May 162011

While flicking through the Sunday papers yesterday, this headline caught my eye:

Cameron has the makings of a truly great prime minister

and I wondered how anyone could be seriously making such a claim at this time.

The author of the think-piece was Peter Oborne, sometime editor of the Spectator and now a columnist on the Daily Mail, so there could be little doubt about where the author was coming from politically. But in the preamble to his contention, there was an interesting canter through post-war political history.

There have only been two great prime ministers since the Second World War: Attlee and Thatcher. Attlee achieved greatness because in barely five years he established the basis of postwar Britain: the National Health Service, a universal welfare state and a managed economy – all funded by massive personal and corporate taxation.

Attlee’s vision was so powerful that for three decades all prime ministers, whether Conservative or Labour, accepted his fundamental insights about social and financial management. By the mid-1970s, however, it had failed. Not until 1979, and the emergence of Margaret Thatcher, did Britain discover a leader capable of challenging the vicious cycle of decline.

Like Clem Attlee, Thatcher redefined the British state. By cutting taxes, taming the trade unions, and encouraging the market, she unleashed tremendous productive forces. Like Clem Attlee, her vision was so powerful that all prime ministers since have found it hard to escape from her shadow. But the Thatcher settlement could not last forever: by the time Gordon Brown was evicted from office exactly one year ago, the British state was facing a crisis of comparable’ magnitude to the 1970s.

I couldn’t find much to quarrel with there, except that one very important word seemed to be missing: nationalisation.

This was an essential ingredient of the ‘managed economy’ that Atlee created, and Oborne refers to, which some might recognise as a step towards a planned economy on the soviet model. Henceforth, ‘the people’ were to own at least some of the means of production: the energy industry and other essential public services. And there was a an inevitable spin off from this which also had far reaching consequences. A significant part of the working population became state employees overnight, and the trades unions, whose activities until the war had been confined to moderating the rapacity of private employers, could now claim a seat at the top table, with not only a brief to protect their members interests, but also the power to influence, and even dictate, government policy. At the same time they had control of productivity, or lack of it, over a vast swathe of the UK’s industrial base.

Atlee’s achievement in setting up the National Health Service and the welfare state are undeniable but, with the wisdom of hindsight, it is also clear that the policy of state interference with market economics that he initiated was a disaster. Until Margaret Thatcher dismantled the nationalised industries three decades later, and ‘tamed the trade unions’ in the process, the UK economy was hobbled by the high prices and high taxation required to keep hopelessly inefficient and uncompetitive nationalised industries afloat.

So what has all this to do with David Cameron joining Atlee and Thatcher in the tiny pantheon of ‘truly great’ post-war prime ministers? According to Oborne, it is possible that our present prime minister’s willingness to meet the challenge of mending an economy wrecked by thirteen years of mismanagement by Gordon Brown head on, allow Ian Duncan Smith to rebuild Beveridge’s outdated model for the welfare state, and encourage Michael Gove to insist on high standards in state education, Cameron may be able to implement an economic, social, and political framework that will last for a generation. If he succeeds on all these fronts, then Cameron will indeed deserve to be ranked with Atlee and Thatcher.

This blog is not the place to discuss welfare reform or the failings of state education, with the very obvious exception of JunkkMale’s fascinating thread here.  However for the last year and more I have been drawing attention to the parallels between the problems posed by the old nationalised industries and the Conservatives aspiration to launch a green industrial revolution using the slogan, ‘the greenest government ever’. There is ample and growing evidence that these policies may be as misguided – and could be as long lived – as the UK’s post-war excursion into nationalisation and a managed economy.

Of course if one considers nationalisation in the context of how the world looked in the late 1940’s, it is easy enough to see why such a policy seemed attractive and feasible. In the aftermath of the great depression, the hungry thirties, and the vastly increased control that government had on people’s everyday lives during six years of war, the idea of sate ownership of energy production, transport and much more must have seemed pretty sensible. Also, at the end of the war, it was still possible to foster the illusion that in the Soviet Union a planned economy was promoting an economic miracle, whatever the human cost might be. But the fact that something looked like a good idea at the time doesn’t mean that it really  was a good idea.

We are living through a period when the illusion that there is convincing – even conclusive – evidence that fossil fuel use has already altered the climate is in vogue, for politicians, broadcasters and other media types, for industrialists of course, who see no harm, and ignore the danger, of cashing in on government subsidies. It is no more difficult for Cameron to persuade people that the nation needs a green industrial revolution than it was for Atlee to win support for nationalisation. The question is whether the consequences will be as long-lasting and devastating.

It would seem that the operation of the UK energy industry in future, as conceived by the coalition, will be controlled not by market forces – supply and demand – but by government regulation, just like the old nationalised industries. In an attempt to compensate for the handicap of making the means of energy production totally uneconomic, the government will provided vast subsidies – and also rig the market by regulation, and even legislation –  in order to attract investment. Which brings us to taxation.

By the late 1970s, it was the tax burden, massive level of national debt, and the cost of underwriting the inevitable losses of hopelessly inefficient nationalised industries that made the Thatcher phenomenon possible, and very, very necessary. Yet the crippling effect of successive government’s attempts to run major parts of the economy had been recognised for many years before. There is a terrible irony in our present government contemplating a policy that could probably be safely described as the most inflationary since the war while it is also facing the worst dept crisis since the war . Energy costs will inevitably rocket, and the increased subsidies that will be needed to minimise the effect will do nothing to reduce borrowing and help build a viable economy once again.

In the post-war era, the enormous tax bill for keeping the nationalised industries afloat could be passed off by governments, to some extent at least, as part of the cost of maintaining the welfare state in the aftermath of Atlee’s relatively short lived administration. Now Cameron seems content to embark on policies that will require increased taxation or borrowing in order to find the the subsidies that will entice investors into the strange, strange, world of ‘renewables’, where demand is created by political subterfuge, and profit is acquired, rather than earned, either by tapping into government subsidy, or by greatly inflating market prices with the connivance of government.

And although the trades unions may not be at the top table calling the shots these days, there can be little doubt that that the green eNGOs are rapidly replacing them, and that their single-issue campaigning is capable of being every bit as corrosive of good governance as that of the unions. What political party would have the nerve to fight a general election with Friends of the Earth, Greenpeace, WWF and a dozen other immensely wealthy operators on the political scene using their vast resources to persuade the public to vote for another party of their choosing.

Peter Oborne has chosen as his two ‘truly great prime ministers’ both the author of the ‘managed economy’ and the author of its destruction. It will be interesting to see if Cameron’s ‘green industrial revolution’ and proposals for the decarbonisation of the UK economy will continue to enjoy public acquiescence, and if he manages to turn his vision into reality, it take a generation before a new ‘truly great prime minister’ comes along to put the economy back together again.

96 Responses to “Is this Cameron’s neo-soviet moment?”

  1. PeterM unlike global warming and melting ice and sea level rise that all happen too slowly for any of us to draw any conclusions within our lifetimes, you will very soon get all the answers to the financial melt down you need. Its coming and the only question is will Cameron be man enough and intelligent enough to be fleet footed and head off the fall out or will he persist with the wasteful schemes and send the UK into the same mire that Spain and Italy are in.

  2. Peter Geany #69

    Whilst I am waiting for PeterM to respond to my questions with some actual fugures I have been looking at your post.

    I’m not really aware of the guy and in normal circumstances I might agree with PeterM’s likely assertion that he was a right wing nut.

    Whilst I don’t buy the consiracy theory until more evidence comes in, his grasp of the financial situation related data and the politics was extremely good. I think we should be flattered in that he believes Britain still has such influence on global financial affairs.

    IF he’s right, he’s predicting a much worse meltdown than I can see coming and heaven knows thats serious enough for a substantial number of countries, of which the UK and US are prime contenders but we shouldn’t forget the growing bubble of China, not to mention the time bombs that will continue to go off in the Euro zone.

    I hope he does turn out to be a right wing nutter.

    Tonyb

  3. TonyB,

    I’ve just been listening to Jeff Steinberg who was comparing the British NHS to Hitlers death camps. Its just beyond me how people can believe such nonsense.

    Anyway, how much should Britain borrow? Maybe nothing at all. The governemnt can do a lot to get the economy moving without it having to cost them a penny. Economics is as much about psychology as anything else and telling people the truth instead of scaring them with silly stories of imminent bankruptcy would help every country’s economy – not just Britain’s. As I’ve explained before, having to pay 3% of GDP to service interest payments at an interest of less than the 5% rate of inflation sounds a pretty good deal to me. You haven’t challenged these figures.

    So how does scaring people damage the economy? Take a simple example of where I have £1000 which I can, if I choose, pay you to fix my roof (say). You then may use that money to get PeterG to fix your car. He then pays me the thousand for some work on his computer network. At the end of it all we’ve all earned a £1000 and I’ve still got the £1000 in the bank. My roof doesn’t leak, your car starts first time, and PeterG has a computer network that doesn’t crash.

    Of course if I’m worried that I might be short of money, in the future, then that £1000 stays in my bank. Unspent. I have to put up with a leaking roof, you can’t use your car, and PeterG is in big trouble when his business loses all its data. PeterG tells everyone that no-one has any money. Which is obviously not true because that £1000 is still there just like it always was.

    So if you want to close all your schools and hospitals and have 10 million out of work then that’s your choice. But it is very wasteful to have people hanging around doing nothing when real work does need to be done, and that simple fact does need to be given equal prominence in economic considerations as to how much money needs to be borrowed and how it is going to be repaid.

    I’m suggesting that people do need to be told the truth, and the truth is that the size of Britain’s debt (compared to GDP) is much less now than it has been historically.

  4. tonyb #77 Whenever you listen to these commentators its a matter of sifting through the chaff to get at the gist. I’m not buying into the conspiracy theory yet, but you know the timing of DSK’s down fall is so so convenient. I have been unfortunate enough to work for two people who behaved like DSK and they were both unreliable, hell to work for and thought they could get away with anything. This type of weakness is very easy to exploit so I’m reserving judgement. One thing is for sure is that something is going to go bang soon.

    I read this article in rolling Stone which doesn’t paint a very good picture of American regulation.
    http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?page=1

    To me its all about the fact that we have regulations in place to protect us but so often they are flouted by the rich and famous. Often the reaction is more regulation that often stifles competition and this results is further economic stagnation. At some point a true leader will emerge that will break the cycle that see’s the tax payer continuously funding excesses by politicians and the Banks.

    The best thing going for the UK is they are able to act independently. But our government doesn’t seem inclined to use that advantage, and seems hell bent on this perverse green spending which will lock us into a high debt future.

  5. PeterM

    So at last you seem to be coming round to the notion that the last thing Britain needs to do is to borrow more.

    The problem with your 3% notion is that this covers interest only. It doesn’t deal with core debt which is still growing as the current account deficit has not been brought under control-it also penalises the vulnerable when coupled with the 5% inflation. I’m very surprised that you seem to have so much disregard for the obvious problems that high inflation brings to those least able to cope with it, and that the more we have to pay in interest the less money there is for the disadvantaged-so much for your compassion.

    If our expenditure continues to vastly exeed our income our debts will continue to get larger and interest payments will increase to reflect this, coupled with the prospect of much higher rates if we don’t maintain a strict fiscal policy. Greece has seen a huge increase of their interest rate because of their laxness-another few points on our debt interest rates because the UK is seen as not being serious will have a huge impact on our financial position.

    This growing debt is even without the £30 billion plus a year for climate change mitgation whilst shackling our businesses, or £80 billion a year for care of the elderly, nor the highly expensive one off projects-some of which have much greater merit than others but many of which will have cost overruns.
    I also note that you willl not take into account private and corporate debt which will also have an impact.

    At some point the increasing debts will need to be repaid but as we are only managing to pay off the interst how will this be achieved?

    As I say I believe we can tackle the problem but the longer it is delayed the more difficult it becomes and the debt mountain become unclimbable.

    tonyb

  6. PeterG

    Regulation has been very lax-in Britains case Gordon Brown removed miuch of it when he made the Bank of England independent and didnt put in place the mechanism to deal with the new situation.

    tonyb

  7. TonyB,

    Q: At some point the increasing debts will need to be repaid but as we are only managing to pay off the interst how will this be achieved? ”

    A: Inflation. 5% inflation means that the debt is effectively halved every 12 years.

  8. sorry. That should be 14 years.

  9. PeterM

    We had this ‘solution’ before when the previous Labour Govt were allowed the keys to the grown up’s cupboard during the 70’s when we gained an impressive inflation rate of over 20%. It devastated those on fixed incomes, those on benefits and savers, started a wages explosion and inflated house prices with consequences that still live with us today.

    I can’t believe that someone who appears to have left wing credentials would have so callous an attitude to the weaker members of our society. Still, after 14 years of an effective inflation rate of of 2% (interest minus inflation) the current account deficit would be roughly under control but the core debt -which would be coming up for repayment-would be left untouched.

    This all assumes of course that interest rates remain low which they wouldn’t if the markets thought the Govt werent applying a strict fiscal policy.

    tonyb

  10. Hi inflation is the trick that the US pulls. Lend it some money and 14 years later you only get half back. The fatal flaw in this scenario is that lenders will start to charge interest rates that are prohibitive, and that results in all the private debt holders basically going broke.

    If the UK were to raise interest rates now,which the need to do by all the economic measures, the country would grind to a halt and many households go bankrupt. we have no growth,high inflation that they are pretending is note systemic, and high indebtedness.

    To break the cycle they need to lower taxes, which includes the £30 Billion green contribution, cut regulation the prevents completion and kick start the economy that way. The idea we can increase taxes as a way of reducing the deficit is totally flawed.

    They should have let the banks go bust, sacked and banned every director and started again. Instead we have the same old people with the same old failed methods.

  11. PeterG and TonyB, Look I’m not necessarily expressing approval for the way inflation effectively works against the lender and in favour of the borrower, when interest rates are low as they are now – its just an observation that that is the way things are at the moment.

    Having said that, I’m sure most people who saw their homes increase in value by leaps and bounds when times were good, whereas their loans were fixed, weren’t complaining then. Even if you’d never paid a penny off your home loan principles, you’d still be well ahead wouldn’t you? So don’t tell me you’ve never benefited from inflation yourselves:-)

  12. I think that should have been ‘principals’ in last post.

  13. PeterM

    The point is that interest and inflation are out of sync and just today the OECD signalled that the UK should raise interest rates in order to curb inflation.

    Once we get to equilibrium your suggestion-poor as it already was- becomes untenable. The current account deficit isnt tackled and the overall debt of the country and its people-continues to grow. You’ve agreed theres no point in borrowing, so other solutions are to cut spending and increase consumption in order to stimulate the economy.

    The latter can only be done by the former, thereby releasing money for spending by those who at the moment feel under pressure.

    It still doesn’t solve the problem though of throwing a giant carbon related cost into the annual equation. This is a much more disposable cost though than that of caring for the elderly-but it seems from this thread that us centrists are more compassionate than you left wingers :)

    tonyb

  14. TonyB,

    Cutting spending doesn’t stimulate the economy. Its curious that both the political left and right seem to want to overrate the scale of the problem. The right to justify sacking the ladies who look after children on school crossings would you believe? The left because they like to believe that capitalism is in its death throes.

    The truth of the matter is that capitalism is not quite as sick as all that. Even in the UK. So far the Conservatives have been able to blame any problems on the last government, but soon they’ll have to revise their ideological position, tell everyone that the economy is on the mend, even if it does mean borrowing a bit more to give them a chance of winning the election and sure enough things will start to look better.

  15. PeterM

    I agree with you that there are some silly ‘cuts’ such as those that see Lollipop ladies removed from protecting children outside schools.

    You still haven’t answered my questions posed in the comments above as to how you stimulate the economy or how much more money you suggest we borrow

    Tonyb

  16. How to stimulate the economy? So you didn’t grasp what I was saying first time around? I suppose I could rewrite my previous comments all over again in a much simpler format but I’m not sure I know how to do that.

  17. PeterM

    There were lots of waffle but no specific figures. Why not try again?

    tonyb

  18. You want a specific figure? How about?

    Two thousand five hunded and five pounds, nineteen shillings shillings and elevenpence three farthings?

    I’ve even converted it to old UK money for you pre-historic dinosaur UKIP types :-)

  19. PeterM

    Through this thread you’ve demonstrated yet again that you are good at Googling (although invariably you take answers from the first page-preferably Wikipedia)) but you want to remain so far within your comfort zone that you won’t take part in any serious debate with meaningful thoughts of your own. Ther is no point in continuing this debate is there?

    tonyb

  20. I avoided getting involved in this debate, (leaving PeterM to defend the common sense of socialism alone – sorry) because I felt it would involve writing a history of the twentieth century, but I couldn’t resist this from the Torygraph’s economics editor Jeremy Warner:

    Oh for the glory days of Sir Arthur Hawkins and the Central Electricity Generating Board. I never thought I’d say that about an organisation that seemed, at the time, to embody the very worst aspects of post-war corporatism and central government planning. But compared with the abject chaos into which British energy policy has descended since privatisation, the absolute rule of the CEGB seems a paragon of virtue […]
    What makes it much tougher for Britain is that, unlike the main continental markets – where the government places the orders, and the utilities, which are all essentially still underwritten by the state, deliver the goods – the industry here is fragmented, substantially foreign-owned and almost entirely beholden to short-term, market-driven considerations […]
    if ever there was an industry better suited to public control than private ownership, it is this one, for the unknowns are so great that only the public purse can underwrite the necessary investment […]
    And Mr Huhne has scarcely helped matters by lobbying, with all the conviction of the religious fanatic, for ever more demanding emission targets from Europe.

    I’m not sure anyone in the Labour Party would be allowed to say anything so sensible.

  21. Geoff You make an excellent point. I would just add these thoughts. The mess in the UK has less to do with who owns and operates the generating plants and more to do with absurd regulation, such that the owners have no coherent plan they can work to. Rather than competing with their fellow generators they are battling to meet government targets. The Government is not the customer, we are, and the generators are not operating in our best interests but how they are told to. This will never work, as we are currently witnessing.

    If it seems as if the generation of power in the UK has returned to the worst days of National ownership then you are correct and witnessing nationalisation in action, but by proxy. Remember these words Regulation is Nationalisation without paying.

    Governments are the worst bar none and without exception at operating anything, and this is what we witness with schools, and with our power generators amongst many other things. Look at the MOD. And we won’t go near the NHS which I have many bad experiences with. What we need is the government to peel away all the regulation and start again. And Geoff don’t forget we have EU regs piled upon ED Milidunces and all mixed up by Chris Huhne’s religion.

    If for argument we wanted to develop a Thorium reactor, no private company would take that on. But the government would have to appoint an operator who would appoint a construction company etc etc. That is how it would happen no matter if the energy sector was private or public. But having the operation in private hands with the correct regulation ensures that the markets discipline’s are adhered to. Its only when the government promises underwrite the ventures operations that management take risks and squanders investor capital just as with the banks. One day politicians will finally have to admit it was changes in regulation that caused the banking crisis.

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