Uncharted Territory

June 12, 2017

The Brexit Logic Trap

Filed under: Brexit, Complex decisions, Economics, Markets, Politics, Reflections, Regulation — Tim Joslin @ 11:52 am

170612 Pic for Brexit post doh

“I think people will interpret membership of the single market as not respecting that referendum.” – John McDonnell

You can’t build a rocket to reach the Moon without understanding the laws of physics.  In politics, as in many other fields of human endeavour, we are most likely to succeed not through raw emotion, but when our goals are aligned with logic and a clear understanding of the real world.  Thus, political projects have for centuries been informed by the carefully crafted logical, evidence-based arguments of thinkers from Adam Smith to Karl Marx.

Somewhat more parochially, the UK will only resolve its Brexit conundrum by finding a solution that works in practice, not just in the fevered imagination of one or other political leader.

Why do I say we’re in a “Brexit conundrum”?  Surely we’ve voted for Brexit and should “just get on with it!”.  Well, no – putting the hard-line “Remoaners” to one side for the moment – it’s not quite as simple as that: the argument now is apparently over whether we have a “soft Brexit” or a “hard Brexit”.  Oh well, I hear from the gallery, we were going to have a “hard Brexit”, but Theresa has put her expensively shod foot in some seriously pungent doo-doo and now we’ll have to have a “soft Brexit”.

Yes, it seems to have turned out that a “hard Brexit” is not a politically viable option, though David Davis and Liam Fox are still in denial.  Nor is a “hard Brexit” economically viable, I might add.  Never mind, “just get on with it!!”, say the great British public: we’re more concerned about the NHS and inequality anyway.

Unfortunately, it’s still not quite as simple as that.

Why?  Because a “soft Brexit” is not a logically viable option.  If it was, Theresa May would probably have proposed it already, since, contrary to popular belief, she and her advisers are not entirely stupid.  No, it turns out that, no sooner have you pulled on one loose thread of the UK’s relationship with the EU, than you’re standing in front of the nation completely starkers, as Theresa May hinted during the election campaign.

For example, if we go “hard” and leave the European customs union, then, for starters, there’s a border problem in Ireland, not to mention with Gibraltar.  Huge bureaucratic costs arise for business, plus we revert to WTO tariffs on all our trade until we can negotiate something different.   Enough!   Let’s stay in the customs union, then, you say.  Oh, but then we wouldn’t be able to negotiate our own trade deals.  We need to do that to offset leaving the single market.  And trade is kind of important because we need to import stuff.  Like food.

OK, then, let’s stay in the single market.  Ah.  But then we’d retain free movement (I know I am on record as thinking that’s a good thing, but I’m trying to be detached and objective here).  And, incidentally, be subject to the European Free Trade Area (EFTA) court, which apparently doesn’t violate our precious sovereignty as much as the European Court of Justice (ECJ), though I’m not sure the great British public would be fully appreciative of the fine distinction.

Hmm, surely we can remain members of uncontroversial European agencies, Euratom, perhaps?  Nope, sorry, not unless we submit to the authority of the ECJ (which Labour don’t happen to feel is worth mentioning in their manifesto, I note), assuming we haven’t already done so by trying to stay in the customs union.

So the dilemma facing the nation’s glorious leadership cadre is to propose either a “hard Brexit” – which might not have got through the Commons even before the General Election and would lead to years of economic chaos and decades of underperformance – or opt for a “soft Brexit”, which would involve remaining in the single market and customs union, but also mean retaining the ECJ and free movement, and (presumably) land us with the same £50-100bn bill as hard Brexit would, as well as no influence over the single market and customs union rules nor the ability to negotiate our own trade deals.

In other words, dare I say it, if we don’t have a “hard Brexit” we may as well stay in the EU.

This is the logic trap in which we find ourselves.

This is why the Labour Manifesto, as David Davis correctly points out, pretty much paraphrases the Tory government’s Brexit White Paper.  Labour write:

“We will scrap the Conservatives’ Brexit White Paper and replace it with fresh negotiating priorities that have a strong emphasis on retaining the benefits of the Single Market and the Customs Union.”

whereas the Guardian’s commentary notes that:

“The [government’s] white paper [die!, evil capital letters, die!] reiterates that the government aims to secure ‘the freest and most frictionless trade possible in goods and services’ with the EU outside the single market and via ‘an ambitious and comprehensive free trade agreement’.

[The Tory government] also wants to be outside the customs union, so it can negotiate its own trade deals, but would like ‘a new customs agreement’, which should be theoretically possible thanks to new technology. … [No kidding, this really is their argument]

… [T]he UK will not seek to adopt an existing model used by other countries, but try to ‘take in elements’ of the single market in certain areas – in other words, bespoke deals for important business sectors. From the EU perspective, all this is ambitious: it sounds suspiciously like cherry-picking.”

Of course, Labour’s presentation during the election campaign was very different to that of the Tories, emphasising that they’d prioritise the economy over immigration, for example, but in essence both are just nuanced versions of Boris claiming he can simultaneously have his cake and shove it into his stupid gob, spraying crumbs and spittle in all directions.

Reality awaits.

September 22, 2016

After the Brexit Referendum (4) – Why UK-Resident EU Citizens Should Get the Vote

Filed under: Brexit, Migration, Politics, UK — Tim Joslin @ 7:15 pm

I’ve mentioned in my previous posts (Free Movement vs Migration; Free Movement vs Work Permit Schemes and the Mobile Classes vs the Rooted Classes) in this so far fortnightly series that EU citizens living in the UK should be fully enfranchised, that is, able to vote in General Elections as well as local and regional ones, not to mention in any referenda that may be held.  In this post I want to approach the issue from a different angle.

To be crystal clear, my proposal is that anyone – EU citizen or not – who has legally lived and worked in the UK for a qualifying period of let’s say 3 years should be entitled to vote in all elections and any referenda, the same as UK and Commonwealth citizens.  Essentially I agree with the “If you live here, you can vote here” position advocated by Jon Danzig, a man who clearly has more than the one blog.

Simple arithmetic suggests it may well be the case that the Brexit Referendum would not have been lost had EU citizens had the vote.  But I believe the disenfranchisement has had much more insidious effects on our political discourse.  As Danzig notes, we’ve been “talking about them as if they’re not in the room”, during the referendum campaign, even more so afterwards, but also for years before.  Had politicians had to take UK resident EU citizens’ votes into account the tone of election campaigning over the years might well have been very different and we might never have had the Brexit referendum at all.

We’ve become accustomed to talking about EU citizens as separate from our “communities” – thereby undoing half a century of community relations effort, as I’ll explain another time – but exactly how can we justify denying them the vote?

Do EU citizens living in the UK have less of a stake in the country’s future than do UK citizens?  Well, they are living here, paying their taxes and reliant on the rule of British law and the provision of state services exactly the same as UK citizens, though of course the details depend on everyone’s individual situation.

Are they here only temporarily?  Well, they might be, but the 3 year qualifying period for a vote suggests at least some commitment to the UK.  The majority will most likely stay considerably longer, not least because most of them are in work.  On the other hand, some UK citizens may emigrate, maybe to retire abroad.  We don’t deny categories of UK citizens the vote on the basis that they’re statistically more likely to move overseas.  Even if EU citizens are more likely to leave the UK in the 5 years after a General Election, the number leaving will be only a fraction of those who have been here 3 years or more already, many of them for a decade or more, so the possibility hardly seems to justify denying all of them the vote.  Besides, I could even argue that the EU citizens who leave the UK during the 5 years after a General Election in some sense “speak for” the EU citizens who may move to the UK after that election, not having had a vote.

So there doesn’t seem to be a rational justification for denying EU citizens a vote in General Elections (or referenda) on the basis that they have less stake in the outcome – or less responsibility for the decisions taken by the elected government, for example in terms of paying taxes.

What about other responsibilities?  I’m thinking of the Colonel Blimps who “fought for this country” or rather whose parents or grandparents did.  Well, many EU citizens could argue that their parents or grandparents fought on the same side in the same wars.  More fundamentally, do we really want to grant the vote only to those who pass some test as to the contribution of previous generations?

OK, so what about future responsibilities for the defence of the realm?  For the vast majority of us that simply comes down to paying the taxes that pay for professional armed forces, taxes that apply to EU migrant workers as much as to UK citizens.  We don’t have conscription any more, but even if we did, would it even exclude the 18 year old children of EU citizens who’ve settled in the UK, children who may well be British citizens?

So there doesn’t seem to be a case for denying the vote to EU citizens living in the UK on the basis that they have less responsibility towards the country or have done less for it in the past.

What about ancestry, then?  On one talk-show during the referendum campaign I heard a woman suggest that her family had been in the UK for 700 years and that this gave her greater rights than her interlocutor, who, as I recollect, could only claim a century or two.  Well, I rather suspect everyone’s ancestry is more complex than that, judging by my own family history and that of those celebs who’ve explored theirs on some TV programme, the name of which escapes me just now.  The practicality of DNA tests to measure Britishness would be undermined by the mongrel nature of our nation, as well as, perhaps, by the political need to ensure the Royal Family score highly.  The blood-line idea is twaddle, isn’t it?

That leaves us with the idea of citizenship.  But that is undermined on two counts:

First, EU citizens resident in the UK have never had to apply for UK citizenship.  They have been treated equally with UK citizens under EU treaties (incorporated into UK law), for example, in their entitlement to grants and loans for higher education.  They haven’t even had to apply for Indefinite Leave to Remain (ILTR) as some foreign residents need to.

And, as I mentioned in previous posts, people don’t change their citizenship unless they have to.  Doing so may involve giving up some rights in their country of origin.  People don’t necessarily make a decision to stay permanently – that is something that just happens.  And they may reason that, depending on how the UK and other economies do, they might need to look for work in another EU country, Germany say, sometime in the future.  It wouldn’t make sense applying for a UK passport.  Besides, it costs around £1000 (for EU citizens) in the UK nowadays (an agenda item for the Brexit discussions, perhaps) and you have to do a stupid test, involving, I understand, the need to memorise the names of the Eastenders and Coronation Street pubs.  If the only advantage is getting a vote, the price is too high for most people.

The right to participate in the democratic process is surely a right, not something you may have to pay for.

Second, and here’s the kicker, other UK residents born overseas do get a vote, even if they’ve been here less time than EU citizens.  In general, non-EU citizens who want to reside in the UK either have to become UK citizens, giving them the right to vote, or apply for ILTR, which doesn’t confer the right to vote but is usually a necessary step to naturalisation.

So an EU citizen may have lived and worked in the UK for 10 years, the same as an American.  But the American has had more incentive to naturalise, since doing so may be necessary to ensure continued residency, for example, if they wish to spend time outside the UK (which could result in ILTR status lapsing).  Though, as I said at the outset, the American should have the right to vote even if they haven’t taken UK citizenship or even obtained ILTR.

And while we’re at it, why should one American living in the UK with ILTR status (or even without such status) not have a vote, while another who has become a UK citizen does have one?  Especially if the American who has become a UK citizen has done so because they wished to spend a few years abroad before returning to the UK?!

It’s absurd that the right to participate in the UK’s democracy depends on the details of the process you have to follow to maintain residency rights.

The big inconsistency, though, is with Commonwealth and Irish citizens.  When I first looked into this I thought Commonwealth citizens needed ILTR status in order to vote.  I now realise when I read the relevant explanation more carefully that they only need to be in the UK legally:

“A qualifying Commonwealth citizen is someone who has leave to enter or remain in the UK, or does not require such leave.”

So, not only are Commonwealth-born UK residents more likely to have become UK citizens – in order to lock-in their right to reside in the UK – than are those from the EU who’ve come to live here under the EU’s free movement provisions and who haven’t needed to lock-in residency rights (at least up until the Brexit referendum), they don’t need to become a citizen to get a vote anyway.

It might be worth pointing out that the Commonwealth now includes some countries – Rwanda and Mozambique – that have no particular historic connection to the UK.  They’ve merely joined the Commonwealth, perhaps out of dissatisfaction with their own former colonial power or simply to enhance their international profile or even just to create more competitive opportunities for their sportspeople!  Of course, in terms of affecting the outcome of elections or referenda, the number of UK resident Rwandan and Mozambique citizens is insignificant.  But it’s the principle that counts.

The franchise for UK general elections and national referenda is not only illogical but also discriminatory.

It should be amended forthwith on the principle of “If you live here, you can vote here”.

Furthermore, carelessness over this one detail may very well have cost us our EU membership, a disaster the scale of which only history will be able to judge, though perhaps they should place the portrait of David Cameron that, following tradition, will soon adorn the walls of No 10, right next to that of Lord North.

September 9, 2016

After the Brexit Referendum (3) – the Mobile Classes vs the Rooted Classes

Filed under: Brexit, Migration, Politics, Reflections, UK — Tim Joslin @ 9:53 pm

I’ve worked out why I’m overcome with rage whenever I hear Frank Field championing the needs of the “ordinary white working class”, in the Guardian’s words (it’s not clear whether Field actually said “white”), besides, that is, his uncanny resemblance to Ian Richardson’s Francis Urquhart in the original UK early 1990s House of Cards series.  I suspect that Field and I see the world quite differently.  Hence my irritation.

The contrast between Field and, for example, Gordon Brown could not be more stark.  It seems to me that Brown, and Blair for that matter, both share my view that, when in power, whilst they represented the British people – and they are patriotic – their concerns were not limited to the welfare of the British.  Others, Poles and Romanians, say, deserve no more or less than us Brits.  You could say that Brown, Blair and the many others who supported the Remain side, including myself, are internationalists, but there may be a more fundamental distinction – between open and closed thinking.  An example of closed system thinking is to carefully conduct a laboratory experiment, varying only one factor at a time; but the real world is an open system, with numerous uncontrollable variables.  Closed thinkers only want to worry about their own area of concern; open system thinkers grapple with complexity.  I’m sure Frank Field believes Poles deserve a good life just as much as Brits do.  I presume he just doesn’t think it’s his problem.

But that means Field has to ignore many of the people who make up today’s British society.  And it seems to me that the specific closed way in which he is thinking is to consider only what I will term the “rooted” classes, the people Labour has historically represented.  Perhaps this form of closed thinking explains in part why there’s not only a divide down the middle of the Conservative Party, but also a damaging – because the issue is so fundamental – schism in the Labour Party, the majority enthusiastic for Remain on one side and Field, Gisela Stuart, Kate Hoey, John Mann and Dennis Skinner, to name the most high-profile Brexiteers – assuming we take Corbyn’s Remain stance at face value – on the other.

Just because the Tories are divided over Europe doesn’t mean Labour has to be.  The vocal minority of Labour Brexiteers (4% of their MPs said Field) have done untold damage to the Party, as well as skewed the referendum debate by portraying Labour as more evenly split on the issue than it in fact is.  I expect many enthusiastic Remainers will transfer their allegiance to the Lib Dems, especially if Corbyn stays on as Labour leader.

So, to the point I wanted to make in this post.  It seems to me that we have to begin with the observation that within each social class, in the UK specifically, but also elsewhere – however many classes you want to define – we have a significant subdivision that I would describe as “mobile”.  For simplicity’s sake, I contrast these people with those we might term “rooted”.  So we have skilled and unskilled or “blue collar” and “white collar” working class who will seek employment only near where they live, which is most likely where their parents live.  “Community” – a term which I find to be another source of irritation, since it is far too often glibly used to refer to all those living in an area, whether they ever talk to their neighbours or not – is all important to them.  But we also have skilled and unskilled, “blue collar” and “white collar” working class, however you want to divide them, who are prepared to travel across continents for employment.

Many of the uber-rich are extremely mobile, seemingly basing themselves in multiple global centres or even, to rub in the point, on £200m yachts, though some are undoubtedly more rooted than others.  Though having said that, it occurs to me that it’s not unknown for even royal families to spend a generation or two in exile.

For large numbers of professionals – the middle classes, if you like – the employment market is national, if not international or even global.  In fact, given the custom in the UK of leaving home to attend university, many of us relocate, at least temporarily, while still in education.

Some industries are so concentrated in small numbers of geographical clusters – consider Hollywood, the City of London, the English Premier League – that, if you want work, you’re pretty much obliged to relocate.  Great cities, such as London and New York, are magnets for the aspirational. Companies increasingly require employees to relocate, often across borders – I’ve been told myself that “international experience” may be necessary for career progression.

Of course, not everyone, not even a majority, move to another country, but mobility has been a feature of the last few decades of globalisation.

Although many have emigrated for centuries, in particular to the New World, to some extent renewed mobility has recently trickled down to what Frank Field would call the working classes.  Or let’s put it another way.  Many families have become rooted over the last century or so, particularly in those former industrial heartlands we hear about that voted Brexit so strongly.  Their ancestors, several generations ago, left the countryside during the era of urbanisation ushered in by the Industrial Revolution.

Other families, such as my own, have moved intermittently for generations, around the country and around the world.  For many, moving for work, or for personal reasons, is just something you do.  You make a life where you find yourself.  I have never had any expectation of remaining in the same locality for my whole life.

Here’s my proposition.  At the present time there is a conflict of interests, at least in the UK, between the rooted classes and the mobile classes.  This was a critical divide between Remainers and Leavers in the Brexit referendum.  The rooted classes see the mobile classes as a threat.  This is particularly the case amongst Field’s “ordinary white working class”.  And, indeed, in some ways they are a threat, since as a society we have allowed rights and privileges to accrue to the rooted classes, in particular entitlement to housing.  But, as in the Industrial Revolution, as in the urbanisation of modern China, economic growth and development has always thrived on mobility.  And the economy never stands still.  You can’t make a decision to freeze the economy as it is – you’ll be destroyed by competition.  The mobile classes are essential to the process of economic renewal, to support technological change.  That’s why it’s a mistake for policy to be determined solely by the needs of the rooted classes.

A large part of the reason for the schism in the Labour Party, then, is that the Brexiteers, particularly the likes of Frank Field, see themselves as representing the rooted “ordinary white working class”.  And, to be honest, they have a point, if they take the narrow view that they represent those who vote for them.  Because we – the UK and the EU – have shamefully allowed the mobile classes to become disenfranchised.  Not only were citizens of other EU countries living, working and paying taxes in the UK denied a vote in the Brexit referendum, so, ludicrously, were UK citizens living overseas, even in Europe, if they’d left this country more than the arbitrary number of 15 years ago.

In part this disenfranchisement has occurred because the rooted classes are seen as privileged.  And see themselves that way too, no doubt – I’m sure there is a certain kind of Brit who would be apoplectic at the idea of giving the vote to “EU migrant workers”.  It’s this idea of the “nation” as a people, rather than a place, of course – an idea which perhaps another time I will argue is unsustainable, though I doubt I have anything new to say on such a longstanding and tediously emotive question – together with the idea of citizenship, which rather ignores the fact that a large part of the point of free movement of labour in the EU was to avoid the bureaucracy and emotional hurdle of the citizenship process.  The aim of course was to create a mobile workforce, with individuals perhaps working in the UK today and Germany tomorrow – something Brexit will no doubt make a more common experience!

But citizenship is only a piece of paper (or a bit in a Home Office computer these days, I suppose).  Granting citizenship to immigrants doesn’t necessarily reflect either commitment on the part of the new arrival, though of course it may often do so, nor assimilation into British society.  People become citizens in large part because they need to or perceive that they need to, especially given the significant cost involved to apply in the UK nowadays.  And EU citizens living in the UK under free movement provisions in EU treaties haven’t needed to become citizens, even though they may be just as committed to the UK and integrated into our society than arrivals from elsewhere who have taken citizenship.  In fact, EU citizens have not up to now had to apply for “indefinite leave to remain” in the UK, a status which gives citizens of Commonwealth countries the right to vote in General Elections and referenda.

Thus recent immigrants to the UK from non-EU countries who became UK citizens soon after arrival in this country were able to vote in the Brexit referendum, whereas citizens of EU countries who’d lived here for decades were not.  Compounding the problem, citizens of Commonwealth countries with UK residency status were also allowed to vote, even from those Commonwealth countries which were never British colonies, as in the case of francophone Rwanda and Mozambique, who seemingly joined the Commonwealth out of dissatisfaction with their own former colonial power.  And the status of citizens of Zimbabwe, suspended from the Commonwealth, was so unclear, I had considerable trouble finding out whether or not they were allowed a vote (for the record, I’m pretty sure they were)!  Most of these enfranchised non-UK citizens were also non-EU citizens, but there is in fact overlap between the Commonwealth and the EU, so citizens of Malta and Cyprus could vote.  As could many hundreds of thousands of Irish citizens living the in the UK, for separate historical reasons.  You could hardly make it up.

The electoral bias against the mobile classes arises not just from the electoral franchise, though.  Even when they have the vote, people may not know who to vote for.  They are likely to be unfamiliar with the UK’s political parties.  And our political structures are geographically based, favouring the rooted classes.  Those who have lived in an area for many years are much more likely to join political parties.  Not only will they have an understanding of local issues, they are also much more likely to see their involvement as a worthwhile investment of time.  The political agenda is consequently driven by the rooted classes.

The idea of the Brexit referendum, indeed, any electoral process, was to weigh the views of all those affected by the decision – in this case all those with a direct stake in the UK’s membership of the EU.  Excluding large numbers of the mobile classes simply biased the vote.  For the mobile classes the opportunities provided by the EU may outweigh any downsides, whereas for the rooted classes aspects of the EU may seem a threat, perhaps one not sufficiently counterbalanced by the benefits to the UK economy.  To reach the right decision all these individual experiences need to be taken into account.  And since the outcome was 52% plays 48% – a difference of a bit over a million votes – somewhat less than the number of EU citizens living in the UK but denied a vote, let alone the total if we also took into account the UK citizens who’ve been living abroad for more than 15 years, it’s very likely that we’ve actually reached the wrong answer as to what is best for the UK.

August 23, 2016

After the Brexit Referendum (2) – Free Movement vs Work Permit Schemes

Filed under: Brexit, Economics, Migration, Politics — Tim Joslin @ 3:22 pm

In my previous post, I argued that free movement is the best way to organise migration.  During the referendum campaign we heard Boris Johnson parrot the phrase “Australian-style points system” with nauseating regularity.  Putting to one side the inconvenient fact that even Australia doesn’t have an Australian-style points system, since a large majority of migrants to Australia are brought in through company sponsorship schemes, I nevertheless assumed that the UK would, after Brexit, attempt to implement some kind of points-based system.

I argued that a points-based system was misguided, in part because it’s bound to reduce social mobility within the UK.  Nevertheless, as the Guardian reports, a survey by ICM on behalf of a think-tank, albeit one I’d never previously heard of, called British Future, found that “[o]nly 12% [of the sample] want to cut the number of highly skilled workers migrating to Britain; nearly half (46%) would like to see an increase, with 42% saying that it should stay the same.”  Baffling.  Why exactly are we leaving the EU?

But, part way through my previous post, it became clear that a pure points-based system might not be what all the Brexiteers have in mind.  I quoted David Goodhart writing in Prospect magazine in favour of “guest citizenship”.  According to Goodhart, free movement has led to many EU citizens coming to the UK who “do not want or need to become British”, causing an “integration problem”.  He claims that “unnecessary resentment” has been created by “the lack of a distinction between full and guest citizenship”.  Utter poppycock.  The problem is the reverse.  Voters are afraid, so they tell us, of their communities being changed by immigration.  If they thought migrant workers were here only temporarily one might reasonably suppose they’d be less, not more, concerned.  In a Wonderland Alice-like leap of logic, Goodhart somehow argues that because many migrants don’t stay forever they should be prevented from doing so, ignoring the common-sense argument that people don’t usually make a decision to stay forever in advance.  Life is what happens when you’re busy making other plans.  Roots are put down over a long period of time.  Moss gathers only slowly on stones.  And so on.

To put my cards on the table, I find Goodhart’s views fairly, well, abhorrent is the word that comes to mind.  He notes in passing, for example, that “the right of people to bring in dependents should be reviewed.”  It seems to me that if you’re working somewhere, you should be able to make your life there.  Not every migrant worker will choose to do so, of course, and some jobs necessarily involve spending time away from one’s family, but settling where you work is the norm, and I don’t see what right the UK has to prevent it.  Doing so is exploitation, pure and simple, taking advantage of the weaker economic circumstances in some other parts of the world.

So I was a bit disappointed to read Alistair Campbell’s musings in The New European (“My memo to Mrs May…”, issue 2, July 15-21 2016) drifting towards Goodhart’s position:

“…in addition to discussing terms of exit, you would like [sic] to explore the possible terms on which we might stay, including another look at immigration… Might freedom of movement become freedom of labour, for example?”

No, Alistair, we should simply be asking for what the EU failed to accept first time round when Cameron asked, which is renewed transition controls with those countries from which there is a large net flow to the UK.  Clearly, 7 years has not proved to be anything like enough for the economies of Eastern Europe to converge with those in the West.  This would save the principle of free movement by amending the rules, rather than sacrificing the principle to rigid, ill-thought-out rules that were drafted on the basis of no experience whatsoever.

The bizarre situation we find ourselves in is that we’ve voted to leave the EU in part because of the number of migrants into rural areas – Boston, Lincolnshire, had the highest Brexit vote – but, judging by the frequent dire warnings from food producers, supposedly we are going to have to create (presumably time-limited) work-permit schemes to maintain the migrant work-force in those very same areas!  Yeap, we need temporary migrants to replace people who, according to David Goodhart, were treating “our national home… as a transit camp and a temporary inconvenience.”

We’ve got a big problem here.  On many levels, not just that of how society values different jobs, an aspect Peter Fleming emphasises.

According to the food producers, we have to produce as much food in the UK as possible.  Even though farming less intensively and leaving more land fallow would surely reduce soil depletion and enhance our ability to feed ourselves in the long-term.  Do we really think our national security is at risk if we have to buy cucumbers from Poland or Romania, rather than employ Poles and Romanians to pick cucumbers grown in East Anglia?  Of course it isn’t.

And apparently migrants on low wages are essential to our food production.  Yet those communities ultimately sustained by farming – Boston, Lincolnshire and its ilk – don’t want East European shops and voices on their high street. I guess Goodhart envisages migrant permits forcing workers to stay on the farm 24/7 – how else to prevent them shopping or speaking in Boston High Street? – and, I presume, traveling in blacked out vehicles to and from Stansted for their Wizzair flights.

But what bothers me most is the general attitude that it is acceptable for non-UK citizens to live in conditions that the locals aren’t expected to put up with.  The fact that only migrant workers will do certain jobs should not be a reason for ensuring a continual flow of migrant workers under schemes denying them rights to make a life in the UK.  Rather, it should be a warning that working conditions in those jobs are exploitative.  Pay – that is, the minimum wage – needs to be increased.  Only when British workers apply for such jobs should we employ migrant workers with a clear conscience.

And I seem to recollect that seasonal fruit-picking jobs were advertised in local newspapers back in the day (I’m talking ’70s and ’80s).  I read such ads as a kid and wondered if I could get some pocket-money that way.  Students, I recall, habitually supplemented their grants by helping bring in the harvest – grape-picking in France being the coolest gig.

The government should simply  face down the farming lobby.  Tell them they’ll simply have to pay more after Brexit.  Put the minimum wage up faster than currently planned to give them a clue as to what they should be paying.  Don’t give them an exploitative migrant-worker scheme.  And don’t give one either to any of the many other industries that are also no doubt lobbying ferociously behind the scenes.  If some jobs move overseas and we have to import cucumbers, so be it.  It makes no economic sense for the UK to do everything – the theory of comparative advantage and all that.

The tragic thing is that if we hadn’t accepted over the last decade that it was OK to employ migrants on lower pay than Brits would accept for the same work and conditions we might not be Brexiting in the first place.

 

August 9, 2016

After the Brexit Referendum (1) – Free Movement vs Immigration

Filed under: Brexit, Economics, Migration, Politics — Tim Joslin @ 5:34 pm

In the days before the Brexit referendum I found myself unable to focus on anything other than the last frantic round of debates, speeches and pleas.  It was clear to me even before the vote that there are several huge interconnected problems with our political culture which could lead to a major political accident.  So I began drafting a letter/paper to send, initially to my MP. Of course, the exercise grew like Topsy and, whilst I may still produce a single document, I’m breaking it up in the first instance and posting it on my rather appropriately named blog.

My original idea was to be clever and couch my thoughts as “regardless of the result of the referendum”, so please don’t think my views are just a snap reaction to the setback.

My overall view has consistently been that the referendum should never have been called and that, even if we Brexit, we must rebuild and strengthen our trading, political and cultural relationships with Europe.  Isolation is not the answer.  Instead we must address the causes of so much dissatisfaction and fix our democracy.

We mustn’t just roll over.  Rather, we need to be tough not only on Brexit, but also on the causes of Brexit!

The most significant issue for Remain was the utter, abject failure – not just during the referendum campaign, but over many years – to build a case for free movement within the EU, or, strictly speaking, the single market of the European Economic Area (EEA), which includes a few additional countries in addition to the EU.  The desirability or otherwise of free movement remains a live issue, since the UK may wish to stay in the single market, members of which are supposed to permit free movement.  Since UK membership of the single market would be highly desirable, it’s definitely worthwhile to start making a coherent argument in favour of free movement.  The horse may have bolted, but it’s still in sight.

First, let me define my terms.

“Immigrants” vs “EU migrant workers”

The core issue in the referendum campaign was “immigration”, though, whatever Teresa “Maggie” May, and many other politicians and commentators are now saying to justify their stance on immigration controls, the question on the ballot paper was Leave or Remain, so the vote gives no clear indication of the level of opposition to free movement.

Furthermore the scapegoats for all our problems are not actually “immigrants”.  Immigrants arrive on visas and are generally on a path to citizenship.  At some point, very soon in many cases, they get to vote.

The term “immigration” suggests an intention of permanency from the outset, whereas “migration” is less committal.  It may or may not lead to long-term residence.  It’s unlikely to involve an immediate change of citizenship.

I’ll therefore use the term “EU migrant workers” to refer to those who are in the UK under the free movement provisions of EU treaties.  I should say that, whatever the context, I don’t like the negative connotations of the word “immigrant” and I’d prefer a more distinct term with a different root rather than “EU migrant workers”.  But those are the words we have and it’s kind of important to actually be understood.

Of course, some EU citizens come to the UK for reasons other than to work or to seek work.  Such “EU migrants” may be economically self-sufficient – retired or the wealthy enjoying the London lifestyle, perhaps – and are unlikely to be able to claim benefits or subsidised housing.  The issues cited in the referendum campaign relate, though, mostly to “EU migrant workers”, not “EU migrants”.

The Rationale for Free Movement of Labour

Why does the EU insist on freedom of movement within the single market?  It seems not to have occurred to the leaders of the Remain campaign to try to answer this simple question.

When I started drafting this post I assumed that the argument for free movement would have been clearly stated by the founding fathers (sorry, they seem to have all been male) of the EU (or, strictly, of the organisation’s predecessor, the EEC).   If there is such a statement – and I may research further – it’s not likely to rank highly in any citation index.  We’re not talking about the Rights of Man, here.

No, all accounts I have seen suggest that the freedom of movement we see now evolved from an initial freedom of movement specifically to work, that is from the free movement of labour.

I’ll come onto why free movement purely to work is unworkable (intended, of course – I can’t resist a play on words) in a fair society, but, first, why is the free movement of labour so important?

The argument is not often stated clearly, but there are several threads of thought:

First, the observation was made in the mid 20th century – predating the EEC, I understand (sorry, more research needed) – that one reason the US economy is more dynamic than Europe’s is because of the higher rates of migration between states in the US than between countries in Europe.  This allows new industries – Motown, Hollywood, Silicon Valley – to develop rapidly and regions to regenerate through “creative destruction” rather than stagnate when the local economy declines – Detroit, for example.

Second, it’s often said that free movement of labour is necessary for free movement of capital.  I take this to mean that if companies or an entire industry moves, or an industrial  cluster exhausts the local labour supply, trained workers can move too.  The alternative would be skilled workers in one country having to retrain or be unemployed, whereas workers in another country have to acquire the relevant skills.  Those with a vocation may be frustrated in their ambitions.  This aspect of European free movement is presumably most beneficial in very highly-skilled occupations, such as research and financial services.

Third, free movement benefits the European economy as a whole when one or more countries face an economic downturn.  As we’re seeing now, young people from some of the southern European countries which suffered most in the euro crisis, who would otherwise be unemployed, are able to find work in the UK and other economies where demand is presently creating more jobs.  Or, conversely, one economy may boom and draw in labour from its neighbours.  Germany’s post-WWII economic miracle led to “Gastarbeiter” (literally “guest-worker”) deals with its neighbours (and, famously, Turkey) which clearly foreshadowed more general free movement in Europe (and complemented free movement between the Treaty of Rome signatories).

Why Free Movement of Labour is Not Enough

Having established free movement of labour – relatively uncontroversial for some decades, certainly in the UK – the EU in 1992, through the Maastricht treaty, and by various directives and court rulings, granted additional rights to EU nationals resident in other member countries, in effect a form of EU citizenship.

There’s little disagreement about the basic narrative of how freedom of movement of labour became EU citizenship, though if you listen to Farage or Johnson you’d assume it was mission-creep, perhaps a plot by European superstate zealots.

But if you reflect for a moment on how people live their lives it’s obvious that freedom of movement purely to work is not enough.  People put down roots where they work.  They may want to retire there.  They start families, or have children already.  Crucially, because people don’t necessarily make a conscious decision that they’re going to remain forever in their adopted EU country, they don’t tend to apply for citizenship.  So the rights of EU nationals to benefits, pensions, housing, healthcare, education of their children and so on has to be protected and on the same basis as the locals.  This is simply a logical consequence, which should have been instituted from the outset.

There are, however, those who deny this logical consequence.  For example, David Goodhart argues in Prospect magazine (August 2016) that:

“A guest citizen is not a full member, does not have full access to social and political rights and leaves after a few years.  Formalising guest citizenship would mean that we could concentrate rights, benefits and integration efforts on those who are making a commitment to this country. … If we don’t want to continue with relatively high inflows we have to guard full citizenship more jealously.”

In other words, he wants us to become more like Qatar.

Why Free Movement is Preferable to Other Forms of Migration

During the entire Brexit referendum campaign I only heard one voice defending free movement.  Mine.  I piped up, somewhat uncharacteristically, in a meeting organised by UCL, where the aforementioned David Goodhart was one of the panelists, to point out that, from the point of view of the home country of migrant workers, free movement is preferable to a points-based system.  It’s less of a brain-drain.  So, I tried to explain, EU countries aren’t going to agree to anything less than free movement as part of any Brexit negotiations.

Goodhart seized on what I said to emphasise that migration in itself is a brain-drain, period, twisting the point I’d made.  So, having put my head over the parapet I had to reiterate my point that free movement is less problematic than a points-based system, since not only doctors are being tempted abroad; their patients are as well.  Wealth-creators may leave for sunnier climes; but so do the unemployed.

The problem with Goodhart’s suggestion that free movement has been bad for migrants’ home countries is that their governments – most vocally Poland in the UK context – simply don’t agree with it.  And he doesn’t repeat his claim in his Prospect article, acknowledging that migration to the UK has been an “unemployment safety valve for struggling southern or eastern European economies”.

But free movement is not only preferable to a points-based system from the point of view of the originating country.  It’s also better for the UK.

First, free movement is simple.  A points-based system not only requires a huge bureaucracy just to keep track of who should be working and who shouldn’t – a dead-weight cost on economic activity – it also implies some bod in Westminster making decisions on how many pheasant-pluckers and widget-testers the UK “needs”.  And all the lobbying that’s bound to accompany the process.  No wonder that in the example of the Australian system that is always cited, the vast majority of immigrants come in with company sponsorship – recruited abroad, something the Brexit brigade are always railing against.

Second, free movement is flexible.  Because it doesn’t involve granting citizenship, migrant workers remain mobile.  Should they fail to retain work in the UK they can return to their home country or go to any other EU country.  In particular, they lubricate the free movement safety-valve (if that’s not taking the metaphor too far) – in the event of a downturn in the UK (as we will no doubt see during the post-Brexit recession) those who have already migrated to the UK for work are no doubt better equipped than UK nationals to find work in their home country or elsewhere rather than swell the numbers of job-seekers in this country.  Perhaps flexibility is why David Goodhart champions a work permit scheme.  But such schemes are flexible only for the host country, not the migrant workers.  If the UK proposes to the EU a system of sector-specific time-limited work permits – as Goodhart seems to be advocating – in return for access to markets they’ll no doubt be told where to go.

Third, if we did institute a points-based scheme to address skills-shortages, won’t that reduce even further the incentive for UK employers to train British workers?  Or to promote them.  At present, migration from outside the EU is in part capped by salary requirements.  So your employer can recruit senior staff, but not junior ones.  Is that really what you want more of?

And, fourth, free movement also confers rights.  What is possibly achieved by restricting migration to and from countries from which the net population flow is low?  Restrictions on movement are almost bound to be reciprocated, so, if Brexit leads to the end of free movement, the opportunities for UK citizens will be reduced and British businesses hamstrung because of restrictions on the ability of their staff to work in France and Germany.  As ever, it’s easy to try to solve problems by taking away other peoples’ rights.

Finally, free movement is a mechanism for economies to converge.  Migrant workers relieve unemployment in their home countries and send money back home – the so-called remittances, helping those countries’ economies.  And economic convergence may take years, even a decade or two, but is a finite process.  Net bilateral migration flows are likely to reduce eventually to zero as the source country develops.  If we keep free movement, then eventually Poles, Bulgarians and Romanians will stop coming to the UK to work.

It seems to me that, if we abandon free movement after Brexit on the dubious assumption it was “the” rather than a reason for the vote – of course there’s no denying it was a factor – we’ll be making a huge mistake.  The current migration flows from Eastern European countries are a temporary phenomenon, and would reduce as their economies transition to be more like those in the West, and anyone who thinks the UK itself won’t someday need an “unemployment safety valve” is living in cloud cuckoo land.  Indeed, net flows of EU migrants may well reverse as the UK economy goes down the pan ahead of Brexit.

The tragedy is that arguments in support of free movement as opposed to other forms of migration were so rarely heard during the referendum campaign.

March 18, 2013

When Politicians Go Mad (Part 1): The UK’s Press Royal Charter

Filed under: 2010 General Election, Media, Politics, UK — Tim Joslin @ 5:30 pm

What is it about Clegg, Cameron and now Miliband? Who the hell do they think they are to repeatedly attempt to make constitutional decisions for all time?

I refer, of course, to the clause in the proposed Royal Charter for the Recognition Panel for UK press regulation (pdf) that allows the Charter to be changed (or terminated) only by a 2/3 majority in both Houses of Parliament.

The last time I became agitated about the UK political process was in a couple of posts, It’s the Executive, Stupid and (presciently) Adieu, AV, both written shortly after the 2010 election when inter alia Clegg and Cameron were attempting to lock us into 5 year fixed term parliaments for all time. It seems Miliband has now joined the party as well, since (as far as I can gather) he’s all for the 2/3 majority clause.

Quite apart from the merits of the particular media “legislation” represented by the proposed Royal Charter, it seems to me fairly obvious that all legislation should be under continual and periodic review, in the same way as an organisation’s Business Plan or a Project Plan. Are the organisational structures and processes that have been established actually meeting their objectives? Not that our politicians ever define any objectives or goals in the first place, as I might have mentioned before.

And – to continue stating the obvious – circumstances may change in future. After all, the media domain is evolving at a rapid pace.

And to claim that the current mediocre generation of politicians have a level of wisdom and insight that will never be exceeded in future would be to invite ridicule.

What we’re about to get is a “Royal Charter for the Recognition Panel for UK press regulation”. Yeap, Parliament is going to be two removes away from what amounts to Press Complaints Commission (PCC) 2.0. Instead of defining the terms of reference of a press regulator, a “Recognition Panel” is being set up to “recognise”, that is (as I understand it), license one or more potential regulators. The Charter includes some vague guidelines as to the recognition criteria.

The idea of the Royal Charter rather than normal legislation is to somehow make it seem that government isn’t “interfering” with press regulation. Come on! What exactly is Parliament there for if it’s not to make laws? We elect our MPs, not our media barons. And who’s being fooled by the Royal Charter device anyway? The irony is that a Royal Charter can – again, if I understand the arcane procedures correctly – be modified more easily than normal legislation, i.e. by the Privy Council who (it seems) advise the monarch who is obliged to take heed, thereby making any future government interference possible without consulting Parliament! Hence the need for a clause requiring the approval of the House for any changes. Which makes it legislation for those who don’t think it is already. Except, of course, for those still claiming it’s not legislation.

The Parliamentary response to Leveson seems to me to have degenerated into insanity. A bandwagon (that would be – surprise, surprise! – in the mainstream media, not through widespread mass-participation campaigning) has developed around a bizarre idea that the Press (or “free speech”) should not be limited by law. Even though “free speech” is already constrained, most notably by laws against libel and contempt of court. When people invoke vague principles, in this case “the right to free speech”, you can be pretty sure that’s cover for another interest. To state the obvious, the media are simply trying to preserve as much of the status quo as possible. And Cameron is taking their side to keep them sweet and because the status quo serves the Tories quite nicely thank you.

I want Parliament to do its job and debate and agree what the Press can and can’t do. To lay down in law, in as much detail as required, how the right to free speech is limited by the need to preserve other rights. And to fix the law in future as and when further problems arise.

For me the issue is privacy. I’d like a right to privacy enacted in law, not subject to interpretation by a Regulator accountable to a Recognition Board established by unamendable Royal Charter. Remember, the papers are allegedly in trouble not for allegedly invading privacy per se, but for allegedly doing it in ways that happened to allegedly be illegal (and allegedly getting caught), i.e. by allegedly hacking phones, allegedly buying information from alleged public officials and so on. In some alleged cases they might have been able to obtain the same information by legal means, e.g. kiss and tell.

The real danger with the Royal Charter is that the press regulation it produces will be ineffective (which is quite likely as, if my understanding is correct*, the actual regulatory board(s) will be 2/3* industry – inevitably acting in their common interest – and only 1/3* lay) and, with a 2/3 majority for change required in both Houses, either of the two main political parties will be able to veto any changes to fix the problem, for their own narrow ends.

PS I see the Guardian’s political blog has just posted news of a dissenting voice in Parliament:

“Charles Walker, the Conservative MP who chairs the Commons procedure committee, told PoliticsHome he was unhappy about the provision in the royal charter saying it could only be changed by two-thirds majority in the Commons and in the Lords.

‘It’s not how we do things in this country. It should be a 50% plus one majority. Parliament could pass a bill to overturn it anyway. The only precedent for this is the fixed term parliaments, and I voted against that on the same basis.’ ”

Hear! Hear!

——–
* This is incorrect. It’s the committee drawing up the media standards code that is weighted towards the industry. According to the latest (18th March) version of the Charter (pdf), Schedule 3, clause 5, the Board itself must:

“b) comprise a majority of people who are independent of the press;
c) include a sufficient number of people with experience of the industry who may include former editors and senior or academic journalists;
d)not include any serving editor;”

Clause 7 keeps changing and now reads:

“The standards code which is the responsibility of the Code Committee, must be approved by the Board or remitted to the Code Committee with reasons. The Code Committee will be appointed by the Board, in accordance with best practices for public appointments, and comprised of equal proportions of independent members, serving journalists (being national or regional journalists, or, where relevant to the membership of the self-regulatory body, local or on-line journalists) and serving editors. There will be a biennial public consultation by the Code Committee, the results of which must be considered openly with the Board.”

Sorry for any confusion.

July 19, 2012

We Need Rules, not Rulers: Culture, Bankers and the Mervyn King Question

Filed under: Barclays, Business practices, Concepts, Credit crisis, Economics, LIBOR, Politics, Regulation, UK — Tim Joslin @ 4:18 pm

The aim of any self-respecting blogger is to make original points. I’m no exception, so it is time to start to wind down this thread on the Libor “scandal” (previous instalments: Saint Mervyn: King by Name, King by Nature; Bashing Barclays Badly and Battling for Mount LIBOR, the Moral High Ground), for the world has in many respects come round to my way of thinking.

Yesterday’s City a.m. egged on the politicians with the momentarily confusing headline:

MPs CALL FOR CAP ON KING’S POWER

and opening salvo:

“REGULATORS grossly overreached themselves by forcing Bob Diamond out of the top job at Barclays, top backbench MP Andrew Tyrie declared yesterday…”

And the refrain “Who will guard the guards?” echoes through the land (and I noticed has even seeped, with the rapid mutation typical of memes, into the consciousness of the brigade of the commentariat more concerned with the easy target of the G4S Olympic security fiasco).

One of our heroes, already mentioned in despatches from the front-line, Hugo Dixon, has another piece on his Reuters blog, discussing how the Governor might be reined in:

“Holding the next governor accountable will be as important as choosing one. The Bank of England was rightly given considerable independence in 1997 to prevent politicians meddling in monetary policy in order to advance their electoral interests. But the institution and its leader have slipped up on enough occasions that leaving them entirely to their own devices isn’t a good option either.

For example, King didn’t sound the alarm loudly enough during the credit bubble and was slow to act when there was a run on Northern Rock, the mortgage bank, in 2007. He then long resisted any investigations into the Bank of England’s own failings in managing the crisis. Now its hands-off approach to the Libor scandal is being revealed.

Based purely on its record, the central bank wouldn’t be receiving extra powers. However, the Conservative-led government has tried to pin the blame for the credit crunch on the previous Labour government’s policies – in particular, its decision to take away the central bank’s responsibility for banking supervision. Hence, it has become politically convenient to reverse that move.

Given this, the priority should be to enhance the Bank of England’s accountability. Under the current system, the government sets inflation targets and picks the governor. It also chooses the deputy governors and members of two committees: the monetary policy committee which sets interest rates; and the financial policy committee which will soon be responsible for financial stability. Their independent members help prevent the governor becoming too dominant.

The Bank of England also has a board, called the Court. But this has been largely ineffective. Though it has recently stepped up its scrutiny of the central bank’s executives, it is hamstrung because it rightly has no say over policy or who is the governor.

Meanwhile, parliament can call the governor and other senior officials in to give evidence. Although this is a potentially important check to the central bank’s power, MPs haven’t yet used this tool effectively.

One way of improving democratic control would be to give MPs the right to hold nomination hearings and, in extremis, reject the government’s choice for governor and other top positions. Indeed, that’s what parliamentarians want. But the government is resisting. If MPs are to change its mind, they must first show they are up to the job.”

Let’s come back to this when we’ve diagnosed the problem.

Because I still feel I haven’t made my point fully.

What the Libor affair shows us is that regulation must be mechanical, not moral.

This is a lesson we failed to learn from King’s behaviour during the financial crisis, despite his starving the UK banks of liquidity in a misguided attempt at preventing “moral hazard”; his expressed desire to stitch up Lloyds shareholders with a backroom deal to take over Northern Rock; and the actual outrageous stitch-up of Lloyds shareholders with a backroom deal to take over HBoS without adequate due diligence, to which he must at least have given a nod.

My first post on the Libor-fiddling topic touched on the subject of culture:

“The excuse for laying into Diamond seems to be some problem with the ‘culture’ at Barclays. Is it any different to that at any other investment bank? Doesn’t the ‘culture’ in any occupation go with the turf? Presumably they don’t want traders to behave like, say, Premier League footballers, or Hollywood actors. Something less flash perhaps: doctors, say or IT guys. But would they still be able to do the job? These occupations surely require quite different qualities and aptitudes. Maybe something a little more sales oriented, perhaps, then: used car dealers or estate agents. Or politicians! But are these professions more or less honest than investment banking? I’m stuck. Perhaps our politicians could spell out exactly how they want investment bankers to behave.”

The aim of yesterday’s post was to develop the idea that the “scandal” is being treated as a moral issue. There’s something “bad” about Barclays, we’re told, and the Bank of England Governor, with ex officio moral authority, judges it comes from the top and fires the Chief Executive.

But what is “culture”?

This is what an editorial, “Culture shock”, in yesterday’s FT (I’m getting my full £2.50 worth!) suggested:

“Culture is not a fluffy chimera of business how-to books or self-congratulatory corporate reports. Culture, real and unnoticed as the air we breathe, is the web of unspoken mutual understandings that frame what people expect from others and think is expected of them. This web shapes the fortunes of any organisation or social group. Bob Diamond, Barclays’ disgraced ex-chief executive, knew this; he once declared ‘the evidence of culture is how people behave when no one is watching’. He was right…

… [non sequiturs omitted]

A culture cannot be heavy-handedly ‘managed’ by legislation or compliance rules alone. It must be more subtly cultivated and tended.”

OK, we can all agree that behaviour within an organisation is determined by executive example and communications; organisational stories; dress code; building architecture, location and decoration; the presence or absence of game rooms; and so on and so forth – as well as the nature and demands of the work, as I previously stressed. But within all that complexity, all we’re really concerned about here is that rules are followed. There may be indirect ways of achieving this goal by means of some kind of arcane cultural alchemy – would Fairtrade coffee, beanbags and dress-down days work? who knows? – but most people would consider it sensible to simply focus on the outcome.

Obviously the “rules alone” are not enough. There also needs to be an expectation of enforcement. A rooting out of dishonesty. And maybe by spending £100m on investigating Libor-fixing rather than, say, carrying out some “routine email housekeeping” (didn’t something like that come up with News International?), Barclays have shown a willingness to steer their internal culture in the direction of obeying the rules.

With this unsatisfactory view of “culture” in mind, let’s consider the crucial question for the future, the “Mervyn King Question”: Is it possible for the Governor to both exercise moral authority AND for there to be effective oversight of the role?

No, of course not. The Governor can’t both exercise his judgement AND explain the detailed reasons for a decision. If he can explain the precise reasons to whoever he, the Governor is accountable, for example those for firing Bob Diamond (“he broke rule 44b clause 3, which is a sacking offence”), then by definition he isn’t exercising judgement.

The Mervyn King Question suggests then that we have to decide which way we jump. Do we want, in the modern world, to trust the personal judgement of an unelected official, or do we want a team expert in banking regulation to ensure that the rules and sanctions for breaking them are clear to banks and that bank behaviour is monitored and the rules enforced?

Do we want a ruler or do we want rules?

The traditional role of the Governor of the Bank of England was one of arbitrary power. This is where Mervyn King believes we should return. No wonder the job of Governor is so coveted.

But there’s a different path. Surely we’d be better off rejecting the moral approach and focusing on the technical aspects of the role of Governor of the Bank of England?

Let’s take as an example the critical case, where it all started to go wrong, when I first became concerned about the outlook of Mervyn King. Instead of arbitrarily allowing banks (such as Northern Rock) to fail to try to prevent “moral hazard” shouldn’t the Bank have made the rules absolutely clear in advance? NR would not, I’m sure, have relied on interbank funding had it’s executives known that funding may be allowed to dry up and they would have to retire in disgrace.

I would suggest that the Bank start by announcing that it will not allow any Bank to fail due to systemic problems (as opposed to Baring-style sudden catastrophic losses), but will provide liquidity as lender of last resort. What constitutes “systemic” would need clear definition, as would the cost of such support which would include a requirement for banks to raise capital. We have to recognise that we can never allow banks to fail under stress – such failures simply cascade through the economy – and dismiss the nonsense that such a backstop is some kind of subsidy for institutions that are “too big to fail”. This is like saying that Tesco is subsidised because the State provides resources for the prosecution and punishment of shop-lifters.

The Libor-fiddling that mattered – that before the financial crisis – was arguably criminality, pure and simple. It was orchestrated by a small group of traders who knew they were breaking the rules, as their emails make clear: “I would prefer this not be in any book!”, “if you breathe a word of this I’m not telling you anything else” and so on. It became a “scandal” because politicians – principally Ed Miliband – immediately made hay. But business isn’t politics. It’s not primarily about character (neither should politics be, of course, but the UK political process is becoming ever more Presidential and less policy-driven). The danger of allowing the political process to drive banking or other business regulation is that there is no satisfactory answer to the Mervyn King question. Even were we to confer moral authority on the Governor as we do the Prime Minister (who is not only elected, but easier to get rid of than the Governor – men in grey suits and all that), business is not hierarchical like government. It is fundamentally about choice and competition. Differences in outlook are necessary.

Dismissing company bosses in an attempt to change the corporate “culture” would seem to necessarily worsen group-think. If all our banks had been the same perhaps they’d all be part owned by the State now. Perhaps they’d all been like HBoS. As it is, Barclays managed to recapitalise without calling on government funds, Santander expanded and the “elephant” HSBC simply marched on barely affected. Diversity matters.

At worst, of course, there is no difference between condemning a bank’s culture and firing the boss simply because you don’t like the cut of his jib.

I promised I’d return to the points Hugo Dixon made. We may well need some or all of the means Dixon suggests for holding the Governor to account. But before we can do that, Parliament needs to step back and look at how the Governor’s role is defined. They need to review his Terms of Reference. Make sure he’s clear what the rules are.

July 18, 2012

Battling for Mount LIBOR, the Moral High Ground

Filed under: Barclays, Business practices, Credit crisis, Economics, FT, LIBOR, Media, Politics, Regulation, UK — Tim Joslin @ 4:17 pm

If you’re going to watch one film about the Vietnam War then I recommend Hamburger Hill. The point of the film for me at least (other discussions of the movie fail to stress this point) was that the battle was not about the strategic value of the eponymous high ground. Rather, both sides were trying to demonstrate their determination.

Catching up with an episode of Mock the Week last evening, I chanced on a rant by the one I would refer to as the tall, skinny panelist with dark curly hair, had the internet not been invented purely to allow me to remind myself that his name is, in fact, Chris Addison. The comic – who I always feel differs from his generally less hirsute colleagues in looking less like a funny-man, and more like a particularly tedious sociology lecturer – observed at some length that everyone is furious about the Libor “scandal”, even though most of them they don’t have a clue what it’s about. Well observed, in my opinion.

My first post on the Libor topic attempted to convey this moral dimension – and the battle for authority – with its title, Saint Mervyn: King by Name, King by Nature, but perhaps I wandered slightly off the theme, in favour of providing a narrative.

It seems clear after Mervyn King’s appearance before the Treasury Select Committee yesterday, though, that the Governor chose the Libor issue as the ground on which to continue a war with the City, and in particular with Bob Diamond. We’re told that Diamond’s sacking was not just about the Libor issue, but about Barclays’ “culture”, and a “pattern of behaviour”, as discussed in correspondence between Lord Turner, head of the FSA and Marcus Agius, Barclays’ Chairman. It seems clear that nothing new had emerged to implicate Bob Diamond personally and that King therefore simply seized the opportunity to get rid of him. Here’s how the Guardian puts it in an editorial:

“And why exactly was Mr Diamond pushed out? Not for any direct involvement in the Libor scandal but, in the words of Mr King yesterday: ‘They [the bank] have been sailing too close to the wind across a wide number of areas.’ No actual infraction; just a general sense of having gone too far for too long. … The impression left is of rather rough justice.”

Indeed, I’m reminded, the Libor scandal itself is nothing new. Although I now seem to have run out of free views of FT.com pages (so pushed the boat out and bought a copy this morning – £2.50, they’re having a laugh!), I did manage to access an old story that I’d bookmarked:

Banks served subpoenas in Libor case

By Brooke Masters and Patrick Jenkins in London and Justin Baer in New York

Regulators probing alleged manipulation of a key interbank lending rate have focused their demands for information and interviews on five global banks, according to people familiar with the investigation.

UBS, Bank of America, Citigroup and Barclays have received subpoenas from US regulators probing the setting of the London interbank offered rate, or Libor, for US dollars between 2006 and 2008. …”

Who says bookmarking thousands of interesting news stories is a waste of time, eh?

And this one FT story contained links to pieces in the FT’s Lex and Lombard columns, as well as another story the previous day:

“Big banks investigated over Libor

By Brooke Masters and Patrick Jenkins in London and Justin Baer in New York

Regulators in the US, Japan and UK are investigating whether some of the biggest banks conspired to ‘manipulate’ the benchmark interest rate used to calculate the cost of billions of dollars of debt.

The investigation centres on the panel of 16 banks that help the British Bankers’ Association set the London interbank offered rate, or Libor – the estimated cost of borrowing for banks between each other.

In particular, the investigation was looking at how Libor was set for US dollars during 2006 to 2008, immediately before and during the financial crisis, people familiar with the probes said.

The probe came to light on Tuesday when the Swiss bank UBS disclosed in its annual report that it had received subpoenas from three US agencies and an information demand from the Japanese Financial Supervisory Agency. …”

When were these stories published? 15th and 16th March, 2011.

Now, I may not be willing to fork out for an FT subscription, but I’m sure Bob Diamond and Mervyn King are. In fact, they probably receive the “Pink’un” as a perk of their jobs.

Regular readers will know that I’m very guarded in anything resembling an accusation that I may occasionally make on here, but it does indeed beggar belief that everyone involved is claiming to have been unaware of the brewing Libor scandal – a matter relevant to banks’ annual company reports – until the last few weeks, since even I knew about it, and the Libor-setting process was, until this month, of course, of somewhat peripheral interest to me, and even that overstates my curiosity. My £2.50 copy of the FT quotes Mervyn King on the front page as saying:

“The first I knew of any alleged wrongdoing was when the reports came out two weeks ago.”

Doesn’t the Governor read the FT? If not, why not?

To the extent I worried about it, I assumed the likelihood of fines over Libor-rigging was “in the price” of bank shares (we must be at the point where banks start assuming a few hundred mill in fines each year as part of their business plans, and therefore product-pricing). Active investors must have also thought bank share prices took account of the Libor investigation, as otherwise they would have sold the banks, short if necessary.

As I mentioned yesterday, Libor manipulation – much of which occurred during the financial crisis when the numbers were guesses anyway – would seem to be less serious than HSBC’s desultory attitude towards controls to prevent money-laundering. (Rather predictably, HSBC have seemingly gone overnight from one extreme to the other: I have recently had an HSBC account, to which I log in online 2 or 3 times a month, locked down – “suspended” so I can’t even pay into it – for no apparent reason).

No, Libor has been chosen as a battleground.

Sacking Bob Diamond makes no sense otherwise. Barclays report that they spent £100m “to ensure no stone has been left unturned” in their internal investigation and have settled early with the regulators. Since this has not been enough to keep the top guys in their jobs, perhaps their successors will adopt a different strategy next time!

And, like a misjudged military intervention, the battle threatens to turn into a war, consuming its instigators.

Mervyn King has clearly over-stepped his authority and threatened his legacy: “It is the BoE that finds itself most directly in the line of fire”, writes the FT’s Chris Giles. Not only are more and more awkward questions being asked in the UK, the regulators across the Pond are now playing holier than thou. That FT front-page lead (taking precedence over a report of the HSBC compliance chief quitting during a US Senate hearing!) is titled: “Bernanke calls Libor a ‘flawed’ benchmark”, and observes that “Mr Bernanke’s description of how the US reacted [earlier, in 2007] to claims that banks were understating the rates at which they could borrow contrasted with testimony yesterday from Sir Mervyn King.”

Mervyn King’s “pattern of behaviour” suggests to me that he may have been bullied at school. If not, I rather suspect he’s now going to find out what it’s like at his regular central-banker get-togethers.

July 17, 2012

Bashing Barclays Badly

Filed under: Barclays, BBC, Business practices, Credit crisis, Economics, LIBOR, Media, Politics, Regulation — Tim Joslin @ 6:10 pm

I noted yesterday that I’d set the recorder to catch Jerry del Messier’s appearance before the Treasury Select Committee. Sadly, when I got home I found I had filled my hard disc with several hours of BBC News 24, which contained no more than 7 minutes of coverage, including “analysis” of the session. Clearly the BBC is not so bothered to get to the heart of the matter.

Never mind, I watched a bit on Parliament TV this morning, after warming up with some live coverage (thanks BBC) of Mervyn King’s appearance, flanked by his deputies and Adair Turner, like a bunch of schoolboys caught reading top-shelf magazines behind the bike-sheds.

Unlike the BBC, the MPs are trying gamely, but you really have to wonder if the process works properly. Maybe just two or three of them should ask all the questions, to avoid lines of questioning being dropped just as it gets interesting, as keeps happening when it’s another Member’s turn for a few minutes in the limelight.

Still, I wasn’t disappointed by del Messier’s grilling (you missed broadcasting some great live TV, BBC), but a couple of points seemed to pass the MPs by.

First, it finally became clear that Bob Diamond’s infamous memo was sent the day after the phone call it records, as suggested by the timestamp. Here’s the full memo:

“From: Diamond, Bob: Barclays Capital

Sent: 10/30/2008 14:19:54

To: Varley, John: Barclays PLC

Cc: del Missier, Jerry: Barclays Capital (NYK)

Subject: File note: Bank of England call

Fyi

File Note: Call to RED [Diamond] from Paul Tucker, Bank of England

Date: 29th October 2008

Further to our last call, Mr Tucker reiterated that he had received calls from a number of senior figures within Whitehall to question why Barclays was always toward the top end of the Libor pricing. His response was ‘you have to pay what you have to pay’. I asked if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions, his response ‘oh, that would be worse’.

I explained again our market rate driven policy and that it had recently meant that we appeared in the top quartile and on occasion the top decile of the pricing. Equally I noted that we continued to see others in the market posting rates at levels that were not representative of where they would actually undertake business. This latter point has on occasion pushed us higher than would otherwise appear to be the case. In fact, we are not having to ‘pay up’ for money at all.

Mr Tucker stated the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.

RED [Diamond]”

I was surprised, to say the least, that none of the Select Committee noticed this delay the first time round when they might have asked Diamond what he did in the intervening time (he phoned del Messier, it turns out, though I recollect Diamond didn’t recollect this). Diamond, I remember, testified at some length that he was concerned that Barclays might appear weak whilst trying to finalise its life-saving Middle East share sale. Surely he would not have waited a day before relaying the message from Tucker.

Second, the MPs are completely failing to distinguish between different periods of Libor fiddling. From 2005-7 traders in Barclays and elsewhere were persuading the rate-setters to submit a Barclays Libor rate in order to try to make money. This is appalling – see the FSA’s report (pdf) for the salacious details. But after 2007 Libor wasn’t working. Interbank lending wasn’t happening. The FSA write:

“In the latter half of 2007 and throughout 2008, lending in London for maturities longer than overnight came to a virtual standstill and there was extreme dislocation in global money markets.”

So the banks were just making a judgement as to what they might be able to borrow at. Since it was just a guess, it stands to reason that if they were guessing higher than every other bank they may as well guess lower. “Low-balling” Libor was done for an entirely different reason from mid 2007 on – top-down from management, rather than bottom-up by traders – so as not to appear weak.

What strikes me is that by releasing Diamond’s file note, Barclays have successfully steered the MPs away from the criminality and into the increasingly murky area of Libor-setting during the financial crisis. Damage-limitation PR, basically, though that’s fairly moot from Diamond’s point of view right now, but the MPs really should have tried to distinguish between the two periods. The symptoms may be similar – dodgy Libor submissions – but the causes are different. Both hayfever and a cold might cause you to sneeze, but you’d treat the two conditions quite differently.

The Committee session with Mervyn King this morning was quite different. The Governor didn’t seem to realise he was in the dock. He was shirty with his inquisitors, and even tried to talk over one. And Andrew Tyrie seemed genuinely cross. He shared the concerns I expressed yesterday. Trouble is, dealing with King is like having a 6 foot shark on a line intended for mackerel. He seems to be pulling in several different directions at once. One minute he’s the regulator (on the grounds that the function is being handed back to the BoE), the next he’s not. One minute Diamond is being fired because of the outcry over Libor, the next it’s to do with a letter from the FSA (the Guardian has posted it here).

I hope and expect Tyrie’s report to be critical of the Governor, and the governance of the Bank of England.

Here are a couple of questions to think about:
– why doesn’t the Bank of England have separate Chairman (and Board) and Chief Executive roles? The Governor would then be – as the Chief Exec – at least accountable to someone.
– if this is what happens when they don’t like the “culture” (or just the CEO) at a bank/a few corners are cut on a poorly defined technical procedures during a once in a lifetime crisis (which all the other banks might have been doing as well)/a few traders find a new way to cheat a poorly-defined system (which might have been happening at all the banks) – delete as applicable, depending why you think Diamond was sacked – then what are they going to do when a bank does something really bad? Like, for example, allowing widespread money-laundering, as HSBC seems to have done.

July 16, 2012

Saint Mervyn: King by Name, King by Nature

I’ve been following the Libor scandal with considerable interest. The former Chief Operating Officer of Barclays Jerry del Messier should be settling into his chair before the UK House of Commons Treasury Select Committee as I write these words – don’t worry, I’ve set the recorder for the BBC News Channel.

Perhaps we’ll find out the answer to why Jerry del Messier was cleared of rigging Libor on the grounds that, according to Barclays’ briefing note (pdf) issued ahead of Bob Diamond’s appearance before the Select Committee he:

“…concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high. He passed down an instruction to that effect to the submitters.”

on the basis of Diamond’s infamous note to file which suggested that Paul Tucker, Deputy Governer of the Bank of England had advised that:

“…while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.”

The mysteriousness of it all arises because Barclays was already lowering its Libor submissions. They admit that during the period Sept 2007 – April 2008:

“Less senior managers gave instructions to Barclays submitters to lower their LIBOR submissions. The origin of these instructions is not clear.”

You’d think that when Jerry del Messier told his rate-setters to “lowball”, someone might have mentioned that they were already doing it!

I really like the point in Barclays memo that:

“[del Messier’s] instruction became redundant after a few days as liquidity flowed back into the market.”

“Became” redundant? His instruction was already redundant!

It’s not del Messier’s behaviour that really bothers me about the whole affair. It seems all the banks were at it, and Barclays may not have been the worst culprit. Barclays is just the first to settle. And the only logical explanation I can think of for George Osborne’s strange claim that Libor lowballing was sanctioned by Balls, Brown and Vadera is that it was an open secret in the City.

After all, no-one would borrow at a rate inflated by concerns that the banks might fail, as opposed to one simply reflecting risk, the base rate and the balance between supply and demand for money. Libor simply doesn’t work in those circumstances. The authorities would be obliged to address the problem any way they could in order to save the economy.

I hate to see public bullying. It seems our politicians – and many in the media and, notably, Mervyn King – just don’t like Bob Diamond. What will they do when they run out of obvious scapegoats? The excuse for laying into Diamond seems to be some problem with the “culture” at Barclays. Is it any different to that at any other investment bank? Doesn’t the “culture” in any occupation go with the turf? Presumably they don’t want traders to behave like, say, Premier League footballers, or Hollywood actors. Something less flash perhaps: doctors, say or IT guys. But would they still be able to do the job? These occupations surely require quite different qualities and aptitudes. Maybe something a little more sales oriented, perhaps, then: used car dealers or estate agents. Or politicians! But are these professions more or less honest than investment banking? I’m stuck. Perhaps our politicians could spell out exactly how they want investment bankers to behave.

Or perhaps Mervyn King could tell us. After all, he’s the one who fired Bob Diamond – never mind that the regulatory investigation is far from complete. Is he going to fire the heads of a dozen other banks?

Never mind that the real reason seems to be some problem with Barclays “culture”, it’s not actually Mervyn King’s job to sack the Chief Executives of banks. Or anyone else employed by a bank for that reason. And even if it was King’s job, he would be obliged to follow due process.

Diamond could be forced to step down if the Financial Services Authority found he was not a “fit and proper” person. Which didn’t happen.

Or if he lost the confidence of Barclays’ shareholders. He might have done, I suppose, but that’s not why he went.

No, Marcus Agius (Barclays Chairman and ex-Chairman) explained what happened:

“Agius told MPs that the chief executive had quit ‘because it became clear that he lost the support of his regulators’ just 48 hours before the American-born Diamond was scheduled to appear before the committee.

Agius described how he had been summoned, along with Sir Michael Rake, the most senior non-executive director on the Barclays board, to see King shortly after Agius’s resignation had been announced a week ago on Monday.

‘We had a conversation in which he said that Bob Diamond no longer enjoyed the support of his regulators,’ said Agius, who then had to hold an emergency board meeting by telephone of non-executive directors to decide how to proceed. He admitted to being shocked as concerns had not been raised when the £290m fine for attempting to manipulate Libor rigging emerged five days earlier.

Agius said he and Rake went to Diamond’s home on the Monday evening. Diamond – who had insisted to MPs last week that he did not know about any regulatory pressures – ‘was not in a good place’, said Agius. He said that the conversation was ‘not long’ and that Diamond had asked for time to talk to his family.

‘I left his [Diamond’s] house confident he would resign, if he hadn’t done so already,’ Agius said.”

Staggering.

I’m surprised there’s not been more outcry at such authoritarian behaviour by the Governor of the Bank of England, who is, after all, just a public official.

One exception is Philip Inman who provides some background in a Guardian piece titled “How Mervyn King Finally Got Bob Diamond.”

“…from the moment the credit crunch began to wreck Northern Rock’s finances in the summer of 2007, the grammar-school boy from Wolverhampton, whose father was a railway worker and then a geography teacher, was ready with his analysis. King said most of the huge debts accumulated by banks could be tied to the huge bonuses executives received as reward for their lending.

In meetings with regulators and then chancellor Alistair Darling, Diamond, then head of Barclays Capital, and his investment banking peers were seen as a bunch of amoral, greedy traders. Darling relates in his diaries how King would counsel against providing rescue funds that perpetuated a risk-taking culture.

But it was Diamond, one of nine children and also the son of a teacher, who made it public and personal. At a time when most bankers were busy trying to prevent their institutions going bust, he broke cover to give an interview in a Sunday newspaper. In an analysis of central banks’ actions in combating the credit squeeze, Diamond notably excluded the Bank of England from praise.

He said providing short-term cash was the job of a central bank. ‘For the recovery to continue we need to find more ways to get liquidity into the short end of the curve,’ he said. ‘That’s down to confidence, and that’s down to the central banks. We’ve seen thoughtful moves by the [US Federal Reserve] and the [European Central Bank].’

The Bank of England saw the interview as a direct attack on its handling of the crisis. King’s response was to embark on a series of speeches and interviews in which he openly decried the emergence of a ‘small elite’ that agreed to pay itself bonuses in good times and bad.”

So petty. Maybe Mervyn is touchy – I think Diamond was right. Perhaps, if King had behaved more like other central bankers, we’d have a healthier banking industry today, and Ed Miliband wouldn’t be threatening to break up the survivors to create more competition. Don’t forget that Alliance & Leicester, Bradford & Bingley and Northern Rock have all disappeared from our high streets.

What’s more, blaming the financial crisis on bank bonuses is simplistic to say the least.

And perhaps central bankers should have seen the housing bubble warning signs a bit earlier.

Another commentator who hasn’t let the matter pass is Hugo Dixon who suggests at Reuter’s that the “BoE governor’s arm-twisting raises tricky issues”:

“…on whose behalf exactly was King speaking? The BoE, after all, is not responsible for supervising banks – and won’t be until next year. That’s still the job of the Financial Services Authority. If King wasn’t speaking for the FSA too, he was arguably stepping beyond his authority.

On the other hand, if the BoE governor was speaking on the FSA’s behalf, why didn’t the regulator itself deliver the message that Diamond should go? And why too did the FSA apparently change its position? After all, the regulator had only just agreed a settlement with Barclays over the Libor rate-fixing scandal. If it had wanted Diamond to go, that would have been the moment to say so.

A further question is how exactly the regulators managed to twist Barclays’ arm. If the FSA doesn’t support a bank director in his role, the current mechanism for removing the executive is to deem him no longer ‘fit and proper’. But it seems hard to argue that Diamond didn’t meet that test. After all, the lengthy investigation into the Libor scandal did not criticise him personally.

Some people will no doubt say it is good that Diamond has gone and it doesn’t really matter how that was engineered. But methods used in difficult situations can easily become precedents.

The BoE is about to become even more powerful next year when it takes over banking supervision. It is important that it operates in a transparent and accountable fashion.”

Quite.

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