Please make it stop!!!

Young children do this really irritating thing.  You are sitting having a coffee with your friend, and the toddlers insist on tugging at your sleeve until you look at the drawing they have just done.  Even though the alleged drawing is little more than random crayoning, you feel obliged to pat them on the head and blatantly lie to them… “Yes dear, it’s very good.”  (At the same time making a mental note that a career in the arts is probably a non-starter).

For about six months last year, it became apparent that modern politics is exactly the same.  Every morning one or other political nonentity would pop up to demand that you look at the latest policy announcement that they had hurriedly crayoned in the night before.  And the more they did it, the more irritated the rest of us got.  Being polite, we offered platitudes like “oh, that sounds very good” when what we should have said was “take your policy announcement and shove it where the sun don’t shine – I’m busy.”

The problem was not that politicians were making announcements (although it would have been nice if these could have been limited to the 6 weeks leading up to the election rather than the tedious 6 months that we were actually subjected to).  Rather it was that the announcements were no more informative than the crayoned scrawls that the average three-year-old might come up with.  What they amounted to was a diet of ill-informed fear mongering… “Don’t vote for them because they are secretly planning to murder every firstborn child in the land” or some such.

It seems a long time since politicians simply told us what they think needs doing, and what they propose doing about it.

It has begun again.  We can look forward to four tedious months of people we have never heard of, together with those we wish we had never heard of, telling us about how the world will be sucked into a black hole if we are foolish enough to take their opponents’ advice.  And the crayon drawings that we are being shown aren’t even as good as the ones three year old Tarquin and Chardonnay produce on a wet Saturday morning.

The problem is – and whatever your views on Europe, I think we can agree on this – as Yogi Bear once pointed out, “making predictions is really difficult; especially about the future.”  Remember that most of the people who are telling you which way you should vote in the EU referendum are the same people who were telling you to put your life savings into Icelandic banks or Spanish property back in 2007.  They are the same people who told you that there was nothing wrong with Northern Rock or Lehman Brothers.  They are the same people who told you that there was nothing wrong with the economy in 2008.  Now they are telling you that if you vote the wrong way, the UK economy will collapse into perpetual ruin and your democratic rights will be replaced with some form of neo-feudalism.

My point?  You are better off asking Mystic Meg which way you should vote than listening to any of these self-appointed fear-mongers.  Maybe we could just settle the whole thing using that Octopus they used for predicting the outcome of the football World Cup.

What MPs forgot to say about Kids Company

Buy it on Amazon

Clearly something went tragically wrong with Kids Company.  But while the MPs on the Public Administration and Constitutional Affairs Committee have focused on the alleged culpability of the Trustees, the colourful character of the CEO, and the failure of regulation, it is the unchallenged assumptions about charity itself that are the most worrying.

As a society we have faced both ways over charity, sometimes seeing it as at best a necessary evil (to be replaced by state services as soon as possible) sometimes seeing it as a unifying  ("Big Society") force capable of bringing communities and nations together. We have gladly donated time and money to a plethora of good causes while recoiling in horror when we discover that bodies like Universities and Public (i.e. private) Schools are afforded charitable status for tax purposes.  We often refuse to donate money for "admin", then complain when charities are poorly managed.  And all the while, governments of all stripes insist on broadening the definition of charity beyond the point where the word has any sensible meaning.

Today the charitable sector is deformed and distorted; divided between the handful of super charities that pocket four-fifths of the sector’s annual pot of £69.5bn, and more than 300,000 small charities and community groups struggle for the crumbs. 

The sad truth is that the largest charities – including many household names – have morphed into Frankenstein’s Monsters comprised of the putrid limbs and organs of the least savoury practices of private and public sector organisations.  Like the worst private corporations, they have sought to maximise their income and drive up the salaries of CEOs and senior managers irrespective of the damage done to their reputations and their beneficiaries.  Meanwhile, by using their status to avoid the regulation and inspection regimes that provide a safeguard to vulnerable users of public services, they leave their users/clients at terrible risk of abuse and harm.  More often pursuing the private interests of senior employees, and often bending to the whims of their most generous donors, only the flimsy fig leaf of the “voluntarism” of their trustees hides the sordid truth that many have long since ceased to be a force for social good.

Although Kids Company received more than £42 million in public funds between 1996 and 2015, it was actually small by super charity standards.  And, paradoxically, those aspects of its behaviour that the MPs were most critical of were those that marked it out as different to the rest.  Kids Company was actually a growing charity that had the gall to continue behaving in the same way as the majority of small charities and community groups do.  That is, they put serving their beneficiaries ahead of concerns about where the money was coming from. Like most groups, they were driven by a powerful personality.  But without such people few charities would ever get off the ground.  Ask anyone who has ever run a small charity and they will tell you that they have two full time roles – one providing their service, the other raising the money to keep it afloat.  And this never ends... so only someone with drive and passion would every do it.  

Despite the MPs’ claim that Kids Company should have built up a large reserve, the sad truth is that most of the money charities raise is targeted at delivering their services. Few donors want to underwrite management and administration, and most refuse to fund groups that have large savings and investments (i.e. “reserves”).  The truth is that the vast majority of charities in the UK live hand to mouth, most often depending on the income from a round of coffee mornings, summer fetes and car boot sales.  A few enjoy support from grant-making trusts and private companies.  A tiny (and shrinking) fraction also gets support from the state.  But only the very largest charities – those big enough to act as, in effect, tax-exempt private sector businesses – get to build up the kind of reserves that MPs seem to think all charities should have.

Nor is there a large pool of skilled and experienced managers desperately seeking to become trustees.  On the contrary, most charities and community groups have to cajole (to some extent at least) the friends and relatives of the founder(s) into becoming trustees.  Hopefully these “trustees” will attend the training courses offered by local voluntary sector councils, or at the very least will read the Charity Commission guidance on being an effective trustee.  However, in practice, most trustees simply lack the time; preferring to rely on the founder(s) to keep their group on track.

The Charity Commission – always lacking resources and often lacking competence too – simply does not regulate the overwhelming majority of charities and community groups.  Indeed, the entirely voluntary majority – those with annual incomes below £5000 – are not even required to register.  Most of the rest – those with incomes below £25,000 – are not required to post accounts.  And those with incomes between £25,000 and £500,000 need only submit to “independent scrutiny” – which often means simply checking that the income and expenditure in the accounts matches the amounts in the charity’s bank statement (it is perhaps no surprise that most fraud and malpractice occurs among this group of charities).  In truth, it is only the honesty and altruism of the overwhelming majority of people who give their time to charity that prevents the sector collapsing into anarchy.  Nevertheless, honest malpractice – in which volunteers are simply unaware of their roles and responsibilities – is widespread. 

Were the majority of charities to be subjected to the same degree of scrutiny as Kids Company has been, it is likely that, albeit on a smaller scale, the same issues would arise.  Had (like Kids Company) any of the 300,000 or so small charities and community groups enjoyed the drive and skills of such a focussed founder, they too might just as easily have attracted the same kind of high-profile and connected trustees.  They too might just as easily have infiltrated the political sphere to the extent that Ministers felt obliged to support them.  But they would also bring with them all of the honest poor practice that is rife within the sector.  And the more institutionalised that poor practice became, the harder it would be to alter it; especially if (until now) the charity had always been able to find the money to cover its operating losses – something, incidentally, that the “too big to fail” banks and many giant corporations live by.

In practice, it is incredibly difficult for a charity to make the transition from a being a small voluntary body into a large regional or even national organisation.  Yet this was not given consideration by the MPs on the Public Administration and Constitutional Affairs Committee who unconsciously accepted the belief that charity can be scaled up.  That is, that an entirely voluntary organisation operating within a single community can develop into a multi-million pound national organisation while still practicing “charity”.   But the sad truth is that it is impossible to do charity at scale.  And the answer is not to be found in more professionalism; better regulation, improved (through payment) management, and being more “business like”.  Rather, the solution is in acknowledging the fact that when charities grow too big, they morph into something else.  They become quasi-public services, almost entirely dependent upon government grants to continue to exist, or they become de facto businesses dependent upon trading – especially through winning public service contracts – to stay afloat.  Only a handful can survive solely on private donations and legacies.

Given the extent of public sector cutbacks, calls for additional regulation are not going to work.  Being more “business like” is only going to further undermine public trust.  And given growing public dissatisfaction, allowing trustees to be paid in order to attract people with appropriate skills and experience (but without passion and commitment) is likely to be the last straw.  So here is a cost-neutral alternative:

1. Bring back Quangos!  If a charity depends on the state to stay afloat, it should convert to a quango whose paid council of management is put in place by the Public Appointments Committee, and whose Chair and CEO are appointed by the appropriate Minister.  Only in this way can we guarantee a reasonable degree of public accountability for public spending.
2. Convert organisations that depend upon trading – including delivering public services – into social enterprises regulated by Companies House, and subject to the same tax arrangements as any other private trading body.
3. Redefine “charity” so that charitable status is only available to entirely voluntary bodies that do not depend on trading or government largesse for their continued existence.

None of this will be done of course. 

The small number of super-charities and their umbrella bodies are too powerful a lobby, and the paid employees too vociferous.  Meanwhile, the overwhelming majority of charities and community groups are too busy delivering services and worrying about where the next donation is coming from to spend time lobbying MPs and Ministers about how best to regulate charities. 

Nor will Ministers want to give up the huge indirect influence over charities that comes from writing them large quarterly cheques; especially if the alternative is to be held directly responsible for the behaviour of newly created quangos. 

What will actually happen is that the Charity Commission will tighten its rules despite being unable to enforce the rules that already exist.  Accountancy standards will be tightened but little will actually change, because accountants are paid by the organisations they audit.  Management and fundraising standards will be tightened, but this will more often result in volunteer trustees resigning rather than in improvements in management... Then there will be another round of scandals which, in turn, will lead to the payment of the trustees of the biggest “charities”.  At the same time, what remains of the 300,000 or so small charities and community groups that give charity its legitimacy will continue to wither and die as the super charities hoover up what money is still available to the sector.  Then, finally, when the public wakes up to the fact that “charities” no longer practice “charity”, private donations will dry up and we will be left with quangos and trading companies in all but name.

Tim Watkins' book What's Wrong With Charity? is available on Amazon or from most bookshops.

We should welcome Lynton Crosby's knighthood

The honours system was ever thus.  Originally devised by absolute monarchs as a means of providing for their bastard progeny, and perhaps as compensation for the cuckolded husbands of the passing occupants of the royal bed, peerages have always been a reward for service to the ruling elite.  Knighthoods, too, have generally been bestowed upon those whose activities have served and bolstered the privilege of the ruling elite.

In the years after the Second World War, the façade of democracy was built up through the use of the lower honours – the MBEs, OBEs and BEMs – to reward charity volunteers, lollypop men and dinner ladies, and the host of entertainers and sportspeople who engage in the essential work of distracting the masses from the injustice of the British class system.  Even so, for the most part, the honours system provided rewards for service to the ruling elite.  This has always been most obvious in the honours conferred upon the luminaries of the (centre) left.  Over the years we have witnessed a steady stream of “moderate” trades union leaders famous primarily for shafting their own members, elevated to the peerage or knighted be the monarch of the day.

As with so much of British life, Blair’s New Labour government was responsible for messing things up.  In opposition, New Labour had used a growing voluntary (sic) sector as an alternative civil service; developing many of the policies that the incoming government eventually enacted.  As a reward, New Labour opened up the honours system to people employed in the voluntary sector, together with the special advisors and senior civil servants charged with enacting New Labour’s programme.

The public were involved to the extent that we were all invited to nominate people who had provided public service.  These nominees would be vetted by a new Honours Committee, which would forward their recommended recipients to the Prime Minister.

These Blairite changes served to confuse the public into believing that the honours system was no longer about privilege and class.  However, even under Blair, the charity fundraisers and lollypop men only got the lesser honours.  Peerages and knighthoods continued to be the preserve of the brown-nosers and lackeys of the ruling elite.

This is why we should welcome Lynton Crosby’s knighthood.  It is an honour in keeping with the historical tradition of the honours system.  It is a reward for (cynical and socially divisive) service to the ruling elite.  It highlights exactly what the system is about.  It helps us tear aside the curtain of celebrities and community workers to see the real class divisions of our increasingly inequitable and divided society.

We should recognise that you cannot have a democratic honours system when you do not live in a democracy.  Nor can you expect a grossly inequitable society to produce anything other than a class-ridden system of rewards to those who serve it.

Like statues in public places, knighthoods and peerages are generally a reward for crapping from on high onto the heads of ordinary people.  And like statues in public places, the best we can say is that the pigeons have it about right!

Can we find a better way of naming these storms?

The key benefit of naming storms would seem to be to provide a reference point where regions experience one catastrophe after another.  We can no longer speak of the “Carlisle floods”, since there have been many.  Nor, now, can we simply refer to them by year – there may have been just one in 2007, 2009 and 2012.  But we may well see three in 2015, and several more in January and February of 2016.  So at least by naming the storms responsible for each episode, we have a point of reference for each one.

The trouble is that in true British fashion, the Met Office has opted for the most banal and uncontroversial names they could find.  Yes, I know that the public were invited to send names in.  But it will have been the Met Office PR department that chose the names that were finally allocated.  So what we have ended up with are a series of storms named after everyone’s favourite uncles and aunts – Desmond, Eve and Frank being the most recent.

These soft, cuddly names appear to directly contradict the chaos and damage caused by the storms themselves.  And I cannot believe that the British public lacked the creativity to capture this.  We can be sure, for example, that someone at the Home Office (or perhaps UKIP HQ) will have attempted to link weather to terror by suggesting names like “Atlantic Storm Osama” in an attempt to imply the potential for death, destruction and disruption.  Far more of us will have undoubtedly suggested naming storms after our favourite villains – “Storm Voldemort” or “Deluge Davros”, perhaps – in an attempt to convey the seriousness of these weather events.

There may be copyright issues that prevent the use of fictional bad guys for naming storms.  And there is a deeper reason for not doing so.  The storms that are currently devastating large tracts of Northern England are not a manifestation of evil impacting us from outside.  They are events entirely of our own making.  These storms are a manifestation of climate change – so-called 1 in 100 year events that have been occurring every couple of weeks (and breaking records each time) cannot be viewed as anything but.  We were warned decades ago that global warming would disrupt the jet stream, push more water vapour into the atmosphere, and produce more violent storms – exactly like the weather events we have witnessed for the best part of ten years now – if it walks like, quacks like, and looks like a bird of the genus Anas, it probably is.

However, blaming climate change is a cop out, since the destruction wrought upon the people of Cumbria, Lancashire and Yorkshire (and several less publicised areas of Scotland and Wales) is more a consequence of human action (and inaction) in response to the threat of climate change than to the new climate conditions.  Perhaps least obviously, the abject failure of government land and housing policy has meant that most new housing in the last thirty years has been built on flood plains with the inevitable consequence that further investment in flood defences has been needed.  But, of course, for thirty years, governments have failed to invest in appropriate defences that take climate change into account – there is no point building defences just a few inches higher than the last flood when scientists are warning us of a need to build our defences several metres higher – anything less is just pouring good money after bad.  Not that the current government has been pouring money into flood defences.  Rather, for the past five years they have deliberately cut back on funding for flood defences – a false economy that may well cost the treasury another £1.5 billion (which will presumably be clawed back through cuts to benefits and social care).

Agricultural policy has also played a part in the deluge.  A deliberate policy of cutting down the trees and burning the peat bogs in the upland river catchment areas has dramatically lowered their capacity for storing water upstream.  The result is that when storms like Desmond, Eve and Frank deposit (what we used to think of as) a month’s worth of rain in a single night onto our hillsides, almost all of that water runs directly into the streams that run into the rivers.  Rivers that government policy has caused to have been straightened and dredged, so that all of this additional water runs into the flood defences downstream with vastly greater force.

So I have an alternative suggestion for naming storms in future – one that I am sure most ordinary people will embrace, but that the Met Office would never dare adopt: instead of using our favourite aunts and uncles, let us name our storms after the politicians who failed to plan for them!  It would, after all, be more accurate to say that “Kendal has been ravaged by “Deluge Davey” or that “the business district of Leeds has been demolished by Cyclone Osborne”.  And, of course, many of the poorest and most vulnerable among us will justifiably tremble at the imminent arrival of “Atlantic Storm Duncan Smith”!

Is this the end for Labour?

We may well come to look back at Wednesday 2^nd December as the day when the British Labour Party died.  Not, as the mainstream media would have us believe, because Mr Corbyn’s pacifism makes him unelectable, but because that was the day when a right-wing version of the Militant Tendency emerged to hold the party to ransom.

The schism has been long coming.  All of us have a moment when we finally tore up our Labour Party membership card in disgust.  My moment came the day Anthony Blair successfully removed “Clause 4” of the Party constitution… not because I believed that there was even the remotest prospect of Labour delivering to the people the means of production, distribution and exchange, but because without Clause 4, the Party was ideologically adrift.  Others were prepared to give Blair and New Labour the benefit of the doubt.  On the back of a huge housing boom, fuelled by record levels of private borrowing, fewer people were experiencing the kind of hardship that had been common in the 1980s.  More people were prepared to forgive New Labour its lack of principles so long as they felt better off.

Then came Blair’s Chicago speech:

“This is a just war, based not on any territorial ambitions but on values. We cannot let the evil of ethnic cleansing stand. We must not rest until it is reversed. We have learned twice before in this century that appeasement does not work. If we let an evil dictator range unchallenged, we will have to spill infinitely more blood and treasure to stop him later.”

This most dangerous of positions essentially destroyed the post war settlement and the doctrine of collective security expressed in the United Nations.  In its place was a return to the harsh imperialism of the nineteenth century in which the nation state (or alliance of nation states) with the most powerful military proclaimed the absolute right to shape the world in its own interests.  Once established, the doctrine paved the way for the failed NATO wars in Afghanistan and Iraq, the destruction of Libya and today’s quagmire in Syria… and is likely to be turned back on us as the Western economies falter while Russia and China grow in confidence.

The invasions of Afghanistan and Iraq – which owe more to the American quest to secure and transport oil than any genuine concern about the plight of the people in those benighted lands – led many genuine pacifists to rip up their membership cards.  Others accepted the disgraceful lies that the Taliban were a threat to the West and that Saddam had weapons of mass destruction that could be turned on us at a moments notice.  However, when it became clear that the government had lied, many more party cards were torn up… something that continued as the body count rose.

At home, too, New Labour became more authoritarian and vindictive in its dealings with its traditional supporters.  Even current Tory anti-terrorism legislations falls short of what New Labour would have put in place had they been re-elected in 2010.  And we should never forget that it was New Labour that introduced the hated Work Capacity Assessment test used to deny disabled people benefits, and which is thought to have led to more than 8,000 premature deaths.  Then there were the single issues – Labour being “relaxed about people getting filthy rich”, tuition fees, the authoritarian Mental Health Act, the sight of Ministers cosying up to the likes of Fred “The Shred” Goodwin, etc.  When the economic storm broke on Gordon Brown’s watch, even the claim to economic competence had disappeared – not helped by the ridiculous “there’s no money left” note left by Liam Byrne and joyfully publicised by the incoming ConDem government.

By the time the hapless Ed Miliband arrived, Labour had become an unprincipled shell, supported only by a rag-tag of careerists and die-hards; largely overseen by a caucus of MPs who stood for office as Blairites.  As David Cameron and George Osborne set about doing to working people what Cameron had once done to a dead pig, the best Miliband's Labour party could offer was to do much the same thing... but promise not to enjoy it.

In May 2015, millions of the people who would have previously voted Labour chose instead to stay at home.  Millions more turned in desperation to the Scottish National Party, the Greens and UKIP in an attempt to find a party that would stand up for them.

Labour would have died after the failure in May 2015 if Ed Miliband had put party before personal concerns and stayed on to clean up the mess he had made.  Having a leadership election immediately after such a catastrophic defeat was a tragic mistake.  The party had not had time to evaluate the causes of its defeat; still less to formulate its future policy direction.  The party needed Miliband to stay on while it sorted itself out.  Although whoever emerged as leader would be unable to secure a parliamentary majority in 2020 because of the loss of Scotland coupled to Tory boundary changes.

Calling an early leadership election paved the way for the "Corbyn surge" – although even this could have been stopped in its tracks were it not for Blairite MPs foolishly allowing Corbyn onto the ballot paper.  MPs opposed to Corbyn’s views claimed that they had nominated him solely so that his arguments could be aired (presumably with the intention that they would also be defeated).  However, the underlying concern was that the election of a Blairite would have led labour into permanent decline – no longer able to win in Scotland, and threatened by UKIP and the Greens in England.  Only in Wales, where Labour treats the Assembly as is own fiefdom and the electorate is backward enough to vote for a corpse so long as it is sporting a red rosette, could Labour guarantee a modicum of power.

The doubling of Labour’s membership as thousands of supporters rallied behind Corbyn’s leadership bid had the effect of a blood transfusion to a dying man.  But it was an intervention looked upon with horror by a Blairite parliamentary party that had already decided to hang a “do not resuscitate” notice at the foot of the bed.  

Always embarrassed by the party membership, the Blairites sought a passive electorate, not an active movement. The majority of Labour’s parliamentary party – who are largely the inheritors of Anthony Blair – see their mission not as opposing the Tory government, but of disenfranchising the party membership while making Corbyn a prisoner of a right-of-centre shadow cabinet.  In this they are aided by the fact that Corbyn was a relic – a lonely ghost of Labour’s left wing past – rather than a member of a growing party faction.  Irrespective of his massive support in the party, inside Parliament you can count on one had the number of Labour MPs who would not prefer a different leader.

What happened in the events leading to the vote for war on 2^nd December was the first flexing of muscles of the parliamentary Blairite Tendency.  And it is perhaps fitting that their first public act was to take Britain into a war that promises to be even costlier than Blair’s illegal war in Iraq.  However, the wider point is this:  Corbyn lacked the power to force a party line because his leadership would be fatally undermined by the ensuing rebellion.  On the other hand, his opponents calculate that they are not yet strong enough to overthrow him.  So within parliament we are left with a stalemate that is likely to manifest across a whole range of issues, and will become increasingly embittered the closer we get to the next election.

Corbyn’s real problem is that he can do nothing to remove his opponents.  Certainly he can use his supporter base to change the way the party does business and to make it easier for party members to elect candidates more in line with their own principles.  But none of that can remove a single Blairite MP from parliament.  Barring death or madness, elected MPs stay in place until they are voted out in a general election.  So whether he likes it or not, Corbyn is the leader of a parliamentary party that will increasingly reject his leadership.

Add into this mix the problems that arise when the Tories gerrymander the constituency boundaries and you have a recipe for open civil war.  Most Labour constituencies will be redefined, forcing sitting MPs to face reselection.  At this point, Corbyn’s supporters will get to reap their revenge.  But even deselected MPs remain as MPs.  And they are unlikely to go quietly into oblivion.  Rather, they are likely to follow the path mapped out by “The Gang of Four” in 1981.  However, this time round we could well see a gang of a hundred or more establish their own version of the Social Democratic Party – adding to Labour’s woes in attempting to win seats back from the SNP, Tories and LibDems.  By which time, I imagine most of Corbyn’s supporters will have given up on electoral politics altogether.

The EU? It’s like an argument with a libertarian!

We all know someone with right-wing libertarian views.  The sort of person who will tell you that Osborne’s austerity cuts are only scratching the surface of what needs to be done.  The sort of person who thinks the best outcome for all of us is if we did away with the state altogether.  The sort of person who, presumably, believes that downtown Mogadishu is some kind of free-market paradise.

We know how the argument goes:

“We would be better off without the state…”

“Er… that’s an interesting idea.  But what would stop another country invading us?”

“Well, obviously, you would have to keep an army, navy and air force for defence…”

“What if a fellow citizen decides to beat you up and steal your possessions?”

“Well, obviously, you would need a police force to maintain law and order…”

“Interesting that you should use the word law, doesn’t that imply that we might need to run a system of courts, with lawyers and judges and the like?”

“Well, obviously, you would need courts to uphold the law…”

“And wouldn’t that suggest that you would need an education system of some kind so that if you were to end up before the courts you would be represented by someone with at least half a clue about what he or she was doing?”

“Well, obviously, you would need some education…”

“And some buildings perhaps?  And maybe some roads or railways so you can actually get to court?..”

So it goes on.  The principle is conceded once you acknowledge that you need armed forces for defence.  All else is the slippery slope towards today’s centralised and all-encompassing state bureaucracies.

Crucially, nobody set out to create a centralised bureaucratic state.  Rather, it evolved as the sum total of all of the solutions we put in place to (so we thought) make our economy operate effectively.  Less obvious state functions like public healthcare have a “market” function in maintaining a healthy workforce.  Food standards play a similar role, as does dangerous dogs legislation.  Research and regulatory agencies were created to ensure that corporations do not cheat.  Special branches of law were created to punish those who do cheat while providing redress to those who would otherwise lose out.  One way or another, all administration, bureaucracy and law relates back to market efficiency.

When politicians set out to create a single European market, irrespective of what they may have said to the contrary, what they were ultimately signing up to was a single European state.  There is no alternative direction or halfway-house here.  If you want a functioning free market, then you have to create a single legislative framework, presided over by a single state to police it.  Consider, for example, the current difficulties with corporate tax avoidance.  This stems largely from the fact that we have yet to develop a single European tax system.  Put such a system into place, and corporations could no longer benefit from registering in, say, Luxembourg because of its generous tax regime.  Quite simply, if you want a single market, then you must have a single set of tax rules.

Nor can you pick and choose.  You either have free movement of people, goods and services or you don’t.  It is inconceivable that, for example, within the UK Wales would act to prevent English people coming to live here or, perhaps, from claiming benefits here if they are unable to find work.  That is the point of a single market – everyone gets treated the same.  Lose the principle and you end up with chaos.  If, for example, Britain chose to end the free movement of labour, might not Poland or Rumania opt to end the free market in goods and services by refusing to export to or import from Britain?

The issue becomes even clearer when we look at the single currency – which Britain uniquely seeks to avoid in the long-term.  This was the issue that is believed to have lost the Scots the independence referendum, since it was clear that the Bank of England could not be simultaneously a Bank of Scotland with a single currency but two divergent monetary policies.  The people of Greece (and Spain, Portugal and Ireland) know only too well what happens when governments overspend in the expectation that the non-national central bank will simply print more money for them.  Once Eurozone politicians realise that austerity will not work, inevitably, they will develop a single tax system and a single monetary policy that will determine the Eurozone budget.  At that point, there will be a single European state in all but name.  The only real question is whether British people want to be part of it.

Let me put it starkly, as I would in arguing with a libertarian: if you don’t want the state then you cannot have the market.

This is the key issue of debate over Europe.  If you want a single state, fine.  You should vote to stay in.  If you don’t want a single state, fine.  You should vote to leave.  But if, Canute-like, you wish to stand before the rising tide and wish for some form of business and usual, then you should probably seek a good psychiatrist.  Because only someone whose grasp of reality has seriously slipped would believe that one or two temporary opt-outs – none of which would be enshrined in treaty – are going to halt the inexorable march toward political union.

The Economics that George Osborne wants to hide

How do you make money?  If you are in the majority, then you sell your time over and over to the same employer in exchange for wages.  Some of you will be self-employed, which means that you not only have to sell your time but you must also spend additional time drumming up new business.  A handful will own businesses, in which case you will make or provide goods and services to sell to customers in exchange for money.  You will either sell directly to consumers, or you will sell to other firms.  Either way, if you cannot supply your goods or services at an affordable price and at a high quality, you won’t get paid.

So if you want to spend more money, what must you do?  Well, either you have to work harder/produce more, or you have to cut back on your current spending.  You can borrow money of course, but only within the limits of your current budget – you have to be able to service your debt.   If you fail to do this, you risk being forced into bankruptcy.  So you understand only too well why you need to run a budget surplus when times are good in order to protect yourself when things go wrong.

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So far so good – we are now at the level of understanding of the economy that Osborne and his friends want us to be.  Using the comely image of the small town householder, Osborne would like us to believe that running the government (which, incidentally, is not the same thing as running the economy) is pretty much the same.  “We can’t pay ourselves more than we earn.”

But let us just take a step back for a moment to consider the question we began with.  I did not ask how you obtain money; I asked how you make money.  And the answer (with a small number of exceptions) is that neither you, me nor the organisations that we work for makes money.  We make widgets (all of the goods and services we produce or contribute to in the course of our work).

So who does make money?  Most of us – even politicians and economists – understand that the Royal Mint makes money.  They produce all of the cash in circulation.  Indeed, it is illegal for anyone other than the Royal Mint to make cash.  So most of us – including more than 70 percent of our politicians – believe that the Bank of England (via the Mint) makes all of the money in circulation.  And if you/they believe this, then you/they must also believe that government surpluses are bad for the economy.

To explain this, let me ask another question: what gives money its value?  Most people – again, including most politicians – think that somewhere in a dark bank vault is a pile of gold bars whose value corresponds to the value of all of the money in circulation.  After all, our banknotes still carry the words “I promise to pay the bearer on demand the sum of…” harking back to the days when a One Pound note was equivalent to a pound in weight of Sterling silver.  In fact, Britain ceased to operate a “gold standard” in the 1930s.  In the years 1944 to 1971 we operated on the Bretton Woods system in which the US Dollar was tied to gold, while all other currencies were linked to the US Dollar.  So, by default, our money was – at least in theory – as good as gold.  But the Americans cheated.  They printed vast sums of paper currency to fund their war in Vietnam, their cold war arms industry and projects like NASA’s Apollo Program.  When other countries refused to trade in dollars and demanded gold instead, the Nixon administration simply reneged on the deal.  Since 1971, all currencies have been free-floating and tied to nothing more than the trust people have in the governments concerned.

So what gives money value?  To put it another way, why should we trade in money rather than widgets or even precious metals?  Indeed, why don’t we trade in a whole range of currencies like dollars, yen, euros and yuan?  In our currency system, there are two reasons.  First, we have a law that obliges us all to accept the state currency as legal tender.  Second – and more importantly – we are obliged to pay tax in the state currency.

So, let us return to how most politicians view the economy.  They believe that the Bank of England (through the Royal Mint) creates money.  This money goes to the Treasury, where the Chancellor and his minions choose where to spend it.  It may be used to fund pensions and benefits; it might be made available as grants to organisations; or it may be used to fund public services.  Either way, the recipients of the money will use it to buy widgets in the private sector.  So, this is how (they believe) money moves from government to the firms and households that make up the economy.

Figure 1:  The politicians' view of money and the economy.

So what does running a government surplus involve?  It has to involve some combination of increasing the amount of taxes coming in and/or cutting the amount of money being spent out. 

Figure 2: How austerity would affect the private sector in this model.

As an aside, this is where much of what passes for a political debate occurs.  Broadly, neoliberals (like Osborne) opt for cutting taxes and cutting spending even further, while social democrats (like Corbyn) prefer to increase spending and increase taxes even further.  Either way, in this two sector (public/private) view of money, austerity and/or increased taxation must result in less money circulating in the economy.  And when you have less money in circulation, you also get low or even no growth, deflation, underemployment and unemployment… just like we have had since 2010.

Fortunately, all of this is a myth.  For while it is true that government is the only body legally allowed to create cash it is far from the only body that is allowed to create money.  This is because we live in a three sector economy – public/private/banking.  For more than thirty years, private banks have created almost all of the money in circulation.  This is because almost all of the transactions in the economy today are in the form of electronic transfers between bank computers.

Figure 4: The role of banks in money creation.

The real reason austerity will not work is not because cuts and taxes prevent money getting into the private economy.  Indeed, the austerity cuts made in the early 1980s paved the way for the long economic upswing in the 1990s and early 2000s.  But the reason it worked then – and why Cameron and Osborne are trying to repeat it today – provides us with an insight into why it cannot work today. To understand this, we need to know how a bank creates money.  Most economists and politicians think that banks operate a “loanable funds” model in which money is transferred from savers to borrowers.  Banks act merely as middle men, taking a fee for arranging the transfer.  In practice, however, no money disappears from a saver’s account anywhere in the system when a borrower takes out a loan.  All that happens is that a computer operative in the bank types a series of numbers into the borrower’s account and types the same numbers as an “asset” in the bank’s accounts ledger.  Through the magic of double entry book keeping, new money is created out of thin air.  A recent Bank of England paper explained it this way:

“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

This debt-based money now accounts for 97 percent of all of the money in circulation.  And it comes with a big drawback… “Compound interest”.  Imagine for a moment that you were the first person to borrow money into existence by taking out a loan for £100 at an interest rate of 10 percent.  At that moment, there would be just £100 in circulation.  But the total amount of debt in the system would be £110.  Where is the other £10 going to come from?  If you don’t find that extra £10 from somewhere pretty soon, the process of compounding is going to cause it to double up over time.

Figure 5: The massive increase in debt-based money.

The fundamental problem with our currency system is precisely that there is always more debt outstanding than there is money in circulation.  And the only legitimate and politically acceptable way of addressing the problem is to keep borrowing ever more debt-based money into the system.  Might there be a problem with this?

Back in the early 1980s when the Reagan and Thatcher governments brought in the financial deregulation that allowed the current system of fiat currencies to take off, borrowing money into existence was less of a problem.  This was in part because there was plenty of unmet demand for goods and services, and in part because very few people had debts – here you might begin to glimpse what Thatcher’s “home-owning democracy” was really about, and what Osborne’s “Help to Buy” scheme was trying to achieve. 

Neoliberals like Thatcher and Reagan believed that politicians and governments could not be trusted with money creation.  It was all too easy for politicians to make rash promises at election time, and then fraudulently fund them by printing money.  When they did this, the result was always the same – inflation.  Although this was experienced as rising prices, in fact inflation is the devaluation of money.  But if governments could not be trusted with money creation, who could?  Enter the bankers!  In the late 1970s and early 80s, chastised by economic crises, bankers were a highly conservative bunch.  The credit that they were prepared to extend went only to guaranteed winners – those with the very highest credit ratings.  Who better to entrust with the nation’s money supply?  Let the banks decide how much debt-based currency would be created and who it would go to.  What could possibly go wrong?

The trouble is that bankers are no different to you or me in that we all think we are above average.  When bankers loaned new money to sure-fire businesses, their success rate was high.  This, they assumed, was down to their personal abilities rather than to a general upturn in the economy.  So they became emboldened to lend even more money into existence.  But there are only so many guaranteed winners out there.  Once these have borrowed what they need, new borrowing has to come from less credit-worthy firms and households.  Fortunately, though, with the economy booming, house prices rising and consumer demand going stratospheric, even these “sub-prime” loans paid off; further fuelling bankers’ self-confidence.

In the up phases, the problem of the interest outstanding on all of the debt-based money does not look so daunting.  So long as new borrowing is increasing, there is enough money in circulation.  Does this sound a little bit like a Ponzi scheme?  If it does, that is because it is.  A Ponzi scheme is a pyramid scheme that involves drawing in exponentially more investors at each level of the pyramid in order to pay earlier investors.  The trouble is that it eventually reaches the point that there is nobody else left to invest.  At this point the whole scheme collapses.

Debt-based money can only survive so long as there are an increasing number of borrowers prepared to enter into the system.  When we reach the point – as we did in 2008 – when nobody else wants to borrow, the system collapses…  or at least it would have done had governments not chosen to sacrifice the people in order to (temporarily) save the banks.  Today private sector debt is close to 400 percent of GDP – dangerously close to where it was in 2007.

Figure 6: The spectacular rise of UK private sector debt.

So how does Osborne’s attempt to force governments to run surpluses impact on the economy in these circumstances?

In order for austerity to work, the private sector would need to be able to borrow more money from the banking sector than the government takes out of the private sector in taxes and austerity cuts.  As we have seen, this worked in the 1980s because few people had debts.  Today we have the double-whammy of what has been called “peak debt”, where there are not enough borrowers, together with a technically insolvent banking sector that is desperate to reduce borrowing.  We might think of this as “banking austerity”.

Figure 7:  When both government and banks take money out of an indebted private sector, growth falls and the economy stalls.

So the reason that running a government surplus (or even trying to cut the deficit) is a really dumb idea is that it is bound to crash an over-indebted private sector.  It matters not one jot that we are able to produce lots of widgets.  It will avail us of nothing if we all try to work like the Chinese.  With insufficient actual money entering the system, the result is bound to be low or even no growth, deflation, underemployment and unemployment… just like we have had since 2010.

So where does this get us?  I think we are in a similar position to US General Pershing in 1918.  He took the view that in order to win the war, Germany had to be crushed and its people had to know from experience that they had been defeated. By not marching into and occupying Germany, he believed the allies would have to do it all over again at some point in the future.  Sadly, in 1939 his fears came home to roost.  In a similar manner, the proponents of austerity and the nonsense of permanent government surpluses will have to fail and be seen by all of us through direct experience to have failed.  Only when the policies of Osborne and Cameron, and their equivalents in Europe, Japan and the USA finally preside over the destruction of the banks and the writing off of debt that should have occurred in 2008 will we be able to have a sensible debate about the future management of the UK economy.  Until then we are in for something of a bumpy ride.

Tim Watkins' Book, Austerity... will kill the economy!  is available in paperback and Kindle formats