OK, I admit it, I have misquoted Nick’s speech to the LibDem City Forum last month - but not by much. This was the most Euro sceptic speech by a LibDem leader in living memory.

Let me quote him precisely: “the UK is enjoying the benefit of currency flexibility and the devaluation of the pound against the Euro is giving a stimulus to manufacturing.” Doesn’t sound like someone who wants to join the single currency, does it? He acknowledges that things may change, but he doesn’t exactly go out of his way to make it sound likely: “conditions may well change to make membership of the Euro the right option for Britain and in these circumstances the LibDems would make that case, subject to a referendum”.

I think that this is essentially the Labour Party’s position: the Euro is not the right option now, but if it becomes so, then we will support it. I guess that, for better or worse, we will not enter the next election promising a referendum on the Euro. Indeed, this speech raises the possibility that we will pledge to keep the pound for the next parliament.

Nick Clegg’s speech to the LibDem City Forum was sufficiently interesting to make the BBC news homepage. Nick acknowledged that Vince wrote it - a deserved tribute to Vince’s credibility. Nick highlighted David Laws, Chris Huhne, and Susan Kramer as evidence that we have “the strongest team of economic expertise in British politics today”. True, but why are none in economic portfolios?!

Here are some of the proposals.

The good

1. The depositor protection system doesn’t work - as the Northern Rock queues show. It needs reforming - although Nick didn’t say how.

2. Bank charges should be transparent. Yes! But what about government charges? Prescription costs are far higher than the medicine cost in almost all cases…

3. Make it harder for banks to repossess houses.

4. Return the capital gains tax system to how it was in 1997, before Labour messed it up.

5. Non-doms limited to 7 years, before being taxed like the rest of us, just as in pretty much every other country.

6. All market participants to reveal positions, making it easier for the market to understand who it doing what - and particularly, who is shorting the market.

The bad

1. “There are minimal benefits to provincial Britain of this growing concentration of economic activity in London”. This is not true: as Nick acknowledges, almost a quarter of income tax revenues (with similar proportions for some other taxes) come from City of London employees. Put simply, many of Middlesbrough’s schools are paid for by London bankers.

2. “There is a strong case too for disconnecting retail banks and investment banks as occurred in the USA”. This is bizarre as the US banking system is in trouble, and because the only UK bank to need bailing out (Northern Rock) was a retail only bank.

3. Including “asset prices, and specifically house prices” in the definition of inflation. It would be very odd to include share prices in inflation - M&S recovery share price rise was not inflation. Including house prices is problematic for two reasons. First, £100,000 at 5% is smaller than £100,000 at 10%, so including the price without consideration of the rate gives a distorted picture. Second, if we done this since 1997, then interest rates would have been higher to cool the housing market. Higher interest rates (and remember ours are already higher on average than in the US, Europe and Japan) reduces investment, raises the value of the pound, cuts exports, and increases unemployment. Still convinced that you want to include house prices in the measure of inflation? Thought not. We should sort the housing market properly, not by some financial quick-fix.

The ineffective

1. Nick think that governments routinely bail out banks. Only one (Northern Rock) has been bailed out, and even there government exposure is limited. In all other cases banks in trouble do exactly what Nick wants them to do: hold a (discounted) rights issue. Shareholders are forced to bail out the bank. That is what they are for - taking profits in good times, and losing out in bad. The Royal Bank of Scotland asked shareholders for £12bn, while Halifax Bank of Scotland requested £4bn. The current system is pretty close to working as it should do.

2. Nick wants counter cyclical capital adequacy rules so that banks hold more capital in booms and less in slumps. There have been lots of calls for this recently, but it may be unnecessary if banks successfully hold rights issues when they need more capital.

3. Nick expressed concern that the City has few spillovers into poor neighbouring Boroughs, such as Tower Hamlets, but offered no policies to change this. In reality, the best way to tackle this is my raising education standards and expectations in underperforming areas - as our pupil premium is designed to do.

4. Shareholders to approve executive pay. Either this will be ineffective, or if it cuts pay it will lead to more private equity, which has no shareholders.

5. Greater provision of generic financial advice. The person taking out too much debt is unlikely to discuss finance with a well-meaning person first.

6. “Newly emerging financial participants - whether it be in Hedge Funds or Private Equity - need to demonstrate that they accept the responsibilities which go with their growing influence” - what does that mean in practice?

Overall a good speech, with real substance worth discussing.

In 1996 a group of Oxford academics produced a book called Options for Britain. It was intended as a thought piece for an incoming (Labour) government. 12 years on, and with less clarity as to the makeup of the next government, we are working on a new volume along the same lines. To that end I have spent the last three days in Oxford at a policy conference.

The concept of pupil premium is was widely supported in the education session. I asked the obvious question: How large must the pupil premium be for the child of Somalian immigrants in Lambeth, compared with a child who is white, living in an affluent suburban area, and with well-educated parents, if we want both to have an equal chance of doing well at school?

No one at the conference knew: because we have never had a pupil premium in Britain we cannot know the answer. But there is some evidence from the United States, contained in Woessmann and Peterson Schools and the Equal Opportunity Policy.

In this book is the authors ask a different but related question: if we hold educational spending for whites constant, how much do we need to spend on the education of blacks for them to have equal educational outcomes? It turns out that the number is very large: spending on black pupils needs to be nine times as high as that on whites.

What does this mean for Liberal Democrats? If we imagine that one in three children received some element of the pupil premium, ranging evenly from almost nothing to nine times the baseline level of funding, then the policy would more than double expenditure on education, and would cost approximately £90 billion.

Of course the final figure could be less. Perhaps the correct figure for Britain will not prove to be nine times, perhaps it will only prove to be four times. Perhaps it will not need to go to one in three students, perhaps only to one in five. But even then the pupil premium would require £24 billion. Whatever the final figure, and we cannot find that out until we try it, it is clear that the £2.5 billion the party says that it will allocate to a pupil premium should be considered a down payment on a work in progress, not a policy completed.

This is not to criticise the party: it has done well to find £2.5 billion has a down payment. Nor should we underestimate the amount of money that a government can find over time. In the first 10 years of the Labour government, government spending rose by more than £140 billion in real terms. A government committed to better educating those who currently do badly in schools could certainly find £24 billion in normal economic circumstances over the duration of one parliament, provided that they made it an absolute priority.

It is worth asking whether such a policy would pass cost benefit analysis. The evidence from America, sadly, is no. In narrow economic terms, taking into account only the additional wages earned, and the greater cost of education, is that spending nine times as much on the education of blacks as whites would yield an investment return of just 1.2%. We could no doubt had a little for reductions in crime obesity and other social ills associated with poor education and resulting poverty. But it would be naive to say that such a policy will pay for itself over the long term.

Of course, there is more to life and economic and investment returns. Liberal Democrats believe that no one should be enslaved by poverty, ignorance or conformity. It says so on our party membership cards. But I think we also believe, well, most of us at least, that people should not be enslaved by the accident of their birth. To that end I think the pupil premium is a right and proper policy for the Liberal Democrats, even if the return is lower than the cost of capital. The challenge for the party is to find a proper sum of money to fund this policy: there is no doubt that we can transform the lives of millions of young people in Britain. But it will take real money to achieve that goal.

">Tim Leunig is a lecturer at the London School of Economics, and writes a regular column on economics for Liberal Democrat Voice.

Nick Clegg gave his first speech on the economy yesterday, and for those of us who call ourselves “economic liberals” it was an enjoyable occasion. There is much to discuss about the 3500 word speech but I am going to concentrate on the big picture and discuss what it means for the party as a whole. I will return to other sections in future articles.

There was considerable criticism that Nick said little about his approach to the economy during the leadership election. It is clear from his speech today that there is little if anything that separates Nick Clegg’s view of the economy from that of Vince Cable. Some passages - such as on debt - were pure Vince, while others, such as those on trade, showed Nick’s history in this area.

Thus Nick told his audience that “I am economic, as well as a social, liberal”, before going on to add that “I am a proud inheritor of the British liberal tradition that has stood up, through the centuries, for free trade, and against protectionism”. He went on to state how Liberal Democrats supported entrepreneurialism, economic growth, competitive markets and globalisation, albeit with internationalist politics to regulate the effects.

This was a much stronger and more unambiguous statement than many of us had expected. The phrase “I am an economic liberal” is not one which everyone in the party is happy to subscribe. Nick must have known what he was doing when he said it and by saying it in his very first speech he set the tenor what is likely to be his long leadership of the party.

He went on to talk with pride about the roles that he had played in developing economic policy earlier in his career. He talked about his role as an international trade negotiator leading the European Union team on China and Russia’s accession to the world trade organisation. He talked about being trade and industry spokesman in the European Parliament pushing through single market liberalising legislation in record time. He talked the opening telephone markets across Europe to competition and liberalising European energy markets.

He pledged that the Liberal Democrats will be “a party committed to economic liberalism, internationalism, to fair taxes, and to competitive, fair markets.” This is a vision to which your correspondent is happy to subscribe, it will be interesting to see what reaction it provokes within the party.

Tim Leunig teaches at the LSE and writes an economics column for LibDemVoice. This is the first of a series looking at the wide-ranging speech that Nick gave yesterday.

This is the first of a regular series of columns from economist Tim Leuning.

January is the time for predictions. Every year economists make them. Sometimes we are right, and sometimes wrong. Some predictions, like inflation, are easy, but others are not. The oil price is not.

For fifty years, 1921-71, the oil price was fairly stable at c. $20 a barrel (in today’s terms). That was surprising: the price yo-yoed in the mid-nineteenth century and was fairly volatile 1880-1921. But neither the booming 20s nor the great depression, a world war, nor a post-war boom seemed to affect oil prices at all. Oil prices were one thing you just did not have to worry about.

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