Bachmann wins Iowa straw poll. And that matters why?

"The most important, meaningless event in the political cycle."

After a troubled few weeks, Minnesota congresswoman Michelle Bachman has won the first big test ahead of the 2012 Republican primary contest, coming top of the Ames straw poll in Iowa. Given she only announced her decision to run two months ago, Bachmann appears to be the Republican candidate with momentum

Of the nearly 17,000 votes cast:

Michelle Bachmann took 4,823

Ron Paul took 4,671

Tim Pawlenty took 2,293

Rick Santorum took 1,657

Herman Cain took 1,456

Rick Perry took 718*

Mitt Romney took 567

Newt Gingrich took 385

Jon Huntsman took 69

Thaddeus McCotter took 35

(*Because he only announced his candidacy earlier the same day, Rick Perry wasn't officially on the ballot but still received 718 votes, more than Mitt Romney. In turn, the normally high-spending Romney chose to sit out this campaign. Ultimately, his camp will hope that Bachmann and Perry split the evangelical vote allowing their man to surge through the middle.)

But does any of this matter? After all, we are five months away from the primary season and some potential frontrunners have yet to announce their candidacy (Sarah Palin) or have only just done so (Perry).

Nate Silver over at New York Times Five Thirty Eight blog makes the case for Ames. He points out that on every occasion since this poll began in 1979, the candidate who came either first or second went on to win Iowa caucus the following year. He writes:

Two successes in particular stand out. In 1979, George H.W. Bush won Ames despite polling at just 1 percent in a Des Moines Register survey -- he went on to win the Iowa caucus. And in 2007 Mike Huckabee, in the low single digits in both state and national polls, finished second in the straw poll, the first tangible indicator of his upside in Iowa.

Huckabee himself, the former Arkansas governor, describes the Ames straw poll as "the most important, meaningless event in the political cycle. Meaningless because it doesn't mean you get delegates. Important because if you are not here, you are also not getting attention."

Silver, meanwhile, has attempted to create a predictive model, taking into account the Ames result and poll ratings:

 

Nevertheless, we should treat the Ames result with caution for a couple of reasons at least. Firstly, it is not foolproof. It got things badly wrong in 1995 (Phil Gramm tied with Bob Dole) and in 2007 (Sam Brownback and Tom Tancredo achieved third and fourth finishes but dropped out before the caucus itself).

Secondly, a victory in the real Iowa caucus doesn't guarantee party nomination. Although the picture has improved since the mid-1990s, between 1984 and 1996 none of the Iowa winners across the two main parties went on to win the nomination.

Incidentally, Romney was the 2007 Ames winner. And look what good that did him.

Jon Bernstein, former deputy editor of New Statesman, is a digital strategist and editor. He tweets @Jon_Bernstein. 

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Labour's investment bank plan could help fix our damaging financial system

The UK should learn from the success of a similar project in Germany.

Labour’s election manifesto has proved controversial, with the Tories and the right-wing media claiming it would take us back to the 1970s. But it contains at least one excellent idea which is certainly not out-dated and which would in fact help to address a key problem in our post-financial-crisis world.

Even setting aside the damage wrought by the 2008 crash, it’s clear the UK’s financial sector is not serving the real economy. The New Economics Foundation recently revealed that fewer than 10% of the total stock of UK bank loans are to non-financial and non-real estate businesses. The majority of their lending goes to other financial sector firms, insurance and pension funds, consumer finance, and commercial real estate.

Labour’s proposed UK Investment Bank would be a welcome antidote to a financial system that is too often damaging or simply useless. There are many successful examples of public development banks in the world’s fastest-growing economies, such as China and Korea. However, the UK can look closer to home for a suitable model: the KfW in Germany (not exactly a country known for ‘disastrous socialist policies’). With assets of over 500bn, the KfW is the world’s largest state-owned development bank when its size is measured as a percentage of GDP, and it is an institution from which the UK can draw much-needed lessons if it wishes to create a financial system more beneficial to the real economy.

Where does the money come from? Although KfW’s initial paid-up capital stems purely from public sources, it currently funds itself mainly through borrowing cheaply on the international capital markets with a federal government guarantee,  AA+ rating, and safe haven status for its public securities. With its own high ratings, the UK could easily follow this model, allowing its bank to borrow very cheaply. These activities would not add to the long-run public debt either: by definition an investment bank would invest in projects that would stimulate growth.

Aside from the obviously countercyclical role KfW played during the financial crisis, ramping up total business volume by over 40 per cent between 2007 and 2011 while UK banks became risk averse and caused a credit crunch, it also plays an important part in financing key sectors of the real economy that would otherwise have trouble accessing funds. This includes investment in research and innovation, and special programs for SMEs. Thanks to KfW, as well as an extensive network of regional and savings banks, fewer German SMEs report access to finance as a major problem than in comparator Euro area countries.

The Conservatives have talked a great deal about the need to rebalance the UK economy towards manufacturing. However, a real industrial policy needs more than just empty rhetoric: it needs finance. The KfW has historically played an important role in promoting German manufacturing, both at home and abroad, and to this day continues to provide finance to encourage the export of high-value-added German products

KfW works by on-lending most of its funds through the private banking system. This means that far from being the equivalent of a nationalisation, a public development bank can coexist without competing with the rest of the financial system. Like the UK, Germany has its share of large investment banks, some of which have caused massive instabilities. It is important to note that the establishment of a public bank would not have a negative effect on existing private banks, because in the short term, the UK will remain heavily dependent on financial services.

The main problem with Labour’s proposal is therefore not that too much of the financial sector will be publicly owned, but too little. Its proposed lending volume of £250bn over 10 years is small compared to the KfW’s total financing commitments of  750 billion over the past 10 years. Although the proposal is better than nothing, in order to be effective a public development bank will need to have sufficient scale.

Finally, although Brexit might make it marginally easier to establish the UK Investment Bank, because the country would no longer be constrained by EU State Aid Rules or the Maastricht criteria, it is worth remembering that KfW’s sizeable range of activities is perfectly legal under current EU rules.

So Europe cannot be blamed for holding back UK financial sector reform to date - the problem is simply a lack of political will in the current government. And with even key architects of 1980s financial liberalisation, such as the IMF and the economist Jeffrey Sachs, rethinking the role of the financial sector, isn’t it time Britain did the same?

Dr Natalya Naqvi is a research fellow at University College and the Blavatnik School of Government, University of Oxford, where she focuses on the role of the state and the financial sector in economic development

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