Thursday 26 May 2011

Randall on the Inflation and the Bank of England

Jeff Randal attracts the eyes and ears of many Very Important People, so his condemnation of the Bank of England deserves to be taken seriously.

His essential argument is the the 'Old Lady' has failed Britain by letting inflation rise to around 5%, whilst keeping interest rates low. His problem is that he treats all inflation as identical, and treats inflation as the be all and end all of economic objectives.

Recent inflation has been caused by weakening pound (thereby making imports more expensive) and increases such as VAT. These are temporary, whereas increasing interest rates will take 12-18 months to take full effect. They would only damage the economy which has been stagnant at best over the last six months, and teetering on the brink of recession. We are likely to be in one once the cuts take full effect (unlike the US, which has pursued a broadly, though modestly, Keynesian approach), and higher interest rates will only make things worse.

What I find odd is the belief that interest rates are somehow 'special'. All you're really doing when you're raising them is making a certain part of the economy more expensive, thereby making some people poorer, thereby reducing demand, thereby reducing prices. In other words, you're creating inflation to cut inflation.

The current inflation we have is not driven by excess demand but by rising costs, and there's no reason to assume that normal inflation will not be just as counter-inflationary in the medium term as interest-rate inflation.


Nor is it clear that 5% inflation is bad. There's actually little empirical evidence that it is, nor is single-digit inflation self-perpetuating; more often its self-negating, for the reasons I outlined above. Britain's rate of economic growth was at its highest between 1945-1970, (see here, page 23, where we went from -5% to +7%, and then from +7% to +3%) when our post-war national debt was vastly greater than ours today, and inflation was often between 5-9%.

Cutting demand during a recession makes no sense, which is why I'm hoping that Very Important People will skip Jeff today.

Saturday 7 May 2011

The Coalition Conundrum


Now that the election’s over, the big question is whether Labour will form a coalition with the Welsh Lib Dems, or go it alone. Quite a few of my fellow Lib Dems are in favour, arguing that it would be better for Wales, we’d get Lib Dem policies implemented and it will help underline the difference between the, basically centre-left Welsh party from the UK one. All in all though, I have to disagree with them.
Unlike a year ago, there is no pressing need for a coalition to be formed; Labour can go it alone, even if it is a bit awkward for them. I am convinced we’ve got better policies, and most of our AMs are of the calibre which would definitely add to the cabinet rather than weaken it. In that sense, a coalition would be good for Wales. However, policies are only so important in the Assembly if the people doing them (not just Labour ministers, but also many civil servants) are lousy – which they basically are. With two cabinet posts (one of which will be junior) I fail to see how much change we can effect on that.
Carwyn Jones may prefer the comfort of a clear majority, but the biggest problem with him and Welsh Labour is their complacency. A £600 funding gap between Welsh pupils and English ones for example should be a matter of deep shame for any party, as should the clear gap in quality of health care, despite Wales spending more per head than England. It’s true that those gaps are partly explained by the London allowance, and Wales greater rurality and health needs – though only partly.
Labour may well be forced to perform better with everyone pointing out their deficiencies – which are huge – than having a comfortable majority which enables business as usual.
As for us as a party, the case for coalition is that we get Welsh Lib Dem policies implemented, and electorally, it will help us distinguish us from the UK party, which is in broad terms, about as popular as Yasmin Alibhai Brown at a BNP rally. Personally, I fail to see any reason why the economy will get better under the coalitions ‘courageous’ policy of drastic cuts during economic stagnation, so that’ll only get worse in the years ahead
On the second point, it may distinguish us, though it could just as easily (though incorrectly) be spun as us being unprincipled harlots for ‘jumping into bed’ (in that quietly sexist phrase) with anyone to get power. The Western Mail is already asking whether ‘Carwyn and Kirsty could make a perfect couple’? Don’t expect troglodytes in Wales to avoid using any and every sexist innuendo possible to further that meme against us. 
Given how little we’re able to communicate the fact – and it is a fact – that a Con-Lib Dem coalition was the only possible option for us a year ago, I doubt very much we’ll be any more successful in putting our explanation across second time round.
Electorally, our primary strategy over the next four years has to be to keep or win Cardiff Central from Labour, Ceredigion from Plaid, and Montgomery off the Tories. Being in coalition with Labour helps us in none of these seats. Moreover, having half the group in the cabinet (and the best half at that) will mean that they will have far less time (to say nothing of political space) to strengthen the party and to campaign for better government. Kirsty is clearly a huge asset to us – perhaps one of the few we have – but her being in the cabinet will blunt that asset massively.
Furthermore, this will be an unpopular government. Not just because it will have to implement cuts (which Labour will blame on us, whether we’re in coalition with them or not), but if it’s going to be vaguely decent and put national interest before party interest, it will have to do unpopular things. One being reconfiguring some District General Hospitals – its unlikely that having big hospitals in Llanelli, Swansea (twice) and Port Talbot is the best allocation of resources. Another is university funding.
The Labour-Plaid policy is very popular, and also fundamentally terrible. Limiting fees to £3,300 for Welsh Universities will mean they have far less money than their English counterparts. Furthermore, the policy of subsidising fees for Welsh students to study outside of Wales, paid for by cutting the Welsh Universities teaching budget will not only mean Welsh Universities lose money (again). They also will essentially subsidise English Universities, and encouraging the best Welsh students to leave Wales (to get a degree worth £27,000 instead of £10,000, for the same price), with predominantly less gifted and less committed English students coming to Wales in return – if they come at all. The best academics will inevitably avoid Wales – which seeing how much hope we’re placing on Higher Education to develop our economy, will only damage us all.
Any decent government will have to remove this very popular policy. If we were in coalition, either we get rid of it – and thereby cementing the charge of betraying students even more – or keep with it to keep some popularity, whilst more of us realise how fundamentally bad it really is. If the argument behind a Lab-Lib coalition is the national interest, then the latter course will not be possible. Labour created a terrible policy which they knew was unsustainable, just so they and Plaid can beat us in seats like Cardiff Central and Ceredigion. They’ve dug Wales into a hole – perhaps even a grave for Welsh Universities. Seeing as we bore the political brunt of Labour digging the hole, I don’t see why we should volunteer to bear the brunt again for them getting out of it.
Last, though definitely not least, there’s the will of the people. Determining what election results mean is not an exact science. That said, it’s clear that they want Labour to have more power than they had with the Lab-Plaid coalition. It’s also pretty clear that they’re not calling for us to be in power. Labour have enough seats to form a government. If it’s an uncomfortable one for Carwyn Jones, then frankly, good. He, and Welsh Labour more generally, have been far too complacent, consistently caring more about being in power than being in government. Being on their own with 30 seats will either finally shake them out of their complacency, or clearly expose the truth of how bad they really are. It’s not in our interest, nor in Wales’ interest, to prevent either of these things from taking place.