Now, her answer was “build roads”, and as a line it works – it’s intended to help a TV audience think about problems of third world countries in a different way. Solutions don’t have to be purely political; lives can be changed through more earthy means. Roads mean access, which means supplies can be provided to struggling settlements and trade networks can develop over greater distances. The yields of infrastructure spending increase exponentially from a lower base; the upgrade from dirt tracks to tarmac roads is massively more worthwhile than an upgrade from conventional rail to high-speed rail, for example. And physical infrastructure as an aid project carries long-term benefits for the aid giver; to this day, a British passport will get you preferential treatment in Saudi Arabia, beyond that even accorded to US passports, because – yes – Britain built the roads. From one of the most intelligently-written shows in recent times, it’s a solid B+ answer.

A fair critique of the road-building plan would be that gains from infrastructure investment rely on other indicators. In a sense, the question is flawed – you can’t fix all of Africa with a single policy, because Africa is bigger and has more diverse problems than any other continent, and if there was a silver bullet even the singularly incompetent political classes of the baby boomer generation would have stumbled upon it eventually. Infrastructure development would work wonders in countries like Botswana, Ghana, Namibia or Mali, which are democratic, broadly stable, but underdeveloped and in need of greater access. It would even have possible benefits in countries like Liberia and Zambia, which, although very unstable, are steadily normalising and could use the positive economic impact to bed in positive change. However, improved roads would be meaningless in places like Sudan, Ethiopia, Somalia, the Ivory Coast or Nigeria – the countries that need development the most. On the one hand, production levels are simply not high enough that infrastructure development would add meaningfully to economic opportunity. On the other, any fresh outbreak of hostilities would shred the roads, or – worse yet – use them to spread conflicts further and deeper.

A better use of donor time and money would, sadly, be to go back to the slightly dry and tedious stuff of political institution-building. Before economic growth and access can truly begin, the constant cycle of instability, megalomania and bloodshed has to be stopped. An armed madman with an army and a significant chunk of the nation’s wealth will always trump any supply-side reforms that international donors can impose, and that is still too common an occurrence in a continent that has provided the ICC with 100% of its indictees.

The aim is not necessarily even to promote democracy, however, although of course more democracy would be delightful – the crucial factor is not mode of government, it’s rigour of governance. More important than jump-starting elections are the processes of implementing reliable judiciaries, building functioning civil services and ensuring that such national services as are provided – schools, policing, and medicine in particular – are run according to standardised norms. Ideally, that can be extended further – the commissioning of public works via PPP models, which has brought huge benefits to Central and Latin America, and the implementation of patent regimes and intellectual property laws.

Isn’t this all rather ephemeral? Can it really be more useful to implement patents than it is to build something as fundamental as a road, or as important as universal suffrage? Well, yes. History demonstrates that societies cohere when they have both something to protect and a viable means of protecting it. Both democracy and broad economic empowerment tend to be lagging indicators; the great powers of Europe all had functioning, largely independent judiciaries long before they had suffrage, unions, or widespread road networks. Meanwhile, the stark difference between resolute non-democracies such as Singapore and Zimbabwe can be explained by means of the application of the rule of law far more effectively than the reach of their respective road networks. Governance institutions, vulnerable as they are, are the building blocks upon which stable societies are built. Any attempt to move forward without them is a construction built on sand.

Francis Fukuyama is embarking on a project to examine the relationship between western aid efforts, their emphasis on democracy promotion and the actual effects that this can have on governance. At a time when Libya is engaged in building a democracy without any functioning institutions of governance to speak of, his findings may turn out to be important.

Insofar as hedge fund managers are just running a scam where one class of rich people rips off another class of rich people, I’m not sure there’s anything systematically problematic about this. But a large share of the money invested in hedge funds seems to come from foundation endowments and pension funds. That in turn makes me wonder to what extent some of the dysfunctional aspects of the financial system can be traced back to dysfunctional governance of those institutions.

Yglesias (and the Economist’s Buttonwood, who he quotes) correctly observe that hedge funds have grown by a dowdy 2.1% over the last decade and a half, despite a booming economy. Indeed it is true – hedge funds have, over the last decade, failed to justify their existence in many respects. But there is a divide between how hedge funds are perceived as an element of the financial system and how they’re used by massive passives – pension funds, endowments and so forth. Hedge funds are often referred to as being an absolute return strategy, and many think this means that they simply exist to make as much money as possible by any means necessary. But that is in fact very rarely the case.

Primarily, hedge funds exist as a hedge against negative performance in more traditional asset classes; thus the name. A pension fund with a properly diversified portfolio will have a hedge fund allocation, not as a workhorse, not to generate massive returns, but to take advantage of unexpected effects elsewhere in the market – sudden stock market rises and falls, geopolitical instability, or bubbles. In other words, a hedge fund doesn’t have to outperform treasury bonds over the long term to justify its existence in a portfolio – it simply has to massively outperform treasury bonds during those periods when bond yields are weak, and thus protect the overall value and yield of the portfolio as a whole.

Now, over the past three years hedge funds have largely failed to do that. In fact they have had a torrid recession, largely because they are pursuing highly correlated strategies (i.e. strategies that closely mirror economic indicators, and thus largely conform to broader economic trends) – a recent study showed that 80% of hedge funds were investing in Apple, which is fundamentally not what pension funds use them for. Which just goes to show: Yglesias may not know what hedge funds are for, but he can be forgiven for that, as many hedge fund managers appear not to either.

But “shock doctrine” is one of those phrases that just annoys me. It annoys me all the more because it comes from the left – a space which I nominally occupy – but yet is such a deeply incoherent piece of intellectual padding.

It was popularised by Naomi Klein in her 2007 The Shock Doctrine: The Rise of Disaster Capitalism, in which she argued that free-market capitalists and their political backers have used, and occasionally manufactured, crises and disasters in order to inflict social change on populations that are unwilling to accept them but unable to resist, due to the aforementioned upheaval. The term gained traction on the left after the Haiti quake, when the US right-wing Heritage Foundation caused an uproar by suggesting that aid be tied to economic reforms. Here’s Adam Ramsay again:

News stories about Haiti are full of tales of looters. There’s less talk of a bigger scale plunder to come. In Naomi Klein’s ‘The Shock Doctrine‘ she maps the rise of “disaster capitalism”. She describes how, over 40 years, The International Monetary Fund (IMF), Pentagon, and various mega-corporations have increasingly used (or created) disasters as an excuse to push through unpopular right wing economic policies, and asset strip vulnerable economies.

I was just finishing this book on Thursday as the scale of Haiti’s earthquake was becoming clear. My immediate fear was an obvious one. So I did what all young lefties do in a time of crisis. I set up a Facebook group: “No Shock Doctrine for Haiti”.

I plucked that quote a little bit selectively but it illustrates my first problem with the term and its use: shock doctrine is a methodology seeking application. Exponents of the theory tend to force this most fashionable of ideas onto situations rather than respond to the unique characteristics of an individual incidents. The book, for example, rests on the idea that the policies of free marketeers tend not to be very popular. For the most part this is unarguable – even Milton Friedman would concede as much – but in her zeal to apply her theory to every possible case Klein makes some dramatic reaches. Apparently, Hurricane Katrina led to the “privatisation” of New Orleans against the will of the population; however, the reforms imposed on New Orleans were structural and mostly welcomed by a population frustrated by lazy and corrupt local government. Haiti is another example of this; although tying catastrophe aid to any kind of condition would have been horrifically wrong, measures to curtail corruption and establish good governance in one of the world’s poorest countries would have enjoyed overwhelming local support. Klein’s depiction of the 1993 Russian constitutional crisis as a conflict between grasping capitalists and honourable democrats shows a profound lack of historical understanding, and her claim that the protests crushed in Tiananmen Square were against further market freedom is based on pure ignorance. And those are just the cases that stretch credibility; the claims that Margaret Thatcher fabricated the Falklands War as a way of breaking the unions shatters it irrevocably.

The second problem is to do with the way that the argument is cased. At one level, the problem is that the issue is mischaracterised as being a tool used purely by the right wing to advance their corporatist goals. In truth, the technique of using a crisis to drive policy reform is as popular on the left as it is on the right. The New Deal in America was launched on an unwilling society as a result of the Great Depression; the great social reforms in the UK of the late forties and early fifties, which led to the formation of the NHS, arose off the back of the post-war slump; Barack Obama used the current economic collapse to the same ends. Blair and Brown spent much of their respective times in office extending the powers of the state, evoking the spectre of terrorism and war as justification.

But this gap masks a deeper problem with the argument, which is the assumption that governments should not use crises as a way of driving social change. It’s predicated on a somewhat condescending lack of faith in populations; it assumes that electorates, struck numb by catastrophe, are unable to resist the snake-oil of perfidious political salesmen. In fact, crises inspire rare moments of national unity; often these moments arise because the crisis in question has exposed a policy failing or fault that simply needs to be corrected, and the correction of which is obvious. Thatcher had to break the power of the unions; whether she needed to do so quite so thoroughly is an open question, but most even on the left now assume that the unions were too powerful, and that to persist in allowing them to run entire industries was a path to economic and social ruin. New Zealand, Chile and Brazil abandoned socialistic policies for freer markets because the former weren’t working well and induced economic crises.

There is some limited value to some of the ideas contained within the term “shock doctrine”. Attaching conditions to Haiti aid, for example, would clearly have been grossly wrong, and those who suggested it were rightly excoriated. The term itself, however, masks deep intellectual failings that continue to undermine the legitimacy of left-wing economic arguments. There is plenty to debate in the new UK budget; the rise in VAT, for example, will be economically and politically unpopular for some time to come. Branding it as “shock doctrine” is ludicrous and shrill, and will neither advance the debate nor grow the left-wing base in opposition.

Naomi Klein, meanwhile, remains an extremely poor role model for the left, and in an ideal world would join Michael Moore on the island of left-wing intellectual rejects. Honestly, we can be much better than this.

I’m posting this, an article about an economist with some unusual ideas about poor world economic alleviation, relatively uncritically.

The central conceit of the article is the work of Paul Romer, a Senior Fellow at Stanford and successful software entrepreneur. Mr. Romer wants to build a series of what he calls “charter cities” – cities run by rich-world governments on land loaned to them by poor-world countries. The article invokes two models – Hong Kong under the British and Lübeck under Henry III of Saxony. If you think that the idea sounds wacky, then you’re not alone. It is a decidedly odd proposition, but for all that it inspires a certain sense of moral abhorrence, it’s an interesting thought experiment, and deserves to be examined for its merits.

His solution may be unconventional, but his diagnosis is complex and mostly rings true. Although an awful lot of poverty can be traced back to underlying causes – corruption, a lack of resources, an unskilled workforce, rich world privilege or weak distribution networks – one feature that is common to almost all poor societies is weak governance.

To drive home the importance of good rules to economic growth, Romer sometimes shows a photograph of Guinean teenagers doing their homework under streetlights. The line of hunched, concentrating figures presents a mystery, Romer says; from the photo it is clear that the teens are not dirt poor, and youths like these generally own cell phones. Yet they evidently have no electric light at home, or they would not be studying by the curbside. “So here is the puzzle,” Romer declares: Why do these kids have access to a cutting-edge technology like the cell phone, but not to a 100-year-old technology for generating electric light in the home? The answer, in a word, is rules. Because of misguided price controls in the teenagers’ country, the local electricity utility has no incentive to connect their houses to the power grid. Their society lacks the rules that make technological advance meaningful.

The Atlantic’s article is subject to the usual sloppy editorialism – the reason why many poor-world homes lack access to electricity cannot solely be reduced to rules, as it will also have roots in infrastructural weakness, high energy generation costs and old-fashioned sleaze. But Romer’s charter cities are more nuanced than that; not only are they intended to provide governance models that will have a pervasive effect throughout localities, they are also intended to act as mediums through which richer countries can funnel defensive stability, money and expertise into a populace.

So the idea has some merit, to the extent that it attacks some of the problems that it sets out to solve in a way that traditional aid does not. Frustratingly, the Atlantic’s article is a puff-piece, and makes very little attempt to examine the further problems that it potentially raises:

1. What country would willingly allow a project like this to take place on their land? Forget the problems implied by corruption – countries with poor governance tend to have poor governors, and western cities on the doorsteps of corrupt officials would cause unwanted scrutiny, provide a safe haven for anti-government sentiment and act as a drain on public purses intended for skimming. The colonial period demonstrated that local populations resent foreign dominance immensely. The anger and distrust that the example of Hong Kong engendered cannot be understated.
2. So if willing assent can be discounted, can it be assumed that charter cities will be imposed by force? Hong Kong was seized; Lübeck was rescued from anonymity and anarchy in the troubled times preceding the rise of the Hanseatic League. Neither example is entirely happy. Even in troubled times, Henry III’s presumption made him no friends, and his possessions were eventually taken from him. Fondness for Britain in her former colonies is in short supply. Furthermore, these were both isolated incidents. At a time when America has earned the ill will of much of the Middle East, it can be seen that no power in the modern world has the capacity to hold several such properties against the will of local populations.
3. The commitment for rich countries would be significant and long-term. This post assumes that the scheme would be undertaken as a philanthropic venture, and that the client cities would not be subject to rapacious profit-seeking – a long assumption at best, but the scheme is posited as philanthropic so that seems like the best basis upon which to judge it. Britain held Hong Kong for a hundred and fifty years and sunk huge amounts of its extensive resourced into it; by the time that Britain was a shrunken homunculus of a power. Would rich governments or populations be prepared to risk so much for such intangible rewards?
4. There is evidence that Hong Kong was exceptional, and reasons why it was exceptional have not been fully examined. Hong Kong was the only part of the British Empire to such achieve gains under the British. The rest of the Empire had mixed results. The benefits conferred upon India are debatable; developmentally it garnered advantages, but the economic gains were weak and confined to a ruling class, deepening and entrenching inequalities already in place thanks to the local caste system. Southern Africa was left with an even more extreme inequality in the form of apartheid. Egypt was left almost entirely undeveloped as its domination was purely strategic; Britain wanted control of Suez. British presence in Mesopotamia led to the formation of the state of Israel; good for Israel, but the local population received fringe benefits at best. The West Indies… so on, so on. Hong Kong was made rich for strategic reasons; it was Britain’s entrepôt and the economic capital of the region. The circumstances in which it existed were unusual.
5. Finally, there exists a problem with the fungibility of governance systems. A British system of patent, competition and bankruptcy laws, for example, may not be the most appropriate in all situations; some countries will respond, for reasons of existing legal traditions and social expectations, to a French of German system. However, this is a decision that will always be subject to political interference and historical influence.

So there are good reasons to discount the actual manifestation of the idea. But that shouldn’t be taken to undermine the perspective that it takes when considering the problems that traditional aid faces when addressing questions of global poverty. The idea exposes some real problems with the assumptions that we make when attempting to confront inequality and these problems deserve to be examined.

Full credit to Kevan for the link.

Europe’s leaders have wedged their heads firmly in the sand.

I think that’s wrong – I think that Europe has a very good idea of where this is going, but is trying to pretend that it doesn’t, so when it happens they can look as surprised as the rest of us.

Is the bailout itself good news? Undoubtedly. The shock-and-awe action, forcefully advocated against a resistant Europe by government economists from America, Japan and the UK, probably saved the Euro and prevented the trashing of the continental economy, as well as ensuring the domestic stability of Portugal, Ireland, Spain and Italy. There’s pretty much no question that strong action was required to prevent a global fiscal collapse, of the kind that would erase the precarious recovery that the world economy has enjoyed over the last six months.

The intent is not in question, then. But the manner is somewhat more dubious. The Freethinking Economist does a better job of explaining the perverse incentives that the bailout has created than I could – politics is my writ, economics is really just a hobby – but political questions about the process that underlies the action remain. To whit: why would the EU have pursued such a knuckleheaded approach when a better, simpler alternative was on the table?

Sadly, it seems to be a result of weak government, both of individual member states and of the EU apparatus of agreement by consensus. As Simon Johnson and Peter Boone give us a flavour of the problems that afflict the governance of the Euro in today’s FT:

Given the incentive problems in the eurozone, it is no wonder more nations want to join – the requirement is just to appear prudent for a few years. No wonder also that it blew up. Nations with profligate governments or weak financial systems have a bonanza; overall, this system encourages a “race to the bottom” – led by governments in smaller countries, which relax fiscal and credit standards to win re-election (or just to enjoy a boom). They borrowed funds from the (unnaturally) less profligate in the eurozone. The Germans were austere; the periphery enjoyed the boom.

The Germans were the only parties to the carve-up who had an interest in arguing for more a sensibly constructed bailout, but – not to put too fine a point on it – Angela Merkel botched it. She failed to prepare Germany for the necessity of a bailout, spinning from cool, popular disdain to agreement in a manner that bewildered and alienated her government and her country. She failed to articulate why the bailout was necessary for Germany and the Eurozone to support the Mediterranean’s failing economies. Many of Germany’s voters believed, and still believe, that clause 125 of the Lisbon Treaty – the one which mandates that there will be no bailouts for members who pursue reckless fiscal policy – was binding and should have been adhered to.

So Ms. Merkel has done the only politically expedient thing: joined the rest of her European collegues in pretending that the package’s obvious failings aren’t there. Germany has become a truly European state. Few are fooled; as Sunday’s result in North-Rhine Westphalia shows, Germany’s voters are inclined to punish their government for its prevarication, lack of leadership and deceit.

This bailout may have stopped the immediate contagion from spreading beyond Greece. But it has driven the longer-term rot deeper into the heart of the single currency, by reinforcing the system of perverse incentives and by undermining the will of Germany, the currency’s salward defender and balwark, to resist the excesses of its neighbours. More worrying is that Germany’s governing CDU is only one year into its term, and will likely not be replaced until 2013.

A bit of good news though: apparently UK manufacturing a booming, albeit from a low base. So that’s nice.

Finally, for those in the UK expecting a government to emerge soon, the chart below may prove instructive. Click for bigger.

I’m starting with the economy because, rightly or wrongly, for many it will be the defining issue of the campaign. Did you notice the hedge in that last sentence? I’ve argued against the economic alarmism of the times before, but it bears particular emphasis today. For the most part, the economy will be what it is. The capacity of the government of the day to affect economic performance is, yes, measurable, but by and large the economy will continue to perform in a manner dictated by forces beyond human control. For most of us, things are going to feel pretty bad for the first half of this decade regardless of who occupies Downing Street.

Nevertheless, we have to play the game, and the first point that needs to be made is that past performance is not necessarily an indicator of future performance. The Tories managed the economy very successfully – until they failed. Labour managed the economy quite successfully, too – until they failed too. The Lib Dems were widely seen to be failures in waiting, and are now reaping the benefits of unexpected success. So before we delve too deeply into this, it’s worth taking a moment to let go of existing sentiment – even if you, like me, are feeling the effects right now – and engage directly with what’s ahead.

The headline fiscal policies of the three main parties have largely converged, to the extent where heated arguments about whether and when to cut are more of a distracting sideshow than a real issue. In a way, this is a shame; it was easier to point our straightforward right and wrong when there was an appreciable difference. The concensus that has emerged, happily, is the right one: the deficit needs to be cut but not yet. Public sector spending needs to be counter-cyclical, and in these lean times a robust public sector is a necessity. The real debate will come with the good times; look, then, for the party that appears to be happiest to cut. In the meanwhile, the meat of choice is in the details.

Banking
Despite the often incendiary rhetoric coming from the three main parties, only one – the Liberal Democrats – has pledged root-and-branch reform of the financial services sector. The Lib Dems’ Treasury spokesman, Vince Cable, has called for the big banks to be broken up, and for those in state ownership to be forced to lend more to credit-hungry companies. This is probably the right thing to do, although doing so in a manner that avoids the impression of declaring war on finance is important. The straightforward truth is that London’s economy needs banks, and Britain’s economy needs London; and while clear failings existed in the regulatory status quo ante it will be important to resist the temptation to throw the baby out with the bathwater. Banking can be safe, profitable and positive – financial services have been at the heart of human civilisation since Darius – they just need to be run and overseen properly.

The Tory’s proposals are in many respects bolder than Labour’s; they want to abolish the FSA, shift supervision of banks and other financial institutions to what they see as the safer hands at the Bank of England, and create a consumer-protection agency. Labour’s rhetoric is spicy but their proposals are flaccid and statist. The Government would assume greater control, grant itself greater powers of regulation and oversight, and institute a broad array of mostly ineffective bodies to administer each other onanastically.

The Economist, in their pre-election feature, said that:

the differences come down broadly to this. Labour offers more of the same; the Conservatives would rearrange the deckchairs; the Lib Dems would shake up the system but haven’t really said how. It’s a choice, if not a great one.

I think that’s pretty much on the nose. In almost all respects, Labour are the clear loser here.

Manufacturing and business
Again, the opposition parties have a clear advantage in both style and substance. Labour’s proposals for the post-election recovery have been most heavily tax-led; the increase in National Insurance is unquestionably a mistake, compounding controversial proposals to extend its tax reach over foreign subsidiaries controlled by British-domiciled companies. Talk of capital flight (when businesses, put off by a hostile tax regime, move overseas) are overblown, although some companies have already moved away to friendlier climes. But Labour’s more positive, business-friendly ideas are also muddled. They rely over-heavily on tax-breaks and other subsidies, which distort the tax code and create complicated and unclear incentives. This is a threat that the Tories and Lib Dems recognise; although the Conservatives also have their fair share of tax breaks, they are proposing to directly cut corporation tax and have pledged to look at simplifying the tax code and associated regulations. The Lib Dems have made a point of targetting “complex reliefs”.

The Tories would be slightly kinder to small businesses than their competition. From the manifesto:

As well as stopping Labour’s jobs tax, for the first two years of a Conservative government any new business will pay no Employers National Insurance on the first ten employees it hires during its first year. To support small businesses further, we will:

• make small business rate relief automatic; and,

• aim to deliver 25 per cent of governmentresearch and procurement contracts through SME s by cutting the administrative costs of bidding.

We will support would-be entrepreneurs through a new programme – Work for Yourself – which will give unemployed people direct access to business mentors and substantial loans.

All of this is tinkering with the engine, however. The main inhibitor of business performance is the deficit and the government’s domination of the credit markets. Until that’s resolved none of the parties will be able to do much to attract business, although they can still do plenty to repel it. Advantage Tories, but don’t base your vote on it unless you’re a small-business owner.

Employment and Inequality
Britain is more unequal than it has ever been.

The blue line in the chart above is the Gini Coefficient, the standard unit used to measure inequality. The higher the line is, the more unequal Britain gets. Two trends stand out; firstly, over the thirteen years of New Labour, inequality has slightly risen despite the huge amount of time and effort put into reducing it. And secondly, the rise under Thatcher was unnervingly sharp.

I mention this not in spite of my earlier injunction to ignore prior performance, but because it’s important to understand where inequality comes from and what can be effectively done to combat it. Labour’s anti-rich policies have been Sisyphian; high-earners liberated by Thatcher’s market reforms have raced ahead, far outstripping the government’s capacity to hold them back. This can be a good thing, if properly managed; wealth is not something to be feared, and in a truly equal society the promise of weath can in erode inequality by promoting inter-generational social movement. But the flip side of the coin is that Labour’s anti-poverty measures have been equally ineffective, and that causes a real problem. Real poverty, especially amongst pensioners and children, has barely fallen since 1997 despite the best of intentions.

So if tackling inequality was so hard in the boom times, what hope is there during the lean? The two main weapons to use against inequality are employment and education – education will be the subject of a later post, but employment is very much of the now. Unemployment has risen on Labour’s watch but not my much – it’s still well below the OECD and EU averages, and Labour have promised to move further and more decisively to squeeze employment. They’ve promised credits to ensure that working is always more lucrative than benefits; advanced apprenticeships; a Future Jobs Fund for young people and a crackdown on benefit fraud.

All well and good. The Tories take a far less liberal line on this, with populist policies bound to go down well with the middle class but unlikely to do much to tackle the employment figures. Under the Tories, long-term benefit claimants who fail to find work will be required to ‘work for the dole’ on community work programmes. Anyone on Jobseeker’s Allowance who refuses to join the Work Programme will lose the right to claim out-of-work benefits until they do. Those who refuse to accept reasonable job offers could forfeit their benefits for up to three years. While there are some positive reinforcements on offer, on the whole the Tory employment package is devoted more to sticks than carrots.

When addressing broader questions of inequality, the three parties have a broader suite of offerings. All three parties will scrap compulsory retirement ages and raise state pension ages, although the Tories will do so fastest; these are clearly the right thing to do, however much it may dismay us on a personal level. The Lib Dems will raise the tax-free earning threshhold to £10,000, which will be of benefit to most; paid for by a levy on expensive houses, this is a purely redistributive measure and is the central strut of what is probably the boldest and most innovative on inequality in this election. All parties would broaden flexible working options; the Lib Dems would introduce name-blind job application forms to reduce sex and race discrimination in employment, initially companies with more than 100 employees. Labour plan to extend elderly care and a publicly-funded national Care Service would be created, although probably not under the next government.

The Tories have a history of not taking inequality seriously and show no signs of reversing that trend here. The main theme of their manifesto is self-determination – the “Big Society” soundbite is really a fetching way of telling people that it’s time to fend for themselves. While it will, again, resonate with middle Britain it’s a proposal that will not bear fruit in the long term. Inequality cannot be combated passively, and while many think that inequality is not a problem that affects them, the lack of economic access and educational opportunity for a significant subset of the population is a huge economic problem that could undermine recovery or prompt a future collapse. If central government has any function at all then it is to avert exactly this kind of indicator.

Labour’s proposals are worthy, but will be expensive. Their costings remain opaque and some policies (“over the next Parliament more than 8,000 new therapists will ensure access to occupational psychological therapy for all who need it”) are just a bit odd, leaving one to question whether they’re strictly speaking worth spending money on at all during a time of recession. Labour’s guarantee to ensure that working is more lucrative than the dole is excellent, although the proof of the pudding will be in the eating – will an extra £40 a week really be enough to get those who currently resist working into jobs? The work-shy are, after all, work-shy.

And the Lib Dems? Their proposals are really the most robust. Theirs the only suite to be fully costed – thanks to the mansion tax and the proposal to scrap Trident (of which more in the post on defence) they have money to throw at their proposals without having to increase the tax burden or cut other, equally essential services. The ironic thing about the Lib Dem position is that, despite being generally not regarded as a credible prospect for power, their proposals are far more plausible than those on offer elsewhere. On this issue they have a clear policy advantage.

Conclusion
There are areas in which the next government can make a big difference. At present, the economy isn’t really one of them – or at least, not directly. The long-term health of the British economy rests on other indicators – migration, education – and the big economic changes that could make a difference, such as radically simplifying the tax code, aren’t being discussed. On the basis that inequality is the one area in which improvements can be directly made, and on the grounds that they appear to be more robustly in favour of reforming the financial services industry, I’d tepidly endorse the Lib Dems on economic matters.

The coming election will be dominated by the economy. Anything else would be nonsensical; of all of the issues that face Britain today, the economic downturn is the one with the greatest capacity to cause long-term harm.

Such is the prevailing mood, anyway. But in truth, the pendulum of public debate may have swung too far into pessimism. The important thing to remember about economic crises is that, while the immediate pain of sharp inflation and redundancies that they cause is real, they do not intrinsically determine the overall fiscal health of a nation’s finances. While they can exacerbate, or be exacerbated by, underlying weaknesses, they can also be ameliorated by sensible policies. Quoth the Economist:

Britain has always paid its debts; investors don’t yet doubt the ability of a British government to get a fiscal grip after the election; and Britons tend to pay their taxes.

Despite the reverses of the past couple of years, the British economy retains important strengths, not least its openness to trade, capital flows and, more recently, migration. There is much talk of rebalancing the economy, of finding new sources of growth now that financial services and the housing market have taken a hit. Yet Britain’s economy is already surprisingly varied. It is still the world’s sixth-biggest manufacturer. The outlook for financial services may have darkened but London’s streets are no less thronged with lawyers, management consultants, accountants and ubiquitous marketing types. Cultural output is strong, with films and video games and edgy fashion pouring forth. Foreigners still want to buy British businesses—and Britain usually does well by it.

[...] The prospects for growth look reasonable. Britain’s record on improving productivity before the crunch was better than its neighbours’. Flexible labour markets have helped restrain wages, so unemployment has not risen nearly as much during the recession as was once feared. Although unions can still damage companies and disrupt public services, they are comparatively small and weak. And, whereas the weaker members of the euro zone are shackled to the stronger countries, Britain has been able to regain competitiveness by allowing its currency to fall. Growth will probably settle down at somewhere between 2% and 2.5%—well below its rate during the long boom, but not that bad historically.

Add to this a high level of informational integration – Britain has a higher level of home broadband and more wi-fi hotspots than any other country – and the advantage, at present, of not being in the Euro, and it seems that Britain has fundamental advantages that make it a strong candidate for a rebound after the election. A U-shape (when the economy goes down, stays down for a while, but then recovers to something like its previous shape) is still far more likely than an L (when the economy goes down and stays down, effectively continuing its normal pattern of growth from the new, lower base). Of course, it still needs to be underpinned by some hard, sensible choices by the incoming government. But the signs are good.

Let’s be clear: this is not the limit of the Conservatives’ ambition with respect to budget cuts. We may or may not get details of the rest of the squeeze this side of the general election – but you can bet there will be more to come.[...]

Labour says it’s too risky to cut while the economy is still weak – the Tories say that borrowing is too high to risk delay.

I’ve been surprised how willing the Conservatives have been to confront this argument head-on. [...]

The trouble, for the Tories, is that Labour have intuition on their side on this one. Most people assume, understandably, that lower public demand in the economy must mean slower growth overall.

The Tories are doing the sensible thing. Like most people in this country, they have realised that – scandal or catastrophe excepted – there is very little credible probability that they are going to lose the next election; they have been dominating the polls and the news cycles for too long for this to be anything other than a neatly-tied package. So they are making hay while the sun shines. They are in the enviable position of being able to run for election while not actually having to conceed anything to the electorate; and, when elected, they can claim a mandate for a cutting agenda.

They have a good lead; by resisting the urge to make it a landslide and instead fixating on preparing the ground for some of the unpopular changes they will need to make in government, they are showing a political maturity that is admirable. If only their policies were equally so…