NPF Report Summer 2018: preparing policy for the Labour Party Conference

My latest report to Labour International on my work on the National Policy Forum is available on the LI website. I'm reposting it here:

NPF Report Summer 2018: preparing policy for the Labour Party Conference

The policy commission on which I sit deals with the economy, business and trade. At our meeting in June we focussed on trade issues, just ahead of the two trade bills returning to parliament.

There was a clear difference of view between the TUC and War on Want who both gave evidence at the session. Both agreed that trade deals have gone far beyond matters of trade. All kind of standards and regulations are treated at “non-tariff barriers to trade” and so modern trade deals often deal in matters which are primarily issues of public health, environmental and safety standards as well as issues of government purchasing, qualifications, and patent protection.

Both opposed special courts for investors (investor state dispute settlement) and agreed that there was too little public scrutiny or accountability of trade agreements.

Rosa Crawford, giving evidence for the TUC, said that trade unions had three main aims:

·         that exclude trade unions and civil society should be involved in future negotiations;

·         that trade deals should provide binding protection for employment rights including enforcement and sanctions procedures;

·         that public services should be excluded for future trade deals.

For War on Want, Jean Blaylock, argued that trade diplomacy was an extremely powerful means of changing international policies. Trade deals allowed deregulation and privatisation to slip by out of sight of the public interest and that there was a ratchet effect, once a market was “liberalised” there was no route back.

Her view was that we trade deals would be better restricted to trade questions and that trade should sit among a range of international agreements focussed on the specific questions eg sustainability and public health.

We also heard a technical presentation on trade remedies. The main take-away was that the UK does not make enough use of the protections available to resist unfair trade.

Barry Gardner, shadow trade secretary, gave an update from the front bench. He covered the amendments to the Trade Bill and Customs Bill many of which were concerned with greater scrutiny and accountability of trade deals.

In July the commission met to consider the responses to the consultation exercise on “The Future of Work”. A report on the commissions work had been circulated only the day before and some of us felt that there had not been enough time to read and digest the document. as this report will be submitted to annual conference, I felt we were not able to do our job properly. I asked for us to be given more time to submit written comments and this was agreed. However, we do not have a policy document as a result of the consultation, simply the annual report of the commission’s activity.

The meeting also has excellent feedback from the front bench. John McDonnell discussed the final report on finance from Graham Turner. His report proposes the creation of a Strategic Investment Board to oversee Labour’s £250 billion investment in economic infrastructure. It recommends changing the Bank of England’s mandate to include 3% target for raising productivity. John also spoke of his work on doubling the number of coops and recommended the Coop Party’s report Cooperatives Unleashed.

Rebecca Long Bailey, shadow business secretary, announced that her report on reforming corporate governance would be published before conference.  She covered the growing anxiety among businesses of a hard Brexit. Major firms like Airbus, BMW and Unipart were engaged in risk planning but smaller firms had no capacity for risk assessment or defence against a no deal Brexit. her team were stepping p business liaison with round table meetings around the country including small firms and focussed on marginal seats.

Totems, Reason and the European Economic Area

From time to time a political issue takes on a totemic role. It acquires a significance beyond its practical import and becomes a symbol or icon of virtue. Support for the issue becomes a badge to identify a political in-group.

Something like this has happened to the question of Britain joining the European Economic Area. The rational assessment of the pros and cons or the choices about trade-offs implied by EEA membership have been eclipsed by the symbolism. Support for the EEA has become a symbol of pro-EU commitment.

Last week, I read in a Sunday paper that “true Remainers want to stay in the EEA”. I suspect that true Remainers (I’m one) want to stay in the EU. It is the choice of a good alternative that is not easy.

Many pro-EU politicians have concluded that this is not the best option for post Brexit Britain. But the 75 Labour MPs who rebelled on Wednesday are using the issue to signal that they are more European than their colleagues.

Many may indeed believe that this formula for access to the single market is the best available. There are good arguments on their side. It would appear less economically disruptive to minimise the changes in the framework of business and trade relationships. Studies suggest a small net benefit to the long run level of economic activity in this scenario. In addition, there is an administrative simplicity in opting in to an existing framework compared to the risks and effort involved in creating a new arrangement.

The pro-Europeans who are not convinced by the EEA membership have a diversity of reasons related to political strategy, regulation and economic performance.

For some, particularly MPs in leave voting areas, there is a need to placate the electorate’s concern over immigration. If there is one area where single market rules would inhibit Labour’s manifesto promises it is the pledges made in 2017 on immigration.

Others who are wary of the EEA point to the difficulty of implementing “rules” over which the country has no say and little influence. Under the rubric of removing non-tariff barriers, single market regulations cover not just product standards, but public health, environment, public procurement, competition and a mass of important public policy issues.

The concern is not so much that current rules might thwart existing policy ambitions. (Although even advocates for the single market acknowledge that some objectives would require careful navigation around the rules.) The real problem is that future rules dealing with technologies yet unknown or problems yet to be identified will impact on policies yet to be imagined.

How would a rule-taking government react if a British regulator declared that single market rules may pose an unacceptable risk to customers or taxpayers, as the Financial Services Authority said of banking regulation in 2009? Inside the EU there is scope to fix such problems which would not be available in the EEA.

At a deeper level rule taking has an economic effect. The best known economic impact studies treat the economy like a self-equilibrating machine. Politicians might set the controls but the mechanism runs by its own logic. A more modern understanding does not separate the economy from its social and political context. An economy is embedded in the norms and standards of a society and adapts to its choices on what behaviour and risks are acceptable. Adopting the rules made for a different social context can inhibit economic development.

Making the EEA into a totemic issue for pro-EU signalling obscures the important questions that need to be explored. The choice is not straightforward. Faced with trade-offs different politicians will make different judgements and arrive at different conclusions.

Creating an in group may serve to paint those who reject the totem as less pro-EU. For some opponents of Labour’s leadership that might be the point.

NPF Reports to Labour International

As representative to the National Policy Forum for my CLP, Labour International, I provide regular reports on my activities via the website and newsletter.

I reported on the plenary meeting held in Leeds in February here:
Policy Making in Leeds, February 2018

I am assigned to the Economy, Business and Trade Commission and I've reported on this year's meetings here:
Report on the Economic Policy Commission and Report Back from the Economy Commission

The NPF is currently engaged in consulting members on eight "priority" policy topics. I'm encouraging Labour International to respond to the consultations. I set out the process here:
Help to Make Labour Party Policy

Using Brexit to Advocate Austerity

A number of Labour politicians - Labour politicians - have been making the case for post Brexit austerity. They may not consciously intend to promote a continuation of austerity even under a Labour government. Their intention might be to harness an anti-austerity impulse to support for the single market. But their case repeats the logic of George Osborne: if tax revenues are down then the government must cut spending.

I thought that the old government-must-tighten-its-belt argument had been defeated, at least in the Labour party. It's back, however, promoted by some Labour politicians who have yet to break from the neo-liberal mindset. Naturally, support for the single market is not limited to neo-liberal thinking. The TUC, for example, makes a more convincing case based on jobs and employment rights.

I challenged the "Brexit means austerity" line in Labour List, Even after Brexit austerity will remain a choice

I fear however than some apparently pro-European campaigns serve another purpose, shifting policy in a less progressive direction.

Labour's Brexit Policy

As part of my role on the NPF, I study the submissions made by members and others to the policy commission on which I sit, Economy, Business and Trade. Quite a few of these relate to Brexit, although a different commission actually has the lead on that topic.

I find that many of the submissions are unsure of where Labour stands and it helps to have this statement of policy which was adopted by the Party conference in September 2017. Unfortunately, I can't find it on the web so I'm posting it here.

NEC Statement on Brexit 25 September 2017

Britain Needs a Pay Rise

Real incomes are falling as inflation rises. Are rising prices really the problem? As I've mentioned before, looking at the numbers, inflation in 2017 is closer to the government's target than it has been for some time. The real threat is deflation and the real cause of falling incomes is low wage rises.

Despite the growth in per capita GDP, the average worker isn't securing the full fruits of her labour.

I set out the argument in an article published by Left Foot Forward on 17 July 2017.

The latest inflation figures will be out tomorrow, here’s why there’s no need for alarm

Tomorrow, the latest inflation figures will be published. The reaction, if recent months are a guide, will be panic and alarm at the continuing high level of consumer prices, the impact on household budgets and the possibility of rising interest rates.

I want to question whether we are drawing the correct policy conclusions from the recent rise in inflation. I would argue that the focus on higher prices is misplaced and risks drawing attention from more important economic questions.

The government has set an inflation target of 2 percent. If the rate of CPI is more than one percentage point away from the target then the Governor of the Bank Of England must write open letter to the Chancellor explaining why the target has been missed and what action the Bank intends to take.

What to expect

If on Tuesday inflation is above 3% then Governor Carney will be sharpening his quill to write to Mr Hammond. This will be the first such letter since December 2016. That’s right it is only a matter of months since the Bank last missed the government’s target.

From May 2015 until last December the inflation index was more than one percentage point below target, at times touching 2 percentage points below target. While commentators were less alarmed by low inflation, for economists the reverse is true. Zero inflation is far more dangerous than inflation at 4%.

High inflation can always be addressed by raising interest rates. However, central banks have no ready answer to deflation – when prices are falling. Deflation combined with high levels of debt is a recipe for recession.

In the US economists have been pushing the Federal Reserve to raise its inflation target above 2 percent. Janet Yellen, America’s central banker, has acknowledged the importance of the issue.

So if 3% inflation is healthier than the levels we saw last summer, should we not still worry about living standards?

Wages

The true cause of declining real wages is the slow pace of wage rises pursued as a deliberate policy. Imposing a 1 percent pay cap is unjust precisely because it takes account neither of inflation nor of rising national income.

When the economy is growing we should expect wages to keep pace. In Figure 1 (above -sources Bank of England, ONS) I compare the level of the median wage to the level of GDP per head, with both scaled to 100 in 2010. It shows that the pay of the average worker has grown more slowly than the growth in national income per head. The average worker is not gaining the full fruits of her labour.

There are two possible explanations: firstly, the share of national income going to wages has fallen or, secondly, more of the wage share is going to workers earning above the average. So inequality is also part of the problem.

Interest rates

It is likely that inflation will begin to fall, if not this month then later this year. The rise in prices is mainly driven by rising import prices due to the fall in sterling after the referendum last June.

A one off rise in prices affects the inflation index for 12 months. So price rises last June drop out of the inflation figures this June. The rise in import prices isn’t passed on to consumers right away. Firms may sell existing stocks at the old price or may take a hit to profit margins. The effect of sterling’s fall takes time to reach the consumer price index but the index falls back at the same pace as it rose.

For this reason the Bank of England would be making a serious mistake if it chose to raise interest rates in response to the change in sterling. The index will fall back of its own accord.

Indeed it could be that rising import costs are masking an underlying problem of low inflation or deflation. When the sterling effect wears off we may find inflation once again dangerously low.

Conclusion

The analysis here is out of favour with most commentators.They prefer a narrative which blames Brexit for all economic ills, including falling real wages. The referendum triggered a fall in the value of sterling which caused inflation eroding household incomes.

This story ignores the fact that real wages were falling from 2010 to 2015 well before the referendum. Leaving the EU will not make us richer, but it should not blind us to the true economic challenges.

The underlying problems are low wages and the risk of deflation.The solution to both is higher pay. Britain still needs a pay rise.

Pessimism Takes Hold

Back in May, before the negotiations on leaving the EU got underway, I wrote that the differences between the UK and the EU need not be insuperable.

The EU had adopted an approach to the talks that would make finding the necessary trade offs difficult. I warned of the difficulties caused by the long period of not talking to each other; the had EU insisted that there would be no informal talks, no probing, no sounding out in advance of formal notification and that all negotiations would take place within the prescribed framework. As a result, I thought, the two sides had developed their understanding of the issues in separate bubbles.

When Mr Juncker accused the prime minister of being on a different planet, he should have realised that both parties were on different planets and needed to invent some quick form of space travel.

I made the case here on Left Foot Forward:

https://leftfootforward.org/2017/05/how-deep-is-the-may-juncker-divide-and-can-it-be-bridged/

Once the talks got going, my concerns deepened. I am acutely aware that the EU is not run by disinterested experts but it has a democratic structure where the centre right has been in power for a number of years. As I explained in this piece on Left Foot Forward:

https://leftfootforward.org/2017/06/brexit-will-be-negotiated-by-europes-tories/

Not only is the EU negotiation mandate inconsistent and illogical, as you might expect from an agreement thrashed out by 27 parties, but it is defensive and negative. It sets out what the EU27 don't want but has little to offer on what they do. The idea that both sides should be aware that they have interests in common in finding a solution that serves all Europeans, those who remain as well as those who are leaving.

The detail is here in Left Foot Forward:

https://leftfootforward.org/2017/06/what-does-the-eu-want-from-the-brexit-negotiations/