FT Articles about Political Economy

[Mark Barrett]

*Three FT articles on Debt, Constitution & Democracy*

http://www.ft.com/cms/s/0/e23c6d04-659d-11de-8e34-00144feabdc0.html
*1.  Debt is capitalism’s dirty little secret*
By Ben Funnell

Published: June 30 2009 19:14 | Last updated: June 30 2009 19:14

Just why is there so much debt in the Anglo-Saxon world? Bankers and
regulators know well that it is in nobody’s long-term interests to have
allowed borrowing to escalate to a position where the US now owes far more,
as a multiple of the economy, than at the start of the Great Depression.

The answer is capitalism’s dirty little secret: excessive lending was the
only way to maintain the living standards of the vast bulk of the population
at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates
the problem with lightly regulated free markets: the rich get much richer
while the rest do not get richer at all. According to Société Générale
economists, the inflation-adjusted income of the highest-paid fifth of US
earners has risen by 60 per cent since 1970, while it has fallen by more
than 10 per cent for the rest. As was recently pointed out in the New York
Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the
bottom third of the US population put together – about 100m people. These
are staggering statistics, confirmed by measures such as the US and UK’s
ever-rising Gini coefficients, which estimate income disparity. Another way
of putting this is that the share of profits in gross domestic product is at
a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of
plutocrats rather than the bulk of the population. So why has there been no
revolution? Because there was a solution: debt. If you couldn’t earn it, you
could borrow it. Cheap financing was made widely available. Financial
innovations such as the asset-backed securities market aided this process,
as did government-sponsored agencies such as Fannie Mae and Freddie Mac.
Regulators welcomed it all while perhaps taking insufficient account of the
moral hazard problem it posed: that ever-increasing leverage meant the
authorities had to keep interest rates low, otherwise the debt burden would
cripple consumption. This prompted more leverage, which exacerbated the
problem.

A walk in any low-income area in the UK confirms this. There are BMWs in the
driveways, satellite dishes on the roofs and furniture delivery vans on the
streets. In both Britain and America the jobless were encouraged to buy
their own homes. No one begrudges anyone else the right to own a home or buy
luxury goods. The problem is that the luxuries need to be paid for out of
earnings and the houses out of equity topped up with an affordable amount of
debt.

The question is whether the debt load – total US credit market debt
outstanding was $53,000bn (€38,000bn, £32,000bn) at the end of March, or 3.7
times GDP – is at all sustainable and, if not, how it can be lowered without
sinking the economy. Those pushing extra debt in an effort to boost the
economy via increased consumption point to the scale of assets backing the
debt. The net worth of US households, including their houses and after
counting debt, was $50,000bn in March, according to the Fed. Not a bad tally
for 306m people: $165,000 each. However, the cost of servicing this debt as
a proportion of income, even with record low rates, is at a 30-year high,
above 15 per cent, as incomes have stagnated and the total level of debt has
risen.

The debt burden has to come down, which means more saving and lower economic
growth for many years to come. Along the way inflation is likely to return,
probably sooner and more violently than most expect, which will prompt
investors to demand a higher return and make it even harder for governments
to tackle the debt. At best the debt will fall slowly over many cycles and
simply trim otherwise resilient growth. At worst it could cause growth to
lurch upwards before tumbling again, with all the attendant uncertainty that
entails. At this point, no one can know which is more likely. I incline to
the more benign view because of the size of household assets but, if the
dollar’s reserve currency status should come under serious attack, rates
would have to rise to defend it and that could itself cause a consumption
crisis.

What can be done? First, although it is not ideal, we should not be too
hasty about abandoning the capitalist model. It is less bad than any other
system yet invented. But we should redouble our efforts to increase
productivity through innovation and creating new markets; simply squeezing
lower-income workers is a bad option, which helped get us into this mess in
the first place. This requires investment in education and research. Second,
we have to learn to live within our means. This means spending less than we
earn, perhaps doing without the BMWs, flat-screen television sets and
leather sofas. Third, we should be careful in distributing the higher tax
burden that we will inevitably have to bear over the coming decade. Very
high marginal tax rates did not work in the 1970s and will not work now.
That said, income disparity at current levels is a political time-bomb that
needs to be dealt with. Finally, we should all come to terms with the fact
that these are structural issues needing structural solutions; they need to
be enforced over a longer time period than any one government’s term. So we
need a new political consensus, one aimed at reducing overall debt levels
while reducing inequality by encouraging education, entrepreneurship and
investment in innovation.

http://www.ft.com/cms/s/2/bef41692-640f-11de-a818-00144feabdc0.html
*2. A creaking edifice in need of repair*
The New British Constitution
By Vernon Bogdanor
Hart Publishing (£17.95)
Review by John Lloyd

Vernon Bogdanor’s lapidary book appears at a febrile constitutional time. As
he makes clear, we have a parliament which sees itself as sovereign, yet it
is viewed with contempt. It has been debased partly by the grubbiness and
occasional criminality of its members, and partly by news media which have
over the decades ratcheted up their own contempt for politicians and
politics. No history of this period can do other than see in the expenses
fiddles an all-too-human but still shocking effort at self-enrichment. Nor
should it ignore the part that powerful but analytically impoverished media
have played in manuring the ground to make it fertile for the vast crop of
scandal now being reaped.

The book’s purpose, implicit in the title, is to show why the formulas
beloved of Walter Bagehot and A.V. Dicey, 19th-century celebrators of the
constitution, no longer hold. Dicey wrote in 1886 that, “under all the
formality, the antiquarianism, the shams of the British Constitution, there
lies latent an element of power which has been the true course of its life
and growth ... the secret source of strength is the absolute omnipotence,
the sovereignty of parliament”. These shams, coupled with that omnipotence,
depended on a series of conventions – the capstone of which is the need for
the Queen’s assent to legislation – which are now at hazard. They include
the Lords’ self-policed subordination to the elected Commons, the
inviolability of the Speaker and the absolute power of Westminster over all
subordinate elected bodies.

So we are constitutionally unsettled. Dicey’s “secret source of strength” is
neither secret – a harsh light shines on parliamentarians’ affairs – nor is
it strong. Bogdanor’s theme is that New Labour’s largest project, inchoate
and even accidental as it often was, has been constitutional change; and the
change has been “something unique in the democratic world. We have been
transforming an uncodified constitution into a codified one, but in a
piecemeal and ad hoc way”. By chance we have been getting a constitution.

What are the elements of this constitution that have sneaked up on us? They
include the Human Rights Act; the European Union; the devolved assemblies of
Northern Ireland, Scotland and Wales; and less obviously the frequent
recourse to referendums, the greater activism of a House of Lords shorn of
most of its unelected members, and the election of city mayors, especially
in London. The Human Rights Act has greatly increased the power of judges;
the EU treaty has put another legislature above Westminster. Parliament, de
facto, has abdicated its authority.

Bogdanor has two dates in mind for the destruction of the Dicey-Bagehot
world. The first is 1968, when the Marx-Lenin-Marcuse-Fanon-Leary-inspired
protest movement aimed to “bring the people more fully within the pale of
the constitution” (I have my doubts).

The second is the general election of February 1974, when a hung parliament
produced a Labour minority government and a surge in strength of the
marginal parties – the Liberals and the Nationalists. Events after these –
the need to pacify Northern Ireland, to defuse Scots and Welsh nationalism
and to cope with the demands of EU legislation – grew larger and larger in
the public agenda, and prompted the constitutional activism of New Labour.

With a quasi-constitution in a quasi-federal state, should we not move to
write the constitution down so that, as Bogdanor argues, we at least know
what it is? It will not, of course, solve all problems: Italy has a
beautiful social democratic constitution and now has an ugly centre-right
government; the US’s exemplary founding document fluttered over the
enslavement of black Americans and the massacre of the native Americans.
Though one can now – and Bogdanor does – get some fun out of the boosters of
the British political genius, it was better than most of what was globally
available.

And it still isn’t bad, relatively. But Dicey’s “shams” no longer cut it.
There is no logic in proposing greater or lesser constitutional change to
deal with expense fiddles. Yet the fact that the political class has reached
for such change reflects more than opportunism (though it does that too). It
points up that the edifice is not just creaking: it is screaming for repair.


This book is written with a vigorous clarity, with easy expertise and with
quiet wit. Bogdanor is himself a part of the constitution, an unacknowledged
legislator: the book is a revel-ation. More, it is a reproach to journalism,
that we have not more clearly explained a great shift of the past decade. He
has.
* *
*3. Politicians must listen, learn and level with citizens*
By John Lloyd
http://www.ft.com/cms/s/0/ef1229fa-67fb-11de-848a-00144feabdc0.html

World leaders, the FT reported last week, “seize on stories about MPs’
bloated expenses claims as evidence of moral decay in the UK”. They should
think twice before rejoicing over those for whom the bell tolls: for it
tolls for them, too, if in a different way.

That democracy is in trouble – in some versions terminal trouble – is now
the commonest of ideas among political scientists, coupled with a regret
that their warnings have not been attended to. In one of the first scholarly
articles to tackle the expenses scandal, for the next issue of Political
Quarterly, the political scientist Alexandra Kelso says that “the House of
Commons and its MPs have unequivocally failed to tell the public about who
they are, what they do and how they do it, in spite of much good advice from
many quarters”.

When Gerry Stoker, who runs the Centre for Citizenship and Democracy at the
University of Southampton, is asked his view of the British expenses
scandal, he chuckles, and says: “Scholars are amused by the chaotic
response, as MPs dust off pet constitutional schemes to address an expenses
problem. And frustrated: there are profound problems of trust in the system,
well known in the academic world and not taken seriously in the political
one.”

When Colin Crouch, who runs the governance and public management group at
Warwick University Business School, wrote the book Post-Democracy in 2004 he
argued that politics was “increasingly slipping back into the control of
privileged elites, in the manner characteristic of pre-democratic times” and
“the consumer has triumphed over the citizen”. When John Keane, who runs the
Centre for the Study of Democracy at Westminster university, published The
Life and Death of Democracy last month, he wrote that since the turn of the
millennium there has been a “sense that official politics were irrelevant,
or at least they poorly represented the interests of the citizens”.

These are men grown grey in the study of politics, and their studies
forecast breakdown, alienation, mistrust, disappointment. Some, like Peter
Mair, chairman of the politics and social sciences department at the
European University Institute in Florence, have seen in the withdrawal of
citizens in most western states from parties, political engagement and even
voting, a sign that the system is all but irreparable. In Italy, political
scientists have a near consensus that Silvio Berlusconi, prime minister, has
developed a media-based populism that increasingly substitutes itself for
parliamentary democracy. The dean of Italian political scientists, Giovanni
Sartori, said in a recent interview: “One of the characteristics of a
dictatorship is a monopoly of the media. He [Berlusconi] has nearly a
monopoly, and what does that do to democracy? It destroys it. You have it as
an empty shell.”

Something of the same charge is levelled against Nicolas Sarkozy, the
president of France. The Dartmouth College scholar of France, Lawrence
Kritzman, writing in Le Monde, complained after the 2007 French presidential
election that “there are no more great speeches or debates about the nature
of democracy; this is a showbiz election, where ideas matter less than
posturing for advertisers”. The charge, that contemporary politicians groom
themselves only for the media, is a familiar one in academia.

The criticism from scholars is that politicians do not give the public the
governance they want. Somewhat contradictorily, they also charge that
politicians do not provide what the public needs – even when people do not
want what is needed. Experts increasingly believe that even the best of
politicians cannot match the world’s challenges, because interest groups and
popular attachment to high consumption will defeat them. The climate expert
James Hansen, director of Nasa’s Goddard Institute for Space Studies, views
the climate measures announced by US President Barack Obama as grossly
inadequate – saying, in a recent interview in The New Yorker: “As long as we
let politicians and the people who are supporting them continue to set the
rules ... then it is unrealistic [to expect the action needed on climate
change].” They are also seen as unable to confront the financial crisis; the
once-popular California governor, Arnold Schwarzenegger, has quailed before
a $24bn ($17bn, £15bn) budget deficit, unable to get a plan of cuts and tax
rises agreed by his legislature because of its – and the public’s –
attachment to expensive state programmes.

Earlier this year, Margit van Wessel, the Dutch political scientist, decided
to test a small sample of her country’s voters, to find out what they
thought of parliamentary democracy. Many saw parliamentarians as
self-interested, prone to compromise, unable to connect with citizens’
concerns, immured in their own world. The voters, she writes in a
forthcoming paper, find too few “norms of directness” in their politicians’
rhetoric. She told me: “The decline of parliament matters – because there is
no obvious alternative.”

There are potential grounds for optimism. Wolfgang Merkel, who directs the
Berlin Science Centre for Democracy, concedes that the shrinking of
political parties is alarming, but says that, with voting figures in the mid
to high seventies, German democracy remains well supported, “and there is no
way the vote will be less than 75 per cent in the autumn elections.” Both Ms
van Wessel and Ms Kelso temper their strictures with a belief that
representative democracy is irreplaceable, and can be regenerated.

The scholars claim they know citizens’ minds better than the politicians who
depend on those same voters. Their advice is: listen to, learn from and
level with these citizens if you want to stay in power – and for
parliamentary government to continue.
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