Category Archives: The economy

Posts about the economy and matters economic

Take Back Control

Arguably, the most successful soundbite of last year’s EU referendum campaign was “take back control”, used by the Leave team. It was delusional, of course, based upon the ridiculous idea that Little Britain could be master of its own destiny outside the EU. The realpolitik of 21st century capitalism means that the mega-rich and multinational corporations are free to move capital – and jobs – around the globe. This makes pure fantasy the idea that one medium-sized country can be in control. Standing together with like-minded countries in a bloc like the EU gives some chance of the needs of the people winning – sometimes – against the rich, powerful and footloose. On our own, forget it.

But the idea – and the phrase – caught the imagination of many, assuming they didn’t think too deeply about it.

Ironically, one year on from the referendum, the idea of taking back control – in a different sense from before – is really beginning to catch on. And, this time, it’s a development of which I approve. Two recent events best illustrate my point.

The 2017 General Election

Once again, the pollsters got it wrong. The Tories’ loss of overall majority came as a surprise and, this time, a pleasant one for me. (The shocks of 1970, 1992 and 2015 were three times too many for one lifetime!) There genuinely seem to be signs of change. Specifically, I mean signs that more and more voters are seeing the Tories and their austerity agenda in its true colours: as a way of reinforcing the power and wealth of a minority at the expense of everyone else.

People are beginning to see the value of the public sphere: the schools, hospitals, police, firefighters, public infrastructure, clean air, enforcement of reasonable regulations for safety in employment, and many more. It extends to an appreciation of the longer-term strategic view that public ownership can give to areas such as blue-sky R&D and in the energy sector.

For three and a half decades, government and economists have asserted the supremacy of free market fundamentalism. They assert that free markets, unfettered by government interference, will produce the best of all possible outcomes. For the poor, their concerns and fears are vilified or ignored. At long last, an increasing number of people see that assertion for what it is: a lie.

They can see with their own eyes that the average worker is still worse off than before the 2007-8 global financial crash. They can see the rise of low quality, insecure jobs and the sham self-employment. They see ruthless employers increasingly treating their workforce with contempt. Too many people feel they have no control over their lives. Job insecurity means they cannot make sensible plans for the future, about basic matters such as housing and starting a family. For the rich, every whim and opinion is indulged and flattered.

The recent general election result showed that more people have seen through the Tories’ lies. Corbyn’s Labour Party finally gave them a real choice: a chance to get back some control. Emphasis on workers’ rights and the renationalisation of railways and utilities is seen to make sense. Private utilities casually rip off their customers – their nationalised forebears never exploited them in that way.

The Grenfell Tower Tragedy

And then came that most unimaginably awful, utterly avoidable tragedy: the Grenfell Tower fire. Four weeks on, those who have lost their homes and those who have lost loved ones still haven’t had their questions answered. Still the authorities, above all Kensington and Chelsea Council, are failing in their most basic obligations to the residents. Most of the support and help for practical, emotional and psychological issues still seem to be given by volunteers and community organisations. Yet Kensington and Chelsea is the UK’s richest authority, with nearly £300m in its reserves. The total breakdown of trust between the state and the citizens of the area is palpably raw and tragic. The Grenfell residents aren’t being given even the basic answers to help begin a grieving process and to rebuild their lives. The lack of control they have over their present and future lives screams out every minute of every ghastly day.

Out of Control

Whilst in no way comparable, I remember clearly the moment I found out my first wife, in her mid-40s, had been diagnosed with cancer. There was an overwhelming sense that our lives had, very suddenly, got totally out of control. Over the following few days, through our own research and with good support from medical staff answering our many questions, we began to feel better able to cope. The cancer hadn’t gone away, but we had more information to begin to make sense of it all and gain a feeling of control once again.

It would be simply wrong, impertinent and insulting to the Grenfell victims to say I know how they feel. But it is, after all, a defining feature of being human that we try, however inadequately, to empathise with those who are suffering. All I can say with any certainty is that it must be massively, massively worse than what I went through – unimaginably so.

A Turning Point?

It feels like the Grenfell fire and its aftermath is a turning point: I really, really hope it is. Grenfell, or something like it, is what happens after thirty-five years of inhumane economic policy, treating humans simply as economic units. And, as economic units, the rich and powerful are treated with utmost respect; the poor and vulnerable with utmost contempt. I sense that people really have had enough, at last.

The hope now is that we can be led by people with the vision to plot a new path to the future. The Labour Party manifesto for the recent election was a good start. Jeremy Corbyn seems to have found his feet. He clearly recognises that, if everyone is to “take back control” of their lives, most of us, at some time need the state to be there to lend a helping hand. This help takes many forms: benefits, doctors, nurses, firefighters, a decent job with a predictable wage or basic needs like gas and electricity from an organisation that doesn’t try to rip you off all the time.

The Tories won’t get us there. Several members of May’s cabinet are professed admirers of Ayn Rand and have called her most famous novel an “inspiration” – here’s one example. Free Market Fundamentalism, that cruel and heartless creed of greed, is the natural brainchild of Rand’s cold-hearted and false assumptions about human behaviour. It must stop. All the people of Britain, poor and rich, must be given the opportunity to take back control of their lives. Starting now.

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Sub-Prime Crash 2.0

We are still recovering, painfully slowly, from the global economic crash of 2007-8. Average real pay is still below pre-crash levels, with only Greece performing more badly than the UK on this measure within Europe. I fear we now have the conditions in place to sleepwalk into the next crash. The 2007-8 crash started in the USA, the trigger attributed to the collapse in the so-called “sub-prime” mortgage lending market. In other words, mortgage companies lent money to people who, increasingly, were unlikely to keep up with the payments. The Tories under Cameron and Osborne seem to have successfully (and unfairly) laid the blame on the Labour Party, on whose watch the crash occurred.

financial crash graph

Assuming the Conservatives win on June 8th, I reckon there is a greater than fifty-fifty chance the next crash will happen on Theresa May’s watch. Only this time, the causes will be more home-grown. We don’t have the same set of circumstances as we had just before the last crash, but we have some very similar problems – and the lessons of the last crash have not been learned.

Household Debt

The level of debt in UK households has been climbing to a record high whilst savings have fallen to a record low. The number of County Court Judgements (CCJs) against debtors has hit a ten year high. And now real wages are falling again. The FT reported this last week, along with the assessment that the last ten years have been the worst for wage earners since the Napoleonic Wars 200 years ago. The economy as a whole has been growing at less than half the rate it did for the first 30 years after the war, when economic policies very similar to those in Labour’s manifesto were followed by Tory and Labour governments alike. Such growth as there has been in the last decade has been snuffled up by the richest 1% of the population – leaving the rest of us worse off than a decade ago. And that growth has largely been funded by more personal borrowing.

Sub-Prime 2.1: Credit Cards

On top of this, there are strong indications that banks and other financial institutions are finding new ways to lend recklessly. Low, or zero, introductory interest rates are luring more people into the credit card habit. As well as the increasing risk of default, companies have been flattering their accounts by a new piece of creative accountancy. They are including future profits from when the introductory rate ends in their current income and so are flattering their financial position. This practice is very similar to an accounting trick used by Tesco for which it was fined £129m by the Financial Conduct Authority, plus a bill of £85m compensation to suppliers.

The risk here is that finance companies engaging in this practice are giving a false (and flattering) account of their financial position.

Sub-Prime 2.2: Car Financing

Over the past few years, motor traders have frequently been in the news – good news – for announcing record car sales. Much of the growth can be attributed to a new way of financing the cost of the car purchase, known as “personal contract plans”. An article here includes a quote from a finance expert that “Borrowing is a very bad idea when it is done against a depreciating asset … such as a car,” adding that there was a “serious level of fragility built into the system”. Something similar is happening in the US, prompting the article Will Cars Be the Death of Us This Time?

Don’t be surprised if the wheels drop off of this wheeze sometime soon.

UK’s Unique Vulnerability

Add to all this, the UK is uniquely vulnerable to disturbances in the global financial system. In my 2015 post Two Gamblers and a Pint of Lager, I explained just how exposed the UK is, with our extreme over-dependence on financial services. With 1% of the global population, we have 37% of the most risky type of financial transactions. Total City trading gambles our entire annual national income every day and a quarter. The right word for such behaviour is “madness”.

So, all it would take is a bit of a shock to the system. If the opinion polls are correct, Britain will vote on 8th June for the maximum possible risk of the biggest shock to our finances since at least the 1970s, and probably since the Second World War. I’m talking about the distinct possibility of the UK crashing out of the EU without a trade deal. Prime Minister May has already ruled out staying in the single market by her obsession on immigration. Add to that May’s character: stubborn, inflexible and with strong control-freak tendencies – look at how the Tory election campaign is being hyper-controlled by a small team of close advisers. Together with her lack of understanding of European sensitivities, egged on by a rabid right-wing press, a vote for the Tories is the maximum risk choice.

Strong and stable? My arse.

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New Fiver: 0 Out of 5

Have you held a new five pound note in your hand yet and taken a good look at it? I have: in a word, YUK! I have no problem with the fact it’s a polymer note. The Australians have had plastic money for over twenty years and other nations more recently also. My quibble is the design.

new five pound note
New Fiver

The images above, as seen on my computer screen, are flattering: in real life, the contrast is reduced and the overall impression is of a blue-grey sludge, particularly on the font. Think of some mould that’s grown over something in the fridge you should have thrown out weeks ago. Or think of some image or sign left out in the sun and the picture and colours have faded.

And just look at the typography and calligraphy. The bold “5” has disappeared, as it did when the £20 note was last changed. That, the fussy typeface and the low contrast all make life more difficult for thousands of visually impaired people. All those squiggles look like the work of a very bored six year old in a school writing lesson.

Apart, of course, from the faces of the two individuals portrayed, the note looks like it could have been designed at any time between the fifteenth century and the 1940s. In fact it’s worse than that, as early 20th century movements such as art deco had a lasting and wide impact on modern design principles.

Good Design

The UK is a world leader in good design. In diverse fields such as the arts, architecture and everyday household objects, we’re world class. For example, the London Tube Map, first published in the 1930s, is a design classic. The Design Council has been doing an excellent job for 70 years encouraging good design and new designers. It estimates that’s worth £71 billion a year, or 7% of the UK’s income (Gross Value Added to be technical). That’s nearly as much as the much valued (by politicians) financial services sector.

Original Tube Map
A Design Classic

Despite some internet research, I’ve not yet found any information telling me who was responsible for the design: certainly, the Design Council’s website search facility draws a blank. Whoever they were, they seem to be trapped in a time-warp bubble which significantly pre-dates the 21st century. The Bank of England does have a “Banknote Character Advisory Committee” (yes, really!) who are responsible for advising on which people’s faces appear on new banknotes. This Committee is reasonably diverse in its membership, which offers some hope. But for the actual design, does anyone know?

Oh, and one last thing: it should have been a coin.

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Downhill All the Way

Britain has been in decline for 140 years. By this, I mean that it has been in relative economic decline: relative, that is, to its main rivals and to the overall global economy. The graph below shows Britain (in green) and other countries’ position since 1870, as a percentage of total global income (GDP). The UK had 9% of all global income in 1870, at the height of the British Empire. Today, this has fallen to under 2.4%. The green line shows a remorseless slide downwards.

Share of global GDP
Share of global GDP

The last 20 years or so shows that Britain shares this downward trend with the other countries shown. The main reason is the recent rise in the economies of China above all and, to a lesser degree, India, Brazil and Russia.

Referendum Effect

I have previously reported that the UK slipped from 5th to 6th largest economy on the day after the EU referendum. This was the result of the instant drop in the value of sterling. Last week, the Bank of England took action to boost growth by cutting interest rates to the lowest level ever seen. Other measures were announced, including more “quantitative easing” (a.k.a. printing money), to try to stave off a new recession.

At the same time, the Bank of England revised its forecast of growth of the UK economy. For next year, the downward revision from 2.3% growth to only 0.8% marks the greatest ever downward revision by the Bank in its history. A further smaller downward drop was made to the growth forecast for the following year. This will make our national income £45 billion lower in 2018 than expected pre-referendum. Once again, our £7bn cost of EU membership looks a real bargain.

A very poor set of economic indicators of the type used as a guide to future growth provides yet more cause for pessimism.

Prophets of Doom?

Former Chancellor George Osborne has a fetish: it’s called austerity. On taking office in 2010, he tipped the UK back into recession by a combination of poor policy and some foolish talk. Of the latter, his false assertion that the UK economy was like Greece’s was perhaps the most foolish. George has been sacked, but he may yet have helped to make his remarks come true – one day. Under his watch, UK productivity growth has been zero. Our relative position is the worst ever. Our productivity is now 18 percentage points below the average for the world’s major economies (G7). That alone is a strong indicator that Britain will continue to lag behind in economic growth.

The new chancellor seems to be taking his time to learn his brief. The lack of action from him contrasts with the more decisive actions from Carney and the Bank. Expert opinion is that both sets of action are needed. Even that will probably not be enough to repair the damage cause by the referendum result.

private frazer
“We’re All Doomed!”

Added to all this is Britain’s lopsided economy, with its over-reliance on financial services. With the failed free market fundamentalism still dominant in the UK and at the ECB, Britain is uniquely vulnerable. A characteristic of FMF policies is the increasing likelihood, over time, of bigger and bigger economic crashes of the type last seen in 2007-8. Remember the figures: 1%, 2.5%, 37% from my earlier post Two Gamblers and a Pint of Lager. With 1% of global population and 2.5% of global income, the UK engages in 37% of the world’s speculative financial transactions. These are the kind that are most destructive to the “real” economy, according to the IMF. When the next big crash comes, we’ll be hit hardest.

Terminal Decline?

So, in this context, the referendum result looks to me like the firing shot in the final phase of Britain’s long fall from imperial glory (or hubris): our terminal decline to rancour, intolerance, introspection and global irrelevance. Welcome to the future of Britain!

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A Glimmer of Hope

Readers of my earlier posts will know that I fundamentally disagree with the prevailing economic policy I call “free market fundamentalism”. Well, a new report by the “High Church” of economic policy, the International  Monetary  Fund, gives me some slight hope for a change. The report was written by Ostri, Loungani and Furceri of the IMF’s research department. Its sub-headline states “Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion”.

To be fair to the authors, they do acknowledge that some reforms under the neoliberal agenda have been beneficial. For example, the increase in global trade and foreign investment has “rescued millions from abject poverty” and helped to transfer skills to developing countries. But the report highlights two specific areas with a far more critical eye.

Free Movement of Capital

The first area concerns the widely adopted policy of removing restrictions on the movement of capital around the world. Proponents of this policy state this enables capital to move to where it will be most productive. But in practice, a great many of these capital flows take the form of portfolio investment or speculative trading. There is no discernible benefit in terms of growth from such flows. What’s worse, there is strong evidence that it leads to much greater instability: “boom and bust”. This instability, in turn, damages growth and hurts poorer people most. In other words, it decreases stability and increases inequality. Increased inequality, in its turn, reduces growth. (See my earlier post Inequality Damages Your Wealth.)

The upshot is that freedom of capital movement does more harm than good.

Incidentally, it’s worth noticing the lopsided nature of Free Market Fundamentalism policy in this respect. Capital is allowed to flow freely across borders; people are not. (Look at the frenzy that the Brexiteers – über-free marketeers to a man – are whipping up about free movement of labour in the EU.) The link to inequality is obvious. The rich have capital to spare to move around the world. The poor have just their own skills, their own labour. Extra freedoms for the former and none for the latter are bound to increase inequality in the longer term.

Austerity

Austerity policy is everywhere: it’s been George Osborne’s mantra for the last six years. Its stated aim of reducing government debt is always used as a cover to shrink the state. The report concedes that reduced levels of debt, all other things being equal, are helpful to growth. But the means of getting there is more damaging to growth than the benefits. It concludes: “Faced with a choice between living with the higher debt—allowing the debt ratio to decline organically through growth—or deliberately running budgetary surpluses to reduce the debt, governments with ample fiscal space will do better by living with the debt.” (The report states that the UK is a country “with ample fiscal space”.)

Two International Institutions

In summary, the IMF said that the discredited policies did not boost growth, that the downside in terms of increased inequality was “prominent” and this in turn damaged growth.

As well as the IMF, the OECD, the other main respected international body on economic matters, also weighed into the subject in February. Its report recommended that countries like Britain should reduce austerity and invest more public money in infrastructure.

The IMF report ends with these words: “Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.” Quite: the FMF sacred cow is overdue for slaughter.

Sadly, the continuing misfortune for Britain is that we have a government, elected on just 37% of the popular vote, but over 50% funded by City organisations and finance companies – many specialising in the corrosive, speculative end of the business. Cameron and company will continue to take the City’s interests as the same as the nation’s. (My earlier post, The City: Paragon or Parasite? shows those interests are not the same – and more like opposites.) The necessary lessons from this new understanding will be learnt very belatedly, if at all.

light at the end of the tunnel
Light…

But the good news is that the two main economic institutions in the world are now seriously questioning the orthodoxy of the past 35 years’ economic policies. There is a glimmer of hope that, one day, even the British government will realise the errors of its ways. Let’s hope we don’t have to wait for the next crash before things start to change.

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Nudge, Nudge: Behavioural Problems?

Who remembers the Nudge Unit? It was all the rage and Cameron’s favourite “think tank” in the early days of the 2010-15 coalition government. Originally part of the Cabinet Office, it was privatized in 2014 and now goes under the name The Behavioural Insights Team. Its aim is still broadly the same: to use psychology and behavioural economics to inform policy making.

Citizens Advice logoI was interested to note that Citizens Advice has commissioned this Team to produce a report, published last week, called Applying Behavioural Insights to Regulated Markets. I was keen to read their analysis and recommendations. It covers much the same ground as my blog post Cat and Mouse published last September. The new report is wider in scope than my post, covering energy (gas and electricity), telecoms, personal finance and pensions.

The Two Fallacies

I explained in my earlier post Two Castles (Part 2) that free market fundamentalism – the guiding economic policy for over 30 years – is fatally flawed by two false assumptions:

  1. The only motive guiding human behaviour (in buying decisions) is the pursuit of material self-interest;
  2. Consumers always make rational, well-informed decisions.
two castles
Two Castles

It was encouraging to see the BIT report fully recognizes the second of these two points. The report says: “there is compelling evidence that consumer decision-making systematically strays from what would be expected from a ‘rational actor’ within economic theory. These systematic deviations, termed ‘behavioural biases’, can result in ‘behavioural market failures’, leading to poor outcomes for consumers.”

The Good Bits

The report gives “compelling evidence” of these failures:

  • Mobile phone contracts overcharging by £355m a year;
  • Energy consumers paying, on average, £300 over the odds;
  • Loss of pension income of between £230m and £1bn over the life of a pension, with 80% of private pensioners missing out on the best deal.

The report also quotes insights from psychology, using the terms “type one” and “type two” thinking. This approximates to the decision making processes in each half of the human brain. It includes an analysis of the different types of “behavioural biases”:

  • Status quo (inertia)
  • Anchors (behaviour affected by suggested examples, e.g. suggested amounts on charity donation websites)
  • Choice overload (brain switch-off when presented with too many options)
  • Framing effects (how offers are positioned / described)
  • Present bias (up-front saving v. cheaper in the long term)
  • Timing (consumers more likely to act, e.g. switch supplier, at a key event, e.g. just before going overdrawn)
  • Overconfidence (optimistic assessment of ability to pay in the future)
  • Vulnerable customers (scarcity mindset: day-to-day scrimping leaves insufficient mental energy to make good decisions)

The report also goes on to make some useful recommendations about the actions regulators can take to address these problems. One example is in consumer education, what the report calls “simple heuristics”. These are simple rules of thumb to aid consumer decision making and which are likely to lead to a pretty good outcome most of the time.

The Black Hole

But there is one glaring omission throughout the report’s 62 pages. It basically assumes that free markets are the ideal paradigm in all cases. Much of what is recommended is about changing human behaviour to make markets work better. That sacred cow has not yet been slain. Which is a shame – and an opportunity lost. Five out of ten, at best then, Behavioural Insights Team.

black hole
Black hole

So we must turn elsewhere. Interestingly, the IMF has just published a paper, Neoliberalism: Oversold?, which is the second publication from them casting doubts on the great god of free market fundamentalism. (I wrote about the previous IMF paper in an earlier post: Inequality Damages Your Wealth.) I’m off to read the new report; it may be worth a future post…

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Jobs, Not Yachts!

Philip Green, owner of retailer BHS from 2000 to 2015, is about to take delivery of a £100 million 90m-long luxury yacht. I’m sure it will look very impressive moored next to his other two yachts. Presumably he also has time to take a ride on his speedboat, private jet and helicopter as well. Handy for those commutes between London and his Monaco tax haven.

luxury yacht
What a yacht I got!

Green paid £200m for BHS and sold it for £1 to a City group headed by Dominic Chappell, twice bankrupt and with no retail experience. But don’t worry, Green doesn’t seem to have suffered too much. Within 4 years of buying the company, his wife was paid £400m in dividends. Over the 15 year period, the Green family received income totalling £586m. At the start of his tenure, the BHS pension fund was in surplus by £5m. The company’s pension fund deficit now stands at £571m, valued on the basis the company is insolvent.

Chappell lost no time in profiting from the ownership of BHS. It paid £25m to Retail Acquisitions, the company that bought BHS and which is 90% owned by Chappell. The £25m is a mixture of management, legal and professional fees, salaries and interest payments.

BHS was founded in 1928. It is now in administration.  11,000 employees await anxiously their fate: will a buyer be found so they can keep their jobs? If the company goes under, the pension deficit will be taken over by the government-backed Pension Protection Fund. Under the terms of the takeover, future BHS pensioners will take a cut of at least 10% in their pension payments. Iain Duncan Smith will now doubt blame the 11,000 former BHS staff as scroungers who made the “lifestyle choice” of choosing to work for morally bankrupt billionaires. This is, of course, if he takes time off from campaigning for the UK to leave the EU. If we leave, Britain will then have a free hand to weaken employees’ rights even further.

jobless queue
BHS workers?

One Pound, One Vote

I distinctly remember, a year or two ago, discussing the consequences of our government’s continuing economic policy of free market fundamentalism. I said that, over time, it inevitably leads to a situation where there are too many luxury yachts and too few teachers, doctors and nurses. By “too many, too few” I meant when compared with the public’s preferences if asked directly. The reason is simple. In a market-based economy, money talks. Gradually over time, the “invisible hand” of billions of transactions shifts the priority for the provision of goods and services ever more towards the needs of the super-rich and away from the rest of us. It’s hard wired into the logic of markets.

At a time when hospitals are clocking up record deficits and record shortages of medical and teaching staff are being reported, my comment – intended purely as a rhetorical device – appears to be coming literally true. What a morally despicable world we seem to have created.

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Reasons to Be Cheerful (Part-ly…)

My wife finds it hard to believe, but basically I think I’m an optimist at heart. Despite all the setbacks, humankind will get gradually wiser and we will learn how to make the future better than the past. Over the long term, of course.

I occasionally spot news items which seem to confirm, or deny, this belief. Here’s a couple from last month, on both sides of the argument.

Peak Stuff?

A report from the Office of National Statistics states that there has been a 30% drop in the UK’s consumption of “stuff” between 2001 and 2013. By “stuff” they mean items such as food, fuel, metals and building materials. Some at least of this drop is because we have become cleverer and / or frugal in manufacturing items. For example, much less metal is now used in building a washing machine. Music downloads have replaced vinyl LPs and CDs.

peak stuff
Peak Stuff?

The optimist’s view is that, perhaps, as western consumer societies mature, we choose to buy fewer “things” and instead spend our money on less tangible leisure activities. If this is so, there is a better potential for the sustainability of our lifestyles and more hope for the future of our finite planet. Environmentalist critics say that the ONS figures are flawed as they do not properly take into account how we, as a country, import our environmental damage, for example through imports of manufactured goods from China. Nevertheless, there is at least some evidence of a glimmer of hope for the future.

Beyond Our Means?

To temper my optimism was another story from the same day’s newspaper. The Bank of England reported the biggest rise in consumer borrowing for a decade. Borrowing rose by 9.1% in the 12 months to January. Whilst this has a positive impact on economic activity in the short term, the medium-term implications are more troublesome. A consumer debt spokesman forecast a 17% rise in unsecured debt defaults by 2020. A professional economic forecaster said mortgage-to-income ratios are at record levels. The outlook, when interest rates eventually start to rise, looks decidedly dodgy.

credit card dominos
Credit card dominos

My principal concern is more basic. We Brits are currently living beyond our means. We are repeating the circumstances which led to the 2007-8 crash – only more so. It was excessive consumer debt which got us into this mess in the first place. The resultant bad debts threatened banks and so the government bailed them out, effectively “nationalising” the debt. Britain is uniquely vulnerable to the next global crash. We have an exceptionally lopsided economy. We have too much dependence on financial services – spectacularly so – and too little in other sectors, especially manufacturing. Osborne has done nothing in the last 6 years to correct this imbalance. His policies have, if anything, made matters worse.

Falling Jenga bricks
Our economy…..                                 One small nudge….            And over she goes….

Think of the tower in a game of Jenga. If the size of the base represents the size of the national annual economy, our speculative trading in the City would be a tower nearly 160 bricks high. Osborne is ideologically committed to removing as much regulation as possible – like removing the lower bricks, one by one, in Jenga. One small nudge (financial shock) and the whole teetering pile crashes to the ground.

Still Cheerful?

So the good news is that we may have taken the first few steps towards a more sustainable future, at least as far as the world’s resources are concerned. But we’re saddled with a government that encourages a “Jenga economy”. Keep smiling…. through gritted teeth!

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Hey You! Get Off of My Cloud!

My earlier blog post Stuck Inside of Mobile aimed to dispel the myth that grammar schools were an engine of social mobility 40 to 50 years ago. The piece provoked some dissent at the time. New information has just been published in the Observer newspaper which supports my earlier assertion. It also adds a new twist to the tale.

ladder to the top
Ladder to the top?

John Goldthorpe is an eminent sociologist from Oxford. Now emeritus fellow of Nuffield College, he is best known for the Goldthorpe class schema, still used as the main classification system for socioeconomic class. Goldthorpe gave a lecture at the British Academy this week on social class mobility. An Observer piece summarizes his position. Goldthorpe’s article encompasses new research by Professor Erzsebet Bukodi at Oxford.

Room at the Top

Goldthorpe’s talk and Bukodi’s research deal with social mobility and the role of education in improving it. Contrary to popular belief, they conclude that social mobility has not reduced over the past 60 years or so. This period was one where access to education, in particular higher education, has expanded enormously. Using his classification scheme, he concludes that the overall rate of mobility has not changed over this period. What has changed are upward and downward components of mobility. 50 to 60 years ago, upward mobility was more frequent than downward, as the number of managerial and professional jobs increased rapidly. In Goldthorpe’s words, there was “more room at the top”.

What’s changed now is that there’s no expansion of top jobs in the economy. People are as much at risk of downward mobility as upward. In fact, it’s worse than this. Technological change and economic policies that export middle-tier skilled jobs (whilst importing the goods produced by them) have hollowed out this medium-skilled sector.

Role of Education

Education is necessary for individuals to aspire to the “better” (and better paid) jobs. But expansion in education alone is not sufficient. For social mobility to improve, Goldthorpe argues, two things must happen. Firstly, the effect of social origin on educational achievement must weaken. Secondly, the effect of educational achievement on social class outcomes must strengthen. Both are needed for the brightest young people to get to the top. At present, too often, it’s the sons and daughters of the richest parents who do so. I can think of a whole load of cabinet figures who confirm this point: supply your own list!

Fear of Falling

Get Off my cloud
Get off!

With no expansion in jobs at the top, there’s only one way to increase upward mobility. That’s by increasing downward mobility. But therein lies the problem: what Goldthorpe calls “psychological asymmetry”. The theory of “loss aversion” strongly supports the notion that parents are even more concerned about their children avoiding movement down the social ladder than they are about them going up. Pretty much all parents want what’s best for their children. Advantaged parents will use their resources – economic, cultural and social – to give their children a competitive edge. They have the sharpest elbows.

Fixing the Ladder

Over the past 35 years, income inequality has increased. Using the image of a ladder, the distance between top and bottom and the spacing between the rungs have both grown. The “hollowing out” of middle-tier jobs means many of the rungs in the middle have broken off. If we want to improve upward mobility, we need to do one, or both, of two things. One is to make it easier to move up and down the ladder. The other is to make more room at the top. To do the first, we need to reduce the level of inequality, narrowing the gaps between the rungs. To do the second, we need to increase R&D investment to expand good, well-paid jobs.

The trouble is, since 2010, we’ve been doing the opposite of this. Tax and spending priorities have favoured the better off. Investment has fallen dramatically and productivity growth has ground to a halt. These have been deliberate policy decisions by a government elected on 37% of the popular vote, run by a party with over 50% of its funding from the super-rich in the City.

Don’t hold your breath: things aren’t going to get better any time soon.

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Energy Policy: Madness, Sheer Madness!

The Competition and Markets Authority don’t get it. (It’s hardly surprising: the clue is in the name). The government doesn’t get it. The “it” in question is having a sane, rational and effective policy for the supply of energy (gas and electricity) in Britain.

Two news items on successive days last week illustrate what I mean.

Madness One

After an 18 month long investigation, the CMA published its findings this week on the workings of the UK’s energy market and how it affects consumers. They found that 70% of consumers were on their supplier’s standard tariff. They concluded that, by failing to shop around, we were being ripped off to the tune of £1.7 billion pounds per year. Their proposed solution? To create a central industry-wide database of all those consumers too lazy (or busy, confused or with poor life skills) to have changed supplier in the previous three years.

In other words, it’s all those bloody consumers’ fault for not acting in accordance with the laws of free market fundamentalism, our guiding secular “religion”.

My earlier blog post Cat and Mouse explains my views on switching energy supplier. In fact, I did do some research within the last year on other suppliers – I’m currently with one of the oligopolistic “big six”. Living in a rural area, there is no mains gas supply – another example of how our market-based energy supply system has failed to provide a 21st century infrastructure, but I digress. Most deals are for dual fuel supply. It boiled down in practice to a choice between the devil I know and one other company, who could perhaps save me a bit over one hundred pounds a year. I then had an online search of customer satisfaction ratings of the other supplier. To put it crudely, they were crap. I’m fortunate enough to consider that £10 a month is not a big deal when judged against the potential hassle of getting through to the new company if anything went wrong. So I stayed put.

The proposed “solution” to the problem of “too many” people not switching suppliers entirely misses the point. All the companies are in the private sector. Public limited companies have a legal duty to consider returns to shareholders above all other considerations. There’s no real competition: gas and electricity (like water supply and railways) are natural monopolies. In the case of the energy firms, there’s no competition in the core service (the pipes and wires), but only at the periphery in billing and customer service. The only innovation in these has been to make the customer do the work of meter reading and moving to paperless billing.

Worse, the proposal throws up a whole list of new problems. There are 37 current energy suppliers, so there’s the potential for 36 lots of junk mail as competitors try to entice you. How safe is the database from abuse? Past experience of the security of centralised databases is not good, let alone one open to 37 companies. Fraudsters and scam-mongers will see another opportunity to exploit the unaware. The Big Six companies are bound to mount a legal challenge to other companies’ access to their lists of customers. And all because the dogma says competition must work.

Madness Two

There was fresh news in the oh-so-long-running saga about Hinkley Point C nuclear power station. You know, the one where the government has spent years trying to persuade the Chinese and the French state-owned EDF to invest in a massively expensive (£18 billion) and risky project to build two new nuclear reactors at the site.

The project is already years behind schedule. Last month, Chris Bakken, the project director, left his job. A week ago, EDF’s Finance director, Thomas Piquemal, left the company. He was known to be a critic of the Hinkley project. Then EDF’s chief executive threatened to pull out of the project unless the French government gives EDF further financial backing. And all this despite the UK government’s “inducements” (i.e. bribes) include offering the firm a guaranteed wholesale price more than double the market rate.

This project is the familiar tale of companies creaming off all the profits and leaving the taxpayer with all the downside risk. Electricity consumers, i.e. all of us, will pay over the odds for the electricity as a further subsidy. And for nuclear power, the downside risks are horrific. In Japan, five years after the tsunami and meltdown, the area around the Fukushima nuclear reactor is uninhabitable for another 24,000 years.

The Energy Elephant in the Room

For a decade or two, the spare capacity to deal with peak load in a winter cold spell has been getting smaller and small and is now dangerously low. Old, dirty fossil fuel plants and nuclear reactors have been closed own but insufficient new capacity has been built to replace them. Lurches of government policy towards renewals, in particular the Tories short step from “greenest government ever” to “green crap” has further deterred investment. It is likely the lights stayed on this winter only because of

elephant
The Elephant?

There’s an elephant in this room. Energy supply should be renationalised. There’s a whole load of reasons: here are the most obvious:

  1. The logic of the market does not apply to a commodity (especially electricity) that should be affordable for all, as it is an essential basis of modern life.
  2. Markets are not good at making strategic decisions over the long term. The certainty of consistent government policy and funding are essential.
  3. The private sector shies away from hard to quantify risk, such as with nuclear power.
  4. The nature of energy supply is a natural monopoly, as mentioned earlier.
  5. Monopolies (and oligopolies as we have in the UK) in private hands will always lead to consumers being ripped off (because shareholders take priority over customers).
  6. Private sector pricing logic tends to disadvantage the poor with poor credit ratings or erratic payment histories, leading to increased inequality in net income after essentials.

Madness

Naoto Kan, Japanese prime minister five years ago, recently said the plan to build Hinkley Point C “did not make sense”. An industry analyst described it as “insane”. I would extend that description to the whole of UK energy policy. Above all, to the belief that consumers can be bludgeoned into behaving according to the diktats of free market ideology.

Madness, sheer madness!

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