LSE Gets It: More Pragmatism, Less Politics

Having recently made the same point, I'm encouraged to see the London School of Economics setting out in detail some of the ways in which the UK could benefit if pragmatic political consensus were to replace party-political dogma. 

However, it would be wrong to think that this approach is only needed in the areas of education, infrastructure and innovation, on which the LSE's report focuses in particular. It's a general shift in attitude that is required in every aspect of our lives. 

This doesn't simply mean that politicians and civil servants should adopt a different top-down attitude. It means inverting the institutional narrative altogether. Politicians and the public sector must adopt a pragmatic, bottom-up view of what works and what does not work at the individual level, for the common good. The public sector must monitor and disclose publicly whether - and, if so, how - its activities, regulations and incentives distort all kinds of local and national markets in favour of private and public sector institutions, thereby constraining innovation and competition. Critically, this extends to the wasteful way in which the public sector purchases its own goods and services.

In practical terms, that shift in attitude requires the civil service and politicians to focus on obtaining data, defining problems, measuring their scale, analysing root causes and implementing lasting solutions. After all, hard choices are easier for more people to accept when they can be shown to be driven by harsh reality rather than party political dogma.

While, fortunately, there's plenty of evidence to suggest that this change is already underway as part of longer term trends discussed on this blog, the voices of institutions like the LSE are critical to those trends becoming mainstream behaviour sooner.  Let's hope similar reports follow from others shortly.

Evidence From Non-bankers On Banking Standards

Here's what some of the non-banks have to say about banking standards (from 17:52).

Pragmatism Grows At Night

In "India Grows at Night" the writer and commentator Gurcharan Das shares his insights into how India's growing, pragmatic middle class can achieve the country's necessary political and economic reforms. While inspired by Das's presence in Tahrir Square two years ago, these insights also resonate with the plight of Western democracies whose growth is inhibited by extractive private and public sector institutions.

The title of the book comes from Das's belief that India's knowledge economy powered her economic growth because: 

"Bureaucrats did not know how to regulate it and could not choke it with red tape, in the way they stifled India's industrial revolution through licences, permits and inspectors... India's knowledge economy literally grew at night while the government slept."

But India's problems are not over. Das explains that the "puzzle is... how can a vibrant democracy with a rising economy and an energetic civil society have allowed the state and governance to decay"?  He then describes the evolution of the Indian state from before British rule until today, tracing the tensions between social and official structures, and the shortcomings of the political system and key market failures.

Despite different starting points, this 'decay' also awaits Western democracies who have not been alert to the need for ongoing political and economic reforms. There's an ominous familiarity, for instance, in the complaint that the Indian state is preoccupied with the quantity of schools and other public services rather than their quality - "which is what really drives shared prosperity." The problems in our financial system are well rehearsed.

Das's description of the reasons for India's institutional decay is also echoed in Phillip Blond's explanation of the 'political bankruptcy' in Western countries. I understand them both to be saying that right wing policies allow the concentration of wealth amongst relatively few extractive institutions and their management and investors, rather than creating an environment in which widespread entrepreneurship can flourish. Meanwhile, left wing policies that are designed to 'redistribute' income through taxation and public spending are grossly inefficient by comparison to markets. The self-interest of partisan politics has gone too far, and legislators have no real commitment to the common good. Electoral battles fought along social and cultural lines distract everyone from critical long term issues, as well as being dangerously divisive. As a result, we lack appropriate regulatory frameworks and incentives to address market problems that stifle innovation and competition. Not only does institutional decay reflect the bankruptcy of dogma-ridden political parties, but as that decay constrains growth the economy itself drifts into liquidation.

Das argues that successful reforms will only be achieved through more active political participation by the members of the rising middle class, since they are the most conscious of the problems and the most impatient for the necessary reforms. He argues that the intransigence of existing Indian political parties creates the need for an entirely new, 'bottom-up', liberal political party. Das explains that this is a 'classical' rather than a 'social' liberalism - tolerant on social and cultural matters, yet wary of state intervention where the private sector and the market can be more effective.

This also seems to reflect the "renewed political idealism" and "participative democracy" for which Phillip Blond argues. 

In UK terms, this would seems to place Das's vision for a 'liberal party' somewhere between the Tories and the Liberal Democrats. And it seems quite telling that UK voters have forced those two political parties into coalition.

However, I disagree that the formation of a new political party or even a new political idealism is a necessary pre-condition for achieving political and economic reform.

As discussed in Lipstick On a Pig, the bottom-up approach that Das refers to has already been unleashed, largely enabled by the Internet's 'architecture of participation'. The 'Arab Spring' and developments in sub-Saharan Africa emphasise both the global nature of this phenomenon and its effective political impact. This process of 'democratisation' requires no more structure than the social media and a city square, and its power lies in the fact that it isn't confined to politics or economics. Greater transparency, knowledge and reform in one area creates the desire for change elsewhere. The result is both seismic and chaotic, yet significant reform is bound to be 'messy', not orderly and neat. As a result, I've suggested we're seeing the evolution of a "personal state" in which we're acting pragmatically as individuals in a highly collaborative fashion through the services of facilitators, rather than passively relying on our institutions to set the pace of reform.

New political parties and ideals might well emerge in this environment, but they will be a symptom of reforms achieved by each of us acting personally, not the cause.   

More Sunlight Needed On Perverse Tax Incentives

Our continuing economic woes seem to reveal a UK Treasury that has lost touch with the fundamental tax and regulatory problems in the UK economy and is unwilling to engage openly and proactively on how to resolve them.

Not only did the Treasury lose any grip it had on the financial system when it mattered most during the last decade, but the rocky passage of the Financial Services Bill and the need to create a joint parliamentary Commission on Banking Standards also reveal that any such grip remains elusive. This, coupled with the UK's bizarrely complicated system of stealth taxes and incentives, demonstrates the urgent need for more transparency and openness in how the Treasury is going about the task of addressing our economic issues.

The latest example comes with the news that the government might revisit the bizarre decision to delay the revaluation of business rates, which are still based on the higher rental values of 2008. The task of setting business rates every five years lies buried in the Valuation Office Agency, an 'executive agency' of HM Revenue and Customs within HM Treasury. So it's nicely insulated from anyone who might complain about the impact of the rather occasional exercise of its responsibility. Instead, businesses have complained to Vince Cable, over at Business Innovation and Skills, and he's bravely (insanely?) promised to do what he can. However, the hermetically sealed nature of civil service silos means the Valuation Office Agency can safely ignore the issue.

Anyone else afflicted by perverse public sector tax issues faces the same problem. 

UK-based retailers are wasting their time by complaining they are disadvantaged compared to international businesses that are better able to minimise their tax liabilities. Not only is this a welcome distraction from the bigger issue of how the public sector wastes money, (which the Cabinet Office has been left to address), but the Treasury hides behind BIS, no doubt laughing-off the complaints as an example of businesses not understanding how the arcane world of taxation really works. The trouble is the Treasury doesn't understand how that world really works either. Nobody does. That was the whole point of Gordon Brown's stealth approach to taxation. But this should be no excuse for the department that's supposed to be in charge. The Treasury needs to take responsibility for understanding and explaining how it all works, including the unintended consequences.

Similarly, the Treasury needs to take responsibility for the fact that the UK's small businesses face a funding gap of £26bn - £52bn over the next 5 years. Here, again, BIS has had to act as a human shield, even threatening to launch its own 'bank'. Yet HMT has allowed four major banks to get away with controlling 90% of the small business finance market while only dedicating 10% of the credit they issue to productive firms. This, despite the fact that small businesses represent 99.9% of all UK enterprises, are responsible for 60% of private sector employment and are a critical factor in the UK's economic growth which has slipped into reverse yet again. Meanwhile, the Treasury continues to resist allowing a broader range of assets to qualify for the ISA scheme, which currently incentivises workers to concentrate their savings into low yield deposits with the same banks that are turning away from small business lending just when it's needed most.

More sunlight please!

Wither Europe?

The Conservative's position on Europe does appear a little screwy. A 'commitment' to reform an over-reaching, bloated bureacracy backed by a phoney 'threat' to leave - the sop to backbenchers that Britons might just decide on a return to economic uncertainty in five years time.

But we've already seen from reports that this plays quite well with the Germans and Swedes. They, and no doubt others, badly need an excuse to talk about European reform without sounding Eurosceptic. The whole experiment is going badly wrong, and something must be done. The British position provides a catalyst as well as someone to blame if it all goes Bristols-up.

This appears to leave Labour in an impossible position. Their options are to oppose a referendum, thereby threatening to deprive other EU members with an excuse to talk about reform, or to outdo the Tories with proposals for EU efficiency. Naturally, their instinct has been to oppose a referendum. After all, they spent 13 years carefully constructing a bloated British public sector and allowing Brussels to bloom. Old habits die hard. And they must be hoping there are enough Europhiles with their snouts in the trough to keep gobbling up our taxes regardless. 

I guess it's a fair bet. But that future looks bleak...