Prospects for Pakistan in 2023

 

Pakistan's Secretive National Security Policy

Najam Sethi in The Friday Times

The PTI government claims to have formulated a National Security Policy after consulting key stakeholders, including hundreds of intellectuals, experts, businessmen, teachers and students. Unfortunately, however, opposition political parties and leaders were kept out of the loop and parliamentarians, even on the treasury benches, were all but ignored. To top it, the policy is classified as “Secret”. We have only been told that “traditional security” is to buttressed by “human security” by increasing the size of the pie that is to be distributed among these two categories. But not to worry. We already know what our National Security Policy has been for over seven decades and we are not shy of asking how and why the new policy should deviate from established wisdom.

Pakistan’s birth is rooted in the biggest mass migration in world history, unprecedented communal violence, and war over Kashmir. In fact, India’s political leaders wasted no time in loudly proclaiming that the new state of Pakistan would be reabsorbed into India before long. Thus insecurity was built into the genetic structure of the new nation and state and over 70% of the country’s first budget was immediately earmarked for military defense and security. The inherited colonial civil-military bureaucracy – that was more developed, organised and cohesive than the indigenous politicians and political parties – now seized the commanding heights of state and society, centralizing power in Governors-General (Ghulam Mohammad, Khjwaja Nazimuddin) and Presidents (Generals Sikander Mirza and Ayub Khan) and signing strategic defense pacts (CENTO, SEATO, BAGHDAD PACT) with the US (ostensibly against communism but in reality to bolster military defenses against India). Thus was born a National Security State based on three national security pillars: Distrust of, and enmity with, India (“unfinished business of partition” pegged to Kashmir); centralization of power via guided “basic democrats” under General Ayub; and dependence on the US for military and economic aid.

This centralized national security state system broke down in 1971 after the break-up of Pakistan following military defeat, leading to civilian assertion under Z A Bhutto and the first democratic constitution of 1973. But the Empire hit back in 1977 with the imposition of martial law, a presidential non-party system under General Zia ul Haq and return to the American camp in the 1980s. The system received a jolt in 1988 with the unexpected exit of General Zia ul Haq but recouped under President Ghluam Ishaq Khan and General Aslam Beg into a hybrid-constitutional system that enabled a strong military nominee or ally as President with the power to dismiss an elected prime minister and parliament (three times in the 1990s). Benazir Bhutto tried to build peace with Rajiv Gandhi but was declared a national security risk and booted out in 1990. The civilian impulse was restrained throughout the 1990s by periodic sackings and rigged elections. It was finally thwarted in 1999 when Nawaz Sharif clutched at bus diplomacy to build “peace” with India and General Musharraf put paid to it by adventuring in Kargil, overthrowing and exiling him, and ruling like a dictator for eight years on the back of billions of dollars in American military and economic aid for abetting its war in Afghanistan. An unexpected mass resistance sparked by a maverick judge, Iftikhar Chaudhry, ended his rule and ushered in the civilians again, but not before they paid the price of Benazir Bhutto’s life. Asif Zardari’s term was blackballed by Mumbai and Memogate, including the sacking of his prime minister Yousaf Raza Gillani; Nawaz’s rule was undermined by surrogate Dharnas, export of jihadis to India and accusations of sleeping with the enemy, finally coming to an end on the basis of a Joint Investigation Team answering to the brass.

This National Security paradigm was revived with the installation of Imran Khan in 2018 and the incarceration and victimisation of Asif Zardari and Nawaz Sharif. But the loss of American goodwill and aid, coupled with the failure of Imran Khan to provide a modicum of governance, has eroded the prospects of economic revival and legitimacy of the hybrid system, discrediting its manufacturers. Meanwhile, the conventional military balance with the old enemy India has fast deteriorated and, faced with the challenge of both legitimacy and feasibility of the hybrid system, the National Security Establishment has been compelled to return to the drawing board and review its National Security Policy.

Perforce, a new National Security Policy has to be fashioned to withstand the loss of American aid and goodwill; to restore representative and credible legitimacy to the political system; and to step back from perennial conflict with India over Kashmir. The trillion dollar question is how. Only a massive transfer of wealth from the super-rich rentier classes to the poor, and a return to a representative civilian system of governance, will stem the rising economic and political discontent and religious militancy that threatens to overwhelm the state; only a prolonged period of peace with India and a profound retreat from militarism will yield the required space in which to accomplish this task. But any overnight attempt to stand the old National Security Policy on its head may unleash a formidable backlash from vested stakeholders among the institutions, groups and classes that have benefited from it for seven decades.

That is why the new National Security Policy is top secret, and jargon and generalities have been profusely sprinkled on its public version to obscure its true content and challenge.

The European Super League is the perfect metaphor for global capitalism

From elite football to tech giants, our lives are increasingly governed by ‘free’ markets that turn out to be rigged writes Larry Elliott in The Guardian

‘The organisers of the ESL have taken textbook free-market capitalism and turned it on its head.’ Graffiti showing the Juventus president, Andrea Agnelli, near the headquarters of the Italian Football Federation in Rome. Photograph: Filippo Monteforte/AFP/Getty Images


Back in the days of the Soviet Union, it was common to hear people on the left criticise the Kremlin for pursuing the wrong kind of socialism. There was nothing wrong with the theory, they said, rather the warped form of it conducted behind the iron curtain. 

The same argument has surfaced this week amid the furious response to the now-aborted plans to form a European Super League for 20 football clubs, only this time from the right. Free-market purists say they hate the idea because it is the wrong form of capitalism.

They are both right and wrong about that. Free-market capitalism is supposed to work through competition, which means no barriers to entry for new, innovative products. In football’s case, that would be a go-ahead small club with a manager trying radical new training methods and fielding a crop of players it had nurtured itself or invested in through the transfer market. The league-winning Derby County and Nottingham Forest teams developed by Brian Clough in the 1970s would be an example of this.

Supporters of free-market capitalism say that the system can tolerate inequality provided there is the opportunity to better yourself. They are opposed to cartels and firms that use their market power to protect themselves from smaller and nimbler rivals. Nor do they like rentier capitalism, which is where people can make large returns from assets they happen to own but without doing anything themselves.

The organisers of the ESL have taken textbook free-market capitalism and turned it on its head. Having 15 of the 20 places guaranteed for the founder members represents a colossal barrier to entry and clearly stifles competition. There is not much chance of “creative destruction” if an elite group of clubs can entrench their position by trousering the bulk of the TV receipts that their matches will generate. Owners of the clubs are classic rentier capitalists.

Where the free-market critics of the ESL are wrong is in thinking the ESL is some sort of aberration, a one-off deviation from established practice, rather than a metaphor for what global capitalism has become: an edifice built on piles of debt where the owners of businesses say they love competition but do everything they can to avoid it. Just as the top European clubs have feeder teams that they can exploit for new talent, so the US tech giants have been busy buying up anything that looks like providing competition. It is why Google has bought a slew of rival online advertising vendors and why Facebook bought Instagram and WhatsApp.

For those who want to understand how the economics of football have changed, a good starting point is The Glory Game, a book Hunter Davies wrote about his life behind the scenes with Tottenham Hotspur, one of the wannabe members of the ESL, in the 1971-72 season. (Full disclosure: I am a Spurs season ticket holder.)

Davies’s book devotes a chapter to the directors of Spurs in the early 1970s, who were all lifelong supporters of the club and who received no payment for their services. They lived in Enfield, not in the Bahamas, which is where the current owner, Joe Lewis, resides as a tax exile. These were not radical men. They could not conceive of there ever being women on the board; they opposed advertising inside the ground and were only just coming round to the idea of a club shop to sell official Spurs merchandise. They were conservative in all senses of the word.

In the intervening half century, the men who made their money out of nuts and bolts and waste paper firms in north London have been replaced by oligarchs and hedge funds. TV, barely mentioned in the Glory Game, has arrived with its billions of pounds in revenue. Facilities have improved and the players are fitter, stronger and much better paid than those of the early 1970s. In very few sectors of modern Britain can it be said that the workers receive the full fruits of their labours: the Premier League is one of them.

Even so, the model is not really working and would have worked even less well had the ESL come about. And it goes a lot deeper than greed, something that can hardly be said to be new to football.

No question, greed is part of the story, because for some clubs the prospect of sharing an initial €3.5bn (£3bn) pot of money was just too tempting given their debts, but there was also a problem with the product on offer.

Some of the competitive verve has already been sucked out of football thanks to the concentration of wealth. In the 1970s, there was far more chance of a less prosperous club having their moment of glory: not only did Derby and Forest win the league, but Sunderland, Southampton and Ipswich won the FA Cup. Fans can accept the despair of defeat if they can occasionally hope for the thrill of victory, but the ESL was essentially a way for an elite to insulate itself against the risk of failure.

By presenting their half-baked idea in the way they did, the ESL clubs committed one of capitalism’s cardinal sins: they damaged their own brand. Companies – especially those that rely on loyalty to their product – do that at their peril, not least because it forces politicians to respond. Supporters have power and so do governments, if they choose to exercise it.

The ESL has demonstrated that global capitalism operates on the basis of rigged markets not free markets, and those running the show are only interested in entrenching existing inequalities. It was a truly bad idea, but by providing a lesson in economics to millions of fans it may have performed a public service.

Britain out of the EU: a treasure island for rentiers

There’s no sign that ministers will use the twin shocks of the pandemic and Brexit to fix a broken system that is failing too many people opine the editors of The Guardian

‘Culturally, Brexit plays the same sort of role as the right to buy, insulating poorer leave voters from the idea that they will suffer from the resulting policies.’ Photograph: Christopher Furlong/Getty Images
 

When the UK entered the coronavirus age in March, state resources and collective commitment were mobilised on a scale not seen since the second world war. Decades ago, Britain had revealed itself, thanks in part to being able to marshal the industrial might of the empire, to be a formidable world power. Its economy was energised with breakthroughs in radar, atomic power and medicine.

Although the story of the pandemic has not yet ended, there appears to be no such transformation in sight under Boris Johnson. Rather depressingly, familiar trends of greed, incompetence and cronyism are reasserting themselves. This is bad news for an economy where there has been a collapse of socially useful innovation. Britain’s lack of hi-tech manufacturing capabilities, notably in medical diagnostic testing, was cruelly exposed by the pandemic.

This country has become more of a procurer than a producer of technology. But it is a remarkably inefficient one – despite an extraordinarily high percentage of lawyers and accountants in the working population. Connections seem to matter more than inventions. How else to explain why, in the desperate scramble to procure personal protective equipment, ventilators and coronavirus tests, billions of pounds of contracts have gone to companies either run by friends or supporters – even neighbours – of Conservative politicians, or with no prior expertise.

History is not short of examples where political insiders were successful in extracting virtually all the surplus that the economy created. Such influential interests moulded politics to enlarge their share of the pie. Greed was limited only by the need to let the producers survive. The shock of war, revolution, famine or plague provides an opportunity to fix a broken society. But if, post-pandemic, UK politicians care less about reform than the retention of power, they will fail to restrain the grasping enrichment that undermines democracy itself.

Windfall profits

Perhaps the most penetrating X-ray of this phenomenon today is by Brett Christophers in his book Rentier Capitalism. The academic makes the case that Britain has become a treasure island for those seeking excess profits from state-sanctioned control of natural resources, property, financial assets and intellectual property. Rent, paid by renters to rentiers, is tied to the ownership or control of such assets, made scarce under conditions of limited or no competition.

Mr Christophers says that the first sign of this new order was when Britain struck black gold in the North Sea. He writes that MPs on the public accounts committee noted with incredulity in 1972 that “the first huge areas of the sea were leased to the companies as generously as though Britain were a gullible Sheikhdom”. After that, public assets were sold off cheaply. The private sector ended up controlling lightly regulated monopolies in gas, water and electric supply, and public transport and telecoms. Customers lost out, overpaying for poor service. In a rentier’s paradise, windfall profits abound. Brazenly occupying the lowest moral ground was essential, as the housebuilder Persimmon proved by earning supersized state-backed help-to-buy profits long enough to hand out a £75m bonus to its boss.

The banks, which took this country to the brink of collapse a decade ago, are at the heart of a rentier state. France, Germany, Japan, the US all have banking sectors smaller than the UK. While banks earning rents have flourished, the households paying them – either directly as financial consumers, or indirectly as taxpayers of a debtor state or customers of debtor firms – have floundered.

The anger that such spivvery engenders is diffused politically by making voters complicit in the theft. The sell-off of council homes, says Mr Christophers, was a privatisation that gave many of those perhaps most inclined to kick against Thatcherism a personal stake in the project. Culturally, Brexit plays the same sort of role as the right to buy, insulating poorer leave voters from the idea that they will suffer from the resulting policies.

The prime minister understands that Covid can change Britain, but lacks modernising policies. He extols the virtues of free competition – both for itself and because such freedom, he reasons, will somehow liberate the spirit fluttering within a pre-Brexit Britain caged by coronavirus. He is no doubt betting that the disruption of leaving the EU will be lost in the roar of an economy taking off as an inoculated population returns to offices and shops.

Weakened regulations

The gap between rich and poor in the UK is at least as high today, academics calculate, as it was just before the start of the second world war. This is largely because the British state that once mediated the struggle between labour and capital has been taken over by rentiers. Weakening regulations, reducing the importance of fiscal policy and shredding social protections has corroded liberal democracy in which an increasingly influential wealthy few have been enjoying a free run. Ultimately, rentiers want to increase what the economist Michał Kalecki called the “degree of monopoly” in an economy. This allows them to limit the ability of workers, consumers and regulators to influence the markup of selling prices over costs and to defend the share of wages in output.

The EU says its labour, environment and customer protections are a floor, not a ceiling, and that they can’t be traded away for frictionless market access. If we had stayed in the club, our ability to concentrate profits for monopolists would have been stymied in future trade deals negotiated by Brussels and open to MEPs’ scrutiny. Outside the EU, Mr Johnson can barter away such regulations – without parliamentary oversight – and scrap safeguards in new technology for higher monopoly profits. Karl Marx wrote in The Eighteenth Brumaire of Louis Bonaparte in 1852 that “the Tories in England long fancied that they were in raptures about royalty, the church and the beauties of the ancient constitution, until a time of trial tore from them the confession that they were only in raptures about rent”. His assessment of early 19th-century Tories applies with unerring accuracy to today’s Conservatives.

Mr Christophers’ insight is that the Tories under Mr Johnson are a party of – and for – rentiers, much more than the interests of productive capital. This explains why, after 2016, the Tory party embraced Brexit and shrugged off productive capital’s concerns about leaving the EU. It will be to the great detriment of this country if the pandemic permitted Mr Johnson to combine present-day fears with a yearning for hopeful change to persuade the average person to vote against their interests in the future. But history often repeats itself first as tragedy, then as farce.

What's behind the headlines demanding a return to the office?

Instead of reimagining the world of work, our censorious press backs those whose wealth depends on the commuter-driven status quo writes Hettie O'Brien in The Guardian

‘Nobody can think that risking their health to save a multimillion-pound sandwich chain is a sensible endeavour.’ Photograph: Peter Summers/Getty Images

 With a deadly virus smaller than a speck of dust still circulating, it’s natural that many office workers would rather be doing their jobs from home. Though this inadvertent mass experiment in home working hasn’t been universally enjoyable, particularly for those living in cramped accommodation or juggling work and children, it has at least freed many from commuting, allowed some to spend more time in their local communities, and made cities less congested as a result.

But this isn’t what you’d think from the censorius press coverage of home working, which has treated it as a collective sickness that is stalling Britain’s recovery. Last week, the Daily Telegraph ran a piece stating that workers remaining at home will be more vulnerable to redundancy, with bosses finding it far easier to hand P45s to employees they haven’t seen during the pandemic. Its language was telling: people must “go back to work”, as if they are not already working.

An article in the Daily Mail reprimanded office workers for “boasting smugly about their exciting new ‘work/life balance’ and the amount of money they are saving on their railway season tickets”, as if these were morally reprehensible acts. “If your job can be done from home it can be done from abroad, where wages are lower”, TV presenter Kirstie Allsopp warned on Twitter, adding: “if I had an office job I’d want to be first in the queue to get back to work and prove my worth”. The meaning of these veiled threats is clear: if you stay at home, expect to lose your job.

Beneath this scolding is a message directed at those who aren’t complying with the old status quo. The service economy in financialised city centres depends on the consumption patterns of office workers: commuting every day involves not just buying a sandwich or a coffee from Pret, but helping to prop up an entire system. Were it not for the vast numbers flowing out of stations every morning, the capacity to extract astronomical rents, both from commercial and residential properties, would shrivel – and city centres would no longer be soulless corporate landscapes where multiple franchises of the same chain restaurant can be found within walking distance of each other.

Warnings from the CBI that city centres could become “ghost towns” if commuters never return belie reality: these have long been sterile places devoid of character – it’s just that in the past, it seemed unlikely they might change.

A recent YouGov poll gauging enthusiasm for this back-to-work mantra found that support for workplaces “encouraging [workers] to return to the office” correlated with age: 44% of over-65s agreed with this statement, while only 25% of 25- to 49-year-olds did so. That the over-65s, the age group least likely to be returning to the office, are the most enthusiastic supporters of this principle is unsurprising. The idea that you’ve got to be physically present to prove your value to your boss encodes an entire attitude to work – one firmly rooted in the Taylorist management doctrine of the 20th century, when employees were expected to conform to the objectives of the firm in exchange for a permanent contract. Today, the expectation of worker “flexibility” is more widespread, and surveillance that once relied on office overseers can now be conducted online (indeed, since the start of the pandemic, the demand for software that monitors workers while they’re working from home has surged).

Despite the media paranoia over home working, many managers don’t really seem to care that people aren’t back in the office. Some companies have said they will move to remote working full time, or at least allow employees to work this way some of the time. The people who seem most concerned about going back to work aren’t workers, or managers, but rentiers – a category that applies to many retiree readers of the Daily Mail and the Telegraph, a demographic that is likely to have paid off mortgages, receives generous pensions and contains a higher proportion of private landlords, and to the rentiers who have funneled their wealth into assets such as real estate and office spaces concentrated in urban centres. Until recently, both of these groups were relatively insulated from economic shocks affecting the labour market, their wealth dependent on the continuation of an old normal that now seems more precarious than ever.

The monstering of home working doesn’t really stem from concern about workers’ productivity or mental wellbeing. Instead it’s an attack on those who dare flout the rules that sustained the old normal. The survival of city centres, and by extension the businesses that extract rent from them, relies upon everyone playing their part – most of all workers. Telling people they must return to the office whatever the circumstances is a way to circumvent critique and insist upon the old normal returning, as if repeating a mantra were all it took to make it true.

When newspapers shriek that workers must return to the office, despite the reality that many don’t want to, they’re voicing what the sociologist Luc Boltanski called a “system of confirmation” – an utterance that is neither truth nor fact, but rather a way of reinforcing the status quo. But nobody can think that risking their health to save a multimillion pound sandwich chain is a sensible endeavour.

Since the pandemic began, societal changes that were supposed to be impossible have happened with relative ease. Workers were sent home overnight, and it now seems that many can do their jobs, if not fully remotely, then at least partially from home. Already, many people are talking of moving away from big cities to avoid the costs of high rent and long commuting times. And behind the claims of economic catastrophe caused by a drop in commuting, some independent businesses have reported that they are thriving. Instead of asking what will happen to city centres if the commuters never returned, we should be asking: what would the city, and the economy, look like if they weren’t organised this way?

Should we be scared of the coronavirus debt mountain?

The pandemic has necessitated huge borrowing – but post-crisis austerity would be the very worst way to deal with it 

 

‘A world in which coronavirus debts are repaid by a wealth tax would look very different from one in which benefits are slashed and VAT is raised.’ Photograph: Ben Birchall/PA


We do not know how this pandemic will end. We do know that we will be poorer when it’s over: GDP is plunging around the world.

We also know that there will be a towering pile of IOUs left from the bills run up during the crisis. When it is over we will have to figure out how to repay them – or whether to repay them at all. That question will decide the complexion of our politics, and the quality of our public infrastructure and services for years to come. Unless we tackle this issue, coronavirus debts will be the battering ram for a new campaign of austerity.

The scale of the challenge is huge. Hard cases like Italy grab the headlines. Its debt currently stands at 135% of GDP. As a result of the crisis it will likely rise to 155%. But it is no longer an extreme outlier. According to the IMF, the debt ratio of the average advanced economy will exceed 120% next year. In the US, the debt to GDP ratio may soon surpass that at the end of the second world war.

These numbers are impressive, daunting even. They offer an open door to conservative scaremongering. The first move in that tradition of debt politics is to invoke the tenuous analogy to a household. In this picture, debts are a burden on the profligate; a moral obligation that must be honoured on pain of national bankruptcy and ruin.

There are some circumstances in which this analogy is apt, specifically when you are an impoverished and desperate country dependent on foreign creditors who will lend to you only in the currency of another country, most commonly that of the US. Many poorer countries are in this position. Few rich countries are. Indeed, one of the definitions of being an advanced economy is that you are not.

Advanced economies borrow in their own currency and overwhelmingly from their own citizens. For them, the household analogy is profoundly misleading. In fact, those seeking to rebut the misconceptions of the household analogy sometimes say we merely owe government debts to ourselves.

That is a liberating thought. It makes clear that we are not in the position of a subordinate debtor nation. But it has a dizzying circularity to it. If we are our own creditors, are we not also our own debtors – master and slave at the same time? Ultimately, it is a bon mot that relies on treating the economic nation as a unit. That may look like liberation, but it is an illusion achieved by removing the real politics of debt – which are about class, not nationality.

Historically, government debts were assets owned by the middle and upper classes, the famous rentiers. And taxes were overwhelmingly indirect and thus fell disproportionately on lower incomes.

Today, the richest still own a disproportionate share of government debt. But the liabilities of the government are now widely distributed. They are staple investments for pension funds and insurers. Government debt is not simply a burden; it is a highly useful financial asset, offering modest interest rates in exchange for safety. It is all the more useful for the fact that the government lives for ever and will generate revenue for ever through taxation. So it enables very long-term planning.

The tax base today is much broader than it was a century ago. But who pays taxes – and who does not – remains one of the most urgent questions of the moment. A world in which coronavirus debts are repaid by a wealth tax or a global crackdown on corporate tax havens would look very different from one in which benefits are slashed and VAT is raised. And it is very possible that debt service will be taken out of other spending, whether that be schools, pensions or national defence.

As the great Austrian economist Joseph Schumpeter remarked in the aftermath of the first world war, “the budget is the skeleton of the state stripped of all misleading ideologies”, the truest reflection of the distribution of power and influence.
It is a distributional issue. But not only that. Debts may also affect the size of the cake itself. As we know only too well, a regime of austerity that keeps taxes high and government spending low is not conducive to rapid economic growth. And yet for debt to be sustainable, what we need is growth in GDP – to be precise, growth in nominal GDP, which includes real economic growth and inflation. Inflation matters because it acts as a tax on debts that are owed in money that is progressively losing its value. Price stability, the objective of monetary policy since the 1970s, no doubt has benefits for everyone, but most of all the creditor class.

This is the awesome dilemma we will face in the aftermath of Covid-19. This is the battle for which we must brace. Not right now, but once the immediate crisis has passed. After the financial crisis of 2007-08, it was in 2010 that the push for belt-tightening began. Like revenge, austerity is a dish best served cold.

Progressive politics cannot, of course, shrink from a battle about budgetary priorities. But it should resist fighting on the terms set by austerian debt-fear. In the circumstances of the UK or the US, alarmism about debt is false. And how false is being demonstrated by the crisis itself.

There is one mechanism through which we can ensure we truly owe the debts to ourselves. That mechanism is the central bank. Its principal job is to manage public debt – and at a moment of crisis central banks do what they must. They buy government debts or, in what amounts to the same thing, they open overdraft accounts for the government.

That has two effects that, acting together, have the potential to negate debt as a political issue. Central bank intervention lowers the interest rate. If interest rates are held down, debt service need not be an onerous burden. At the same time, the central bank purchases remove government IOUs from private portfolios and put them on the balance sheet of the central bank. There, they are literally claims by the public upon itself. 

When the central bank buys the debt it does so by creating money. Under ordinary circumstances one might worry about that causing inflation. But given the recession we face that is a risk worth running. Indeed modest inflation would help us by taking a bite out of the real value of the debt.

Of course, ensuring that the central banks continue their crisis-fighting methods into the recovery period will itself require a political battle. Fearmongering about inflation is the close cousin of fearmongering about debt. We should resist both blackmails. We have the institutions and techniques to neutralise the coronavirus debt problem. We owe it to ourselves to use them.

Don't be fooled: Britain's coronavirus bailout will make the rich richer still

The government schemes protect asset owners, while the bulk of the costs will eventually be borne by ordinary people writes Christine Berry in The Guardian


Posters for a rent strike during the coronavirus lockdown, Bristol, 31 March 2020. Photograph: Ben Birchall/PA


Recent weeks have been profoundly disorienting, as we all adjust to life in lockdown during a pandemic. For the left, they have also been politically disorienting, as a Conservative government borrows hundreds of billions of pounds to underwrite wages.

Some have been mesmerised by this spectacle, convinced that a socialist utopia is just around the corner. We need to snap out of this, and fast. Instead, we must ask the same questions we always should: who benefits from these interventions, and who pays? Who will be empowered and who disempowered?

The crisis itself is already exacerbating economic inequalities. At first sight, the government’s income support schemes might look as though they will help to redress this. In reality, they will achieve almost exactly the opposite. It’s been widely noted that many people remain excluded from the safety net, but the problem goes deeper than this. Where is all this money coming from – and where is it ultimately going? 

The answer lies principally in a massive expansion of debt. Wage support is being funded by large-scale public borrowing of the kind we were told was unaffordable just a few months ago (although this is now being supplemented by direct financing with newly created money from the Bank of England). Yes, this could usher in a new era of state intervention – but it could just as easily herald a new era of austerity.

Conservatives such as Sajid Javid – who tweeted that “the whole point of fiscal conservatism in normal times is to be able to act decisively if there is a genuine economic emergency” – are already trying to reconcile the crisis response with austerity politics. Fiscal hawks will be keen to draw a line under the crisis period and insist that we now need to tighten our belts again to pay for it.

Meanwhile, mortgage and rent “holidays” and guaranteed loans for small businesses require people to take on private debts that they will have to pay back when the crisis is over. One way or another, then, the bulk of the costs will still eventually be borne by ordinary people.

On the other hand, virtually no sacrifices have been demanded of banks, landlords or profitable corporations, such as utility companies. The only people in society not being asked to share the burden are “rentiers”: those who make money by owning assets they can charge others to use.

Landlords have access to mortgage holidays but are not required to pass these on to their tenants. If they do, they can recoup any missed rent when the crisis is over. Since the same cannot be said for tenants’ lost income, many will be pushed further into debt or face eviction.

Banks are enjoying government loan guarantees with few strings attached. This means that they are not shouldering the risk of extending credit to struggling businesses during a downturn – that is being borne by the state. Meanwhile, mortgages and credit card debt will still be repaid in full – or with added interest if holidays are granted.

Given all this, wage support acts primarily to protect rentiers’ income streams by enabling working people to keep paying rent and bills, and debtors to keep making loan repayments to their creditors.

The government moved swiftly to protect the interests of rentier capital but has consistently dragged its feet in protecting the interests of workers. Indeed, most support has been channelled through banks, landlords, employers and utility firms – with government simply trusting them to benignly pass it on. This is at best naive and at worst irresponsible.

Guidance innocently declares that mortgage holidays for landlords “will mean no unnecessary pressure is put on their tenants”. Unsurprisingly, emerging anecdotal evidence suggests precisely the opposite. The business interruption loan scheme has already had to be overhauled after banks failed to extend low-cost credit to struggling businesses, while the Financial Conduct Authority was forced to stop them hiking overdraft charges. Meanwhile, some large companies are still laying off workers, or at best, pocketing government support and refusing to top it up from their own coffers.

The government has built an economic bunker from which rentiers will emerge unscathed into the scene of devastation wreaked on the rest of the population. Many will find their bank balances considerably enhanced, since they have been unable to spend money in theatres, bars and restaurants. As economist Gary Stevenson points out, if some of this windfall is spent on property, the result will be to push house prices up – adding insult to injury for the low-paid renters who will have borne the brunt of the crisis. All of this is simply indefensible. 

Crises always create winners as well as losers. The bank bailouts of 2008 should have taught us that state intervention is not necessarily progressive. Back then, the state assumed the liabilities of finance capital and ordinary citizens ultimately footed the bill. Now, we are seeing a very similar story play out again – but the mechanisms at work are more subtle, the implicit subsidies for rentier interests passing under the radar.

The left must ruthlessly follow the money and ask in whose pockets it will end up. It must stand alongside those demanding that the big winners in our economic system pay their share: groups such as London Renters’ Union, demanding a true rent freeze. Wetherspoons workers, still fighting to be paid in full. The Jubilee Debt Campaign, calling for personal debt repayments to be frozen and ultimately written off.

Perhaps, as Stevenson suggests, we should also be demanding an emergency wealth tax to redress this huge tilting of the scales towards the asset-owning rich. Without such measures, we should be under no illusions: this crisis will leave our economy even more unequal and unstable than it was before.

Why rigged capitalism is damaging liberal democracy

Economies are not delivering for most citizens because of weak competition, feeble productivity growth and tax loopholes writes Martin Wolf in The FT

“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”  

 With this sentence, the US Business Roundtable, which represents the chief executives of 181 of the world’s largest companies, abandoned their longstanding view that “corporations exist principally to serve their shareholders”.  

This is certainly a moment. But what does — and should — that moment mean? The answer needs to start with acknowledgment of the fact that something has gone very wrong. Over the past four decades, and especially in the US, the most important country of all, we have observed an unholy trinity of slowing productivity growth, soaring inequality and huge financial shocks.  

As Jason Furman of Harvard University and Peter Orszag of Lazard Frères noted in a paper last year: “From 1948 to 1973, real median family income in the US rose 3 per cent annually. At this rate . . . there was a 96 per cent chance that a child would have a higher income than his or her parents. Since 1973, the median family has seen its real income grow only 0.4 per cent annually . . . As a result, 28 per cent of children have lower income than their parents did.”

So why is the economy not delivering? The answer lies, in large part, with the rise of rentier capitalism. In this case “rent” means rewards over and above those required to induce the desired supply of goods, services, land or labour. “Rentier capitalism” means an economy in which market and political power allows privileged individuals and businesses to extract a great deal of such rent from everybody else. 

That does not explain every disappointment. As Robert Gordon, professor of social sciences at Northwestern University, argues, fundamental innovation slowed after the mid-20th century. Technology has also created greater reliance on graduates and raised their relative wages, explaining part of the rise of inequality. But the share of the top 1 per cent of US earners in pre-tax income jumped from 11 per cent in 1980 to 20 per cent in 2014. This was not mainly the result of such skill-biased technological change. 

If one listens to the political debates in many countries, notably the US and UK, one would conclude that the disappointment is mainly the fault of imports from China or low-wage immigrants, or both. Foreigners are ideal scapegoats. But the notion that rising inequality and slow productivity growth are due to foreigners is simply false. 

Every western high-income country trades more with emerging and developing countries today than it did four decades ago. Yet increases in inequality have varied substantially. The outcome depended on how the institutions of the market economy behaved and on domestic policy choices.  

Harvard economist Elhanan Helpman ends his overview of a huge academic literature on the topic with the conclusion that “globalisation in the form of foreign trade and offshoring has not been a large contributor to rising inequality. Multiple studies of different events around the world point to this conclusion.” 

The shift in the location of much manufacturing, principally to China, may have lowered investment in high-income economies a little. But this effect cannot have been powerful enough to reduce productivity growth significantly. To the contrary, the shift in the global division of labour induced high-income economies to specialise in skill-intensive sectors, where there was more potential for fast productivity growth. 

Donald Trump, a naive mercantilist, focuses, instead, on bilateral trade imbalances as a cause of job losses. These deficits reflect bad trade deals, the American president insists. It is true that the US has overall trade deficits, while the EU has surpluses. But their trade policies are quite similar. Trade policies do not explain bilateral balances. Bilateral balances, in turn, do not explain overall balances. The latter are macroeconomic phenomena. Both theory and evidence concur on this. 

The economic impact of immigration has also been small, however big the political and cultural “shock of the foreigner” may be. Research strongly suggests that the effect of immigration on the real earnings of the native population and on receiving countries’ fiscal position has been small and frequently positive. 

Far more productive than this politically rewarding, but mistaken, focus on the damage done by trade and migration is an examination of contemporary rentier capitalism itself.  

Finance plays a key role, with several dimensions. Liberalised finance tends to metastasise, like a cancer. Thus, the financial sector’s ability to create credit and money finances its own activities, incomes and (often illusory) profits. 

A 2015 study by Stephen Cecchetti and Enisse Kharroubi for the Bank for International Settlements said “the level of financial development is good only up to a point, after which it becomes a drag on growth, and that a fast-growing financial sector is detrimental to aggregate productivity growth”. When the financial sector grows quickly, they argue, it hires talented people. These then lend against property, because it generates collateral. This is a diversion of talented human resources in unproductive, useless directions. 

Again, excessive growth of credit almost always leads to crises, as Carmen Reinhart and Kenneth Rogoff showed in This Time is Different. This is why no modern government dares let the supposedly market-driven financial sector operate unaided and unguided. But that in turn creates huge opportunities to gain from irresponsibility: heads, they win; tails, the rest of us lose. Further crises are guaranteed. 

Finance also creates rising inequality. Thomas Philippon of the Stern School of Business and Ariell Reshef of the Paris School of Economics showed that the relative earnings of finance professionals exploded upwards in the 1980s with the deregulation of finance. They estimated that “rents” — earnings over and above those needed to attract people into the industry — accounted for 30-50 per cent of the pay differential between finance professionals and the rest of the private sector.  

This explosion of financial activity since 1980 has not raised the growth of productivity. If anything, it has lowered it, especially since the crisis. The same is true of the explosion in pay of corporate management, yet another form of rent extraction. As Deborah Hargreaves, founder of the High Pay Centre, notes, in the UK the ratio of average chief executive pay to that of average workers rose from 48 to one in 1998 to 129 to one in 2016. In the US, the same ratio rose from 42 to one in 1980 to 347 to one in 2017.  

As the US essayist HL Mencken wrote: “For every complex problem, there is an answer that is clear, simple and wrong.” Pay linked to the share price gave management a huge incentive to raise that price, by manipulating earnings or borrowing money to buy the shares. Neither adds value to the company. But they can add a great deal of wealth to management. A related problem with governance is conflicts of interest, notably over independence of auditors. 

In sum, personal financial considerations permeate corporate decision-making. As the independent economist Andrew Smithers argues in Productivity and the Bonus Culture, this comes at the expense of corporate investment and so of long-run productivity growth.  

A possibly still more fundamental issue is the decline of competition. Mr Furman and Mr Orszag say there is evidence of increased market concentration in the US, a lower rate of entry of new firms and a lower share of young firms in the economy compared with three or four decades ago. Work by the OECD and Oxford Martin School also notes widening gaps in productivity and profit mark-ups between the leading businesses and the rest. This suggests weakening competition and rising monopoly rent. Moreover, a great deal of the increase in inequality arises from radically different rewards for workers with similar skills in different firms: this, too, is a form of rent extraction. 

A part of the explanation for weaker competition is “winner-takes-almost-all” markets: superstar individuals and their companies earn monopoly rents, because they can now serve global markets so cheaply. The network externalities — benefits of using a network that others are using — and zero marginal costs of platform monopolies (Facebook, Google, Amazon, Alibaba and Tencent) are the dominant examples.  

Another such natural force is the network externalities of agglomerations, stressed by Paul Collier in The Future of Capitalism. Successful metropolitan areas — London, New York, the Bay Area in California — generate powerful feedback loops, attracting and rewarding talented people. This disadvantages businesses and people trapped in left-behind towns. Agglomerations, too, create rents, not just in property prices, but also in earnings.  

Yet monopoly rent is not just the product of such natural — albeit worrying — economic forces. It is also the result of policy. In the US, Yale University law professor Robert Bork argued in the 1970s that “consumer welfare” should be the sole objective of antitrust policy. As with shareholder value maximisation, this oversimplified highly complex issues. In this case, it led to complacency about monopoly power, provided prices stayed low. Yet tall trees deprive saplings of the light they need to grow. So, too, may giant companies.  

Some might argue, complacently, that the “monopoly rent” we now see in leading economies is largely a sign of the “creative destruction” lauded by the Austrian economist Joseph Schumpeter. In fact, we are not seeing enough creation, destruction or productivity growth to support that view convincingly. 

A disreputable aspect of rent-seeking is radical tax avoidance. Corporations (and so also shareholders) benefit from the public goods — security, legal systems, infrastructure, educated workforces and sociopolitical stability — provided by the world’s most powerful liberal democracies. Yet they are also in a perfect position to exploit tax loopholes, especially those companies whose location of production or innovation is difficult to determine.  

The biggest challenges within the corporate tax system are tax competition and base erosion and profit shifting. We see the former in falling tax rates. We see the latter in the location of intellectual property in tax havens, in charging tax-deductible debt against profits accruing in higher-tax jurisdictions and in rigging transfer prices within firms.  

A 2015 study by the IMF calculated that base erosion and profit shifting reduced long-run annual revenue in OECD countries by about $450bn (1 per cent of gross domestic product) and in non-OECD countries by slightly over $200bn (1.3 per cent of GDP). These are significant figures in the context of a tax that raised an average of only 2.9 per cent of GDP in 2016 in OECD countries and just 2 per cent in the US.  

Brad Setser of the Council on Foreign Relations shows that US corporations report seven times as much profit in small tax havens (Bermuda, the British Caribbean, Ireland, Luxembourg, Netherlands, Singapore and Switzerland) as in six big economies (China, France, Germany, India, Italy and Japan). This is ludicrous. The tax reform under Mr Trump changed essentially nothing. Needless to say, not only US corporations benefit from such loopholes. 

In such cases, rents are not merely being exploited. They are being created, through lobbying for distorting and unfair tax loopholes and against needed regulation of mergers, anti-competitive practices, financial misbehaviour, the environment and labour markets. Corporate lobbying overwhelms the interests of ordinary citizens. Indeed, some studies suggest that the wishes of ordinary people count for next to nothing in policymaking.  

Not least, as some western economies have become more Latin American in their distribution of incomes, their politics have also become more Latin American. Some of the new populists are considering radical, but necessary, changes in competition, regulatory and tax policies. But others rely on xenophobic dog whistles while continuing to promote a capitalism rigged to favour a small elite. Such activities could well end up with the death of liberal democracy itself. 

Members of the Business Roundtable and their peers have tough questions to ask themselves. They are right: seeking to maximise shareholder value has proved a doubtful guide to managing corporations. But that realisation is the beginning, not the end. They need to ask themselves what this understanding means for how they set their own pay and how they exploit — indeed actively create — tax and regulatory loopholes. 

They must, not least, consider their activities in the public arena. What are they doing to ensure better laws governing the structure of the corporation, a fair and effective tax system, a safety net for those afflicted by economic forces beyond their control, a healthy local and global environment and a democracy responsive to the wishes of a broad majority? 

We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits. What we increasingly seem to have instead is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy. Fixing this is a challenge for us all, but especially for those who run the world’s most important businesses. The way our economic and political systems work must change, or they will perish.

A basic income could be the best way to tackle inequality

Robert Skidelsky in The Guardian

Britain isn’t the only European country to hold a referendum this month. On 5 June, Swiss voters overwhelmingly rejected, by 77% to 23%, the proposition that every citizen should be guaranteed an unconditional basic income (UBI). But that lopsided outcome doesn’t mean the issue is going away anytime soon.

The idea of a UBI has made recurrent appearances in history – starting with Thomas Paine in the 18th century. This time, though, it is likely to have greater staying power, as the prospect of sufficient income from jobs grows bleaker for the poor and less educated. Experiments with unconditional cash transfers have been taking place in poor as well as wealthy countries.

Swiss voters reject proposal to give basic income to every adult and child



UBI is a somewhat uneasy mix of two objectives: poverty relief and the rejection of work as the defining purpose of life. The first is political and practical; the second is philosophical or ethical.

The main argument for UBI as poverty relief is, as it has always been, the inability of available paid work to guarantee a secure and decent existence for all. In the industrial age, factory work became the only source of income for most people – a source that was interrupted by bouts of unemployment as the industrial machine periodically seized up. The labour movement responded by demanding “work or maintenance”. Acceptance of maintenance in lieu of work was reflected in the creation of a system of social security, “welfare capitalism”.

The aim of welfare capitalism was explicitly to provide people an income – typically through pooled compulsory insurance – during enforced interruptions of work. In no sense was income maintenance seen as an alternative to work. As the idea of interruption from work was extended to include the disabled and women bringing up children, so entitlements to income maintenance increased beyond the capacity of social insurance, with benefits paid to eligible individuals from general taxation.

In the 1980s, Ronald Reagan and Margaret Thatcher unwittingly extended the scope of welfare further, as they dismantled institutions and legislation designed to protect wages and jobs in their respective countries. With both left to the market, “in work” benefits, or tax credits, were introduced to enable employed workers to earn a “living wage”. At the same time, conservative governments, alarmed at the growing cost of social security, started to cut back on welfare entitlements.

In this newly precarious environment of work and welfare, UBI is seen as guaranteeing the basic income previously promised by work and welfare, but no longer reliably secured by either. (A leading advocate, Guy Standing at Soas, University of London, has written a book called The Precariat.) An additional argument, always resonant in this tradition, but particularly so today in poorer countries, is UBI’s emancipatory potential for women.

The ethical case for UBI is different. Its source is the idea, found both in the Bible and in classical economics, that work is a curse (or, as economists put it, a “cost”), undertaken only for the sake of making a living. As technological innovation causes per capita income to rise, people will need to work less to satisfy their needs.

Both John Stuart Mill and John Maynard Keynes looked forward to a horizon of growing leisure: the reorientation of life away from the merely useful toward the beautiful and the true. UBI provides a practical path to navigate this transition.

Most of the hostility to UBI has come when it stated in this second form. A poster during the Swiss referendum campaign asked: “What would you do if your income were taken care of?” The objection of most UBI opponents is that a majority of people would respond: “Nothing at all.”

But to argue that an income independent of the job market is bound to be demoralising is as morally obtuse as it is historically inaccurate. If it were true, we would want to abolish all inherited income. The 19th-century European bourgeoisie were largely a rentier class, and few questioned their work effort. Virginia Woolf wrote that a woman who wanted to write fiction “must have money and a room of her own”.

The explosion of robotics has given the demand for UBI renewed currency. Credible estimates suggest that it will be technically possible to automate between a quarter and a third of all current jobs in the western world within 20 years. At the very least, this will accelerate the trend toward the precariousness of jobs and income. At worst, it will make a sizeable share of the population redundant. A standard objection to UBI as a way to replace earnings from vanishing jobs is that it is unaffordable. This partly depends on what parameters are set: the UBI’s level; which benefits (if any) it replaces; whether only citizens or all residents are eligible; and so on.

But this is not the main point. The overwhelming evidence is that the lion’s share of productivity gains in the last 30 years has gone to the very wealthy. And that’s not all: 40% of the gains of quantitative easing in the UK have gone to the wealthiest 5% of households, not because they were more productive, but because the Bank of England directed its cash toward them. Even a partial reversal of this long regressive trend for wealth and income would fund a modest initial basic income.

Beyond this, a UBI scheme can be designed to grow in line with the wealth of the economy. Automation is bound to increase profits, because machines that make human labour redundant require no wages and only minimal investment in maintenance.

Unless we change our system of income generation, there will be no way to check the concentration of wealth in the hands of the rich and exceptionally entrepreneurial. A UBI that grows in line with capital productivity would ensure that the benefits of automation go to the many, not just to the few.

The end of Wahhabism? Saudi Arabia may go broke soon

Ambrose Evans Pritchard in The Telegraph

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now "effectively dissolved". The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. "It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run," said the Saudi central bank in its latest stability report.

"The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience," it said.

One Saudi expert was blunter. "The policy hasn't worked and it will never work," he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year - and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. "We've driven down drilling costs by 50pc, and we can see another 30pc ahead," said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. "We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days," he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. "The freight train of North American tight oil has kept on coming," said Rex Tillerson, head of Exxon Mobil.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.

The wells will still be there. The technology and infrastructure will still there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 - since the threshold keeps falling - they will crank up production almost instantly.

OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for "clean fracking" in China as plasma pulse technology cuts water needs.

Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia's giant Ghawar field, the biggest in the world.

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The 'fiscal break-even price' is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.

He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up - entirely reliant on imported weapons - that will propel Saudi Arabia to fifth place in the world defence ranking.

The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. "Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon," said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.

The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.

Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.

The Saudi buffer is not particularly large given the country fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. "We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years," he said.

Standard & Poor's lowered its outlook to "negative" in February. "We view Saudi Arabia's economy as undiversified and vulnerable to a steep and sustained decline in oil prices," it said.

Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.

"We were lucky before because the oil price recovered in time. But we can't count on that again," he said.

OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.

In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers - and the solar industry - to come of age. The genie cannot be put back in the bottle.

The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices - far from clear - they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.

Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.

The government can slash investment spending for a while - as it did in the mid-1980s - but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.

Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.

Diplomatic spending is what underpins the Saudi sphere of influence caught in a Middle East version of Europe's Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.

We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.