Author: Kishan

The Government Is Not Like a Household

~ Kishan ~ Leave a comment

“On Politics Live BBC political editor Laura Kuenssberg compared the situation to “the credit card, the national mortgage, everything absolutely maxed out”, adding that “for next few years, there is really no money”.”

Economists lambast BBC over ‘misleading’ UK debt coverage, City A.M.

Seeking a Narrative tries to avoid quick takes and reactionary posts, but I couldn’t quite help myself when one of our most prominent political reporters made such an error in a live broadcast to the nation. It echoes the household analogy that was used to devastating effect in the wake of the previous crisis, neutering the recovery.

In this post, I want to counter this false narrative. In particular, I write about why you cannot compare the government budget to the household budget. Consider it a companion piece to my previous post on why you shouldn’t worry about the deficit.

Picture of a stack of coins with an ominous clock in the background.
Photo by Pixabay on Pexels.com

The household – that’s you and me as private individuals and families – has money coming in and going out on a regular basis. These incomes and expenditures usually have a monthly pattern (bills, wages, etc.). If monthly incomes are greater than expenditures, then the household has a ‘surplus’ and can add to their savings or pay down debt. If the reverse is true, the household is in ‘deficit’: it must either run down existing savings or take out a loan to cover the difference.

Loans are usually okay to fill in a gap every now and again, but reliance on loans is inadvisable. Unfortunately many households do have to rely on loans, sometimes even taking out new loans to pay back previous ones. The more loans a household takes out, the higher the interest rate they are likely to be charged. But eventually credit sources run out as confidence in the household’s ability to repay all this debt dissipates, and without further recourse they may have to declare bankruptcy.

This seems to make sense. And the course of our everyday lives confirms this logic even if we don’t experience it ourselves. What we do not have so much experience of is the management of public finances which don’t follow the same logic. Politicians use this asymmetry to their own advantage. What do they know that we don’t?

The government also has money coming in and going out on a regular basis. We usually talk about these in yearly terms, though various statistics are also collected monthly and quarterly. If revenues are greater than expenditure, the government runs a fiscal surplus, and can afford to pay down its pre-existing debt (or increase its reserves). If the government outspends collected revenues, it runs a deficit for that year and must use borrowing to fill the gap.

Chart showing UK government spending and revenue as percentages of GDP since 1970/71.
“Since 1970/71, the government has had a surplus in only six years.” (source)

So far, so similar. The major divergence does occur at this point in the story, however, I will point out that already there is a difference with the household. This difference is that government spending can influence government revenue. The same cannot be said of the household.

For instance, if the government increases welfare payments for the poor, they then spend this money on goods and services which yield consumption taxes (like VAT). Note the reverse is also true: if the government reduces its injections into the economy, it will receive less in taxes, and also risks materially reducing everyone’s living standards. No individual household has that power.

That aside, the major divergence is in the nature of borrowing each entity undertakes.

In terms of official sources, households are limited to things like payday loans and credit cards from financial services providers. These loans must be repaid to avoid severe consequences.

Whom does the government borrow from? Mostly retail banks and financial institutions like pension funds. An increasing amount is also borrowed from the Bank of England, which, being another arm of the public sector, often isn’t even quoted in debt statistics.

How does the government borrow? The instrument of borrowing is the bond. Bonds are IOU notes. The government says, “if you give me £100, I will give you £5 every year for a 50 year period, at the end of which I will return to you the initial £100”. In this example, the £100 is called the principal, the £5 is the coupon, 5% (£5/£100) is the yield or interest, and the 50 year period is the duration or maturity.

Chart showing the distribution of government debt by banded maturity.
Most government bonds mature after at least 7 years. (source)

The maturity of bonds can vary, but the average of the current stock of bonds that have been issued is about 15 years. But governments usually last five years (even less these days). How does that work? Well, here’s the secret: when it does need to borrow, the government issues bonds that it knows it may not need to repay. Annual interest payments do happen, but the final repayment may not occur until a generation or two down the line, by a future government.

What does today’s government do? It pays interest payments, and the final repayments, on bonds issued by previous governments. The “government” is an entity that far outlasts any individual Chancellor, Spending Review period or parliamentary term.

The task of any given government is to manage the interest and principal repayments on the stock of bonds accumulated by its predecessors (the “national debt”), as well as issuing new bonds to fund its own spending gaps if applicable, including the need to borrow to repay previous debts.

The assumed infinite lifespan of government is what allows it to continue like this without worrying about repaying all of its debt. (I say ‘assumed’ because there is the possibility the state will collapse but, should that occur, I imagine we will have more pressing issues to tend to.)

If governments can just keep servicing debt like this then these bonds carry little risk – so borrowing more does not correlate with higher interest rates. In fact, if a country has control over its own money supply and issues bonds in its own currency there is hardly any risk at all.

But this does not apply to all governments, and that’s why Greece and Argentina are also false parallels to the UK. Greece, along with the rest of the Eurozone, cedes monetary sovereignty to the European Central Bank. Argentina issues bonds denominated in US dollars, over which it has no control. The UK is more like the US and Japan: large economies with large debts to match.

At this point hopefully you get the picture: the UK government’s borrowing is of a very different nature to that of the household. The table below summarises.

Table summarising the similarities and differences between government and household finances covered in this post.

Though this is not to say the Treasury faces no constraint at all. A legitimate concern is the cost of interest payments. If interest payments keep rising then they will eat into an ever increasing portion of government revenues, thereby increasing the need to borrow just to pay interest, as opposed to funding public services and welfare provision.

It is this figure – interest payments as a proportion of revenues – that we ought to have debates and discussion about, not if the government has any money. I will return to these ideas in future posts.

Sources and Further Reading

Official sources and statistics

Commentary from professional economists

Why Proportional Representation?

~ Kishan ~ Leave a comment

Here is the follow up to my post that explained how the arguments in favour of First Past the Post have gotten weaker in recent years. This post will be more about the benefits of Proportional Representation particularly in the context of the 2019 General Election.

Note that PR isn’t a system per se but instead a type or category of system. In the same way that FPTP as a system falls into the category of ‘plurality’, there are different systems that could be labelled PR. In this post I will be advocating the principle of using a PR-type system, rather than for a specific system.

Proportionality

So let’s start with the biggest and most important (at least to me) point in favour of PR: proportionality. It’s in the name, folks.

In 2019, the Conservatives achieved 44% of the vote, yet obtained 56% of the seats. Due to the nature of our political system, all you really need is 50% + 1 seat in the House of Commons to form a government – the extra 6% of seats actually does little besides insulating the government from minor rebellions.

Thus, it took 44% of voters to elect a majority government to rule over all of us for up to five years. In other words, most voters in 2019 chose a party that was not the winning party, but are nevertheless subjected to a single-party majority government. Another term for this is minority rule. This election wasn’t unique but standard fare with FPTP; only one election since World War II yielded a government that had more than 50% of the vote share.

A PR system would more closely align the national vote shares with seats in the Commons.

Chart showing the disparities between vote shares and seat shares in the 2015, 2017, and 2019 general elections for all parties.
Some parties benefit disproportionately from FPTP – to the detriment of others. (source)

So, depending on the system, 44% of the votes would probably not yield a majority. Labour’s 31% of the vote coincidentally matched its 32% of seats in 2019, though of course this does not mean Labour voters should be satisfied as some of these will be excess votes for a winning candidate in some constituencies balanced by fruitless votes that will have gone to losing candidates in others.

This problem of ‘wasted votes’ – over 70% of all votes in 2019 – affects all parties to some degree and would be mitigated, if not completely eliminated, under a PR system.

Ultimately the principle I believe in is that only a majority of the vote share should lead to a majority government. Not only do we not have this, but a majority of votes are wasted, so that only around 30% of votes in 2019 mattered at all. I would argue this is undemocratic.

Voter Choice

A second point in favour of PR is the ability to give voters some choice. PR enables voters to exercise considerably more choice than just crossing one ‘x’ in one box to elect one candidate for one constituency.

A couple of examples may help here.

In Germany, the voting system for the primary chamber is Mixed Member PR. The system is also used for the devolved assemblies in Wales and Scotland. The ballot allows voters to pick one candidate for their local constituency, much like the FPTP ballot. However, a second part of the ballot allows a ‘top up’ vote for a party to represent your wider region. These top up votes translate into seats, meaning even if your local-constituency vote goes nowhere, your regional-constituency vote still contributes to the final seat tally.

Suppose you are a centrist and currently live in a Con-Lab marginal. Clearly your support for Lib Dem or independent candidates won’t go anywhere, and you are thus effectively disenfranchised. Under Mixed Member PR you would be able to voice your support for centrist candidates in the regional-constituency even if you think your local-constituency vote is going to waste.

In Ireland, the voting system for the primary chamber is the Single Transferable Vote. A popular system on the island, it is also used for the devolved assembly in Northern Ireland. The STV ballot allows voters to rank candidates in order of preference for broader constituencies than exist under FPTP. Not only can you therefore voice your support for multiple parties in a ranking of your choice, you can choose to support different politicians within the same party.

  • Infographic showing how the two parts of the ballot for a German election contribute to the make-up of the primary chamber.
  • Picture of a specimen Irish ballot.
The German and Irish voting systems, whilst more complex, allow for greater proportionality and fewer wasted votes. (source for Germany) (source for Ireland)

Perhaps the party you usually support is currently being ruled by a faction with which you disagree on many positions. Under the current system you are again effectively disenfranchised; it’s the party candidate or the least worst alternative. Under STV you would be able to voice your support for the party’s candidates of another faction (assuming they choose to stand, of course), as well as other candidates with whom you sympathised, if you so wished.

Constituent Links

Another point in favour of moving to PR is that it would enhance the links between MPs and their constituents.

Note that some detractors of PR claim the exact opposite: that FPTP, where relatively small constituencies elect their MP, is the best choice for maintaining a local link between politicians and the areas (and voters) they represent. In fact, this analysis is superficial – and to see why, we need only turn again to the 2019 election.

Many MPs are elected on less than 50% of the vote, something almost all parties benefit from.

The seat of Sheffield Hallam was held by Labour by winning 35% of the vote share. The Conservatives won Ynys Mon with 36% of votes. In both of these constituencies, nearly two in three voters placed an ‘x’ in the box of another candidate – their votes completely wasted. It is incredibly difficult to claim that FPTP enables a close link between voters and representatives when most voters didn’t vote for them.

A proportional system would have allowed the election of representatives who did reflect voter preferences.

At the other end of the spectrum, we have ‘safe seats’, in which voters reliably vote one way.The Electoral Reform Society were able to correctly predict 316 out of 316 seats ahead of the 2019 election, half of all British seats. If seats are so uncompetitive, can we really be sure that the MP gives a toss one way or another about how constituents outside of their base feel? For voters of other parties, do they really feel a close link to their MP?

Two charts showing the prevalence of safe seats for both parties.
For voters of both major parties, votes count much less towards the final result in some constituencies compared to others. (source)

Under a proportional system, with multiple MPs representing voters, constituents have more than one MP to turn to – and, as a result of proportionality, those MPs will better reflect most voter preferences to boot.

A Better Politics?

A final point I’d like to make in this post is that FPTP is basically the most adversarial system we know of, and that it’s probably no coincidence that all the big parties love tearing into each other. PR could change that.

Now, I won’t claim that all problems of government would be done away with as soon as we replace the voting system; that we would get all the politicians we ‘deserve’; and the political process would immediately become much more sanguine and collegiate. Far from it.

What I do believe is that a shift to PR would be accompanied by a shift in the way politicians engage with each other, as well as what it would mean for their relationship with voters.

Politicians across the spectrum would behave, campaign and lead knowing that they may well have to work together some day, so it would be inadvisable to needlessly agitate, trip up, and fault each other. Perhaps they would instead spend this time reassuring the electorate that they have more in common with other politicians than they currently let on and focus on the issues that matter.

Voters would be able to vote (in at least one way) for the party and/or candidate they truly wish to vote for, without having to worry about their vote being wasted. MPs would better represent the diversity of political views among the electorate.

Picture from the Make Votes Matter website showing 12 reasons to be in favour of PR.
Are you convinced yet? (source)

This may mean more parties, sure – but it would also mean right-leaning voters see their choices elected in the North West; left-leaning voters see theirs in the South East; and long-suffering voters of minor parties would finally see representation wherever they are.

Such a new arrangement might just allow for a revitalization of the political process and democratic engagement, enabling the breadth of views in society to be represented and work together to address the grand challenges we face: decisions surrounding decarbonisation; handling the impacts of demographic changes; learning and implementing the lessons from Covid-19; and many more.

Doesn’t that prospect alone make it worth a shot?

Related Reading

Join the Campaign

UK 2019 Election Analysis

Electoral Systems in the UK and Abroad

Further Arguments In Favour of PR

Learning About Intersectionality

~ Kishan ~ Leave a comment

I confess I didn’t really know what this word meant until earlier this summer when I heard Dr Rhonda V Sharpe give a (virtual) talk about it. Since then I’ve increasingly come round to its importance for the political and policy research community. In this post I write up what I’ve learned about intersectionality so far.

The idea of ‘intersectionality’ is usually traced back to Professor Kimberlé Crenshaw’s paper of 1989. When we think of discrimination or inequality, we often think of a comparison of outcomes between two or more groups. For example, with race, we might compare educational attainment of whites vs non-whites (or BAME/BME). With gender, you might look at the gender pay gap, comparing the earnings of men and women.

What an intersectional approach tells us is that this traditional form of analysis reduces our identities to a single dimension. We have many facets to our identity: geography, age, gender, race/ethnicity, religion, and so on. If we investigate outcomes through a single lens, that restricts our analysis of actual lived realities of the people we’re studying. What if performance in one outcome isn’t a result of the identity that we’re investigating, but as a result of that identity intersecting with another?

Crenshaw recognised this in light of the liberation movements in the late 20th century USA. Black Americans were calling for greater rights for black people. Women were calling for the advancement of women. Where did black women fit in? It’s not as if a bit of a push for blacks, and a bit of a push for women, would be enough to enable social progress for black women, because their bad experiences weren’t (and aren’t) just the sum total of bad experiences suffered by all women and all black people.

‘Black woman’ is its own distinctive identity. That intersection between race and gender is what Crenshaw recognised. You could go further: young vs old black women, native vs foreign-born, etc.

That seems simple enough to accept; of course we have more than one dimension to our identity. But what does this mean in practice? It can mean that simple, reductive analyses can be replaced with more complex, nuanced analyses that tell us more about actual social experiences and outcomes.

For instance, a report from the Runnymede Trust in 2017 looked at the impacts of post-2010 austerity on BME women. The investigators modelled the impacts of changes to the tax and benefits system, and public services, and both combined. This in itself is not unusual in policy analysis.

Where they go further is in disaggregating the data to look at the impacts by race, gender, income and household type – but not all at the same time, due to data limitations.

Still, they’ve come up with some pretty interesting figures, like the ones in this chart. The accuracy of the numbers per se isn’t as important as the point they’re making. Whilst we know (or could intuitively figure out) that high income households suffered less than low income households, what this brings to light is that the impacts aren’t uniform across races even within income groups.

  • In the richest quintile, households across all race categories all saw roughly similar declines in living standards, with a somewhat more pronounced fall for mixed households.
  • In the 3rd and 4th quintiles, black and white households seemed to be hit the hardest.
  • In the 2nd quintile, Asian households were hit the worst and changes to taxes and benefits affected them more than changes to public services.
  • In the poorest quintile, white households saw the smallest decline, and changes to public services affected mixed households the most.

The report authors note this may be down to BME households being more reliant on public services and differences in household composition. The hope is that such analysis enlightens future policy-making when it comes to similar changes to taxes, benefits and public services. They conclude that more data is needed and government ought to conduct this kind of analysis themselves.

What about a more recent crisis – Covid-19? I haven’t yet come across any detailed research and analysis in the UK context but have found a couple of briefings from Professors Olena Hankivsky and Anuj Kapilashrami, two health academics, from this spring.

They urge policymakers to take an intersectional approach to understanding the risks of coronavirus as well as the impacts of lockdown on people around the world. Three main features of an intersectional approach are outlined in their blog for the BMJ.

First, “intersectionality refuses a predetermined hierarchy of vulnerable groups”.

Single-dimensional analysis can tell us that older people are more vulnerable to the virus than younger ones, men more than women, and those with certain pre-existing conditions over others. The logical conclusion seems to be that older men with pre-existing conditions are the single most vulnerable group.

What’s missed is that all people over a certain age are not equally vulnerable, all men are not equally vulnerable over all women, etc.

We know that certain ailments make ethnic minorities more vulnerable than others. We also know that regardless of age, if you lack access to basic amenities such as good housing and sanitation, you are more vulnerable. The transmission of information isn’t neutral either – culturally and linguistically inaccessible information makes certain groups more vulnerable to infection and death.

Secondly, the authors point out that intersectionality necessarily rejects one-size-fits-all analysis and recognises how “a web of intersecting factors” shapes risks and impacts on different people.

The authors highlight how homeless people and low income migrants face particular challenges beyond their demographic characteristics: environments where it’s difficult to maintain recommended hygiene and distancing guidelines. Under lockdown, poorer women, ethnic minorities, and disabled women are less likely to have (access to) support if they are stuck in abusive environments and relationships.

Finally, and somewhat provocatively, intersectionality reveals what the common experiences of different groups can reveal about the social structures that govern society.

The authors note that neoliberal globalisation provoked competition between countries over medical equipment. Within countries, nationalistic impulses led to countries shutting down borders to protect their “natives” from the “others”, prompting the vilification of migrants and ethnic minorities.

I might also add here a bit about the media. In the early stages of lockdown, journalists made much of the shift to remote working and the accompanying challenges. I remember finding this interesting at the time, since it didn’t really apply to a lot of people I know in my own area. Later, official statistics revealed that there was indeed a significant variation in remote working across sections of society: by occupation, region and age.

Vast swathes of the country were still left with little choice but to go outside for income. They faced a starkly different set of experiences and challenges. Yet the journalistic profession, itself dominated by certain intersectional identities, provided a distorted view of reality.

Where does this leave us? Well, the hope is that researchers and analysts involved in policy research engage in more intersectional analysis. For those outside government, like academics and think tankers, its about engaging in analysis that better reflects the objects of study and may lead to better recommendations. Researchers and analysts within government will find a lot of common ground with these motivations.

A more pressing concern for government, however, is that intersectional analysis can enable fairer treatment of all sections of society and policies that recognise and accept the diversity of our identities.

Regardless of whether it’s from government or not, I hope to see more intersectional analysis of social policy in the future and the light it sheds on the experiences of everyone in society.

Sources and Related Reading

Intersectionality in Theory

Intersectionality in Practice

How Progressives Could Build Back Better

~ Kishan ~ Leave a comment

Towards the end of October, Compass held an event series entitled “Build Back Better: How?”. A lot of good content to chew over from a range of voices talking about a range of ideas. In this post I attempt to weave together just some of what seem to be the most salient issues on the progressive agenda for a post-pandemic UK.

Giving People a Voice

A greater role for citizens in decision-making was one such recurring theme. In particular, Citizens’ Assemblies have gained a lot of traction in recent years, off the back of seemingly successful experiments in Ireland and elsewhere. Stuart White, an academic, talked attendees through the reasons for a CA (namely the desire to move on from referenda) and the advantages of the CA process.

The advantages include providing a route for politicians to reform the political system while avoiding the conflict of interest associated with changing the rules of the game – that is, the rules of their own game. For example, the voting system or House of Lords reform.

Picture of people in a conference room.
Photo by Christina Morillo on Pexels.com

And anything the CA recommends will be more legitimate. Not driven by party political interests but rather the national interest, deliberative democracy in the form of CAs offer legitimacy in a way that transcends partisan agendas. Indeed, once implemented, these decisions would be difficult to overturn by politicians who simply didn’t like them.

CAs also offer a way for political groups to resolve internal disputes. Think EU exit for the Conservative Party, or electoral reform for progressive parties.

Sarah Allan from Involve, who helped run Climate Assembly UK this year, offered more practical benefits of CAs. Done right, they allow citizens with diverse experiences and backgrounds from right across the breadth of society to contribute to decision-making. The participants themselves enjoy an experiential benefit of contributing to decisions that affect them. And to other citizens, CA recommendations will inherently be treated more favourably than just another policy report from the Westminster bubble.

However, I noted CAs are not without their disadvantages. Most obviously, the Climate Assembly UK’s recommendations were non-binding. Decisions ought to be made ultimately by politicians who can be held accountable at the ballot box. White offered a formula of CA + referendum on final recommendations, which might side-step the involvement of politicians altogether. Though of course it was the messiness of referenda that a CA sought to avoid in the first place…

I did note a deeper criticism could be parsed from the contribution of Amy McDonnell, a representative from the campaign for the Climate and Ecological Emergency Bill. Whilst supportive of CAs, she argued that Climate Assembly UK didn’t go far enough in terms of scope and scale. The CEE Bill would ask a CA to work on an earlier deadline than the government, and also consider adaptation and biodiversity loss. It made me realise setting the right question, premise, scale and scope for CAs are also important for their legitimacy.

Good Leadership

Maybe we ought to make sure we elect the kind of leaders who set the right terms of reference. There was an event dedicated entirely to leadership and what ‘good leadership’ might look like.

Jamie Driscoll, Metro Mayor of North of Tyne, pointed out that a lot of what we hate to see in our politicians – needless hostility, aggression, constant need to undermine each other – owes a lot to the system in which they operate. Our House of Commons has been designed specifically for the two major parties to face off against each other. Our party system itself encourages tribalism. Our media thrives on conflict, so are only too happy to facilitate us-versus-them discourses.

A complete overhaul of this environment is probably setting our sights too high right now. In the meantime, however, we could try to change our expectations of our leaders. We should encourage politicians who are willing to admit when they’re wrong, willing to work with others, and show compassion and empathy. The ‘chest-thumping toxic macho culture’ of Westminster got a lot of mentions across all events, but so did Jacinda Ardern, Prime Minister of New Zealand, illustrating what might be possible.

Picture from NZ news source with the headline reffering to Jacinda Ardern's response to Christchurch attacks
Prime Minister Ardern’s response to terrorist attacks received widespread attention (source)

Practically, this would mean a lot more reaching out to communities and the third sector. At the national level, this could mean involving advocacy organisations in CAs, but also a greater role for third parties (academics? advocates? trade unions?) in regular policy development. But perhaps more pressingly, central government should be willing to devolve to, and work with, local government.

And even at the local level, there is scope to reach out. The borough of Barking & Dagenham has invested heavily in a social infrastructure that incorporates third sector organisations linked to community residents, quite contrary to traditional bureaucratic structures. Council Leader Darren Rodwell explained this allowed them to respond much more quickly, and comprehensively, to the coronavirus pandemic than the levers pulled by central government. Surely this example is worth emulating by councils elsewhere?

A Domestic and Global Vision

An event based on globalisation underscored the point that any party – not just progressive ones – need to have a global vision as well as a domestic one. This is a corollary of living in an international system where decisions in other countries, or at the international table, impact us here (and vice versa). In no area is this more urgent than climate action, which also had its own panel.

Picture of a globe with a face mask
Photo by Anna Shvets on Pexels.com

Domestically, this year we have seen all sectors of society – communities, businesses and government – engaging in rapid, complete change in operations. The emergence of Mutual Aid groups, factories churning out PPE, and a partnership of fiscal and monetary policies to stabilise employment were just some of the examples given by Andrew Simms, Coordinator of the Rapid Transition Alliance. If we can muster up so much momentum, so quickly, in the midst of a lockdown, just imagine what we could do for the climate?

A renewed progressive vision for the country can go further. The Climate and Ecological Emergency Bill charts a blueprint more ambitious (and more substantive) than our current strategy. Attendees also heard from representatives from two intriguingly simple yet radical campaigns. One wanted to reclaim public space from corporate advertisers, to replace ads with whatever local residents would like to see more of instead. The other campaign wants to remove all cars from city life – even electric ones!

But decarbonisation and climate mitigation is a global crisis – in cause and effect. In truth there are some things we have little control over (political leadership in the major polluters for instance) but there are certain things we do have control over: our soft power, the values we demonstrate, and our leadership by example. Examples include the carbon budgeting method and the statutory Net Zero target.

A progressive vision for the world would have to be much more radical, in the literal sense of the term: going to the core of the international system and reforming it root and branch. Existing international organisations in their current incarnations – the UN, IMF, et al – have a sketchy record in facilitating climate action, or indeed other progressive causes. And they’re distant from the citizens of the world, even the citizens of the major powers which are accused of manipulating them for their own purposes.

Graphic showing European countries hold disproportionate voting power in the IMF.
Based on 2015 data. Is this democratic? (source)

Whether reformed or overhauled, a progressive international system would require organisations which allowed more countries a say, as well as a more direct say for citizens. The academic Dena Freeman asked attendees to imagine a global parliament, for example, or the ability to petition for a particular issue akin to Citizens’ Initiatives. Such massive changes must necessarily be accompanied by a greater awareness of the international system and global citizenship education.

This is where I might get quite sceptical. Educating the public is easier said than done for issues of everyday relevance, let alone global politics. But I noted a sound-bite from Lisa Nandy MP, Labour spokeswoman for foreign affairs: “globalisation isn’t working for working people”, referring to the unexpected political developments we’ve seen in recent years. Maybe this sort of imaginative thinking is exactly what would allow people to ‘take back control’?

Plenty of food for thought all around. I look forward to seeing how the narratives around these ideas evolve as progressive parties start eyeing the next election. And of course I equally look forward to writing about these ideas in greater detail in the future.

Links to Event Recordings

We Need Pluralism in Economics

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Photo by Sharon McCutcheon on Pexels.com

One of the flaws in mainstream economics today is the rigid adherence to a particular paradigm: the neoclassical school. Sticking within one paradigm (within any field) means that you operate with one set of fundamental assumptions and use the same kinds of methods to answer the same kinds of questions.

However, with the neoclassical school, those assumptions are often unreasonable, the methods used are accordingly unsuitable, and the questions presuppose a certain view of what’s worth investigating.

This post makes a case for pluralism in economics – the acceptance of multiple schools of thought within economics alongside the neoclassical school. It is based on a virtual lecture by Professor Ha-Joon Chang given as part of the Rethinking Economics festival held in July 2020. Chang demonstrated how the ongoing Covid-19 crisis is exposing the deficiencies present in the neoclassical school, and I will attempt to do the same.

Marginal Thinking

First up: the theoretical approach taken by the neoclassical school leads one to take the present conditions of society as a given – including the relative status of people and businesses. Any change from the status quo must be justified by making society as a whole better off but making no one worse off – the ‘Pareto principle’. This precludes the possibility of redistribution, be it of income, wealth or market power.

Mainstream economists are, by their nature, suspicious of big changes as opposed to those ‘on the margin’ and tend not to contemplate the case for systemic change at all. This leads to a world-view that is ‘conservative’ in the sense of wishing to preserve the status quo.

The pandemic necessitated a response on a much grander scale than just marginal changes, however, with Western governments significantly breaking with the pre-existing fiscal orthodoxy to provide financial support directly to people and businesses. Germany has stepped back from its commitment to maintaining a balanced budget and the UK has supported jobs by becoming the ‘employer of last resort’. Such measures were surely unthinkable by decision-makers even a year ago.

Mainstream economic thinking isn’t the reason such measures have been taken, but they had a role in keeping them off the agenda… until now. Barriers in the intellectual space for ideas are now being broken. If neoclassical economists shirk back, then there’s an opportunity for other schools to step in and provide frameworks for different ways of looking at the economy and collective action within it. No one school may prevail, but that’s the point: different schools provide alternative ways of looking at society.

Economics as a Kaleidoscope

This leads us to the second complaint: the real world is far too complex for one school to be the only one we can rely upon to interpret reality. Chang refers to the ‘Singapore problem’ as epitomising this view. In his own words:

If you read the standard account of Singapore’s economic success in places like The Economist or the Wall Street Journal, you will only hear about Singapore’s free trade and welcoming attitude towards foreign investment. You will never hear about how almost all the land in Singapore is owned by the government, while 85% of housing is supplied by the government’s housing corporation. 22% of GDP is produced by state-owned enterprises (including Singapore Airlines), when the world average in that respect is only about 9%.

Neoclassical economists pride the market in their analysis. The analysis provided can be useful in ascertaining how to make markets work efficiently, or the benefits of free trade, for instance. But this is because for them, the market is the focus of analysis. Other schools which take other social phenomena as the focus of analysis – such as institutions, government, social class – can, taken together, offer a more comprehensive view of reality, like a kaleidoscope.

Picture of colourful geometric shapes
Photo by Adrien Olichon on Pexels.com

Needless to say, the pandemic has made the world more complicated than we previously believed. We urgently need new conceptions of global governance, the role of government in society and, for economists in particular, welfare provision for people and businesses.

Mainstream economists had already neglected the development of the ‘gig economy’ and are unlikely to contemplate more radical proposals such as a universal basic income for example. Alternative schools can contribute to a better informed and more socially useful framework for policy-making.

How Should We Think About The World?

What do I mean by ‘socially useful’? Well, a third argument in favour of displacing the neoclassical school from its pedestal is that the training of economists in only one school blinds students to the judgements they are making about the nature of society, and the actors within it (people, businesses, governments, other units). These judgements are value judgements, or based on subjective opinions, as opposed to positive judgements based on objective fact.

Note that the complaint isn’t that the neoclassical school’s value judgements are wrong, but that they’re often hidden, both from students who are learning the subject, as well as for the intended audience of research conducted by the neoclassical economist.

These judgements are hidden from students precisely because they’re (in the main) only taught one school. If you only learn one thing, or how to do one thing, why would you question it? Why would you think there were other ways to do that one thing?

Students who do learn about other schools have remarked that it’s only after they went out of their way to read about and research other schools did they realise a) what they were taught is only one paradigm and b) other schools show there are other ways of looking at the world – that is, different value judgements about the nature of society and the actors within it.

Comic strip illustrating "if you have a hammer, every problem looks like a nail"
(source)

One of the ‘hidden’ value judgements that has been exposed this year has been the idea that income should be determined by market value alone. There is no other conception of ‘value’ in the neoclassical school when it comes to labour. To be sure, this has been a criticism of the school even before 2020: domestic chores and care work go unrewarded and uncounted in the national accounts.

This year we’ve seen that ‘key’ or ‘essential’ workers that have kept society going are probably under-paid considering their value to society beyond simply their productivity, the labour market, or other conceptions of market value. Neoclassical analysis is sceptical towards the minimum wage, let alone a living wage.

The idea that people might be worth more (or even less!) than simply what they’re paid is probably common sense to most people, and is evident among those of other schools, but neoclassical economists often don’t make judgements like this explicit: they’re hidden behind their mathematical equations and models. Other schools expose these judgements to us, but also expose us to other ways of looking at the world.

Final Words

Ultimately, pluralism in economics is about saying that multiple schools can and should co-exist in a social science. By learning about (and investigating across) different paradigms, each with their own fundamental assumptions, methods, and research questions, the economist gains a richer understanding of social reality as well as their own discipline.

There is much more to say about the state of economics (and economists) today, which I hope to tackle in future posts. For now see the links below to delve deeper into the topic.

Sources

Further Reading

  • Exploring Economics is a wonderful free resource to learn about different schools and how they compare to each other.
  • Rethinking Economics is the UK branch of the student-led movement to reform the undergraduate economics curriculum.

There Is No Justification for First Past the Post

~ Kishan ~ Leave a comment

A typical essay question for Politics A-level students asks them to list the arguments for and against retaining First Past the Post, the voting system by which we elect MPs to the House of Commons.

The ‘for’ side usually includes such points as:

  • it’s easy to understand compared to systems of Proportional Representation, all you have to do is put one cross in one box every five years
  • there’s a direct link between constituents and MPs
  • it returns single-party majority government which are “strong and stable”
  • ‘fringe’ parties are restrained

The ‘against’ side usually goes something like:

  • MPs can (and often do) represent constituencies where most people voted for another candidate
  • majorities in Parliament – that is, Governments – are usually formed based on a minority of the national vote share
  • ‘safe seats’ effectively disenfranchise electorates in entire constituencies whilst ‘marginals’ become the focus of political campaigning
  • proliferation of tactical and protest voting

Based on the weight of the evidence presented, the student might then firmly come down on one side or the other, perhaps supported by an auxiliary argument kept up their sleeve shoehorned into the conclusion.

At least, that’s how it was when I did my A-level. It’s a topic I still care a lot about as it’s quite clearly the central feature of our constitution and, in my view, the cause of many other political problems.

For the rest of this blog, I want to give a more thorough critique of the standard arguments proposed in favour of FPTP that I’ve ruminated upon in the 5-6 years since I last wrote a studenty essay about it (and in a more casual style). The arguments against are, I believe, just as valid now as they were then.

Graph showing that since 1935, the only election where the majority of voters voted for the parties that formed the government was 2010.
Anything here seem odd to you? (Source)

Firstly, the idea that voters would find any other system too difficult to understand is ridiculous. With the right informational campaigns provided any new system can be conveyed easily. Can you really argue that voters, despite being expected to make decisions about which party to vote for on the basis of their record, their manifestos, their leaders and so on… would fail to do much more than put a cross in a box?

Secondly, even if I grant you that the direct link between constituents and their MPs is important, there are systems that can maintain this link. They’re used in the UK already: Scottish MSPs, Welsh MSs, and London AMs all use the Additional Member System, whereby voters vote for their local representative and also a ‘top up’ representative across a broader area. Other countries call this system Mixed Member Proportional, including New Zealand which chose this as the successor to FPTP in 1993.

Now the idea that FPTP returns single-party majority governments might seem quaint to anyone who’s been paying attention over the past ten years. In the four elections we’ve had since the one in 2010, two of them returned a majority for no one (2010, 2017) and one of them returned a slim majority. Only one, the last one that took place in 2019, returned a single-party majority government.

Picture of former Prime Minister David Cameron with junior coalition partner Deputy Prime Minister Nick Clegg, in apparently high spirits
The pinnacle of stability? (Source)

The argument made more sense before the 1980s when the party system was basically binary: people voted for one of two parties. Slight shifts in the electorate towards one or the other tended to result in strong majorities for one of them. In the 1980s, Labour splintered to produce the Social Democrat Party, which formed an alliance with the Liberal party.

In the 1983 election, the alliance gained 25% of the vote but only 23 seats. By the end of the decade the SDP formally merged with the Liberal Party to become the Lib Dems we know today. By the 2000s, the Lib Dems became an electoral force of their own and joined government in 2010. The following decade saw the Scottish National Party also rise to prominence.

Our system of politics has become multi-party but our system of government remains dual-party. That’s why it’s become difficult for single parties to form majority governments.

But why were they desirable in the first place? The idea is that single-party majority governments would provide decisive leadership and the government can just whip their political programme through parliament. The alternative – coalitions, which are more likely under proportional systems – are seen as unstable partnerships and would not provide the same level of decisiveness required to lead a national government.

I’d like to make two points here. The first is that the Con-LD Coalition government of 2010-15 lasted five years, longer than any government since then has managed to. Before 2010, governments struggled to last five years at all, never mind keep their majority while doing so. In fact, a quick scan of Wikipedia tells me you have to go back to the end of the 19th century (yes – not the 20th) to see a single-party majority government, led by the same Prime Minister, last five years.

Table showing 2010-15 Government was the only one where a Prime Minister lasted 5 years with a parliamentary majority.

The second point is that actually single-party majority governments are not so ‘stable’ at all. Despite its youth, the current strong majority of the Conservative government has revealed significant fractures. This is because one party does not mean all members belong to one ideology or adopt one position on all matters.

Political parties are, themselves, coalitions of various preferences. The Labour party is perhaps the more notoriously factionalised, but since 2016 the Conservatives have fallen over themselves to show that they’re not above vicious in-fighting either.

So I ask you, when you vote for a party at the ballot box, are you paying attention to which ‘wing’ or ‘faction’ of the party the local candidate belongs to? What if you support the socially liberal party leader, but the party’s candidate in your constituency is socially conservative? What if your preferred candidate supports fiscal activism, but the leader is known to be more laissez-faire?

But ah, you say, people vote for the national party leader at general elections, not the candidate. Well, quite. That’s not a resoundingly democratic argument, but I’ll bite…

What were lifelong Labour voters who didn’t agree with the Iraq war to do in 2005? What were lifelong Conservative voters who didn’t support the Brexit to do in 2017, or were against the extreme faction that ran the party as of the 2019 election? The bigger question is: if parties have become such broad coalitions, then is a single cross in a single box for a single representative really the ideal way to express our preferences? (Hint: No.)

Finally, I want to address the argument in favour of FPTP that ‘fringe’ parties are prevented from entering government. When I first encountered this notion I had my doubts about it; a counter-argument often runs that ‘third parties are penalised’ under FPTP, implying ‘fringe’ is just a euphemism for parties that we don’t like. Recent political history has shown that this argument is completely antithetical to a putative representative democracy.

Around one in eight (12.6%) voters opted to vote for UKIP in 2015, one of these ‘fringe’ or ‘extreme’ parties if there ever was one. Of course, they gained no representation in Parliament… but it did lead to pressure on the Tory seats in which they came second. Rather than being given representation directly, UKIP instead led to the radicalisation of the Conservative party.

Undoubtedly voting UKIP was a ‘protest vote’ for many: voters just wanted to show their discontentment with the pro-European mainstream in both major parties. But that, in itself, is an indictment of our system: you can vote for a party knowing that it’ll have no direct impact, but maybe, just maybe, an indirect effect on the eventual winner. Surely we can do better than this.

Vignette of someone putting a ballot into a ballot box
Photo by Element5 Digital on Pexels.com

Then there are those who genuinely did want to be represented in Parliament by UKIP, but were too dispersed to lead to victory in any one seat.

All parties should be given an equal and fair shot at representing constituents, making laws, holding the government to account and, if parliamentary arithmetic allows it, joining the government themselves. Otherwise, as we have seen, discontent with the mainstream has no formal way of expression, leading to political volatility and constitutional discontent – even with single-party majority governments.

Those are my (strongly felt) complaints against First Past the Post. This post wasn’t meant to be a full, comprehensive take-down of FPTP but just some of the responses you can make to advocates of the system. The advocates are usually members of one of the two main parties who, as with the issue of Lords reform, are reluctant to change the system when they get the chance.

In a future post, I intend to take a more optimistic tone in arguing in favour of a system of Proportional Representation.

Take Action!

Quite fortuitously, just as I was finishing up this post, I found out that a parliamentary committee is investigating the public’s priorities for constitutional reform. Regardless of what you thought of my post, if you have 5 minutes to spare between now and the 2nd November, please do fill out this survey to let MPs know what matters most to you.

Further Reading

If you want to have a deeper dive into FPTP and its follies, I refer you to the Electoral Reform Society and Make Votes Matter. Between them they have all the facts, evidence and analysis you could ask for on voting systems here and abroad as well as information about the civil society movement to grow a cross-party, cross-country alliance in favour of electoral reform.

Learning About the Childcare System

~ Kishan ~ Leave a comment

As the events of this year have unfolded, the popular, media and political attention has focused on health care and social care, and quite justifiably so. What has not been given as much attention is childcare. That is, until a few recent reports and articles have explored the subject. In this blog, I want to share what I’ve learned about the childcare system so far, and some initial reflections.

Picture of a toddler playing
Photo by Kraken Images on Pexels.com

Government is not the only provider

According to one source, childcare “was in a crisis before the crisis”. Government provided childcare was already not enough to cater for everyone’s needs before everything changed. Free childcare for 3-4 year-olds only extends to certain families for 30 hours a week, 38 weeks per year. The remainder of parents’ needs have to be met out of pocket. Only about 57% of British local authorities had enough places to cover children last year.

The gaps in childcare provision left by government have been filled by two different sorts of childcare providers, apparently depending on what kind of neighbourhood you live in: private/independent providers for parents in affluent areas; parents in poorer areas were more restricted in their choice to charities.

Let’s look at the private companies first. You might think that having to pay fees for nurseries would lead to better quality childcare (like how private schooling should lead to better grades). According to at least one report, this is not the case. While a lot of the private providers are small businesses and childminders, an increasing number of them are international chains, backed by big money.

These companies are driven by the concern for profits, rather than the care for children. The staff tend to be unqualified workers on short term contracts, including students, who are cheaper than more qualified staff on longer contracts. This combination of low pay, low qualifications and transience doesn’t seem to be a great approach to childcare.

A feminized workforce

Perhaps the most important aspect of the workforce, as a whole, is that 97% of it is female. Childcare is gendered. If it’s not outsourced to external (female) carers, it’s done at home, predominantly by mothers. This creates an interesting dynamic. Working parents (of whom it is usually the mother taking such decisions) who can’t take care of their children hand it off to (mostly) other women.

But if children stay at home, where most care is undertaken by mothers, they then have to juggle their regular work with care. If the (mostly) female care providers lose business this way, they can lose their jobs.

Picture of a woman trying to work with kids playing in the background
Photo by Ketut Subiyanto on Pexels.com

In other words, there is a double-burden to women in the event of a shock to the system.

Enter Corona

By now you will realise this is not just a hypothetical. With the first lockdown, incomes of providers were hit hard, and working mothers took on a good chunk of extra work looking after children. The drop in providers’ incomes were only somewhat mitigated by government relief schemes (the implementations of which were complex and confusing to providers).

When parents were returning to work, care providers were not given adequate financial or material support to ensure safe environments for children. Around 30% of providers were reliant on parents paying (at least some) fees throughout the period they were not using their services to stay afloat, as well as meet the costs of protective equipment. Relying on parents’ generosity – and incomes – is far from sustainable.

In a survey conducted in July, most working mothers responded that they do need care to continue regular work, but only about half of them were getting what they needed. Consequently, working hours have had to be cut back and about half of working mothers who were expecting to lose their jobs blamed the lack of childcare.

The decline in parents’ demand, lack of support from government, and restrictions on how many children can be accommodated have led to significant strain in the system. Somewhere between a fifth and a quarter of providers were estimated to be operating at a ‘significant deficit’ during lockdown, and about a quarter of providers are predicted to close within a year (a third in poorer areas).

Levelling up childcare

I’m still learning about how the childcare system works (or, you know, doesn’t work), but a recurring theme seems to be how childcare is such a jumbled-up system of funding, provision and quality because it isn’t seen as an essential element of social infrastructure, but should be, as it is in other European countries.

Graph showing gross and net childcare costs for EU countries, as a percentage of women's median earnings. The UK is ahead of all other countries.
OECD report showing that, both before and after taxes/benefits, childcare costs in the UK were ahead of other European countries in 2019.

The contrast to schools is often made, such as in the differing levels of commitment to providing protective equipment. But remember that there isn’t a large chunk of schools that are explicitly driven by profits located only in the more affluent areas; charities only left to pick up the slack in the poorer areas. Most schooling is provided by the state free at the point of use in a nationally standardised manner, not discriminating by parental income or working status. Other options exist alongside it, not in place of it.

The comparison to schooling is made to convey the notion that, like education, childcare is a vital service and can go a long way towards the positive social, emotional and cognitive development of children. Moreover, for working parents, there may not be an alternative. So why are they treated so differently?

Bearing all this in mind, it’s little surprise to me that beyond the calls to plug the immediate funding gaps, the ‘bigger picture’ reform proposal is for childcare to be made a universal public service, like schooling, free at the point of use. If fees are introduced, there should exist substantial assistance for low income households.

In doing so, the government would recognise childcare as a necessary element of our social infrastructure and in the process:

  • reduce unfair disparities in availability of provision which accentuate pre-existing social mobility gaps
  • provide the service at an affordable (or no) price, doing away with barriers to access
  • implement national standards and regulation, both of the quality of care and of working conditions
  • directly elevate an area of society whose function (or dysfunction) disproportionately impacts on women

Too much to ask for?

The question this raises is: if we’re finding it difficult to fund what little state provision that exists already, how on earth are we going to fund a universal service?

What we ought to remember is that the government wouldn’t just be throwing money into a void. The money spent on workers would contribute to greater disposable income, and the greater provision of childcare would help parents return to work (or work more).

Both these instances would result in the recycling of money in the economy, contributing to growth and finding its way back to the Treasury in the form of income and consumption taxes. So at least some of the investment would ‘pay for itself’.

In the longer term, children would be given a better start in life and would grow up to contribute to society and the economy more productively.

You can trust someone who seems to have done all the modelling and come up with a nice figure to prove it’s worth the cost. But personally, I think the case is overwhelming even if we can’t estimate the exact numbers.

Sources and Related Reading

Articles:

Pre-pandemic reports and research:

Briefings and reports on the financial impact of the pandemic:

Policy proposals:

Business Debt: Two Proposals

~ Kishan ~ Leave a comment

Ever since the scale of the hit to businesses by the lockdown became clear, there’s been chatter in the UK and elsewhere about the idea of letting governments invest in businesses directly by taking a stake in them. The same basic model appears in different forms and goes by various names: sovereign wealth funds, sovereign investment funds, state holding companies are just some of them.

Picture of an empty office
Photo by Pixabay on Pexels.com

I’ve recently come across an alternative to this model, whereby instead of providing explicit funding to (and taking partial ownership of) a range of companies, the government would provide convert the debt into longer term loans like the student loan book. This model has been proposed by Angus Groom in a report for Onward.

In this blog, I want to explore the differences between these two approaches.

Background on Sovereign Wealth Funds

Sovereign wealth funds are not new, but have proliferated in recent decades. Norway’s SWF, the largest such fund in existence, is roughly three times the size of the country’s economy and owns 1.5% of all shares in the world. Funds in the Middle East prefer private to public equity. It’s not just oil countries – Singapore and China also have massive SWFs, funded by large current account surpluses. All such funds tend to diversify their investments into other areas too, like real estate.

The idea is that returns on this investment outweigh just holding the funds in cash (where they also risk being pinched by political opportunists). These funds can be accessed to help finance countercyclical fiscal policy, or provide a buffer when normal government revenues drop.

The UK had an opportunity to follow in our Nordic neighbour’s footsteps with the discovery of North Sea oil and set up a SWF of our own. That we didn’t has been seen as a mistake by some, with the current crisis being our chance to rectify it. The crucial differences would be that instead of using oil money, we’d be using the money borrowed with ultra-low interest rates. And instead of going on a global buying spree, we’d be investing in UK businesses.

Investing in British companies gives them immediate liquidity and gives the government a source of future revenues. This mutually beneficial arrangement allows businesses to maintain employment and capital expenditure, as well as support the public sector balance sheet.

Picture of Chancellor Rishi Sunak with the caption indicating £26bn could be lost to fraud and bankruptcy
The Sun’s coverage of the National Audit Office report into business loans

Assuming good returns on the investment, this money needn’t be restricted to crises: it could be used by a government which finds itself facing increasing demand to spend on ageing populations, climate mitigation and adaptation, and so on.

The rise of publicly-backed money being funnelled to companies in loans saw the arrival of proposals of a SWF, including one by Lord O’Neill that has reportedly caught the eye of the government. The proposal includes not just a direct investment but the possibility of ‘debt-to-equity’ swaps, essentially converting government loans into shares for the affected companies. The government would become part-owner of the businesses involved, in return for reducing debt liabilities.

So far, so good. What’s the catch? Why might someone propose a different model?

Practical Problems

Groom acknowledges the “theoretical merits” of such a model, but outlines the “practical problems”.

How should we determine the pricing structure of partial ownership for private businesses? For publicly listed companies, the share price exists as an obvious anchor price for the government. There is no equivalent for private companies. The government would have to directly enter into negotiations with every willing and eligible private business to come to an agreement about how much control to hand over and for what price.

Groom estimates the number of eligible businesses (those in receipt of government debt) to be around 1.2 million. Many of these will be small sole-trader businesses. Can we really expect most, or even many, of these businesses to enter into complex financial discussions with a government agent?

I would think only larger, more ‘sophisticated’ businesses with internal finance departments and such, would even be up to the task, meaning only the more resourceful companies would be willing to enter into an agreement in the first place. Even then, this would take a lot of time and resources (both the government’s and businesses’) in the midst of a crisis that doesn’t seem to be ending any time soon.

Picture of teammates working on something
Photo by Pixabay on Pexels.com

Suppose that such hurdles were overcome and the Treasury becomes part-owner of a legion of firms. There is then the question of managing all these stakes. The administrative cost of doing so may, according to Groom, outweigh the costs of simply forgiving the bad debt. However, he also outlines the various ways that forgiving/restructuring business debt would also be problematic, such as the moral hazard it would establish.

Groom instead finds a way to marry the benefits of equity ownership and debt forgiveness but avoid administrative complexity and moral hazard. He would like to convert business debt into ‘income-contingent liabilities’. A snappier name for it is the ‘tuition fees model’.

Learning from the Student Loan Book

In England, students can borrow the money to pay for university fees and repay them after graduation. This loan is unlike other loans in many ways. For our purposes, the relevant features are that:

  • You only repay when you can (a government-specified income threshold). If you can’t, you stop – resuming when you can.
  • Repayments are a fixed percentage of your income, like a top-up to your marginal tax rate, rather than fixed sums.

Groom would like to convert debts held by businesses into a similarly structured scheme. Businesses would benefit by not having to repay when they don’t make a certain sum of profits. This means they can focus on recovering, or just getting by, for now, not having to worry about debt repayments.

Then, when they’re making profits again, the repayments are taken in a proportionate way automatically with tax payments. For the particularly fortunate, there would also be the option to make lump-sum payments, analogous to how a business might want to buy its equity back under the equity ownership scheme.

My schematic, based on Groom’s paper

One major difference Groom proposes to the ‘tuition fees model’ is that instead of expiring after thirty years, these loans should last in perpetuity. The rationale is that a set deadline may encourage some creative accounting practices among the affected businesses pursued to avoid paying the tax.

Other ways also exist to suppress profits – like increased spending on wages or business items – but I would hardly argue these are negative consequences.

Great Expectations?

The big question mark surrounding any scheme is the scale and speed of business recovery. That is, how much of the debt currently being taken on can be expected to be repaid, and how much of it is simply bad debt that the government will have to write off? When will ‘normal’ trading conditions resume? And when they do, what will the new normal of profits be?

If income-contingent loans are adopted, and many businesses don’t recover (not hitting the profit threshold set by government) for a long time then the policy will just become an implicit restructuring anyway. Interestingly, this might be worse than outright forgiveness: if firms which are close to death are kept alive (‘zombie firms’), this could weigh on productivity growth by hampering ‘creative destruction’ and labour market churn.

This line of thought holds parallels to the Bank of England’s quantitative easing after the last crisis. Such a result would be awfully ironic for Groom, whose paper spends a lot of time explaining why zombie firms are bad.

Only a government optimistic about the scale and speed of business recovery would adopt his approach, according to my reading. A more pessimistic government would veer towards forgiveness, restructuring, or some combination.

But where does this leave SWFs? Well, the conversion from debt to equity is fraught with complexity and as Groom notes, the Chancellor himself showed scepticism towards this approach in front of the Treasury Select Committee.

I still think it’s an interesting idea worth pursuing, and I hope it stays alive in the intellectual space. There are a lot of lessons to learn from previous UK forays into state holding companies, as well as the SWFs of other countries, which is probably better suited to officials working in a non-pandemic environment.

Sources and Related Reading

Reassessing China’s Belt and Road Initiative

~ Kishan ~ Leave a comment

When I think of Chinese development finance, or the Belt and Road Initiative, I often think of a grand strategy. I picture a map which highlights China and various countries around the world to which it is offering “help”.

Map showing China
Photo by Suzy Hazelwood on Pexels.com

The coverage of the Belt and Road Initiative in western newspapers is the main reason for this image. According to some narratives, China is offering help to developing countries not out of the kindness of its own heart, but with the intention of capturing sites of geostrategic advantage. An incident involving a ‘lost’ Sri Lankan port catalysed a lot of this discourse.

Up until recently, I admit that I had blindly accepted this logic of China’s ‘debt-trap diplomacy’. What I’m only just finding out is actually, the story is not so straightforward.

Recently, the international affairs think tank Chatham House released a report called ‘Debunking the Myth of Debt-Trap Diplomacy’ which does what it says on the tin. This blog draws heavily on this work, as well as others, which can be found in the links below.

The first lesson I’ve learned is not to trust everything I read even if it’s in a “good” newspaper.

The New York Times is one of my go-to sources for coverage not just of American developments, but more general reporting too. It’s pretty mainstream and popular. But neither it, nor any news medium, can be trusted to seek out, investigate and report back the full story of any phenomenon. It’s their account of the Sri Lankan port where I first learned about the idea of debt-trap diplomacy – and, thinking “this is the NYT”, I gobbled it up quite uncritically. (Chatham House offers a very different narrative about what actually happened in Sri Lanka.)

I’ve also learned a lot about what the BRI is, and how it actually works (at least until it gets debunked by yet another source!). The rest of this blog explores some of my findings.

“China” is not one single entity

For one, it’s not so different from other countries in certain respects: it has a vast bureaucracy with many arms (which may or may not coordinate with each other) engaged in a complex dance with the private sector (financial and non-financial) and state-owned enterprises (which are difficult to delineate). I can’t think of a suitable way to extend the metaphor of the dance, but basically, it gets even more complicated when foreign governments are involved.

Graphic showing links between different actors involved in BRI development projects
Chin and Gallagher’s schematic

In this case, the narrative that the Chinese government was seeking to profit by tricking developing countries into giving up key sites should have set off multiple alarm bells before I bought into it. In light of the above, it’s incredibly unlikely that everyone in the Chinese government would completely sign up to help further geostrategic aims in a coherent or successful way.

When you have so many moving parts in the system, decision-makers at the top of the government have to be sufficiently vague so as to give some direction of what they’d like to see happen, but not in enough detail so as to provoke conflict. 

The BRI is one of these objectives. There is no massive blueprint or central BRI planning directorate in a bunker somewhere in Beijing plotting world domination. It’s more like a simple directive that different arms of government and business are trying to make sense of, sometimes working together, but also sometimes working against each other.

I was shocked to read that there were some BRI-branded projects that were supported by government decision-makers, but which Chinese companies backed out of due to profitability concerns! This does not sound like a centrally planned grand geopolitical strategy.

“It’s the economy, stupid!”

In the case of the BRI, the prime actors seem to be the development banks (China Development Bank and Export-Import Bank of China) and the government agencies responsible for business, industrial and economic planning (Ministry of Commerce and National Reform Development Commission). It appears that the Chinese foreign ministry – nominally where foreign policy decisions are made – has been sidelined. Chinese businesses (which may or may not be state-owned) also play a big role.

But if it’s the decision-makers (MOFCOM, NRDC) and instruments (development banks) of economic policy that are spearheading a programme, it probably indicates economic objectives rather than foreign policy objectives that are being pursued.

People wearing yellow safety helmets
Photo by Pixabay on Pexels.com

These objectives include the transferring of domestic productive capacity to other countries. Productive capacity simply refers to how much the economy can produce. In China, this is a lot – thanks to plenty of infrastructure investment over the past few decades. Yet there’s only so much investment you can do in your own country before the returns on them start falling. So what to do with all this excess capacity (not just the ability to invest, but also the money and skills which want to make a profit)?

As it happens, countries around the world are in desperate need of investment, indeed the exact sort of infrastructure investment that China has managed. So the government agencies and the development banks have pursued relationships with foreign governments for mutual benefit.

The formula seems to be: recipient governments sign agreements with MOFCOM (or other senior Chinese government figures) to set the broad terms of the agreement, the development banks make the loans, Chinese companies then bid to be the suppliers, and major infrastructure gets built. This has happened to occur under the branding of BRI, but if I’ve understood correctly, some form of this directive has existed prior to 2013, when BRI was formally announced, and would’ve happened anyway.

Another thing I’ve learned about the Chinese government is that they, too, like learning. They used their own economic development process as a model for what might work overseas. An example of this is land-based collateral. When the CDB was still concerned with domestic growth, they made loans to locals using land as collateral. This seemed to work.

Now that they’ve moved abroad, we see a parallel: use a foreign government’s land (or some other natural resource) as collateral in loans. For oil exporters, it’s probably oil. For Ghana, it was cocoa beans. An interest in the revenues generated from commodities allows for lower risk, and therefore lower interest rates, on the loans.

But the story about how profitable or successful these ventures actually are is still up in the air too. The loose direction from the top of government, combined with conflicting objectives between the actors involved, have, according to this report, contributed to Chinese businesses not making profits on their involvement in BRI projects well into the 2010s. A lot of projects have had to be abandoned.

Graph showing investment gap by sector
Global Infrastructure Outlook estimates a shortfall of $15 trillion of infrastructure investment by 2040.

On the recipients’ side, there also exist clear issues. The Hambantota port showed one of them: the fact that development projects can easily be conceived or implemented in a way that brandishes the ruling elite’s reputation rather than in a way which benefits the public. Besides the massive opportunity costs of time and resources, these ‘white elephants’ and ‘bridges to nowhere’ can be an impediment to development rather than a boost. Corruption is rife on both sides. 

More recently it looks like the top of the Chinese government has taken steps to better coordinate the different actors involved, adhere to more well-recognised international standards, and stamp out corruption. Commentators as well as the government themselves have made clear there’s still a long way to go.

But why take the risk at all?

The big question that still remains is why do countries borrow from China? Why not stick with established Western lenders?

I think this is the most important insight for anyone concerned with the nexus of globalization, development and the evolving balance of power in the international system. The simple answer is: China offers an alternative.

Western-led donors and development banks offer loans with policy conditionality, costly and inflexible terms, and generally a model which obeys the norms of the global North. These norms shift: at times this has been ‘Washington Consensus’ neoliberalism. More recently the focus has turned to micro-level interventions in human capital, for instance – admittedly more benign but much smaller in scale.

The Chinese approach, problematic though it has so far been, represents a complete step change. Rather than policy conditionality, they emphasise the respect they pay to the recipient countries’ wishes and development objectives. Rather than following models which may or may not work, China offers a model which has led to unparalleled economic growth, development and poverty alleviation: its own. 

If you were a developing country that wanted to become rich, whom would you turn to?

Sources

What Might a Reformed House of Lords Look Like?

~ Kishan ~ Leave a comment

In the summer, the Prime Minister announced 36 new appointments to the House of Lords, and the press dutifully followed their ‘look at all this cronyism!!’ routine. But this is the same story we’ve seen many times before. Prime Ministers of every party appoint loyal functionaries, political has-beens and financial benefactors to the upper chamber and have done so since 1958. 

Westminster Parliament
Photo by Dominika Greguu0161ovu00e1 on Pexels.com

Once appointed, peers get to modify legislation, hold the government to account and even join the government as a minister. That’s the official job description at least, and that’s enough to make any believer in democratic government cringe. To be sure, there are some peers appointed on merit who are truly diligent and contribute meaningfully to the legislative process. Many former senior civil servants, academics and representatives of civil society bring their expertise and experience to bear.

But ‘on the ground’ the majority of peers do not contribute meaningfully to the goings-on of parliamentary business. In lieu of a salary they can claim a daily stipend for attendance which, if it weren’t for the pandemic, would have been equivalent to what most adults can claim per month with Universal Credit. There is no accompanying obligation to actually speak, or vote, or anything. Peers often use their titles and their privileges to peddle themselves to others or, worse, peddle foreign powers in Westminster. We only know bits and pieces of this latter charge because they do not have to register their financial interests. The problems caused by the mere existence of the Lords goes on and on.

Abolish or Reform?

Having said that, I wouldn’t do away with the upper chamber altogether. We are still in need of a revising, advisory chamber for legislation. The peers that do involve themselves are quite engaged. But their scope in carrying out these roles is severely limited by their lack of legitimacy. So even if peers do something we personally may agree with, it’s difficult to justify their actions (and in many cases they can be overridden anyway). As a consequence, we continue without an adequate check on the government in the House of Commons.

But that’s part of the problem: parties in government don’t want a stronger check on Commons business. And parties in opposition who cry ‘shame on you’ on the incumbent Prime Minister change their minds when they’re at the helm. All three parties who have served in government since 1997 have promised huge or complete reform of the Lords. The reality has been half-baked, incomplete changes, tweaks, many reviews, and the Frankenstein of a chamber we see today.

Infographic: 809 total members in the Lords, including 26 Bishops, 92 hereditaries, 284 ex-politicos
created with Piktochart

So to even countenance any government creating a reformed chamber, we probably have to take as given that the Commons will retain primacy. The Lords cannot have so much legitimacy that it could seriously threaten the will of the lower chamber. A new chamber fully elected by the electorate under any system is basically off the table.

I agree with those who argue keeping an appointed element would actually be a good thing. One of the few benefits that currently flow from the Lords is the presence of independent experts who are not politicians and would probably not stand in elections anyway. Retaining such expertise would serve the legislative process, even if it means forgoing an electoral mandate. The chamber would therefore be at least partially appointed or selected. 

Designing a New Chamber

This might mean, for instance, an 80% elected chamber, a 20% appointed chamber. The Commons voted for this kind of mix in 2007. The questions they didn’t quite get round to asking were: how should the majority be elected, and how should the minority be appointed?

Electing members using First Past the Post would be a sub-optimal step, as this could cause confusion in the electorate as to what the difference in roles should be between the two bodies. Finding a system less democratic than FPTP would be difficult to find, let alone justify. So an indirect election might be the next best thing. An indirect mandate means that rather than the whole voting public, a group that already represents the electorate would elect the new members.

This group could be MPs in the House of Commons themselves. Lord Steel’s proposal is one example, though he omits a role for appointments. He proposed a new Senate that would be composed of 450 Senators. Every five years, the House of Commons would elect 150 Senators to serve 15 year terms. 

At first glance, this seems reasonable; the new Senators could hardly threaten the legitimacy of the body that elected them in the first place. But the power to make appointments still ultimately stays in the same place: Westminster party elites. It’s hard for me not to see the new chamber just becoming a retirement place for MPs who still retain their party’s favour, and would continue to be whipped accordingly.

ERS claims just 12% of people support keeping the Lords in its current form
The Electoral Reform Society campaigns for reform of the Lords (among other things)

Another representative group could be local authorities. Personally, this is the approach I favour most. Giving councils a direct representative in Parliament would be hitting multiple birds with one stone: an effective voice in central government for all areas of the UK; no elections that could threaten the Commons; and serving the ‘levelling up’ and devolution agenda. The elections and duration of tenures would be similar to Lord Steel’s proposal.

The only argument I see against this proposal is that councils would end up picking their own councillors, so the Lords would still become more politicised. At the same time, former councillors would bring the knowledge of the delivery of local services into the formulation of legislation. This would also serve as a counterweight to the tendency to centralise power in Westminster, which resulted in our poor efforts at setting up track-and-trace. I think it’s a fair enough trade-off.

The minority to be appointed is a comparatively easier beast to tackle, regardless of how the majority is elected. This 20% should be reserved for members who are not politically affiliated and are experts in their fields. Leaders from civil society, academia and former senior civil servants should be recruited. The House of Lords Appointments Commission already allows nominations for apolitical appointments – given that we’d be removing its job of approving the Prime Minister’s appointments, it would now have room to be more proactive. The first batch of appointments shouldn’t be too difficult: there’s plenty of them already in the Lords.

Will we see it happen?

Even if this all looks nice and logical, will anything like it ever come to pass? I honestly don’t think it will unless, or until, popular opinion turns strongly against the Lords, so that the topic becomes unavoidable. Were this to be the case, and the Lords did something that really invoked a backlash from the public and the Commons, this likely means the political environment would be highly volatile, which isn’t the best environment for sensible decision-making.

It’d be interesting to see how instead of a sensible reform a government instead created a chamber that’s even more freakish than the one we have now. Just kidding, of course… I wouldn’t want to jinx it.

Sources and Related Reading

A history of House of Lords reform:

More facts and figures:

Some responses to this year’s appointments:

Proposals for reform: