The Magic Money Tree

For the first time in years there are two competing and different visions of the future on offer to the British electorate. On the one hand, we have the Conservative Party, who offer a vision of a country where people who work hard can enjoy the fruits of their labour. This is a vision of a small state, with low taxation and low levels of public spending, where fiscal discipline is enforced by austerity politics. On the other hand, there is the vision of the Labour Party, which starts at the point of markets failing to deliver a fair outcome and needing corrective measures to ensure a fairer society. It is a vision of an expanded fiscal policy with greater roles for state intervention. The Conservative criticism of Labour policy is that there isn't a magic money tree to pay for all of this. Is that quite true?

To answer this question, we need to go back to the financial crisis of 2007-08. Those were desperate years. The banking system was on the verge of collapse, the money supply was falling sharply as banks stopped lending to each other, and there was a real prospect of an acute depression in the real economy. Desperate times called for desperate measures. Two such measures were adopted that had a long term significance - the bail out of the banks and Quantitative Easing.

The banks were bailed out through the purchase of equity by UK Financial Investments Limited - an arms length holding company that manages the government holdings of RBS along with those of UK Asset Resolution Limited (the vehicle created to unwind the Northern Rock and Bradford & Bingley mortgage books). At present, UKFI holds 72.1% of the equity of RBS, which is worth about £23 billion at current market prices, and 100% of UKAR, which has an outstanding loan book of about £19 billion. In addition to that, the Bank of England intervened in the UK bond market to purchase £375 billion of gilt edged stock. This still sits on the Bank of England balance sheet. Together, there is well over £400 billion of liquid assets sitting in public sector balance sheets, almost literally doing nothing.

UKFI and the Bank of England are public sector bodies, subject to public accountability. If a Labour government is elected, then it would be within the realms of possibility that these bodies would be subject to political review. What could happen? It is entirely possible for an incoming Labour government to set up a National Investment Bank (NIB), which is a pledge under the current manifesto. It is entirely possible for a Labour Treasury to direct UKFI and the Bank of England to transfer their asset holdings into the NIB. It could also require the Student Loan Company to transfer into the NIB their £100 billion loan book. It would be entirely possible for the NIB to re-allocate those assets in different ways.

How could it be different? Take the issue of Private Finance Initiative (PFI) assets. These are assets such as schools and hospitals which are built by the private sector and leased for use by the public sector. They have a reputation for delivering poor value to the public purse. Labour has stated that it will issue no new PFI contracts during their term of office, and will seek to reclaim the assets of existing PFI contracts. It would be entirely possible for a Labour government to enact legislation that seeks to swap out the PFI assets held by private corporations for gilt edged stock held by the NIB. The capital value of PFI contracts is estimated at just over £60 billion, which ought to be a manageable sum for the NIB.

As we hear future discussion about Labour's spending proposals, the question of the magic money tree is bound to recur. From a purely financial stand point, it would be entirely appropriate for an incoming Labour government to swap around some of the assets in the public sector. It would also be appropriate for the NIB to fund additional capital assets - bridges, roads, schools, hospitals, prisons, the list is quite large. It could also fund the human capital of the country by reaching a different settlement for the education sector.

When the critics of Labour say that the money isn't there, that statement is untrue. It is there, but isn't currently being put to any good use.

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Using Megagames To Unlock The Future

All quiet on the Taiwan front!

I was recently asked to act in an analyst role in a megagame undertaken by professional wargamers. Normally I would participate as a player, but this invitation gave me an opportunity to stand back and consider the use of megagames as a technique to generate stories about the future. The game we played was 'Dire Straits', a megagame set at the beginning of 2020, that sought to explore some of the diplomatic and military possibilities that might unfold in East Asia at that point in time.

A megagame is a non-linear representation of a complex system in which the actors interact to generate a narrative about a future state. In Dire Straits, we had about 120 players, representing most of the nations on the Indo-Pacific axis, advancing what they thought to be their national interests. The game wasn't at all deterministic, which allowed the players to roam over any form of policy option. It is satisfying that, in the scenario generated, war didn't result. However, in a number of flashpoints the participants moved up to the jump point, but then backed away again. This had a refreshingly familiar ring to it.

In considering why we might want to use megagames as a tool for unlocking the future, five analytical points came to mind:

1. A ‘game’ represents a ‘system’. In the case of Dire Straits, the system being represented is the web of international relations in East Asia and beyond. This compels us to think systemically about international relations.
2. If we have a system, then we will need actors to operate the system. This compels us to identify the key actors within the system and their motivations to act within the system.
3. The system consists of a series of relationships between the various actors. The game compels us to define the relationships between the various actors and examine the modes by which they interact with each other.
4. The interactions between the actors permits us to examine the strategies they adopt in their interactions. The game compels us to adopt a strategy to play the game and to monitor the outcomes of the strategies adopted
5. From a systemic perspective, this then opens the possibility of wind-tunnelling various potential strategies from within the game framework. This can be used to identify, consider, and experiment with various policy options. 

It is my view that megagames are a valid tool for generating future narratives. They are best suited to large questions because, as a technique, they are not an inexpensive exercise. By definition, they involve a large amount of staff time. In order to yield interesting results, they need to be conducted several times. However, they can provide a way to cut through the complexity that is inherent in many systems. 

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Putin Rolls The Dice ... And Throws A Six

The Russian victory parade in Odessa.

We previously wrote about the game 'Putin's War', and how it might be pulled apart and reconstructed as a multi-player game which could be used to examine some of the issues affecting Russia's neighbours in the near future. We were recently given an opportunity progress this idea at a gaming conference. 

One of the aspects of the vanilla game that sat awkwardly for us was the uniformity of the Blue team. To recap, the Blue team contained both Russia's neighbours (the Baltic States, Belarus, and Ukraine), along with a selection of other nations within eastern Europe. We wanted to split this team into something that more closely resembled the current state of affairs.

In the vanilla game, the United States does not play a large part because of the logistics of sending a significant force to eastern Europe in a short space of time. We wanted to model this differently. We added a political game to the vanilla game that included the process by which Article 5 of the North Atlantic Treaty is invoked, adding delay upon delay before America could engage in operations. For the United States to become involved, Article 5 needs to be invoked, the North Atlantic Council needs to approve action, and Congress needs to ratify the decision for action. In a game modelling 30 days, the potential for delay is significant.

We didn't want to ignore recent developments in Europe either. As the United States appears to be lessening it's commitment to the defence of Europe, the European Commission is developing a Common Security and Defence Policy outside of the NATO structure. We wanted to give that a fair wind and to incorporate that idea into the game. The European arrangement organises member states into various battlegroups. We decided to use two such battlegroups - the Nordic Battlegroup (Estonia, Latvia, Lithuania, Sweden, and Finland) and the Visegrad Battlegroup (Poland, Hungary, Slovakia, and the Czech Republic). The battlegroups would only be activated once the Common Security and Defence Policy is activated. This would come after the North Atlantic Council approved the invocation of Article 5, and required the approval of the European Council of Ministers.

As the United States appears to retreat from the defence of Europe, Germany naturally becomes more important in that defence infrastructure. Germany was represented by a single player, whose brief was to maintain the rating of the 10 Year Bund. We added a little financial aspect to the game, modelling the impact of conflict in eastern Europe on the bond market. 

Two further key elements to the Blue team were Ukraine and Belarus. Not part of NATO, not part of the EU, already a victim of Russian aggression, Ukraine occupies a difficult position. We structured the game so that the Russian players could focus their attention on Ukraine without the direct intervention of NATO and the EU. We did try to encourage a little bit of Polish adventurism through the occupation of Ukrainian territory. Belarus, on the other hand, sat between the two sides. In reality, Belarus tries to maintain good links with both NATO and Russia. By assumption, we inserted a neutral Belarus into the game. We could equally have included Belarus in either the Blue team or, more realistically, the Red team. It would be interesting to run the same game three times, each with a different assumption about Belarus.

Although we talk of the Red team, this is actually Russia. We wanted to make Russia less monolithic, so we spilt the team into two - the Southern Military District and the Western Military District. Following current deployments, the intended focus of the Southern Military District would be Ukraine and the focus of the Western Military District would be the Baltic States. We gave the Red team players the opportunity to play co-operatively or competitively with each other. The mechanism for this was the allocation of action points and the allocation of reinforcements from the Central and Eastern Military Districts.

The briefing to players was:

The purpose of the game is to consider how eastern Europe could look if the Russian Federation were to take military action to restore a land buffer between itself and the European NATO nations. By assumption, the scene is set for the spring of 2020. Europe has been through a series of acrimonious negotiations over Brexit, with the various Member States arguing over the post-Brexit landscape. President Macron has failed to re-vitalise France, leaving Germany the undisputed dominant force in the EU. The people of Europe responded by voting heavily for Eurosceptic politicians in the European elections of 2019. On the other side of the Atlantic, the US Presidential elections are under way, with the incumbent polling well on an ‘America First And Only’ platform. Meanwhile, there are reports of large troop movements in the Russian Federation …

The game unfolded more or less as we expected it to. The Russian players acted co-operatively and decided to focus on the occupation of Ukraine. The reinforcements were allocated to the Southern Military District and the area of Significant Ethnic Russian Population in Ukraine was occupied in the first turn. In a single move, the state of Malorossiya came into being. There was little response from the Blue team. As Ukraine is not part of NATO, it cannot start the process of invoking Article 5, which also means that the Common Security and Defence Policy could not be invoked. In terms of the game, Ukraine acts alone.

That did beg the question that if this would prove so easy, why hasn't it happened already? I think that the answer to that question highlights the weaknesses of gaming as a technique to view the future. All sorts of assumptions were made in the game about the behaviour of the players (which were written into the rules) and other key nations who weren't players (China springs to mind here). These assumptions are worth teasing out. For example, what if the United States, outside of the framework of NATO, had armed and trained the Ukrainian forces, making them much more effective than originally thought? What if western sanctions had caused far more caution on the part of Russia? What if Russia feared the possibility of a more adventurous Chinese response in Central Asia? None of this was covered in the game, but in real life it has to be taken into account.

We allocated an hour and a half to the game. This wasn't long enough. During that time, we only managed to brief the players on the game mechanism, the political game, and the working aspects of the Bond Market. This left us time for just a single turn. It was a long turn, with quite a lot happening, but the action was confined to Ukraine. The non-Ukrainian Blue team players had little to do because the Red team players avoided the trap of involving NATO at an early stage. I quite liked this as a model of real action, but I accept that it didn't include the Blue team players as much as we had hoped that it might.

Looking to the future, I think that the experiment was sufficiently positive to continue with the game. We now know that it needs a good day to play through and that it has the potential to offer some useful insights into the near future history of eastern Europe. I believe that very few of the mechanisms need further tweaking, and that it would be good to roll it out over all of the ten turns to see how far it goes. All we need now is a group of willing volunteers and a venue.

Stephen Aguilar-Millan

© The European Futures Observatory 2017