April 27, 2015
Edinburgh is a majestic city. The view, in bright sunshine, from the statue of Adam Smith on the Royal Mile down the hill towards the New Town must be one of the finest urban vistas anywhere in the world. Today, the St Andrew flags are flying everywhere, and with the SNP set to win more than 50 of Scotland’s 59 seats in Westminster, there is a real feeling that the nationalist movement is predominant.
The big news here in the morning papers is the quote from Alex Salmond, the former SNP leader, that he will enjoy “writing Labour’s budget” – a reference to the fact that the Labour Party can only govern if they are propped up by the SNP.
As kingmakers, the SNP’s top brass can demand what they want. The last nationalist party to wield as much power in Britain was Parnell’s Irish Parliamentary Party in the late 1880s.
The most likely result is that the SNP won’t go into government but will prop up a weak minority Labour government, in return for a shopping list of goodies for Scotland. In this way, the SNP consolidates its power at home without the responsibility of government. If things go well, it takes the kudos and if not, it blames Westminster.
There are many emotional issues driving the Scottish nationalists, but apart from the issues of nationhood, the issue of economic inequality is fuelling the switch to the nationalists. The Nationalists – whose policies are quite left – constantly reiterate that the British economy is being run for the rich, and an independent Scotland would be run for the people.
The current SNP leader, Nicola Sturgeon emphasises how, unlike the posh Ed Miliband and much posher David Cameron, she actually grew up in a council house and thus understands ordinary people.
According to an article in the Guardian this week, in post-war Scotland, most children of Sturgeon’s generation grew up in council housing. Slum clearances in every Scottish city and town enormously increased the number of council properties. In the 1960s and 1970s, about 60 per cent of Scotland’s homes were rented by their occupants from local authorities and housing associations, twice the proportion in England. Scotland is said to have had the largest public-to-private ratio of housing stock in any country west of the Soviet bloc.
Given this political backdrop, the irony of being in Edinburgh to talk economics to upbeat investors at the imperious Balmoral Hotel, under the statue of the free market’s chief prophet, is not lost on me.
The reason investors are upbeat is that stock markets have been roaring ahead in recent years – all over Europe. This is making the owners of assets very rich. But who do you think owns assets? Rich people own assets, and poor people do not.
Therefore, rising economic inequality is not the unintended consequence of policy – it is policy. Economic policy is exacerbating inequality not reducing it because the new ideology, driven by central banks, is based on printing money to boost the economy and drive growth.
The hope is that, when the banks get all this free money from central banks, they will lend it, pushing up the price of assets, stocks, bonds and houses.
In time, the theory is that as asset prices rise, people will “feel” richer, and this feeling of being richer will coax people into buying more, borrowing more and investing more.
This is what was termed “trickle-down” economics in the 1980s. It was championed by right-wing warriors Reagan and Thatcher. Today, it is being trumpeted by all mainstream parties from the German right to the French left.
What is actually happening is that opportunity is not trickling down to wages, but greed is pushing up asset values.
This conundrum is the source of the deep political fault-lines all over Europe which is amplifying inequality and driving left-wing parties like the SNP, Syriza, Sinn Féin and Podemos; and right-wing ones like the Front National in France and Ukip in England.
All these radical parties were minority affairs only a few short years ago. They were dismissed by the centre Left and centre Right, but now they are becoming significant players and kingmakers in some cases. The reason they are gaining power is because they have a narrative which appeals to people. They can make their story of the excluded more communal and universal by wrapping it in the national flag.
If the centre parties want to choke off the rise of the populists, they have to stop depending on financial markets to do their job for them.
This policy of using monetary policy exclusively to jump-start the economy is precisely the opposite of what was used by Franklin D Roosevelt during the Great Depression. Back then, Roosevelt realised that if the banks caused the problem by too much lending, they shouldn’t be relied upon to find the solution to a problem which they had caused.
He saw that, when interest rates are close to zero and there is no real investment, any new investment can have an amplified positive impact on the economy. He concluded that the knock-on effect from one large-scale investment would be very significant, so he embarked on a massive public works plan to get the US economy going again.
As his plan worked, it was adopted by different countries after the war. As a result, the reason why Nicola Sturgeon grew up in a council house is because the British state built them as part of a public works project.
Today, with the rate of interest at zero, there is an amazing opportunity for this country and other European nations to address inequality by investing in housing, education and health. We know that state investment in these crucial areas is what makes societies more equal.
There has never been a better time to do this. There has never been a greater political need for it either, but the centre seems paralysed. Wouldn’t it be amazing if the centre ground of European politics was destroyed because it failed to do the sensible things that you’d expect of the centre ground to do in the first place?