The case for hard Brexit

For all the talk of Brexit meaning Brexit what has become abundantly clear over the past few months is that most politicians and political commentators haven't got a clue what Brexit means or should mean, and nowhere is this confusion more apparent than in the Labour Party. At the heart of this confusion is the single market. Time and again we hear politicians from both the Leave and Remain camps declaring that while we might leave the EU, we will still need to be part of some aspects of the single market. On this they are all completely wrong to the point of delusion.

The problem is not that they want to cherry-pick which parts of the single market they want to keep, and thereby appear to trying to have their cake and eat it. The problem is that (a) they clearly do not fully understand what "access to the single market" (as they term it) means or entails, and (b) they have still failed to realise that all aspects of the single market, not just the freedom of movement of people, represent an existential threat to the very concepts of nationhood, sovereignty and democracy in the UK and in the rest of Europe. As a result it is not just small parts of the single market architecture that we need to reject, like the free movement of people, it is ALL of it.

Today Theresa May finally seemed to get some of this. Speaking from the same venue, Lancaster House,  where Margaret Thatcher once extolled the virtues of the single market, the current prime minister finally admitted that Brexit is incompatible with single market membership. Of course the big irony in this whole debate is that the single market in its current incarnation is primarily a child of unbridled Thatcherism. It is economic neo-liberalism in its purest form. In which case one would think that the Labour Party should be the party above all others that opposites it tooth and claw while the Tories should be the most vociferous advocates. It's a strange old world. No wonder the public are confused.

As we are forever being told, the single market is constructed around four fundamental freedoms: the freedom of movement of goods, the freedom of movement of labour, the freedom of movement of capital, and the freedom of movement of services. This is my reasoning on why we need to reject all four of them.

The freedom of movement of goods

On the face of it this is the one aspect that everyone agrees that we should keep. After all we are all in favour of free trade aren't we? Well yes, maybe, up to a point (although in a future post I may proffer a more contentious view). But we can protect most free trade using World Trade Organisation (WTO) agreements, and as most global tariff barriers now average less than 2%, any further reductions will have diminishingly small economic gains. Unfortunately this aspect of the single market goes much further than just free trade. It also seeks to create a "level playing field" within the EU by prohibiting any form of state aid and outlawing any government action or policy that could be construed as having distorted the market. Now while this may appeal to the neoliberal free marketeers, it should fill anyone with a social conscience with profound horror.

This freedom, in concert with EU competition law, effective curtails many socially progressive state interventions, ranging from taxation policy (such as minimum pricing of alcohol) to industrial strategy such as support for key industries like steel or nuclear power. If we accept the freedom of movement of goods, then we will be compelled to accept the rest of EU competition law and thereby be prevented from running our own economy in a way that allows us to protect it against external shocks and predatory pricing from outside the EU. If we can't set minimum prices for socially damaging substances like alcohol, then we can't set minimum prices for anything else such as labour. So you can kiss goodbye to the national minimum wage. If we can't support key industries in a recession then you can kiss goodbye to Keynesian economics. In short you can kiss goodbye to any form of economic choice at the ballot box. That is one reason why support for social democratic parties has fallen across Europe. It has fallen because those parties can no longer offer the policies that they once could. Instead they are forced to offer a sanitised version of centre-left neo-liberal economic orthodoxy and so democracy effectively dies.

The freedom of movement of labour

The negative effects of this part of the single market have become obvious. More than any other it has led to mass migration across the continent and widening inequality in all member states. The result has been catastrophic depopulation in the east and high structural unemployment in the west. Yet it didn't need to be this way.

Before most of the eastern former communist states joined the EU they were granted interim status where they were able to trade freely with the EU but had no freedom of movement of people, much as many Brexiteers want for the UK now. The result was that firms inside the EU, including a number of major German car manufacturers, moved some of their production out of the EU and into these states attracted by the lower wages and supply of labour. The jobs moved to where the labour was. Then, when these states gained full membership of the EU it all changed. The jobs stopped moving east and the people were forced to move west instead. Why? Because it was cheaper and more profitable for the corporate sector for people to move to where the jobs were rather than the opposite happening. The result has been one of the greatest economic migrations Europe has seen since the Irish potato famine of the 1840s, and both have been driven by the same laissez-faire liberal economic free-trade ideology.

This highlights one of the key objections to the freedom of movement of labour: it transfers the economic cost of matching jobs to people from the firm to the worker. In effect the costs are socialised and the gains are privatised. There is nothing remotely socially progressive about that. In fact it smacks of moral hazard as was illustrated in extremis by the financial sector pre and post 2007 where the benefits of an unequal system are privatised and the costs socialised. The result for member governments is also potentially calamitous. Their potential liabilities in terms of future welfare and education payments will become unlimited due to immigration while their income could become squeezed by tax avoidance from an increasingly mobile upper-middle class. The result would be either economic insolvency at a national level or a collapse in public services, and before either of these happens we would see a rise in income inequality and unemployment as migrant workers drive down wage rates ever further.

Then there is the effect on tax revenues. Those that support freedom of movement claim it benefits the UK economy, that it leads to increased taxes and that immigrants make fewer demands on public services than the average UK citizen. What they fail to note is that many migrants are temporary and so are exempt from UK tax, and those that stay often send money back to their country of origin. According to the World Bank (pdf) this could be over $11.5bn. This has the double whammy effect of both reducing jobs and GDP per capita in the UK and worsening our current account deficit.

So freedom of movement of labour represents a complete volte-face in terms of economic rationale. It treats workers as little more than a commodity that exists to serve the economic machine rather than treating the economy as a system designed to optimise the happiness of the individual. When coupled with other measures that effectively remove any form of democratic choice for the individual, then it really is the stuff of a some nightmare dystopian future that has so far only really existed in the pages of a few sci-fi novels.

Even more worryingly given that most in the Labour Party appear to support it, it is not even remotely socialist. For a start you cannot have full employment if you have open borders because the faster you create jobs the more migrants will flood in. It is like trying to bail out a rowing boat with a hole in the bottom. And if social democracy is about anything it is about aiming for full employment. On top of that freedom of movement of labour increases inequality. It allows rich countries to strip poor countries of their best talent to the disadvantage of the least well of in both countries. So much for international solidarity.

The freedom of movement of capital

The ability to move capital freely between member states may at first glance seem relatively harmless, but actually it has had a major detrimental impact on the ability of states to balance their budgets. The recent controversy over Apple's tax dealings with Ireland illustrate how multinationals can exploit the freedom of movement of capital to avoid tax. And it is not just Apple. Google's Dutch double-Irish sandwich tax avoidance scheme also plays heavily on this freedom, not to mention that of GSK and many others.

It is of course not just corporate tax avoidance that benefits from the freedom of movement of capital. Tax avoidance by individuals does as well. In my last post I argued for the taxation of UK ex-pats, partly as a way of tackling tax avoidance by the rich. Yet as long as we are in the EU, and more importantly, obliged to respect the freedom of movement of capital such measures will be impossible. In short freedom of movement of capital is at the heart of most tax avoidance, and so as long as we cling to it we will be unable to tackle the scourge of tax avoidance and governments will find it ever harder to raise the taxes they need to fund the services we all want.

And then there is the issue of financial speculation. For years there have been calls for something akin to a Tobin tax to be levied on financial transactions in order to suppress both the size and the volatility of the financial markets in order to improve market stability. Yet such a tax, particularly if imposed on currency trades, would again violate the principle of the freedom of movement of capital.

The freedom of movement of services

Of all the four freedoms this is perhaps the most rarely used, overvalued and misunderstood. The principal argument in favour of it is that because the UK has a large service sector that accounts for up to 80% of its economy, and also because a large part of that is the financial sector that accounts for a large part of our invisible exports, then we desperately need to retain access to the single market in order to protect jobs in London and to generate wealth and taxes. At the heart of this freedom is the concept of the financial passport. This allows any financial institution to operate in any other EU member state once it has been given regulatory approval in another EU state. The problem is that this just doesn't work.

This financial passporting is the system that allowed unregulated Icelandic and Irish banks (among others) to operate within the UK before 2007 and then collapse. It also allowed UK banks to import much of the financial crisis in 2007 from the US and the Eurozone. Do we really want a repeat of that?

The fact is the freedom of movement of financial services is a red herring. After 2007 the City was complaining about excessive future EU regulation. Now it says it needs to be part of the EU. These two positions are contradictory. The reality is it is easy for a UK financial company to open an office inside to EU for regulatory reasons and the cost is negligible. Moreover the financial benefits of exported financial services are puny. Financial services may account for about 13% of the economy, but exported financial services are a mere fraction of that. It really isn't worth the hassle.

Summary

What I have shown is that none of the four freedoms of the single market brings any real benefit. The freedom of movement of services exposes our economy to high risk lending and other dubious financial practices. The freedom of movement of capital prevents governments taxing the rich and large corporations, and will ultimately lead to a collapse in national tax receipts. The freedom of movement of people leads to social disintegration and alienation, inequality and unemployment, and will ultimately lead to a collapse of national finances. The freedom of movement of goods leads to a loss of democratic choice and sovereignty.

What I think all this illustrates is how the EU has lost its direction and its soul. The EU could have been a force for social good. It could have protected workers rights while promoting equality across the continent through the redistribution of income and resources such as through a common industrial policy. Instead of exporting jobs to China and importing labour from Poland we should have been exporting jobs to Eastern Europe thereby re-industrialising the continent and not de-industrialising it.  The result would have been an EU that was richer and more equal. Instead it has become consumed by a neoliberal monster that ultimately has had the opposite effect. That monster is the single market.

The EU, and particularly the single market, has become little more than a protection racket. As we are now seeing as we try to leave, the EU not only bullies those countries that have chosen to join, like Greece, it also bullies those outside. The message it is sending out, even to non-members, is play by our rules or we will trash your economy. This is another reason why it must be stopped.

20 questions for the next Labour leader - part 2

Having just watched the Newsnight debate between the five contenders for the Labour leadership, I have to confess that I am still not much the wiser. With Jeremy Paxman seemingly more interested in trying to get the candidates to talk about the past (e.g. Iraq, Gordon Brown's leadership) than the future, there was precious little time for the candidates to outline future policy changes. Paxman's attempt to try and get Ed Balls to knife Alistair Darling over his last budget was particularly emblematic of much that is wrong with the way politics is conducted inside the Westminster/media bubble. Then Michael Crick had the audacity to claim that Ed Miliband had underperformed because he had "..failed to put forward the kind of visionary ideas..." that he had outlined at previous hustings. Well of course he failed, Michael, because he wasn't given the opportunity. In fact none of the candidates were.

In a previous blog I outlined five of the top twenty questions that I think need to be addressed in this leadership debate. Only the first of these (why you?) and the last (civil liberties) were really addressed in the Newsnight debate. The issues of housing, inequality and the candidates' own policy priorities were largely ignored. Yet the previous debate hosted by the Fabian Society seemed to be much more policy oriented. As a result it is slowly becoming apparent that there are some distinct differences between the various candidates, but we will only be able to fully appreciate what these are when we find out where each candidate stands on a range of different issues. Many of these critical issues will be in policy areas where the last government was found wanting, both by its supporters and by the electorate as a whole.

6) Clearly electoral reform is one such issue. The media think this is only of relevance to political anoraks, but it is becoming clear that it is central to issues of social justice and inclusion. It also impacts on the way political parties position and differentiate themselves and hence on amount of choice voters are given at elections. This was one of the key policies that was addressed at the Fabian meeting. It now appears that most of the candidates are signed up to electoral reform. Ed Balls is even in favour of a written constitution, which brings me on the the next point.

7) Constitutional reform.
One area where the last government lost trust was over its refusal to grant the people a referendum on the Lisbon Treaty. So would a future Labour government grant a referendum on all future EU treaties? This question is even more important given the role that such treaties appear to be playing in forcing the UK government to contract out public services and possibly privatise the Royal Mail.

8) Then there is the euro. Given the current problems in the eurozone it is imperative that we know under what circumstances (if any) each candidate would countenance the UK joining the euro. It is also important that we find out to what extent they each understand the potential economic consequences of doing so. One of the biggest economic consequences of joining the euro would be in the effect it had on the UK financial sector.

9) So would any of the candidates be prepared to reform the banking system to make it more competitive and reduce the risk of another financial collapse? Are they prepared to break up big banks? What other financial measures would they introduce? And how would they prevent the most disadvantaged in society being excluded from access to bank services as banks seek to increasingly make customer pay annual fees for bank accounts?

Of course it is not only our banking system that is prone to excessive executive pay and a disproportionate bonus culture. The same is true of much of British industry.

10) So how would each candidate improve shareholder democracy and Company Law in order to reduce corporate fraud, tax evasion and avoidance, and excessive executive pay and bonuses?

11) How would they regulate takeovers in order to maintain market competition, improve consumer choice and protect British businesses and jobs from unfair competition and commercial predators? There is no doubt that the takeover of Cadbury by Kraft cost Labour many thousands of votes, both around Birmingham and elsewhere.

12) Wealth and Mansion Taxes.
Which candidates would support a Mansion Tax of the type outlined by Vince Cable? Such a tax is far more redistributive than income tax and could generate up to £20bn, as I pointed out a few months ago. That is nearly ten times the amount that inheritance tax currently generates. It is also far more than is currently generated by stamp duty and CGT.

So, twelve down and eight more to go.

20 questions for the next Labour leader - part 1

Last week Sunder Katwala of the Fabian Society posed the question on the Next Left blog site, "What are the difficult questions the leadership candidates need to answer?". The biggest surprise about this question is that no-one has asked it sooner. Many in the Labour Party who were unhappy with Gordon Brown's leadership may well have acted against him long before the last General Election if there had been a credible alternative candidate waiting in the wings. Unfortunately, one of the reasons that there was no credible alternative (even though there were plenty of potential candidates) was that no-one really knew what any of the possible leadership contenders stood for. The problem now is, we still don't.

There is a common misconception in the media that Labour lost the last election merely because of a failure of presentation, both in its policies and in the personality of its leader. I disagree. I believe Labour lost because it ran out of policy ideas and therefore appeared to many to be a spent political force. After 2001 it had exhausted the stock of policies it had built up in opposition, and any policies it came up with subsequently it had to invent on the hoof while running the country. Unfortunately most of them ended up sounding as though they were made up on the hoof. They lacked coherence and intellectual rigour, and alienated our core support. In fact many of them just didn't work. On top of that there was a total failure to address the issues that affected Labour voters the most (jobs, housing) or angered them the most (bankers bonuses, immigration, the economy). That is why before the Labour Party can choose a new leader, the members need to know where the candidates stand on the issues that matter to them.

Unfortunately, so far in this leadership campaign all we have seen is more of the same. It has been the same bland candidates with the same vacant policy agendas. So far the campaign has been about who has the looks to take on Cameron, and who can amass the biggest army of sycophantic backbench supporters. That is why Sunder is right to ask his question. I have already offered Sunder my initial answer on what those questions should be, but here I will outline my definitive top 20, starting with my top five. The rest will come later.

1) The first question any potential leader should have to answer is the BIG one. It is this: "Why do you want to be leader? "
This is the question that Roger Mudd of CBS put to Ted Kennedy when he ran for US President in 1980. His failure to answer it effectively ended his presidential ambitions. For that reason alone, it is a question that deserves to be put to all leadership candidates. The events of the last ten years demonstrate that if a party is to avoid electoral stagnation, it needs to have a leader with a vision, not someone whose sole aim is to manage things a bit better, or is driven by his own hubris, vanity and lust for power and status. That is the underlying importance of this question.

2) The next question is one that I think follows on naturally from Q1. It is, what is YOUR big idea? What do you see as the fundamental structural problems in British society and what would you do to correct them?

Then we need to get into specifics regarding what a future leader would do if they became PM. If there are three issues that define the failure of the Blair/Brown years, then they are probably the housing crisis, the continuing rise in inequality, and the attack by the last government on civil liberties.

3) Housing
First we need to know if the candidates fully understand the role the housing bubble played in causing this current recession. Do they appreciate the effects that shortages of affordable housing have on distorting the labour market and reducing the mobility of labour? Do they recognise that inequalities in housing inevitably lead to inequalities in health, wealth and education? Do they understand that booming house prices lead to underinvestment in productive industry, and therefore to stagnating GDP and excessive private sector debt? Do they understand that housing booms always end in housing crashes, and that that always leads to recession, or worse? If so, we need to know how they plan to address these problems.
Would they support the building of more Council Houses, or social housing? And if so, how would they ensure that house building occurred in sufficient quantities? More importantly, how would they prevent future housing booms from occurring? I have already argued that control of house price inflation is essential to our future economic growth, and I have already outlined how such price stability could be achieved. If you don’t know the answer then I suggest you look here.

4) Inequality
Despite many noble initiatives, inequality in Britain grew (by some measures at least) under the 13 years of the last Labour government. If the Labour Party stands for anything, then it must be for the promotion of equality and fairness in all sectors of society. I doubt that anything in the last election campaign angered Labour voters as much as seeing David Cameron continually trying to present himself as the new champion of the poor and dispossessed. So any new Labour leader must outline how they would reduce inequality and make Britain a fairer country?

5) Civil Liberties
Despite incorporating the European convention on human rights into UK law, the last government's record on human rights and civil liberties was far from exemplary. Allegations of collusion in torture, extraordinary rendition, unlimited detention without charge and ID cards all made it look repressive and authoritarian. Worse still, it appeared more authoritarian and pro-establishment that the Tory Party. That is hardly a favourable position to be in for a party that claims to be the champion of the working man.
The question then for the leadership candidates (some of whom were associated with many of these illiberal policies) is this. Which should take priority under the law: the civil liberties of the individual, or the right of the state to maintain its own security? To claim (as many politicians do) that one must always try and balance civil liberties against the need for security seems to me akin to arguing that a country should always try to compromise between democracy and totalitarian rule. It can never be about balance or compromise. It is always about principles. It is about which of the two viewpoints should take priority, both in government policy, and under common law. It is also about the balance of power between the establishment and the people: the rulers and the ruled. That is why Labour should always be on the side of civil liberties, because it is about protecting the disadvantaged from abuse of power by the privileged.

These then are the first five questions I would put to the leadership candidates, but they are not the only ones. It remains to be seen, though, if we manage to get any satisfactory answers to any of them.

Nick Clegg and the Tories - deal or no deal?

So who should Nick Clegg and the Lib Dems do a deal with? And what should they seek to get in return?

Clearly their first priority must be electoral reform. This is clearly their best opportunity yet to secure a set of reforms that could completely change the dynamic of British politics. Unfortunately, there are a number of major obstacles standing in the way that could prevent them from achieving this.

The first problem is this. On issues of policy (tax, electoral reform, Europe, the economy) the Lib Dems are much closer to Labour than the Tories, and so are most Lib Dem activists. Unfortunately, the same cannot be said for most Lib Dem voters, particularly those in many of the seats in the South of England where the Lib Dems are the main opposition to the Tories. So while most Lib Dem party members and MPs would be much happier forming a coalition with the outgoing Labour government, they could face a backlash from some of their voters and the Tory press if they did. David Cameron may not have won the election last Thursday, but there is no doubt that Gordon Brown lost it. Therefore Nick Clegg would be committing electoral suicide if he was seen to be supporting a Prime Minister who had been rejected by the voters.

The alternative Lib Dem-Labour scenario is that a coalition between the two parties could be agreed, but with Gordon Brown stepping down as PM. But would Gordon Brown ever agree to that? I suspect not, but even if I'm wrong, who would replace him? No-one from within the Labour Party has the mandate, and a new leadership election would take too long. So how about if Nick Clegg were to be the new PM? That might be more popular with the electorate, but then the problem switches to the question of who would be his Chancellor of the Exchequer. The public would also want Vince Cable, but it is inconceivable that any coalition between the Lib Dems and Labour could be agreed with the Lib Dems holding both of the two top posts in Cabinet when they are by far the smaller party. And the alternative is that Gordon Brown might demand his old job back.

Finally there is the problem of stability. A Lib Dem-Labour coalition would still fail to command a majority in the House of Commons. It would need the additional support of the SDLP, the Greens, and either Plaid Cymru or the SNP or both in order to govern. Yet the greater the number of partners, the greater the risk of collapse. The question the Lib Dems should therefore be asking themselves is this. How long would such a coalition need to exist in order for it to deliver electoral reform in time for the next election? And how likely is it that it would happen? The doomsday scenario is that this coalition would collapse before any real reform could be enacted, and that at the ensuing general election the Tories went on to win decisively, with the Lib Dems routed. Electoral reform could then be off the political agenda for another generation.

So if a Lib Dem Labour coalition is fraught with difficulty and danger, how about a pact with the Tories? At first sight it is hard to see, though, how a pact between the Tories and the Lib Dems (whether in the form of a formal coalition or an informal one) could work given the massive differences in policy between the two parties and the mutual hostility of many of their respective MPs. Moreover, the Tories would never agree to electoral reform of the House of Commons. However there is one thing that the Tories could deliver that would be a total game changer - reform of the House of Lords.

David Cameron and the Tory Party claim to support a fully elected upper chamber, so now Nick Clegg needs to call their bluff. The outgoing Labour government has claimed that it was opposition from the existing Tory life peers and hereditary peers that blocked and delayed reform of the House of Lords in the final years of Gordon Brown's premiership. David Cameron on the other hand can deliver the necessary votes in the House of Lords needed to get reform through quickly. That should therefore be the price that Nick Clegg should demand for limited support of a minority Conservative government in the House of Commons. The critical factor here is speed. If reform of the House of Lords is not in place before the next general election, not just in legislation but in operation as well, it can always be repealed by a new (Tory) government in the House of Commons that may seek to break any promises and cancel any deals agreed previously. There is little honour in politics, particularly if it gets in the way of the exercising of unbridled power. However, once an elected House of Lords is up and running though, no House of Commons will be able to abolish it unilaterally. It would need a broad consent in The new House of Lords as well, and turkeys don't usually vote for Christmas. In short, once it is up and running, a directly elected House of Lords is here to stay. It is irreversible.

Now at first sight this might all seem like a small and insufficient concession for the Lib Dems to extract from the Tories given that most people see the House of Lords purely as a revising chamber. I believe, though, that reform of the House of Lords is the real key to total electoral reform in this country. It represents the small crack in the dam that will eventually bring down the whole structure. As the new House of Lords would be elected by PR, it would be more proportional, more democratic, and therefore more legitimate than the House of Commons. It could act as a block on extreme policies promoted by governments with Commons majorities but minority support from the electorate. In effect it would lead to coalition governments without the need to reform the voting procedure for the House of Commons, though that would surely follow. In short, it would totally change the rules of the game. That is why Clegg must seize the opportunity now. He may never get another chance.