Wednesday, 5 October 2016

On how the Tories have ceased to be the party of economic liberals

The Conservative Party's annual conference, which finished today, has proved to be a milestone in its history, marking a shift in policies that's more radical than anything we've seen since Margaret Thatcher came to power more than 37 years ago.

Theresa May, who became prime minister by default rather than by popular mandate, has at a stroke reversed the party's role as the champion of economic liberalism. The 'stop migration, then get the best trade deal that the EU would allow in those circumstances' approach to Brexit will hit the British economy badly in the years after leaving the EU. I predict stagflation as last seen in the early 1980s as the UK had to deal with stagnant growth and high inflation. As someone tweeted over the course of the conference, this UK is figuring how it's going to learn to walk after it's sawn its own legs off.

The referendum result was a direct consequence of uncontrollable EU immigration. Being part of the single European market, a construct that Margaret Thatcher pushed for vigorously, the UK had to accept the free movement of labour, along with the free movements of capital, goods and services across the EU. All went well until, in 2004, the EU enlarged itself from 15 member states to 25, including eight countries from Central and Eastern Europe that had shaken off the Soviet yoke barely a decade and half earlier.

It was at this point, that Tony Blair's Labour government, continuing the liberal economic policies of its conservative predecessors, opened the door to free movement of labour to over 70 million citizens of the eight new CEE member states. It did not have to. The UK had the right to a transition period of up to seven years before it was obliged to open its labour market to workers from Poland, Slovakia, Latvia and the rest. The Germans waited - but Tony Blair didn't.

Back in 2004, the UK had over 600,000 unfilled vacancies, and employers across rural parts of southern and eastern England were crying out for workers. Not cheap workers, just any workers. At that time, unemployment in Poland was over 20%. Yet somehow the UK civil servants who did the sums worked out that opening the UK labour market to workers from the new member states would result in 13,500 coming each year. They were wrong. The real figure was 250,000 coming each year.

The rest we know. The new workers boosted UK economic growth, but that growth was uneven, distorted. Though the UK rebounded from the depths of economic crisis faster than any other western European economy, it was only London and the South East that truly felt that recovery.

The rest of England - the England that voted for Brexit - has had rather a harder time.

Mass migration from the EU is only one of four major shocks that Britain faces. In this week's Economist, there's a magnificent special report on globalisation. [Five articles, linked from this page.] It is a must-read to get a good understanding of Brexit, Trump, Le Pen, AfD and other rich-world reactions to the process that's been accelerating for the past quarter-century.

The Economist lists four factors which taken together have caused less-well educated people in the rich world to be relatively poorer than they were a generation ago:

  • Footloose capital has moved manufacturing to lower cost emerging economies, China's opening to the world being a major event in this respect.
  • Migration - be it from Mexico or Poland, migrants from poorer countries are coming to richer ones like the US and the UK and competing for those manufacturing jobs that have not moved to China.
  • Automation - be it factory robots or IT-driven industries that run on algorithms rather than bean-counters. Low-skilled and routine jobs are being automated out of existence.
  • Finally, on top of all this - a global financial crisis that began eight years ago with the bankruptcy of Lehman Brothers. The deepest and longest crisis since the Great Depression that began with the Wall Street Crash of October 1929 and lasted until WW2.

Now, looking at the above list, the first three were all phenomena that benefited the rich, the business owners and the senior managers they employ. By outsourcing jobs to lower-cost economies, by investing heavily in automation, profits have been boosted, increasing the gap between the rich world's rich and poor from the historically low levels of the 1970s. And the fourth - the financial crisis - hit the poor far harder than it did the rich.

During the 1990s and 2000s, this process was already under way, but few were fussed as economic growth floated all boats, and new technological toys delighted consumers at ever-lower prices. The aftermath of the financial crisis has left many low- and middle-income families angry at the tax-dodging antics of the global corporate giants and the rich elites that own them.

There is another element that the Economist report did not touch on - the seeming lack of a new motor for genuine growth that could help get the global economy out of the rut it's in. Since WW2 the world has seen the car, the television, household appliances, personal computers, mobile phones, evolve, falling dramatically in price and improving dramatically in performance.

The rich world is stuffocated - we have too much of everything, and cannot think of new things that everyone will want to have but currently doesn't. After the smartphone - what next? All that the world of IT is currently offering is solutions to kill jobs - apps that will make redundant entire swathes of workers. Accountants and auditors will go the way of comptometer operators, thanks to fintech and taxtech algorithms.

Consumers will gain in convenience (shopping - I put goods into trolley, load them from trolley to the conveyor belt at the checkout till, load them back into the trolley, then load them from trolley to car) but globally millions of retail jobs will go when supermarkets invest in RFID/IoT solutions.

Back to the Conservative Party conference. Margaret Thatcher and her 'dries' fought the 'wets' (those wanting to shield the more vulnerable members of society from the effects of red-in-tooth-and-claw economic liberalism). The 'dries' won. Now, Theresa May is seeking, as she says, the centre ground by coming down hard on migrants in the belief that this will help the English working class.

Politically, this is very shrewd; it's an existential blow aimed at both UKIP and Corbynite Labour.

But is it economically shrewd?

The policy responses to an issue as complex as globalisation must be global in scope and expert-led, not knee-jerk reactions such as building a wall with Mexico. It is clear that massive tax evasion by global corporations is a huge issue for governments. The only answer is multilateral action to clamp down on tax havens, profit shifting and profit base erosion - this is better done within the EU. And with the UK government now planning to cut corporation tax to 15% and then some more, the UK is heading to become a tax haven in its own right, the proverbial race to the bottom.

Answers to the problems caused by globalisation? Investing public money in infrastructure. Building railways, canals, roads, pavements [!], water treatment plants, renewable energy plants, extending airports, creating jobs that cannot be outsourced to other countries. But that public money needs to be raised somehow - clamping down on VAT fraud, the grey economy and corporation tax dodgers should do the trick, but only if nation states work together.

The conference which finished today will be seen by future historians as a turning point in British history, one that resulted from the shock result of the 23 June referendum. I predict that the post-Brexit years will be a lean and hungry period. Britain won't see an extra 2,500 young people a year deciding to start studies in medical school to make up the gap left by doctors from the EU. British universities will be hit by a sudden drop in foreign students and lecturers from the EU. British care homes will be short of 83,000 care workers that currently come from the EU. British employers will either have to find huge pay rises to motivate native workers who're currently turning their noses up at the wages that keep those firms competitive - or see their businesses shrink.

Britain's loss could be Poland's gain - but only if the Polish government sees what's really going on and takes appropriate policy measures now.

This time three years ago:
Goodnight Dżerzi - Janusz Głowacki's book reviewed

This time four years ago:
More serious setbacks on Second Metro line construction

This time six years ago:
Leonard Cohen in Katowice

This time eight years ago:
The short-term future of suburban development (How right I was!)


Anonymous said...

Its going to be interesting seeing this developing. I read your views on stagflation and I hear from other well read and educated folks the complete opposite. Given leaving the EU has not happened in the past I am more open minded as to the consequences. UK has old and currently underdeveloped trade routes to Asia, Middle East and Africa. To be frank Germany and France have done a far better job at deveoping the expanded EU than the UK has done which is evidenced by the major firms; telcos. utlities, banks, transportation being under German and French influence. UK has benefited from an international workforce to fill the service jobs that Brits no longer want to do. The EU has a positive trade surplus with the UK whilst at the same time the UK is the 2nd largest sponsor after Germany - when you are paying for the party and not dancing with the pretty girls nor getting a share of the booze its not surprising you go elsewhere. Britain has shown resilience, enterprise, warriors with a specific can do attitude for centuries - in the longer term I dont see this changing - lets let them get on with it - we have enough to worry about in Poland without worrying about what we dont know and cant influence on an island 900 miles away

Michael Dembinski said...

@ Anonymous:

From today's FT: "IMF cuts forecast for UK economy. Fund anticipates growth of 1.1% a year" Yeah, well, they're biased, as Christine Lagarde did warn the UK of the dangers of leaving the EU.

Also from today's FT: "UK inflation expectations rocket to 3.5% - Bank of England". Another bunch of so-called 'experts' who were calling on the UK to remain in the EU.

Perhaps I'm wrong to read the FT and Economist for my news and opinions. Maybe it would be wiser for me to stick to the Daily Mail and Daily Express.

Let them get on with it? Let them get on with turning my pension and my savings into worthless dust? NO EFFING WAY.

KrakowJosh said...

I normally agree with most of your writings, Michael, but here I must disagree somewhat. Perhaps because I was and am a keen supporter of Brexit (principally for economic and democratic reasons - I have no problem whatsoever with EU citizens wishing to live and work in Britain; or anywhere else in the EU), I continue to see a lot of what I consider sour grapes in much of the media. The FT was a strong cheerleader for Remain, and The Economist (part owned by the FT) claimed pre-referendum to be slightly on the Remain side.

What is killing savings and pensions is negligible interest rates; low inflation - i.e. of the order of 3-4% pa - would allow interest rates to rise. Also, it should be clarified that the Single Market is not a free trade area per se, and that membership of it compels us to levy tariffs on imports from Commonwealth nations, for example.

If nothing else, the referendum convinced me that expert opinions in august journals need to be carefully vetted for pre-existing beliefs, particularly when a whole layer of comfortably-paid political and quasi-political jobs will evaporate upon completion of Brexit, many of whom (understandably) have close ties with the British political establishment.

Post-referendum I've engaged with many people in both Poland and the UK: those who were disappointed with the result were mostly either large-statists or had a shallow grasp of the facts. I realise that for many immigration was a key issue, but I think there's been a deliberate blurring of the distinction between free movement of EU citizens and open doors for non-EU citizens (and of course by voting for Brexit, I unavoidably became associated with a minority of rather unsavoury people, politically speaking).

The EU is expensive, profligate and undemocratic. If Britain's exit prompts it to become a better-run, leaner, more accountable organisation, then all Europe will benefit.

Just my opinion ;)

Michael Dembinski said...

@ Kraków Josh:

Did you see the now-viral video of LBC's James O'Brien asking a Brexiter to name ONE piece of EU legislation that should be scrapped?


This to me sums up the media atmosphere preceding the referendum.

This 'layer of political and quasi-political jobs' line. You remember Nick Clegg saying that Brussels (Commission, Parliament, etc) employs around the same number of people as Derbyshire County Council.

It is marginal. The Brexiteer arguments were straw men, blazing across the front pages of the Daily Mail, Daily Express and Daily Telegraph.

Interest rates: up goes inflation. 3.5% by the end of next year. BoE puts up interest rates accordingly. What happens to growth?

What happens to mortgage repayments of millions who're currently borrowing at historically low rates?

I should have hedged some of my UK savings into dollars before the referendum, which I feared would go the wrong way, but I failed to act. This, Josh, has already cost me in zloty terms as much as I earn in one year.