 continue to resonate, and the
financial crisis remains central to understanding the economic shock of the
pandemic and the policy response that should follow. The policy adopted after 2008 arose from the success
of fiscal conservatives in blocking the brief period of fiscal expansion which
had serious economic consequences over the next decade; and the policy debates
that raged then will be repeated as the world emerges from the pandemic. Can the same mistakes be repeated and steps
be taken to correct the economic weaknesses?
The coronavirus exposed the differential impact of mortality by age, ethnicity, and deprivation that arose from growing inequality of income and wealth, the insecurities of precarious employment, and the erosion of public services. These trends were apparent before 2008 as deindustrialisation led to a loss of relatively secure jobs for workers without formal educational qualifications, and ‘intangible’ capital benefitted workers with formal credentials.[1] These structural changes led to discrepancies in income and wealth, and reduced resilience, which the policy response to the global financial crisis did nothing to mitigate and much to exacerbate.
This outcome was not preordained. When the G20 met in London in 2009, Gordon
Brown, the British prime minister and host, called for a fiscal response. He was opposed by Peer Steinbrűck, the German finance
minister, who criticised Brown’s ‘crass Keynesianism’ for ‘tossing around
billions’ that would burden future generations.
At home, Mervyn King, the Governor of the Bank of England, exceeded his
authority in rejecting a fiscal stimulus: it would increase the size of the
deficit and boost consumption, so hindering the long-term need for British and
American economies to save and invest, to reduce household and bank debt, and
to resolve the trade deficit by shifting from domestic spending to exports. He
insisted that ‘monetary policy should bear the brunt of dealing with the ups
and downs of the economy’, and that was what happened.[2]
The case against fiscal
stimulus and deficits was justified by Alberto Alesina who argued that reducing
the deficit by an increase in high taxes would be ‘deeply recessionary’ and
that taxes would continue to grow as a result of automatic, inflation-linked
entitlements. By contrast, cuts in
spending would be more successful in reducing the deficit, removing
uncertainty, restoring confidence, encouraging investment, and avoiding an
unfair redistribution between present and future generations. Gains from private consumption and investment
could be larger than cuts in government spending and would therefore lead to
higher output.[3] Similarly,
Ken Rogoff and Carmen Reinhart argued that data from 44 countries over 200
years showed that a ratio of national debt to GDP above 90 per cent reduced
growth by 2 per cent.[4] Politicians on the right, such as George
Osborne, seized on the ’90 per cent rule’ to argue that an inexorable rise of debt
threatened low growth and national bankruptcy.
Osborne duly embarked on a policy of austerity when he became Chancellor
of the Exchequer in the British coalition government in 2010.
These economic arguments
were flawed. Alesina ignored the
distributional consequences of tax increases versus spending; he overlooked the
fact that current spending can leave more assets for future generations; and he
neglected the harm of austerity on both young adults unable to secure work and the
elderly whose mortality increased. And was
it really the case that private consumption would increase when many workers
were experiencing economic hardship?
Much depended on circumstances. A cut in
public spending to balance the budget might lead to growth if debt, interest
rates and taxation were all high (as they were in Italy in the 1980s and
1990s), but not necessarily in other circumstances.[5] Oliver Blanchard and Daniel Leigh of the IMF found that a reduction in
spending or tax increases of one Euro would reduce GDP by almost 2 Euro and not,
as previously estimated, 0.5.[6] Austerity and tax increases after 2010 therefore
reduced GDP and drove economies into recession; unemployment rose and households
had less to spend, and the short-fall was not taken up by the government. As growth fell, so the ratio of national debt
to GDP rose from what it might otherwise have been. Fiscal expansion would have been a sensible
option.
Similarly, the supposed relationship
between growth and national debt was bad history. Reinhart and Rogoff lumped countries and
periods together regardless of circumstances, and their ignorance of context offers
a warning when attention turns to the higher levels of debt after covid-19. The case of Britain since the eighteenth century
shows that their ‘rule’ was misguided. Peaks
in debt arose from warfare in the Napoleonic and world wars, and the way that
debt was subsequently reduced differed. After
1815, the reduction of national debt from over 200 per cent of GDP to around 25
per cent by 1913 was largely the result of economic growth; by contrast,
inflation had no role in reducing the real burden, for prices were no higher at
the close of the period. There was also an initial period of political
unrest over the burden of the debt, for war-time income tax expired in 1816 so
that the cost of debt service came from taxation of producers and workers, with
a transfer to landed aristocrats and rentiers.
During the First World War, debt again rose above 200 per cent of GDP. Now, growth was less significant for the
economy experienced a decade of low growth as a result of the collapse of the
global economy, adoption of high interest rates to bolster sterling in
preparation for a return to the gold standard at an overvalued rate, and the
emergence of competition which led to over-capacity in major industries. ‘Financial repression’ was not an option –
that is, low interest rates and diversion of savings into government funds by
capital and exchange controls – for the government’s strategy was to maintain
open international financial markets. The
costs of servicing the debt was high and falling prices after the post-war boom
held up the ratio of national debt to GDP.
Nevertheless, the high costs of servicing the national debt was met by ensuring
that the tax regime was perceived as equitable between classes and interests. A similar level of debt after the Second World
War coincided with rapid economic growth stimulated by war demand and
facilitated by recovery of the global economy because of cooperative
action. The cost of debt service was
reduced by low interest rates and financial repression that was now permitted
by exchange and capital controls, and was paid from taxation
that shifted income to poorer members of society which created greater equality
of income and wealth, and increased consumption. At the same time, inflation contributed to
reducing the debt burden: about 30 per cent of the fall in the debt ratio to
2008 was a result of growth and the remainder from inflation.[7] The political economy of debt and its
relationship with growth therefore depended on circumstances – and this point
needs to be recognised in dealing with the costs of covid-19 when the arguments
used to justify austerity after the global financial crisis might return.
Although a selective reading of
economics provided intellectual justification for opposition to fiscal
expansion, the policies were pursued for other reasons. Mark Blyth, a leading
critic of austerity, explained that the politics of debt became a morality play
that ‘shifted the blame from the banks to the state. Austerity is the penance – the virtuous pain
after the immoral party – except it is not going to be a diet of pain that we
shall all share. Few of us were invited
to the party but we are all being asked to pay the bill’. The rhetoric of austerity shifted blame from
the banks to a bloated and inefficient public sector and overly generous
welfare.[8] On
this view, it was a cynical tactic of ‘bait and switch’. Paul Krugman commented that the rejection of
fiscal expansion was ‘the victory of an orthodoxy that has little to do with
rational analysis, whose main tenet is that imposing suffering on other people
is how you show leadership in tough times’.[9] In
both the great depression and global financial crisis, house prices in the
United States fell by a third from peak to trough; in the former, mortgagees
were assisted by the federal government and banks were regulated; in the
latter, state intervention was presented as a problem rather than cure (despite
a massive state bailout of bankers).[10] The political economy of fiscal orthodoxy in Germany
had a different rationale, for taxpayers would not do for southern Europe what
they had done for East Germany after reunification. Merkel was also concerned that the German –
and European – population was ageing so that the crucial issue was not to boost
domestic demand which would undermine competitiveness and pass the burden to
future generations. The solution was to
export and accumulate a surplus. In
2009, the Bundestag adopted a constitutional amendment to impose a rigid fiscal
rule.[11]
Both Britain and the United States, which
initially adopted a fiscal stimulus, now changed their approach. At Toronto in June 2010, the G20 announced a
commitment to ‘growth-friendly fiscal consolidation’ and argued that ‘failure to implement
consolidation where necessary would undermine confidence and hamper growth.
Reflecting this balance, advanced economies have committed to fiscal plans that
will at least halve deficits by 2013 and stabilize or reduce government
debt-to-GDP ratios by 2016’.[12] The rejection of fiscal expansion had
serious consequences that continue to resonate.
Merkel and Schauble adopted a rigid stance during the crisis of the
eurozone: no budget deficits, no common European debt issuance and no European
fiscal union. The result was slow recovery
and serious austerity in southern Europe, with a risk that when the next crisis
arrived the fundamental issues of the eurozone had not been resolved. The commitment to reducing public debt intensified the recession, whereas a
fiscal stimulus would have allowed more investment in infrastructure and
compensated for the reduction in consumption.
The policy adopted in the United
States and Britain, and eventually in the European Union, had serious
distributional consequences that contributed to the fragility of the economy in
2020. Quantitative Easing was necessary
to prevent the collapse of the financial system but exacerbated other problems. It led to higher asset prices that benefitted the richest 10 per cent or
so; their assets and income rose in an upward spiral and they had a lower
propensity to consume. The result was a savings
glut of the rich. In contrast, austerity
– as well as economic change that led to greater precarity – meant that the
lower 90 per cent of the income distribution turned to private debt and
‘dissaving’ to maintain consumption. As
their debt rose, so they had greater difficulties in maintaining their spending
with the result of economic
fragility – and the government did not step in with sufficient public spending
to maintain consumption.[13] In the New Deal and Second World War, taxation contributed to reduced inequality
of income and wealth; after the global financial crisis, corporation taxes were
reduced and disparities continued to grow with resentment and disillusion that
fed into populism and economic nationalism.
The imbalance was also apparent in
China whose economic development rested on unusually high savings and a low
level of household consumption, as a result of low interest rates, regressive
taxation, a need to supplement weak welfare provision, and gains by the party
and business elite. Before the global
financial crisis, the savings fuelled domestic investment and the current
account surplus, with funds flowing into the United States to fuel the subprime
market. After the crisis, China provided
a massive fiscal stimulus which prevented another great depression. ‘Keynesianism
with Chinese characteristics’ involved local and regional governments embarking
on ambitious schemes for investment in the infrastructure. Domestic consumption was encouraged by
subsidies to rural households to purchase large domestic appliances. The result was the largest single stimulus to
the world economy.[14] China’s fiscal stimulus prevented the recession from being any deeper
but distorted investment and created a fragile shadow banking system with a
high level of non-performing loans. Household consumption remains low, with a
continued savings glut – but without profitable opportunities for investment. The outcome could be a further round of
wasteful investment based on credit with a risk of financial crisis; the export
of goods with a massive external surplus that will cause tensions with the
United States; or a shift of incomes to boost consumption by poorer households
that will require a major change in policy.
The other major saver was Germany,
where household consumption was stagnant before the global financial crisis, the
government held down its spending, and the economy produced a large external
surplus. The outcome was lending to the
United States to fuel subprime mortgages and to other countries in Europe –
Greece, Spain, Italy – to create unsustainable credit and consumption. The response to the eurozone crisis did not
help, for Germany did not boost its own consumption and enforced austerity on other
members of the eurozone. The foundation
flow of the absence of a
fiscal union alongside monetary union was not addressed. Fiscal
transfers needed to be higher in Europe because labour mobility was lower than
in the United States; in fact, transfers were much lower. In February 2020, the so-called ‘frugal four’
of Austria, Denmark, Sweden and the Netherlands aimed to limit the EU budget to
1 per cent of GDP compared with their own revenues of 48, 52, 49 and 44 per
cent of GDP. This ratio of 40 or 50 to 1
between state and federal revenues contrasted with a ratio in the United States
of 1 to 2 between state/local and federal spending. A much larger European Union budget is needed
to deal with structural change, environmental sustainability, education, health
care and research and development, at a time when inequalities between regions
cause strain.[15] This approach was anathema in Germany which
tried to extend its own fiscal conservatism to the rest of the EU.
When covid-19 hit, the problem of the savings glut had not been
resolved: it existed before the global financial crisis, and the policy
response had done nothing to resolve the problem either within individual
countries or in the imbalance between global savers and debtors. The major question is whether the crisis of
covid-19 can allow an escape from the problem of the savings glut and low
consumption that was not taken after the global financial crisis?
Despite austerity, automatic payment of welfare
benefits and low growth meant that national debt rose in most OECD countries after
the financial crisis. In France, it
increased from 87.8 per cent in 2011 to 98.4 per cent in 2018, in Italy from 119.7
to 134.8 in Italy, in the United Kingdom from 80.1 to 85.7, and in the United
States from 99.8 to 106.9. The exception
was Germany where the level fell from 79.8 to 61.9 per cent. Debt levels were
already high before covid-19 and are set to rise closer to war levels. In April 2020, the IMF’s tentative initial
estimate was that by 2021 the debt to GDP ratio would rise to 116.4 per cent in
France, 150.4 per cent in Italy, 95.8 per cent in the UK, 131.9 in the US but only
to 65.6 per cent in Germany. [16]
The figures are estimates whose
accuracy will depend on the trajectory of the pandemic, the speed of recovery,
and political choices.
Many commentators, politicians and economists now accept that
rejection of fiscal expansion after 2010 resulted in weak public services and contributed
to the disparities of the virus. On the
other hand are those who argue that the level of debt is unsustainable and that
it will exacerbate the generational divide of the pandemic. Why should the younger generation be left to
pay for high levels of debt when their prospects are employment are reduced and
growth might be suppressed? Adam Tooze rightly thinks
that the question of repayment ‘will decide the complexion of our politics, and
the quality of our public infrastructure and services for years to come’ He fears that the level of covid debt can be a
‘battering ram’ for a new campaign of austerity and ‘conservative
scaremongering’.[17]
In April 2020, Gordon Brown reflected on his failure to sustain the case for
fiscal expansion after 2008, and called for his successors to avoid making the
same mistake again.[18]
Although the generational divide
is serious, the solution is not a return to austerity to reduce debt. The real burden of debt can be reduced by
moderate inflation as after 1945. The (largely
unjustified) fear of inflation led to caution in stimulating demand after the
financial crisis. Of course, rapid
inflation as in Germany in the early 1920s created social dislocation and
resentment as fixed incomes and savings were eroded. Equally, the pursuit of price stability since
the late 1970s benefitted creditors and increased the real burden of debt. The solution is a careful calibration of
central bank intervention to allow a modest level of inflation that can, as
after 1945, gradually reduce the level of debt and stimulate consumption.
The cost of servicing the debt then needs to be held down, as
it was by low interest rates and financial repression after 1945. The policy became mor difficult with the
resurgence of international capital markets and financial flows from the 1970s,
but Quantitative Easing has led to a decade of low interest rates that is not
likely to be reversed soon. It is not only a policy choice by central
bankers but a structural issue: the savings glut of the rich led to downward pressure
on interest rates to balance the supply and demand for savings. The risk of
higher rates can be reduced by extending the duration of bonds or making them
perpetual. It is therefore possible to
live with the larger national debt, provided that annual deficits are reduced enough to stabilise
its level – and this can be achieved by increases in taxation rather than cuts
in spending.
Low interest rates and the glut of savings are not without problems, for they reflect large disparities of income and wealth that have been exacerbated by rising assets prices created by quantitative easing. The economy was vulnerable prior to the pandemic because of high levels of household and corporate debt which led to the global financial crisis and continued afterwards. The focus on public debt distracted attention from the real problem: an increase in household debt to maintain consumption and in corporate debt to fund stock buybacks, embark on mergers and acquisitions, increase profits, and pay higher dividends. Indebtedness rose in line with inequality. What was needed after the global financial crisis, and could be achieved now, is a set of policies that creates greater equality to remove the savings glut of the rich, so allow consumption to rise without the need for higher levels of household debt, and removing the incentive for corporate leverage.
This change could encourage economic growth which was the main reason
for the reduction in the level of the national debt after the Napoleonic wars
and a major cause after 1945. Excessive fiscal consolidation after
2010 reduced growth and damaged productivity and made the debt burden worse. American and European economies suffered from
low growth and stagnating productivity and the policies adopted after 2008 failed
to provide solutions to low growth and stagnating productivity in the United
States and Europe and might have made matters worse. The rebalancing of economies might stimulate
investment and growth and remove risky reliance on corporate debt to maintain
profits and household debt to maintain consumption. Of course, redistribution and the removal of
the savings glut might lead to higher interest rates and an increase the costs
of servicing the national debt in the longer run, but in the short to medium
term low interest rates can be locked in as the debt ratio is reduced by faster
economic growth.
Faster growth will mean changing the tax regime. In some countries, the level of taxation is
low which provides more fiscal headroom to raise taxes rather than cut spending:
the level of taxation as
a share of GDP in France is about twice that of Ireland which therefore has
more fiscal headroom. But the issue is
not only the level of state revenue, for the structure of taxation and
perception of fairness are also important, as we noted at the end of the Napoleonic
wars in Britain. Tooze correctly comments
that ‘who pays taxes – and who does not – remains one of the most urgent
questions of the moment. A world in
which coronavirus debts are repaid by a wealth tax or a global crackdown on
corporate tax havens would look very different from one in which benefits are
slashed and VAT is raised. And it is
very possible that debt service will be taken out of other spending, whether
that be schools, pensions or national defence’.[19] What tax regime will permit faster growth and
encourage productivity?
A redistributive strategy to remove the savings glut of the rich and
transfer consumption to the rest of society will require a major shift to a
more progressive pattern of taxation and spending in the United States on the
lines of the New Deal; and a return in Britain to something more like the
pre-Thatcher period. In China, it will require
greater benefits for migrants from the country to the town, improved welfare
benefits and workers’ rights, and a shift in taxes to the rich. Abolishing tax deductibility of corporate
debt could discourage a reliance on financial leverage. Action could be taken against multinational
corporations who erode the fiscal base by shifting their profits to low tax
regimes – and taxes could be introduced on the rent-seeking behaviour of digital
and tech companies. A wealth tax could capture the gains of rising assets from Quantitative
Easing and break the upward spiral of inequality. ‘Green’ taxes on carbon and congestion would
ensure that growth did not come at the expense of the planet. The revenue from higher or restructured taxes
could then be spent in ways that encourage an economic transformation by giving
incentives to green technology, better education and training, and improved physical
and social infrastructure to regenerate declining industrial areas. The failure to tackle these issues after 2008
contributed to the economic fragility and populism that hindered the response
to the pandemic.
None of these changes will be easy, but they are not impossible. The Chinese Communist party’s main aim is to maintain social order and power, so a shift in its policy is not implausible – and the outcome n the United States might change with the demands of younger members of the Democratic party. There are also signs of change in the European Union away from the refusal of Germany to transfer resources or to stimulate domestic consumption that limited the response to the crisis of the eurozone. Concern about the bond purchasing programme of the European Central Bank was raised in the German constitutional court and passed to the European Court of Justice which supposed the policy. The issue was returned to the German constitutional court which decided in May 2020 to reject the ECJ’s judgement – a potentially devasting blow to the ECB’s response to the pandemic that caused outrage in Spain and Italy. The decision was economically perverse but the court’s defence was that it interpreted the law which democratically elected politicians should change. There are indeed signs that the German finance ministry is shifting its position, starting even before the pandemic. The new finance minister, Olaf Scholz, appointed a chief economist – Jakob von Weizsacker – who had proposed in 2011 that debt up to 60 per cent of GDP should be pooled among participating countries, with additional debt remaining a national responsibility. Covid-19 pushed Scholz to accept the need for fiscal stimulus and a eurozone package which he claimed, with considerable exaggeration, was Europe’s ‘Hamiltonian moment’. In 1790, Hamilton mutualised existing debt which Scholz’s proposal does not. It does allow joint issuance of debt, but as an emergency measure, and there is no sign that the EU will have major tax-raising powers or a single finance minister. The ‘frugal four’ remain doubtful – and the electoral risks in Germany are high. The proposal might succeed only because it is not a ‘Hamiltonian moment’. At least it is symbolic, as the German deputy finance minister put it, as ‘a significant signal to Europe that we’re serious about the idea of solidarity’.[20]
Solidarity is needed not only in Europe, for even before the
covid-19 crisis there were warning signs of a crisis of debt in emerging and
developing economies, with some countries close to default and unable to borrow
more on international markets. In 2020,
the World Bank worried about ‘a global wave’ of private and public debt in
developing and emerging markets that was fuelled by the savings glut: the level
of debt was higher than in previous waves of indebtedness over the previous 50
years, each of which led to a crisis.[21]
The problem if not only the scale of
debt but a shift in its character. In the 1980s and 1990s,
creditors were banks and governments; now more debt is owned by bond funds who
are reluctant to reschedule and more inclined to hold out. Members of the ‘Paris club’ of official
creditors can negotiate a deal with debtor governments – but the largest
official creditor – China – is not a member and is suspected of using loans to
further its strategic aims. The emerging market debt was an issue before covid-19
and is much more serious and the prospects of international institutions reaching
agreement to prevent another devastating debt crisis and wave of default are
slight given American hostility to multilateral institutions.[22]
The continued implications of policies adopted after the global financial crisis mean that it has not receded into history. Rather, the policies left economies in a fragile position. In Europe and the United States, weak growth and productivity was combined with a savings glut for the rich and debt-funded consumption for the rest, and with an obsession with austerity and the public debt rather than the inequalities that fuelled private indebtedness. The crisis of the eurozone and the need for fiscal transfers was not resolved; and both China and Germany continued to build up savings and surpluses. The need after covid-19 is to adopt policies that were rejected after 2008 in order to provide a better foundation for high and sustainable growth in a green economy where GDP is not at the expense of climate change, and with the benefits more widely distributed.
[1]
Jonathan
Haskel and Sian Westlake, Capitalism Without Capital: The Rise of the
Intangible Economy Princeton and Oxford, 2018; Jim Tomlinson,
‘De-industrialization Not Decline: a New Meta-narrative for Post-war British History’,
Twentieth Century British History 27 (2017), 76-99
[2] George
Parker and Bertrand Benoit, ‘’Berlin Hits Out at “Crass” UK Strategy’, Financial
Times,10 Dec 2008 Adam
Tooze, Crashed: How a Decade of Financial Crises Changed the World
London, 2018, 272-3
[3]
Alberto
Alesina, Carlo Favero and Francesco Giavazzi, Austerity: When it Works and
When It Doesn’t Princeton and Oxford, 2019
[4]
Carmen
Reinhart and Kenneth Rogoff, ‘Growth in a Time of Debt’, NBER Working Paper
15639, Jan 2010
[5]
Barry Eichengreen, Hall of Mirrors: The Great Depression, the Great Recession,
and the Uses – and Misuses – of History New York, 2015, 10.
[6] Oliver
Blanchard and Daniel Leigh, ‘Growth Forecasts and Fiscal Multipliers’, NBER Working
Paper 18779, Feb. 2013
[7]
Nicholas
Crafts, ‘Reducing High Public Debt Ratios: Lessons
from UK Experience’, Fiscal Studies 37 (2016), 201-223; Duncan Needham, ‘Covid-19
and the UK National Debt in Historical Context’, at http://www.historyandpolicy.org/policy-papers/papers/covid-19-and-the-uk-national-debt-in-historical-context
[8] Mark
Blyth, Austerity: The History of a
Dangerous Idea New York, 5, 7, 13-16.
[9] Paul
Krugman, ‘The Third Depression’, New York Times 28 June 2010
[20]
Guy Chazan, ‘The Minds Behind Germany’s Shifting Fiscal Stance’, Financial Times
9 June 2020; Ben Hall, Sam Fleming and Guy Chazan, ‘Is the Franco-German Plan
Europe’s “Hamiltonian” Moment?’, Financial Times, 21 May 2020
[21]
M Ayhan Rose, Peter Nagle, Franziska Ohnsorge and Naotaka Sugawara, Global Waves
of Debt: Causes and Consequences Washington DC: World Bank, 2020
[22]
Colby Smith and Robin Wigglesworth, ‘Why the coming emerging markets debt
crisis will be messy’, FT 12 May 2020; Patrick Bolton, Lee Buchheit,
Pierre-Olivier Gourinchas, Mitu Gulati, Chang-Tai Hsieh, Ugo Panizza and
Beatrice Weder di Mauro, ‘How to Prevent a Sovereign Debt Disaster: A Relief
Plan for Emerging Markets’, at https://www.foreignaffairs.com/articles/world/2020-06-04/how-prevent-sovereign-debt-disaster
http://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.png00Martin Dauntonhttp://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.pngMartin Daunton2020-07-09 09:41:042020-07-09 09:41:06The global financial crisis and Covid-19: learning the lessons
1919 marks the centenary of the founding of the Bauhaus in Weimar by Walter Gropius. The story of his time in London in the 1930s – along with other members of the school – is well worth telling, as it has been in the recent biography by Fiona Macarthy . It is a story about Jack Pritchard and Isokon, of Maxwell Fry and MARS, of the impact of Gropius’s design for Impington Village College on postwar schools. It is part of a wider story of modernist architecture in Britain, such as Berthold Lubetkin’s work for Finsbury – both housing and the health centre. It is a story of hostility but also of postwar influence through Leslie Martin and Eric Lyon’s Span housing. It is a wonderful theme for an exhibition at RIBA, drawing on its own archives and other collections. Sadly, the exhibition fails as a result of the self-indulgent design of Pezo von Ellrichshausen. Plans and documents are hidden in pillars stretching down the exhibition space, glimpsed through circles and triangles at heights that are too high for people who are short and too low for people who are tall, and impossible for anyone in a wheelchair. Reading any of the documents is difficut as a result of shadows and distance. Sofia von Ellrichshausen and Mauricio Pezo are architects based in Chile who are known in Britain for their installation of sixteen steel towers outside Hull Minister, commissioned by RIBA as part of the City of Culture in 2017 which I visited and enjoyed as a witty and playful intervention in what was otherwise a dead space; and for the Sensing Spaces exhibition at the Royal Academy in 2014. They have designed some striking houses. The idiom of their buildings reappears in the exhibition – tower-like structures with irrregular openings – as well as their excellent work in spatial structures that blur the boundary between art and architecture. But they and RIBA have done a disservice to their predecessors, obscuring rather than illuminating the work of Gropius, his fellow exiles and collaborators. They have chosen to make it a self-indulgent exhibition about their own design rather than working in the service of the material or the viewer.
http://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.png00Martin Dauntonhttp://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.pngMartin Daunton2019-10-06 19:30:422020-07-09 09:36:20Bauhaus and Britain
A shallow history of Brexit could
start with the referendum in June 2016 when 33,577,342 electors voted, with 51.9
per cent opting to leave and 48.1 per cent to remain on a turnout of 72.2 per
cent. It only needed 635,000 of those
voting to change their mind for a different result which was what was widely expected
even by Nigel Farage. Much of the
subsequent debate turned on short-term contingent factors concerning the
campaign – the articulation of the message ‘Take Back Control’, the focus on getting
out people who never voted, the exploitation of the refugee crisis, and the use
of data from Cambridge Analytica and Facebook.
These issues are all Important, and if the vote had gone slightly the
other way, we could not be where we are in 2019.
But focussing on the narrow victory
for leave misses two wider points:
Before the 1975 referendum, British engagement with European integration was distinctive and always differed from the founding members, never fully committed. Why?
There was considerable change since the 1975 referendum when 67.2 per cent were for remain and 32.8 per cent to leave, on a lower turnout of 64.5 per cent. The only two areas with a leave majority were the Western Isles and Shetland. Why this shift since 1975?
These two questions shape a longer or deeper history of the second referendum.
WHY
NOT ENGAGE IN THE INITIAL CREATION OF THE EUROPEAN ECONOMIC COMMUNITY?
Britain’s
circumstances after the war were distinctive and unlike the rest of western
Europe, so that there was rationality in the guarded response to such
initiatives as the European Payments Union and the Coal and Steel
Community. In particular, there were
four features.
Responding to post-war reconstruction
In continental Europe, the experience
at the end of the war offered reasons for integration:
The experience of defeat and occupation led to
a desire to create a stronger bloc to prevent being overwhelmed by the Soviets
and United States
There was a strong sense that the traditional
nation state had failed the people: the recreation of trade for prosperity and welfare
for stability rather than a race to the bottom needed supranational bodies to
work with nation states.
Britain was not defeated or occupied; rather,
the war validated the legitimacy of the state.
There was less concern with being overwhelmed by the United States, and no
reason – as in France or Italy – to fear powerful domestic Communist parties.
Britain did have serious economic
issues that needed to be resolved to which the answer was not European
integration
Debt to US: the end of Lend Lease and the
terms of the post-war loan had conditions attached to end imperial preference
and restore convertibility of the pound
Sterling balances in India, Egypt and
elsewhere had to be paid down
By definition, the defeated or occupied
powers did not owe money to the US and had no accumulated large holdings of
foreign currency overseas – the economic problems at the end of the war were
radically different.
The British government therefore had
different problems, and response to European integration was rational, at least
in the short-term.
Alan Milward rejects the idea that decisions by the British government after the war were blinkered, atavistic or pathological. Rather, they arose from rational thinking about how to adjust to the post-war world. They did not succeed which is not to say they were foolish. British government’s thinking was shaped by two issues: the sterling area and imperial preference..
2. Sterling area
Britain emerged from the war with huge
debts to empire in sterling payments for food, raw material, and military
payments. As a result, sterling formed
about 80 per cent of world reserves, more than before the war: there was a paradox
that the war weakened the British economy but increased sterling’s importance
in global reserves.
These sterling balances were not
convertible into other currencies and were ‘blocked’. There was a major issue of how to deal with
them:
Write them off/down, treat like Lend Lease received
from the United States– some wanted to do this, but it was seen as unwise given
the prospects of independence for India, and the immorality of taking away
accumulated sterling after India suffered so badly from the famine in the war.
Turn the balances into funded debt and pay
interest – but why would holders agree to take a income stream when they wanted to spend the money on
development?
Go for a long, slow grind of paying down
The problem of sterling balances meant
the British government could not engage in the same way as Europeans in the
European Payments Union which was designed to stimulate intra-European trade which
was vital to Europe but less so to Britain given that European markets were
smaller and sterling balances were the major issue.
And there were differences over the
form of European integration – Britain did not welcome a customs unions with
supranational institutions [Saunders 34]
This relates to the other key postwar issue: what to do with imperial preference
3. Imperial preference
Imperial preference was adopted in
1932 in response to the great depression; it formed part of a wider move to
trade blocs throughout the world. In 1930-33, the proportion of imports from
empire rose from 27 to 38 per cent. [O’Rourke]
In 1951, Australia alone took 12 per
cent of British exports – more than the Six founding members of the EEC.
1952-54 Commonwealth took 48 per cent
of exports – Six 19.6 per cent. [Saunders 41]
There is a link with different
policies for agriculture: Britain had a very low proportion in agriculture from
mid-19th century [1871 22.6 per cent when just over 50 per cent in
France], and opted for free trade in food, sold at world price. In the 1930s, the
British government retained this approach through deficiency subsidies to cover
the gap between costs for British farmers and world prices, which were paid by
general taxpayers. In Europe, prices were
kept above world prices by protectionism – hence, support for farmers fell on
consumers. The politics of food and
agriculture radically different
To look beyond Europe was not insular
but a sober though short-sighted appraisal [Saunders 41]
The Six traded mainly with themselves
so the EPU made sense to kick start trade – Britain traded mostly outside Europe, so why disrupt trade
for doubtful benefits?
The Americans wanted Britain to
abandon imperial preference in return for Lend Lease and a post-war loan – but the
British government realised this was not practical.
There was a debate in 1946 over a
European Customs Union: the idea was proposed by Ernie Bevin, foreign
secretary, but opposed by a Cabinet committee led by ministers concerned with
the economy – Hugh Dalton and Stafford Cripps.
The report in 1947 found that a European Customs Union would not be the
best possible outcome for Britain – but if one were formed, Britain should join,
for exclusion would be harmful.
Cabinet agreed to consider an empire
customs union; a combined empire and commonwealth customs union; a European
customs union; and the relationship between the empire and a European customs
union. Meetings to discuss European Customs Union foundered on how to reconcile
with imperial preference [Grob-Fitzgerald 68-9, 75]
A free trade area was more reconcilable
with imperial preference than a customs union: in a free trade area, it would
be possible to have one’s own trade policy (as in NAFTA) and border checks. In a customs union with a common external
tariff, border checks were not needed – but it follows that all goods coming in
from outside had to pay the same tariff, and UK could not offer lower tariffs
to say New Zealand lamb than did France.
Also linked with views on form of cooperation
4. Intergovernmentalism versus supranational institutions
The idea of Commonwealth did not
assume supranational institutions, and Britain obvious had the leading role. The British government would not easily
accept a supranational Europeanism in which it was not the dominant player. The
European Coal and Steel Community – the precursor of the EEC – had a
supranational high authority and court of justice
British preferred the Organisation of European
Economic Cooperation which was an intergovernmental body to divide up Marshall
Aid, exchange information and discuss issues.
Britain did not need to rebuild
institutions after war, did not face issues of collaboration/resistance –
instead, victory in the war enhanced the legitimacy of institutions in a myth
of standing alone against tyranny.
Saunders 40 points out that Britain was with and not of Europe: issues
were discussed with Europe but without an intention of joining in the process
of supranationalism. This was found on
left and right:
On the left, there was concern that
supranationalism wold limit democratic socialism: why nationalise the commanding
heights of coal and steel only to hand them to a European body? Herbert Morrison commented : ‘It’s no good –
the Durham miners won’t wear it’. [Saunders 42]
On the right, there was a sense of global
power. Anthony Eden remarked that ‘Our thoughts move across the seas to the
many communities in which our people play their part, in every corner of the
world. These are our family ties. That
is our life’.
This view was not confined to the
right: Harold Wilson said in 1965 our frontiers are in the Himalayas and that
he would prefer to withdraw half the troops from Germany than any from Far
East.
The British government withdrew from the
Spaak talks in 1955 and devised Plan G of 1956 for an industrial free trade
area under the OEEC. This could maintain
imperial preference and was intergovernmental.
Britain withdrew from European discussions and the treaty of Rome which
had a customs union. Instead, it set up
EFTA in 1960.
Hence thinking about customs union
which is now a key issue in the debate over Brexit goes back to the immediate
post-war period – it was just not seen as significant as it was for European
economies
But by the
1960s, attitudes were changing which takes me to a second question:
WHY
DID ATTITUDES CHANGE SO THAT BRITIAIN JOINED THE EEC WHICH WAS REAFFIRMED IN
1975 REFERENDUM?
In 1971, 244 MPs voted against joining,
356 for. Only 39 Conservatives voted
against the government and against membership – about 80 per cent voted for; 69
Labour MPs voted for membership, against the party line ie about 70 per cent were against.
Pro-European Conservatives wanted the
Commonwealth model but now they had no choice except to enter a body with a
supranational structure; and one with CAP locked in. Why did they accept the change? There were four main reasons.
A wake-up call
The dangers of relying on the sterling
area and imperial preference were clear: they were soft markets, and British
firms were not competing with better quality goods from Germany or more
advanced consumer goods.
By 1962, Britain traded more with the Six
than with the Commonwealth. Now, it was
not a gamble to join but an acceptance of reality. Membership of the EEC was part of a
Conservative strategy for competition at home and abroad.
A common trope in the 1960s was that Britain
was the sick man of Europe, suffering from the British disease of inflation,
low productivity, industrial unrest which reached its nadir in the three-day
week.
The response of the left response: in December
1974, Tony Benn thought that the final collapse of capitalism might only be
weeks away – why prop it up with Tory measures like the EEC? He wanted socialist planning whereas Conservatives
favoured expanded market capitalism.
On the right, there was a need to
break out of cycle of decline: membership of the EEC would be a wake-up call of
competition in faster growing economies.
Edward Heath in 1971 remarked that ‘For 25 years we’ve been looking for
something to get us going again. Now
here it is’. He wanted Britain to be
more than ‘to nestle on the shoulders of an American President’. Membership of the EEC would be dynamic and
bracing, which Fintan O’Toole likens to the cold showers and beatings of
English public schools.
The
Director in April 1975 captured the mood: ‘The economic problems facing
Britain are so numerous and so urgent that Gladstone, Keynes, Adam Smith and St
Francis rolled into one would find it hard to affect them’ [Saunders 155]
Thatcher campaigned for membership – it
meant a single market would would break restraints on trade.
Sovereignty was discussed but as
second order issue:
Vic Feather, union leader: Britain
cannot go it alone – would be knackered; sovereignty was not important. ‘The price of oil is not determined by the
British Parliament. It is determined by
some lads riding camels who don’t even know how to spell national sovereignty’.
[Saunders 179-180]
Alec Douglas Home 1975 [Saunders 245]:
I do not
see much point in parading a banner called sovereignty, if at the same time
trade, strength, authority and security slid away. We had full sovereignty in
1914 and in 1939, but it did not stop war, and victory only came when we shared
with others in an alliance. We had
sovereignty in 1931 but it did not prevent three million unemployed.
O’Toole 11: ‘A common theme in the early 1970s is that Britain is such a failure that it has no choice but to join the Europeans. The image is not that of a fabulous dynastic union but, rather, of a grumpy old bachelor settling for a bad marriage because the alternative is a slow death in miserable loneliness’.
2. End of delusion of imperialism and great power status
Despite Wilson’s claims that Britain was
a great power, in 1967 Britain withdraw from east of Suez.
1971 White Paper: in a generation Britain
would have renounced the imperial past and a European future, leading to
uncertainty about its place in the world.
There was a feeling of dejected resignation [O’Toole 12] Membership was primarily sold as a remedy for
economic ills – not a strong emotional connection, but pragmatic and
instrumental.
1975 remainers argued that unrestrained nationalism led to war and Britain needed to join Europe to stop war. The posters for ‘Britain in Europe’ used the poppy as their symbol and the dove of peace. One poster proclaimed ‘On VE Day we celebrated the beginnings of peace. Vote YES to make sure we keep it’; another commented that ‘Forty million people died in two European wars this century. Better lose a little sovereignty than a son or daughter’. Ted Heath – a lieutenant colonel in the war – said that he was ‘entirely prepared to make a contribution of national sovereignty to the building of peace in Europe’. The 26-part documentary on The World At War was shown in 1973-74 – the public was receptive to the idea that European cooperation was an alternative to the clash of competing sovereignties [Kidd LRB 25 Oct 2018]
3. EEC was an alternative to socialism – or was it a capitalist bloc?
In 1970s, Conservatives were the
European party: the EEC offered competition, a growing market and was not
socialist which offered a threat at home, for example with Benn’s Alternative
Economic Strategy.
Labour was more hostile to the EEC as
a capitalist bloc. Labour argued that
the EEC was less multiracial and harmed the undeveloped world with its
protectionist policies. EP Thompson defined the EEC as a group of fat, rich
nations feeding each other goodies’ and united by ‘introversial white bourgeois
nationalism’ [Saunders 18]. The EEC
seemed to run counter to the radical ideas of the New International Economic
Order for justice between developed and undeveloped countries.
The Labour National Executive
Committee in 1962 made the point that ‘Unlike the Six, Britain is the centre
and founder member of a much larger and still more important group, the
Commonwealth. As such we have access to
the largest single trading area in the world; and political influence within a
world-wide, multi-racial association of 700 million people.’ The real dangers for the future were not
Germany v France, but Communists against non-Communists and the inequalities of
developed and underdeveloped, white and coloured races. More than any advanced country, Britain had
the chance to resolve these issues – the Commonwealth was ‘a truly
international society, cutting across the deep and dangerous divisions of the
modern world’. ‘If we are ever to win
peace and prosperity for mankind, then the world community that must emerge
will be comprised of precisely such diverse elements as exist in the
Commonwealth today’. [Grob-Fitzgerald 292-3]
At the Labour party conference, Gaitskell
ruled out membership of EEC as the end of Britain as an independent state and a
1000 years of history – and the end of the Commonwealth.
By 1983, the Labour manifesto – the longest suicide note in history in the words of one of its MPs – pledged to take Britain out of the EEC. Michael Foot, the leader of the party, opposed membership in 1975 in terms that almost outdid Farage in 2016: ‘The British parliamentary system has been made farcical and unworkable by the superimposition of the EEC apparatus. It is as if we had set fire to the place as Hitler did with the Reichstag’.
4. Agriculture
Concern over CAP now shifted. It was locked into he EEC, and it was
possible to find a reason to accept it.
In the 1975 referendum, the focus
turned to food security with concerns about a Malthusian crisis by reports from
the Club of Rome: CAP might mean higher prices but would prevent shortages. The era of cheap food was over.
Margaret Thatcher campaigned for remain
and said that ‘most housewives would rather pay a little more than risk a bare
cupboard. In the Common Market we can be
sure of having something in the larder’. [Saunders 278.]
An agony aunt made the point in a
politically incorrect manner : ‘Like the day of the red-coated soldier beating
the living hell out of fuzzy-wuzzies, the day of cheap food has now gone’.
[Saunders 278]
The remainers shifted the ground from
cheapness to availability. Callaghan
predicted that EEC prices would converge to world prices – ‘The prospect is
therefore that membership of the Community, a major food-producing area, will
offer us greater stability of prices at reasonable levels, and security of
supply in times of shortage’. [Saunders 290]
The leavers were easily portrayed as
irrational and extreme: a combination of Enoch Powell, the IRA, CPGB,
Soviets. On the other side, remainers
seemed rational: the Conservative and Liberal parties, the National Farmers Union,
Australia and NZ.
The
referendum of 1975 was a victory for remain – so why did attitudes then shift
by 2016?
WHAT
HAPPENED TO UNDERMINE SUPPORT?
A selective
list could point to six factors
Britain was chained to a corpse
The European Union was no longer seen
as a wake-up call:
advance of neoliberalism in the UK and decline of social democracy: EU came to seem statist and controlling. Rejected by free-market fundamentalists who see Britain as buccaneering. Leaving would complete the Thatcherite agenda – she had warned at Bruges of risk of defeating socialism at home only for it be reintroduced from Brussels.
European growth was slow
Institutions of labour market were rigid and inflexible (in eyes of right) – and European rules ran against desire for labour market flexibility.
Eurozone crisis and lost decade: although Britain was not in the eurozone, it no longer seemed the European economy was the future compared with BRICS. An upward trend in negative attitudes to EU started in 2010 with eurozone crisis [Clarke, Goodwin, Whiteley 72] This could appeal to the left as well as right – to Corbyn, who sympathised with Benn from 1970s, it proved his point: the exploitation of Greece for the benefit of German industrialists.
Eurozone and migrant crisis made EU look incompetent – unfortunate timing of the referendum in 2016.
2. Deindustrialisation and globalisation
We can understand why attitudes shifted
in declining industrial areas – by 2016 there was not a single Durham miner, or
for that matter scarcely a Sunderland shipbuilder. In 1975, workers in these sectors still had
good wages and status – miners, shipyard
workers had skills which were specific to a trade and not based on formal
qualifications. They relied on tangible
capital.
Since 1975, these areas deindustrialised
– not as a result of the EEC but of changes in technology. Even if industry produced the same amount of
goods as before, fewer workers were needed.
The issue was not globalisation or the European single market. [Tomlinson]
In 2016, the older skills were worthless
and were competing with similarly low-skilled workers from EU – benefits went
to those with formal qualifications, able to handle abstractions and intangible
capital.
Supporters of EU failed to grasp the
anger of those who were suffering. A Bank
of England report argued that a 10 per cent increase in the proportion of
migrants was associated with a 2 per cent reduction in pay for unskilled
workers in services such as care homes, shops, bars [Clarke, Goodwin, Whiteley
12] – and this outcome was given emotional force by images of refugees crossing
the Med or arriving in Germany. Areas of
low pay, high unemployment, a tradition of manufacturing and lower skilled
workers voted to leave [Becker, Fetzer, Novy]
By contrast, the better educated
benefited from lower trade barriers and were not affected by the free movement
of labour – they likely to benefit from valuable skills that were attractive in job
markets in EU and world. [Clarke,
Goodwin, Whiteley, 62-3] Hence 37 per
cent of university graduates voted leave compared with 60 per cent without a
university education; 35 per cent of upper and upper middle class voted leave compared
with 64 per cent in working/lower classes.
Hyper-globalisation and the ‘elephant curve’
of Branco Milanovic contributed to the
outcoe. He showed
Two
sets of winners: middle class in emerging markets and global plutocracy
Losers
the working/lower middle class in developed world
The well-off elite argued that immigration was a net benefit, that it was misleading to complain for they brought valuable, hard-working people who were younger people who paid taxes; they were not a drain on wealth of idle white working class. The real problem was not migration or transfers to the EU that led to queues for medical care, pressure on schools or housing – rather it was austerity.
3. Austerity
The real issue was not the migrants
who were net contributors to taxation but were widely seen as leading to
problems in NHS, schools, housing. Those
problems did exist, and wages were stagnant.
It was claimed – falsely – that leaving EU would give £350n a week to
NHS – the issue was not Brussels but austerity after 2010.
Austerity was an entirely
self-inflicted wound – led by David Cameron and George Osborne with the complicity
of the LibDems who were campaigning to remain.
Austerity had nothing to do with Brussels – other than indirectly in
seeing what it did to Greece.
In France, incomes of lowest 50 per
cent of the population rose by 32 per
cent since 1982 – unlike in Britain. The Piketty graph shows that inequality
within Britain [U shaped, returning to the level around 1900], compared with
France [L shaped. So no returning to previous levels].
Communities were left to cope with the
consequences of globalisation with less help from central government. The Brexit vote was related to austerity and
poor provision of public services – and found to be more significant than
immigration in determining the vote. Vulnerable
populations were becoming more dependent on the state which stopped mitigating the
rise of inequality with radical austerity in 2010, activating grievances and
converting them into hostility to EU. It is possible that that a modest
reduction in austerity would have reversed the decision. [Becker et al; Fetzer]. Corbyn did not articulate this – he hated
austerity but did not like the EU either.
The flaw of Cameron and Osborne was that they wanted efficient markets, but did not do what was needed to retain popular support for them. The result was to hurt the market – or ironically to hand over influence to those who argue for Brexit as a cover for even more market fundamentalism.
4. Has Britain ever got over winning the war?
Europe moved on from the Second World
War – Britain did not. We can note the
ways that the war and its legacy are commemorated:
In
France, commemoration is part of Europe: Macron referred to France not standing alone
in First World War, needing Canadians, British, Italians US. The political message is pro-European – the French
Prime Minister at Compiegne in 2017 remarked that ‘to love peace is to love
Europe’.
In
Britain, there is little mention of others in the armistice service, except
Commonwealth. Instead, there is a myth
of standing alone. A memo written for
Cameron concerning the commemoration of First World War said that ‘we must
ensure that our commemoration [of the First World War] does not give any
support to the myth that European integration was the result of the two World
Wars’ [O’Rourke p6]. Commemoration was led
by a Brexiteer MP, Andrew Murrison. The
Irish economic historian Kevin O’Rourke remarked: ‘If words fail you then I’m
afraid I can’t help, for they fail me too’.
It was argued by some in 1975 that
joining the EEC was a betrayal of those who fought against Nazis. Hence Enoch Powell saw Britain in ‘a life and
death struggle with other weapons and in other ways, the contention is as
surely about the future of Britain’s nationhood as were the combats which raged
in the skies over southern England in the autumn of 1940’. [Saunders 53] But such views did not have traction –
especially in the context of the Cold War.
Such views became more important in
2016 when they were linked to a sense of superiority and deep grievance that British
sacrifices were not give their due; it was a revolt against imagined oppression.
O’Toole [8] refers to a pleasurable self-pity of being hard done by, of winning
the war and losing the victory, with a precipitous fall from being the heart of
empire to an occupied colony or vassal state. It is what O’Toole [102] calls
the ‘metapolitics of exaggerated grievance’
The shift is apparent in the words of Roger
Helmer in 2018 [a former Cons and now UKIP MEP]: ‘When I was born, I was
not European citizen (and my father’s
generation fought to ensure we should not be German citizens). I am determined that I shall not die as a
European citizen’. He Implied that Europe was German project – and this was often
made explicit (and had some traction in progressive circles given the harsh
treatment of Greece by Germany and a suspicion that the euro kept exchange
rates more competitive than would have been possible with the Deutsch Mark). In 1989 Kenneth Minogue of LSE argued that
‘the European institutions were attempting to create a European Union in the
tradition of the medieval popes, Charlemagne, Napoleon, the Kaiser and Adolf
Hitler’. Boris Johnson in May 2016
similarly commented that the EU was an attempt to do by different methods what
Napoleon and Hitler tried – the EU was ‘pursuing a similar goal to Hitler in
trying to create a powerful superstate’.
The European Union was now seen as a
surreptitious take over and defeat, a plot – it was sold EEC as a common market
not a European super state. This
rhetoric took bizarre forms such as the mad cow war when German alarm about
eating CJD beef was turned by the hyperventilating Daily Mail into a showdown ‘on a scale scarcely seen since the
Battle of Britain’.
This reading of history was summed up by
Mark Francois in Jan 2019 when the German CEO of Airbus warned of the consequences
of Brexit for manufacturing wings in North Wales: ‘Mr Enders’
intervention is a classic example of the sort of Teutonic arrogance, which is
one of the reasons why many people voted to leave the European Union…. My
father Reginald Francois was a D-Day veteran, he never submitted to bullying by
any German, neither will his son.’ He
then ripped up the letter live on BBC.
It seems that many people had watched too many films like Our Finest Hour
and Dunkirk, and endless repeats of Dad’s
Army. Ironically, the remain campaign in 1975 recruited Captain Mainwaring
(the actor Arthur Lowe) to its cause. [Saunders 108].
Jacob Rees-Mogg reached heights of absurdity in Oct 2017: ‘We need to be reiterating the benefits of Brexit…. Oh, this is so important in the history of our country… It’s Waterloo, it’s Crecy! It’s Agincourt! We win all these things’. He neglected to point out that the Prussians played a major role at Waterloo, and that the victories at Crecy and Agincourt were interludes before the loss of French territory.
5. Identity
Concerns about national identity were
more important than economics: a fear of loss of cultural identity.
In the 1966 World Cup, the flag used
by English supporters was the Union jack – Englishness and Britishness were interchangeable. This ceased to be the case: the cross of St
George replaced the union jack.
The Census of 2011 asked for
self-identification: in England 60 per
cent identified as solely English (77 per cent in the north-east, 37 per cent
in London) compared with 29 per cent as English and British.
There was a clear shift with the
movement for Scottish independence: in 1996 a survey found that only a third of
the English chose to be identified as English rather than British; this rose in
2011 to half. Scots could seek freedom
from London – England could not seek
freedom from London but could from Brussels. [O’Toole 190]
Mike Kenny argued in 2014 that the re-emergence of English national identity ‘may well turn out to constitute one of the most important phases in the history of the national consciousness of the English since the 18th century’.
6. Revival of the anglosphere
This shift in identity has links with the
return of the Anglosphere or CANZUK or empire 2.0 as it was sarcastically called by civil
servants – a new union not with Europe but with the white empire. Britannia
Unchained (2012) was a neoliberal project of deregulation, following the
example of buccaneers who made the empire by pursuit of private wealth, released
from the ties of EU. One of authors was
Dominic Raab. It was in a tradition
going back to 19th century – J R Seeley, imperial federation, Anglo-Saxondom
of Cecil Rhodes, idea of English-speaking people (in which allow India).
Anglosphere became a right-wing movement
as in conferences of Hudson Institute in 1999 and 200, including David Davis,
the minister for exiting the EU, and members of the Heritage Foundation. Some of key participants wrote for the Murdoch
and Conrad Black press; and there were links with the Charles Koch Foundation
and Cato Institute. Pearce and Kenny [131] comment that ‘the fusion of
Anglospheric thinking and neo-liberal ideas emerged as a vibrant ideological
pattern’. They point out that the appeal
is to a free market, neo-liberal future against the more statist approach of
Brussels. The Anglosphere is useful as a
way of imaging Britain as a global, deregulated privatised economy – it
provides a mask for otherwise unpalatable ideas which do not appeal in areas
suffering from austerity and decline.
Nigel Farage urged in April 2014:
‘Let’s re-embrace the big world, the 21st century global world. Let’s strike trade deals with India, New
Zealand, all of those emerging parts of the world’. The UKIP manifesto in 2010 claimed that ‘Britain
is not merely a European country, but part of a global community, the
Anglosphere…. From India to the United States, New Zealand to the Caribbean,
UKIP would want to foster closer ties with the Anglosphere’. [Pearce and Kenny
145] . David Davis took a similar line
in 2016: ‘This is an opportunity to renew our strong relationships with Commonwealth
and Anglosphere countries. These parts
of the world are growing faster than Europe.
We share history, culture and language.
We have family ties. We even
share similar legal systems. The usual
barriers to trade are largely absent’. [Pearce and Kenny 153]
CONCLUSION
The outcome of the referendum in 2016 had
deeper roots than any use of social media or misleading claims about
immigration or funding for the NHS.
Britain had good rational reasons for stay aloof after the war, and when
governments did turn to membership, it was for instrumental and contingent
reasons that soon evaporated. In 2016,
the remainers had greater problems in finding reasons to support the EU than in
1975 when it seemed to offer a route to prosperity and faster growth; in 2016,
the eurozone crisis made the EU took weak and risky. The Brexiteers had an easier option of
offering change and disruption, a promise of freedom and sovereignty and
growth. Any attempt to suggest there
were risks could be rejected as ‘project fear’ and had the weakness of being
negative. But
many of the possible arguments were over-looked. The argument in 1975 about sovereignty was
used by the leavers with the notion of ‘take back control’ – though the EU was
acting against American tech giants that
were a greater threat to sovereignty; the loss of revenue from base erosion and
profit shifting by multinational corporations exceeded payments to the EU; and
there was little understanding of what leaving on WTO rules meant. The decision was made – now it remains to be
seen at what costs.
References:
SO Becker, T Fetzer and D Novy, ‘Who
voted for Brexit? A comprehensive district level analysis’, Economic Policy 32
(2017)
Harold D Clarke, Matthew Goodwin and
Paul Whitley, Brexit: Why Britain Voted to Leave the European Union Cambridge
University Press, 2017
T Ftezer, ‘Did austerity cause
Brexit?’ Warwick Economics Research Papers 1170 2018
Benjamin Grob-Fitzgerald, Continental
Drift: Britain and Europe from the End of Empire to the Rise of Euroscepticism
Cambridge University Press, 2016
Mike Kenny, The Politics of English
Nationhood Oxford University Press, 2016
Mike Kenny and Nick Pearce, Shadows
of Empire: The Anglosphere in British Politics Polity, 2018
Alan S Milward, The United Kingdom
and the European Community, I: The Rise and Fall of a National Strategy
1945-1963 Cass, 2002
Kevin O’Rourke, A Short History of
Brexit: From Brentry to Backstop Pelican Books, 2018
Fintan O’Toole, Heroic Failure:
Brexit and the Politics of Pain Head of Zeus, 2018
Robert Saunders, Yes To
Europe! The 1975 Referendum and
Seventies Britain Cambridge University Press, 2018
http://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.png00Martin Dauntonhttp://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.pngMartin Daunton2019-09-29 20:46:202019-09-30 09:04:40Brexit: a deep history
In April 2009, G20 leaders from the world’s major developed and emerging
economies met in London under the chairmanship of the British Prime Minister,
Gordon Brown. It was a critical time as
demonstrators took to the streets of the City of London, and the world faced
the prospect of the financial crisis turning into something akin to the Great Depression
of the 1930s. Indeed, Brown explicitly
made a link with the World Monetary and Economic Conference held in London in
1933 that failed with disastrous consequences for the global economy and
ultimately for peace.[1] He warned that the stakes were high and cooperation
was needed to avoid a repeat of the downward spiral into trade and currency
wars of the 1930s. History was called on to provide guidance – but the participants
at the London summit in April 2009 had very different readings of history.
A return to Keynesianism?
One approach was to return to John Maynard Keynes whose response to the
Great Depression was to reject ‘balanced budgets’ and to argue for budget
deficits to rebalance the economy. By
Keynes’s account, the depression was caused by a lack of demand which led to
excess capacity so that savings were not invested. The solution was to boost demand through
public works and a budget deficit, which would then create an outlet for
savings and lead to economic recovery. The
G20 summits of 2008 and 2009 seemed to make ‘the return of the master’, to take
the title of a short book by Keynes’s biographer, Robert Skidelsky.[2] The summit of November 2008 marked, in the
opinion of the Financial Times, a
‘sudden resurgence of Keynesian policy’ with a commitment to ‘use fiscal
measures to stimulate domestic demand to rapid effect’, within a policy
framework ‘conducive to fiscal sustainability’.
The G20 communique in April 2009 confirmed this return to Keynes: ‘we
are undertaking an unprecedented and concerted fiscal expansion, which will
save or create millions of jobs… that will, by the end of next year, amount to
$5 trillion, raise output by 4 per cent, and accelerate the transition to a
green economy. We are committed to
deliver the scale of sustained fiscal effort necessary to restore growth’.[3]
In 2008, the United States adopted the
Economic Stimulus Act which offered tax rebates to stimulate consumption, and in
2009 the American Recovery and Investment Act to boost public spending. But the revival of Keynesianism and public
spending were short lived.[4]
The fiscal stimulus was modest and soon gave way to fiscal consolidation
or ‘expansionary austerity’ – a belief that the way to growth was through cuts
in public spending designed to restore balanced budgets. Austerity was portrayed on the right as
natural and self-evident: the state was inefficient and drove out private
investment; public debt was a curse and could not be sustained. Debt sustainability became the priority
rather than employment or growth, and governments embarked on programmes to cut
the budget deficit and national debt.[5] Criticism
came above all from Germany. Peer
Steinbruck, the Social Democrat finance minister in Angela Merkel’s coalition government, criticised Brown’s
‘crass Keynesianism’ for ‘tossing around billions’ that would place a burden of
debt on future generations.[6] Jurgen Stark of the European Central Bank and
formerly vice-president of the Bundesbank saw a ‘substantial risk’ of a repeat
of the 1970s: ‘I really cannot see why discretionary fiscal policies, which
have proven to be ineffective in the past, should work this time’.[7] The concerns were not confined to Germany,
the home of fiscal rectitude. Even in
Britain, Mervyn King, the Governor of the Bank of England, intervened in
political debates by expressing his concern about further increases in the size
of the deficit by fiscal stimulus and argued that ‘monetary policy should bear
the brunt of dealing with the ups and downs of the economy’.[8]
In February 2010, the major economies in G7 embraced austerity, and at Toronto
in June 2010 the G20 announced a commitment to ‘growth-friendly fiscal
consolidation’ or more bluntly, austerity.[9] Even the Keynesians had to admit that there
had been a structural deficit when the economy was booming and that steps were
needed to control spending. It was
therefore hard to justify large-scale public spending even at a time when
interest rates were low. Instead, fiscal
rules were introduced, including by left of centre governments. These rules ran from a moderate ‘golden rule’
that the return on any new debt was to be higher than the cost of servicing the
loan, or a more rigid rule that the budget must balance over the cycle or even
annually.[10] In the eurozone crisis, austerity to reduce
budget deficits and the national debt were imposed on southern European
countries and Ireland, with a refusal to reschedule the debt or default, unlike
in earlier episodes both before the First World War and in the Mexican crisis
of 1982.[11]
The message that debt was bad, that the crisis had been caused by improvident
behaviour by the state, was easy to explain to voters.
My aim in this paper is to explain why Keynesianism and fiscal stimulus were
defeated by austerity and Quantitative Easing.
My first point is that the shift was justified by a lesson from history –
that the Great Depression was a result of inappropriate monetary policy by the
Federal Reserve which must now be avoided.
The triumph of monetary
policy: a ‘lesson’ from the Great Depression
In his memoir of the crisis, Ben Bernanke, the Chairman of the Federal
Reserve, drew a stark contrast between the actions of the Federal Reserve in
the 1930s and after 2007:
In all crises, there are
those who act and those who fear to act.
The Federal Reserve … failed its first major test in the 1930s. Its leaders and the leaders of other central
banks around the world remained passive in the face of ruinous deflation and
financial collapse. The result was the global Great Depression, breadlines, and
25 per cent unemployment in the United States, and the rise of fascist
dictatorships abroad. Seventy-five years
later, the Federal Reserve … confronted similar challenges in the crisis of
2007-2009 and its aftermath. This time,
we acted.[12]
Bernanke was a self-confessed ‘Great Depression buff’ and he was
obsessed with the question of why the Great Depression occurred and why it was
so deep and long. He generalised from
the Great Depression to argue that problems in the financial system lead to
serious economic downturns. In a
recession, banks become more cautious in their lending and borrowers are less
credit-worthy. As a result, credit is
less available, and both household purchases and business investments decline,
so intensifying the recession. Falling
or stagnant prices and wages mean that borrowers are less able to keep up
existing loan repayments than at times of rising prices and wages when the real
level of debt falls. Consequently,
borrowers cut discretionary spending to keep up payments and are less able to
borrow for new purchases.[13]
He followed in the steps of Milton Friedman and Anna Schwarz’s
reinterpretation of the Great Depression as a monetary phenomenon. They argued that the contraction of the money
supply just before the crash of 1929, and again in the early years of the Great
Depression, led to a sharp drop in prices, falling wages, and postponement of
purchases in the expectation of lower prices in the future. In their view, the Fed could have taken
‘different and feasible actions’ to prevent the decline in the stock of money,
so reducing the severity and length of the Great Depression. Instead, the monetary policy of the Fed was
inept.[14] On the occasion of Friedman’s 90th
birthday in 2002, Bernanke made a public statement of apology on the behalf of
the Fed: ‘I would like to say to Milton and Anna: Regarding the Great
Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t
do it again’.[15] He had, as the title of his memoir would
later put it, ‘the courage to act’, and the Fed responded to the Great
Recession as it did in part as a result of the lessons he drew from history.
The lesson drawn from the Great Depression was to pursue monetary policy
rather than fiscal stimulus, and on 18 March 2009, the Fed embarked on
Quantitative Easing. But arguably it was
the wrong – or at least, not the only – lesson from history. Two leading economic historians, Barry Eichengreen
and Kevin O’Rourke used the historical record of the Great Depression to argue
that, in the few cases where it had been tried in the 1930s, fiscal policy and
deficit finance worked, and that governments after the Great Recession should
take advantage of low interest rates to borrow, increasing public spending
until households, banks and firms could take up the slack.[16] Their historical analysis went largely
unheeded and instead politicians turned to another interpretation of the past
to argue that high levels of debt were harmful to growth – the so-called ’90
per cent rule’ proposed by two leading economists with close ties to the IMF
and Federal Reserve – Ken Rogoff and Carmen Reinhart.
The ‘ninety per cent
rule’
In January 2010, Reinhart and Rogoff’s issued a working paper ‘Growth in a time of debt’ for the National Bureau of Economic Research, based on a dataset of 44 countries over 200 years, with over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate mechanisms and historical conditions. They argued that a debt to GDP ratio above 90 per cent led to a fall in the median growth rate by 1 per cent, and even more in the average rate and in emerging markets (see figure 1). They found that ‘seldom do countries simply “grow” their way out of deep debt burdens’. They argued that ‘debt intolerance’ appeared when debt rose, with an increase in the risk premium and a consequent need to ‘tighten fiscal policy in order to appear credible to investors and thereby reduce risk premia’. The political consequence of this finding were serious. Although the Maastricht criteria for membership of the euro specified that a country’s deficit should be no more than 3 per cent of GDP and the debt/GDP ratio no more than 60 per cent, many members were exceeding these limits – and the conclusion of Reinhart and Rogoff was that the level of debt was reducing growth and therefore making escape more difficult. For their part, the United States had a debt to GDP ratio of 103 per cent and Japan of 230 per cent in 2014. If Reinhart and Rogoff were to be believed, reducing the debt was vital for economic recovery.[17]
FIGURE 1
Source: ‘Growth in a Time of Debt’, Carmen M. Reinhart, Kenneth S. Rogoff, NBER Working Paper
No. 15639, Issued in January 2010, Revised in December 2011
The calculations of Reinhart and Rogoff were soon challenged as
inaccurate, with a correction of their data suggesting that the average country
with a debt over 90 per cent of GDP grew by 2.2 per cent rather than declining
by 0.1 per cent. Nevertheless, they
claimed that the relationship remained and their views were widely disseminated
in the press.[18] Politicians on the right seized on a
seductively simple ’90 per cent rule’ that if the debt were not stopped, it
would rise inexorably until the country collapsed in bankruptcy. Paul Ryan, the
Republican chairman of the House Committee on the Budget, cited their study to
argue that debt above 90 per cent ‘has a significant negative effect on
economic growth’. He drew a stark choice
between two futures: a path to prosperity, with debt completely paid by the
2050s; or a path to economic disaster as debt rose to almost 900 per cent of
GDP by 2080. In his view, the obvious
sources of this ‘crushing burden of debt’ was social security, Medicare and
Medicaid.[19]
(see figure 2) In February 2010, shortly
before he became Chancellor of the Exchequer in the Conservative-Liberal
Democrat coalition, George Osborne commented that the study of Reinhart and
Rogoff was ‘perhaps the most significant contribution to our understanding of
the origins of the crisis’. It offered
him some intellectual justification for his ideological belief in a smaller
state.[20] Reinhart and Rogoff themselves were more
nuanced, proposing that debt could be reduced not only by austerity but also by
restructuring both sovereign debt and mortgages on houses, or by reducing real
interest rates which amounted to a tax on bondholders.[21] What was simply not politically feasible was
an increase in American taxation to European levels to cover social spending
and stop the debt from rising.[22]
FIGURE 2
Source: The Path to
Prosperity: A Responsible, Balanced Budget. The House Republican Fiscal Year
2015 Budget Resolution
More seriously than the errors in the spread sheets, the ninety per cent rule is bad history that was used for ideological purposes. Context matters and the observations of Reinhart ad Rogoff did not distinguish between different circumstances. Above all, there is no mention of war. A major reason for peaks in debt was warfare which complicates the relationship with economic growth. The ratio of debt to GDP exceeded or was close to 200 per cent in Britain during the Napoleonic and both world wars (see figure 3). High debt in the Napoleonic wars was associated with the industrial revolution, and over the ‘long eighteenth century’ from 1688 to 1815, Britain sustained a much higher level of debt and taxation without default than did France. Simply put, there was a contrast between the French revolution and the industrial revolution. The national debt in Britain was sustained by an effective fiscal system and bond market in the City of London that contributed to the growth of an efficient financial system that sustained commerce, unlike in France which experienced frequent default.[23] During the First World War, the level of debt in Britain again rose and the economy experienced a decade of low growth – not as a result of debt so much as the collapse of the global economy and overvaluation of sterling with the need for high interest rates to maintain parity . By contrast, a higher level of debt as a result of the Second World War coincided with, perhaps even stimulated, rapid economic growth as a result of fiscal stimulus and the recreation of a global economy.[24] The ability to pay down the debt after war depends on interest rates – high after 1918, low after 1945 – and growth rates – low after 1919 and higher after 1945.[25]
FIGURE 3
It might be argued, with considerable justice, that
high levels of debt created by the pressures of warfare are different from the
recent situation where debt has increased in peacetime and even at periods when
the economy has been running at full capacity as the result of a structural
deficit. This is a fair point, and nothing
that is said here is intended to justify improvident spending and maintenance
of a deficit. But warnings about over-spending should not become reasons for
slashing spending without considering other factors. Action to reduce the deficit and debt might
be justified where debt is serviced by high levels of taxation of productive
wealth and income which harms growth; on other occasions, it is serviced by
taxation of high earners that shifted income to poorer members of society and
increased consumption. Similarly, a cut in public spending to balance the
budget might possibly lead to growth if debt, interest rates and taxation were
high (as in Italy in the 1980s and
1990s), but not necessarily in other circumstances. One of the real lessons
of history is that context matters and ‘rules’ as laid down by Reinhart and
Rogoff are misleading and even dangerous.[26] A crucial is why the deficit arises. Spending on education, technology and infrastructure
might raise the rate of growth and produce a rate of return that is as high as
or even higher than private sector investment.
On the other hand, the deficit could arise – as it has in the United
States – from extravagant spending on defence or military adventures. From expensive
subsidies to the drug companies in Medicare, as well as generous tax cuts. The structural deficit may be reduced without
cutting spending that benefits growth and employment. Stiglitz rightly argues that the argument
above the deficit in the United States, and one might add in the United
Kingdom, has been shaped by politicians and economists whose concern is less
about the size of the deficit and how to reduce it than about the size of
government and the level of progression in the tax system. It is, in his opinion, ‘a wolf’s agenda in
sheep’s clothing’.[27]
Reinhart and Rogoff refer to ‘debt intolerance’ and the risk of a higher
risk premium with the need to restore credibility by austerity. But their own work shows that credibility is
not only a matter of the level of debt – it also reflects the existence of a
credible tax regime. The comparison
between Britain and France in the long eighteenth century shows that a country
can sustain a higher level of debt and taxation where the state and fiscal
extraction has a higher level of legitimacy.
Similarly, in This Time Is
Different, Reinhart and Rogoff show that Greece defaulted over half of the
time since it secured independence and its tax system was inadequate. Indeed,
it was not reformed after the bail-outs and rescheduling prior to the First
World War. Debt crisis in
the Ottoman Empire, Egypt and Greece before the First World War led to international
financial control and an opportunity to reform the tax system. In Egypt and the Ottoman empire, more
progress was made in the absence of democracy than in Greece, where democracy
and the need for political negotiation within parties and parliament led to
blockages.[28]
This historical record
suggests that the risk premium on Greek debt should be high; in fact, it fell
with membership of the eurozone. Up to the financial crisis, the risk premium on sovereign debt of
members of the eurozone fell to a very narrow range. In July 2007, the interest rate on 10-year Irish
sovereign bonds was actually lower
than on German debt, reflecting the complacent assumption that eurozone
sovereign default was impossible. This
situation soon proved untenable. Risk
premiums rose and rates between countries became more dispersed. By January 2009, the risk premium on Irish
sovereign debt had risen to 300 basis points, at which point the Irish
government rescued the Anglo-Irish bank at a cost of around 20 per cent of
Irish GDP. The crisis in banking spilled
over into alarm at public debt and the risk premium rose to over 1,000 basis
points.[29]
Of
course, both Reinhart and Rogoff and the Maastricht criteria assume that the
debt to GDP ratio is the most appropriate measure. But is it?
Both are statistical constructs and should be treated with caution. Diane Coyle has set out the complex story of
GDP measures, what they include and exclude.
As she points out, there is now debate over how to capture complicated
global production chains, how to measure ‘intangibles’ that are a larger share
of the economy, and how to deal with sustainability, given that an increase in
the GDP can come at the cost of destroying ‘natural’ capital and so passing
costs to the future.[30] Similarly, public debt can be manipulated by
drawing the line between the state and non-state actors, such as through the
use of public private partnerships or Private Finance Initiatives that were
adopted particularly by the ‘new Labour’ government in Britain: the capital
cost of hospitals or schools is raised by the private sector, and does not
appear as national debt, though the charge for the use of the asset might be
more onerous. A recent analysis by Avner
Offer points out that ‘Placing debt off
the balance sheet was a deception which provided no benefits. It was a “fiscal
illusion”, no more than an accounting trick. There was no saving, just the
opposite. A much higher cost was imposed on future taxpayers in order to
present the semblance of prudence and self-control.’ The
construction of large-scale capital projects with long time horizons is ideally
suited to state finance at low interest rates but PFI schemes allowed bankers to
secure a revenue flow at money market rates with a guarantee underwritten by
the credit of the state. Howard Davies,
the former chairman of the Financial Services Authority, Audit Commission, and
Royal Bank of Scotland was in a good position to castigate PFI in 2018 as ‘a
fraud on the people because essentially the government is always the cheapest
borrower’. [31] Focussing on reducing the ratio of debt to
GDP might be a false economy for public spending and debt create assets which
are handed to the next generation. If
the state spends more on productive assets at a time of low interest rates, and
those assets encourage economic growth, the result would be to reduce the debt
to GDP ratio. Instead, the turn to Quantitative
Easing led to an increase in the value of equities held by richer people and
left the poor suffering from a reduction in welfare.
The
measure of GDP to debt could be replaced by another measure: the ratio of debt
to national assets to produce the net worth of the state (assets minus
liabilities). Borrowing to invest is
different from borrowing for consumption, and high-return public investments
can raise growth, unlike spending on warfare or handouts to the financial and
other corporate sectors.[32] In 1957, the net worth of the public sector
was about 30 per cent below GDP but it rose to about 75 per cent in 1979. The
‘great divestiture’ of the Thatcher and Major governments marked a fundamental
change, with net worth falling to under 20 per cent of GDP. Apart for the sale of council houses to their
former tenants at a discounted price, the sale of public assets largely benefitted managers who secured higher salaries and financial
interests, rather than customers – so contributing to a rise in
inequality. It did not
lead to popular, widespread share ownership; nor did it have a major impact on
productivity. The sale of the assets contributed
to debt repayment in the 1990s, offering a short-term wind-fall at the expense
of future income. Indeed, the net worth
of the UK is lower than any country except Portugal according to a recent IMF
report – and Japan moves from being the heaviest debtor in terms of debt to GDP
to somewhere in the middle of the table (see figure 4). In the words of Viktor Gaspar of the IMF, ‘it
is not only what you owe; it’s what you own’.
The IMF pointed out that countries with stronger balance sheets pay less
interest on their debt and that well-run state enterprises could add up to 3
per cent of GDP to the revenue of the state.[33]
FIGURE 4
The
point was well made by AB Atkinson that the focus should not be on reducing the
ratio of debt to GDP:
We should be focussing on the
overall net worth of the state, not just on the national debt. The proper objective of fiscal policy should
be a return to a situation where the state has a significant positive net
worth. Of course, the reduction of the
national debt would contribute to this end, but it is only one side of the
equation. The other side is the
accumulation of state assets. By holding
capital and by sharing in the fruits of technological developments, the state
can use the resulting revenue to promise a less unequal society.
The solution was
not necessarily a return to nationalisation for there were other possibilities
such as the creation of a sovereign
wealth fund such as in Singapore or Norway, or some form of mixed ownership
with management left in private hands.
In his view, a state with a positive net worth can create a fairer society
within and across generations than one in which individuals pass on their
assets to their descendants, leading to growing inequality.[34]
Of
course, Atkinson’s approach valued the state – a belief that ran counter to the
attack on the state since the 1970s.
This attack went through two stages.
The first was a crisis of the tax state in the 1970s which meant that revenues
were not large enough to cover demands for welfare at a time of the economic
crisis – so leading to a turn to debt to make up the shortfall. By making higher taxes politically
unacceptable, and in some cases such as the United States during the Reagan
presidency making unsustainable tax cuts, the result was a greater reliance on
debt. The second stage was then to attack
reliance on debt as imprudent. Why,
then, did the tax state suffered from a legitimation crisis in the 1970s?
The crisis of the tax state
High
levels of debt are not necessarily the result of an unusually large public
sector or high levels of social service expenditure. Elliot Brownlee and Eisaku Ide argue that debt
in the United States and Japan reflects a relatively low tax effort with attempts
to increase taxes in the 1980s facing opposition.[35] The point can be extended, for Wolfgang
Streeck argues that hostility
to tax increases led to a crisis of the tax state in the 1970s, leading to the creation
of a ‘debt state’ to defuse distributional conflict between capital and labour. Monetary expansion inserted more resources to
extend the promise of ‘socially pacified capitalism, but resulted in
stagflation. The outcome was a growing
reliance on debt to meet the needs of workers beyond the capacity of the
economy. In Streeck’s view, the containment of taxation
was a first stage of a neoliberal agenda; the next stage was the ‘consolidation
state’ to reduce public spending, with a growing reliance on private debt to
supplement income from work. The process
is apparent in the United Kingdom where government debt in 1995 was about 58
per cent of GDP and household debt 72 per cent; by 2008 the figures were 61 per
cent and 110 per cent. Streeck sees a new
legitimation crisis of democratic capitalism, for the consolidation state on
longer produces even the illusion of equitable growth. Streeck calls for a turn from market justice
to social justice.[36]
It is not necessary to follow Streeck’s argument that there was an internal
contradiction between capitalism and democracy to agree that there was a crisis
of taxation and public finance in the 1970s.[37] The oil shock of 1973 led to a recession in
most OECD countries. Cheap oil had served as one of the main motors
of the impressive growth rates in Western countries. Now, increases in the price
of petrol exacerbated the incipient economic crisis at a
time when the benefits of a shift of labour from low productivity agriculture
into manufacturing were largely exhausted, and the gains of post-war
technological changes had been captured.[38] Most OECD countries slipped into
recession. The rise in oil prices led to a dramatic increase in production
costs for industry and also in the energy costs of private households,
contributing to a fall in consumption outside the energy sector. In most Western
countries the crisis consisted of high inflation rates, falling production,
rising unemployment and balance of payments deficits. The result was the end of
the boom. In Western Europe growth in
GDP per capita was 4.05 per cent from 1950 to 1973, but only 1.75 per cent from
1973 to 1997.[39] Expectations for welfare had been raised but
the economic system could not deliver.
By the 1970s, profits
were being squeezed in many industrial economies, so that it was difficult to balance
the claims of capital, wages and consumers and to maintain capital investment.[40] Investment
in manufacturing was only 5.4 per cent of gross capital stock in 1960‒1968 in
Britain, but much higher in Japan (9.4 per cent) and Germany (19.1 per
cent). The oil price shock after 1973
and the rising costs of borrowing in the 1980s led to a fall in investment in
manufacturing in most countries: in Britain it fell to 3.1 per cent of gross
capital stock in 1980‒1988, and even more strikingly in Japan to 5.8 per cent
and Germany to 10.2 per cent. In Germany
and Japan, about two-thirds of the fall in investment can be explained by
declining profitability; surprisingly, in Britain the effect of profits was
modest.[41]
The squeeze on profits
meant that the social contract between labour, capital and the state on which
the boom rested started to break down. After the war, the social contract was
based on workers trading lower current consumption for higher living standards
in the future, based on the belief that industrialists would reinvest their
profits. Commitment to the deal was
underwritten by the government through tax-breaks on condition that firms
invested, by schemes for industrial support, and by welfare benefits for the
workers. Barry Eichengreen argues that this neo-corporatist ‘web of
interlocking agreements’ increased the cost of bringing the post-war settlement
to an end.[42]
But by 1970 the contract was breaking down as profits fell, squeezed by the
demands for higher wages which could no longer be covered by gains in
productivity. One response was to turn
to debt to meet expectations.
The end of the Bretton
Woods system constituted another major challenge. On 15 August 1971, President
Richard Nixon suspended the convertibility of the United States dollar into
gold. The subsequent attempts to return
to pegged exchange rates failed, leading to a new exchange rate system.[43]
The Bretton Woods regime was based on a desire to stabilize exchange rates and
at the same time allow individual countries to pursue an active domestic
monetary policy. These two aims could be reconciled only by limiting the
movement of capital in response to different interest rates, for free flows of
capital would put pressure on the fixed exchange rate – the so-called trilemma
which allowed a choice of only two of fixed exchange rates, capital movements,
and an active domestic monetary policy. The Bretton Woods trade-off came under
pressure with growing freedom of capital movement after currencies became
convertible in 1958, and with the emergence of the Eurodollar market and the
relaxing of capital controls in the 1970s. The greater scope for movement of
capital between countries allowed more freedom in monetary policy but constrained
independence in taxation policy, for if a country adopted policies that were
too redistributive or costly for markets to tolerate, they would be punished by
capital flight. The rise of the
Eurodollar market also increased opportunities for evading taxation and
contributed to the growth of tax havens.[44] The result was both to make more funds
available for borrowing by governments and to make higher taxation more
difficult given the risk of capital flight.
It was also difficult
to rely on taxation given changing cultural assumptions about what was
considered to be fair, just and equitable.
A major shift in the 1970s was from collective to individualistic approaches
to society. Dan Rodgers has termed this
the ‘age of fracture’ in the United States, defined by a movement away from concepts
of national consensus, managed markets and citizen responsibility to a more
fluid sense of gender and racial identities, narrower definitions of collective
responsibility, and the replacement of solidarity in terms of class or race by
fluid, multiple identities. Keynesian macroeconomics was overtaken by flexible,
instantly acting markets and by the individual interest of public choice
theory. Rodgers argues that solidarity and collective institutions gave way to
a more individualized sense of human nature based on choice, agency,
performance and desire. ‘Strong metaphors of society were supplanted by weaker
ones. Imagined collectivities shrank; notions of structure and power thinned
out.’ Social assumptions shifted through a ‘contagion of metaphors’, as central
features of game theory moved from economics departments into law and the
social sciences, and out into the wider public discourse. The notion of
‘choice’ was employed more frequently and became an inherent claim on both the
progressive left – for example, a woman’s right to abortion or an individual’s
right to sexual identity‒ and the conservative right ‒ the freedom to choose
how to spend one’s own money. Both used the rhetoric of choice, though for
different ends.[45]
This shift in
attitudes is connected to a change in the nature of political mobilization from
the 1960s. The mass political parties that emerged in the nineteenth century
were coalitions of different interests, making concessions to construct a
general platform for which members would campaign, even if they were not
entirely happy about all the elements. This pattern weakened from the 1960s
with greater mobilization on single issues rather than a common platform.
Issues such as feminism and sexual politics, or the politics of consumption,
suffer from what Geoff Eley has called the ‘tyranny of structurelessness’ with
decentralized and non-bureaucratic forms of mobilization. In his view, the
‘empowerment of participation’ of 1968 was difficult to convert into a response
to the emergence of global capitalism.[46]
At the same time, politicians
on the right sold a more optimistic future to a weary electorate, offering ‘populist
market optimism’ that was expressed in the significant tax cuts of 1979 and
1981 in Britain and the United States. These ideas were popularized in two
best-sellers published in the United States. The first was Jude Wanniski’s The Way the World Works which advocated
a supply-side approach, arguing that a ‘wedge’ of taxation interrupted trade
between producer and consumer; if it could be reduced, the economy would
flourish. The Democrats offered spending to help the poor; rather than oppose
spending, the Republicans should promise tax cuts which, they claimed, would
restore full employment and so contain pressure for public spending and reduce
the size of the public sector.[47]
The second was George Gilder’s Wealth and
Poverty, which presented an optimistic account of economic growth once entrepreneurs
had been unshackled from the fetters of taxation; Reagan made sure that the
members of his cabinet were given copies.[48]
Historians have
grappled with the reasons for the change from collective to individual
attitudes to taxation and the state. In broad terms, it is often said that it
amounts to a rise of neoliberal ideas,[49]
but why did they have purchase now? An
economistic interpretation of the shift is provided by public choice theory
through the self-interest of voters seeking to maximize their utility and
deciding whether paying taxes for the collective provision of public services
was beneficial. There are two ways of explaining a change in the perception of
the costs and benefits of taxation. The first way is to look at the
relationship between the franchise and taxation. Until 1970, most voters in
Britain fell below the income tax threshold, and certainly below the higher
rate threshold. Thus they were likely to benefit from public spending without making
a proportionate contributing to it, and so had good reason to vote for more
generous welfare and higher taxes. As wages rose and tax thresholds did not
increase in line with inflation, more voters began to pay income tax or were
liable at a higher rate – indeed, they could experience a very high marginal
rate by losing benefits and coming into the purview of direct taxes. The
politics of direct taxation had changed. After the war, the median voter earned
a modest income, falling below the threshold for income tax. This gave rise to
strong electoral support for direct taxation. By the 1970s, the median voter
was paying income tax at a high rate and so eroded support for direct taxation.
A second way of
looking at the changing assumptions of taxpayers and the electorate is to
consider the relationship between the incidence of taxation and the receipt of
benefits. In some countries, such as Britain, social benefits were funded by
direct taxes largely funded by middle-class voters. Initially, the middle class
might feel that they were getting a reasonable deal, for they might
disproportionately benefit from greater access to healthcare and secondary and
higher education; and at a time of high employment, there was less concern that
benefits were being used to support the ‘undeserving’ poor. A public choice
analysis suggests that the attitude of middle-class taxpayers would change by
the 1970s. The somewhat generalized
pattern of welfare provision after the war seemed attractive at the time, but
rising incomes and advances in healthcare created a demand for more
individualized and targeted provision. Greater
disposable income and paying higher taxes for a basic level of provision seemed
less attractive to a generation with different assumptions about consumer choice
created in the decades of affluence in the 1950s and 1960s. Why not opt out of
the state system and purchase what they wanted? By contrast, in some countries
direct taxes were much less important and the costs tended to fall on
consumption: thus whereas in the United Kingdom consumption taxes comprised
27.6 per cent of total taxation in 1970, they accounted for 50.5 per cent in
Ireland, 38.3 per cent in Italy and 36.5 per cent in France.[50]
This different tax structure modified the assumptions of the electorate, for
the middle class was less inclined to pay high income tax rates to fund
benefits for less well-off members of society who were now defined as ‘scroungers’,
than in a system where costs fell on indirect taxes. Could it be that a less
progressive tax regime mitigated the hostility of voters with incomes above the
median to provide redistributive welfare benefits?
The economic crisis of the early 1970s meant,
as Rodgers’ says, ‘a breakdown in economic predictability and performance’.[51] A
similar point is made by Daniel Stedman Jones who sees the emergence of
neoliberalism as the result of the economic crisis of the 1970s and the
acceptance – on the left as much as the right – of the need for new policies to
fill a policy vacuum in response to the collapse of the Bretton Woods system
and the onset of stagflation. John Hicks – an economist closely associated with
the triumph of Keynesianism ‒ pointed out in April 1973 that the General Theory was devised to deal with
deflation and offered no solution to the problem of rising inflation, and
especially the combination of high inflation and high unemployment which seemed
impossible in classical Keynesianism. Consequently, there was a crisis of
Keynesian economics.[52] Ideas for an alternative approach had been
evolving in a network of think tanks and pressure groups. In Stedman Jones’s
words, ‘just as in 1932 or 1945, the 1970s were a rare moment when the pieces
of the political and economic jigsaw were strewn all over the place, in need of
painstaking rearrangement’.[53]
The new democratic
states of Southern Europe – Portugal, Spain and Greece – faced particular
issues. Their welfare systems lagged
behind the rest of Europe, and they opted for a fiscal regime of progressive income
tax rather than the French or Italian approach of high consumption taxes to
overcome widespread tax evasion. Their
problem was that they lacked the capacity to administer such a system through a
well-trained tax bureaucracy, so leading to tax fraud and evasion.[54] Consequently,
they were left with the problem of how to finance their emerging welfare
systems. They turned to the same
solution as Italy – to overcome tax fraud by using the central banks that were dependent
on the government in order to monetize large and recurrent budget deficits. They
also relied on ‘financial repression’, delaying financial deregulation of
domestic banks in order to oblige them to hold government debt and to hold down
the interest payment. The result was to
plug the gap between welfare demands and fiscal capacity by reliance on monetary
expansion and debt.[55]
For these reasons, increases in tax revenue
were negligible in comparison with the boom period. With expenditures
continuing to grow, governments increasingly relied on borrowing to meet their
financial obligations, helped by the oil money in the Western banking system.
The level of government debt in the wealthy OECD countries steadily rose. The debt state had arrived – and when the
financial crisis arrived, any move to increase taxes to fund welfare was
rejected. Instead, the deficit and debt
had to be reduced.
Bait and switch:
rhetorical strategies
I
have so far argued that the defeat of Keynesianism and fiscal expansion can be
explained by the triumph of monetary policy as a result of a particular reading
of the history of the Great Depression, by the use of the 90 per cent rule to
justify retrenchment, and by the rejection of higher taxation. A further reason is the notion of ‘bait and
switch’ – that is, explaining that there is a problem with the deficit and debt
levels, and then switching the explanation from the costs of bailing out the
banks to the public’s demand for generous welfare benefits.[56] The result was noted by Stiglitz: ‘deficit
fetishism’ was used as a way of justifying reduction in the size of the
government and the progressivity of the tax system, and of avoiding alternative
approaches that would hit vested interests of the military-industrial complex
or large corporations. In his view, ‘the
financial sector has imposed huge externalities on the rest of society.
America’s financial industry polluted the world with toxic mortgages, and, in
line with the well established “polluter pays” principle, taxes should be
imposed on it.’ A plausible view of the
debt crisis is that the high cost of bailing out banks led to a fiscal burden
and to deflation in an attempt to close budget deficits. Worries about sovereign debt led to a loss of
confidence in banks which held government bonds; the costs of rescuing banks
hit public finances; and austerity weakened economies and made it harder to
deal with the deficit. The result was a
vicious downward spiral. But the
narrative that took precedence was that a bloated and inefficient state and
generous welfare provisions fuelled the deficit and the rise of the debt.[57]
Economists and commentators on the left rejected Ryan’s explanation of
the rising ratio of debt to GDP, and instead argued that the financial crisis
of 2008 led to higher debt as a result of bailing out the banks. In their view, debt was cyclical and could be
reduced by faster growth stimulated by fiscal policies. In the words of Mark Blyth, a leading critic
of austerity,
we have turned the
politics of debt into a morality play, one that has shifted the blame from the
banks to the state. Austerity is the
penance – the virtuous pain after the immoral party – except it is not going to
be a diet of pain that we shall all share.
Few of us were invited to the party but we are all being asked to pay
the bill.
On this view, high levels of public debt arose from the bail out of the
banks, but those who were culpable passed the blame to the state, with the
costs falling on the poor. The rhetoric
of austerity provided a moral justification by shifting blame to a bloated and
inefficient public sector and overly generous welfare.[58] This strategy rested on the economic ideology
of the Virginia school of economics associated with James Buchanan, that the
state was a rapacious Leviathan that needed to be contained. Cutting taxes and allowed debt to rise was a
way of ‘starving the beast’ by imposing tax cuts and provoking a fiscal crisis
in order to create support for cuts in spending and welfare as the only viable
solution. Indeed, it was the Democratic
administration of Bill Clinton that produced a surplus of $86.4 billion in 2000;
the deficit returned under George W Bush, reaching $568 billion in 2004. The
Republicans feared that a surplus would encourage more spending which could
only be stopped by tax cuts and a budget crisis that could chain the state.[59]
At the heart of the rhetoric was a supposed identity between personal
prudence and public finance, and the need to ensure that burdens were not
passed to future generations. This take
me to a further reason for the defeat of fiscal policy
The analogy of the
individual and the state
Every individual is mortal
and expects to pay off a loan at some point.
Creditors are willing to lend several times the annual income in young
adulthood, mainly for house purchase, but the amount will decline over life. By analogy, the state should not continue to
accumulate debt which is passed on to future generations – a common
justification for debt repayment and austerity.
But is this a sensible argument?
States do not die and older citizens are replaced so that communal debt
does not need to be paid off in the same way.
It is therefore possible to continue with a steady-state debt. Further, where the debt is held by citizens
of the country – as it the case for two-thirds of British and even more of
Japanese debt – it is not a net liability of that country’s citizens.
The question to ask is
whether the debt is sustainable. Debt has
risen since the recession as the state has taken on private bank debt and
growth rates have fallen as a result of the recession and austerity. It is true that a large debt causes
distortions because it needs taxation to service it and reducing the debt now
would reduce taxation in the longer run.
But in the short run reducing the level of debt means either higher
taxes that might increase disincentives and reduce output or, more likely, cuts
in welfare that hit the poor. The
question is whether the long-term benefits are worth more than the short-term
pain. Debt reduction replaces a steady
time–profile of taxation and benefits by imposing higher taxes (or lower
welfare) now for lower taxes (or better welfare) later. It is entirely possible that the distortions
in the short run are greater than the reduction in distortions in the long run,
and the sacrifice is not worthwhile. And
the welfare costs of debt reduction are not linear: an IMF paper estimated that
paying down 5 per cent of GDP leads to a 1 per cent welfare cost, rising to 6
per cent where 20 per cent is paid down.[60]
Indeed, the short-term pain
has long-term consequences. The
imposition of austerity in southern Europe has led to very high levels of
unemployment for young adults which will affect their life chances in the long
term. And it is not only the young who
suffer, for there is also a fall in life expectancy. In Greece, health spending fell from 9.8 per
cent of GDP in 2008 to 8.1 per cent in 2014, and GDP itself fell. The death rate rose by 17.6 per cent between 2010-16.[61] Bond
holders and banks were protected at the expense of long-term unemployment and
premature death. In 2015, an IMF report
concluded that it might indeed be better to pay interest now rather than reduce
the debt by austerity, and to wait for growth and inflation to have their
effect:
For those countries that are not at imminent risk of losing market
access, current policy debates center on the appropriate pace at which to pay
down public debt. Those who believe that debt is bad for growth favor a rapid
reduction in indebtedness, whereas those who stress Keynesian demand management
considerations argue for a measured pace of consolidation, perhaps with a
ramping up of public investment while interest rates remain at historic lows.
Somewhat lost in this debate is the possibility of simply living with (relatively)
high debt, and allowing debt ratios to decline organically through output
growth….. [T]his third course, of living with high debt, merits consideration
in countries where debt sustainability concerns are not pressing.
Whether it is possible to live with high debt depends in large part on
the ‘fiscal space’ between the actual debt to GDP ratio and debt limit that
might trigger a crisis (see figure 5). This
is not an invitation for Greece to carry on regardless – it is for a partial
default or restructuring to avoid the pain of austerity, and then to ensure
that a credible tax regime is created. There
was no compelling reason for countries to embark on austerity when they had sufficient
fiscal space.[62]
FIGURE 5
From Ostry, Ghosh and Espinoza, ‘When should
public debt be reduced?’
Conclusion: the problem of the future
A recent report of the UK Office of Budget Responsibility in January
2017 predicted that the austerity programme would bring the debt ratio down from
90 per cent to 80 per cent by the end of the 2020s. The welfare costs started to have serious
political consequences for the government of Teresa May who announced in
September 2018 that austerity would end.
But the OBR report calculated that the public sector deficit and debt
would grow to 234 per cent by 2066/7 – a level higher than during the three
periods of warfare. The explanation is
in part an erosion of the tax base with globalisation and tax avoidance, and
pessimism on future growth prospects, even leaving aside the impact of Brexit. Above all, the reason is an ageing population
with the consequent costs of health, social care and state pensions, and the
obligations to pay pubic sector occupational pensions. The government’s assets more than cover
government borrowing (a slightly different measure from national debt) but not
the occupational pension entitlements and financial liabilities from quantitative
easing. (see table 1)
TABLE 1 AROUND HERE
Whole of government accounts for UK, 2015/16, £ billion
Source: Martin
Slater, The National Debt: A Short History London, 2018, 244
Here is a serious issue, for the costs of ageing and of the pension
obligations are paid by younger workers who will not themselves have similar
benefits. The growth of inequality both
between classes at a point in time, and between generations over time has been
worsened by austerity and debt reduction.
What can be done? One solution is
to leave individuals to provide their own welfare through the free market,
continuing the reduction in taxes and debt.
Another is to boost economic growth to accelerate out of debt, though
this depends on policies to ensure that growth is inclusive. The more radical solution is to turn back the
erosion of the tax state of the 1970s. Atkinson
and Piketty propose measures such as a wealth tax, property tax, and
progressive lifetime capital receipt tax which now seem utopian.[63]
What I suggest is that the shift from fiscal policies and public spending after 2009 for a policy of Quantitative Easing and austerity created more problems than it solved, leading to widening disparities of income and wealth. Instead of action to resolve the impact of hyper-globalisation and technical change on social disparities, the policies of QE and austerity led to Brexit and the election of Trump which were linked with market fundamentalism. The question is whether the situation can now change. The problem of an ageing population and increased costs of care and pensions needs to be tackled – and the solution is likely to require an increase in taxation and a reconsideration of the politics of public finance. The 1970s marked a crisis of the tax state; will the 2020s mark a crisis of the consolidation state with the possible return to a more equitable society? It will only happen if ‘bait and switch’ and the rhetoric of austerity can be countered. In the United States in 2018, the prospects are not hopeful. Large tax cuts for the rich and corporations are leading to renewed deficits, and Republicans such as Paul Ryan have abandoned their earlier apocalyptic visions of mounting debt now that it arises from tax cuts to the rich rather than benefits for the poor. When the crisis does arrive, the danger is that the response will be cuts in spending that could stimulate growth rather than the restoration of tax cuts. But other solutions are possible, and the virtue of historical analysis is to show that what now appears the natural order of things has not always been so.
notes
[1]
Interview in Daily Telegraph, 30 Jan 2009.
He returned to the comparison on several occasion: see Simon Robinson
and Catherine Meyer, ‘Gordon Brown: sometimes a crisis forces change’, Time 25 March 2009.
[2]
Robert Skidelsky, Keynes: The Return of
the Master London: Allen Lane, 2009
[3]
Chris Giles, Ralph Atkins and Krishna Guha, ‘The undeniable shift to Keynes’, Financial Times 30 Dec 2008; London
summit – leaders; statement, 2 April 2009; Barry Eichengreen, The Hall of Mirrors: The Great Depression,
the Great Recession, and the Uses and Misuses of History, Oxford: Oxford
University Press, 2014, 10, 340-2.
[4]
The stimulus was less than suggested at the G20: see Chris Giles, ‘Large numbers
hide big divisions’, Financial Times,
3 April 2009.
[5]
Eichengreen, Hall
of Mirrors, 7, 9-10, 282, 284, 332-3; Austerity measures are outlined
in BBC website, ‘EU austerity drive country by country’, 21 May 2012; Alberto
Alesina and Silvia Ardagna, ‘Large changes in fiscal policy: taxes versus
spending’, NBER working paper 15438, Oct 2009.
[6] Philip
Stephens, ‘Summit success reflects a different global landscape’, Financial Times, 2 April 2009
[8]
Chris Giles, ‘UK bank chief urges caution’, Financial
Times, 25 March 2009; evidence to House of Commons Treasury Committees:
Bank of England February 2009 Inflation Report, Oral and Written Evidence,
Tuesday 24 March 2009, Q97 at www.publications.parliament.uk/pa/cm200809/cmselect/cmtresy/376-i/376i.pdf
[10] The rules are set out in Eleva Bora, Tidiane
Kinda, Priscilla Muthoora and Frederick Toscani, ‘Fiscal rules at a glance’,
IMF April 2015 at http://www.imf.org/external/datamapper/FiscalRules/Fiscal%20Rules%20at%20a%20Glance%20-%20Background%20Paper.pdf. See also X. Debrun, L. Moulin, A. Turrini, J.
Ayuso-i-Casals and M. S. Kumar, ‘Tied to the Mast? National Fiscal Rules in the
European Union’, Economic Policy,
April 2008, and Charles Wyplosz, ‘Fiscal rules: theoretical issues and
historical experiences’, in Alberto Alesina and Francesco Giavazzi (eds.), Fiscal Policy After the Financial crisis Chicago:
University of Chicago Press, 2013, at http://www.nber.org/chapters/c12656.pdf
[11] R P Esteves and A C Tuncer, ‘Eurobonds
past and present: a comparative review on debt mutualization in Europe’, Review of Law and Economics 12 (2016)
and ‘Feeling the blues: moral hazard and debt dilution in Eurobonds before
1914’, Journal of International Money and
Finance 65 (2016).
[12]
Ben S Bernanke, The Courage to Act: A
Memoir of a Crisis and its Aftermath New York and London: WW Norton, 2015,
vii
[14]
Milton Friedman and Anna Jacobson Schwartz, A
Monetary History of the United States, 1867-1960 Princeton: Princeton
University Press, 1963, pp. 301, 407-419. See the correction to their view in
Eichengreen, Hall of Mirrors, 114-6.
[17] Carmen
Reinhart and Kenneth Rogoff, ‘Growth in a time of debt’, NBER Working Paper
15639, Jan 2010; see also Carmen Reinhart and Ken Rogoff, This Time is Different: Eight Centuries of Fiscal Folly Princeton:
Princeton University Press, 2009.
[18]
Their statistics were challenged by Thomas Herndon, Michael Ash and Robert
Pollin, ‘’Does high debt consistently stifle economic growth? A critique of Reinhart and Rogoff’, Political
Economy Research Institute, University of Massachusetts Amherst, WP series no
322, April 1013, at
www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf
[19]The Path to Prosperity: Restoring America’s
Promise. Fiscal Year 2012 Budget
Resolution, House Committee on the Budget, Chairman Paul Ryan Wisconsin.
[20] George
Osborne, ‘Mais Lecture: A new economic model’, 24 Feb 2010
[21]
Reinhart and Rogoff, ‘Debt, growth and the austerity debate’, New York Times, 25 April 2013; ‘Why we should expect low growth amid debt’, Financial Times 28 Jan 2010; J Cassidy,
‘The Reinhart-Rogoff controversy: a summing up’, New Yorker 26 April 2013.
[22]
Martin Wolf, ‘The radical right and the US state’, Financial Times, 12 April 2011; the case for cutting spending
rather than increasing taxes was made by Alesina and Arganda, ‘Large changes in
fiscal policy: taxes versus spending’, see Blyth, Austerity, pp. 173-6 and Iyanatul Islam and Anis Chowdhury,
‘Revisiting the evidence on expansionary fiscal austerity’ at http://voxeu.org/debates/commentaries/revisiting-evidence-expansionary-fiscal-austerity-alesina-s-hour
[23] P
Mathias and P O’Brien, ‘Taxation in Britain and France, 1715-1810: a comparison
of the social and economic incidence of taxes collected for the central
governments’, Journal of European
Economic History 5 (1976); J Brewer, The
Sinews of Power: War, Money and the English State, 1688-1783 London: Unwin
Hyman, 1989; PGM Dickson, The Financial Revolution in England: A Study
in the Development of Pubic Credit, 1688-1756, London: Macmillan, 1967.
[24] Martin
Daunton, Just Taxes: The Politics of
Taxation in Britain, 1914-1979 Cambridge: Cambridge University Press, 2002.
[25] Nick
Crafts, ‘Reducing High Public
Debt Ratios: Lessons from UK Experience’, Fiscal
Studies, epub., 23 December 2015.
[26] See my own work on debt after the Napoleonic,
First and Second World Wars in Trusting
Leviathan and Just Taxes;
Eichengreen, Hall of Mirrors, 10.
[27]
For example, Joseph E Stiglitz,
‘Stimulating the economy in an era of debt and deficit’, The Economists’ Voice,
March 2012 at http://www.degruyter.com/view/j/ev
[28]
Reinhart and Rogoff, This Time Is
Different; C Tuncer, Sovereign Debt and International
Financial Control: The Middle East and the Balkans, 1870-1914, Houndsmill:
Palgrave Macmillan, 2015.
[29] Paul Wallace, The Euro Experiment Cambridge: Cambridge University Press, 2016, 82-3,
89; Ashoka Mody and Damiano Sandri, ‘The Eurozone crisis: how banks and
sovereigns came to be joined at the hip’, Economic
Policy 27 (2012), 201-6, 225-7; M Ehrmann, M Fratzscher, RS Gurkaynak and
ET Swanson, ‘Convergence and anchoring of the yield curves in the euro area’, Review of Economics and Statistics 93
(2011).
[30] Diane
Coyle, GDP: A Brief But Affectionate
History revised edition, Princeton and Oxford: Princeton University Press,
2014, ch. 6.
[31] Avner
Offer, ‘Patient and impatient capital: time horizons as market boundaries’,
University of Oxford Discussion Papers in Economic and Social History no. 165,
August 2018, 11-19.
[33] Chris
Giles, ‘Cash strapped countries advised to manage assets better’, Financial Times 10 Oct 2018; World Economic and Financial Surveys. Fiscal
Monitor October 2018. Managing Public
Wealth IMF, Washington, 2018.
[34]
Massimo Florio, The Great Divestiture:
Evaluating the Welfare Impact of the British Privatizations, 1979-1997 Cambridge
Mass and London: MIT Press, 2004; Anthony B Atkinson, Inequality: What Can Be Done? Cambridge Mass and London: Harvard
University Press, 2015
[35] W
Elliot Brownlee and Eisaku Ide, ‘’Fiscal policy in Japan and the United States
since 1973: economic crises, taxation and weak tax consent’, in Marc Buggeln,
Martin Daunton and Alexander Nützenadel
eds., The Political Economy of Public
Finance since the 1970s, Cambridge: Cambridge University Press, 2017.
[36]
Wolfgang Streeck, Buying Time: The
Delayed Crisis of Democratic Capitalism London: Verso, 2014.
[37]
Explored in Marc Buggeln, Martin Daunton and Alexander Nützenadel, ‘The political economy of public finance since the
1970s: Questioning the Leviathan’, in Buggeln, Daunton
and Nützenadel eds., The
Political Economy of Public Finance, 6-16.
[38] Karen R. Merrill,
The Oil Crisis of 1973‒1974, Boston, Mass:
Bedford Books, 2007; Mahmoud A. El-Gamal and Amy Myers Jaffe, Oil, Dollars, Debt and Crises. The
Global Curse of Black Gold
Cambridge: Cambridge University Press, 2010{Die politischen und gesellschaftlichen Auswirkungen der
arabischen Erdölpolitik auf die Bundesrepublik und Westeuropa, Stuttgart 1996.|.}
[39] Angus
Maddison, Economic Progress: {The Last Half Century in Historical Perspective, 1999, Table
3a.|The Last Half Century in Historical Perspective, 1999, Table 3a,
in www.ggdc.net/MADDISON/ARTICLES/madpaper.pdf. See also
Niall Ferguson, ‘Introduction: Crisis, What Crisis? The 1970s and the Shock of
the Global’, in ibid.; see also Charles Maier, Erez Manela and Daniel J.
Sargent (eds.), The Shock of the Global.
The 1970s in Perspective, Cambridge, Mass and London: Harvard University
Press, 2010, 9. }
[40] Andrew Glyn and Bob Sutcliffe, British
Capitalism, Workers and the Profits Squeeze Harmondsworth: Penguin Books,
1972, 66‒8;OECD, Towards Full Employment and Price Stability
Paris: OECD, 1977.
[41] V. Bhaskar and Andrew Glyn, ‘Investment and Profitability: The Evidence from
the Advanced Capitalist Countries’, in Gerald Epstein and
Herbert Gintis, eds.,
Macroeconomic
Policy after the Conservative EraCambridge: Cambridge University Press,
1995, 190‒1.
[42] See Eichengreen, The European
Economy, 31‒47; and ‘Institutions and Economic Growth: Europe after World
War 2’, in Nicholas Crafts and Gianni Toniolo, eds., Economic Growth in Europe since 1945 Cambridge: Cambridge
University Press, 1996, 38‒72.
[43] Francis J. Gavin, Gold, Dollars,
and Power. The Politics of International Monetary Relations, 1958‒1971
Chapel Hill, NC: University Press of North Carolina, 2004.
[44] Harold James, International
Monetary Cooperation since Bretton Woods New York and Oxford: Oxford
University Press, 1996; Barry Eichengreen, Globalizing
Capital. A History of the International Monetary System Princeton, NJ:
Princeton University Press, 1996; Gabriel Zucman, The Hidden Wealth of Nations. The Scourge of Tax Havens Chicago:
University of Chicago Press, 2015; Ronen Palan, The Offshore World. Sovereign Markets, Virtual Places, and Nomad
Millionaires Ithaca, NY: Cornell University Press, 2003.
[45] Daniel T Rodgers, Age
of Fracture Belknap Press of Harvard University Press: Cambridge, Mass. and
London, 2011, 3‒12. See also Pierre Rosanvallon, The Society of Equals Cambridge, Mass. and London: Harvard
University Press, 2013, ch. 4; Edward D. Berkowitz, Something Happened. A Political and Cultural Overview of the Seventies New
York: Columbia University Press, 2005; Bruce J. Schulman, The Seventies. The Great Shift in American Culture, Society, and
Politics New York: The Free Press, 2001.
[46] Geoff Eley, Forging Democracy:
The History of the Left in Europe, 1850‒2000 Oxford: Oxford University
Press, 2002, 378, 468.
[47] Jude Wanninski, The Way the World
Works: How Economies Fail – and Succeed New York: Basic Books, 1978.
[48] George Gilder, Wealth and Poverty
New York: Basic Books, 1981; Rodger, Age
of Fracture, 69, 72.
[49] Angus Burgin, The Great
Persuasion: Reinventing Free Markets since the Depression Cambridge, Mass.
and London: Harvard University Press, 2012 emphasizes Milton Friedman as a
great persuader. See also Philip Mirowski and Dieter Plehwe, The Road from Mont Pèlerin: The Making of
the Neoliberal Thought Collective Cambridge, Mass. and London: Harvard
University Press, 2009.
[50] Eurostat
(ed.), Structures of the Taxation Systems
in the European Union 1970‒1997 Luxembourg: Office for Official
Publications of the European Communities, 2000, 148.
[52] John R. Hicks, The Crisis in
Keynesian Economics Oxford: Oxford University Press, 1974. See also Maier,
‘Malaise’, 32‒8.
[53] Daniel Stedman Jones, Masters of
the Universe: Hayek, Friedman and the Birth of Neoliberal Politics
Princeton, NJ and London: Princeton University Press, 2012, 215‒16.
[54] Sara Torregrosa Hetland, ‘Did democracy bring redistribution? Insights
from the Spanish tax system, 1960‒90’, European
Review of Economic History (2015), 1‒22; and ‘Bypassing progressive taxation:
fraud and base erosion in the Spanish income tax (1970‒2001)’, IEB Working
Paper 2015/31 Chiara Bronchi and José C. Gomes-Santos, ‘Reforming the tax system
in Portugal’, OECD Economics Department
Working Papers, 302 (2001).
[55] See Stefano Batalossi, ‘Structural fiscal imbalances, financial
repression and sovereign debt sustainability in southern Europe, 1970s-1990s’, in
Buggeln, Daunton and Nützenadel, Political Economy of Public Finance,
262-298.
[56] Mark
Blyth, Austerity: The History of a
Dangerous Idea New York: Oxford University Press, 2013, 5, 7, 73, 87
[57]
Stiglitz, ‘Stimulating the economy’ and ‘Dangers of deficit-cut fetishism’; Blyth,
Austerity, 5.
[59] Adam
Tooze, Crashed: How a Decade of Financial
Crises Changed the World London: Allen Lane, 2018, 27.
[60] Martin
Slater, The National Debt: A Short
History London: Hurst, 2018, 228-234; JD Ostry, AR Ghosh and R Espinoza,
‘When should public debt be reduced?’ IMF Staff Discussion Note June 2015
SDN15/10.
[61] ‘The
burden of disease in Greece, health loss, risk factors and health financing
200-2016: an analysis of the Global Burden of Diseases Study, 2016’, The Lancet Public Health 3 (2018).
[62]
Ostry, Ghosh and Espinoza, ‘When should public debt be reduced?’
[63]
Atkinson, Inequality, 302-4; Piketty,
Capital, Part 4.
http://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.png00Martin Dauntonhttp://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.pngMartin Daunton2019-09-29 15:43:342019-10-07 09:28:47National debt and austerity
In his speech to the UN in September 2019, President Trump drew a stark contrast between globalists and patriots. Globalism, he claimed, ‘exerted a religious pall over past leaders causing them to ignore their own national interests’ and ‘wise leaders always put the good of their own people and their own country first’. In his opinion, ‘The future does not belong to globalists. The future belongs to patriots. The future belongs to sovereign and independent nations who protect their citizens, respect their neighbors and honor the differences that make each country special and unique’. ‘Patriots’ became a group with special access to the national interest, able to ‘see a nation and its destiny in ways no one else can. Liberty is only preserved, sovereignty is only secure, democracy is only sustained, greatness is only realised by the will and devotion of patriots’. The obvious corollary is that criticism of narrow self-interest and support of the global common good becomes unpatriotic treachery. In her speech to the Conservative Party conference in 2016, Teresa May made a similar, though less strident, claim that ‘If you believe you are a citizen of the world, you are a citizen of nowehere. You don’t understand what citizenship means’. Both were setting the ‘somewheres’ against the ‘anywheres’, to use the terms of David Goodhart in The Road to Somewhere: The New Tribes Shaping British Politics (Penguin 2017).
The notion of who is a citizen is contested and shifting, and the reflections of Frederick Cooper are very helpful in providing an overview of the debate and different meanings that are given to the term. Here is a draft review that I have recently published.
Frederick Cooper, Citizenship,
Inequality and Difference: Historical Perspectives Princeton and Oxford:
Princeton University Press, 2018, x + 205
This short book based on the Lawrence Stone lectures at the
Shelby Cullom Davis Center at Princeton handles a vast topic of contemporary
significance. Reading Cooper’s history
of contested claims to citizenship is a depressing experience – not because of
any failure of his lucid and acute analysis, but in response to the current
political connotations on both sides of the Atlantic, with President Trump’s
calls to build a wall and corral children of immigrants into camps or Prime
Minister May’s ‘hostile environment’ for would-be migrants. Cooper’s long historical perspective reflects
these current debates over citizenship as inclusive or exclusive, over what
threshold of commonality is needed to allow access to the status of citizen. It is a book that deserves to be read far
beyond academic specialists.
The Nationality Act passed by the British parliament in 1948 made
people in the white Dominions of Australia or Canada into ‘Commonwealth
citizens’, and of Jamaica and Nigeria into citizens of ‘the United Kingdom and
the colonies’, alongside the category of ‘British subject’. Cooper refers to these layers of citizenship
as ‘superposed nationality’. When
immigrants from the West Indies arrived on the ss Windrush in 1948, they were citizens with the right to settle and
work in Britain – as one government minister claimed, like Romans they ‘can say
“Civis Britannicus sum”’. Attitudes soon
changed, with the warnings of Enoch Powell, classical scholar and politician,
that, like the Tiber, British cities would foam with blood. Starting in 1962, rights to citizenship
became more restrictive, which led to political scandal in 2018 when May’s ‘hostile
environment’ denied citizenship to the children of the Windrush generation who
had every reason to assume that they were citizens, after living and working in
Britain for 60 years. At the same time, three
million European Union citizens resident in Britain wonder what rights they will
have after Brexit, and 2 million British people living and working elsewhere in
the European Union worry that they will lose their citizenship of the European
Union – another example of ‘superposed nationality’. The fantasy of ‘taking back control’ might strip
British citizens of their European Union citizenship, and European Union
citizenship of their rights in Britain.
These issues are deeply felt and highly contentious – and Cooper’s book
provides long run and comparative insights into our current dilemmas.
Similar issues of superposed nationality arose in the French
constitution of 1946. The French Empire
became the French Union, with the colonies as overseas territories whose residents
became citizens of France – and in Algeria, Muslims gained the right to
citizenship without renouncing their Islamic status and accepting the civil
code. But in 1974, French citizenship
became more restrictive, ending the special treatment of former overseas
citizens and creating a class of people who were resident in France without access
to welfare benefits. A distinction
emerged between French people with a historical claim to French heritage and the
children of immigrants. These debates
over inclusion and exclusion fuelled the far right of Le Pen – but equally,
French republicanism and laicisation marginalised those who were accused of
‘communitariansim’. In both Britain and
France, inclusive citizenship made sense for reasons of state at the end of the
Second World War in an effort to hold empires together – thirty years later, empires
largely disappeared and so did the need to offer inclusivity.
Cooper ranges widely, drawing parallels between the French constitution of 1946 and the Cadiz constitution of 1812 which debated similar issues in the Spanish empire, leading to the same fears of dilution of citizenship of those who saw themselves as more genuinely Spanish than diverse ethnic groups in Spanish America. The Cadiz constitution took an inclusive definition, as in France in 1946 and Britain in 1948 – at least for indigenous peoples, though not for Africans and their descendants who were assumed to come from somewhere else. Citizenship rested on being a member of an established community – a concept that emerged in early modern Spain in which citizenship was ‘performed’ in a collection of local communities.
Cooper sees the origins of these debates in the ancient
world, which was often referenced in later periods. Unlike the closed city
states of Greece, the Romans attached conquered people to the empire by an offer
of citizenship. The edict of Caracalla
in 212 extended citizenship to all free male inhabitants, without obliging them
to surrender their local patriotism and identity. The edict was used by Indians at the end of the
nineteenth century to claim a right to British imperial citizenship – an option
that was opposed by the British government and by Dominions which feared a
flood of Asians into Australia or Canada.
Instead, citizenship might be limited to a white ‘Greater Britain’, so
directing Indians to demands for independence.
Cooper shows how claims to citizenship were contested and
defined in diverging ways. Was it
acquired by birth on a state’s territory – jus
soli – or descent from a recognized citizen – jus sanguinis. Both
approaches had (and have) their critics – the former for granting citizenship
to individuals with a minimal attachment as a result of the chance of birth,
the latter for denying the rights of long-term migrants. Different regimes handled claims in different
ways, by creating group-differentiated citizenship in the Ottoman Empire, tsrarist
Russia, the Soviet Union and India, or a more universal approach defined by the
Declaration of the Rights of Man and of the Citizen in 1789.
Cooper covers a vast subject in a necessarily brief manner, building on his own deep knowledge of France and its empire. The book could have been two or three times as long, and dealt in more detail with the internal political and cultural debates that led to different outcomes. But the virtue of brevity is that highly complex and contentious issues can be understood – and provide ammunition for those who, like Cooper, wish to counter narrowly inclusive and national definitions of citizenship with a flexible and multilevel citizenship. In 2016, Theresa May assured the Conservative party conference that ‘If you believe you are a citizen of the world, you are a citizen of nowhere. You don’t understand what citizenship means.’ Cooper shows that May has no historical or conceptual understanding of what citizenship has meant and can mean.
http://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.png00Martin Dauntonhttp://create.martindaunton.co.uk/wp-content/uploads/2019/06/MD-logo.pngMartin Daunton2019-09-29 12:01:412019-10-07 09:29:37Who is a citizen?
In July 1944, 45 nations met at Bretton Woods in New Hampshire to discuss plans for the post-war monetary order, and to create the International Monetary Fund and International Bank for Reconstruction and Development. Discussions on trade soon followed with the negotiation of the General Agreement on Tariffs and Trade in Geneva in 1947. This post-war multilateral order was largely an American creation to prevent ‘beggar my neighbour policies’ of currency depreciation and trade warfare, and to create a balance between economic nationalism and the pursuit of globalisation. Now, 75 years later, President Trump is challenging these multilateral institutions and threatening a return to economic nationalism. At the same time, Brexiteers appeal to article 24 of GATT which they (wrongly) claim will allow a transitional trade deal with Europe, and proclaim the virtues of ‘a bright future based on World Trade Organisation rules, the body that succeeded and incorporated the GATT.
Nick Thomas-Symonds, the MP for Torfaen in South Wales and chair of the All-Party Parliamentary Group on Industrial Heritage, has every reason to be passionate. His own family worked in the South Wales coalfield, and his constituency is the home of the Big Pit at Blaenavon which is part of the World Heritage Site. On 11 July 2019, a summit of the APPG met at the V and A.
The director of the V and A, Tristram Hunt, pointed out that the museum brings together two strands. The first is the collection of the East India Company; the second is the celebration of industry at the Great Exhibition of 1851. The V and A is the embodiment of Industry and Empire, the title of Eric Hobsbawm’s classic economic history of modern Britain. Whether the V and A adequately interprets its imperial background is a moot point. It is trying to make links with industry in conjunction with regional museums in five industrial centres to inspire thinking about design – and the new base in Stratford in east London will rescue the industrial heritage of the Lea valley and London as a major centre of the industrial revolution.
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