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Full interview with Lutfur Rahman, mayor of Tower Hamlets

“I don’t believe we have extremist groups in Tower Hamlets”

How has your Bangladeshi heritage shaped you?
I think it gave me a sense of collective responsibility and stability, and the importance of being part of a community, a society. But I soon became part and parcel of the East End of London, growing up here in the 1970s.

What is your priority as Tower Hamlets mayor?
My top priority is more housing, to help the 23,000 people on the housing waiting list.

But what can you, as a mayor, do to solve the housing shortage?
We have to continue to build more homes and work with various stake holders: with private investors, with developers and, yes, with central government, in terms of trying to lever in more money, identify the land and deliver on our targets. We will take advantage of all the opportunities that exist.

But your own former council colleagues in the Labour Party won't work with you, will they?
Well, three Labour councillors have already come out and joined me. There are many more Labour councillors who will want to work with the mayor of Tower Hamlets and serve the community of Tower Hamlets.

What is your response to the two mayors of so-called Olympics boroughs, Robin Wales and Jules Pipe, who have said they won't work with you?
Tower Hamlets is one of the five Olympics boroughs but my borough is not run at the behest of any of the leaders of the four other boroughs. I will stand up for my borough and deliver for my borough. When I was a leader of the council, for example, we passed a motion in full council calling for 50 per cent of the Olympics village to be converted into socially affordable housing.

Will you be reaching out to those two mayors, and to your other critics?
I believe in consensual politics, that you work collectively, you work together with others. I will work with whoever wants to work with me but the people who are important are the people of Tower Hamlets: the people who voted for me and even the people who didn't vote for me, they're also important. I'm here to serve the people of Tower Hamlets. Whatever other mayors say, that's their prerogative. I'm not interested in that.

You've been accused of appointing only Asians, only people from a Bangladeshi background, to your team. Are you discriminating against white people?
The senior management team of this council, excluding one member, is all white. So for anyone to make such assertions is unfair. I believe in a meritocracy. People get jobs in this council based on ability. There is a clear recruitment process in place

The chief executive of this council is a white gentleman, Kevan Collins, whom I appointed during my council leadership. My cabinet, during that period, had white members. If people want to work with me, I welcome them to do so. Two days after I was elected as mayor, I sent out an email to each and every member of the Labour group on the council inviting them to come and work with me in my cabinet. Unfortunately, the following Monday, they convened and, by a slender majority, passed a motion not to work with me. So what I am supposed to do? Of course I want race to be reflected, gender to be reflected, ability to be reflected in my cabinet.

You were deselected as Labour's candidate for mayor after criticism of your conduct. Why did you stand as an independent against Labour?
I was elected as the candidate by 433 members of Tower Hamlets Labour Party. All I wanted was that the members should assert their right and decide who led them. If they had chosen someone else, I would have fallen behind that person and served the party loyally.

A small clique in the NEC, only seven or eight members, decided to get rid of me on the basis of a dossier based on false allegations, hearsay and unsubstantiated allegations. We live in a democracy where the rule of law prevails; I am a lawyer and they should have given me a chance to refute the allegations against me in front of an independent panel. I am sure I would have disproven each and every allegation. What's so sad is that they then didn't impose the candidate who came second, John Biggs, but instead imposed the candidate who came third, Helal Abbas, who made these false allegations against me in that dodgy dossier and who received only 117 votes.

It has been suggested that the NEC picked Helal Abbas over John Biggs because it wanted a non-white candidate in Tower Hamlets. Do you agree?
It could be one of the factors. But it was the wrong decision to make. They shouldn't have got rid of me in the first place. I would have won the election for Labour by an overwhelming majority.

It has been suggested that one of the reasons you were removed by the NEC as the Labour candidate is because you refused to back Rushanara Ali, Labour's parliamentary candidate in Bethnal Green and Bow at the general election in May?
In 2007, I stood for the Bethnal seat and I lost by a very small number of votes to Rushanara Ali. But I fell behind her and I supported the Labour Party in the general election. It is not true that I didn't work for her. I went out to all corners of the borough campaigning for Rushanara. And I don't believe she has said I never campaigned for her; she has never said it to me. When she went to Brick Lane mosque, just before the election, I stood up on camera, in front of everyone there, and made a speech supporting her. If Harriet Harman and the NEC had asked me for the facts, I would have given them the facts.

So if it wasn't your conduct or behaviour, what do you believe is the real reason the NEC removed you as the mayoral candidate then?
I don't know. All I can say is this: the people of Tower Hamlets last month made their voice heard. By an overwhelming majority they voted for me and my team and they voted for justice. At the end of the day, the final judges were the people of Tower Hamlets.

Were you behind the various smears against your opponent that appeared in a local paper?
For the record, none of my team was associated with any local paper, formally or informally. The stories that the local papers carry is their choice. It has nothing to do with me.

Were you disappointed to see such smears about a former colleague and friend?
I am not going to make comments about Councillor Abbas's private life either this way or that way. None of my literature contained negative stories. My literature was about my policies and the positive aspects of my campaign.

Who funded your mayoral campaign, and your various legal fees?
I funded my own campaign. And I funded my legal fees too from my own pocket. Listen, I am a lawyer. I was a solicitor for many years, a partner in my firm. I worked hard my whole life.

Have you had any discussions with Ed Miliband about rejoining the Labour Party?
The whole of my political upbringing has been on the basis of Labour values. I want to serve the community on a progressive agenda but I have not had any conversations with Ed Miliband.

Would you like to rejoin the Labour Party in the near future?
I am happy to serve the people of Tower Hamlets. They will decide how I serve them.

Is it true that Ken Livingstone has been negotiating your return to the Labour Party?
I have a lot of respect for Ken Livingstone. As to what discussions he is having with anyone, that is between him and that person. I have not appointed anyone to enter into any such conversations on my behalf.

Why did Ken come to campaign with you?
You'd better ask him. He is an astute politician.

How would you describe your own politics?
I believe in social democracy, in equality of opportunity, in social justice, in the welfare state. I believe we must have a system, democracy, that caters for all.

Are you a social democrat or a socialist?
I am a social democrat; I'm left of centre.

Who are your heroes, political or otherwise?
Tony Benn. I have a lot of respect for him.

Who did you back for the Labour leadership?
David Miliband. But I thought Ed Miliband was an equally able candidate. I am sure he will make a great prime minister.

But he tried to get rid of you from the party?
He didn't get rid of me. He was in the middle of a leadership campaign. Six or seven members of the NEC got rid of me. I believe it would have been different had he been leader at the time.

Will you stand as a parliamentary candidate in the East End in 2015?
My only intention is to serve people of Tower Hamlets. I was grateful to be given the chance to serve as a local councillor and now as mayor. My only determination now is to succeed in my mayoralty.

So you won't rule out standing against the local Labour MPs, Rushanara Ali or Jim Fitzpatrick, at the next general election?
At this stage, all I can think about is building more homes, making sure our schools perform, making sure we have a borough where crime is low, and making sure the whole community is served equally. That's all I'm interested in.

How important is your Islamic faith to you?
I am a proud Muslim. I am glad that my values have come from Islam. But I am also glad that Labour Party values have given me great strength over the past 20 or 25 years. Go and speak to people of Tower Hamlets, the people who voted for me, who voted for someone they believe is a pluralist and can serve them well and serve them equally.

Are you a member of the much-criticised Islamic Forum of Europe?
I am not a member of the Islamic Forum of Europe. I have never been a member.

But you do have close contacts with the group?
I have close contacts with the chair of the Tower Hamlets Inter Faith Forum, with rabbis, with the Bishop of Stepney, with people who are of no faith. The IFE is one group among many. As leader of this council, I will work with each and every member of the community, whether they are Sikh, Hindu, Muslim, Jew, Christian or people of no faith.

Is the IFE an extremist group?
I don't believe we have extremist groups in Tower Hamlets. If so, I am sure the government and the police would have intervened long and ago. I will work with anyone who adheres to civil society, to democracy, to the progressive values of this council. I believe that previous leaders have worked with the IFE and other such organisations and some previous leaders are on record as having funded such faith groups. If there was nothing wrong with working with such groups then, why now?

Do you support a caliphate, here or elsewhere?
I believe in a social-democratic society. I believe in a society where, through a democratic process, representatives are chosen and elected.

Do you believe sharia law should be incorporated into British law?
I am a lawyer and I was invited to the London Muslim Centre [in July 2008] when the then chief justice, Lord Phillips, came to speak and said that there are merits in learning from certain aspects of sharia law, to help our legal system. Not the penal elements; the family and civil elements. If the chief justice can make those comments, who am I to disagree?

Should the gay population of Tower Hamlets be worried by your victory?
During my opening speech as mayor, in front of the full council, I made it quite clear that I want to serve each and every member of my community, including the gay and lesbian community. It is not for me to make value judgements. I want to work with every member of the community, whatever their sexual orientation. I grew up with people in the East End from all backgrounds, black, white, gay, and many of them are still my mates.

Did Tower Hamlets town hall, on your watch, allow CDs of a Muslim preacher who has allegedly justified wife-beating to be handed out to visitors?
That did happen but it has been stopped and the chief executive has clear instructions from me not to let that happen again. It did not happen with his approval or my approval. And I assure you nothing of that sort will happen with my approval. But you can't control things that happen without your knowledge.

Can you explain what links, if any, you have to Saudi Arabia and your trips to that country? How were they funded?
It is an obligation, as a Muslim, to do the pilgrimage to Saudi Arabia. I haven't done the Hajj but I have had the good fortune of going on Umra [the lesser pilgrimage]. I have been on Umra four or five times. I went to Saudi Arabia on Umra during my council leadership at my own expense, on a private trip. As a Muslim you are not allowed to take money from anyone else, if you have the means, to go and pay your respects to Allah and go to the Kaaba [in Mecca].

Would you say you are a secularist? A secular politician?
My whole political upbringing has been about clear diving line between my faith and my politics. I believe in a civic, social democratic society.

Do you believe in a secular Britain?
I do. I live in a society based on a clear division of powers between the church and the state. Yes, I absolutely believe in a secular society.

Is there a plan?
I always have a plan. I had a manifesto, didn't I?

Are we doomed?
I am an optimist. I always look for the good nature in people.

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

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The optimism error

We are told that austerity has triumphed and that the British economy is running full steam ahead. The reality is more alarming.

In Cardiff last Thursday, 7 January, George Osborne warned of a “dangerous cocktail of new threats” to Britain’s prosperity. These include collapsing global stock-market and commodity prices, weak growth in China and Latin America, stagnation in Europe and turbulence in the Middle East. Osborne was right to prepare us for “headwinds”. What he could not admit was that the fragility of the British recovery he now discerns – just two months after his triumphal Autumn Statement – is due, in no small measure, to his own austerity policies.

The unpalatable truth is that austerity in the face of the private-sector collapse of 2008-2009 has weakened our ability to produce output. Britain has been left overfinancialised, overborrowed and underinvested. It is not surprising that it is exceptionally exposed to any global downturn.

Before John Maynard Keynes it was believed, by economists at least, that a competitive market would normally produce full employment. As the facts of experience appeared to indicate otherwise, economists, prompted by Keynes, sharpened up their theory. A market economy would ­always lead to full employment provided wages and prices were flexible. Workers, if facing unemployment, had only to accept wage reductions to “price themselves back into work”.

However, as it seemed unrealistic to suppose that workers would do this – or do it quickly enough – government policy could short-circuit the painful process of adjustment. When a slump threatened or occurred, a government could stimulate spending by cutting interest rates and by incurring budget deficits. This was the main point of the Keynesian revolution.

This policy ran from the 1950s to the 1970s. It was overthrown in the 1980s, when unemployment prevention became confined to interest-rate policy, eventually run by the central bank, not the government. By keeping the rate of inflation constant, the monetary authority could keep unemployment at its “natural rate”. This worked quite well for a time, but then, following the widespread failure of the banking system, the world economy collapsed in 2008.

In a panic, the politicians, from Barack Obama to Gordon Brown, took Keynes out of the cupboard, dusted him down, and “stimulated” the economy like mad. When this produced some useful recovery they got cold feet. “Keynes,” they said, “you’ve done your job. Back in the cupboard you go.” I wrote a book at the time called The Return of the Master. A reviewer pointed out that the Master had returned for six months only.

Why had the politicians’ nerve failed and what were the consequences?

The answer is that in bailing out leading banks and allowing budget deficits to soar, governments had incurred huge debts that threatened their financial credibility. It was claimed that bond yields would rise sharply, adding to the cost of borrowing. This was never plausible in Britain, but bond yield spikes threatened default in Greece and other eurozone countries early in 2010. Long before the stimulus had been allowed to work its magic in restoring economic activity and government revenues, the fiscal engine was put into reverse, and the politics of austerity took over.

Yet austerity did not hasten recovery; it delayed it and rendered it limp when it came. Enter “quantitative easing” (QE). The central bank would flood the banks and
pension funds with cash. This, it was expected, would cause the banks to lower their interest rates, lend more and, by way of a so-called wealth effect, cause companies and high-net-worth individuals to consume and invest more. But it didn’t happen. There was a small initial impact, but it soon petered out. Bank lending, an important index of recovery, in fact went down as the institutions sat on piles of cash and the wealthy speculated in property.

So we reach the present impasse. Events have confirmed that a competitive market economy is subject to severe collapses, and the effects of these linger in the form of elevated unemployment, lower output, lower productivity and increased poverty. At the same time, however, counter-cyclical policy is disabled. Monetary expansion is much less potent than people believed; and using the budget deficit to fight unemployment is ruled out by the bond markets and the ­Financial Times. The levers either don’t work, or we are not allowed to pull them. Where do we go from here?

 

The present situation

The first thing is to establish where we now are. How much recovery has there been in Britain? Economists try to answer this question with reference to the output gap – the difference between what an economy is actually producing and what it can produce. The OECD’s most recent estimate of this gap in the UK stands at a negligible -0.017 per cent. We might conclude from this that the British economy is running full steam ahead and that we have, at last, successfully recovered from the crash. This is the basis of George Osborne’s triumphalism. His critics, including myself, have been proved wrong. His austerity policies have worked. Or so we are told.

But such a conclusion would be premature. Although we are producing as much output as we can, our capacity to produce output has fallen. This can be shown by comparing the current economic situation to where we would expect to be, according to the historic trend.

From this perspective, championed by the Oxford economist Simon Wren-Lewis, the position is far less rosy. Growth in output per person in Britain (roughly “living standards”) averaged 2.25 per cent per year for the half-century before 2008. Recessions in the past have caused deviations downward from this path, but recoveries had delivered above-trend growth, lifting us back up to the previous path. One can say that the “business cycle” oscillates between errors of pessimism and errors of optimism. In other words, the loss of output is temporary.

This time it was different. The recovery from the financial crisis was the weakest on record, and the result of this is a yawning gap between where we are and where we should have been. Output per head is between 10 and 15 per cent below trend.

We are faced with a puzzle. If the output gap is as small as the OECD believes, then the British economy appears to have lost much of its productive potential. It is no longer a case of demand falling short of supply, leaving a surplus of workers and capital equipment. The supply is no longer available: we have lost eight years’ growth of productivity. Between 1971 and 2007 productivity growth averaged 2-3 per cent a year. Since the recession started it has been close to zero. Why is it that the recession turned spare capacity into lost capacity? One answer lies in the ugly word “hysteresis”.

 

Hysteresis

This is an idea borrowed from physics. If an insulated wire is wrapped around an iron bar, and an electric current is then passed along the wire, the iron bar becomes magnetised. Some of this magnetism remains even after the current has been switched off. A shock has a long-lasting effect. This is labelled hysteresis.

An economy experiences hysteresis not when output falls relative to potential output, but when potential output itself falls as a result of a recession. What happens is that the recession itself shrinks productive capacity: the economy’s ability to produce output is impaired.

The intuition behind it is simple enough: if you let a recession last long enough for capital and labour to rust away you will lose growth potential, on account of discouraged workers, lost skills, broken banks and missing investment in future productivity. By not taking steps to offset the negative shock of the recession with the positive shock of a stimulus, the coalition government cost the country 10 per cent or more of potential output.

The phenomenon of hysteresis is not ­necessarily captured by high levels of “headline” unemployment. In fact, low levels of unemployment may reflect low productivity growth, as employers prefer to use cheap workers to investing in machines: unemployed workers may be re-employed in part-time or minimum-wage or zero-hour contract jobs. Much of the new private-sector job creation lauded by the Chancellor is exactly in such low-productivity sectors. The collapse of investment is particularly serious, because investment is the main source of productivity.

The challenge for policy is to liquidate the hysteresis – to restore supply. How is this to be done?

 

Blockage of policy

An economic recession is precipitated by a fall in private spending, be it investment or consumption. It can be countered by monetary and fiscal policy, aiming either to stimulate private spending or to replace it temporarily by public spending. On the monetary front, the bank rate was dropped to near zero; this not being enough, the Bank of England pumped out hundreds of billions of pounds between 2009 and 2012, but too little of the money went into the real economy. As Keynes recognised, it is the spending of money, not the printing of it, which stimulates productive activity, and he warned: “If . . . we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips ­between the cup and the lip.”

That left fiscal policy. Fiscal policy can fight recession by cutting taxes or increasing public spending. Both involve deliberately budgeting for a deficit. In Britain, any possible tolerance for a deficit larger than the one automatically caused by a recession was destroyed by fearmongering about unsustainable debt. From 2009 onwards, the difference between Labour and ­Conservative was about the speed of deficit reduction. The contribution that deliberate deficit budgeting might make to recovery was never mentioned, except by unreconstructed Keynesians.

So we now have a situation in which the main tools available to government to bring about a robust recovery are out of action. In addition, sole reliance on monetary policy for stimulus creates a highly unbalanced recovery. The money the government pours into the economy either sits idle or simply pumps up house prices, threatening to re-create the asset bubble that produced the crisis in the first place. We already have the highest rate of post-crash increase in house prices of all OECD countries. This suggests that the next crash may not be far off.

 

The public accounts trap

From 2009 onwards the main obstacle to a sensible recovery policy has been the obsession with balancing the national budget. A government can finance its spending in one of three ways: it can raise taxes, borrow from the private sector, or borrow from the Bank of England (that is, “print money”). Each has advantages and disadvantages, but public opinion has decided that the first of these – covering all spending by taxes – is the only “honest” way. In popular discourse, borrowing signifies a “deficit”, and a particular horror attaches to deficits, because they suggest the government is not “paying its way”. “We must get the deficit down” has been the refrain of all the parties.

Printing money to finance public investment has been suggested by both the Labour leader and the shadow chancellor as a way to get round the borrowing constraint. Its advantage is that it wouldn’t directly increase the national debt, because the government would only owe the money to itself. On the other hand, it might destroy confidence in the state’s ability to control its spending, and it would jeopardise the independence of the central bank. So, printing money to pay for public spending should only be a remedy of the last resort.

It is right to be concerned about a rising national debt (now roughly £1.6trn). But the way to reverse it is not to cut down the economy, but to cause it to grow in a sustainable way. In many circumstances, that involves deliberately increasing the deficit. This is a paradox too far for most people to grasp. But it makes perfect sense if the increased deficit causes the economy, and thus the government’s revenues, to grow faster than the deficit. If the economy is in the doldrums, practically all forms of government expenditure should be welcomed, as they utilise idle resources.

In our present situation, with little spare capacity, the government needs to think much more carefully about what it should be borrowing for. Public finance theory makes a clear distinction between current and capital spending. A sound rule is that governments should cover their current or recurrent spending by taxation, but should borrow for capital spending, that is, investment. This is because current spending gives rise to no government-owned assets, whereas capital spending does.

If these assets are productive, they pay for themselves by increasing government earnings, either through user charges or through increased tax revenues. If I pay for all my groceries “on tick” my debt will just go on rising. But if I borrow to invest in, say, my education, my increased earnings will be available to discharge my debt.

Covering current account spending by taxation is at the heart of the balanced budget rule. But as Thomas J Sargent, certainly no Keynesian, wrote in 1981 (Federal Reserve Bank of Minneapolis, Research Department Working Paper W): “The principles of classical economic theory condone deficits on capital account.”

Now is an ideal time for the government to be investing in the economy, because it can borrow at such low interest rates. But surely this means increasing the deficit? Yes, it does, but in the same unobjectionable way as a business borrows money to build a plant in the expectation that the investment will pay off. It is because the distinction between current and capital spending has become fuzzy through years of misuse and obfuscation that we have slipped into the state of thinking that all government spending must be balanced by taxes – in the jargon, that net public-sector borrowing should normally be zero. George Osborne has now promised to “balance the budget” – by 2019-20. But within this fiscal straitjacket the only way he can create room for more public investment is to reduce current spending, which in practice means cutting the welfare state.

 

A British Investment Bank

How can we break this block on capital spending? Several of us have been advocating a publicly owned British Investment Bank. The need for such institutions has long been widely acknowledged in continental Europe and east Asia, partly because they fill a gap in the private investment market, partly because they create an institutional division between investment and current spending. This British Investment Bank, as I envisage it, would be owned by the government, but would be able to borrow a multiple of its subscribed capital to finance investment projects within an approved range. Its remit would include not only energy-saving projects but also others that can contribute to rebalancing the economy – particularly transport infrastructure, social housing and export-oriented small and medium-sized enterprises (SMEs).

Unfortunately, the conventional view in Britain is that a government-backed bank would be bound, for one reason or another, to “pick losers”, and thereby pile up non-performing loans. Like all fundamentalist beliefs, this has little empirical backing. Two relevant comparators – the European Investment Bank and Germany’s KfW (Kreditanstalt für Wiederaufbau) – show that, in well-regulated financial systems, such banks pay for themselves. Neither bank has had to go back to its shareholder(s) to raise fresh money to cover losses. The EU is setting up a European Fund for Strategic Investments, which, with a capitalisation of €21bn, is expected to lever at least €315bn of investment over the first three years.

George Osborne has rejected this route to modernisation. Instead of borrowing to renovate our infrastructure, the Chancellor is trying to get foreign, especially Chinese, companies to do it, even if they are state-owned. Looking at British energy companies and rail franchises, we can see that this is merely the latest in a long history of handing over our national assets to foreign states. Public enterprise is apparently good if it is not British.

Britain already has two small state investment banks – the Green Investment Bank (GIB) and the British Business Bank. But the Treasury is so obsessed with avoiding any increase in the deficit that, up to this point, it has deprived these newly formed institutions of any power to borrow. This has restricted their investment potential. The Green Investment Bank was capitalised with £3.8bn of public funds in 2012; it has so far invested £2bn. Now the government proposes to privatise the GIB, because “it is necessary to move the bank off the public balance sheet if it is to arrange additional funding through borrowing”. The same fate no doubt awaits the British Business Bank, set up to channel money to SMEs.

Apart from exposing its unjustified belief that public investment must be loss-making, the Treasury’s stance is an artefact of its insistence that there should be no net borrowing. It was to avoid this grave effect on public investment that Gordon Brown, as chancellor, was drawn into the large-scale Private Finance Initiative, when there were cheaper financing mechanisms available.

Setting up a British Investment Bank with enough borrowing power to make it an effective investment vehicle is the essential first step towards rebuilding supply. Distancing it from politics by giving it a proper remit would create confidence that its ­projects would be selected on commercial, not political criteria. But this step would not be possible without a different accounting system. The solution would be to make use of comprehensive accounting that appropriately scores increases in net worth of the bank’s assets. The British Investment Bank I envisage would only finance investment in productive assets: although its borrowing would show up in the public accounts, it would be financed by revenue from its own activities. This is fundamentally different from tax-financed debt, and fully in line with the conventional theory of public finance outlined above.

Has the Chancellor the courage to grasp the opportunity?

He can justifiably congratulate himself on having avoided the worst disasters to which Treasury accounting rules and narrow ideology could have led him. But in the non-political recesses of his mind he must understand that the recovery over which he has presided is incomplete, fragile and, above all, unfair.

The first necessary step is to reform the way we do our national accounts, in order to dispel the deficit and debt phobia that blights sensible policy.

Robert Skidelsky is a cross-bench peer and a leading biographer of J M Keynes. His most recent book is “Britain Since 1900: a Success Story?” (Vintage)

This article first appeared in the 14 January 2016 issue of the New Statesman, David Bowie