7 August 2017

The Right is in rude health


In his most recent weekly CapX briefing, Robert Colvile claimed that British politics has an ideas deficit. The Right, he suggests, has struggled to offer any diagnosis of the world’s problems since the 2007-09 financial crisis (the start of which has its 10th anniversary this week) that is acceptable to the public, who have overwhelmingly lost faith in market-based solutions. The Left offers a critique many find persuasive, but its proposals for how to respond seem like hackneyed repetition of policies that have demonstrably failed in the past.

I don’t agree. For what it’s worth, I think Robert is wrong about the ideas of the Left as well as the Right — the ideas in, say, Paul Mason’s Post-Capitalism, are much more radical, visionary, utopian, ultimately unrealisable and unfortunately likely to lead to oppression and disaster than “socialism with an iPad”. But here I’ll stick mainly to what I think he’s got wrong about the Right.

First, let’s dispense with the idea that voters have “lost faith” in the solutions of the Right since the Financial Crisis. For all the opinion polling on attitudes to markets, since 2008 every general election in the UK has returned a Conservative-led administration.

What voters who say they’re unsatisfied with “free markets” and “public service reform” and so forth actually mean is that they don’t believe that the older Major-Blair-Brown-early Cameron consensus works any more. Remember Oliver Letwin’s May 2007 speech — just a few short weeks before the financial crisis began, declaring that “instead of being about economics, politics in a post-Marxist age is about the whole way we live our lives; it is about society. Politics today is socio-centric… As David Cameron put it…: ‘It’s not economic breakdown that Britain now faces, but social breakdown.’”

The Conservatives of the mid-2000s tried to move the argument away from economic questions. They thought Blair had accepted everything economic that mattered and so they wanted to differentiate themselves from Labour in other policy areas. But they were wrong to think the economic debate was settled. Right-wing thinkers at the time said they were wrong, voters today intuit that they were wrong, and policy hasn’t changed properly to reflect the ways they were wrong.

The Right offers rich critiques and fecund programmes of solution. There is no barren wasteland of ideas or mere clichéd repetition of nostrums that the public has already rejected. Consider some examples.

Voters feel the 2007-09 crisis and its aftermath, alongside other issues such as the intergenerational unfairness of house prices, show that there is something flawed at the heart of our economic model. The Right absolutely agrees. A model in which those with money and connections acquire and grow assets by taking risks that produce high returns in good times but then, when the luck runs out, are bailed out by the state, is economically disastrous and morally indefensible. And the idea that this problem can be addressed with a bit more regulatory oversight of banks and bankers, or a few tweaks to our planning system to encourage more house-building, is naive.

Some on the Right are just as naive with their own proposed “solutions” — telling politicians to be “braver” about allowing banks to fail is all very well when you’re sitting in a think-tank office and it’s not going to be your head on a spike when the mob turns ugly. But not all of us. Some on the Right have ideas for re-making capitalism from the heart out. I disagree with some of them (i.e. all of them except mine – naturally!). But the idea that ideas are lacking is wrong.

Let me illustrate with some specifics. A lot of right-wing thinkers believe that deposit insurance for banks is a fundamental flaw. Bank deposits are the largest source of capital for banks, which are in turn the largest distributors of capital across the economy. Once governments guarantee bank deposits, they will almost always bail out banks entirely, which in turn means banks take too many risks, are too similar to each other in their business models (reducing effective competition) and grow too large relative to the size of the economy, undermining the ability of governments themselves to borrow but also resulting in lop-sided economies where instead of making money by investing new gadgets or creating new practical services, clever people seeking big money work in finance.

Aside from those who think “just let ‘em fail” is an answer, there are three other main schools of thought on how to correct for this problem.

One says that the problem is that bank deposits are by their nature risk-taking loans (used to support the bank itself, in turn, making other loans) but people believe them to be storage facilities for their money (in polls 92 per cent of people think they own their bank deposits — which is not in fact true). So bank deposits are, on this account, actually a kind of con. To address that, we should (these folk say) ban banks from offering these kinds of fraudulent deposits. The only kind of deposit permitted, they say, should be in accounts where the money is actually stored completely safely.

Others say that this is far too extreme. All that is really needed (on this account) is to limit bank deposits to being used to support only relatively low-risk investments, such as residential mortgages or personal loans, splitting off other activities, such as fancy derivatives trading, wholesale financial activities and perhaps also commercial loans, to be supported by other forms of capital than deposits (eg by corporate bonds or by equity). In such cases banks would still fail every now and then, but when they did so depositors would lose such a small proportion of their money (perhaps 5 to 10 per cent) that they could be allowed to lose a little money without much pressure for bailouts.

My own answer lies between these. The former I think more radical than necessary; the latter inadequate by itself. I note that until the early 1970s we used to have two kinds of bank deposits in the UK — both the completely safe type discussed above (in what were called “savings banks”) and the kind of deposits we have today (in what were commonly called “fractional reserve banks”). Historically, around 20 per cent of deposits were placed in savings banks. Regulation, inflation and bailouts destroyed the savings banks, with the coup de grace coming from the EU’s deposit insurance directive in 1979. What we should do now is to require that every bank licensed to accept deposits must have legally nested within it a savings bank (insured by the government without limit and required to be 100 per cent safe). In order to deposit money in a (risk-taking, uninsured) fractional reserve bank, consumers have to turn down the savings deposit. That way, no-one can claim not to have had the option to deposit without risk and all risk-taking is on consumers’ own heads.

These are radical as-yet-unrejected ideas. They might be wrong, but they are not hackneyed.

Thinkers on the Right also offer new approaches on public services that are not simply “cut spending”, “user charges” or “privatise it”. I and others have proposed new systems of mandatory insurance for unemployment, sickness and healthcare, with options to purchase more comprehensive and less comprehensive packages. (Note that I did not say “private insurance” — I have in mind mandatory public insurance schemes, fully respecting the “free at the point of need” principle, with the payments collected via the existing “national insurance” system.) Others propose new models of state pensions saving, flexible across the life cycle to aid with things like funding children’s university education.

On housing, as well as schemes to ease planning restrictions generally, there are ideas such as the establishment of new garden cities or plans to allow local authorities to trade with each other for the location of new housing. Some (myself included) say none of this will work to get prices down much so long as interest rates are artificially low, but they are definitely radical and imaginative in their own right.

The point of all this is that on the Right many of us acknowledge that our economic model is importantly flawed, that simply keeping public spending low or privatising public services is not adequate, and that housing markets have created huge intergenerational unfairness. We are not just repeating old mantras, we recognise that solutions must be politically pragmatic not just notionally economically ideal, and voters have not rejected our ideas.

The Right is not bereft. We have more and better ideas than ever before.

Andrew Lilico is an economist and political writer