Liberal Vision

Errant Knight – a red in yellow clothing?

Further to my earlier post “Bunch of disgruntled Lib Dems resort to Plan B” – I have now received three emails, all effectively asking whether the London Liberal Democrats have declared UDI from the rest of the party? I’m certain they haven’t. The Lib Dems in our capital work hard and quite brilliantly – often in “non benign” circumstances.

But London Lib Dems now have a problem judging from the emails I have received. Cllr Stephen Knight (one of the Guardian letter signees)  appears at least to be using his position as a London assembly candidate to promote the national economic proposals of the campaign group Compass (openly boasting about the fact that “prominent Lib Dems back plan B“) that is aligned to our opponents.

This is a group explicitly hostile to our coalition Government that describes itself as “open primarily to people who are eligible to be Labour members” and “building a bridge to the 200,000 or so people who have left the Labour Party and to many more who have never joined” …

The London Liberal Democrats are a valued and crucial part of the party. I assume they will be talking seriously to Mr. Knight . It is he after all who is promoting himself in the Guardian letter as “Leader, Liberal Democrat group, London borough of Richmond, No 2 on Liberal Democrat List for 2012 London assembly elections” .  (Though I note, to date, he has not mentioned the Guardian letter on his website).

Of course we all know that the party contains a broad range  of views  and yes I really do believe in free speech and debate but my complaint (and those who have emailed me) is about Mr Knight’s conduct – specifically that he is using his official candidate status to promote a Labour front group.

In my view he should be suspended immediately as a GLA candidate for the party pending further investigation. This investigation should be serious and deliberative, but also swift. I would like to know if, when he was being selected, his literature made clear his fundamental opposition to the coalition economic policy?  During his selection interview how did he answer any questions about areas of policy he disagreed with?  I can not see any other option than for disciplinary action if there is any doubt that his opposition to the coalition was not made clear at the time.

If the London regional party doesn’t act swiftly, then we can all do so within the constitution of the party. Lib Dem voters should not be asked to vote under a list system for a man who seems to be a Labour candidate under Lib Dem colours.

Discuss.

Tags: Cllr Stephen Knight, Compass

Plan B is crazy

On Monday, a handful of Lib Dems wrote a letter to The Guardian (itself hardly newsworthy!) expressing “broad support for the Compass Plan B proposals reported in the Observer” the day before. Notwithstanding the fact that these are the “usual suspects”, Lib Dems that have proved very keen to cozy up to the Labour Party, the question remains, does Compass Plan B have anything to say about how we might resolve our economic woes?

Let’s first consider the Compass proposals:

What would Plan B entail in the short term?

• The cuts would be reversed until the economy is growing strongly.
• A new round of Quantitative Easing (money created by the central bank) would be directed to a Green New Deal, to insulate and prepare large numbers of buildings to generate renewable energy.
• Increasing some benefits for the poorest who are then likely to spend any extra income, this would help get the economy moving again.

Let’s look at those first three points in turn:

Reversing the cuts would be a disaster. Firstly, it would send a clear message to the markets that the UK has even less fiscal rectitude than Greece. At least they are implementing an austerity budget, albeit half-heartedly. If we now reverse our cuts, we the markets will panic and our borrowing costs will sky-rocket. And for all those anti-market fundamentalists out there who may want to dismiss “The markets”, in this context “the markets” are all the people who are actually able to lend us money; without them, we will need to find another £150 billion of savings TODAY!

Furthermore, as even the devout Orange-booker Gareth Epps knows, ripping up a budget mid-year and telling the entire public sector to go back to the spending-drawing board would be massively disruptive. It’s not easy to turn the tanker around: in many cases, departments and even whole organisations have been abolished, and staff have already been let go. But in addition workers will be left in an upsetting limbo, unsure of whether their jobs have a future or whether they are only being kept on for as long as the government remains in panic mode.

And is Compass really saying that all the cuts are bad? Has nothing been abolioshed that was not a waste of money?

Frankly, the government would be better off looking for extra unnecesary expenditure and cutting that too, using the tens or even hundreds of billions saved to cut taxes. That really would stimulate demand.

The proposal to reverse the cuts is economic genius compared with the proposal to use a new round of Quantitative Easing (money created by the central bank) to fund a Green New Deal. At this point, a little distinction is worth noting. While QE is inherently dangerous and inevitably inflationary, so far the QE that we have experienced has been used to re-capitalise the banks and encourage them to start lending more. This isn’t good, but it’s not the Weimar Repblic. Credit Easing – making money to lend directly to companies, is probably even more risky. But neither of these are what Compass is suggesting.

No. Compass is suggesting that the government print money to fund government spending. And that, dear reader, is the Weimar Republic. Using QE to pay for a Green New Deal would repeat the greatest mistake in the history of government, which was pithily summed up by an economist, usually referred to fondly among Compass-leaning Lib Dems and even Labour chancellors:

“…Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

What about increasing benefits for the poorest so that they spend extra? Would this really help get the economy moving again? Firstly, one has to consider where the money is coming from. If it comes from taxes, it’s simply robbing Peter to pay Paul: there is no increase in “aggregate demand”, just a shift of demand from those who earned the money to those who did not. Whatever your enthusiasm for redistribution, don’t pretend that you can re-distribute something bigger!

What if it is funded by borrowing? Well, it may seem superficially attractive if you ignore the points about markets above, but unfortunately, the evidence suggests that people respond by saving more in anticipation of the higher taxes to come, thus killing off any extra growth. No dice, I’m afraid. It’s a non-starter.

Actually, Compass do seem willing to fund some of their spending through increased taxation:

• It would cancel Private Finance Initiative debts, saving the nation £200bn in debt repayments.
• By Introducing a Financial Transaction (Robin Hood) tax on the banks
• The £70 billion in yearly uncollected tax would be closed.

The third is too ludicrous not to brush aside first. The idea that any government is simply ignoring £70 billion in yearly uncollected tax is absurd fantasy. Either it’s made-up fantasy-tax (like the £6 billion that Vodaphone don’t owe the British taxpayer) or there are very good reasons why it’s not being collected, and a Compass-led government would find it no easier to collect that the current one (or the last one!).

Cancelling all PFIs is nothign more than populism. Indeed, it would be illegal without (and possibly even with) legislation. Effectively, PFIs are a loan – a private contractor gives something to the government (say, a new hospital) in return for a revenue-stream that repays the loan. If HMG starts passing laws repudiating their loans, then it will be treated as a default and Britain will be declared bankrupt. What is more, it will shatter the confidence of investors and prevent the UK ever getting help financing capital projects again.

Finally there’s the Tobin Tax (Robin Hood, it is worth remembering, fought against tax-raising government officials!). There simply isn’t space enough here for this one. Suffice to say that it will simply make it more expensive to lend and borrown money, and so there will be less of it, which means a less efficient economy. There’s much more to say, but where to begin? (Well, maybe that imposing it unilaterally in the UK will simply destroy one of our biggest industries to the benefit of the French and the Americans).

According to Compass,

Plan B would mean that the Government pays down the deficit through growth and spending adjustments only when the economy is in good enough shape to

which is a little like saying that we can’t thrown the ballast out of the hot air balloon until we’ve got the damned thing off the ground!

In summary, then, Compass’s Plan B is, in reality, Plan Crazy. It would massively destabalise the UK economy in both the short and long terms, and cause untonld damage. It is rather a shame, therefore, that a handful of Lib Dem malcontents felt the need to so publically support it!

Tags: Cllr Stephen Knight, Compass, Compass Plan B, Liberal Democrats

Vince Cable’s moral compass

It is said that you can judge a person by the company they keep. In that case, Vince Cable’s halo has slipped a bit.

His decision to give his support to Compass in its campaign for a High Pay Commission to curb “excessive” pay is bad politically, economically and morally.

Compass is an avowedly socialist campaign group, the primary focus of which is the Labour Party. It is a partisan body that has for some time sought to make Labour even more interventionist, statist and illiberal. Vince Cable should not be giving it intellectual succour.

In addition, the very idea that the government should impose maximum wages upon individuals should be anathema to him both as a liberal and as an economist.

I have written an article on the Institute of Economic Affairs blog explaining some reasons why maximum wage legislation is a bad idea. On the one hand, “There is no reason, functionally or morally, why a person should not enjoy any amount of wealth”. On the other, free economies have a far better reputation for wealth creation, poverty alleviation and even wealth distribution than interventionist ones. So maximum wage legislation is unfair both on an individual and a community-wide basis.

On top of this, Vince’s reason for supporting the High Pay Commission is flawed. In his words “There is no justification for massive pay and bonus awards in financial institutions, the most important of which are guaranteed or owned or have been rescued by the tax payer. Transparency and tax are important but a High Pay Commission looking at both equity and economic aspects is a welcome suggestion too.”

Firstly, the justification for “massive pay and bonus awards in financial institutions” is the same as it always was: it is necessary to attract the best talent. That the industry spectacularly failed in 2007 does not mean that there is no need to chase talent in 2009. What was wrong with the bonus culture in 2007 (and before, and indeed since) was not the size of the bonuses but the behaviour for which they were being paid. Had Compass proposed a Short-Term Gain Bonus Commission they might be on to something, but that is not what they are proposing. In attacking the size of the bonus rather than the behaviour they are rewarding, Compass is off the mark.

It is also not true that “the most important” financial institutions “are guaranteed or owned or have been rescued by the tax payer”, unless he is referring to the Bank of England’s lender of last resort function, which is centuries old and has been exercised without the need for maximum wage legislation for all that time. Only some financial institutions are actually owned by the taxpayer; Barclays and HSBC did not require a bailout and should not be subject to interference. Indeed, Lloyds TSB would be in a far better state had the government not effectively strong-armed it into merging with the bankrupt HBOS.

Of course, the government should not have a stake in the banks. Even if a bailout was necessary it should be reversed as soon as possible. But while the government does own shares in the banks it has a duty to taxpayers to get the best return on its investment. This will require the best talent available in the industry, which means that state-owned banks will need to compete with the rest of the sector by offering pay and bonuses commensurate with market rates. In fact, one cannot escape the feeling that the idea of limiting pay in the private sector is just a means of keeping down the costs to state-owned industries; a case of government being forced to intervene further to address the consequences of its past interventions.

His final point is the one I have discussed at in my IEA blog posting. The “equity and economic aspects” of government intervention are far more harmful to the poor than are the effects of leaving people alone. Free societies are not only fairer than less free ones, with the poorest owning a larger proportion of the nation’s wealth than in more interventionist economies, but they also create more wealth, so that the poor enjoy vastly more absolute wealth in free economies than in command economies.

Maximum wage legislation is a bad idea. It is also a bad idea for the Liberal Democrat’s shadow chancellor to support the socialist wing of the Labour party.

Tags: Compass, Maximum wage, Vince Cable