The Lib Dems have a big problem with Coalition politics. They are the one party that believes coalition government can be better than majority party government. They are the one party of the top three that know they will need a coalition in future if they are to be in government again. Despite this, they cannot help themselves from constantly criticising the Coalition government from without. Some of their Ministers are endlessly making proposals they know Conservatives cannot accept from outside the government despite being members of it.

As someone who is sceptical of coalition this neither surprises me nor dismays me. However, I do not want it to get in the way of doing things now that would help turn our economy round. Surely for at least the first three years of the planned five year coalition Lib Dem Ministers should concentrate on doing the things that Conservatives and Lib Dems agreee about? The aim should be to stress the advantages of the polices that both parties can accept, not to stress the frustrations that Lib Dem Ministers feel with things the Conservatives will not accept. The aim should be to find more things that both parties can happily do together.

There are many Conservatives today like me who want to see more freedom for UK citizens. We feel the state has grown too big and bossy. We want a government which trusts more of the people more of the time. We want a government with the confidence to repeal some of the excessive number of laws and rules we have, and to cut back on the number of things the state interferes with at considerable cost. I thought there was meant to be a strong strand of liberalism within the Lib Dems. Can’t we have some more of this?

I went to see Nick Clegg early on in the governent’s life. There were strong rumours that he was going to put through a Freedom Bill. I took forty or so proposals for repeal to add to his measure. I set them out for him in writing. In the meeting I explained that doubtless he would not like all of them, but several of them would seem natural for Lib Dems to welcome. I expected that if he had another list I would like many of the items on it. He was friendly, but it ended with the news that he was not going to put through such a Bill after all. Isn’t it time to revive it?

Conservatives are tax cutters by instinct. We do get a little weary of hearing that the wish to cut Income Tax is a unique Lib Dem proposal. We are willing to cut Income Tax in the particular way they wish to get some tax cuts through. Together the parties should be able to come up with a stronger agenda to cut tax on enterprise and effort.

At the start of the government’s life I was asked by a senior Conservative Minister what I thought of the idea of major reform of the NHS. I said that “would be brave Minister” and went on to suggest not attempting it in this Parliament, given that we had not won the election and given likely coalition pressures. I argued that successful reform of education and welfare would be difficult enough. When I read the Preface to the White Paper on NHS Reform signed by David Cameron and Nick Clegg I decided that their vision was one I should support. I overcame my worries and have ever since voted for the measure and done my best to explain the government’s case for it. I was also swayed in favour by some of the comments in the Lib Dem’s Orange Book and their Manifesto, though their proposals went further than I would have chosen myself. I therefore find it surprising, eighteen months on, to read that it is the Lib Dems who are toning this measure down or saving the NHS from these reforms, when they had such impeccable Lib Dem origins and support as well as appearing in the Conservative manifesto.

The cruel paradox for Lib Dems is this. They need to show coalition works. Instead, every time Labour attacks them from the left for daring to support it, Lib dems are wobbled off and attack the coalition with Labour. They are undermining the public’s view of coalition at the very time they should be trying to show it works.

Some have queried my comment that rail sibsidies fell in the early years of privatisation, only to rise rapdily again after the nationalisation of Railtrack.
The figures are:

1993/4 £1627 m

1995/6 (post privatisation) £431 million

2000/01 £1214 million (lowest Labour level)

2009/10 £4619 million

It was never easy challenging the accepted wisdom. Indeed, if you look at what they did to poor old Galileo, it has got easier. In the freer west people do not normally get put on trial in a court or sent to prison for disagreeing with the official view, though in recent years thought crimes have become more popular again with legislators.

I first encountered this difficulty in the 1970s when I argued that nationalised monopolies were a great way to harm the consumer, cost the taxpayer a lot of money and lose employees their jobs all at the same time. It took more than a decade to persuade government that they needed to introduce competition into telephones and sell the oil and steel industries. Even today there is still a rearguard action trying to claim that nationalised monopolies in “special cases” like railways could do the job better. As someone who believes in free debate, I am not complaining they think and argue that,but it is a tired old argument based on amnesia about how BR used to run.

Challenging orthodoxies got a lot harder when the orthodoxy was made in Brussels. I was one of the few who tried to dissuade the CBI, the Conservative and Labour parties and the official machine that the Exchange Rate Mechanism could not possibly work for a divergent economy like the UK. Every trick was used to crowd out our case and to argue the famous “golden scenario hypothesis”, that we would soon be moving rapidly to a land of milk and honey, powered by exchange rate stability and low inflation. That was a mightily expensive collective mistake. Some write in to this site and say devaluation would not work for Greece, yet it was essential for the Uk at the end of the ERM era and ushered in a good period for economic performance.

Those of us who took the same pessimistic view about the future of the Euro had some more success. We first persuaded the Conservatives to offer a referendum, and then more importantly Mr Blair followed. That saved the pound. Mr Brown helped by continuing to block it, so we could watch for more than a decade as the Euro passed through its heady first phase when the poor got richer by borrowing, to its crisis phase when the money ran out and the strains led to three countries needing subsidised credit and special measures(so far). The UK establishment ended up with a better record on the reality of the Euro, even though many members of it had argued the case for us to join on many occasions.

Today we have the green establishment. It is hard work trying to win the argument that if the UK adopts more anti carbon dioxide measures than other countries, and hikes the price of energy too high at home, we lose jobs and business but the world does not end up with less carbon dioxide. This obvious point got lost in the enthusiaism of the many in the establishment for the global warming theory. At least now we have a new ally in the form of the UK Chancellor of the Exchequer who has warned that high energy prices do more to deindustrialise the UK than to cut worldwide carbon dioxide output.

One of the strange features of global warming theory is the reaction of its leading protagonists. They say it is scientifically derived, but then go on to say the science is proven and established.I thought the essence of scientific method was to reach a hypothesis that seemed to fit the facts, and then to keep trying to improve or destroy it by further testing or experiment. This seems to be a thesis where the aim is always to buttress it rather than test it. For many years scientists thought Newton had said the last word on planetary motion, but the twentieth century did not rest until they had replaced or improved on the Newtonian universe in a dramatic way.

Today’s news that the Greek debt reduction has attracted the support of 85.8% of the bondholders is what passes as a success these days in Euroland. The Greek state can now use the collective action clause to make all bonds held under Greek law convert to the new terms. The Greek government claims it will hit the IMF/EU targets for debt reduction through debt restructuring. Bondholders are being made to pay some of the bill of Greek excess spending in recent years.

Each bondholder will receive 15% of their money back in a cash equivalent, and 31.5% of the face value of their bonds in the form of a new 30 year Greek bond paying just 2% at the outset, rising to 4.3% over its lifetime if all goes well. The stated reduction in bondholder wealth is therefore 53.5%. However, the new bonds are unlikely to be worth their par value. Early indications are that Greek debt will continue to change hands on very high yields, meaning if a bondholder wants to sell their new bonds they will have another large loss. They might lose threequarters of the par value on the new bonds, taking their full loss to around three quarters of the capital value at the issue price of their original bond.

Individual investors of course may have lost a lot less, as they may have bought in at much lower prices, and will have received some income. The government is also offering sweeteners in the form of the promise of extra payments if the Greek economy grows well in the years ahead. These probably have little value today, though we all hope for the sake of Greece they do in due course become more valuable.

Whilst many are treating this outcome with relief, it is scarcely good news. An advanced country and a member of the Eurozone has failed to repay its debts. Markets still do not trust fully the new debt instruments the Greek state is issuing. The Greek economy, deep in recession, has just lost more potential spending power from private sector holders of these bonds. This follows hard on the heels of the extraordinary decision to cut the minimum wage by 22%, the minimum wage for young people by 32%, and some of the pensions in payment by 12%.

Greece is an extreme example of how a western economy locked into a single currency has to slash living standards to try to live within its means. After years of building up debt, the country faces the reality that no-one wants to lend to it on anything like normal terms. Inside the Euro all the adjustment has to take place by some combination of smarter working, job losses, wage cuts, and in extreme cases failing to repay debts. The Greek decision to make bondholders take very large overall losses is just part of the huge price the better run members of the Euro and many prudent savers in Europe are now paying for Greek membership of the currency. It would be better if Greece left the Euro as soon as possible, to help them and to help the reputation of Euroland.

The Greek debt swap is seen as a success, but it is part of a much larger painful adjustment which is far from over. Portugal should be worrying, as they are still a long way from being able to return to the markets to finance themselves in the normal way.

Labour have understandably decided to make “fairness” the test of government policy. The Coalition government has decided to dance to this tune. Everything that is done has to be fair – fair between different groups in society, fair as judged by a general goal of greater equality, even fair between Lib Dems and Conservatives. If we are to live through austerity, the politicians argue, we must show that policy is fair. Those with the broadest shoulders should take the heaviest load.

Let me disappoint some of you. I do not think a government should set out to make unfairness part of its policy. Far from it. I do however have two worries about this test or doctrine. The first is, there is no consensual or agreed view of fairness. The second is, the government should not do things in the name of fairness that might delay the recovery, stand in the way of sorting out the mess, or deny the reality that the state has run out of money. To do any of these will add to unfairness and unhappiness in the longer run, not reduce it.

Fairness is to some extent in the eyes of the beholder. Labour and the government argues that it would be unfair to increase benefits for the unemployed by less than price inflation. After all those benefit levels do not permit lots of luxuries. Many people going out to work for low incomes ask is it fair that out of work benefits go up by 5.2% when their wages may be frozen, or rising just 1-2%? Politicians tend to say that it would not be fair to impose strict conditions on receiving benefit concerning how strenuously people should be looking for work, and on what type of jobs they should be prepared to take. Others in society think there should be stiffer requirements, as they have to go to work and do not feel they have the option to stay at home.

Politicians think bankers are paid too much. They argue it is not fair that bankers get such large basic salaries and often large bonuses on top, simply for doing their job. Yet Labour wrote contracts for the top people at RBS which were generous by normal standards, and the Coalition accepted it needed to honour these commitments. This action resulted in the bonus row this year for the CEO of what remains a loss making bank, dependent on txpayer support. They do not seem to take the view that footballers are paid too much, even though some football Clubs end up bankrupt thanks in part to the very high salary bill.

The danger of fairness policies is they can end up requiring yet more tax revenue to pay more out in benefits and subsidies to those people and policies which the fairness judges think are worthy of such help. We have talked many times on this site about some of those decisions that get in the way of economic recovery or industrial revival. Whilst I agree fairness is important, in current circumstances I think successful recovery is even more so as it can deliver the jobs that fairness and solvency require. The best way to narrow income differentials is to raise the levels at the bottom, and that requires more to go to work.

City am today reminds us that mortgage rates are rising. The Bank of England can and does keep short term official rates on hold, but the rates people actually pay are going up. Savers are expecting better returns, so borrowers have to pay more to cover the costs of deposit taking. Meanwhile smaller and medium sized companies have long been paying way over the very low base rate.

Listening today to criticisms of the governemnt’s aim to get the UK railway system to a similar level of efficiency as contiental systems by reducing some 30% of cost, I was struck by people telling me our system is dearer becausee it is privatised. I seem to remember passanger numbers and freight volumes rising strongly, and subsidies falling, when it was fully privatised. Then costs and subsidies rose swiftly again ocne the main part of the railway, the track and signals were renationalised. The old nationalised monopoloy had a poor record with falling use, safety problems and high levels of subsidy.

            The government believes that competition drives innovation, lower prices and better service. They run a Competition Authority to encourage and enforce  more of it. They are even trying to introduce it gently into public service areas that have not enjoyed much of  it, like water and healthcare.

               When it comes to banking, an area where we are meant to be world leaders, we have precious little competition. We have four main banks. Two of those have substantial taxpayer shareholdings, and have received collosal amounts of taxpayers money to keep them going. British industry and wider business spends much of their time complaining that these banks do not give them the service they need, the loans they require or the prices they can afford.  The banks have been heavily regulated, but not in a way which stopped two of them getting into financial difficulty. Today they are heavily regulated in a way which limits their ability to lend more to fuel a faster economic recovery.

                  The banking industry needs a substantial dose of competition. That would raise its service levels, get it back into friendlier contact with the wider business community, and lead to innovative offers. There is considerable thought going on in Parliament about just how this can be done.

                  I am not going to repeat the details of my proposed split up of RBS that has appeared on this site before. We could create say three sound competing banks out of RBS and sell them to the private sector. Dr Cable has emerged as a supporter of an RBS break-up, though he wants a different version from mine. There is one additional advantage from this scheme that I have not mentioned before before. The new banks need not take with them any of the accumulated tax losses. From the first day they make an overall profit they would then contribute tax revenue to the government, a welcome improvement on the current position where the weak banks  are unlikely to pay tax for several years.

                    Andrea Leadsom is proposing that each UK clearing bank be required to establish full bank account portability. Everyone’s bank account under this scheme would rest with the current bank in a way which allowed the whole account with all its Direct Debits , income and spending arrangements to stay in place and to be transferred as a working whole to a new bank when you wish to switch. Such a system of bank account portability would tackle one of the main reasons why many people today do not move their accounts, because they fear all the complications of having to set up everything again from scratch.

                    Several of us are proposing that the barriers for entry into banking be lowered. Some who have looked into the possibility of setting up a new small bank have been put off by the very high costs imposed by regulators before they can get started. If you have to construct a unique banking model at great expense, have to hire staff and Directors and establish premises before you can gain a licence it is a large barrier to entry which only the very rich and persistent will overcome. It appears to be too difficult and too costly to get a banking licence in the UK, protecting the incumbents more than is desirable.

                  Yesterday the UK fell into seventh place behind Brazil in the list of the world’s largest economies. We used to be fourth behind the USA, Japan and Germany. China has already risen  to second place and now Brazil is on the climb.

                   In a way its good news. There are many more people in China, Brazil and India. As they become richer, so we should expect them to overtake medium sized western countries. The world has been an unfair place for many years. It is good if some of  the world’s lower income countries prosper. As they get richer so their citizens have better lifestyles. They expand the world market for more sophisticated goods and services. We should be able to serve those new consumers. We should be pleased for them.

                   There is, however, a darker side to this story for the west. As the emerging market economies get better at competing, their energy, hunger and hard work can take business away from western factories and offices. They can take jobs from us, or they can help force down wages in the west as their super competitive prices attract world demand.

                     The US has experienced a long period of no real wage growth in factories and general  services as the rest of the world has challenged and started to catch up. Now the Europeans are discovering that they too have been paying themselves at levels which are difficult to sustain against the competitive onslaught.

                      The problems for western politicians is acute. The very global market which is doing so much to advance living standards in the emerging world may start to lower the living standards of many in the western world. That same world market will create many more high end consumers, which in turn enables the brightest, best and most commercial in the west to earn far larger sums out of the much enlarged market. What is good for a top football team or a recording star may be bad for a car plant operative or a telephone service employee.

                      The cuts in living standards result from the increased competition from many  areas. They also come from unwinding the excessive debts and deficits individuals and some companies had built up as well as western governments. Living standards were sustained well beyond our joint earning capability up to 2007, and are now adjusting sharply in some cases.

                     In the extreme case of Greece they have decided on a 20% cut in their Minimum Wage to try and price their country back into European, let alone world markets. The UK and US has cut living standards in recent years by devaluation. US and UK citizens can now afford fewer imports for the same income. Spanish, Portuguese and Irish living standards are being adjusted sharply downwards by the cruel logic of the Euro, and by the ending of plentiful credit which had helped sustain demand, income and asset values.

               The global market is great for the Manchester Uniteds. They can expand their fan base mightily and charge good prices for their videos and merchandise. It is good for the high end bankers, fine wine merchants, smart lawyers, business advisers, estate agents selling London properties and the rest who know how to charm money out of the world’s new rich. It is proving tougher for some of the more traditional businesses who wake up to find the emerging countries do it faster, cheaper and on a huge scale. The UK lost much of its textile business to the East some years ago. It needs to watch out for other industries, as the emerging countries add cheaper energy, cheaper labour and control of some of the raw materials to their mix.

        The UK has developed several universities that regularly sit near  the top of  the world league tables.  Oxford, Cambridge, UCL, LSE and Imperial are world beaters. Others in the Russell Group maintain high standards.  The world’s talent still beats a path to their doors. This should be a strength for the UK. It is something we should welcome and foster.

         The UK has a bad habit of denigrating some of its most successful institutions and businesses, and failing to reinforce success. In an increasingly competitive world we need to get better at backing the best in our country, and expanding it on a global scale. The US has done a great job in backing Harvard, Yale, Princeton and other high flying American schools. We need to catch up.

          The big difference between the US elite and the UK elite is a question of money. The US government has offered very favourable tax breaks to encourage donations to their universities. The institutions themselves have followed intense and successful ex alumni and corporate programmes to encourage more giving. The leading Colleges have built large endowments, giving the universities flexibility to hire the best faculty members, to finance top level research, and to provide bursaries and scholarships to talented energetic young people without much income to support themselves. It has proved a heady mixture.

         They have added to their success by fostering strong links with venture capital and other investors. They come to the campus to assess the quality of research and to put money into developing the best ideas. The university and the faculty members can participate in the commercial success of their applications and their break throughs.

          Oxford and Cambridge are moving in the same direction, but they need to raise more money than they currently enjoy to match the US levels. The City of London and the great universities need to work ever more closely together.  Gone are the days when the best academics, the Nobel prize winners, would automatically wish to come to Oxbridge whatever the terms.  They look for higher salaries. They expect substantial money for laboratory facilities and suport staff in sciences. Even the humanities Professors now would like research assistants, and plenty of office accommodation and support for their teams.

          The arrival of many very hard working and intelligent Asians in the top US and UK universities is changing things again. For the moment it is a helpful development. It gives the Anglo Saxon institutions a more global feel, it increases the competition for places and money, and adds a new Asian perspective to studies and research. We should regard this as partly a transitional phase. The Chinese in particular will want to learn how we and the US run great universities. They will wish to transfer some of the talent and the organisational genius to their own institutions. They are on the look out for our best ideas and our best people.

             The UK needs to concentrate on promoting the policies that help our best catch up with the financial might of the leading Americans. It needs to develop more  joint working between the groves of Academe and the workshop of private equity. OFFA is not helpful in this connection, as we have discussed before. Nor is too much box ticking in research assessment. Some blue sky research requires risk taking. Some will flop. It is about judging people, more than trying to construct a perfect audit and  a set of questions which will infallibly come to the right answer over who should have the money.

            Listening to Oxford academics at an undergraduate College on Saturday night, they are understandably  preoccupied by seeking grants and finding sources of money to maintain their work. As largely independent institutions they cannot be exempt from some of the pressures of the fund raising marketplace. As world leaders they could hope for an answer at national and university level which provides more money overall to reinforce this UK success.