Mr Trump does a U turn on military intervention

Trump supporters do not mind if their President breaks the normal conventions of diplomacy or asserts US interests too brashly in his tweets. They might mind a bit more as he backs down from one of the main refrains of his campaign, that he would keep the USA out of many of the military interventions favoured by Mrs Clinton and the Democrat establishment. Mr Trump gave us the impression US troops would be coming home from Afghanistan.

The dismissal of Mr Bannon as Chief Strategist has placed Mr Trump more precariously dependent on the advice of the Generals in the White House who do not share Trump supporters scepticism about US military adventures abroad. Aware of the danger of his foreign policy looking like continuity Obama Mr Trump claimed his policy is new and different. The main differences he tells us are they will not go in for state building, and will win against the terrorists by using greater force.

Ruling out state building arguably makes it more difficult to get a long term success. Only if these troubled countries can establish moderate well supported governments that can turn people to building a more prosperous economy is their hope of stopping recruitment and deployment of more terrorists. If the US now does not wish to help do this, it may make things more troubled.

Saying more force can be used to defeat the terrorists is also not easy. These terrorists belong to a bewildering array of differing and fluctuating groups and cells. There is no single ISIL army to be defeated in the field. They embed in the civilian population, making it inevitable that the more force you use the more civilians you are likely to kill. Given the distrust of Sunni for Shia and vice versa, if the west targets one group of terrorists it can appear to be taking sides in a religious civil war which leads to resentment of the western forces. Some of those the US fights welcome martyrdom which adds to the risks. Years of bombing Middle Eastern targets, several invasions later, there is still a substantial terrorist problem in parts of the Middle East. Why should we believe that more bombs will crack it?

PS I now hear that the US Secretary of State shares these criticisms of his Presidents statement. According to the S of S the US will not have an easy win by using more force and will need to undertake negotiations and diplomacy to resolve the conflict!

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UK repays a little debt in July

The UK borrowing figures are coming out better than the Office of Budget Responsibility and some other forecasters have been suggesting. In July we had the first July surplus since 2002, at £0.2bn. This leaves borrowing at £22.8bn for the year to date. It seems likely the government will borrow less than the OBR forecast of £58.3 bn for the year as a whole.

The main reason given for a better performance was the increase in self assessment income tax receipts. Total revenues were up 3.4% whilst spending was up by 1.6%. The total stock of official debt stays at £1758 bn or 87.5% of GDP. The effective stock of debt is £1323 bn or 65.8% of GDP, as the state has bought in £435bn of the debt and now owes itself this money.

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Brexit negotiations

There is still more commentary and idle speculation about Brexit than I would like, whilst what we need is to pin down the EU on whether they want a deal or not. The more the opposition, business and some in the media argue on about what the UK position should be, the more likely it is the EU will delay and avoid engagement in the hope that the UK will give more ground.

This is, however, a very dangerous strategy for the EU. The more they reject sensible approaches by the UK, the more UK opinion will harden against them and in favour of simply leaving. If the EU delays talks about trade for too long, they reach the point of no return where they will run out of time to prevent the imposition of tariff and other barriers on Danish bacon, French dairy products, Dutch vegetables and Irish beef. At some point they will need to respond positively to the UK offers on trade if they wish to retain full tariff free access to the UK market.

The EU has some strange negotiating aims, and one understandable one. They seem to think the European Court of Justice should still decide cases affecting the UK. They have missed the point that when we become an independent country again the UK Supreme Court is the ultimate appeal court for UK based matters, just as the ECJ will remain as the ultimate appeal court for EU based issues. So an EU citizen legally settled in the UK will come under our jurisdiction for their rights in the UK, just as surely as a UK citizen living on the continent will continue to fall under ECJ jurisdiction on matters surrounding their rights. Trade disputes will be resolved by the usual international methods, as they are today between the EU and Australia or the USA. This does not entail Australia accepting ultimate ECJ authority. There are WTO procedures for adjudications of trade disputes.

They seek to think the UK should stay wedded to EU laws as they evolve. Again this is not something other countries have to do just to stay trading with the EU. Of course if the EU wishes to impose requirements on products and services they are importing they may do so, as long as these are the same conditions for the whole world, and are not a restraint on trade as defined by the WTO. It will be a matter of future negotiation and UK choice how far we go in matching or adopting standards and rules the EU imposes for the rest of our trade. The UK will regain its voice and vote on a number of global standards bodies where we may be able to help create global standards that are good and drive more trade.

They seem to think the legal settlement of someone in the UK under current rules should allow them to pre-empt any future UK migration policy. Most of us want there to be a fair policy after exit that offers the same rights to EU and non EU arrivals.

The issue I understand but reject is their belief that we should go on paying after we have left. This would clearly be helpful from their point of view. There is no legal basis whatsoever for any such payments. The UK did not receive a bonus or downpayment when we joined the EU to reflect liabilities they had all built up before our joining, so why should we pay them for future liabilities. Once we have left we get no benefit of the spending so we should not be contributing to the spending.

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What should a UK foreign policy look like?

As we leave the EU the UK will be free to design a new foreign policy. Whilst it is true that the present Treaties allow an EU country to express a different view about a third country from the common EU line, it is becoming increasingly centralised with more resources being put into the EU diplomatic service and more loyalty expected to the EU High Representative’s view. In many areas, ranging from trade to climate change the UK and other member states have to accept the common line and allow the EU to lead. The UK is bound in to a trade policy by Treaty, and has to watch as the EU represents us at the WTO even though we have to pay a membership subscription to the WTO. There are many other bodies making standards and regulating business worldwide where the EU has taken over form the UK. When it comes to military intervention the UK and the others still have the power to decide for themselves whether to commit to common action or not.

The UK needs a new foreign policy not just to incorporate the areas the EU currently does for us, and the new freedoms we will have to shape a policy in our own national interest. We also need it to reflect on the problems caused by coalition and NATO actions in the Middle East and elsewhere in recent years. Many UK voters are critical of the UK’s policies this century, disliking the military interventions in Iraq, Afghanistan. Libya and Syria, and disliking the inability of the UK to argue its own case in matters like trade and energy to look after its own economic interests. Take back control was mainly articulated about migration, taxes and domestic laws, but it was also relevant to the conduct of foreign policy.

I wish to explore how we should use our new freedoms, and what we should learn from the military interventions of recent years, in a series of blog posts over the weeks ahead. Today I wish to start with the issue of what should be the main purpose of UK foreign and defence policy? I would propose that the main aims are

1. Creating friendly and positive relationships with our neighbours and partners, including promoting more free trade, more exchanges of ideas, investments, intelligence, cultural activities and the rest.
2. Having sufficient power to defend and protect the UK islands and our dependent territories, and sending clear messages of our resolve to protect ourselves should need arise.
3. Working with allies and partners to promote peace and prosperity worldwide, seeking conflict resolution and better economic development in troubled developing countries. Acting where we can make a difference for the better.
4. Recognising the limits to our abilities to reform or amend governments and their policies far from home. We are not to blame for all the ills of the world and cannot solve all the worlds problems.
5. Seeking mutual understanding with the major powers of the world, whilst being able in conjunction with our NATO allies to protect ourselves if diplomacy fails.

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How should the UK develop a European foreign policy?

The UK will need clear and well defined relationships with the EU and with Russia. All the time there are some powers for independent action, especially militarily, amongst the EU states, we will also need good links to Paris, Rome, Berlin and Madrid as well as to Brussels.

The aim of the relationship with the EU will be one of friendly collaboration. If we leave with a deal we will be continuing free trade with them as well as many close workings over Intelligence, defence, policing, trading standards and the like. If we leave without a deal and the EU decides to impose some barriers on our access to the EU markets, then the UK will have to retaliate with tariffs against their food, cars and other items attracting tariffs under WTO rules. This might then lead to a change of heart by the EU, who may wish to enter talks about how to remove those barriers again. The UK should be willing to do this, though there is no need for the UK to be desperate to do it or to give ground to secure such a change.

More difficult is our approach to Russia. I have no more time for Russia’s military adventures in eastern Europe than the western governments or NATO. I do, however, think there is a chance that Russia could be a better world citizen if the west collaborated more and resorted to sanctions and condemnations less. The west should of course keep up its guard and be aware lest Russia does resort to aggressive and illegal actions, but should not go looking for trouble. The West through the EU and NATO intervened in Ukraine in ways which provokes a mixture of anxiety and aggression in Russia, fearing for the security of its warm water naval base. Whilst this did not justify the illegal annexation of Crimea, the west did not facilitate a peaceful solution to this problem by allowing a referendum, for example, to let the people decide where they wished to belong as the UK has recently done in Scotland.

The UK has intervened too much in past centuries in continental politics and wars. Whilst the West did have to engage to bring Hitler down, it is more difficult to see what national interest the UK pursued in the First World War. The main aim of our foreign policy should be to keep out of continental rows and conflicts. The UK has sold the pass on the old idea that we need to stop a single power dominating the continent. It is now Foreign Office policy to encourage and allow the consolidation of power on the continent under the EU. In that case we need to be global in reach, have partners around the world, and keep out of the EU’s more contentious issues.

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Inequality of power versus inequality of income

The left’s analysis that says inequality is the key to understanding Brexit, Trump and much else needs to make a distinction between inequalities of power and inequalities of income. Many populist voters in the USA and Europe have cast their votes against concentrations of unaccountable or dogmatic political power in the elites that control their societies. That is different from an attack on those who have made lots of money from being good at sport, entertainment or business. Senior executives of large companies owned by other people are often seen in the same category as government politicians and officials, whereas entrepreneurs offering new goods and services are seen differently and usually more favourably.

In the USA the Trump voters rebelled against the political correctness of the Democrat regime, and condemned the big money politics and large salary government they are paying for through their taxes. In The Euro area voters rebel against the austerity politics of much of the zone, as it struggles to meet Germany’s demands for lower wages and little borrowing to stay in a currency with competitive Germany. On both sides of the Atlantic populist voters are often critics of the prevailing climate change theory, disliking the way it results in dear energy and ever more regulations affecting how they live their lives. Populist voters also resent the way their thoughts and language are controlled, with many topics now subject to a politically correct mantra not shared in their hearts by these voters.

Brexit was a vote to take back control, with many people fed up with the laws, controls and spending plans of a Brussels government we cannot influence as we wish or throw out of office for failure. Brussels has still not apologised for the Exchange Rate Mechanism crash it caused which hit many families and businesses in the UK.

I welcome laws against racial and religious hate speech, as I do think stopping unpleasant words can create a better climate, making violent acts less likely. In other ways I am on the side of those who think these governing elites have too much power and use it in ways which damages people’s freedoms and incomes unnecessarily. High taxes are not usually the poor person’s ally, as they hit them as well as the rich. Some regulations designed to improve conditions for all succeed in blocking more jobs and enterprise. Allowing too many migrants in to a country to get jobs can make it more difficult for people already settled there, and does add to the resentments of those on low pay or no pay.

One of the things the elite finds most difficult to understand about the Trump phenomenon is how he can make more and more outrageous statements as the elite see it but not suffer with his core voters. That is to miss the main point. Mr Trump is seen by many of his voters as someone outside the governing elite trying to get it to respond and think more like the people he represents. When he makes a statement no normal politician would make because it is offensive to us or because we see it is not politically correct so carries political risk, many in his base cheer him on for breaking the conventions. They realise tweets do not in themselves achieve anything, but they also expect Mr Trump to try to find ways of cutting taxes, removing barriers to enterprise, to police the borders better and do all the things that constitute Trumponomics. “Making America great again” was about boosting the growth rate, having more jobs at home, raising living standards.

What we don’t yet know is whether Trump supporters will be tolerant if he carries on speaking out without winning more of the battles he needs to win to grow the economy. In Greece where Syriza was elected to bust Euro austerity policies they failed but retained considerable support for trying. Mr Trump will probably do better than them, as he goes about deal making for a more prosperous USA. Carrying a major tax reduction for all later this year will be an important moment for this Presidency. If he does the UK will need to make sure it remains competitive on tax.

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Understanding the Trump phenomenon

Listening to the “liberal left” trying to explain the Trump phenomenon is a frustrating experience. Of course I agree with them that all elected politicians should condemn any efforts to whip up racial hatred. What interests me is they say that the big Trump vote was only possible because of the large inequalities they see today. These must be inequalities thrown up by the last eight years of Democrat rule, as there was no Trump insurgence eight years ago. Presumably they would argue that today’s inequalities build on inequalities in earlier decades which were not large enough or obvious enough to produce a Trump. They see the Trump phenomenon as a protest vote against these inequalities.

There is a germ of truth in what they are saying. Many people who were fed up with low wages or no wages voted for Mr Trump.They did not however vote for him to protest against inequality. They voted for him to cut their taxes and fire up America’s economy so they can get a bit richer. They voted for him in the full knowledge that he is a very rich man, was going to be surrounded by many other rich men, and favoured cutting the taxes the rich pay as well as the taxes lower paid people pay. They were not jealous of Mr Trump’s riches. They want some of them to rub off on them.

The germ of truth comes in these voters attitudes towards Mrs Clinton. There were two types of privilege and wealth on offer in the two contrasting Presidential candidates. Mr Trump offered the version of entrepreneurial riches, acquired by himself or some would say with help from his father’s business acumen. This is completely acceptable to most Trump voters. They do not mind if an entrepreneur makes large sums and pays himself fabulous money. Nor do they baulk at soccer or baseball stars, singers or actors earning great money either. They willingly pay for their services, and have the choice not to.

The type of privilege they object to is privilege that comes through political office and big budget politics. The lurid rhetoric of Trump supporters, often going beyond the tough language of the campaign proper, concentrated on “the swamp” of Washington, seeing it as a source of corruption. Mrs Clinton herself faced endless disobliging chants and allegations, as she was the perfect representative of those with families that draw big salaries from the state and live in a world of big budgets from party financing. Voters thought big politics had let them down, was syphoning off too much of their money through taxes they had to pay, and was rewarding for those in it, not for those it should seek to serve.

Trump voters worried about easy migration because they think wages have been depressed too much. They worried about trade systems which allow so many foreign imports, because they want to help make those things at home. They worried about just how much they have to pay to Washington in taxes when they need to spend more on their own needs. They will not mind if Mr Trump allows rich people to become richer, as long as they become richer too.

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The value of A levels

Some time ago after giving a talk I was asked by a student at one of our top universities if I thought the A levels I had were of the same value and difficulty as the ones he had most recently obtained. I was both pleased to have a question out of the ordinary, and worried about how to answer it.

I decided to answer it factually. I said that every year A level marking is moderated and assessed by the Examiners, with a view to being fair between the years. In theory if a paper has been more difficult than past papers the required marks are lower, and vice versa. I had no evidence or analysis to question that thesis that standards have been approximated year by year.

Duty done, I then asked him a question. I asked if if he was implying that standards had risen and my A level was inferior. He laughed and told me he thought his A level had not been to the same high standard or difficulty as mine. I thought it sad that a clever and probably hard working student felt like that about his recent qualifications. He of course had the luxury of knowing he was going on to get a more prestigious qualification, a degree from a great university. To those leaving education at A level similar thoughts would be more upsetting.

Mr Gove decided that creating advanced qualifications with a high proportion of course work rather than exams might lead to less rigour. Whilst most people would work hard and make an honest account of themselves, and most teachers will lead, teach and mark professionally, there is more danger of abuse in course work. You could cheat by getting others to help you too much with the course work or even dictate it to you. You could benefit from favouritism in marking – or suffer from bad relations with your teacher assessors for reasons unconnected with the standard of your coursework. You could benefit from being asked to do the work again before formally submitting, if it was not good enough the first time. Mr Gove therefore decided to move A levels back to reliance on final exams.

I remember the A levels I took well. They depended entirely on the final exam performance. It meant you needed to both understand and remember the course material.It was also a flexible exam based system in the subjects I took. If you had reached a higher level than that required you could be awarded a high mark even if you had not answered covering the basics in the way the marking system was designed to capture. There were no single right answers, as the examiners recognised the complexity of the questions and the range of answers that could be interesting.

The two years of the sixth form to pass those exams were the best and and most formative of all my years in formal education. I just hope today’s A levels are a similar challenge and spur to students. I still use the techniques of economic analysis I first studied then, and still can place what I am currently doing in an historical context from the History course. I remember the material because I needed to learn and understand to pass the exam. A few years ago I took an A level equivalent professional exam. That was reliant on rote learning with the doctrine of the right answer. Where the problem was mathematical requiring you to memorise a formula and apply it to data that made sense. Where it was multiple choice between arguable answers it was more hazardous and less sensible. It was not nearly such a worthwhile educational experience.

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Real incomes rise just a little to June 2017

The ONS presented a healthy picture of employment growth in the year to June 2017. There are 338,000 extra jobs in our economy. Unemployment has fallen by 157,000 on the year. Many of the new jobs are full time jobs.

It also showed a small rise in average weekly pay, though it reported the figure as 2.1% up on a year. This left average earnings behind prices by 0.5%.

However, Figure 9 of the same ONS report provides a graph of average weekly earnings adjusted for price rises by putting the figures into a common 2015 price level. This shows June 2017 at £490.5, a little up on June 2016 at £488.2. This is confirmed by the average weekly pay figures in current prices reported at the top of Section 8. That says “average total pay for employees in GB was £506 a week (June 2017) up from £493 for a year earlier” That is an increase of 2.6%, in line with prices as measured by the CPI.

It is interesting that using June on June produces a different answer from using quarter on quarter which they highlight. It provides some light on why retail sales, consumer spending and jobs have increased when so many forecasters were expecting the opposite.

As some of you have pointed out, it leaves the unanswered question of why did the Treasury forecast big job losses following a pro Brexit vote and an Article 50 letter? It also raises the issue of which of these contrasting portraits in the same official document give the more accurate picture of what is happening?

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Fare rises and Network Rail’s derivative losses

Yesterday the RPI for July told us that rail fares will go up by 3.6% next year. As I reported yesterday on this site, costs have been mounting at the nationalised Network Rail which supplies the expensive track, stations and train slots. The railways will want this substantial fare rise, which always bears heaviest on commuters. Off peak and leisure travellers can benefit from highly discounted fares designed to try to fill the many empty seats outside peak hours.

Rail travellers paying those fares will not be amused to learn that the losses Network Rail have been making from their derivative dealing continue. According to the last accounts Network Rail lost another £116 m on “movement in the value of cash flow hedge derivatives”, compared to a £232 m loss the previous year. (Accounts page 95) The total fair value of derivatives they hold rose again last year, from £963 m to £1102 million. (Accounts p 97). The liabilities on derivatives rose from £1408 million to £1529 million. The notional amounts were of course much greater, rising from £17,094 m to £17,974 million. (Accounts pp 120-121 Note 19)

I am surprised Network Rail continues to run such large positions in derivative instruments now that its financing is all secured by the government. The present management have inherited both foreign currency borrowing and index linked borrowing. Their predecessors took out various derivative positions in interest rates and currencies with the results I have reported before by quoting their Accounts, now updated for the most recent year.

I continue to ask why do they do this. What benefit is this to taxpayers who supply 70% of the revenue and who own 100% of the shares of this business?

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  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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