High pay equals low growth.

 The High Pay Commission has told us what we already knew: that the very rich have turned the economy into a personal wealth-generating machine.  Earnings for CEOs have risen thousandfold over the least thirty years as average earnings have only tripled. 


  There is no conceivable economic justification for their extravagant wealth, which has arisen largely through regulatory indolence and public ignorance.  Remuneration committees composed of highly paid executives naturally acquire an exaggerated sense of their own worth.  The idea that those dull boardroom suits, with their bad breath and stale management speak, are 'masters of the universe' is laughable. 


  The capitulation of successive governments to  neoliberal fantasies about how the productive economy actually works has allowed a climate of kleptocracy to command Britain's boardrooms. If even Labour politicians are "relaxed about people getting filthy rich so long as they pay their taxes" (Peter Mandelson, 01) then it is hardly surprising that the wealthy have filled their boots. 


  The trouble is that moral condemnation of this kind of elite behaviour doesn't work.  They don't have any morality beyond brute self-enrichment.  What is needed is a critique of the economic implications of allowing he top 1% to acquire 40% of the wealth.  In a British context it is about looking at the way this concentration of wealth undermines the productive economy.  


   The kleptocrats don't spend their money in productive ways, they use it for speculation in property, commodities and other assets.  This leads to stock market instability,  spikes in the prices of property, oil and food,  and to the creation of sophisticated financial products designed to increase yield, like hedge funds, special purpose vehicles, private equity.   Poor people spend their money on food, clothes and other consumer goods all of which generate economic activity and employment.  


   Grotesque inequality of wealth is not just an abomination, it is an economic depressant in the truest sense.  It creates stagnant pools of wealth, sucking the vibrancy out of the economy and depressing growth.  Roosevelt had the right idea when he slapped initially a 70% tax and then, ultimately, a 90% tax on incomes above $200,000.  If you look at the history of taxation rates in the UK and US over the last eighty years, it is no accident that the most productive years of the capitalist economy were in the 1950s and 1960s when tax rates were double what they are today.  


   That's the trouble with capitalism today.  They don't know what side their bread is buttered. 

UK Government launches sub-prime mortgage scheme

   How will using taxpayer's money to subsidise inflated house prices make home ownership more affordable?  The UK housing minister, Grant Shapps has announced a "get Britain building" programme (inspired I fear by similar moves in Scotland)  in which the state will lend most of the deposit on first time home buyers' mortgages.  They say this is to help first time buyers, whose average age,  according to the BBC, is now 43 years.  It won't - this is just a sop to the construction industry which is tanking again because of the euro-debt crisis. The money will go straight to the builders of the over-priced doll's houses that are too small for family life.

    There's a very good reason why building societies and banks are asking for deposits:  because house prices are falling.   Houses are still far too expensive in Britain, compared with continental Europe or America, and subsidising the sale of them will only keep prices unaffordable a bit longer.  What first time buyers need are houses that they can afford, not yet more debt.  Those lured into this scheme are likely to find, in future years, that they have taken on negative equity.   Anyone who seriously believes that house prices are going to rise during a double dip recession needs to be saved from themselves.  


 The government  also intends to increase the discount on the sale of council houses  so that people will be able to pick them up for half of what they are worth.  This is an unwarranted extension of the policy that has virtually destroyed social housing in Britain.  Selling council houses for a fifty percent discount to the market rate is immoral and should be illegal.  It is the taxpayer who paid for the construction of these houses and it is unforgivable to hand the capital gain to private home owners, many of whom will sell to buy-to-let landlords.  These houses will then be let at rents that can't be afforded by most working people, let alone the unemployed or low paid.  The inflated private rents will be paid by the government, the taxpayer, through housing benefit.  This amounts to a systematic asset stripping of public assets.  


   But the worst thing about both these policies is that it is all about trying to solve a debt crisis by yet more debt.  You would have thought after the last three torrid years that we had learned something about the dynamics of the debt economy, but apparently not.  All we need now is for the newly privatised Northern Rock (or rather the profitable bit, since the £50bn in dud NR mortgages has been retained on the state's books) to start offering 95% mortgages and the cycle will be complete.   If the government wants to help young people it should be taxing the profits and bonuses of UK banks who owe their existence to the tax-payer.   It should restore the cheapest and most effective means of building affordable homes, which is council housing.  And it should tax the speculators who sit on building land and make unjustifiable profits out of the housing shortage.  Ultimately, the UK housing crisis cannot be addressed without some form of site value taxation.  

Sovereign debt crisis? The answer's in Frozen Planet.

  Think of the european nations as a herd of bison pursued by a pack of wolves. For long periods nothing seems to happen. Until, one of the bison gets separated from the herd and the wolves descend in a lightning coordinated assault. However, if the herd regroups and charges, the wolves have no chance and will back off again.

I'm grateful to Frozen Planet for this imagery, which isn't exactly how financial markets work, but is helpful in explaining the political dimension of the sovereign debt crisis. The point is that the nations always have strength in numbers. The markets, which have been picking eurozone nations off one by one, can only do so as long as governments don't unite against them. Politics trumps economics

The trouble is that the euro bison, instead of charging the wolves, are wandering around the tundra, nibbling the grass, butting heads and generally failing to get their act together. This is because there's a failure of leadership: there is no dominant bison to call the others into line and charge the markets. Well, actually there is dominant bison – Germany – but for understandable historical reasons, Germany is reluctant to tell the rest of the herd what to do. A German dominated superstate is a very frightening prospect for countries, like France, who spent half of the 20^th Century fighting them.

If the eurozone had a central authority, a proper central bank, or an institution like the Federal Reserve in America, the markets would be losers and would have to seek kills elsewhere – the cost of borrowing in Italy would be the same as in Germany because the Italian bonds would be european bonds, backed by the combined might of greatest economic force on the planet – the European Union. What is happening now is that the markets are testing highly indebted countries like Greece and Italy and the rest of the herd is leaving them dangerously exposed.

The Clarity Act is as clear as mud.

  There is an air of quiet desperation in Whitehall as civil servants and UK government ministers try to out-manouevre Alex Salmond over the referendum.  They feel he's been getting away with murder, insisting on holding it at the time of his choosing and with an unspecified number of questions. 

    Westminster has finally realised that including "devo max" on the ballot paper as well as independence would leave Salmond with a win win  - since he would happily settle for fiscal autonomy for Holyrood if independence is rejected, as opinion polls suggest it would be.  Hence the threat to take it out of Scottish hands altogether and stage a pre-emptive independence referendum organised by the UK Electoral Commission.  After all, as constitutionalists like Oxford Professor Vernon Bogdanor keep telling us, Holyrood doesn't have the legal authority to run a binding referendum because the constitution is reserved to Westminster.  Why should England dance to the Nationalist tune?  It is a complaint uttered by UK commentators and academics around bodies like the Constitution Unit at UCL, who really think it's time to jolly well stand up to these separatists, and beat them at their own game

   The Labour minister, Margaret Curran, has wisely tried to head off this pre-emptive referendum which would of course play directly into the hands  of the SNP.  What better than for London to be dictating the constitutional destiny of Scotland? The SNP is hoping against hope that Westminster will make their day. The problem with the metropolitan political and academic elite - who only read the ultra-unionist headlines in The Scotsman - is that they have very little understanding of political dynamics north of the border, or how much attitudes have changed here over the last five years.  The SNP has an absolute majority in Holyrood, and any attempt to impose a referendum would be blocked.  There would have to be a consent motion passed by the Scottish Parliament for any legislation initiating a Westminster-led referendum.    

  So that is a non starter.  The next trick is to introduce a Clarity Act such as the one passed by the Canadian Government in 2000, though never recognised by the province of Quebec which inspired it.  This was the product of an examination of the legality of secession by the Canadian Supreme Court, and was seen by many Quebecers as an attempt to stifle their independence movement.   The Clarity Act states that subordinate regions or principalities have no legal right to secede. However, if a referendum is passed in which the question is clear, and there was a substantial though undefined majority, then the other states in the union have a duty to respond to the demand for autonomy.   It is a masterpiece of legal sophistry, open to almost any interpretion, from sending in the tanks to endorsing independence on the basis of a majority of one.  The latter is how Quebec separatists see it. 

   The Clarity Act, a reaction to the knife-edge 1995 Quebec referendum has never tested, so no one really knows what it means in practice.  It is the work of constitutional lawyers and, like economists, if you put twelve of them in a room you will get twelve different interpretations. But any attempt to use constitutional law to foil the Nationalists will backfire as assuredly as holding a pre-emptive referendum. The SNP holds most of the cards. Unionists would be far better advised to sit on their hands, and wait to see what Alex Salmond comes up with in 2014 – though I suspect that we'll be hearing about the question or questions long before that.

Of course Scotland would be admitted to the EU. Look at Latvia, Estonia etc etc.

  I've been in this game too long.   I remember being taken by the Tories nearly twenty years ago to Brussels to hear Baroness Ellis  warn that Scotland would not be allowed to join the EU.  Don't even think about it!  France and Spain would block an independent Scotland to discourage their own separatist movements. England wouldn't accept Scotland as a legitimate nation.  There would be years of wrangling over budgets.  England would dump financial liabilities onto Scotland to reduce its contribution to the EU budget etc etc..

 Scotland would end up broke and isolated, a ragged and homeless fragment lost in the North Sea.   It was tedious rubbish then, and it is rubbish now. Yet, barely a week goes by without some report or other announcing that wee Scotland would be frozen out of Europe and told to go and sit on the naughty step. 

    I've just been looking at the latest report to hit the front pages.  It came from the House of Commons Library and it is a background briefing note, not an authoritative assessment of the Scotland's legal status within the EU. It carries its own health warning  "[This briefing note]  should not be relied upon as legal or professional advice or as a substitute for it.  A suitably qualified professional should be consulted."   It goes on to rehearse all the arguments that have been made about Scotland's relationship to the EU that have been made over the years. Pros and cons - naturally, the Scotsman chose the con and headlined this as "£8bn Bill To Join The Eurozone". This presupposes that Scotland would automatically join the euro, which of course is not going to happen, at least in the short term.  Just like Sweden, Scotland would have the right to decide whether and when to join the euro. The report goes on to question whether membership would be automatic and finds differing views among constitutional authorities. 

   Lawyers make their money from creating legal complexity, so you will always find that there are differing legal opinions about secession.  But the political reality is that it is inconceivable that the EU would try to block an independent Scotland from entry. The EU is founded on the principle of national self-determination, so the idea that Scotland would not be recognised as a nation in Europe is ludicrous.  Scotland is already a part of the EU through its participation in the United Kingdom, and as a nation in its own right, Scotland would automatically qualify for membership of the EU.   It would take concerted action by the other member states to prove, either that Scotland is financially insolvent, or that it is not a democracy, or that it is in in violation of the European convention on human rights.   That is not going to happen. 

  Sure, there may be bureaucratic obstacles to formal entry - calculations of Scotland's contribution, relationship to the eurozone, Shenghen - all of which are the subject of opt outs by the UK.  But many of these problems would also face the RUK (Residual United Kingdom) in exactly the same way.  How much should England and Wales pay exempt of Scotland?  What weight should English votes continue to carry in the Council etc etc..  

  But the central question: Scotland's ability to remain in the EU, answers itself.   in 2004, the EU admitted a raft of small European countries many of which had been part of the Soviet empire.  The idea that the EU would reject Scotland because it used to be part of the UK is laughable. Iceland is being given a free entry ticket to the EU as I write.  Scotland is a wealthy country, unlike Greece or the small former Eastern block countries like Latvia and Estonia or minnows like Malta.  Scotland has around £400 billion in oil reserves, a quarter of Europe's wind and wave energy, five of the top universities in the planet.  

I despair at unionists who make these arguments because they are only destroying their own case.  If this is the standard of debate we can expect in the run up to the independence referendum then - roll on independence!

Hollywood and the arms trade.

"The Shadow World - Inside the Global Arms Trade" by Andrew Feinstein Hamish Hamilton £25

     There's a memorable sequence at the start of the 2005 Hollywood blockbustrer, “Lord of War” which shows a bullet's eye view of a bullet's life cycle, from a manufacturing plant through various intermediaries till it ends up in the head of an African civilian via the chamber of a Kalashnikov. The message is clear: arms don't come from nowhere. From factory to gun, there is a path that is easy to trace for anyone with the will so to do. The fact is, as Andrew Feinstein explains in this remarkable and couragous book, that governments are so heavily involved in the deeply corrupt world of arms dealing, that they turn a blind eye to the human cost and the damage they do to their own economic and moral integrity.

The “Lord of War”, played by Nicolas Cage, was based on the life Russian arms dealer, Viktor Bout aka “the merchant of death”, who made his name busting arms embargoes in African states in the 1990s. He helped arm the Liberian dictator Charles Taylor's murderous NPFL, and the psychopathic Sierra Leonian bandit Foday Sankoh's RUF, which used child soldiers doped with crack cocaine to kill tens of thousands of civilians. The activities of the RUF featured in another Hollywood film, “Blood Diamond”, starring Leo diCaprio, in 2006 which connected up the dots between the illegal diamond trade and international gun running.

Despite their lurid celebrity these master of war are rarely prosecuted. Viktor Bout was finally arrested after a sting operation in Thailand in 2008 when he offered to sell weapons to US DEA agents posing as members of the Colombian marxist group, FARC. He had been under the protection of Russian oligarchs, who were furious when their man was arrested in Thailand and put pressure on the Thai authorities not to allow his extradition. It took two years and the personal intervention of Barack Obama to get him to America, where he was finally convicted last week.

It may be that Bout's capture was only made possibly by Hollywood. Had it not been for the publicity generated by these films, it's unlikely that the President himself would have been involved. In “Lord of War”, it was suggested that Bout's immunity arose from his being a US intelligence “asset”. There is evidence that he and his associates were indeed involved in George W Bush's “War on Terror”, and provided information about terrorist organisations like al Qaeda which Bout had supplied. Indeed, Feinstein clams that an attempt by the Belgian authorities to arrest Bout in Athens in 2002 was foiled when US intelligence sources tipped him off.

Fact is indeed stranger than fiction. Which is good news for Hollywood, but bad news for the future world peace. If it takes a multi million dollar film before any of these monsters are arrested, then God help Africa. Mind you, there is enough in Feinstein's book for a dozen film pitches. Bizarre characters leap from the page - like Adnan Khashoggi,confidant of royalty, who claimed to be the wealthiest man in the world, and whose yacht, Nabila, was used in the bond film “Never Say Never Again”.. Then there is Dale Stoeffel, a US arms adventurer and ex special forces agent in Bruce Willis mould, who stood to make a killing out of the war in Iraq, but was himself killed in 2004 after he crossed members of the provisional Iraqi government. Yoshio Kodoma, aka “The Monster”, worked closely with US arms companies as they bribed and bought their way to the heart of the Japanese government.

But the grand-daddy of them all, and the source of most of the wealth of arms dealers like Adnan Khashoggi, was the al Yamamah arms deal, the biggest in the world, negotiated personally by Margaret Thatcher with the Saudi Royal family in 1985. It was an arms-for-oil deal worth £40bn, benefiting the UK defence conglomerate BAE systems, and according to Feinstein, Iron Lady's son, Mark Thatcher, who swept up the crumbs. Huge sums were paid in “commissions” to Saudi Princes and shady intermediaries. More than £6bn was paid out, and some of it, according to Feinstein, even flowed through the accounts of the Saudi fixer, Prince Bandar, into the pockets of two of the terrorists responsible for 9/11.

Feinstein's account of how the Serious Fraud Office was nobbled in its attempt to bring BAE to justice is deeply disturbing because of the insight it gives into the way that the entire British establishment has been subborned by decades-long complicity in the arms firm's questionable activities. Feinstein has seen BAE's modus operandi at close hand. He was an MP in the South African parliament after the collapse of apartheid, and he saw how the African National Congress was persuaded by BAE to spend £6 billions on weapons systems it didn't need while millions died of HIV/AIDS.

We knew the arms business was corrupt, but only a book as exhaustively researched as this one is able to reveal just how serious and extensive this corruption really is, and how democracy itself is threatened. “The tragic reality”, Feinstein says, “is that arms companies, large and small, and arms dealers and agents, get away with corruption and bribery on a massive scale, complicity in crimes against humanity and even murder. They operate in a shadow world, taking advantage of gaps in the international legal system and hiding behind the protective cover of powerful politicians and intelligence agencies.”

The Shadow World is a heroic book by an author who, in writing it, has placed himself in the firing line. We surely can't go on leaving this story to Hollywood. The global arms trade totalled $1.6 trillion in 2010, up 53% in ten years. As the world plunges into a double dip recession, with huge stockpiles of weapons, the script is being written for the ultimate disaster movie.   

Greek referendum? Bring it on.

   Referendums and markets don't mix. A referendum on Scottish independence is coming, and already the markets, or at least analysts from Citigroup, are saying it “will create huge uncertainty” and advising investors to shun Scotland. The trouble is, democracy is all about uncertainty. Democracy is inconvenient. But in times of constitutional uncertainty, it is absolutely paramount that the people clearly register their support or opposition to change.

In Greece, where democracy began, the markets are threatening to bring the house down because the Greek government is going to put the EU rescue package to a referendum. This is being cast as a breach of faith, a spanner in the works, an “abject failure of leadership” as one financial pundit put it yesterday. How dare this jumped up prime minister, Papandreou, ask the people for their point of view? What have they got to do with it?

Well the people have quite a lot to do with it. It is they who will be losing their jobs, suffering a decade of falling wages, higher taxes and the humiliating presence of an “occupying force” of Brussels civil servants telling their treasury ministers what to do, where to cut, etc.. It seems to me that this involves such a diminution of national sovereignty that it really should be endorsed by the people. After all, changes in the Treaties of the European Union require a referendum of the people – though governments in countries like Britain are peculiarly reluctant to hold them.

The markets are a mob – a capricious and unthinking herd, liable to emotional spasms and irrational passions. Think of the dot.com crash, the property bubble, irresponsible bank lending. The markets are not capable of rational thought; only people are. The mistake was not to tag a ballot onto the Brussels bail out last week, so that it could be clear that the people of Greece would be fully behind the deal. Or not.

Now, admittedly, the referendum proposal did rather come out of the blue. The Greek government is in turmoil, and we don't even know, at this stage, whether Papandreou will survive in office long enough actually to hold it.  But I have a simple view of these things, which is that the people do have a right to decide on their destiny, and moreover, that an austerity programme of the magnitude of the one facing the Greek people, really needs a democratic endorsement. Better a referendum than a protracted general election.

The choice before the Greek people is this: they either stick with the euro austerity plans, or they go for default. At present, there appears to be a considerable constituency for default – certainly on the streets and in the media. But as we all know, it is dangerous to simply take the political temperature from street demonstrations. No one really knows what the mass of ordinary Greeks really think. Opinion polls suggest that a majority of Greeks are unhappy about about the deal, around 60%, but we also know that around three out of four Greeks say they wish to stay in the EU. A referendum campaign is the way to reconcile these conflicting views.

The costs of default could be far greater than the cost of the Brussels austerity. Restoring the drachma, at a hugely devalued rate against the euro, would increase Greek debt by at least 60%. This is because the debt remains denominated in euros and will still have to be paid. The cost of Greek borrowing would also increase because Greece no longer has the powerful economies of the EU supporting its currency. Greek peoples' savings and pension funds will of course be destroyed, overnight, Greek banks will collapse and borrowing costs to small businesses will soar. Those public sector workers, so vocal on the streets, and so defiant against Brussels, would be in penury and out of work because the government would not be able to borrow the money to employ them.

On the other hand, a default along the lines of the Argentinian default of 2001, would make Greek exports competitive, because they would be a lot cheaper. Markets don't look back, and once the default is over, if the economy appears to be stabilising, it's possible that investors might start lending again in five years or so. Greece could also negotiate some kind of loose peg to the euro and remain within the EU free trade zone. Greek holidays would certainly become a lot cheaper, and that could help build an economic recover.

But do the Greek people really want to be impoverished servants of wealthy German tourists? Maybe they do. By the time the markets start lending again, the Greek economy will be a shadow of former itself. With few natural resources, and very little advanced manufacturing, it would be in the situation of some low wage north African and middle eastern countries. It's not at all certain that the fragile Greek democracy would survive – it is only thirty six years since Greece was run by a military junta, and the colonels are restive again. The great thing about membership of the EU is that it requires countries to respect democracy, civil rights and the rule of law.

So, Greece has a very grave decision to make, with momentous implications that will affect the country for decades. A majority for the Brussels deal would impress the markets and ensure that the Papandreou government had a firm mandate for austerity, to implement the Brussels plan. A majority for default would also clear the air.. Greece could tell the private investors that they can sing for their money – or take a 90% haircut. A vote for default might even make Europe come up with a better offer, it if looks like the euro would collapse as a result.

What I find offensive is the way commentators have reacted as if a referendum is somehow illegitimate, a damaging distraction. When countries like China, under a communist dictatorship, start telling democracies like Greece to “shelve its unhelpful referendum” I think we have to ask who exactly these ”markets” really are. Democracy is always the worse choice – except for all the others. Last night, European leaders grilled Mr Papandreou about his plans late into the night. I hope he stands his ground.