BRITAIN AND THE PRICE OF INSTITUTIONALIZED FOLLY
As was explained in the previous article, the outcome of the British general election was eminently predictable. Yet the Prime Minister, her advisors, her colleagues and the “experts” – that is to say, supposedly the “finest minds” in government and politics – did fail to predict it.
They seem genuinely to have been gobsmacked by a result which any intelligent observer should have seen coming.
This debacle cannot be blamed entirely on Theresa May, tempting though that must be to those who share responsibility. To be sure, her plan to stay in office with the help of the DUP (the Ulster Unionists) does make her look detached from the real world. But the decision to call an unnecessary election was not taken by her alone. We can assume that ministers and advisors concurred with her assessment that triggering a vote would deliver a greatly increased majority. Professional analysts and commentators, collectively known as “the experts”, clearly thought so, too.
This, then, was an extreme case of shared folly. An impartial observer might well wonder whether these people are fit to run a whelk-stall.
Unfortunately, international capital markets may now be starting to wonder much the same thing.
We need to understand this collective loss of wits, and not just because the British public deserve better. There is every likelihood that political farce could, within months, turn into economic tragedy.
From crass to crisis?
The dangerous nature of the British predicament needs to be spelled out. The economy runs an entrenched (and worsening) current account deficit, which last year was £85bn, or 4.4% of GDP. This gap must be filled by matching inflows of capital. Debt and equity injections from abroad have ceased to be a choice, or a luxury. In effect, they have become a necessity, a subsidy and a lifeline.
Even before this fiasco, there were plenty of reasons why foreign investors might have considered pulling the plug. Those reasons can only have become more persuasive since Thursday’s vote.
This, it must be stressed, is not a purely academic argument, of interest only to economists. Stasis in the capital or “financial” account is not the norm. So, if the inflow of capital ceases, then in all probability it will turn into an outflow.
Accordingly, the biggest danger now is a “Sterling crisis”, with capital flight taking hold. If you think that a currency, or an investment, might collapse, your natural and logical response is to pull your money out before it happens. We can expect a lot of other adverse economic consequences but, short-term, a currency crisis has become the risk that dwarfs all others.
In this event, a slump in the pound could turn into self-fulfilling panic. If this were to happen, Sterling would tumble, inflation would spike, and interest rates would soar, something that a country with Britain’s amount of debt simply cannot afford. Property prices, which already look wobbly, could be expected to slump if rates rose, putting part, at least, of the banking system into jeopardy. The Sterling value of debt denominated in other currencies would escalate, quite possibly beyond levels of sustainability.
The reality, then, is that an economic crisis could threaten the United Kingdom within a very short time. Averting this requires policies, and it requires a government capable of implementing them.
The barest minimum required now is a demonstration to the markets that somebody competent is in charge. That “somebody”, pretty obviously, isn’t Theresa May. But neither is it the charismatic Boris Johnson, or the cool-headed Phillip Hammond, or anyone else within the collective failure-machine that the government high command has become. And neither, before anyone asks, is it Jeremy Corbyn.
What, then, is the mind-set that led to this mess? By far the likeliest answer is “institutionalized thinking”. This needs to be explained.
The collapse of the Soviet Union provides a textbook example of institutionalized thinking. To any objective observer, the failure of Soviet-style command economics was very obvious indeed, many years before 1989. Unfortunately, though, the USSR was not being run by objective observers. It was being run by men whose whole political lives had been lived within the confines of a collectivist orthodoxy. That the system might actually fail was not thought about, because it had become – quite literally – unthinkable to those within the institutionalized bubble.
This is not simply a case of people ‘believing what they want to believe’. It is more fundamental than that. It is group-think, within tramlines created by orthodoxy, and imposed by practice.
The same kind of institutionalized thinking which blind-sided the Soviet leadership seems to have taken over the British political elite. To these people, the very idea that millions might vote for Jeremy Corbyn was – again, literally – unthinkable. Within their institutionalized terms of reference, ideas such as nationalization, or imposing heavy taxes on the wealthiest, or reversing privatization, or challenging the tenets of what passes for market economics, were simply mad. Accordingly, therefore, only a lunatic fringe would vote for it.
When millions did precisely that, it must have seemed as though a chasm had opened up where solid ground had once existed. A phrase involving “rabbits” and “headlights” characterizes what seems to have been happening in Whitehall and Westminster since Thursday.
Though a shock, the ”Brexit” vote was not sufficient to shake this mindset because, within the elite, leaving the EU was not unthinkable. The majority of the high command did favour continued membership, but enough of its members supported “Brexit” to make the idea real and credible.
That the voters might also turn their backs on the long-established economic orthodoxy, however, was not something that the high command had ever considered.
Are there solutions?
If there is a historic parallel with what is now happening in Britain, that parallel is 1974. In that year, a second election was called, but it was hardly more conclusive than the first. A Labour government limped on, supported by Liberal votes in Parliament. Nothing much changed, because no-one was in a position to change anything.
By 1976, a lot of influential commentators around the world had reached the conclusion that Britain was probably finished. The ensuing second “Sterling crisis” (the first was 1967) was resolved only with a strings-attached bail-out from the IMF. The institutionalized governing mindset didn’t change, however, and was only rooted out by the new broom wielded by Margaret Thatcher in the aftermath of the 1978-79 “winter of discontent”.
This time around, a rescue by the IMF would be out of the question. Not only are the numbers at stake simply too big, but international capital flows are now vastly larger, and dramatically more rapid, than they were back then. If the markets decide that Britain and the pound are financially toxic, then that – as the saying goes – is that.
This, clearly, is case where prevention is not only better than cure but, is very probably, the only choice on the table. There is no room for complacency – a major economy really can lurch into chaos if things are handled badly enough, especially if serious structural weaknesses already exist.
So somebody needs to get a grip, and soon – but that isn’t going to happen from within the rarefied confines of the political bubble. Mrs Thatcher, and her guru Sir Keith Joseph, were outsiders in the 1970s, people whose ideas differed completely from those of the contemporary political establishment.
Something similar is needed now. Thinking as radical as Sir Keith’s is required, and it will need to be taken up by someone as resolute as Mrs Thatcher.
This is not to say, of course, that a return to Thatcherism is the answer. Very clearly, it isn’t. Neither do Mr Corbyn’s ideas offer a solution. In both instances, turning back the clock won’t work.
Somebody had better come up with something new – and quickly.
A new settlement?
The outlines of a new model aren’t hard to sketch. If Britain is going to stop short of Corbynite collectivism, it is clear that the economy needs to be run along market lines. Equally, though, the current version of the market economy is finished, for two very good reasons – it is failing economically, and it is being repudiated politically.
In all probability, what needs to emerge is a renewed commitment to a “mixed economy” model which takes the best from both the private and the public sectors. Political reality will demand greater redistribution, and an ending (and probably a reversal) of the privatization of public services. Somewhere along the line, fixes need to be found for a system which rewards speculation at the expense of innovation.
For this to happen, many cherished privileges will have to be sacrificed. If there is good news here, it is that the country could hardly become more bitterly divided than it already is – and that “Brexit” can give policymakers greatly enhanced breadth of options.