Sunday, 21 September 2014

What’s so new about Osborne’s new British Economic Model?

James Silverwood discusses Osborne's economic strategy.

In June 2009 Shadow Chancellor of the Exchequer, George Osborne, delivered a speech in
which he set forth the economic policy strategy of a forthcoming Conservative Government. Osborne argued that the “challenge of the alternative government is now to provide the clarity, leadership and direction the country needs. To show that we have learnt the lessons of the last decade, and that we offer the country a new British economic model”[1] with the immediate priority of that model being to restore Britain’s international credibility by dealing with Britain’s fiscal deficit. Osborne would later argue that the key macroeconomic policies to secure economic recovery and rebalance the economy were “the same policies that David Cameron and I have been arguing for since the beginning of this crisis – monetary activism [and] fiscal responsibility”[2]. These macroeconomic elements of the new British economic model were adopted in office by the incoming Coalition government after May 2010. The commitment to reducing the budget deficit was central to the Coalition Agreement with George Osborne, by now Chancellor of the Exchequer, originally targeting a balanced or surplus current budget by the end of Coalition’s term in office and for public sector net debt to begin to fall as a share of GDP by 2015-16[3] (both targets which have subsequently been extended).

But what is new about the new British economic model? The most succinct answer is nothing at all. Public expenditure reductions have been a common macroeconomic response of successive British governments to economic crises, and crises more generally such as war, since the age of Napoleon.  Even during the supposed Keynesian era of UK economic policy after the Second World War less weight was placed on fiscal policy as a stabilisation tool than on monetary policy. Indeed one academic has questioned the ‘Keynesianism’ of fiscal policy in the post-war era, suggesting that in fact, fiscal policy was largely contractionary due to persistently large current account surpluses[4].  Public expenditure reductions were deployed with much vigour during the crisis hit inter-war period as consecutive governments strove to achieve balanced budgets and national debt reduction. The British experience of fiscal policy in the 1930s mirrored that of the United States (US) where the adoption of New Deal policies often obfuscates that the US did not implement policies of fiscal stimulus[5].

More recently public expenditure reductions (and tax increases) were used by the first Conservative government of Margaret Thatcher (1979-83) most famously perhaps in the 1981 budget, and perhaps equally famously, causing consternation from 364 economists whom wrote a letter to the Times to object. Furthermore, subsequent revisions to the government’s original medium-term financial strategy (MTFS) targeted a balanced budget, which was subsequently achieved in 1988-89 and 1989-90 when budget surpluses of 1.3% and 0.2% of GDP were achieved in real terms.

Where then does this leave monetary activism? If by monetary activism we mean the policies of cheap money and quantitative easing (open market operation) adopted since 2008, we can again, say there is nothing new in these policies at all. The adoption of cheap money policies has its antecedent in the interwar period when interest-rates were reduced to 2% in the spring of 1932. Furthermore, research by several scholars indicates that the British interest-rate framework was far more ‘politicised’ and ‘managed’ during the classical Gold Standard (1870-1914) monetary regime than the supposed autonomous mechanism of adjustment of the system was meant to allow for. Open market operations meanwhile, have its historical antecedent in British monetary policy from 17th century monetary arrangements between London and Edinburgh. Open market operations were also integral to the ‘management’ of the Gold Standard and were institutionalised by the Exchange Equalisation Act in 1932 permitting intervention in foreign exchange markets (which was subsequently re-enacted in 1979 and continues to operate in the present). Quantitative easing (an open market operation), often labelled as an ‘unconventional’ monetary policy, operates as a quasi-debt management and credit policy and is an extension of similar operations undertaken by the Bank of England in the 1970s and 1980s. As one study of monetary policies by central banks after the Global Financial Crisis concluded that ‘the policy responses to the crisis are not really unconventional in their essence. It is the specific market segment chosen as the focus of central bank operations that is, for the most part, novel – at least by recent experience. Moreover, rather paradoxically, some of these policies would have been regarded as canonical in academic work on the transmission mechanism of monetary policy done in the 1960s-1970s, given its emphasis on changes in the composition of private sector balance sheets”[6]. Given the emphasis of fiscal responsibility and monetary activism in the macroeconomic approach of the interwar National government, I would argue that the macroeconomic approach of the Coalition government, far from instituting a new British economic model, rather illustrates the re-emergence of Chamberlainism (Neville Chamberlain, Chancellor of the Exchequer, 1932-37).

The Coalition’s macroeconomic strategy therefore illustrates not a new approach to policy but consolidation back towards a macroeconomic orthodoxy with deep historical roots. Whilst this post has not been able to illustrate all aspects of that orthodoxy (for more information please see here and here), it is presented in the diagram below. There is nothing new about the new British economic model.

James Silverwood is a doctoral candidate at the University of Hull where he is researching the thinking underscoring British economics.

[1] Osborne, George (2009) A New British Economic Model, Mais Lecture, Cass Business School, London, 9th June 
[2] Osborne, George (2009) The Conservative Strategy for Economic Recovery, The Paths Back to Recovery Conference, London. 15th September 
[3] Osborne, George (2010) Financial Statement, House of Commons, 22nd June 
[4] Matthews, RCO (1968) ‘Why has Britain had Full Employment since the War?’, The Economic Journal, Vol. 78, No. 311 (September) 555 – 569. 
[5] Brown, Cary (1956) ‘Fiscal Policy in the Thirties: A reappraisal’, The American Economic Review, Vol. 46, No. 5 (December) 857 – 879. 
[6] Borio & Disyatat (2009) Unconventional Monetary Policies: An Appraisal, BIS Working Paper No. 292, November 2009

Sunday, 14 September 2014

The Scottish referendum shows us why the British political class must embrace real change or die.

Charles Lees discusses the need for political change in Britain following the Scottish referendum.

There was a moment this week when a clutch of opinion polls[i] showing the Yes vote ahead or neck-and-neck with No in Scotland sounded the first audible death rattle of the Union. Even if the No camp eventually crawls over the finishing line ahead of Yes on the 18th of September, the current scare has been a near death experience for the British state in its current form. So, whatever the outcome of the referendum, Britain’s political class will very soon have to implement some important lifestyle changes. But that is for the future. At the moment the patient is still collapsed in the street, looking up at the autumnal sky, listening for the sound of the ambulance sirens that might signal help is on its way.

So how did the British political class find itself in this position? It is not as fatuous as it sounds to refer to the need for lifestyle changes. The British state retains a pompous theatricality and the Westminster village a degree of complacency and cynicism that is not just inappropriate in today’s world but has begun to actively grate on the sensibilities of significant numbers its citizens, and not just in Scotland[ii]. The dissonance that we hear in the dialogue between rulers and ruled is not just a function of British decline, it is also about other countries successes. An increasingly well-informed and well-travelled citizenry can see and experience for themselves that there are alternative ways to organize our political affairs and more equitable and often more successful economic models on offer as well. But, with one or two honorable exceptions[iii], the British political classes have been unable or unwilling to recognize the growing disconnect with voters and quick to discount and denigrate constitutional alternatives as unworkable or – a favorite term in the village – simply bonkers. And in this fashion opportunities have been lost.

The most regrettable lost opportunity – and not just in the context of the Scottish referendum - was the failure to enact a root-and-branch reform of the structure of the British state in the late 1990s. The asymmetrical and frankly incoherent devolution of limited powers to three out of four of the constituent nations was not intended to unleash and empower the political forces that had been building up since the early 1970s but to buy them off and contain them in what many regarded as talking shops, albeit with differing levels of real political power. In particular, the complete failure to address the ‘West Lothian’ or ‘English question’[iv] at all revealed the contempt of many members of the political class for their voters. The joke at Westminster was that the only answer to West Lothian question was not to ask it in the first place. How we laughed.

So, as we now know, Westminster’s granting of a flawed Scottish parliament did not ‘kill nationalism stone dead’ as George Robertson once predicted[v] and the current two-year referendum campaign that is reaching its unpredictable climax has revealed a complete inability to articulate a positive message in defense of the Union in its present form. I am not blaming the Better Together campaign for that – I cannot think of a convincing way of doing that either. And the reason for that is that the status quo has become untenable. David Cameron has come under fire in recent days for not including a third option for Devo-Max in the referendum question. This is missing the point. Cameron was right to not allow three choices in the referendum, as this might easily have split the no vote (see how Prime Minister John Howard split the yes vote for a Republic in Australia in the 1990s[vi]) as divide supporters of independence. The real problem was much more fundamental in the failure to recognize that there should have been a straight vote between some form of Devo Max and outright Independence. If this had been part of a wider offer as part of a federal solution to the ongoing disfunctionality of the modern British state, so much the better.

As it is, the No campaign has been reduced to making threats about the consequences of change. Many of the threats have substance but the No camp is increasingly facing a credibility problem. The most hotly contested of these threats has been UK Chancellor of the Exchequer George Osborne's 'no ifs, no buts' refusal (backed by the leaders of the main Westminster parties) to countenance a currency union between the residual UK and Scotland in the event of a Yes vote. In a UK economy that has been allowed to grow over dependent on the fate of the banking sector this threat has the potential to inflict enormous self-harm. For If Scotland votes yes and the markets take the UK government’s threats at face value there is the potential for a run on ‘Scottish’ banks. If that happens the Bank of England will have to guarantee the liquidity of those banks during the run-up to independence, which could beggar us all. The best way to avoid such a run on the banks would be to agree to let Scotland share Sterling after separation. And that is why the SNP and large swathes of the Scottish people are apparently confident that the UK is bluffing on the issue.

So, as the patient lies there on the road, he or she might consider if they could have done more to prevent this trauma happening in the first place. Could they have been more generous and imaginative in the late 1990s when there was a window of opportunity for real reform of Britain’s outmoded imperial state? Did they really think they could put off further devolution of powers when it became clear that the SNP’s re-election in 2011 meant an independence referendum was on the cards? And do they really think, at this late hour, that any raft of new Devo-Max measures for Scotland can be passed without considering the further destabilizing effects that they would have on the rest of the British state? Like the recovering alcoholic or the coronary survivor, the British political class will have to embrace meaningful changes to its lifestyle or else the next significant event may be terminal for the British state.

Charles Lees is the Head of the Department of Politics, Languages and International Studies at the University of Bath. 

[i] Curtice, J. ‘TNS now say it is a dead heat’. What Scotland Thinks blog.
(accessed 10 Sept. 2014).

[ii] Hansard Society (2014) Audit of Political Engagement, 11, (accessed 10 Sept. 2014).

[iii] See for instance Graham Allen MP on constitutional reform. British Politics Group blog. (accessed 10 Sept. 2014).

[iv] See Robert Hazell on the ‘English Question’ (accessed 10 Sept. 2014).

[v] See Garland, W. (6 May 2007). How Bulldog Brown could call Braveheart Salmond’s bluff. The Scotsman. Johnston Press. (accessed Sept. 10 2014).

[vi] Kirby, M (2000), ‘The Australian Republican Referendum 1999 – Ten Lessons. Law and Justice Foundation of New South Wales. (accessed 10 Sept. 2014).

Tuesday, 9 September 2014

Vote No get Yes, Vote Yes get No? A Classic Downsian rush to Devo-Max?

Mark Shephard from the University of Strathclyde presents an insightful discussion concerning the Scottish independence referendum.

The Yes campaign have wanted it more, been more organised and visible, and have offered more positives and hopes via the November 2013 White Paper Scotland’s Future while also being able to attack all the things a sizeable proportion of the electorate in Scotland do not like namely, Thatcher, the Tories, class, the bedroom tax, and the 9% recommended pay rise for MPs. This attack strategy has arguably been ‘upped’ in the last few weeks and this is most likely a key cause of getting Labour and undecided voters to see that the Yes campaign promises Labour voters a greater chance for more Labour policies seeing the light of day than a No vote. The Yes campaign have played a very clever hand in which they have addressed the needs of the emotional and the rational by offering ‘independence’ that appeals to those who want independence no matter what, and then for the questioning, it looks like Yes are offering a fair bit of independence but within the Union such as keeping the Pound Sterling, the monarchy, NATO membership and maintaining the NHS, the BBC, and a social union.

There is much comparison between Scotland and Norway, but when Norway voted for independence in 1905, the result was virtually unanimous with over 99.9% of voters voting Yes (which at 85% turnout included an overwhelming majority of the electorate). Whichever side wins in Scotland, it looks like neither will obtain the support of the majority of the electorate, and so, while this should not matter in terms of legal legitimacy which just requires a plurality of the vote (whoever wins) it might matter in terms of perceived legitimacy. When the SNP won the 2011 Scottish Parliament elections, for example, critics were keen to point out that although they had won the majority of seats they had done so with just over 22% of the electorate’s support. The same is true of Westminster elections as the Conservatives’ (main coalition partner) won just over 23% of the electorate’s support in the 2010 General Election. Indeed, lack of legitimacy has been a feature of British (and Scottish) elections for decades, for example, Lord Hailsham warned about the perils of elective dictatorship which ironically was a charge levelled at Labour, but which became more synonymous with the subsequent Conservative governments led by Margaret Thatcher.

In the very first BPG blog, and indeed since I started teaching in Scotland in 1998, I have argued that there are two solutions to the current constitutional questions facing the UK today: independence or federalism (approximately symmetrical regional units with city hubs) and yet neither of the two main parties alternating in power at Westminster has formally offered this. Given the likely close vote in the independence referendum, and now the possible quick rush to federal solutions, it looks like I was right. If the mainstream UK parties are serious about the Union, then devolution and a few more powers are no longer going to pass muster. Federalism could save the Union, but then again, so might independence…it just depends upon the flavour of independence on offer, and probably most importantly, the kind of independence that is actually deliverable in an interdependent world.

To the passionate and to those who have taken sides there is a huge difference between a Yes and No vote in the Scottish independence referendum. To a few observant others however, it looks like if you vote No you get quasi-Yes (devo-max) and if you vote Yes, you get quasi-No (BBC, NHS, Pound Sterling, HM Queen, NATO, shared embassies, social union…). Either way you could argue it is a victory for Yes as they are going to get either devo-max or independence even if ‘independence’ looks a lot like devo-max just with a wee bit more max. And if it is No, then Yes might continue until there is a Yes vote; the ‘Neverendum’. So for Yes it could be argued it is a sort of ‘heads I win, tails you lose’ scenario.

Even if the reality of what is being proposed is much closer today than the campaign rhetoric suggests, there is nothing to say that come the 19th September, the reality actually becomes more like the rhetoric. If we say the No side were to win, what exactly is the Union position on devo-max? If history repeats itself, will they recoil on their promises? If we say the Yes side were to win, how far will they go? In particular, what will a written constitution mean for Scotland? We have been promised that parliamentary sovereignty (no parliament can bind its successor) will be replaced with people’s sovereignty (enshrined in a written constitution containing a lot of policy statements). This sounds great in theory, but in practice will it mean that Supreme Court Justices (or possibly just one middle-of-the-road Justice holding the balance of power in a split court) have de facto sovereignty rather than the people or the people’s representatives? (i.e. representative democracy). At least with parliamentary sovereignty (which is checked by much already, e.g. Human Rights Act) the voters can throw the rascals out at the next election. In short, might parliamentary sovereignty paradoxically offer more power to the people than people’s sovereignty which might offer limited power of consultation for a brief moment in history? Also, once you put policy into a constitution (e.g. right to bear arms) it can be hard to take it out even if the subsequent interpretations of that policy are nothing like what was originally envisaged. Moreover, if the money is no longer there, should we bind future generations to policies that they may no longer be able to afford? And if we write a constitution elastically (e.g. ‘must seek to protect and enhance the quality of the environment’) might this create an expectations gap between what is actually possible versus what is desirable in an ideal world? Will this lead to a further spiralling down in trust of our politicians?

One thing is certain, not everything will be achievable. Politics involves compromise and negotiation. ‘…we promised 10 oranges and delivered a couple of these and changed a few other things along the way to compensate for this…’ is most likely what will happen. And we as citizens need to recognise this. In addition, if we are paying in less than we are spending, how long can promises of even more spending add up without rises in taxation? Who pays, and how much?

What is becoming clearer is that the constitutional landscape will have to change either way of the vote. Politics has never been this interesting or this important to those living in not just Scotland, but also the rest of the UK and further afield (e.g. Spain and Catalonia). These are the days we will remember for the rest of our lives.
Mark Shephard is a Senior Lecturer at the University of Strathclyde and has been exploring social media comments and the independence referendum since 2012.

Sunday, 31 August 2014

Tea Party Time on both sides of the Atlantic

David Coates considers possible similarities between the US Tea Party and the UK Independence Party.

There is always a complex but close relationship between economic conditions and political options, such that the understanding of one invariably requires an understanding of the other. That is particularly true in periods of sharp economic or political change of the kind we have known since 2008. The decision by the MP, Douglas Carswell, to transfer his political loyalty from the Conservative Party to UKIP triggered the following set of thoughts about present and future interactions between economics and politics on both sides of the Atlantic.

On the economic side of the equation, as is now widely understood, people in both the UK and the US still live under the shadow of the great recession of 2008-9. The credit crisis of September 2008 which triggered that recession was not a normal moment in modern economic history. On the contrary, it changed everything. It brought to an abrupt end nearly two decades of sustained economic growth, and in doing so, it completely blocked the continuation of the balancing act between demand and supply that had brought generalized prosperity to an entire generation of workers in each economy. It also left a lot of people struggling economically simply to survive.

There were people struggling before, of course. Capitalism and poverty always go together; but post-2008 the numbers and proportion of the population experiencing daily pressure on their budgets increased dramatically.[1] Jobs were no longer plentiful. Part-time employment, even self-employment, on low/subsistence wages became commonplace.[2] Semi-skilled workers who a generation before had left school and found good paying jobs in readily-available manufacturing plants suddenly found those jobs in short supply, and their equivalents in the service sector – if there at all – significantly less well paid.[3] The burden of that unexpected adjustment fell particularly on the young as the unspoken deal, which they spent their teenage years expecting to be theirs for the taking in their young adulthood, suddenly evaporated before their eyes. In the United States, for example, instead of guaranteed employment, a high-school diploma brought for many only systematic exclusion from the paid labor force.[4] Instead of high-paying jobs, four years at college for many middle-class children brought them only record levels of student debt.[5] And instead of living independently and even buying a first property, even many of the more privileged children of the late baby boomers often found themselves as academically qualified as their parents but still living at home![6]

The financial crisis and its aftermath left, that is, a working class in or on the edge of poverty; a middle class economically squeezed as it had not been in living memory; and an entire generation of millennials facing a lower rate of social mobility than their grandparents enjoyed in 1970, and a lower rate of house purchase than any time since the 1970s.  Politics could not be “business as usual” in the wake of so sharp a break with previous experience and expectations; and contemporary politics in both Washington and London these days is not “business as usual.” Amid the existing array of familiar political faces and options, new political forces are in play whose significance and potential need now to be understood.

When the assumptions of a whole generation are thrown into question in this fashion, it is only to be expected that the politics of that generation should also begin to change. Yet what is intriguing in our present circumstances is how modest those changes have thus far proved to be amongst the particularly deprived and exploited in both economies, and how little traction the recession has given the Democratic Left among its traditional constituencies. It is as though being poor – and particularly poor and black – in both the US and the UK is so deeply entrenched in the way the economies and societies function that not even an intensification of that poverty can do more than trigger an occasional outburst of urban rioting of the kind witnessed in parts of London in 2011 and in Missouri in 2014.[7] And it is though the bulk of American labor has given up even the fight to join a trade union, let alone to use it for progressive political purposes. At least low-paid American retail workers are in revolt, but even they stand so often isolated and alone.

What is also intriguing is how, so far at least, the millennial generation have stayed off the streets. Some of them were there briefly in the “Occupy Wall Street” demonstrations, but in the main millennials seem too overwhelmed by the daily struggle to find work, wages and even a career to do more than vote with their feet, staying away from a mainstream politics that offers them nothing immediate to ease their conditions.[8] Where the politics have changed, and where unexpectedly a right-wing populism has established deep roots in both political systems, is among white adults – the bulk of whom are now already middle-aged or older.  Right now we are seeing the coming together of a white working class that feels threatened by labor market competition from the next generation of immigrants, and a white lower middle class struggling to avoid slipping back into the ranks of the nearly poor. Angry white men seem particularly significant participants in all of this:[9] sustaining a profound Tea Party challenge to main-stream Republicans in the United States, and enabling UKIP to win a larger percentage of the popular vote than did any of the other three main political parties contesting the UK’s European elections in May.

The demographics of the Tea Party movement in the United States and of UKIP are, in this sense, remarkably similar. Typical Tea Party activists “are overwhelmingly older, white, conservative men and women who fear that ‘their country’ is about to be lost to mass immigration and new extensions of taxpayer-funded social programs…for low- to moderate-income working-aged people, many of whom are black or brown.”[10] The UKIP equivalent is “blue-collar, old, white, male, with few qualifications and a very pessimistic economic outlook,”[11] with UKIP best described as “a first home for angry and disaffected working-class Britons of all political backgrounds, who have lost faith in a political system that ceased to represent them long ago.”[12] The two political movements are not identical, of course.  Each is a product of its own place and time. Tea Party politics is infused with a Protestant evangelical social conservatism that UKIP broadly lacks, and by strands of libertarianism[13] which have no real purchase in more social-democratic Britain. And by the same token, UKIP is particularly engaged with issues of immigration from, and political subordination to, the European Union, which parallel but do not exactly match Tea Party anger at illegal immigration across the US-Mexican border. 

But both political formations share an anger at the present impasse, a strong conviction that the existing political parties cannot break that impasse, and a determination to do so themselves by rolling back the welfare state and freeing their members from the existing burden of taxation.  Though the different candidate selection systems in the two democracies allow the Tea Party to colonize the Republican Party in a way that UKIP can never hope to replicate inside the British Conservative Party, both are potent forces pulling their national politics to the right: collectively constituting for the modern era what Trotsky, long ago when talking of interwar fascism, called a “levĂ©e en masse of the petty bourgeoisie.” 

It is not immediately obvious yet just how permanent a presence in UK political life UKIP will prove to be. But what may determine its long-term potency and presence of UKIP is whether a millennial generation thus far so ill-served by mainstream parties also proves open to its appeal. And in that sense, mainstream parties on both sides of the Atlantic hold their – and indeed, our – future in their hands. Stopping the spread of support for rightwing populism requires more from them than simply refuting Tea Party and UKIP claims on immigration, important though that refutation will be. It also requires the design and implementation of a new economic growth strategy that can bring jobs and prosperity back to an entire generation.  So as we go to vote next time, it will be worth asking all the candidates just what elements, in their view, such a growth strategy should contain. For rather more hangs on the quality of their answers than simply the outcome of one general election. What hangs on the quality of their answers could well be the outcome of many elections to come.

David Coates holds the Worrell chair in Anglo-American studies at Wake Forest University, and has published widely on British politics. 

[1] Don Lee, ‘Fed survey: 40% of households show signs of financial stress,” Los Angeles Times, August 7, 2014: available at

[2] Will Hutton, “George Osborne’s economic ‘recovery is built on sand,” The Observer, January 26, 2014: available at

[3] A wage gap representing $93 billion in lost wages since the recession. For details see the press release of the United States Conference of Mayors, Wage Gap Widens From Recession As Income Inequality Grows, August 11, 2014: available at

[4] See Pew Research, The Rising Cost of Not Going to College, Published February 11, 2014: available at

[6] Matt O’Brien, “It’s not your imagination: millennials really are living in their parents’ basement,” The Washington Post July 11, 2014: available at

[7] Tim Newburn, “The Ferguson riots may seem similar to those in the UK – but there are stark contrasts,” The Guardian, August 21, 2014: available at

[8] There is also a strong libertarian current among millennials. On this, see Robert P. Jones et al, In Search of Libertarians in America, Washington DC: Public Religion Research Institute, October 2013, available at

[9] See Frank Schaeffer, America’s White Male Problem, posted on, January 7, 2013: available at  Also Thomas Magstadt, Angry White Guys: The Roots of Reactionary America, posted on NationofChange April 14, 2013: available at;  and Michael Kimmel, Angry White Men: American Masculinity at the End of an Era, New York: Nation Books, 2013.

[10] Theda Skocpol, “Why the Tea Party’s Hold Persists,” Democracy Journal, Winter 2014, p. 11: available at  See also Theda Skocpol and Vanessa Williamson, The Tea Party and the Remaking of American Conservatism. Oxford & New York: Oxford University Press, 2013, pp. 25-32.

[11] Robert Ford & Matthew Goodwin, “Why UKIP and the radical right matter for progressives,” Policy Network, April 10, 2014; available at

[12] Robert Ford and Matthew Goodwin, Revolt on the Right: Explaining Support for the Radical Right in Britain. London: Routledge, 2014, p. 270.  The full social profile of UKIP supporters is at pages 152-62.  Available at

[13] On this, see Edward Luce, “The tide is rising for America’s libertarians,” Financial Times, January 12, 2014: available at