What GM Says About Western Politics

The Chapter 11 filing of GM yesterday marked one of the biggest bankruptcy filings in corporate history. The hope and expectation was that restructuring would permit ‘Government Motors’ to emerge from supervision by August.

GM in America

GM employs 28,000 people worldwide, building 20,000 vehicles per day. One million Americans depend on it for healthcare and retirement benefits. Politically, this is where the free market stops.

Chapter 11 is widely regarded as a humiliation for the company and, to an extent, for American industrial leadership. The Presidency has become intimately involved in the presentation of the process because the system that he has inherited means that he has little choice but to intervene.

If the intervention is being sold as a potential reinvigoration of the company, it is equally a sign that the legacy of the Reagan-Bush experiment in economic libertarianism is not politically sustainable when the free market's propensity for 'creative destruction' affects a sufficient bloc of voters in a democracy.

The point needs emphasising. Across the capitalist West, there is now a major redistribution of resources from the relatively unorganised within society, especially the poor but also the middle classes, to preserve the economic prospects of chunks of a system that otherwise appears to have failed.

If taxes must rise and social programmes be cut in the context of preserving the value of currencies in international trade, then it is bitter fruit that the main beneficiaries of largesse will be stakeholders in the system that caused the crisis and ailing industries that failed to reform when they could.

A New Age of Sclerosis?

This may prove to be the beginning of an age of sclerosis in the West in which the best of capitalism (the creative destruction that promotes innovation) is in danger of being jettisoned to preserve the worst, the dead weight of big ticket industrial capacity that cannot survive without protection.

The best of socialism (social cohesion created by moderate redistribution to the weakest from the strongest) will not appear. The costs of the worst of state planning make it impossible - in this case, the redirection of scarce capital to hold up industries where political power exists and has leverage.

Somehow, the West seems incapable of creating a social democracy that can encourage and drive innovation. Or a free society that can also provide decent life chances for its poorest and weakest members.

Economic libertarians might say that social democracy and innovation are contradictions in terms. Globalisers might say that social democracy on a national base (the only way it can work) operates against both efficiency and innovation.

And yet, now, we are faced with a broken system that has to be supported in ways that work against both economic liberty and the reduction of social deprivation. With so much capital needed for automotive, banking and the maintenance of a war effort, little is left for universal healthcare.

A European Perspective

The crisis over GM’s bankruptcy has developed important European ramifications, setting the strategies of the German government (corporatist financial intervention of the old school) against those of the British government (no cash left in the kitty and an ideological commitment to free market solutions).

The truth is that the UK has exhausted itself bailing out the banking system on which the City of London depends whereas German export strength relies on the sort of manufacturing invested in Opel. It is logical for the UK to use scarce capital in one direction and Germany in another.

Unfortunately, German subsidies to buy Opel almost certainly mean that the bulk of job losses will be in the UK (Vauxhall). This is of considerable concern to a New Labour Government. Vauxhall car workers, through the Unite trades union and others, are stalwarts of its crumbling political coalition.

In the UK, Business Secretary tried to manage the justifiable fears of British car workers – there are 50,000 jobs at stake across Europe and the British feel vulnerable in the pecking order.

The British objective is simple – to avoid the Germans protecting their car workers’ jobs in their election year at the expense of British jobs a year or so before the next British General Election.

Politics thus intrudes on British economics with a not-so-creative tension between the need to keep the major unions on side, virtually sole providers nowadays of funds and political machinery for New Labour, and the worry that corporatist intervention might alienate important business and city interests.

Business Secretary Mandelson is known to be facing strong resistance to providing financial support from Cabinet colleagues because they see the latter risk as greater than the former. It is Mandelson who has the better understanding of the nature of power within his own party.

German Corporatism & Defence of the Indefensible

The British economic elite definitely does not like the German handling of the matter, believing that its efforts to save Opel would seriously distort the market through its Euro1.5bn of bridging finance and that it should not be propping up terminally ill corporations.

The European Commission was pulled in to try and square the different demands of the various national interests involved because the British are not the only ones troubled by German action. GM Europe has major plants under threat in Belgium and elsewhere.

Despite unconvincing denials along the 'we are all Europeans now' line, Berlin is clearly trying to ensure that the half of GM Europe situated in Germany is relatively unscathed by job cuts.

New Labour was explicitly linking its national government financial support to the salvaging of the two UK car plants but it was only offering fairly small beer. So, it was not sitting at the table alongside Berlin in talks with GM.

All of this, like the Eurofighter investment (a complete waste of public money from a defence perspective that is also directed at maintaining manufacturing capability and jobs), parallels the desperate measures in the US designed to protect the automotive sector.

Across the 'old' West, Governments are trying to preserve elements in both the military-industrial complex and the petrol-automotive complex because of the votes and jobs involved. This is a redistribution of resources from the bulk of the population to special interests.

A sensible British defence policy would close down the Eurofighter programme, much as as the US has cut back on the Raptor programme, and end the Trident investment, much as economics will drive US-Russian arms limitation talks.

A sensible Western industrial policy would not depend on circulating tax dollars, pounds and euros back into arms production and rampant over-capacity in manufacturing. By this stage of development, the OECD should have moved on to the effective provision of services to its own populations en masse.

But, of course, as we have noted before, much of the mainstream political class has now lost its connection with the population at large. It is made up of complex coalitions of special interests who can deliver specific funding and block votes. Democracy, in this respect, has become decadent.

Where We Are Heading ...

From this perspective, the political class could service special interests quite adequately under cover of general prosperity until recently but recession is showing the bulk of the population how the sausages are, in fact, made - and it is not a pretty sight.

German panic at the possible failure of the British to throw good money after bad in the Eurofighter project (they need not have worried) and at the effects of the collapse of GM Europe are directly linked to the German electoral cycle.

There is also a serious tension between getting the right result for a German-dominated Europe in the Euro-elections - in which the disturbing trend of the British towards scepticism requires cautious management - and getting the right result in the German domestic elections later in the year.

The weakness of the British political class demonstrated in the recent expenses scandal in London is only the beginning of a more general anxiety mitigated by the undoubted trust in Obama in the US and the integrated nature of German corporatism which still delivers material universal benefits.

When the Republican Party in the US finally recovers from the Reagan-Bush years and discovers a new way to connect with the general public and when the real cost of German corporatism becomes too much to bear, then these anxieties are likely to emerge in a far more poisonous form.

Until then, the crisis is at its most acute in London where the complete collapse of any pretence to social democratic cohesion is matched by the worst sort of special interest politics managed by a political class that has lost the plot.

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Economics and the UK's Great Power Status

Economic pressures are biting hard into British ability to project power. The British have finally left Iraq, handing over security control to the US on April 30th, but are committed to Afghanistan. 179 British military personnel have died in Iraq over six years and the death toll is mounting in West Asia.

Competing Pressures on Budget

There a number of fiscal issues arising here.

The expense of operations East of Suez was presumed to be worthwhile because economic growth, derived from never-ending globalisation, would pay for the interventions necessary to stabilise the lands where the wild things are. That growth has come to a grinding halt.

Projection of power also involved high expenditure along three competing lines - boots on the ground to follow through on intervention, a bigger naval presence to protect trade and energy routes and participation as leading player in the projection of European power.

On top of this were Cold War hang-overs like the independent nuclear deterrent (Trident) and demands for more budget against insurgent and terrorist threats from the security services, not excluding GCHQ budgets for monitoring the Government's own electorate.

This is a massive and mounting sum - nuclear upgrades, better equipment for the army, aircraft carriers, the Eurofighter, hugely increased 'spook' budgets ...

Tough Decisions

... and yet there has been no recent Strategic Defence Review. Few take seriously the threat of a direct assault by any other sovereign state on the island of Britain and the threat of terrorism appears to be mostly talk with any likely annual death rate less than one severe bombing raid on civilians in 1940.

Expenditure entirely depended on increased tax revenue and a politically compliant population that would not mind the steady diversion of taxes into the toys of great power status because it was living it large on easy credit. Neither the revenue nor the compliance may now be taken for granted.

The constituency for worrying about child poverty or the state of care homes had been swept aside with union connivance but, as the mafia say, 'things change'. The state of the British economy has taken all the fun out of defence procurement and it will soon direct attention back to social problems

The Government's refusal to undertake a full Strategic Defence Review until after the next Election creates an illusion of business as usual until the crunch in government spending really takes hold from 2011. This is purely tactical - a hope against hope that New Labour can bluff its way back in 2010.

Government strategy has been reduced to stalling on big decisions wherever it can, kite-flying on the possibility of killing off big projects like Trident (in the context of some US-led wider nuclear disarmament treaty) and spending high now to achieve some short term objective and then get out.

West Asia - A Race Against Time

Take West Asia. UK policy has three components - don't upset the Americans, don't spend any more money than necessary and hope that the Americans can pull off their Iraq trick and allow the British to get out in 2010, preferably just before an election, with honour intact if not enhanced.

The UK has just published its new medium term strategy for Afghanistan and Pakistan to bring it into line with US policy in the area. It will send a temporary extra 700 troops to Helmand to help provide security for the presidential election in August.

But the Army is not happy. Gordon Brown vetoed any further UK involvement in the US troop surge in Afghanistan much to the consternation of commanders on the ground. Their immediate demand for 2,000 more troops was curtly rejected.

The issue of military anger ('incensed', according to the Financial Times) at the Government’s decision is an interesting one because there seems to have been a sustained campaign by the Army to embarrass the Prime Minister in the media.

To some extent, this military anger is a righteous irritation with a failure to resource it properly on mission. To some extent, it represents anger that lack of available force means that Helmand Province will soon become a wholly US command and that Brits will be ordered around as their juniors.

But behind this is the fear that the military may be cut back in favour of aircraft carriers and aircraft in the post-election Strategic Defence Review (probably undertaken by the Tories). If funds are committed to the big toys now, the incoming Government may be faced with a fait accompli.

The Old 'Guns versus Butter' Debate

Boots on the ground ensuring a victory might have been an argument for spending more on soldiers in the future, regardless of the fact that, if the UK can no longer afford a Blairite policy of global humanitarian intervention, there is really not much point in having much of a standing army at all.

The Financial Times sided with the military this week, criticising the Government for trying to conduct war ‘on the cheap’. This is a little naïve about a domestic situation where there is no stomach for massive transfers of funds and loss of lives at a time of economic crisis.

Extra funding was promised to help Pakistan’s counter-terrorism operations as well as education and economic assistance, with pledges of £665m over the next four years. Yet, privately, respected intelligence analysts are telling MPs that the UK should just scuttle from West Asia as fast as possible.

British citizens might legitimately wonder why £665m of their taxes are going to improve education overseas when everyone knows that there will be serious cut-backs in education and in other services at home within that same period to assist in a war that might be supposed to be none of our business.

Case Study in Crisis - The Eurofighter Programme

The end of the days of fiscal wine and roses is not restricted to its effect on overseas operations. The UK has declined to pay £1bn towards the Eurofighter Typhoon jet programme on demand amidst European anger. It will now come to a decision by May 15th and it is not an easy one to make.

Brown was personally called by Merkel, asking him to keep to a commitment for a programme conceived in the Cold War (mid-1980s) and probably of no real use to the UK compared to the more immediate requirement to balance the economic books.

There will be more European protests. Anxiety in Berlin relates to its own domestic politics and should not detain us. The bottom line for us is that the British were quite prepared to bung a £1bn wad towards the European attempt to be a strategic power in its own right as an entry price to the game.

Now the Eurofighter looks like a great white elephant, economically and potentially politically, a grand European project which is really a luxury item and, in fact, the pursuance of continental industrial policy by other means.

Its supporters are increasingly reduced to warning of the effects of a failure to proceed on an industry which provides 40,000 jobs. This is important politically when the main union involved is central to the New Labour project but the argument does not have a great deal to do with national defence needs.

A £1bn subsidy to the defence sector is going to upset a lot of people. Those seeing public spending cuts and future tax rises and those sectors who have not received Government help, notably the rival automotive sector which has had minimal assistance, are not going to be well pleased.

Political Tensions

The military, who would rather have the money spent on improved equipment for missions like Afghanistan, are opposed and have friends in the Tory Party. Drifting liberal and left supporters of the Government, many on the cusp of walking out of the Labour coalition altogether, will not see the point.

The decision affects the Treasury (public finances), the Business Department (industrial policy) and the Ministry of Defence (allocation of limited resources), while pressure from European partners involves the Foreign Office. Eurosceptics could have a field day in the run-up to the June 4th vote.

The UK defence industry is getting equally irritated with the Tory Party’s alleged plans (as yet very unclear) to cut expenditure on defence. Tories are giving private assurances that certain programmes are safe (presumed to be the aircraft carriers) but, in public, the opposite impression is being given.

The Tory Party has the same problem as New Labour. It likes to talk tough and has its own services constituency but it also needs to win and hold power amongst a population who will not take kindly to high taxes and poor services if taxes only mean funding the military.

Prospects

We now have the prospect of two years’ of struggle by the defence and security services and industrial interests to sustain the ‘guns’ budget against some increasingly desperate social demands from the 'butter' interest, with each defence interest squabbling, in turn, over access to what remains.

Unlike the Edwardian era when German dreadnoughts threatened an empire, the 1930s when fascism looked to conquer Europe or the Cold War when Cossacks with snow on their boots threatened to reach the Channel, there are no serious national enemies on the horizon other than a few terrorists.

All in all, unless the 'guns' lobby comes up with a really good scare, they are going to find it harder and harder to compete with any democratic mandate for sustaining the welfare state and resisting tax increases. And perhaps quite right too ... unless, of course, some extraterrestrials arrive on cue.

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The Budget & The Bigger Picture

There is little point in pre-speculating on the content of the Budget tomorrow. Economic uncertainty has meant that Treasury officials have been ‘doing their sums’ right up until the last minute. You will read all about it in a little more than twenty four hours.

What We Are Led To Expect

The Government is expected to claim that things will be worse than expected in 2009 but that we will see growth again in 2010. The recent predictive track record of the Treasury has been pretty poor for some time now so it might be best just to take any of their prognostications with a big pinch of salt.

The Chancellor is also expected to indicate that the Government will now not recoup the full costs of the banking intervention and that its costs to the taxpayer could be as high as £60bn. A provision will be added to 2008’s public borrowing totals and public debt.

A huge increase in public debt is likely to be headline news tomorrow although we are getting rather used to problems being talked up while the good news is kept back for the day. Currently, the peak deficit is touted as £170-180bn.

If public debt is to be this large or nearly this large, then it is likely that the (projected) £147.0bn gilt issuance target is likely to be revised upwards. It is hard to see how this cannot affect sterling.

Expected global demand for sovereign recapitalisation in the coming months creates the worst conditions possible for the UK’s plan to finance its debts in the market. Major tax rises and public spending cuts, in this context, are almost certainly not negotiable.

There is another problem bubbling up – this time with seven building societies who are said to be ‘in crisis’. A slew of credit-rating downgrades on bonds have forced them into talks with the Bank of England about their funding.

No, they are not going to go bust but they are likely to have to cut back on mortgage lending at precisely the wrong time, from the Government’s perspective, without more help.

So What Happens To Gordon Brown's Economics?

There is one big question that needs answering, if not now then soon – does the British economic model stand up to scrutiny in the wake of the credit crisis?

Two years ago, the economy was booming on lines that may now seem illusory but which were touted by the Government as a model for the rest of the world. Some overseas leaders were so entranced by it that they were on the cusp of following its credit-fuelled, free market, light government approach.

The liberal economic consensus today seems to be that the financially near-busted state of the State must inevitably result in public sector retrenchment and so in private sector growth as well as a new insularity in global affairs. So far so likely.

But we have our doubts that it will all be so simple. The analysis takes no account of ‘politics’ – the reactions of those whose services will be cut or who will be horrified by the effect of cuts on others, as well as of those who find high taxes intolerable and a ‘bloated’ public sector something to be axed.

The Politics of Crunch

The ‘British model’ was not quite as people imagined it. It was touted as 'free market'. Not quite. It was not a light hand Government but a Government acting in partnership with finance capital, regulating it to the demands of an economic model that poured credit into the economy and privileged toxicity.

Decisions not to use executive and legislative power are not negative but positive. New Labour chose not to intervene for ideological reasons and it must take responsibility for the consequences.

The inter-relationship of ‘big’ globalising business and government was intimate. This alliance now faces massive populist pressures from both Right and Left simultaneously. On the one side, a resentment of taxation and regulation and, on the other, anger at poverty and unemployment.

Can these two pressures be squared or will they even themselves out to allow the old system to survive, the lesser of three evils compared to one or other populist resistance model? On the face of it there seems to be no alternative to 'business as usual' but we are not so sure of this either.

The politics of post-crunch Britain could be very new, both libertarian and demanding on the political centre, apparently impossible to square but with both Right and Left tending, in practice, to the diminution of state power in favour of either smaller national business or community and protest politics.

For example, how can a Eurofighter at around £100m a shot (let alone Trident) be seen as a sound investment when small businesses want lower taxes and while care homes descend into abuse and scandal for lack of funds. It doesn’t stack up. Both sides might agree that we don't need any more guns.

Some Fundamentals

There are fundamentals here that need to be reviewed. Household debt as percentage of annual disposable household income has increased dramatically since 2001.

At 90-110% levels, it could be argued that having a whole year of your disposable income designated for debt was unwise but the ratio has moved on from these pre-2001 levels to something over 160% in just seven years.

Such debt levels require continued high growth to service or a nice dose of hyper-inflation to be resolved – no or low growth means serious family and personal pain for many, regardless of job prospects.

The private sector (excluding the dimwits in banking) has probably never been better managed in our history but, as manufacturing has fallen in importance, the slack has been taken up by a services sector that has depended on both disposable income and on full, i.e. increased public sector, employment.

Taxpayer funds (logically from the private sector) have been siphoned off to increase employment in the public sector by over 20% since 1998 to meet New Labour's main promise to its union backers in 1996 that full employment would be a strategic aim of its Government.

Think about it – if we are to have public sector cuts and increasing reluctance to spend freely on services, this means that full employment strategies are at threat. Working people are going to be faced with more uncertainty and worsening conditions to match middle class dimunition of wealth.

So the perfect storm is that a chunk of the middle class and a chunk of the working class are going to be aggrieved at the centre and at each other ... instead of leading a coalition of workers and bourgeoisie, the Government faces a war on two fronts. New Labour's political strategy is dead.

The Centre Holds With Difficulty

This brings us back to politics. In the last week or so, we have seen some downright filthy behaviour by New Labour senior officials. Attention has shifted from Parliamentary expenses to a ‘smear operation’ run by Damian McBride from Number Ten which has degraded both Party and Government.

The Sunday Times implicated Education Secretary, Ed Balls, Brown’s closest ally, but this seems to us little more than a continuation of the war between Blairites and Brownites by other means. What we are really seeing is a political and media class that is completely detached from the crisis in the street.

It may seem unimportant that former MP, Alice Mahon, has left the Party in disgust but, although retired, she is a significant figure in the now-aged traditionalist Left. For such a tribal loyalist of the old school to leave the brand she has given her life to, indicates just how far the official British centre-left has sunk.

Of course, growing criticism of a ‘bloated’ public sector is triggering the usual populist measures designed for the headlines. The Government has used this sector as a vote creation scheme over a decade, just as it has pump-primed the outer regions and small nations with Southern cash.

What it has to do now is get the public sector to 'be more efficient' rather than follow through on the logic of its economic mismanagement - those job cuts and reductions in pay and perks. Hence, the clamp-down on one easy target – the pay and perks of executives in the over-padded Quango sector.

Private Sector Opportunities?

This general trend towards talk of ‘efficiency savings’ (aka penny-pinching) and ‘asset sales’ is being undertaken both for its own sake and to send a political signal.

Current interest is in the cost of back office functions, implying an opportunity for private business in offering outsourced services not only to Whitehall but to local authorities, police, the health service and the public sector in general.

Much of this is kite-flying but the unions won’t like it. A political and PR battle is about to start up between a private services sector hunger to get hold of this new market and a public sector resistance to changes that will cost jobs and benefits and force through more onerous terms and conditions.

However, there is an alternative model in which the public sector sorts itself out through comparisons and indicators that compare worst practice with best practice and drive improvements and service sharing through strategies of example, fear and punishment.

Managerialism is very much more politically feasible than privatisation. It fits in better with the sentiments of New Labour. Private sector vultures might, therefore, have more of a fight on their hands than they had hoped.

So To The Future ...

This leads to the big political question – if a busted centre-left, following moderated right-wing policies, is about to be ousted (though this is not certain?), what precisely will it be ousted by?

Evidently a Tory Government or conceivably some Tory-Liberal coalition or even some National Government concoction involving right-wing Blairites are on the cards.

But what will their policies be? How will they respond to a devastating failure in a model that has been touted globally for over a decade?

Cultural changes of which we still know little may suggest that a new mix of the libertarian, in its anti-State aspects,and the paternalist, to deal with social crises that will fill the newspapers in the months to come, will emerge. Maybe we may term this anarcho-conservatism or conservative anarchism!

Without adequate resources to meet demands, knowing of mounting resentment at 'nannyism', a new Government will be ‘nudging’ the public into becoming more sensible and not expecting too much of the State. 'Tough choices' will mean what they can get away with.

Does this now mean a new centre-right Government following moderated left-wing policies? We think that this is a possibility, not by choice but by circumstance.

A section of the Tory Right, otherwise libertarian, is already deeply engaged with the crisis in the council estates and this means intervention of sorts.

An election in 2010 may represent an ideological revolution– a new, more insular yet increasingly European, less strident but mildly nationalistic, more communitarian economically and yet socially libertarian Britain, led by English Tories, even if in coalition, is now on the cards.

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