Most of the twentieth century saw a clear demarcation between blue and white collar workers. Blue collar workers were paid less, and their lives were much less secure. They were more likely to be on short-term contracts – labourers were often hired by the day. Their work involved a greater risk of injury, and thus loss of work. They were less likely to have unemployment insurance and a company pension. The employment conditions for white collar workers were much more reliable – and that, as much as the difference in income, meant that white collar workers were able to buy a house, giving them a security not enjoyed by blue collar workers.

On these measures Britain continues to go backwards. The number of people with a good quality pension has been falling for many years. The government is working on this, but increases in life expectancy make it hard to develop realistic plans that do not scare people off.

The number of home owners is also falling. This is bad news. Almost everyone with the means to own chooses to do so: ownership provides security and certainty that no other tenure can match. Owning your home is particularly useful when you retire and your income falls. As a tenant you may need housing benefit, which puts you at the mercy of rules on allowable bedrooms, allowable rent levels, and so on. The security that is a hallmark of “being middle class” involves owning your own home.

Social mobility, properly understood, means opening up the essential stability of middle class lifestyles to as many people as possible. We made real progress between (say) the 1930s and the 1990s. The proportion of white collar workers rose, and blue collar workers increasingly enjoyed more stable employment, with pensions and the ability to buy a house.

In contrast, we have gone the wrong way on these issues for twenty years. There is a real agenda for action here.

Government should concentrate on what it can do, in this case education. Kids from poor backgrounds generally do much worse at school – and so they end up poor later on. Government can improve school results for such kids relative to others: Labour did it – a bit. There is big variation in this across the country, so every local authority except one should be ringing up those who are doing better and learning from them.

Money matters to schools. I would like to see a handful of schools given it in spades – some double the usual budgets, some quadruple, and so on – to see just what it costs to ensure that next to no-one leaves school without the qualifications and attitude to make a go of their lives. As a country we need to know what it costs to break the cycle of intergenerational poverty. It may even be that it pays for itself in future tax revenues and falls in benefit spending. Or it may be so expensive that we take the democratic decision as a nation, not to pay for it.

Social mobility is usually measured in terms of whether people relative to each other. If one person rises, another must fall, by definition. Although true in relative terms, it is not true in absolute terms. Graduates numbers increased dramatically over the last twenty years, and the graduate wage premium has not fallen. A better educated Britain is more attractive for those wanting to employ the well-educated.

The Victorians worried that we would have too many people able to read and write (“Why do labourers need to be able to write?”) – but as education increased over the twentieth century, the quality of jobs increased with it.

We never have anything to fear from increasing the supply of well-educated people. Social mobility is not a threat to the haves – we can all “have”.

Today I have published an analysis of Labour’s proposal. It uses the Business Innovation and Skills graduate income “ready reckoner”, which is based on data from the ONS Labour Force Survey. The underlying data are as good as they can be, although of course predicting graduate incomes in 30 years time is a dangerous game.

The results are stark. The biggest winner is the government, because it will have to write off fewer outstanding debts after 30 years. The reality is that for most borrowers the current scheme is already a graduate tax irrespective of whether the headline fee is £9,000 or £6,000. They simply won’t earn enough to pay the loan off, whether the headline fee is £6,000 or £9,000. Cutting the fee cap from £9,000 to £6,000 will not alter their monthly or lifetime repayments.

Some graduates do gain: notably those who earn enough to pay off their loans in full. Our analysis shows that over half of the gain to graduates goes to the richest 20% of graduate – those who earn more than £2m in the 35 years after graduation. The typical beneficiary is 50 years old and earns £72,500 at the time when they benefit from Labour’s proposal.

In contrast young graduates get very little benefit – under 1% of those within 10 years of graduation will gain.

Labour have said that they will levy a higher rate of interest on those earning £65,000 or more. This will raise very little – people earning this amount have often paid off their student loan already, simply because they have had reasonably high earnings earlier in their career. Earnings at this level are most common late in people’s careers – the average outstanding student loan for these people at that point is less than £4,000. An interest rate surcharge will simply lead them to pay the debt off immediately.

Finally, Labour will pay for the change by scrapping the fall in corporation tax on banks. This means that money will be taken out of the economy now (though higher taxes on banks) and put back into the economy in 25 years time (when some graduates will pay less in repayments). In today’s economic climate it makes no sense to take money out of the economy like this.

Tim Leunig is Chief Economist at CentreForum. You can read Centre Forum’s analysis of Labour’s proposed £6,000 undergraduate degree cap here (PDF).

She has been found guilty, and will be sentenced on 1 September. District judge Elizabeth Roscoe told her that her remorse would ‘very much go in your favour’ but warned that she could still face prison because of the ‘serious nature’ of the case.

That would not be appropriate. What Natasha Reid did was wrong, but, bluntly, since she got home with the television, and does not appear to have been caught on camera, she could probably have got away with it. She chose to confess, a remarkably brave thing to do given that sentencing was likely to be harsh.

Many people, without any history of criminal behaviour, seem to have been caught up in what happened. It is plausible that there are others like Natasha, who stole something, and are now regretting it.

The justice system seems to be able to distinguish between people like these and between those who saw what happened as a great opportunity to steal and would do the same again.

The authorities should therefore declare that anyone guilty of theft, who gives themselves up, and returns the goods undamaged, will be given a conditional discharge. This means that they will not have a criminal record, unless they repeat the offence. Those who stole consumables, such as alcohol or cigarettes, could confess and pay for the items. This would not apply to those who damaged property or were violent.

The idea is to encourage everyone who, at some point in the last few days, did something they regret in a moment of madness to come forward and say that what they did was wrong, that they regret it, and to return the property that they stole. People would be given four days to report what they did. They could do it in person, or online.

But equally, the authorities should offer rewards to those who report others who stole, damaged, or were violent. The authorities would announce this too, and the rewards would begin as soon as the four days were up.

It will do no-one any good if people like Natasha Reid are sent to prison and given a criminal record. A criminal record makes it less likely that she will find work, and make it more likely that she will end up on benefits. Prisons are full, and regular early release schemes let seasoned criminals out all the time. Better to keep them in than to release them to make a place for the fairly harmless Ms Reid.

We know too that prisons are factories of crime, where we do not want people to end up unless they are a danger to the public. Ms Reid is no such thing.

And above all, we want the community to come together, in truth and reconciliation. That is best served by encouraging as many people as possible to follow Ms Reid’s example, and step forward, confess, apologise, and repay. An offer of a conditional discharge makes that more likely, and so makes it more likely that communities can come together again and move on.

Consumer price rises are inevitable when the wholesale price goes up. But my supplier, E.ON, has structured its price rises to hit the poor more than the rich. They are doing this by raising the cost of gas much more for small users than large users.

They have raised the price of the first 2680 kWh by 46%, but the price of additional units by only 15%. This means that the poor – and the green – will see much bigger rises in their bills.

Notes: These figures relate to E.ON SaveOnline 4

Prices in pence /kWh are rising from 5.304/2.94 to 7.75/3.372 for the first and subsequent 2680 kWh.

The pattern is similar for electricity – those who use more than £1000 worth of electricity a year will see prices rises by only half as much as those who use small amounts.

Of course, people can swap suppliers. But E.ON’s behaviour makes it look as though they think poorer customers – who may be less well informed, and have worse access to the internet – are less likely to swap. E.ON appear to think that these people are trapped and have decided to exploit them. This is not acceptable.

The competition authorities need to see whether this approach is widespread, and clamp down on it if it is. And in the interim politicians should use the bully pulpit to shame companies who behave like this.

Tim Leunig is Chief Economist at CentreForum.

David Cameron needs to be as ruthless. So long as the Murdochs have a powerful media presence, his hiring of Andy Coulson and his closeness to Rebekah Brooks are real issues. The retoxification of the Tory party is underway.

Cameron should announce that he was lied to by Coulson, and that the level of rot can only have happened if people at the top were not managing the paper properly. It was Brooks and the Murdochs’ job to know how their reporters got their scoops: whether they actually knew about the phone tapping and corrupt payments to the Police is irrelevant.

Cameron should state his view that they are not fit and proper people to hold any form of media licence, and that he has written to OFCOM accordingly. The bid for BSkyB would be dead. He should also announce that the government will place no advertising in any Murdoch paper from now on, and call on other advertisers to do likewise.

He should then announce an immediate ban on all Murdoch staff from all government press conferences, and state that no government minister will grant interviews, brief or take calls from any part of the Murdoch Press. He should challenge Labour to do likewise. They could hardly refuse.

Murdoch is a global player, and there comes a point when it is simply not worth his staying in Britain. He would be angry, very angry, but today Cameron holds more cards than Murdoch. The Sun is hardly going to back Milliband in revenge. In any case the evidence that the Sun and other papers sways voters is very slim indeed. The Sun would either limp on under Murdoch ownership, fold, or be sold. There is a market for a right-wing red top, and no doubt in some form the market will supply that. Cameron need not worry about his coverage in the medium term.

This strategy would undercut Cameron’s opponents, reassert his primacy in the news cycle, win him plaudits from all other papers (including the Mail, which is important in Tory circles), and turn a retoxification event into a detoxification event. Of course it would involve Cameron admitting a mistake in hiring Coulson, but that is already obvious to everyone, and he can blame Coulson for lying to him.

So Mr Cameron, are you as ruthless as Mr Murdoch?

But the claim, repeated by the Department for Work and Pensions, that this policy is needed so that people on benefits do not get more than those on average earnings is a lie. People on average earnings are also eligible for benefits, particularly if they have a family.

If you earn £26,000 you pay about £5000 in tax and national insurance. But – if you have a family – you are eligible for in-work benefits. If you have a non-working partner, 4 children, and live in central London, then the online benefit checker says that you will get around £8,000 in tax credits, £16,000 in housing benefit and £3,000 in child benefit. Your benefits total £27,250, and your total income is £48,000 net.

If that person loses their job, then under the current system their income will fall by £15,000 a year, to £32,800 a year – surely a big enough fall to create an incentive to look for a job. The government wants this family’s income to fall further, to £26,000.

You can argue, if you wish, that £32,800 is too generous, although as Sandi Toksvig might remark, that is to put the “n” into “cuts”. But what you can’t argue is that we need a £26,000 cap to prevent the unemployed family being as well off as the family on average earnings because it simply isn’t true. The unemployed family is already 33% worse off than the employed family, and has less than half the disposable income once you subtract housing costs.

The only grounds to support the £26,000 cap is believing that unemployed people with large families should be poorer than they currently are. If you believe that, support it. If you don’t, oppose it.

Dr Tim Leunig is Reader in Economic History at the London School of Economics and Chief Economist at Centreforum. He would like to thank Mark Lloyd for excellent research assistance.

You have no right whatever to speak on behalf of the Government. Foreign affairs are in the capable hands of Ernest Bevin . … a period of silence on your part would be welcome.”

Now imagine the Liberal Democrats win the 2010 election. For financial – or other – reasons the party leadership decide to defer or abolish our pledge to abolish tuition fees.

The head of the party’s Federal Policy Committee, unanimously backed by all members of that committee, writes to Nick Clegg to tell him he must not do that, and that FPC is the sovereign policy-making body. But we all know the reality: Clegg will mimic Attlee’s response to Laski.

People vote for MPs and not for parties, and it is MPs and not parties that have the authority of the popular mandate. That is the way that the British constitution works.

It may be that FPC defeats the leader over tuition fees, but, if it does, it is a pyrrhic victory that would disappear as soon as we gain power. More important than this particular skirmish, or this particular issue, is the underlying incompatibility of our party and our country’s constitutions.

If we are serious about being a party of power, isn’t it time that we came up with a way in which party members can have a say in developing policy and the like, that works with the way the British constitution works, not against it?

* Tim Leunig teaches at the London School of Economics and is an occasional contributor to Lib Dem Voice.

The first prediction was right, in spades – I will write again in 5 and 10 years time about the second.

The prediction provoked a short but high quality exchange in the comment column. Not everyone agreed: Nick Rouse wrote of a “primitive economist’s models that bear no resemblance to reality” while in May, Mary Matthews wrote that “Boy, did you get it so wrong”, before adding “Economists cannot predict the future and trying is a waste of time.” (NB: I respect the fact that neither of you hid behind Anonymous in your commenting).

Economists’ predictions will always have large error bounds because we are trying to predict the aggregate results of individuals’ idiosyncratic decisions. But oil producers and users need to think about likely price trends when making investment decisions. Forecasting is necessary.

Predicting that a price will fall when it is more expensive than usual, and demand and supply are elastic, is likely to be right. As petrol prices rose in the forecourts, people cut back. The number of miles driven fell a little, sales of fuel inefficient cars fell (particularly in the US, where the price rise was highest in percentage terms), and people slowed down on the motorway, quite dramatically. In addition, the prospect of getting more than $100 a barrel for stuff that had been worth much less only a year before led oil producing nations to increase supply.

Demand fell, supply rose, and today Bloomberg report that West Texas Intermediate is $48.58 and Brent is $49.23. These are lower than long term prices, since at these levels deep water exploration, and Canadian and Venezualan oil shales will not be profitable. But oil prices may not rise this year, for three reasons.

First, stocks are high. Last year stocks were low, so bad news led to spikes in prices, as people worried that we would run out of oil (which Nashville did, by the way). This time we could get some short term very low prices, if oil needs to be moved and storage is not easy to come by. Oil is expensive to store, particularly on ships.

Second, demand is low. People remember how much high oil prices hurt, and may well continue to buy cars that do not expose themselves to that risk, even though prices have fallen. And there is a recession in many places.

Third, populist regimes such as Iran and Venezuela need oil revenues. When the price falls, they may be tempted to increase output to try to make up for the lower revenues per barrel. Otherwise they risk losing political support. That in turn, however, will lower the global price.

The prediction: the oil price will not reach even half its 2008 peak in 2009.

* Tim Leunig teaches at the London School of Economics and is an occasional contributor to Lib Dem Voice.

What are the benefits of going to university?

Going to university is profitable for individuals, on average, and for any given A-level grades. Although a handful of degrees (e.g. medicine) are particularly profitable, once you take into account A-level grades, most subjects are equally valuable (classicists earn more than media studs grads because classicists generally have better A-level grades).

Second, the “profitability” of going to university remains even as graduate numbers have increased. This tells us that demand for graduates is elastic: if you create more of them, employers will hire them on graduate salaries, and the country becomes richer.

Third, post-1945 technology has been “skill-biased”: its use has been greatest in countries with high skill levels and the biggest beneficiaries have been those with highest skills.

This suggests that the optimal number going to university will continue to increase, both at undergraduate and MSc levels. 80% of people whose parents went to university go to university themselves, and it is possible that the optimal proportion of the population for university is as high as 80%. It is certainly much higher than today’s levels, which are low by world standards. We need a policy that stacks up for more people going to university.

Given skill-biased technology change, increasing university education reduces income inequality, since otherwise demand for graduates will outstrip supply, causing pay rates for already well-off graduates to rise. Increasing university numbers will increase national income, and reduce income inequality.

Fees do not deter

As Julian said, entry to university is almost background-blind. Those with good A-level grades from top, middle and bottom are almost equally likely to go to university. The current fee structure is not deterring anyone from going to university, even though lots of people claim it would have deterred them and will deter others.

There are very few kids from poor backgrounds at university because schools are managing to overcome the educational effect of poverty (poverty itself, low aspirations, poorly educated parents, lack of role models).

If we believe that no-one should be enslaved by poverty, ignorance and conformity, it follows that addressing schools’ failures to overcome social background is a or even the pressing concern.

Furthermore, in that fees do not put kids from poor backgrounds off going to univ, and given that those going to univ are disproportionately affluent, moving money from this group to fund the pupil premium is both liberal and progressive.

Finally, the only way we can increase the numbers going to university, is if our schools prepare more university-ready students. That does mean a big step change in school results, which will cost big money, but has the potential to break the intergenerational poverty cycle.

Local universities

As Paul Holmes says, poorer students often choose to stay at home and study locally. The obvious solution to this would be lower accommodation prices (for which house-building is the best solution so that rents fall).

That said, part-time students, those who are married, have kids in school, etc, will want to go to a local university, and we should celebrate “mainstream universities” who cater primarily for such groups. Going to a local university is not necessarily a sign that the system has failed.

Graduate degrees

We need to think seriously about graduate level courses. Many students pay LSE £10-£15k for a one year MSc (plus London living costs) because those courses enhance their earnings. Since we recruit by word of mouth to a large extent, they must be right! Yet the British government funds virtually no MSc students. (Hence LSE has lots of British undergraduates, and few British MScs). Both our party and the government needs to think about how we are going to fund 10%, 20%, 30% of people through a graduate degree.

University funding levels

British universities are dramatically underfunded. It doesn’t affect LSE that much, because we have non-EU undergrads and postgrads to cross-subsidise EU undergrads. Providing one textbook for every nine students (have you seen the price of law textbooks?), videoing lectures, paying copyright fees to scan readings and put them on line, keeping class sizes down, providing specialist software, and yes, paying faculty who are actually good enough at their subjects to teach them at university level is expensive. The debate nationally about raising fees is in the context of that debate. If the govt decides to double fees it will be because they know that universities that don’t have as many foreign students as we do cannot provide a decent university education on their current budgets. What is the Liberal Democrat answer to this? Saying that we can sort-of afford to abolish the current loans for the current students does not mean we can afford to abolish loans to fund universities at sensible levels, for sensible numbers of students.

Getting the long term picture right

In its panic and determination to “do something now” government must not forget its role in securing the long-term underpinnings of the economy. There are three areas in which Britain has serious problems.

Our education system fails individual citizens and the country, whose only decent long-term future is to have a very highly skilled workforce. There is little correlation between parental income and intelligence at age 3, 80% of people whose parents went to university go to university, and going to university is the best thing you can do financially. It seems likely therefore that the long-term outcome is for 80% of people to go to university whatever their background, and perhaps half the population to do a graduate degree. We need expand universities and more importantly give kids from poorer backgrounds a decent education so that they can go to university. Failure to do so will increase income inequality: high skill employers will raise wages to compete for the limited number of people with degrees, while low skill employers will offer low wages, as the number of unskilled people competing for those jobs will be very large. Getting education right makes us richer, and more equal.

Britain’s infrastructure is creaking, particularly in the southeast. Our motorways are clogged, our most important airport is full, and twice out of the last three times that I have tried to get on the tube at Holborn station the station has been closed completely owing to overcrowding. We need to invest more, particularly in congested areas, otherwise internationally footloose businesses will move elsewhere and we will end up a second-rate economy.

Finally, and not withstanding recent falls in house prices, housing is too expensive. Millions growing up in Britain cannot expect to buy or rent without government benefits. Few people aspire to live on benefits, and when life on benefits is inevitable no matter how hard you work at school is it any wonder that so many young people feel so alienated? We must reform housing supply so that house prices do not rebound dramatically after current falls. Housing needs to be once more for the many and not the few. That would ensure that a much higher proportion of people, whatever their natural ability or educational attainment are able to choose a place to live of their own, and to live in it without involvement from the state. As liberals that should be a priority.

Tax policy

The rapid deterioration in the fiscal position should worry us all. The British tax system is much more pro-cyclical than people previously thought, so that tax revenues fall dramatically even when the downturn is relatively small. (Remember, the economy has only just started to decline, so the fall in tax revenue so far is massively disproportionate to the decline in the real economy).

The government’s previous fiscal rules did not work, and we need to develop some better ones. The first thing to do would be to look at the cyclicality of the tax system, piece by piece. It does not ultimately matter how cyclical the tax system is, so long as we know how cyclical it is. The more cyclical the tax system, the more important it is to run a (massive) fiscal surplus in boom years that can then be used when the economy turns down. In general, there seems to be some correlation between the most progressive elements of the taxation system and the extent to which the tax system is procyclical. Those of us who believe strongly in progressive taxation should therefore be calling for much greater fiscal surpluses in good years.

Interest rates and the Bank of England

The Bank of England’s monetary policy committee has done well. They did not rush to cut interest rates when inflation still looked to be a real threat (don’t forget that this summer saw the highest level of inflation for a decade). But as soon as there was a serious prospect of deflation they cut interest rates dramatically, and have made it very clear that they would do so again.

The bank has been given a job to do: keep inflation on track. Exogenous events, such as the huge oil price rise, mean that inflation cannot be held perfectly on track. But the Bank of England has done as well as anyone could expect. Calls to change the Bank of England’s mandate as soon as we don’t like a particular decision are at best foolish.

Anybody who has read the recent Bank of England minutes will know that the Bank cut interest rates to 3% because that is what they thought was needed to keep inflation at 2%. They did not do it to refloat the economy. The fact that deflation rather than inflation is now the threat shows us that stagflation is not an issue: we are not back in the 1970s. Were inflation to be a threat the Bank of England would be raising interest rates rather than cutting them (and would be right to do so). That inflation is not a threat, and that we have not entered the wage price spiral is a demonstration of just how successful Bank of England independence has been, and demonstrates more generally that inflationary expectations are fairly low, and that workers are sensible enough not to demand high wage rises when doing so would simply lead to unemployment. The contrast with the 1970s is very apparent, and must make it less likely that unemployment will surge in a way that it did in the late 1970s and early 1980s.

Fiscal policy

Much has been written about the need for a fiscal boost. The debate has been poor, with politicians and the media muddling up underfunded tax cuts, tax cuts funded by spending cuts, and tax cuts funded by rises in other taxes. The last two have no impact in this context, and will not be considered.

Underfunded tax cuts, or unfunded spending rises, are not what Britain needs at the moment, for three reasons. First, the British government has spent the last 10 years spending as though there were no tomorrow. Tomorrow has now arrived and the kitty is bare. We have one of the world’s highest structural deficits. There is talk of the deficit rising by more than £200 billion over the next couple of years. You would have to more than double income-tax to pay that off. Even if you wanted to pay it off over 10 years it would require a huge rise in taxes. Or we could never pay it off, and pay £10bn+ a year in extra interest payments, for ever. But £10bn is not trivial – if we had done the same in the last downturn, which £10bn of recent public expenditure would you be happy to see disappear to pay higher interest payments? Or do you prefer £10bn in extra taxes? If we were Australia or Canada, who have big surpluses, then we could think about a fiscal stimulus. But thanks to the least prudent chancellor since Anthony Barber, we do not have that option.

Second, a fiscal boost may not be needed. Interest rates have already fallen dramatically, putting a lot of money into the pockets of people with mortgages. Someone with a £200,000 tracker or variable rate mortgage is currently £4000 a year better off. At least some of that money will be spent, keeping the economy afloat. In addition, the pound has fallen dramatically helping every firm that exports, or which competes with imports. Foreign students applications to British universities have increased noticeably this autumn. Lower interest rates and a lower value of sterling will both helped refloat the economy and may be sufficient of themselves.

Third, a fiscal boost may actually be harmful. The Bank of England have been explicit that underfunded tax cuts without a credible repayment plan are inflationary, and make it less likely that they will cut interest rates in the future. Underfunded tax cuts mean higher interest rates.

Of course, automatic stabilisers (lower tax revenues as the economy declines, and higher spending on items such as welfare payments) should be allowed.

Bank lending

It is important not to resume borrowing levels of two years ago. Indeed, we can calculate the optimal level of mortgage lending. Net lending should equal the value of new houses built, minus deposits on those houses, plus the same for houses bought by newly-formed households, and those moving to larger houses, minus regular capital repayments on the existing mortgage stock. Housebuilding rates are low and the deposits are high (sensible from the bank’s point of view, in the context of falling prices), so net mortgage lending should be low.

MoneySupermarket.com reports first-time buyer five year fixes at 6.6%, 2 year remortgage fixes at 4.5%, and the usual standard variable rate is 5.5%. The mortgage market is working pretty well.

What is not working is interbank lending. On any given day some banks have spare money, and others are short. Banks can lend to and borrow from the Bank of England, but it pays little interest and demands good security. So instead they borrow and lend among themselves, at the “London interbank rate”. This is usually slightly higher than Bank rate, reflecting a higher level of risk. At the moment it is much higher, and the reasons that this are not well understood. We need to work out why this rate is so high.

It is not the market rate, being set each day by six people meeting together. The solution may be a proper market in which supply and demand interact to clear, minute by minute, day by day, rather like stock markets, and in which each bank borrows at a rate that reflects other bankers’ perception of the riskiness of their bank.

Interbank lending is needed for business lending to resume properly. Clearly banks should be cautious about lending in a downturn, but banks are not lending where it would be profitable. This has potentially serious problems for the wider economy, since cash flow problems can force good businesses to go bankrupt, and lack of finance prevents innovative firms from investing and expanding. Governments may need to push banks, or supplement them on a temporary basis. If they do that the loans should later be sold on to banks.

For example, the Bank of England could make loans related to base rate, but with the proviso that when the London interbank rate returns to a more normal margin over the bank rate the loan becomes a normal one based on the London interbank rate, and which would then be sold to a private bank.

Bank bailouts

The economic downturn was precipitated by financial problems. This is a sign of a successful financial sector: they are there to bear risks other people do not want to bear, and are correspondingly prone to crises from time to time. Since the underlying rationale of a bank is to borrow short and lend long, the threat of bank runs will always be with us.

Banks in Britain needed government assistance to distinctive reasons. Some banks, such as Northern Rock, lent imprudently. Their shareholders should receive nothing. This will encourage shareholders in other firms to monitor management more closely, and will reduce the bill to taxpayers. The government should close down Northern Rock as quickly as possible: Britain has lots of banks and losing one that behaved so badly would be a good thing. Better monitoring of management by shareholders, or better regulation, should prevent another North Rock.

Other banks had liquidity problems caused by relying on interbank lending rather than retail deposits. These banks made sensible loans, and both management and shareholders can consider themselves unlucky. But luck is part of business and if you don’t want to take the risk don’t buy shares. Only government was large enough to underwrite these banks’ refinancing and rightly drove a hard bargain. These banks should and will survive, and taxpayers are likely to get a reasonable return for their investment: the underlying loan portfolio is good.

In essence, bank “bail out” policies were successful: no retail depositor lost their money, runs on banks were stopped pretty quickly, and a 12% return for taxpayers on preference shares looks like a pretty good deal.

The only blot on the government’s copybook is suspending competition law to allow Lloyds and Halifax Bank of Scotland to merge. When banks are too big to fail they can take gambles without worrying about the consequences. This merger should be stopped, and undone later if it is not stopped now.

This lecture is the sort of thing that Chancellors and members of the monetary policy get to give, not opposition politicians. It says something of the respect with which Vince is held by serious economists that he was invited to deliver it. And did he deliver. This was a serious speech, by a serious economist, for serious economists. If that’s you, read it in full.

For most people it was a speech about bubbles, going back to the Tulip mania in the 1630s, and talking about our recent housing market. Vince has – to his credit – been worried about this since 2003. His proposals were:
1) The Bank of England’s mandate should include asset as well as general prices (using the Swedish model, and as advocated by former MPC member Sushil Wadhwani);
2) Bank capital adequacy rules should be tightened in booms, to stop banks getting carried away;
3) The creation of a counter-cyclical national land value tax;
4) That banks should offer those with mortgage arrears shared ownership;
5) That government should allow social housing agencies to borrow to buy 150,000 properties a year at wholesale prices from desperate building firms;
6) That we need more credible (read, more restrictive) fiscal rules; and
7) That we need more liberalisation in energy and food markets – both of which have seen big price rises recently, unlike more liberalised sectors.

The press release, powerpoint slides and full speech are here.

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.

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.

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.