Archive for the 'Economy' Category

h1

Sales tacks. What to do with the high street holes caused by shop closures

Wednesday, October 31st, 2018

This has been a torrid time for many retailers. Every week brings news of another familiar high street shop on the skids. House of Fraser, Toys R Us, Maplins, Poundworld and Gaucho have all gone bust. Many household name chains are closing stores at a rate of knots. Rumours abound of big names struggling. 

You would be forgiven for thinking that retail spending had been hit. Far from it. Retail spending continues to grow.  It grew to the end of September by 3%.

Popular opinion has it that this reflects a move to spending online. According to this view, as a result of the likes of notonthehighstreet.com, far too many familiar names are not on the high street any more. 

There is such a shift, but this is far from the whole truth. In 2017, the most recent year for which we have figures, spending continued to grow at traditional shops by a perfectly respectable 2.7%. While online sales increased at a much more racy 15.9%, in absolute terms spending increased nearly as much at traditional shops (by just over £7 billion) as through online sales (by £8.2 billion). Online spending is increasing proportionately but it is not yet directly eating into retail spending in traditional shops, so far as we can see.

So other forces are also at play here. As well as a shift between modes of spending, there are, as always, shifts in spending patterns by type. Primark, Lidl and Aldi have been gaining market share and profits. At the other end of the spectrum, Harrods, Harvey Nichols, Fortnum & Masons and Selfridges have all posted buoyant profits.

The impact seems to have been felt most in the mid-market. Marks & Spencer, in many ways a bellwether, have endured three years of falling profits. This has been reflected in stock market valuations. JD Sports for a while had a higher market valuation than Marks & Spencer (recent market movements have reversed this). 

Well this is all very interesting but what does it mean? If you work for one of the struggling retailers, job security is a worry. The bigger social impact, however, is probably the effect on Britain’s towns. Whether or not these companies go bust, many are on a programme of closing shops. Marks & Spencer, Debenhams, Homebase, Mothercare and House of Fraser are all reducing the number of outlets. The high streets have lost Woolworths and BHS in the recent past. New shops are not taking their place. Retail life is being sucked out of Britain’s towns.

The most marginal outposts are often in the most marginal towns. Marks & Spencer is closing 100 shops by 2022. So far it has announced or implemented 35, which include Andover, Basildon, Birkenhead, Bournemouth, Bridlington, Clacton, Darlington, Dover, Durham, Falkirk, Fareham, Fleetwood, Keighley, Northampton, Portsmouth, Redditch, Slough, Stockport, Stockton and Walsall.  House of Fraser is closing 31 of its 59 stores, including Birkenhead (again), Bournemouth (again), Carlisle, Doncaster, Hull, Plymouth, Swindon and Wolverhampton. Debenhams have yet to unveil their list.  It no doubt will include a similar roll call of medium-sized towns.

These are very diverse places. But they have this much in common – none of them are world centres of anything and all of them have lots of people who quietly want a slightly better life for themselves – or at least, for life not to get any worse.

The cultural damage caused to these places by these closures will be substantial.  Often these shops were mute symbols of modest and respectable aspiration in places where anything exciting usually happened elsewhere.  Those places will feel smaller, less loved and more forlorn.

This problem has been much-commented on.  If you’re not looking at what Centre For Towns, an independent think tank with Labour roots, is doing then you’re missing a big part of the jigsaw puzzle that is British politics today.

Labour, noting that places like those listed have an outsize number of marginals, have been campaigning hard on the need to do more for the country’s towns, producing slick videos about the problems that towns face.  This looks like a smart strategy for them to pursue, and a definite improvement in this regard on the much more metropolitan campaign Ed Miliband had by default fought. Expect to see them continue with this theme.  There’s a reason why Jeremy Corbyn asks Prime Minister’s Questions about bus routes.

The Chancellor of the Exchequer took a couple of eye-catching steps in the budget to address this problem, imposing a new levy based on profits made online in Britain and easing restrictions on converting shops into residential property. Neither measure looks very meaningful. The amounts raised by the levy will be chickenfeed in the context of the problems the high streets face (it’s far from clear that shop closures are being driven by the move online anyway) and it’s all very well converting shops into residential property but you have to give people a reason to live there. 

There is a substantial danger that with the loss of a social heart, many towns will become dormitories for the poor, just as many of our coastal towns already have. With local government having undergone swingeing cuts this decade, the capacity for that to be addressed locally has been sharply reduced. The omens are not good.

So the question that now needs answering is what a lot of our towns are for. Right now, the politicians seem short on answers.

Alastair Meeks


PS – If you think you know Britain well, try this quiz. I got 82.



h1

The persistence of lack of memory. How the state retirement age was changed and communicated

Sunday, October 28th, 2018

Old sins have long shadows. The equalisation of state pension age was first mooted in the early 1990s and was enacted in 1995. Yet it remains controversial now. The action group WASPI campaigned in the last general election and that campaign arguably made the difference in some marginals.  Theresa May might conceivably have got an overall majority if it had not been for their efforts and the whole course of Britain’s departure from the EU, among other things, might have been radically different.

What are they campaigning about? The argument shifts from point to point.  The current focus is on the absence of notice given to the women who were affected by this change. A Parliamentary Research Paper published this week, State Pension age increases for women born in the 1950s, looked at the claims on this. 

A key section has the title “Did women affected have advance warning?” Its three subsections are headed: “How much notice should people get?”; “What did the Government do?”; and “How aware were women affected?”. 

Other sources of information are dealt with in just three words (“including press coverage”). This by itself shreds the value of the report to pieces. In practice people get their information about pensions from many sources, public and private. They watch TV.  They listen to radio. They read newspapers. They look online. They look at their company pensions materials.  They plough their way through their personal pension documentation. They talk to IFAs.  They talk to friends. Any examination of the advance warning that women got needs to look at all of those sources.

As it happens, there was plenty of press coverage. I was going to look into this myself, but I found that Josephine Cumbo of the FT had beaten me to it. In the period 1993-2006, she found more than 600 mentions in the national press.  As she notes, it appeared on front pages. It appeared in tabloids. The controversial nature of the changes was fully aired. This was not a law change that was smuggled out in secret.

But let’s give the WASPI women the benefit of the doubt and accept that they somehow missed this. So let’s think carefully about what is really being said when it is complained that insufficient notice was given.  The complaint is not, on the surface at least, that the change should not have been made.  Not even a group that campaigns for the restoration of sex inequality under the name “Women Against State Pension Inequality” has the gall to argue that. The complaint is that if only I had been told, I would have done something different. 

“Something” is usually conveniently unspecified. In practice, however, it can amount to only one thing: that the individual would have saved more money earlier. Let’s leave to one side the fact that means that the money that has not been saved has in practice already been spent on something that the individual would have wanted (so the individual, having consumed cake is now wanting to have it again). This idea of earlier saving implies that the individual, if only she had been told, would have planned rigorously for her retirement.

That’s hard to reconcile with the evidence or indeed common sense. Even if the changes had been perfectly understood by all, many would not have been able to afford to do more.  Many would not have wanted to.  The tax advantages for saving in a pension had always been there, but were not taken up with anything like the enthusiasm that financial logic would have suggested.

It is disappointing, to say the least, that the Parliamentary Research Paper did not look at information about pensions provided in the private sector. In the early 1990s, occupational pension schemes were having their own torrid time equalising retirement ages.  When the state followed suit, they made sure that they built that into their scheme booklets. 

If the compilers of the Parliamentary Research Paper had done any research in this area, they would have found that the point was routinely covered in the mid-1990s in scheme booklets. Here’s a typical example (not one drafted by me, though I certainly put together a few at that time). As you can see, anyone who read such statements would have been quite clear about the nature of the change that had been made.

The conclusion we can draw about women who were members of such schemes who were unaware of the change in state pension age is that they did not look in any great detail at their pension scheme literature, or if they did, it did not sink in. That suggests a lack of interest in long term saving and casts doubt on whether they would have paid any attention at the time to any government communication either.

These, remember, were the women who were likely to be among the most interested in pensions, already having made private arrangements. The rest were going to be a lot less interested. 

As it happens, this fits well with other evidence we have. A 2005 DWP Paper on Women and Pensions noted that only 22% of women had worked out what their retirement income would be and only 47% of women said they had looked into saving or investing for retirement. Perhaps one leaflet from the government would have galvanised the indolent into action. Personally, I am seriously sceptical. 

So, contrary to the implied argument being made by WASPI and its supporters, the changes to women’s pension ages were widely discussed in the 1990s and the early 2000s and they were communicated to many by sources other than the government – and yet they still were not absorbed by many. The women affected have already had the benefit of the money that they spent and they have not noticeably been otherwise disadvantaged by any lack of notice (as opposed to disappointed).

Their claim to any form of compensation is weak. The inverse relationship between the vehemence with which they press their case and the merits of it is striking.

Upton Sinclair supposedly observed that “It is difficult to get a man to understand something when his salary depends upon his not understanding it”. It seems that it is just as difficult to get a woman to remember something when her pension depends on her not remembering it.

What MPs of all parties have to wrestle with is that WASPI and their supporters, no matter how misconceived, have votes at their disposal. Making sure that they dispose of them in a favourable manner without wrecking longstanding pensions policy positions might be a tough balancing act.

Alastair Meeks

Alastair Meeks is a former Chair of the Association of Pension Lawyers




h1

Footing the bill. The challenges for freespending politicians

Tuesday, October 9th, 2018

I like big buts and I cannot lie.  If I am presented with a rosy apple, I look for the worm.  If I’m covered with dark clouds, I look for the silver lining.  I’m that guy who likes to say “I think you’ll find it’s a bit more complicated than that”.  I’m unapologetic: it usually is more complicated than that.

Sometimes, however, important simple truths are hiding in plain sight.  Hercule Poirot noted that on one occasion he could not persuade anyone that something was a clue because it was four feet long.  Many basic political truths come into the same category.

One such truth is currently giving British politics an air of unreality. Both main parties have decided that public restraint is so 2015 and they are currently competing to bribe the public with goodies of all kinds. Theresa May has declared an end to austerity. Jeremy Corbyn is building on his 2017 election campaign, for which one of his own advisers reckoned the spending commitments could be costed at a trillion pounds.

So you could be forgiven for not realising that Britain’s national debt has tripled in absolute terms (to more than £1.7 trillion) since 2005 and more than doubled as a share of GDP (to over 85%). The best that one could say is that it is now levelling out as a share of GDP. Britain continues to run a deficit of 2% or so. Far from being frugal, Britain has continued to live beyond its means and shows no signs of starting to.

If spending really is going to be unleashed in some areas, it can only come from reduced spending elsewhere, increased revenues from taxation, increased borrowing or expropriation.

The economy has grown anaemically for most of the last decade and shows no signs of producing the growth that would increase tax revenues to fund new spending promises (and reduce social security spending). Indeed, pessimists point out that on the normal business cycle a recession is well overdue. Recessions put a much greater strain on public finances and one would make an end to austerity even more challenging.

Getting the money by reducing spending elsewhere looks very difficult to achieve now. Local authorities have to date borne the brunt of the cuts and many are under severe financial pressure. One, Northamptonshire, has already gone bust. Others may follow. Central government looks an equally unpromising source in the main. For starters, if austerity has ended, that implies any cuts are going to be painless (and you would have thought they would have been made already if they were). The one department where cuts would not be noticed immediately by the general public, defence, is off limits for the Conservatives.

So Labour’s solutions, tax rises and increased borrowing, look a bit more promising than the Conservatives’. In practice the Conservatives would need to adopt those solutions too.

These are not get out of jail free cards.  If the markets lose confidence that borrowings will be paid back, the costs of borrowing rise and can rise very sharply very quickly indeed.  The Italian government fell in 2011 when lenders turned their backs on it, despairing at its inability to get a grip on public spending.  The latest Italian government has suddenly seen its borrowing costs rise sharply when it thumbed its nose at EU spending.  An obviously irresponsible British government would not be able to push its luck for all that long.

Tax rises are therefore going to form a big part of any spending spree.  So whose pips are going to squeak?  Like Doctor Samuel Gall, as recounted by Tom Lehrer, Chancellors of the Exchequer find their fame and fortune specialising in diseases of the rich.

This leads on to another obvious truth.  Any rise in taxes is going to be very unevenly regionally distributed.  London is far richer than any other part of the country, however you slice it.  The Gross Value Added per head generated by London is twice that of the rest of the country.  If you look at it on a GDP per head basis, it’s as though Switzerland were tacked onto Portugal.  If property taxes are to be considered, the properties in ten London boroughs are worth more than all the properties in Scotland, Wales and Northern Ireland combined.

London already subsidises the rest of the country to an extraordinary degree.  Any increase in taxation will make that imbalance still greater.  That would not matter if London shared political values with the rest of the country.  Increasingly, however, the capital’s politics are following their own path.  In the last London-wide opinion poll, the Conservatives tallied just 25% of the vote, roughly 14% behind their nationwide polling level.  As a reference point, in 1992, the Conservatives secured 45% of the London vote, 2% ahead of their nationwide polling level.

Any Conservative attempt at raising taxes to pay for spending is likely to be perceived in London, correctly, as an attempt to fleece the capital to prop up the government’s client base.  This is unlikely to be accepted passively for any length of time.  The Conservatives have spent so long using London as target practice for their provincialist rhetoric that they have forgotten that wealth creators always have options available that are not available to the recipients of largesse.  So far Londoners have not used them, though their growing impatience with the Conservatives is shown in the polling.  That forbearance will not last indefinitely if pushed.

Labour start with much more political capital in the capital.  Their plans, however, are far more ambitious than the Conservatives’ and so the impact on voters’ pockets will be that much greater.  It has to be highly questionable whether voters will accept the reality of much heavier taxation if it happens.

So both party leaders’ mouths are writing cheques that the body politic can’t cash.  Is there another way?  Pure expropriation is prohibited under the European Convention on Human Rights (though it would be amusing to watch Conservatives make that argument against any attempt by Labour to nationalise without compensation).  That would probably be a step too far for either main party.

However, there are assets comprising the odd trillion that are available to a particularly shameless or desperate government.  The government could nationalise private pensions.  Preposterous?  The idea has already been tried in Hungary and Poland.  Britain’s private pension provision currently stands at roughly 120% of GDP.  

The government would need to pay the pensions in the future, but that would be another government’s problem and the government has the ability to manufacture reserves by the use of racier actuarial assumptions than the private sector could justify.  It would release a lot of immediate funds for all those exciting projects that the public crave without immediate losers.  With some very well-publicised pensions failures recently, the cash grab could be sold as an improvement in pension scheme member security.

The idea has already been floated in Labour circles.  Ann Pettifor, who sits on Labour’s Economic Advisory Committee, has called for pensions to be nationalised.  It might be a very bad idea from the viewpoint of the economy in the long run but it could provide an answer in the short term to Labour’s trillion pound question.  Definitely something to watch.

Alastair Meeks




h1

A new furrow. The changing nature of work and what that might mean for the future

Sunday, March 25th, 2018

Imagine, if you will, that you are a horse. Take that extra step and imagine that you’re a horse capable of reasoning, a Houyhnhnm if you will. As you stand in your stable at the end of the day, imagine you are reflecting on your species’ relationship with humans. It got off to a poor start, with humans seeing you as a food source. Fortunately, humans in general saw greater possibilities in you, learning that you could be a far greater source of power than they could manage on their own.

The partnership endured for millennia. It worked well on both sides. Whenever humans needed more power, they needed more horses. Humans sorted out food and shelter, and mostly took good care of their power source. Through thick and thin, humans and horses stood side by side. Until they didn’t.

From the horse’s perspective, it all broke down following the industrial revolution. It broke down in two conflicting ways. First, humans devised mechanical means for dispensing with equines as a power source. And secondly, in the short run the need for living horse power for those who could not afford the mechanical means increased to the extent that the caring relationship between humans and horses broke down for many. You can see traces of this in the donkey sanctuary adverts on TV – poor humans in the developing world cannot afford to care properly for the animals they get to work for them (though I question whether the donkeys should be the priority for help).

Let’s return from Gulliver’s Travels to present day human life. For at least two centuries soothsayers have made predictions that industrialisation would destroy jobs. And during that period, the jobs market has inexorably expanded. John Henry’s hammer ultimately lost out to the steam-drill, but we have always found new uses for humans. Some jobs were destroyed by industrialisation – “computers” used to be human beings until surprisingly recently – but more were created as a result.

As the horses found out, however, past experience, even when it has been accrued over millennia, does not always act as a guide to future experience. This time it’s different are reputedly the four most expensive words in the English language. But we cannot exclude the possibility that this time might be different for us too.

Humans might currently be enduring the same contradictory pull that horses faced in the nineteenth century of industrialisation leaving them behind and yet being needed for ever more low quality work elsewhere. Simultaneously Britain has record-breaking levels of employment and record-breaking numbers of articles about how robots are going to steal all the jobs.

Both might be true reflections of current reality. Wage growth in Britain has been anaemic for years, despite those record-breaking levels of employment, record-breaking numbers of vacancies and 40 year historic lows for unemployment. The jobs being created are evidently not of great quality (at least not in monetary value terms).

We have to conceive of a point where machines do not create new work for humans but instead subtract from the human labour required. That point may not have been reached yet but at some point it surely must be, when machines can perform a sufficient proportion of the tasks that people can perform at least as effectively as humans. That day looks quite close at hand now. What will then happen to humans?

Right now, the fruits of mechanical and computing labour are taken by the owners and shareholders of the businesses that use them, with almost none going to the people whose jobs they are displacing. That worked in a system where enough of those people move to new jobs where they have good prospects of advancement and are able to participate fully in society.

If that system has ended, however, then in the long run that arrangement is going to be unsustainable if the owners and shareholders of those businesses do not come to comprise a far larger class than they currently comprise. There are many, James Kirkup and Chris Dillow included, who believe that we have already reached that point. Even the most gung-ho laissez faire capitalist should pause to consider the implications of that. The coming political debate is not about how to share the proceeds of growth but about how to grow the number and size of those shares.

Even as socially Britain has moved sharply to the right on an anti-immigration wave, economically Britain looks to be moving to the left. Jeremy Corbyn has captured this mood for many. Theresa May has been criticised by some in her own party, when stealing Ed Miliband’s old policies, for failing to make a stand for free market values. In fact, she is ahead of her critics on this occasion. Free market values are only going to be preserved if their advocates can come up with a format that enables enough people to participate properly in the free market.

Ultimately, in the twentieth century horses were completely replaced as means of power in Britain. Humans in this country now use them largely for recreational purposes only. The lives of horses nowadays in Britain are pleasant, with them well-fed and well cared-for. You might not be enthused by castration if you’re expected to jump over the fences but otherwise life for a horse in Britain today is generally sweet.

There are, however, far fewer horses than there used to be. Figures are hard to come by but it seems that in the later part of the nineteenth century there were more than 3 million horses in Britain. Today there are something like 1.3 million.

Maybe that points the way ahead for humans too in the long term. If there is not the need for so many of us to work, we will find a way to incentivise ourselves to reduce our populations. Our heirs would live untroubled and fulfilling lives, but there would be fewer of them, as we pass the baton of civilisation onto machine-based intelligence. At that point we become the last domesticated animal.

Alastair Meeks




h1

Facts and fantasies about public ownership. Don Brind looks at the evidence from abroad

Tuesday, October 17th, 2017

Did you Know?

• “In Singapore 20% of GDP comes from state owned enterprises, 90% of land is state owned and 85% of housing is public.”

• “48 million Americans, in over 2000 cities and districts, get their electricity from the public sector, at a price on average 12% lower than the price charged by private energy companies.”

So, it seems, it’s not just Venezuela that inspires those “Marxists” Corbyn and McDonnell in their ambition to use public ownership as a key driver of economic policy.

Singapore and the United States are significant because they are the places to which right wing Tories direct you when they want to show all will be rosy in the post Brexit world. Thus Tory MEP Daniel Hannan launched his free-trade think tank by lauding Singapore: ”They have gone from being half as rich as us to twice as rich. What was the magic formula? Just do it. They dropped their barriers.”

Unhappily for Hannan, he came in for a bit of fact checking by Laurie Macfarlane who tweeted the facts in the first quote above.

The economist is a research fellow in University College London’s new Institute for Innovation and Public Purpose which was launched last week by its charismatic founder and director Mariana Mazzucato. Mazzucato’s book The Entrepreneurial State has been hugely influential within the Labour party and Liam Byrne, the shadow minister for Digital weighed in with a tweet supporting Macfarlane: “Singapore, lionised by free marketeers, long ago learned the value of an entrepreneurial state.”

(Lest this is taken as a recommendation for all things Singaporean, blogger provides a cautionary corrective.  “In this rich kids’ playground, there isn’t even a minimum wage. Although Singapore sells itself as a model for racial harmony, there are certainly hierarchies, and they tend to be along racial lines.”)

The key question is what is the right role for the government and the public realm in general in creating economic prosperity. And when it comes to the US, Professor’s Mazzucato’s thesis might be summed up as Do As They Do, Not As They Say. She shows how important federal research agencies have been in driving innovation in defence, electronic, health and energy.

The fact that 2,000 US cities and districts have publicly owned utilities fits in with her thesis.

The quote above comes from the campaigning and research website We Own it which, I understand, is followed by Shadow Chancellor John McDonnell’s team. It declares “We’ve been told myths about privatisation for 30 years. It’s time for public ownership.”

The website highlights a report by Professor David Hall, of Greenwich University which suggests moving to a publicly owned energy system in the UK would pay for itself in 10 years. It estimates the savings of £3.2 billion per year would be possible because of the lower cost of borrowing in the public sector, and “an end to extraction of dividends by shareholders.”

The report proposes a new model of public ownership based on “ national, regional and local public ownership” which would “encourage renewable energy generation by local authorities, co-operatives and community groups. They would supply consumers and compete with the Big Six suppliers.  “In Germany, such companies have captured up to 50 per cent of the market.” And, by the way, “the proposals are designed to be practical under existing EU law.”

The Singapore and US examples challenge to the right-wing assumption that public ownership is a bad thing, a view articulated last week by Andrew Neil on the BBC’s Daily Politics on when he asked Labour front bencher Jenny Chapman.  “Can you give us an example of where nationalising something has raised productivity?”

I’m a fan of Neil and I’m not suggesting he was offering a personal opinion. His interviews are a tough gig and one of his little tricks, as his guest stumbles, is to answer his own question. Not this time. But if he’d done his research he would have found answer to his question in the OECD report Improving Infrastructure in the UK

It says “the British rail system has an efficiency gap of about 20-40% with respect to comparable European countries.” The costs of the rolling stock in the UK, which accounts for about 70% of total private investment are “40-60% higher than in other European countries.”

So, Andrew, just in case you were betraying a personal view you are wrong. The state owned rail systems in France and Germany are more efficient that than the UK’s privatised system. I knew you’d want to know.

Don Brind



h1

Is nationalisation really making a comeback? Don Brind doubts it.

Monday, October 9th, 2017

I’m a bit of a fan of the old Clause Four  of Labour’s constitution drafted by Sidney Webb in 1918. I love that line about securing “for the workers by hand or by brain the full fruits of their industry”. Pure poetry.

And the idea of getting “equitable distribution … upon the basis of the common ownership of the means of production, distribution, and exchange,” is a good one. I believe, too, that each industry or service should have “the best obtainable system of popular administration and control”.

Note that there was no mention of nationalisation in Clause Four. But nationalisation was what we got from the great reforming Attlee government. Tools developed in wartime were used to carry out the massive reconstruction and social transformation which inspires modern Labour.

By the mid 50s, however, there were concerns about how these ‘vast, bureaucratic public corporations” operated. In 1955 the academic and future Cabinet minister Richard Crossman said “failed two key test for socialism, “a state-owned industry should be fully responsible to Parliament and give a share of management to its workers.”

Tony Benn was more pithy in his 1980 book . After five years as Energy and Industry secretary he observed ‘nationalisation plus Lord Robens [the moderate erstwhile chairman of the NCB] does not add up to socialism’.

Nationalisation became a dirty word and the Thatcher/Major privatisations of the 80s and 90s were left largely untouched by Blair and Brown.

But fast forward to 2017 and not only are Tony Benn’s apostles Jeremy Corbyn and John McDonnell  proposing to take privatised industries back into public ownership but the policies are popular.

According to a Populus poll, for the Legatum Institute, a majority of voters hold a more favourable view of ‘socialism’ than ‘capitalism’ and more than 75% of voters want to water, electricity, gas and railway (76%) in public hands.  Majorities also favour wage caps for CEOs and worker representation at and board level, stricter regulation and the abolition of zero hour contracts.

The Tories are worried. Chancellor Philip Hammond told business people who turned up for £400-a-head dinner at the Tory conference in Manchester. “You have to decide to combat this menace or collaborate with it and let it get into power.”

It’s a problem of the Tories own making, says the Guardian’s Aditya Chakrabortty, because  “modern-day Conservative leaders aren’t much cop at capitalism.”

He says voters are not being ideological but entirely pragmatic in rejecting the Tories and a form of capitalism offered to them – “one that cannot provide them with wage rises, secure homes or decent care for their loved ones.

The Conservatives have ended up defending capital rather than capitalism. They have championed finance and pretended it stands for all business.”

He says Labour’s election manifesto proposed a bigger public sector, higher taxes and a promise to borrow more to invest. “That is capitalism, of a kind that Angela Merkel would know.”

My hunch is that despite its apparent popularity the re-nationalisation will be a relatively small of the Corbyn and McDonnell’s economic strategy.

An interesting analysis in the Financial Times shows how ‘light touch’ regulation has made some utility deals extremely lucrative for foreign investors . It says “Lax regulation has turned Britain into a rentier’s paradise”, because in setting tariffs regulators have become “over influenced by the demand of utilities and City investors to provide generous financial terms … rather than securing efficient services and value for money for consumers.”

Re-nationalisation and stricter regulation are not mutually exclusive but it’s the regulation that is more likely to be effective in stopping these industries ripping off customers.

Donald Brind



h1

What’s wrong with this picture?

Sunday, September 17th, 2017

High employment and low wage growth

Another month goes by and another month of extremely confusing employment data.  The good news is astoundingly good: record levels of employment, 40 year lows of unemployment and record numbers of job vacancies per unemployed person.  These are statistics that would indicate a booming economy and you would normally expect rapid wage growth.  Indeed, economists have a concept of NAIRU (non-accelerating inflation rate of unemployment), which is a not very snappy way of saying that if unemployment goes below a certain level, wages will rise and feed into inflation.  Effectively, it’s the law of supply and demand being applied to the labour market.

That isn’t happening in Britain despite all those employment records.  Wage growth has been lacklustre for years, with no sign of it picking up any time soon.  Whatever NAIRU is in Britain, we don’t seem to have reached it yet.  Why?

I’m not an economist so I don’t have the answer.  Since the economists don’t seem to have the answers either, however, I feel entitled at least to look at some of the possibilities because they are central to the politics of the age.  The public mood seems to be that the economy is not working for the bulk of the population.  If this is true, finding the reason and addressing it should be the urgent priority of all parties.  If it is not true, politicians have a still bigger problem explaining this.

So what are some of the possibilities?

The statistics are wrong

Whenever you are confronted with an apparently-contradictory set of data, you should always consider whether the data are accurate: Garbage In, Garbage Out.  The simplest explanations are often correct, so we should take this possibility seriously.

The possibilities for data errors include: fewer people in work than the statistics show; more people seeking work than the statistics show; salaries are rising faster than the statistics show.  No doubt there are others – data can go wrong in lots of ways.

The Office for National Statistics has a justified world class reputation for the quality of its statistics.  That doesn’t mean that they are necessarily accurate, especially when they are measuring things that are hard to measure.  Getting representative samples in a rapidly changing society is difficult (as the nation’s opinion pollsters would gloomily agree after the last two general elections).  Pay in small businesses, which collectively employ a large  proportion of the workforce is estimated indirectly.  It is conceivable that salary rises, for example, are not being adequately captured if sectors with higher wage inflation are being underweighted by the ONS.  It is also possible that the number of immigrants has been undercounted (many won’t want to be visible, which makes this rather more likely).

The statistics are misleading us

Let’s assume, as we must in practice for now, that the statistics are right.  That doesn’t mean that they are being correctly understood.  For example, average salary increases might be muted in part precisely because more workers are joining the employment market if those employees are joining at the bottom.  If ten employees are earning £20,000 a year on average and an eleventh starts work on £10,000 a year, the average declines to just over £19,000 a year.  Indeed, the other ten could each receive a 5% pay rise and average pay would be stagnant.

The employment data need to be understood carefully too.  The ONS collects information for this series only on 16-64 year olds.

The supply of labour is bigger than conventionally understood

Since the Second World War, work has been seen as something that you do between finishing your education and retiring.  But in fact there have been three big shifts in the workforce in that time.  First, women have entered the workforce in large numbers.  When the Queen came to the throne, one in three women worked.  Today, over 70% of women between 16 and 64 work.  This is still some way behind the 79% of men that work, so there still remains scope for further growth here.

Secondly, Britain has welcomed large scale migration.  Last year, 11% of all workers were non-UK nationals.  They are far more likely to be overqualified for their jobs than UK nationals and more likely (in the case of EU nationals, much more likely) to be working longer hours than UK nationals.

Thirdly, many are not stopping work when retiring.  10% of those aged 65 or over are in work (just under 4% of the entire workforce).

All three of these sources of new labour may potentially give employers recruitment options that mean that they are not under the wage pressure that one might expect.

That said, I don’t buy this at all.  By far the single biggest growth in the workforce in this period was caused by women joining it.  Real wage growth was largely buoyant throughout the post-war period when this took place.  Any downward pressure on wages was more than outweighed by other upward pressures.  Net immigration is now waning and at present at least we are seeing no net increase in older workers in the workforce.  It seems likely that something else is at play.

The demand for labour is smaller than conventionally understood

Another possibility is that employers are using labour precisely because it is cheap. Some may do so rather than paying for more expensive technological alternatives, and any attempt by employees to increase their wages will be rebuffed on that basis.  Other employers may choose to use labour in the UK for reasons of convenience rather than outsource the work to other lower wage economies.  If so, employees are competing against both technology and workers in other countries to a far greater extent than previously.

If the equilibrium were balanced in this way, you would not particularly expect the workforce to be increasing.  To make sense of that you would need to conclude that other pressures (reductions in social security benefits) were pushing people into the job market.  And indeed, that is what is happening: social security benefits are undergoing a further squeeze at present, almost unnoticed.

So perhaps this is a part of what is going on.  Those on benefits are seeing those benefits cut and are rationally deciding to take whatever work they can get.  As a result, employers are not feeling any great pressure to raise wages.  The unkind might call this exploitation.

What might that mean politically?

Much of the political focus to date on low wage growth has been on immigrants and poor productivity.  But if it is in part a function of austerity, the political parties should be looking instead at addressing low pay and looking for the effects of that to trickle up.  Both main parties are proposing to increase the minimum wage, which would help, as would looking to employers of the low paid to pay more towards their support (whether by outsourcing social security provision, taxing them more per low paid employee or otherwise).  In the longer term, workers are only going to be able to compete against their international competitors and work with technology if they are more skilled, so education remains a very high priority.

And, just perhaps, the trend of reducing social security benefits needs to be reversed.  One of the reasons that it is paid is to keep people off the breadline.  If it is no longer doing that, more money needs to be found from somewhere.  Just a thought.

Alastair Meeks




h1

The DUP deal has cost a lot more than £2bn: it’s blown apart the Tories’ economic case

Saturday, September 16th, 2017

Austerity is dead – but what can replace it?

YouGov published the results of an innovative survey on Thursday, where it found that the British public seemed more willing to pay a Brexit bill of £25bn (where 29% said they would find that acceptable), than one of £10bn (backed by 18%).

Good news for Monsieur Barnier? Not exactly. The survey was designed to assess the effect of the options presented on the answers elicited, with the sample split into two groups. The first was asked whether they would find a Brexit bill of £5bn, £10bn and £20bn acceptable (note that these were independent questions, not options to one question); the second group had the same questions but with £25bn, £50bn and £75bn.

The most striking feature of the answers was the similarity in profile: the larger numbers did depress the scores a little but the respondents still clustered to the lowest amount in not too dissimilar numbers – and as mentioned above, the lowest amount for the second group received a good deal more support than the middle amount in the first, despite being considerably more.

The conclusions to take from this are firstly, that large parts of the public don’t really understand big numbers and what they mean in real terms; and secondly, and consequently, that what is an acceptable amount to pay will be determined by the political argument, not the financial or legal one.

That matters for Brexit but the lessons from the survey are more widely applicable and the government this week has opened up a whole new field on which they can be applied.

Public sector pay restraint could never last indefinitely. Seven years of mostly below-inflation pay rises / freezes has not only had a negative impact on morale but has tested the limits of the employment markets in terms of retention and recruitment. At some point, that limit was going to be reached (though not yet – there are more teachers and nurses in Britain today than in 2010, for example; to the extent that there’s a recruitment problem, it’s one about the rate of expansion, not the fact of it).

However, by breaching its own dam and offering the police and prison staff increases of more than 1%, the government has entirely predictably and understandably set off a chain reaction of other public sector staff demanding their own above-cap rises. The NHS unions were first off the mark, demanding a 3.9% rise, plus an additional £800 on top.

This leaves the government with several considerable problems. The first and most obvious is to explain why some jobs deserve bigger increases than others, when those others include perennially popular services such as nurses, where an Ashcroft poll found that the public would back nurses striking over pay. Again, the public are probably not actually answering the question asked (as to do so properly, people would need to know how much the various roles pay, and I suspect most don’t), but as far as the politics are concerned, that doesn’t really matter.

There’s also the matter of the money. Opening the door to higher pay settlements will undoubtedly bring a bigger bill. In theory, the police and prison service are supposed to find the extra pay from their existing budgets but in reality this could very well prove impossible without running the kind of risks that governments shouldn’t. The overall public sector wage bill is about £180bn a year so to settle at 3%, in line with CPI would jack up the pay bill by about £3.6bn a year. If the demands of the health unions were applied across the board, it’d add close to £10bn in one go – and all this at a time when the deficit is widening again. (Some of the pay would come back in direct or indirect taxes and through stimulated economic activity, but by no means all of it).

Unfortunately for Theresa May, as YouGov proved, the public does arguments, not numbers. And the argument for austerity died the day that she magically found £2bn to seal a deal with the DUP (£1bn a year for two years). No matter that in the context of the government finances, £1bn is close to loose change, to most people it sounds like A Lot Of Money (which, in reality, it is). More importantly though, the £25bn or whatever for Brexit and a £60bn deficit are also A Lot Of Money; there is practically no difference in the immediate political impact of agreeing deals with these sums.

Instead, the public will buy into a plausible narrative. Austerity was justified for so long in the public mind because of the Liam Byrne letter: there was no money left, and even Labour admitted it. That, however, no longer stands. There must be money around because the Tories found some for the DUP, and have found more for the police, mustn’t there? Besides, seven years should long enough to sort it out, shouldn’t it? Well, ‘not really’ and ‘only if you work harder than the UK did’, in reality. But in the short term, perception trumps reality.

For the Tories, this is more than a short term problem of restless unions. Theresa May’s whole election messaging was based on the government being strong and stable. For reasons best known to herself, the economy – which has been strong and stable and which continues to generate record employment – barely featured. All the same, the strategy was justified by the results. But having now undermined the strategy without giving a good explanation for the chance in policy, will the public continue to give the credit for the results?

There will be many repercussions down the line that arise from May’s decision to do a deal with the DUP – or, more specifically, to do the deal she did. For all the focus on Brexit right now, losing control of the economic narrative will matter more.

David Herdson