Capitalism

To the American ear, these questions sound bizarre. Capitalism and democracy are bound together like Siamese twins, are they not? That was our mantra during the Cold War, when it was abundantly clear that communism and democracy were incompatible. After the Cold War ended, though, things grew murkier. Recall that virtually every U.S. chief executive and every U.S. president (two Bushes and one Clinton, in particular) told us that bringing capitalism to China would democratize China.

Angelenos have focused their ire and attention over the past week on the Bostonian among them and the unspeakable acts heas committed.

Not Whitey Bulger, whose alleged unspeakable acts happened long ago and far away from his Santa Monica hideaway. I refer, rather, to Frank McCourt, owner of the Los Angeles Dodgers, who, since he arrived from Boston to take ownership of the club in 2004, has driven it into the ground and, on Monday, into bankruptcy.

TWICE during the 1970s, a stroppy decade, leftish British politicians tried to turn the monarchy into a nationalised industry. There were plans to place Queen Elizabeth II and a few close relatives on state salaries and sack the rest of her family, andaa few years laterafor a Department for Royal Affairs, bringing the crown under Whitehallas management. Both attempts were resisted. Since then, royal aides have cannily worked to secure autonomy and arms-length financing from government. Just now, the mood behind palace walls must be giddy relief.

The queen has rarely been as popular as she is now, in her Diamond Jubilee year. The contrast with other arms of the establishment is striking, and revealing. For most people at the top of the public sector, this is a perilous time.

For months there has been angry scrutiny of the sums paid to the bosses of public or publicly controlled bodies, from the BBC to the railways and the bailed out Royal Bank of Scotland (RBS). The BBC says that its next director-general will take a big pay cut. Network Rail directors this week bowed to ministerial nagging and promised to donate any annual bonuses they receive to a fund for improving safety at level crossings.

Stephen Hester, the RBS chief executive recruited on a commercial contract by the previous Labour government to salvage the stricken bank, found himself pilloried on tabloid front pages (photographs of him riding to hounds saw heavy use). He was threatened with a vote in the House of Commons, organised by the now-opposition Labour Party, on whether he should take his annual bonus. When Conservative ministers offered tepid support, Mr Hester buckled and gave up the bonus.

In a BBC interview on February 8th, Mr Hester mounted a valiant defence of high pay in his bank and elsewhere. RBS was a atime-bomba saddled with APS45 billion ($71 billion) in losses, he said. He had scoured the world for the best people to defuse it, and if they did a good job they deserved recognition. He warned Britain not to seek fairness by acutting down successa. Yet Mr Hesteras arguments will not end the storm.

Ed Miliband, the Labour leader, presents todayas voter anger as a yearning for afairness in tough timesa. The Conservative chancellor of the exchequer, George Osborne, vows to fight unnamed foes trying to create an aanti-business culture in Britaina.

On the streets, another explanation can be heard. Interview voters almost anywhere, and they couch their anger in terms of natural justice. The bankers caused this mess but are doing fine while ordinary folk suffer, is the invariable charge. Ask them about bonuses in particular, and they wonder why well-paid bosses need extra for doing their jobs properly.

None of these explanations is wholly wrong. But none really explains the depth of national outrage. Start with Mr Miliband. His talk of afairnessa is, in part, a coded call for redistribution. Higher taxes on millionaires are strongly backed in opinion polls, butaunluckily for the leftavoters also overwhelmingly back a government plan to cap payments to those on welfare. Britons are only partly in Robin Hood mode: they want to take from the rich, but also to kick the poor to look for work.

Nor are Mr Osborneas warnings about anti-business forces convincing. Although Britons are cross about high pay, few seek capitalismas overthrow: they dislike corporate fat cats for being fat, not for being cats. As for votersa stated desire to see bankers suffer just retribution, they need to explain their dislike of well-paid BBC or railway bosses who did not cause the credit crunch.

Other explanations are needed for the public mood. Perhaps surprisingly, one clue may lie in the popularity gap between the queen and bankers such as Mr Hester. The Diamond Jubilee has prompted a slew of new royal biographies, making familiar points about how the monarchy has shrewdly adapted to modern mores. A new biography by Andrew Marr, a writer and broadcaster (and former Bagehot) makes a less familiar point. It quotes palace advisers who believe the queen has the ahumility of the hereditary principlea, meaning a sense of duty rooted in knowing she did nothing to earn her extraordinary position.

Listen carefully to Mr Hester, and he stands for an opposing principle: the idea that the unusually talented may deserve extraordinary rewards. Yes, people are paid unequal amounts, but donat forget how wealth is created and the successful motivated, he says. In essence, he is making the case for meritocracy.

Merit is a fine principle. But the most painful revelation of the debate on high pay may be this: many Britons are not convinced that they live in a functioning meritocracy.

Are the bosses bluffing?

Assuming that voters are not suicidally casual about who holds Britainas biggest jobs, their desire to slash bossesa pay leads to one conclusion: the public does not believe that executives are as exceptional as todayas pay levels would suggest. Some voters may be ready for a gamble, believing that bosses are not as globally mobile as they claim to be and would stick around if their pay was cut. Others may be more cynical, suspecting that bosses are not as unusually talented as they claim, so that others could do as good (or as mediocre) a job for less.

This is a dangerous mood, transcending labels of left and right. Indeed, it sometimes feels as if all political parties are following, not leading, public opinion. Even the queenas popularity, though mostly rooted in 60 yearsa service, is a warning sign: she is also admired because she does not claim to deserve her status.

Britain, an unusually free-market minded place, likes to think it is organised around such principles as open competition and rewards for merit. Cut through the noise about bankers and their bonuses, and it turns out that many voters think the fix is in.

WITH your back to the open sea, an island can feel encircled, even claustrophobic. Turn to face the waves and an island feels like a starting point, a place surrounded by a variety of bracing possibilities, both good and bad.

Britain has the politics of an island. At worst, its political debate can be parochial, even tin-eared about the world outside. Yet Britain is an outrider for openness, standing out among large European nations for its faith in free trade, liberalised markets and undistorted competition. In many neighbouring countries, calls to reject free trade and embrace protectionism attract a quarter or more of the vote. Not in Britain. Yet in island politics, the temptation to gaze inward is never far away.

Debates about capitalism dominate British politics. The Conservative prime minister, David Cameron, his Liberal Democrat deputy Nick Clegg, and the leader of the opposition Labour Party, Ed Miliband, have repeatedly spoken about building a fairer economy. Responding to voter anger, they talk of reining in bankersa bonuses and pay packages for company bosses. All three agree that there is a need to curb welfare for the work-shy. Most of all, they agree there is a desperate need to help the asqueezed middlea whose incomes stagnated even when times were good.

Listen to the leaders, and it would be easy to conclude that the root of the problem is the moral failings of Britainas political parties. The parties accuse each other of letting unfairness thrive, because they are variously nasty, incompetent or unable to stand up to vested interests. Immigration has become part of this argument. The Conservatives accuse Labour of lazily allowing foreigners to take millions of jobs during the boom years rather than improving the employability of native workers.

On January 19th Mr Cameron accused the previous Labour government of making a aFaustian pacta with debt-fuelled, finance-driven aturbo-capitalisma. That pact, he charged, let bankers and corporate bosses collect ahuge rewardsa while channelling welfare to those at the bottom. Hard-working Britons in between lost out. Labour does not believe in markets, Mr Cameron went on. Conservatives do, and know how to fix them when they fail. Delving into history, he cited Tory reformers from Margaret Thatcher to Benjamin Disraeli.

A few days later, in the House of Lords, a coalition of Labour peers and Church of England bishops cited Charles Dickens and Victorian notions of the deserving and undeserving poor as they attacked government plans to restrict the welfare payments received by any one household to the median income of a working family. The rebels won, with the Lords voting to ease the benefits cap for families with many children. Their rebellion will be overturned: some three-quarters of voters support the cap.

So far, so very British. Yet these seemingly distinct, domestic disputesaabout income inequality, executive pay, welfare, the squeezed middle, even immigrationaare all also arguments about something bigger. Without acknowledging it, Britain is having a row about globalisation.

The Faustian pact Mr Cameron describes is, at heart, an attack on the previous governmentas compact with globalisation, with soaring rewards for a few, millions parked on out-of-work benefits at the bottom, andaTories would sayacompetitiveness either neglected or artificially boosted by importing migrants. Mr Milibandas asqueezed middlea analysis leans heavily on work by the Obama administrationas aMiddle Class Taskforcea, and its studies of how, in an era of automation and globalised supply chains, American workers have seen real incomes stagnate while the richest saw their share of national wealth surge.

Inside Downing Street, there is much discussion of Tyler Cowen, an American economist who argues that, for many Western workers, economic stagnation may be the anew normala. Jesse Norman, a Conservative MP whose ideas for reforming capitalism found strong echoes in Mr Cameronas recent speech, calls globalisation athe whale under the surfacea of todayas arguments.

In lots of other countries, anxiety over globalisation is openly discussed. In Britain, political leaders have instead chosen to channel voter anger into arguments about each otheras character. Does that matter? A cynic might argue not: no serious British politician is calling for protectionism, so let sleeping dogs lie.

That is too complacent. British support for free trade runs deep, but thoughtful types in all three parties are worried.

No opt-out from global competition

The pressure from globalisation is as intense as ever, says one Tory. But now Britain must manage without the easy credit and generous welfare that once cushioned the impact of competition.

On January 26th the Lib Dem leader Mr Clegg demanded a big income-tax break for the ahard-working manya, funded by hitting top earners or closing a loophole used by buyers of pricey houses. He calls stagnating middle incomes an aemergencya.

To some alarmed Labour colleagues, Mr Miliband gives the impression of seeing capitalism as a bad system that needs fixing with regulation, and globalisation as the internationalisation of capitalism. Lord Mandelson, a founder of New Labour, this week published a report with the IPPR think-tank, offering ways to shore up support for globalisation. In America, free trade Democrats atook to the hillsa after Bill Clinton left office, says Lord Mandelson. aWe mustnat see the same happen in Britain.a

Openness comes naturally to the British, a maritime bunch. The British elite has backed free trade for more than a century, partly because for a long time Britain was a world-beater. But now British voters are angry, and globalisation is part of the reason. Consent for open markets has withered before. Denying that a battle needs to be fought is the first step to losing it.

ED MILIBAND, leader of the opposition Labour Party, has a problem which should not be serious, but probably is. In this buffed and burnished television age, he sounds and looks a bit odd. This makes him increasingly the butt of jokes. Things are so bad that a BBC interviewer this week asked himamore or less directlyawhether he was too ugly to be prime minister.

There is not much that Mr Miliband can do about his slightly prissy delivery and doleful, irregular features. In contrast another, genuinely grave, flaw is entirely his own fault. Mr Milibandas plans for solving Britainas most pressing problems manage to be both too timid and implausibly ambitious.

On January 10th Mr Miliband gave a speech on the economy, explaining what his party should stand for, now there is less money around. Amid horrible approval ratings (according to YouGov, a pollster, some two-thirds of voters think the Labour leader is doing a bad job) allies of Mr Miliband talked up the importance of the address. They called it a moment to abash on the heada the idea that Labour is in denial about the need to fix the public finances.

Mr Miliband made an important concession in his speech: that Britain will probably be stuck in austerity after the next general election, planned for 2015. That means a future Labour government would not be able to reverse every spending cut made by the Conservative-Liberal Democrat coalition, he said. His Labour Party would not be able to repeat Tony Blairas and Gordon Brownas strategy of letting financially turbocharged growth rip, while diverting some of the proceeds into public works and welfare. Labour would have to deliver afairness in tough timesa.

Mr Miliband and his inner circle are convinced this message resonates with the asqueezed middlea: the group that has seen its living standards stagnate while welfare recipients at the bottom of society and bankers at the top seem to have been spared pain. The Labour leader believes that he predicted the current national mood of gloom and anger. He devoted chunks of his speech to explaining just how prescient he has been.

He had been mocked when he first attacked acrony capitalisma, he declared. Now Tories and Lib Dems were scrambling to copy him. A year and a half ago, Labour warned the government about the dangers of cutting spending too far and too fast. It had been proved right, he insisted. Because too much demand has been removed from the economy, the government would have to borrow aAPS158 billion morea than planned over five years.

The Labour leader is fond of this last argument about missing demand, and repeats it often. But this is odd. For one thing, it is a source of public doubts about Labouras commitment to reducing the budget deficit, a task most voters say is necessary. For another, it is a ludicrously complex line of attack. Economists disagree about the precise impact of deficit spending (and voters are just as confused, with poll numbers on whom or what to blame for Britainas economic woes splitting every which way). Most damagingly, Mr Miliband is picking a fight about the past. He is seeking to prove, with numbers, that voters made a mistake when they trusted the coalition back in 2010. That is a strange use of an opposition leaderas time.

It is also not working. Polls show voters far more inclined to trust Mr Cameron than Mr Miliband on the economy, even if they are not sure the Tory leader is worried about fairness. Perhaps this is because, on taking office, the coalition made a much bigger and more easily understood prediction: that a terrifying economic storm was brewing, which would be made more lethal by Labouras failure to put money aside in good times.

Mr Miliband claims to arelisha the chance to manage the economy differently. But when it comes to embracing austerity, he could hardly sound more grudging. In his speech he did not admit to a penny of wasted spending in 13 years of Labour rule. He offered a single example of spending he might trim, and vowed to offset that with compensation from the private sector. In office, he explained, Labour might not be able to increase the winter-fuel allowance (a universal benefit paid to elderly dukes as well as retired dustmen). To offset that pain, he would push energy companies to offer their cheapest fuel tariffs to the elderly.

The quiet man

What changes does Mr Miliband relish, then? The answer lies in his talk of breaking with New Labouras economic model. Yes, he says, he is aincredibly prouda of schools and hospitals paid for with the proceeds of growth, and the jobs created under Mr Blair and Mr Brown. But too many of those jobs offered low-paid, low-skilled drudgery. Mr Miliband wants to use athe power of governmenta in new ways. He vows to harness regulations, tax rules and government procurement contracts to craft a kinder, more sustainable version of capitalism with a marked Rhineland tinge: think apprentices, employee representatives helping to set bossesa pay, and a Britain in which smart graduates want to design clever machines, not City derivatives.

These are bold plans, at a time when governments worldwide are struggling to survive until next month. Mr Miliband is serenely confident. These are early days, he says. The government is failing. Voters will come round.

Votersa trust in the government could crumble. But Mr Miliband may not have much time. Grumbling from Labour MPs is turning into on-the-record sniping. Timidity about how to cut spending is less of a problem than their leaderas vaulting ambitions to reshape British capitalism, just when voters have lost faith in the ability of experts of all sorts to improve anything. Mr Miliband is a mid-sized politician making outlandish claims. That credibility gap explains why voters are not listening.