IQ v. AI

My friend David Skilling published an interesting note last week on the dangers of a Liz Truss style fiscal accident in the US. Many readers will recall that in 2022 Truss’ mooted economic policy led to an unwind in the gilt market.

The US has some of the ingredients that sparked the fall in gilts, very high debt levels and a political system that has managed to make Truss look normal (she is now a regular on the far-right circuit). That said, the US economy is robust, so it would in my view require a Trump led ‘rule of law’ crisis to profoundly upset the Treasury market.

Without dwelling too much on Liz Truss, who like many others appears increasingly radicalised by the American right, she is often invoked as an example of someone who is intelligent in an academic sense, but at the same time possessing no emotional intelligence (Amelia Oudéa Castéra is another recent example). An incorrect extension of this supposition is that people with high quality degrees in maths and physics should not enter politics.

Arguably, we need more scientists and mathematicians in government. For instance Singapore’s prime minister is a mathematician and economist. Returning to the UK another example comes in the form of David Willetts, who for a long time performed the role as the Tory party’s ‘boffin’ or in-house intellectual.

He was minister for Universities and Science between 2010 to 2014, where one of his roles was mapping the eight technologies of the future (AI and semiconductors, Satellites and Space, Robotics and Autonomous Systems, Geonomics and Synthetics Biology, Regenerative Medicine, Agri-Science, Advanced Materials and Nanotechnology, and Energy and its Storage) and how a national industrial policy could be built around them.

In 2023 in a very interesting document (if this is what excites you), Willetts published a review of the ‘Eight Technologies’ and subsequent UK industrial policy. It is full of anecdotes on political life, including a sketch of Nicholas Ridley’s (former Secretary of State for Trade and Industry) approach to his role as “no in tray, no out tray, only an ash tray”.

More seriously, the document helps to understand the hollowed out nature of the UK economy today, the bankrupting of industrial and education policy and the enormous task facing a (likely) incoming Labour government. I will emphasise a couple of things.

The first is that the pinpointing of the technologies of the future was, broadly, spot on. The second is that there were far too few people in politics and policy who had the requisite education to interrogate technologies such as satellites and robotics. Third was the debilitating effect of multiple reorganisations of innovation focused departments and a hollowing out of the capabilities needed to support innovation (third level education). Ultimately this produced an economic model and mindset that was not sincerely invested in innovation and that accepted Liz Truss’ budget as a viable plan to support economic growth.

It is also a mindset that has veered away from trying to frame a serious regulatory policy around new technologies like artificial intelligence (AI). The current UK government has a stated policy of ‘not regulating AI’, presumably because it hopes that a regulatory race to the bottom will attract AI focused investment.

This lacuna creates a difficulty for the Labour party, who have promised a coherent policy framework around AI (coming soon apparently). To date, the Labour point person on innovation and AI Peter Kyle has stressed the need for the government to streamline regulation so that innovation in tech is not unnecessarily impeded and has lauded the need for AI to drive the economy ‘create 10 DeepMinds’.

However, there is a looming policy battle between one side of the party that wants to promote innovation (Tony Blair Institute for example) and the unions on the other (the TUC has prepared papers on the impact of AI on the jobs market) that is more skeptical. The TUC paper is not particularly thorough and reads more like something a management consultant than a labour market specialist has cobbled together. It gives little sense of how AI will change the ways we work – how it could enable workers in industrial sectors and undermine those in white collar services for example.

That is a pity because, in the context of an AI bubble, the impact that AI will have on work is one of the emerging questions that need answering. Already a number of initiatives are springing up, such as the Martin School at Oxford and MIT’s Shaping the Future of Work project which is already throwing up some interesting policy recommendations.

If the UK wants to be a credible leader in AI it should follow an example Willetts outlines in his paper on an ‘extremely effective British official campaign during the 1980s to shape mobile phone standards in Europe and then globally around its operating system. Influencing the setting of international standards is key especially if they can be linked to intellectual property’.

It is now too late for the UK to set the standard in AI, but it might play an important role in helping to make the new EU framework (EU AI Act and supporting AI innovation package) more commercial, and more easily financed.

As Liz Truss said, we need an economic NATO in Europe.

Have a great week ahead,

Mike

Labouring on

Last Sunday’s lunch was made up of a pint (or two) of ale and a packet of pork scratchings, in the inimitable Peveril in the Peak, in Manchester. It was the start of a week-long tour of the United Kingdom, taking in Manchester, London, the Cotswolds and Belfast, from where I am sending this note.

In the Peveril we soon got chatting to a couple from the Wirral, and after a discussion on football and rugby, the conversation soon turned to politics, and specifically the question of why British people are not more visibly upset at the state of their country. Growth lags all European rivals, multiple corruption scandals are bubbling to the surface of political life, public services (i.e. NHS) have been degraded, and in particular the regions outside London are suffering.

Opinion polls suggest British people are ready for a change of government – Labour is eighteen points ahead of the Tories, far more so when it comes to younger voters. Indeed, a recent poll by YouGov (commissioned by a group of Brexiteers, allegedly) pointed to a 120 seat landslide for Labour. Yet, if British people are upset, they are nonetheless ‘keeping calm and carrying on’.

They may soon get their day at the polls. In a recent interview, prime minister Rishi Sunak suggested that the next UK general election (which must happen by next January) would likely occur in the second half of 2024. This has set commentators guessing the date of the election.

An important date to watch is the Tory party conference which will be held in the first week of October (1st, 2nd), and could thus point to an election just before or more likely after the US election (potentially around Nov 14th). At the same time, the risk of ‘noise’ from the US election might even push the UK election to earlier in the Autumn.

My sense is that Sunak will wait as long as possible given how far behind the Tories are in the polls and may try to engineer a low turnout (every UK general election going back to 1931 has been held on a Thursday, but Sunak could aim for a Friday election, hoping that low turnout could rob Labour of younger voters). Other factors and dates to bear in mind are the UK budget on March 6th and local elections on the 2nd May.

We might also bear in mind that Sunak may no longer be master of his own destiny. The Tories’ promise to send asylum seekers to Rwanda, which has become the organising idea within the party, was nearly ‘sunk’ by a rebellion by the very right wing of the party (reportedly prompting one MP to declare ‘my party has gone mad’). Sunak survived, but is at best a fledgling leader.

The Tories face two more by-elections – in Kingswood and Wellingborough – in coming months, and these will provide a good benchmark of how they are faring (there is a low probability that someone may try to unseat Sunak as leader if the by-elections go badly).

In that context, the election is now Labour’s to lose.

Labour have on several occasions performed less well than polls suggest, notably when the Tories under John Major snatched a victory in 1992 having been behind in the polls. The Blair led ‘New’ Labour (1997) was much better at campaigning and there are signs that Blairites are making a comeback in the ranks of the party now, and that their sense of discipline is holding.

While it is generally accepted that this Labour frontbench is neither as dazzling nor potentially transformative as that of the first Blair government (Starmer is less charismatic and less ’bullish’ than Blair), they are starting to behave in a Blairite manner.

So far, Labour’s strategy has been to allow the Tories to make mistakes. The Labour policy manifesto is, publicly, very dull, and does not give away much. I expect that they will launch more specific policy options in the immediate run-up to the election. This steady, cautious approach belies the fact that Labour has had only six prime ministers in its modern history – while the Tories have had five in just the last eight years.

With regard to the election and its aftermath, several issues will matter.

First, similar to Donald Tusk’s first months in power in Poland, Labour will emphasise a return to the ‘rule of law’ and the rooting out of corruption. Institutional reform (i.e the abolish the Lords, with electoral reform a wild card) and tougher policing of the behaviour of politicians and their associates will be prominent, and we expect there will be further inquiries into the behaviour of Tories/Tory donors.

Labour cannot (immediately) reverse or renegotiate Brexit. But there is scope for the EU and the UK to adopt a less antagonistic and more pragmatic stance with each other on trade oversight, financial services and the regulation of new technologies. Military and security cooperation might well grow even closer. In foreign policy, the UK should be easier to deal with (there is an outside chance that one of the Miliband brothers returns), and the most difficult issues for Keir Starmer will be Israel/Palestine, China and relations with the US (if Trump is elected).

Labour will inherit a difficult legacy in terms of the damage to the UK economy and the rising deprivation in the regions. The biggest task facing Labour is to rebuild the UK economy, re-equip and re-engineer social services and to achieve a sense amongst British people of a sense of ‘fairness’ (equality) across British society. Whether this will imply higher taxes (the Tories will likely cut taxes to low levels, trapping Labour) on individuals and companies, or even the introduction of a wealth tax, is not yet fully clear. Tax breaks, such as ‘non dom status’ would likely be phased out under Labour.

Labour’s economic policy will likely be more state driven – and privately financed, such as the issue of ‘green gilts’ to fund new green energy infrastructure. Rachel Reeves, the shadow chancellor is close to the Biden team and an admirer of ‘Bidenomics’. Also, like Gordon Brown, he is keen to emphasise fiscal discipline and as a potential chancellor will be keen to avoid a Truss style bond market wobble.

Labour are being very careful to guard their lead in the polls, and to not allow themselves to be held hostage to specific policies. They had best save their energy for the lengthy challenge ahead.

Have a great week ahead,

Mike

Beyond Brexit – a plan for Northern Ireland

I am trying hard not to write about Brexit, partly because it is so unpredictable and partly because so much else has been written and said about it. There are however two economics related angles that are worth mentioning. The first relates to the challenge of reviving the British economy after Brexit, and I covered this in a Times oped earlier this week (Times.html). The other is the longer socio-economic future of Northern-Ireland.

One of the frustrating and revealing aspects of Brexit is the way it has shown a lack of real interest in the North from some British politicians. For instance, in the recent past Boris Johnson has compared the border between Ireland and Northern Ireland to the boundaries of London’s congestion charge zone.

This level of ignorance is a pity because the reality is that Northern Ireland is one of the poorest economic regions of the UK, falls well behind the level and rate of growth of Ireland the Irish Republic and continues to suffer social, political and economic rigidities. Social divisions are being mended all too slowly, local politics at Stormont is inadequate and the economy remains embarrassingly overdependent on government spending.

Brexit has shone a light on many of these issues and has illuminated the lack of appreciation many in Westminster have for Northern Ireland in particular and Irish history in general. Arguably, a film (‘Titanic’) and tv series (‘Game of Thrones’) have done more for Northern Ireland’s fortunes than its local and London based leaders.

In particular Theresa May’s Brexit strategy was fatally snared by a shoddy understanding of the complexities presented by the border between Northern Ireland and the Republic. Indeed, there is a risk for Britain that Brexit is replaying the divisions and debilitating bitterness of the Ireland’s separation from Britain in the 1921 Anglo-Irish treaty.

Yet, while there have been very few if any winners in the Brexit process so far, it does represent a valuable opportunity for London, Washington, Dublin and Brussels to recognize that Northern Ireland needs a second wind in terms of its socioeconomic development. Irish America can add an important voice of support here. Northern Ireland should not be parked as a political issue but should be cultivated economically and socially.

A provocative but potentially fruitful suggestion is that a portion of Britain’s Brexit exit ‘settlement’ to the European Union be set aside as the basis or seed capital for a Marshall Plan–type fund for Northern Ireland. This could then become a joint UK-EU financed fund with further funding from the UK, the EU and its institutions like the European Investment Bank. The fund would not substitute for spending in Northern Ireland by London but would have the long-term aims of increasing socio-cultural harmony, human development and the economic potential of Northern Ireland’s economy.

Another interesting source of funding is the growing appetite in capital market for social impact investment opportunities. This potential supply of funding is not yet met with a large, coherent supply of impact investment projects, partly because this kind of investing is not yet well understood and partly because it is difficult to create large scale projects here. Northern Ireland could be a model for doing social impact investing in a meaningful way.

The really interesting part of the proposal is that neither London, Dublin, Brussels or even Washington would be involved in planning and running such a program. This would be done by a group of small, advanced economies – the likes of Sweden, Singapore and Switzerland.

This approach would have political and economic attractions. The first is that few if any of these small, advanced countries has political ‘baggage’ with respect to Northern Ireland and would be therefore less likely to fall foul of the distrust that bedevils politics in the North (for example, the advice of New Zealand technocrats might be easier to take, and more credible than policies crafted in London or Washington).

Secondly, and more tellingly, small advanced countries are the source of the secret sauce of economic, social and human development. They tend to dominate the league tables of socio-economic success, from ‘most globalized’ to “most innovative nation” or most “prosperous nation.” Indeed, the small advanced country model is acknowledged in Northern Ireland’s ‘Economy 2030’ plan.

What small, advanced and open economies have in common are drivers like education, strong institutions, the rule of law, and the deployment of technology—their intangible infrastructure. Northern Ireland needs better ‘intangible infrastructure’, applied in an imaginative and constructive way.

A few examples of what a small state led fund might tangibly focus on include the kind of skill-based apprentice schemes found in Austria and Switzerland, rezoning of housing from deeply politically entrenched areas using the social-impact-investing model found in Belgium, investment in cultural projects that are common to all communities (such as is done in Scandinavia and Switzerland), and the establishment of poles of excellence in certain professions, such as legal financial services.

Such a fund might draw on the expertise and governance capabilities of small states. This might well add energy and transparency to policy decisions and the employment of detailed rolling five-year plans might help speed up what is at times a sclerotic policy process.

Given the frequent and urgent manner in which parties to the Brexit process annunciate the risks to Northern Ireland in general and the Peace Process in particular, it is time they do something to set it on a positive course. It is also high time that Brexit produces at least one good news story.

How Britain can address the end of globalization – today’s Times

Moving on through the end of globalization

Note this oped was published in today’s Times, https://www.thetimes.co.uk/edition/business/britain-needs-to-find-its-place-in-the-era-of-post-globalisation-f20sjksvn

Most Britons have had enough of Brexit, many will think it can’t get any worse. They may be wrong. Once the Tory leadership contest is over the Brexit circus will start over again. When it does, the risk is that any forbearance the EU showed Theresa May evaporates, and that it takes a tougher line on financial services for example. This will come as little comfort to business people, workers and the Treasury.

There is a glimmer of hope however, which is that in the Dante’s inferno that is world politics, Britain is not alone. Many other countries are suffering political or even democratic recessions, and a good number of others are at the wrong end of an accelerated cycle in the rise and fall of nations. In this context, Brexit is not an event, or the event, but rather part of a global process.

This ‘levelling’ process is the end phase of the period of globalization that has carried so much with it over the past thirty years, and the fallow period that will follow as a new ‘order’ is built up. It is no surprise that the most acute political debates today relate to aspects of globalization – wealth inequality, migration and the role of technology in our societies for instance.

Neither is it a surprise that the two countries that have delivered the most significant political shocks in recent years (Brexit and the election of Donald Trump) are those that have been in the vanguard of globalization.

In this respect Westminster, and much of the British media, need to look up and string together the many strands of change occurring in economics, foreign policy and politics around the world. Brexit has allowed many politicians a ‘policy holiday’ in that it has permitted them to engage in parlour games while neglecting both domestic policy and what can be described as a paradigm shift in world affairs.

This paradigm shift may offer some avenues for a post-Brexit Britain, though it may well be that the next generation of politicians, rather than the current one, makes this journey. Several trends are worth flagging.

One is that globalization is ceding to a multipolar world, made up of three large regions – the US, EU and China each of whom have increasingly distinct approaches to things like technology, democracy, war, economics and politics. These ‘poles’ will increasingly do business with each other, to the detriment of twentieth century institutions like the IMF and World Trade organization. The opportunity for mid-sized nations like Britain is to first arbitrage the differences between these large regions in say law and finance, and to become more distinctive in terms of national identity.

A second trend relates to economics. The world is replete with economic imbalances like record indebtedness, very high inequality and inordinately powerful central banks. Like climate change these represent growing, though unchallenged risks in terms of the policy response. There is a potential advantage to countries who tackle these issues early rather than in the midst of a crisis. Britain should act here, and where possible lead other countries.

The other aspect of economics that is vital is the need for countries like Britain, most of Europe and increasingly the emerging world, to rediscover the ingredients of organic growth. In the last decade economic growth has become heavily financialized, and this creates obvious risks. The majority of the non-London UK economy is in bad need of a framework that will focus on increasingly Britain’s economic potential, and coherently drawing together areas like taxation, education and finance. This is the kind of response that Brexit requires.

Michael O’Sullivan is the author of The Levelling (PublicAffairs),

What Boris should say on Hong Kong

St Mary’s, Putney – site of the Putney Debates

I spent much of last week in London where in between meetings and torrential rain I managed to get down to Putney to pay homage to St Mary’s Church. Those of you who have read ‘The Levelling’ will at this stage know that the nave of St Mary’s is adorned with the following quote ‘For really I thinke that the poorest he that is in England hath a life to live as the greatest he.” It comes from Colonel Thomas Rainsborough, an officer and military hero in Oliver Cromwell’s New Model Army and a leading member of a group called the Levellers.

The Levellers were a prominent mid 17th century group who created the first popular representation of constitutional democracy in the form of their Agreements of the People. Standing in front of St Mary’s I wondered what the Levellers might think of today’s world and its bizarre goings on.

In particular two political events, or rather processes, might interest them – the election of the next Tory leader and by extension British Prime Minister, and protests in Hong Kong, both of which are watershed moments.

To start in Westminister, where Boris Johnson has taken the lead in the Tory leadership race, and with Jeremy Hunt or, my wildcard bet Rory Stewart, as the likely challenger to a Boris centric No. 10. The Levellers liked their politicians to be modest and honest as the following quote shows ‘by woefull experience found the prevalence of corrupt interests powerfully inclining most men once entrusted with authority’. In that respect they would eschew the cult of personality that has infected the Westminster circus.

The Levellers, being a practical lot, would also scratch their heads at the lack of really concrete policy proposals from the major candidates. They would also worry that the spectacle of Brexit has distracted so many in politics from the business of government and that as a result there has been a policy holiday whilst elected officials have engaged in three years of parlour games. This lack of policy leadership is now showing in infrastructure, crime and social cohesion and is an underlying risk for the UK in general.

In that respect most Britons have had enough of Brexit, many will think it can’t get any worse. They may be wrong. Once the Tory leadership contest is over the Brexit circus will start over again. When it does, the risk is that any forbearance the EU showed Theresa May evaporates, and that it takes a tougher line on financial services for example. This will come as little comfort to business people, workers and the Treasury.

One last thought on Brexit, which is that in my view Brexit is really a national crisis of identity that happens to have been channelled towards European politics. One sign of this crisis of identity is the lack of voice and diplomatic clout that Britain has with regard to the situation in Hong Kong.

I recall the television pictures of bowed head of Chris Patten at the handover ceremony in 1997, an image that perhaps said more about Britain’s place in the world than that of China (incidentally one of the interesting elements of the handover was a memorandum that Prince Charles authored on it – there are not many copies in circulation but worth a read if you can find one!).

Indeed, few of the Tory leadership candidates are willing to speak forcefully about the situation in Hong Kong at a time when many natives of the city regard the current protest as a vital test and perhaps the decisive one at that. For those in Hong Kong that I have spoken with, the culture, way of life and public life of Hong Kong are at risk of being subsumed.

From a markets point of view the reaction to protests in Hong Kong has been relatively muted and should remain so given that the extradition Bill has been delayed. In the event that tensions rise again, the risks are high given that Hong Kong is the fifth largest stock exchange in the world, has probably the most overvalued property market and a currency peg. One might well argue that the economic and sentiment impact of Hong Kong being subsumed by China should be comparable to those of Britain leaving the EU.

Against this background, one news item to watch, beyond the US-China trade dispute, is a speech on US foreign policy (vis a vis China) by Vice President Mike Pence on June 24 at the Wilson Centre in Washington. The last such speech by Pence in October 2018 at the Hudson Institute was I felt, breath taking in its hostility to China, and there is a risk that ahead of the G20, we get a repeat of this.

As a last word, my sense at this juncture is that markets are vulnerable to a resetting of very dovish rate expectations by the Fed, to the realisation that the trade dispute between the US and China is a schism rather than a tiff, and that the earnings season sees recent macro weakness played out in profit and loss statements. Safe assets are very well bid – look at bunds and gold – risky assets are looking complacent.

Have a great week ahead

Mike