Tuesday, 26 April 2011

AV or not AV? That's not the question.

I'm a democratic, freedom-loving lefty and I know many others who share my values. It is therefore very perplexing that some of my dearest friends are currently likely to vote 'No' in the forthcoming referendum to change the voting system in British general elections. This Easter weekend I had a long conversation with one of these friends, during which I came to understand his objections to the change on offer, and I recognise some real problems with AV; however these are not sufficient to justify a 'No' vote, especially if you are a democratic, freedom-loving left-winger. If you are one of those, please let me explain why you should reconsider your decision to oppose this change:

It seems that the over-riding reason for opposing AV among lefties is that it is thought that it might lead to a more bland, centrist style of politics in which the Liberal Democrats will hold the balance of power, most of the time, if not forever. Owen Jones makes
this case in his blog. A similar case is put forward in another Labour blog, here. Both offer well articulated arguments. However, I believe this is a grave misconception, which the 'No' campaign would dearly love us to accept. The first big clue that this is a misconception comes from the very composition of the 'No' campaign itself: a reactionary cocktail mixed from the Taxpayers' Alliance, the Tory right, the BNP and the hyper-authoritarian Blairite wing of the Labour party (John Reid, Margaret Beckett, et al). Still, this issue is too important to indulge in ad hominem arguments. Many on the left see the referendum as a chance to give Nick Clegg a well-deserved kicking. This is probably the best reason to vote 'No'; a reason with which I can thoroughly identify, but it's just not good enough when it comes to a fundamental matter of the mechanics of democracy. On the other hand, Labour supporters might also want to consider the fact that a 'Yes' vote would severely weaken David Cameron.

So, why is it a mistake to think that AV would lead to more bland, centrist politics? First, it could hardly have escaped anyone's notice that the current climate of political debate is already about as bland and centrist as it is possible to be. Why is that? Well, who decides elections, in practice? Left-wing voters in inner city ghettos? No. Elections under first-past-the-post (FPTP) are decided by a tiny number of floating voters in a small number of marginal constituencies; about 1.6% of the electorate. These people tend to read tabloid newspapers and watch the X-Factor. At present, if you want to win an election, you need to pander to them. No one else counts. Labour takes the inner-city vote for granted and the Tories can always rely on the country squires. This is why you can barely squeeze a blue Rizla between the two main parties on policy. They both accept the neo-liberal economic consensus, the need for cuts and the inviolable rights of banks to rip us all off, ad infinitum. None of this can ever possibly change under our current voting system. We are completely at the mercy of media pundits and the voters they manipulate.

The status quo is completely unacceptable, if you support progressive politics. There is no case for FPTP over AV when it comes to a consideration of fairness and democracy. Why should it take
10 times as many votes to elect a Liberal Democrat MP as a Conservative MP? This is indefensible, no matter how much you may hate Liberal Democrats. The reason is partly because the Lib Dem vote is more uniformly spread across the country. Why should the geographical concentration of support have such a huge effect on the way our democracy functions? Would you accept that fact if it were the Labour vote (or even Conservative vote) that were spread out, and the Lib Dem vote were more concentrated? In their hearts, even opponents of change understand that AV is marginally more democratic than FPTP. It is totally obvious that AV gives voters more power to influence elections, because it means fewer votes will be wasted. The argument is best summarised by a cartoon:

Cartoon by R. Douglas Johnson
It is also untrue that AV would disadvantage smaller parties, as has been claimed by the Socialist Party, among others. It has been pointed out that in Australia, the Greens got 11.8% of the vote but only 1 MP out of 150, under AV, whilst we have 1 Green MP in the UK with only 1% of the vote. The point to understand here is that AV leads to an increased vote for smaller parties, although it doesn't generally give them more MPs. That's because people are free to express their true opinions under AV, without wasting their vote. AV is not PR, but that 1 Australian Green MP would equate to 4 MPs in the 650 seat House of Commons, so AV does have the potential to benefit smaller parties, by increasing their vote, although minor parties are unlikely to win many more seats. The increased vote for minor parties also gives them a chance to influence the policies of other similar parties who might want to court transfer votes. On the other hand, AV makes it impossible to elect a candidate who is strongly opposed by a local majority: this will often be a BNP candidate, or perhaps even a Tory, which may explain their opposition to AV. It is most unlikely to affect the prospects of the Greens, who are not  widely reviled. They will still find it hard to win seats, but no more so than under FPTP.

But what of the alternative? The 'Yes' campaign has been guilty of grossly exaggerating the benefits of AV over FPTP. Whilst this has been as nothing compared to the outright lies peddled by the 'No' campaign, the truth is that AV is only a very small improvement over FPTP, in terms of democracy. The evidence is that it is only a very marginally more proportional system, most of the time, although it may increase the effect of a landslide. FPTP is almost as likely to lead to hung parliaments, and the Australian experience with AV suggests that coalitions are not going to be the norm. In any case, the evidence is very sketchy and based on a host of assumptions backed by very little firm data; it is 90% guesswork. It is important to understand that the outcome of elections depends crucially on the political landscape and context: this is true under any electoral system. Here is where AV offers real improvement: it promotes plurality because it gives voters the power to express their true preference, as Sunny Hundal argues on LibCon.

FPTP is designed for a two-party system. It simply doesn't make any sense in a multi-party democracy where voters feel increasingly disinclined to support the two main parties. I grew up during a time when the left-wing vote was split, most obviously in the 1983 election. This delivered a landslide victory for Margaret Thatcher's Tory party on 42% of the vote, despite the fact that most voters were clearly opposed to their policies. The splitting of the left-wing vote produced 17 years of extreme neo-liberal Tory government, until the Labour party finally learned to pander to those tabloid-reading floating voters in marginal seats. The result was a further 10 years of neo-liberal Thatcherism, but with the smiley face of Tony Blair on the poster - admittedly we did get more money for health and education but at the huge cost of foreign wars for oil, PFI scams, tuition fees, lower social mobility, deregulation, welfare for bankers and a vicious attack on our civil liberties.

A recent YouGov poll suggests that
Labour would now be the main losers if AV were adopted in preference to FPTP. This is very much in contrast to what would have been the case for most of the past 30 years, including the 2010 election. A closer look at that poll reveals that Labour, with 42% of the vote, would still have an outright majority under both FPTP and AV. The only effect of AV would be to reduce the Labour majority by a mere 13 seats, which I consider to be a good thing, as it would reduce the power of the executive over the legislature. The Tories would have the same number of seats under either system, so the Lib Dems - as ever - would be the beneficiaries, although they would still have less than half as many seats as they have now, due to the collapse in their support - and yet they would still be under-represented! In short, the political landscape has changed, and that is why Labour is no longer necessarily the biggest loser from FPTP. It looks like it may now be the right-wing vote that is fragmented, for the very first time in history. The Tories are fighting for reactionary votes with UKIP, the BNP and the right-of-centre rump of the Lib Dems. This may well be a temporary state of affairs, though, bearing in mind the rising support for the Green party and the possibility that the Lib Dems may rediscover their principles and position themselves to the left of Labour, as they have done for the past 3 or 4 elections, to great effect.

None of this really matters. It would be foolish in the extreme to make a decision on electoral reform on the basis of narrow party political advantage as revealed by a snapshot of voting intentions from a single poll at a single moment in history. This momentary advantage of FPTP to the Labour party is not even that great (13 seats in an overall majority either way). Still, it seems that many Labour supporters, especially left-wing activists, have a gut feeling that anything which benefits the Lib Dems must be opposed. There is considerable tribalism in this feeling (often based on local antipathies), and its intellectual justification is a half-thought-out assumption that AV will lead to more centrist politics. I hope I've already shown that this assumption has no basis and that centrist politics is rather a consequence of FPTP.

In fact, there is a condsiderable body of voters and potential voters to the left of Labour, whose views are largely ignored and whose votes are taken for granted or considered surplus to requirements by the party. Many of them voted Lib Dem in 2010 and have since been attracted either to Ed Milliband's more leftish style of Labour politics, or to the revitalised Green party, which is well to the left of Labour on most issues, and far less authoritarian. Electoral reform at last holds out the possibility of galvanising a broad left majority capable of steering the Labour party away from the neo-liberal consensus of the past 30 years. We must not let this opportunity slip away. The centre is the ground already occupied by the two main parties; it makes no sense to 'reach out' to that ground, where there is no room for manoeuvre. AV would give Labour an incentive to reach out to the left instead - to the Greens, socialists and remaining left-wing Lib Dems - in pursuit of the transfer votes it will need to defeat the Tories who, at the same time, are likely to pursue transfers from parties to the right of them, like UKIP. This could well shake up the political consensus in a way that is desperately needed.

AV will not solve all the problems of our broken electoral system. It may well not solve any of them to a great extent. But a 'Yes' vote will send out a clear message that we cannot put up with this bland rubbish that passes for democracy any longer. We need to shift the electoral battleground away from a handful of floating voters in marginal constituencies. AV is only a small step in the right direction, but it is the start of a process of wider electoral reform, including reform of the House of Lords, which must not be sacrificed for the sake of nit-picking objections, tribal prejudices, short-term advantage or a misplaced nostalgia for the two-party politics of the 1950s. If there is a 'No' vote on 5th May, we can be sure that supporters of the status quo will use it to block all attempts at electoral reform for decades to come. This is exactly why the Taxpayer's Alliance and the Tory right want us to vote 'No', which is exactly why we should vote 'Yes' to AV.

I will end on a completely shameless ad hominem argument, which you should probably ignore. Here are the two chaps who most desperately need a 'No' vote on May 5th, and this is how they will look if you give it to them, because the current system serves their interests perfectly, even when they are not in power:

Addendum 26/4/11: Neal Lawson wrote a similar piece to mine on 15th April in Open Democracy, which is well worth reading and makes it perfectly clear that it is the forces of reaction, wealth and privilege which have the most to lose from a 'Yes' vote. In case you doubt this, note that the 'No' campaign is largely funded by big business and wealthy bankers such as Peter Cruddas (founder of derivatives dealers CMC Markets), Lord Sainsbury, Peter Hargreaves (head of Hargreaves Lansdown) and Lord Fink (head of Man Group), as confirmed by the bankers' propaganda sheet, CityAM in today's issue (page 10).

Ask yourself why these people, the Tories, the TPA and the BNP all desperately want a 'No' vote. Ask yourself that question and think hard about it over and over again from now until May 5th.

Tuesday, 12 April 2011

The Elephant in Ireland's Room

The Irish banking crisis shows no sign of being over yet, as further bank bail-outs were announced recently. There has been much talk about the causes of Ireland's crisis and its severity, but almost no politician or economist has pointed an accusing finger at Ireland's attractive corporation tax (CT) regime. This is considered inviolable and essential to secure Ireland's recovery. Other countries are even scrambling to follow Ireland's example, as the UK announces corporation tax cuts and Northern Ireland's First Minister talks of reducing CT to 10%. So, apparently a low corporation tax rate is far from being harmful to the Irish economy. Or is it? I will argue that Ireland's CT rate (at 12.5%) and more importantly its weak tax regulations were in fact among the three main causal factors in its banking crisis. Let's look at them. Only the first is obvious:

1) Poorly regulated global growth of debt and related structures. This refers to the ability of banks to pump ever more debt into the global economy and for that debt to cross borders almost at will.

2) Ireland's low CT rate and very lax rules on what multinational corporations (MNCs) are allowed to get away with. Note: it isn't just the low rate that is important, but the rules which go with this; they work in tandem.

3) Tax avoidance by MNCs, aided and abetted by banks and accounting firms.This is the elephant in the room.

To put it simply, without 2), Ireland would not have been a target for 3), which greatly inflated the size of its banking sector and left it massively over-exposed when 1) led to a global debt tsunami. Incidentally, the debt tsunami also destroyed the economy of Iceland, which had followed a very similar path to Ireland. It too has a low CT rate (15%), lax regulation and a bloated banking sector which is now killing its economy. How come? In order to understand this, one needs to know a bit about the tricks MNCs use to avoid tax, by shifting profits into lower-tax jurisdictions from higher-tax ones.

If you are a MNC, one of the most popular tricks is to heap a big pile of debt onto your operations in high tax countries, financed by loans from your own subsidiaries in low tax countries. Debt interest payments can be set against tax in many cases, which means you can transfer your profits to a low tax (or no tax) jurisdiction. There's no real trade going on here; it's just an accounting trick, a form of what is called 'transfer pricing'. High-tax countries know about this and have put rules in place to discourage the use of tax havens for this purpose. However, Ireland is not officially regarded as a tax haven, and so escapes these rules. Instead, it is a trusted member of the eurozone club, which puts it in a highly privileged inside position. Nonetheless, Ireland's tax rules are so weak that it should be considered a tax haven, just like the Cayman Islands or Bermuda.

Photo: Peter Morrison / AP

To illustrate this point, consider the case of Google, which moved its HQ to Dublin in order to escape tax. They do it by exploiting two well-known tax avoidance scams called the 'double irish' and the 'dutch sandwich'. These are essentially transfer pricing scams involving the use of debt to shift profits through other poorly regulated jurisdictions like Luxembourg and the Netherlands. Ultimately, Google decants its profits in Bermuda, where it pays no tax at all. The result is that globally, Google gets away with paying just 2.4% tax on all its profits, saving it over $3 billion and leaving the taxpayers of many countries to pick up the shortfall. The irony is that Ireland scarcely benefits at all from all this, since Google largely escapes even Ireland's low CT rate. Many other companies are operating the same scam, all quite legally. Over the past decade, hundreds of companies have moved their IP licensing or Treasury operations to Ireland or set up subsidiaries there to take advantage of the tax avoidance gold rush. In their wake, they leave a trail of debt:

An inevitable consequence of this tax avoidance activity is to create a huge demand for loans from low-tax, weakly regulated countries like Ireland. Irish banks sucked in a huge amount of money, most of which left the country almost immediately in the form of loans between subsidiaries within MNCs. The flow of this money increased from 400 billion to 2.5 trillion euros between 1998 and 2009, which is about 15 times the entire GDP of the Irish economy (see page 3 of this report). This demand for debt led to a rapid increase in the balance sheets of the banks, pumped up like body-builders on steroids. The Irish government even facilitated this growth by setting up the International Financial Services Centre (IFSC) as an offshore centre; a tax haven in all but name.

Cartoon: Kipper Williams

When the global financial crisis struck in 2008, Ireland's bloated banks were left completely exposed, at the mercy of the insane, virtually unregulated credit markets. The debts quickly unravelled, leaving taxpayers all over the world holding the IOUs. Ireland was particularly badly hit because its banks had taken on a disproportionate amount of the bad debt. They got into that position by being the centre of a huge tax avoidance network. 

Most observers like to point to Ireland's property bubble and subsequent bust, but this was really a sideshow. It's true that Ireland suffered a particularly severe property bubble, as did many other countries, but this was a consequence of the inflated balance sheets of its banks, not a primary cause. Banks don't like to leave spare money lying around. If there's the possibility of using it to speculate on an asset price bubble, that's what they will do, and so they did, mainly through commercial property lending. After all, it's so much easier than sound long-term lending to small businesses for genuine investment.

The most remarkable thing is that no one appears to have learned anything from the crisis, least of all Irish politicians and economists, none of whom saw it coming in the first place. They are carrying on as if it were a one-off and a bail-out is going to fix everything. I can confidently predict that articles like this one will be ignored. Banks' balance sheets will gradually recover - all paid for by higher taxes and public spending cuts. The whole insane cycle of tax avoidance and debt-driven growth will start again. The Spectator will run articles on the new economic paradigm, Celtic tigers and how it will all be different this time. A few lefty economists will raise doubts and be dismissed as peddlers of sour grapes. Then one day the financial markets will implode. Again. Only next time it will be much worse, and again, Ireland will be first in the firing line, because it remains a plump target for companies wanting to avoid tax.

The lesson for Ireland and for all of us, is that if you advertise yourself as a cheap whore, don't be surprised when multinational corporations treat you like one. They really don't love us. We have to stop letting them use us. 

Tuesday, 5 April 2011

The War is (Not Really) Over

This post is about pessimism; the pessimism which descends upon most of us at one time or another, when we consider the ignorance and sheer stupidity which engulfs this piss-stain of a planet. I'm talking about those times when you're watching a news report about civil war in Libya, where we see Western bombs destroying tanks and guns supplied by Western companies to a 'brutal dictator' who was our 'ally' last month, then it cuts to a report of Saudi troops 'bringing order' to Bahrain, riding in on British-built APCs. Then maybe there's a report about record bonuses for top bankers at Goldman Sachs; a bank found guilty of fraud by the SEC, but whose chief economist has been appointed to the Bank of England's monetary policy committee, which decides UK interest rates. This story is juxtaposed with tales of cuts to incapacity benefit and housing benefit for people who never caused a single recession, ever. That sort of thing.

Then, just to cap it all, the ad break comes, but there's no relief, because all you get is the grinning face of a leathery old rock star who used to be your hero but whose balls are now firmly in the grip of The Man, as he's reduced to advertising car insurance. What do you do at that point? When you just don't feel able to fight the power any more? Because if humanity were worth saving, it wouldn't need your help. I'll tell you: you get drunk and write a bitter poem about it. Then you get a grip again:

The War is Over

Don’t try to tell me it would be more fun
to rock and rail and scream a rebel yell –
the war is over, and the bastards won.

It’s not the Devil or Attila the Hun
who wants to know you’ve got a soul to sell.
Don’t try to tell me it would be more fun.

I saw it on TV, read it in the bastard Sun;
now Iggy’s selling insurance. Fuckin’ ‘ell,
the war is over, and the bastards won.

To shoot the world with my high-calibre love gun,
or sit and swivel on a high-explosive shell?
Don’t try to tell me it would be more fun.

My brain’s in the laundry basket – better run
before they invent the pills to make me well.
The war is over, and the bastards won.

I’ll be a monk, and you can be a nun,
when they take me to my padded cell.
Don’t try to tell me it would be more fun,
the war is over, and the bastards won.


Notes: Sharp-eyed poetry nerds will recognise this as being a villanelle; a surprisingly versatile form, particularly good for ranting and raving with.