Category: Economics

Happy Brexmas

Steve Rose

As the turkeys that voted for Brexmas celebrate the oven being lit, it is a good time to look hard at what Chief Turkey Farmer and Head Chef Johnson has in mind for the stuffing.

Leaving the EU didn’t have to be the end of the world. The EU had a lot wrong with it. Fisheries for example, although the UK Government were more complicit in encouraging non-British trawlers into our waters than they would want to tell you. The expansion to poorer Eastern Europe countries was a fatal mistake, draining them of their best skills and opening their markets for exploitation, whilst topping up the bank accounts of sometimes corrupt, sometimes racist, often homophobic, more often incompetent Governments. However, it had a lot of good points too with the Single Market of undoubted economic benefit to the UK. A Norway solution would have enabled us to continue to benefit from the Single Market whilst being able to develop our own trade deals elsewhere, for what that’s worth. We might also have been able to put conditions on any financial contributions.

The turkeys are cock-a-hoop at what they think are the benefits of free trade deals with the rest of the world. How misinformed they are. Free trade works when the parties involved are roughly on a par in terms of economic and industrial development. It works best for net exporters of goods and commodities. But 80% of the UK economy is services. Manufacturing, food, mining including oil, gas and coal, and so on represent just 20% now and our labour costs in those sectors are comparatively high. Free trade in goods and commodities with less developed countries with much lower labour costs will inevitably destroy what little industry remains in the UK. Take a look at the automotive industries in New Zealand and Australia to see the future of our car factories. Conversely, free trade with developed, high labour cost economies in the EU based on common standards and rules, has been very beneficial to the UK over the years. We really don’t want or need free trade with China, India, and Brazil. We really do need access to the EU for our services sector. We have a major balance of payments surplus with the EU in services and, in their own economic interests, I have no doubt that the EU plans to restrict UK access in that area.

Trump is the result of ill-considered free trade that has destroyed a huge amount of US industrial production. Make no mistake, Trump’s trade wars are very popular domestically and may yet see him re-elected despite everything else.

So right now we have a belligerent Chief Turkey Farmer and Head Chef declaring that the UK will not be tied to any EU rules. When it comes to services though, they are the customer and the customer is always right or they go somewhere else. When it comes to our exports of goods again, they are the customers and set the rules. We can, or course, set our own rules when we are the buyers but we don’t exactly have the capacity to replace EU imports with domestic production. Either way we have a very weak hand when it comes to negotiation with a trading bloc seven times our size. It is utter madness.

I fear it is necessary for Brexiteers to dip their toes into the pain that will be life outside the EU/EEA. Nothing other than the reality of a decimated economy will change their minds. For some, trapped in a fantasy where the British Empire is still there, just waiting for us to rejoin, nothing at all will alter their view.

In the meantime, despite his rantings, Farage’s joy is likely to be relatively short-lived. Leavers are predominantly older and Remainers predominantly younger, 80% of the 18-24 group. To put it bluntly, Brexiteers are a dying breed. Remainers will, in time, have enough political clout to reverse Brexit. I give it 10 years unless the turkey farmers realise that the Norway/EEA route is actually the best compromise. I will be in Trafalgar Square celebrating Brentry. But the EU also need to learn some lessons to prevent other nations following the UK out. It needs reform of fisheries and agriculture, to focus on people first, and to stand up against the “democratic backsliding” in Poland and Hungary. It needs to recognise that free movement of people works only where the push/pull factors do not result in mass migrations of skilled and educated citizens, causing major problems at both ends – Romania and the UK for example. These problems need real solutions.

Corbyn Annihilation

Steve Rose

As Theresa May had her turning point in 2017 when her campaign came off the rails over social care, so I witnessed yesterday the most comprehensive annihilation of a political leader ever when Jeremy Corbyn was interviewed by Andrew Neil. It has to be a major impact on his credibility amongst those watching directly or even just viewing clips or reading press reports. My mind had been changing over the last week or two on my tactical voting plans, and that interview was the final straw. I will be voting Lib Dem after all and nothing right now could convince me to add my X to a Corbynite Labour candidate regardless of the risks.

The headlines are mostly concerned with Corbyn’s inexplicable failure to apologise for past anti-semitism in the Labour Party. That simple act might have closed down that entire line of questioning but he chose not to.

However, his inability to grasp that bonds are debts subject to interest was appalling. Technically if I buy a house on a mortgage then I have a debt and an asset that hopefully becomes worth more than the debt. They cancel each other out. However, that relies on the house value not going down and me keeping up the repayments. Buying train operating companies and Royal Mail are major risks, not dead cert profit makers with a guaranteed future value. Most of the energy companies make only very small profits and some make losses – hence many many failures in that market.

And then let’s move to Labour’s tax-raising plans. As Neil proved, those plans don’t just involve the most wealthy, even if they stay and pay, but will put up taxes for those on low incomes too, those claiming the married person’s allowance, those reliant on dividend income. He will put up taxes on small companies and on online sales, mostly small businesses run from spare rooms. Anyone who might inherit their family home in London and the South East will be paying up to £60,000 more in inheritance tax. Labour is targetting everyone . The policies disincentivise small business, entrepreneurs, high earners, and homeowners.

Overall, when you add together the failure to properly tackle anti-semitism, ridiculous nationalisations, and the intention to attack small businesses, entrepreneurs and pensioners reliant on modest dividend incomes, it is clear that a vote for Labour is a vote for economic collapse far in excess of what the Tories can achieve with their Brexit plans. Corbyn will turn us towards the Venezuela economic model. In the meantime, Labour moderates are letting Corbyn get away with this, presumably hoping a drubbing in the election will bury him and Momentum forever. It’s a dangerous tactic.

I only hope Mr Neil does the same hatchet job on Johnson, although I am resigned now, I think, to leaving the EU being the only way of lancing the boil and making the case for rejoining quickly, maybe not completely but along Norway lines. Johnson has to fail spectacularly in his Brexit to close the argument down for all time. Nevertheless, the way the polls are working at present, as Labour drops, the Lib Dems rise so a steep Labour decline at this point will only help us. Maybe Jo Swinson won’t be PM but she has a much better chance after last night of perhaps making major advances in Parliamentary numbers. The Lib Dems might be able to stop Labour extremism if Labour end up as the largest party.

Lib Dems Promise to Add £85 Billion of National Debt

Steve Rose

That and £15 billion in extra taxes. £100 billion over 5 years to tackle the effects of climate change and protecting the environment. That’s an extra £1300 in national debt for every man, woman, and child in the UK. Tackling climate change is a laudable policy. Bankrupting the country and indebting future generations in a futile attempt to reverse it is anything but laudable. It is reckless.

The UK cannot, on its own, influence climate change. We can prepare, we can lead, we can mitigate within our borders, we can’t stop it as we don’t control the globe. There is plenty that can be done for a fraction of that money. You can spend £1 billion on reversing deforestation of the Amazon. You can change building regulations to make all future buildings zero carbon. You can invest in renewable energy technology and electric vehicle development – affordable conversion kits for all cars, vans and trucks. You can cancel HS2 and spend the cash on local public transport improvements. You can put VAT on meat to cut demand for farting cows. I could go on and on. But it doesn’t add up to £100 billion over 5 years.

This borrow and spent recklessness, wiping out every single benefit of debt reduction austerity we’ve been suffering for 10 years, makes it very difficult for me. I couldn’t stand on a doorstep and try and explain this degree of irresponsibility to a potential voter. It is almost as if we have returned to the days of making up fantasy policies justified by the knowledge that we’d never get anywhere near having the power to implement them. We can promise fairy dust powered flying carpets to solve congestion problems to get a few votes. But this is serious. We could, like in 2010, actually hold the balance of power and be held to account for failing to implement absolutely crackpot ideas. And in 2015 we were severely punished for that kind of failure.

I despair, I really do.

Added: 17/11/2019

I have received a response to the above post. It reads:

You don’t seem to understand what the National Debt is. The Government is essentially a huge bank. On the one hand it creates the currency by spending money into the economy. On the other it takes in savings in that currency and in the process creates a so-called National Debt. So if you buy £100 of Premium bonds you are adding to the National Debt.

So its not something our children and grandchildren would ever pay off. It is their asset.

The government spends money into the economy and gets some of it back in taxes. But it can’t get back more than it has created in the first place. The difference is the deficit. That’s quite normal.

If the Government always ran a surplus then it would, in theory pay off the National Debt after a time. But a surplus takes money out of the economy. When it paid of the ND there would be none left and we would be reduced to a barter economy.

Firstly, thank you for taking the time to respond; it is appreciated. I’m not an economist, but there again neither are 99.99% of ordinary voters. So I make no apologies if I have used incorrect terminology. If you borrow £85 billion through bonds then you create a debt of £85 billion that someone someday will need to pay back. Comparing a Government with a bank doesn’t work in my opinion. This Lib Dem proposal involves borrowing £85 billion. In the absence of information to the contrary this will involve lenders – individuals, countries, banks, institutions. The asset belongs to the lenders, not to the nation. It will need to be paid back by the debtors, the nation. It is a national debt even if it isn’t The National Debt. If I am misrepresenting how £85 billion will be found to fund this policy then the fault lies with how the policy is communicated because I suspect 99.99% of voters interpret the announcement in exactly the same way as I have. If it’s too complicated to explain to 99.99% of voters then drop it because others will tell them what it means and you won’t like their explanation.

Corbyn is also using the same cost neutral argument to explain how mass nationalisation costs nothing. If I take out a loan to buy a house for £200,000 on a 100% mortgage (they did exist once), technically I have a debt for £200,000 and an asset worth £200,000. But the asset is only mine when I’ve paid off the debt. Until then the asset really belongs to the lender. And the lender will want interest so I will actually pay £400,000 for my house. If I don’t look after the house and spend more money on maintenance and repairs it might lose value so maybe I pay £400,000 for a house that then gets sold for £100,000 or falls down and it costs me more money to clear the rubble. You could also argue that since I could make do with a £100,000 flat (I do live in the North), I’ve borrowed and spent £100,000 plus interest and maintenance more than I actually needed to. I’ve gone short on essentials and worked longer hours to make those repayments when it wasn’t actually necessary. The idea that you can buy things through borrowing and it costs nothing is absolute nonsense, arguments to fool the fools. That applies to Corbyn and also to Lib Dem excesses.

I would also add that if I borrow £10,000 to plant 5,000 trees with no intention of harvesting them ever for their wood, it isn’t a realisable asset and I haven’t increased the land value. It’s just nice to look at and good for carbon capture. I don’t mind any Government promising to borrow and spend £500,000,000 to plant 250,000,000 trees, great. Just don’t pretend it won’t really cost anything.

Time Up Labour

Steve Rose

Labour’s 32 hour week proposal is amongst their most dangerous policies. Currently full-time employees work on average 37.3 hours a week. This proposal would reduce productivity by over 16%. The economists can grind that number to determine the reduction in GDP and profitability but I think we can guarantee that it won’t be a positive outcome.

The proposal will also create significant gaps in essential services – healthcare, policing, fire fighting. It is hard enough right now to access healthcare due to staff and skills shortages, let alone if their hours are cut.

The Labour suggestion is that this change would be phased in over 10 years. That isn’t really a consolation other than giving big businesses a fairly long lead time to pack their bags and leave the UK for more sensible, more productive, and more profitable locations. They haven’t got far to go – Ireland is close by.

The country could not afford to pay pensions at 60/65 and it is now rising to 67, an additional 11,500 hours for women, 3,300 for men. For younger workers retiring at 68, add a further 1,600 hours to that. So we all have to work longer to pay for our retirement. It’s a policy backed by all the main parties. McDonnell is now saying we can take off 10,000 hours by working 4 day weeks throughout our working life. What was the point of that? He can’t add up, clearly, and that’s pretty dangerous for a Chancellor.

There is an interesting article on Lib Dem Voice at the moment where Eddie Sammon makes a case in favour by using voluntary tax breaks for employers. It’s a better approach but some of the comments are not quite as supportive. I particularly chime with what has it got to do with the Government what hours I work. Preventing exploitation is the Government’s job so progressively reducing the maximum working week from 48 to 45 hours, and including all NHS workers, is a good idea. For environmental reasons, working your average 37.3 hours over 4 days instead of 5 makes sense and a lot of people already do that. Neither require a 16% reduction on the average working week.

If I may quote Eddie’s final line: “I still believe that GDP growth is desirable, but as Jacinda Ardern and Jo Swinson have said, a country’s prosperity cannot be judged on economic growth figures alone.” I completely agree with the latter sentiment although I am not convinced GDP growth is that desirable in a stable and wealthy economy as it sucks up natural resources in creating ever more growth. What we should be looking at is distributing GDP somewhat fairer than we currently do.

Pension Age

Steve Rose

Today a group of women lost their case in the High Court over whether the rise in the pension age to 67 by 2018 is unfair because they were not given enough time to make adjustments to cope with years without a state pension. The court found that the change corrects historic discrimination against men and isn’t unfair.

I have no sympathy whatsoever with the case being made. As a man I have always been astonished that men were expected to work 5 years more than women for their state pension. This situation is even more unfair when you take into account that women live longer to men, and therefore, on average, draw their pension not just for 5 years more, but more than 8 years at an additional cost of over £53,000 compared to men. The change means they will only get a bit over 3 years extra pension compared to me. That’s fair.

I saw the claimants being interviewed on the news channels, saying they have been robbed. This is absolute nonsense. They claim they are being forced to work longer when they have paid in for 45 years. What, forced to work as long as men have had to work and pay in? What’s their point?

Pension ages were not always different. When introduced it was 70 for both men and women and only 25% lived long enough to collect. In 1925 the age reduced to 65. In 1940 the age for women to retire reduced to 60 so most couples could retire at the same time – presumably based on women being 5 years younger than their husbands. Society has changed so much in the last 80 years but the pension age gap lagged behind for far too long.

When I started work at 16, as a civil servant, retirement was mandatory at 60. I could expect to receive my pension for 10 years. My female colleagues would get 16 years. That was my expectation for most of my working life. Now I know I will have to work to 67. That’s life. We are all living much longer. Even retiring at 67 I will now get 12 years of pension, and my female counterparts will still get 16 years. What this group seems to want is 23 years of pension for women approaching 60. Who is going to pay for that? Largely younger people struggling to raise kids and pay mortgages. It’s not on.

Frankly the equalisation of the pension age was, in my opinion, staggered over far too long a period. It is a correction that should have been made decades ago. For all its faults we have a benefits system designed to be a safety net for those who have not yet reached retirement but who cannot work for health reasons. That is the right mechanism, not the prolonged continuation of a gross inequality. I’m happy to pay taxes to help out people genuinely in need who have fallen on hard times through not fault of their own, not so happy to subsidise people of my own generation who just want to put their feet up for 23 years.

I’m feeling a little less “liberal” today it seems. I’m not feeling tolerant of these frankly selfish children of the 50’s and 60’s. Sorry. As to our party’s commitment that these women are “properly compensated for the failure of government to properly notify them of changes to the state pension age”, I cannot support it under any circumstances. They were properly notified. Equalisation has been on the cards since 1995. This was correction of a long-standing inequality and we did the right thing in 2011 when speeding up the timetable.

£10 Minimum Wage

Steve Rose

Labour have promised a £10 minimum wage for everyone, including under 18s. If you believe the ranting comments of the righteous right readership of the Express, this would signal the end of life as we know it, replaced by a totalitarian regime akin to North Korea. But this is a policy that should be universally advocated, across party lines.

For Labour it’s a bread and butter matter of social justice for the proletariat. The Lib Dems have a century or more of campaigning for social justice too and when in power last were responsible for the substantial increases in income tax thresholds. But even the very much right of centre Tories seem to have embraced a relatively high minimum wage and tax thresholds.

When the Minimum Wage was first introduced there were a lot of mainly Tory voices adamant that it would result in massive job losses. I’ve no doubt that the extra labour costs did result in some people becoming unemployed. But overall, the fears were unfounded. It will be a similar situation when a £10 / hour level is set. Hospitality, care, and retail sectors will be most affected and consumer prices will probably need to increase. That is the main background argument against higher minimum wage level and, in isolation, it has some merit.

However, the likely reason why Tory Chancellors have embraced it is that if someone in full-time employment still cannot afford the basic necessities of life then the State steps in and uses tax income to pay benefits to plug the gap. Companies that pay decent wages, and their employees, effectively subsidise other companies who pay the bare minimum they can get away with. Companies that pay decent wages also benefit from greater staff loyalty, higher productivity, and better retention rates, leading to lower costs and/or higher profits.

A £10 Minimum Wage, or National Living Wage as it is now formally called, is the right thing to do both morally and economically. Some prices might rise but would be countered by a reduction in the tax take needed to support low paid workers. As for the businesses that will lose their wage subsidies, I have very little sympathy.

To me it’s an open and shut case but although the Greens also want £10, and the Tories are committed to 60% of median earnings, the Lib Dems want an independent review to consult on how to set a “genuine living wage”. Clear as mud, kicking the can down the road, call it what you will, what we actually need is a simple, easily understood message.

Saving Private Firms

Steve Rose

I have just been watching coverage of the Labour conference and the bizarre suggestion from the Shadow Chancellor and some activists that the Government should have stepped in to save Thomas Cook. They argue that it was once a nationalised company, although this was only because it was a subsidiary of a subsidiary of railway companies that were nationalised, not because the Attlee Government thought a publicly owned travel agent was a great idea. They also mention the rescue of banks but the economic and social impact of allowing several major banking groups to collapse is of an entirely different scale to allowing a travel agency to go bust.

When it comes to Thomas Cook customers, none will lose money. The Atol guarantee protects those with bookings and currently on holiday. The Government has agreed to repatriate those on flight-only deals at no charge to them, and those with flight only bookings can claim off card companies.

But there are 9,000 employees in the UK that will now be unemployed. The collapse of their employer with no warnings will undoubtedly cause hardship for many before they secure other work. It would be wrong not to show compassion for those workers although propping up their failed paymasters is not necessarily going to provide the security they need.

There are lots of reasons why companies fail but they generally divide into mismanagement of some kind, or a major realignment of the market that the company was unable to adapt to. An example of the former would be the demise of Barings Bank; an example of the latter would be Blockbuster video rental following the trend to online movie streaming. Thomas Cook have adapted to the Internet age and online booking but still had a large and expensive high street network of travel agencies. But they had huge debts and were unable to renegotiate their loans. That’s mismanagement. So in the case of Thomas Cook it looks like a bit of both.

Whilst there are always peaks and troughs when it comes to holiday bookings, the millions of Thomas Cook customers are not going to stay at home for the rest of their lives. They will move their business to competitors, some established, some that see the loss of Thomas Cook as an opportunity to step into the market with a new offering. If it takes 9,000 people to deal with Thomas Cook’s customer base then 9,000 new jobs will be created in those competitors, and industry-experienced staff will be at a premium.

Firms going bust, even ones with the historical pedigree of Thomas Cook, but also many long-established retailers, is not always a bad thing beyond the immediate chaos that surrounds closure. Companies get fat, they get arrogant, they borrow too much, they employ mercenary Directors interested in their own enrichment rather than being deeply and personally invested in the company. They become inefficient and eventually become unprofitable when competing with newcomers. The weaknesses are often most obvious in recessions when demand falters and funding becomes tighter. Taking these basket cases into public ownership cannot possibly solve these issues. They either need radical new management, e.g. a takeover by a leaner, more innovative competitor, or to close down and allow the business to migrate to better run competitors.

There are exceptions – private companies in monopoly positions such as rail operating companies, and businesses where failure impacts on national security and defence, or where overwhelming economic and social damage would result.

What is very worrying is that John McDonnell clearly does not understand the basics of business. He does not understand that the demise of Thomas Cook will result in their business migrating to better run competitors. Would he be fit for purpose as a future Chancellor. I quite like listening to McDonnell; some things he says I agree with. But his response to the Thomas Cook collapse is very worrying. Would a Labour government nationalise every lame duck bloated and inefficient business that goes bust?

It is right that Government should ensure that employees of companies that fail are treated with compassion, are promptly compensated for arrears of wages, redundancy, holiday pay and so on (they are), and given help to find alternative training or employment. It is wrong for the Government to take ownership of failing companies where there is not a monopoly public interest and effectively subsidise the bad against the interests of new and innovative competitors.

Free Trade Isn’t Fair Trade

Steve Rose

One of the big benefits of Brexit, we are told, is that we will be able to do our own trade deals with countries around the world. Presumably tariff-free trade deals. The opposite of free trade being protectionism, for which Donald Trump is being widely denigrated.

But is life that simple? Free Trade Good, Protectionism Bad?

Obviously it isn’t. Tariffs exist to protect domestic markets against unfair competition resulting from lower material and labour costs in other countries. It also prevents “dumping” where a country will sell goods at lower than cost in order to destroy competitors and thereafter dominate that market. On the other hand the protectionism embodied by the Corn Laws in the 19th Century caused untold hardship, including death through starvation and undoubtedly worsened the impact of the potato famine in Ireland. So there has to be balance. Tariffs to protect against dumping and unfair competition but no tariffs where demand is higher than supply or the tariffs protect inefficiency or exist for the purposes of profiteering by vested interests.

Free trade amongst countries that are roughly in the same ballpark when it comes to economic and industrial development is usually a positive thing. We buy your Volkswagens, you buy our Minis. We buy your Mercs, you buy our Jags. So the free trade between the wealthier EU countries is generally beneficial for all. Rapid expansion of the EU into less affluent parts of Eastern Europe is not so good for either side of the equation. It was an opportunity to move manufacturing production to less expensive labour markets whilst also giving unfettered access to fragile and developing economies. Enabling exploitation.

Free trade in goods and materials between countries with a huge gulf in economic development can be a big mistake although can be mutually beneficial when targeted. Does the UK want a free trade deal with China that covers cars and steel? I’d say absolutely not as this would decimate what we have left of those industries. Indeed we should be levelling the playing field to rebuild those industries.

There is another use of trade tariffs that Trump has championed but which is actually a powerful tool for good in International Relations. That is the imposition of tariffs, or cessation of free trade for political rather than economic reasons. The use of trade to influence behaviour. The most obvious manifestation of this is where sanctions are involved, complete prohibition of trade. Undoubtedly this does damage the country being sanctioned but more often than not it is the ordinary citizens who suffer rather than the priviledged leaders. They may even use the sanctions to demonise the foreign powers imposing them. However, there is a more subtle application. As an example EU free trade with Mercosur countries is currently frozen pending Brazilian action to stop the destruction of the Amazon. Outside the EU we can do ethical trade deals such as free trade in bananas only where the producer respects all human rights. For example, Costa Rica generally scores highly on LGBT rights where most Commonwealth Caribbean countries do not. It also rates higher than Italy and Malta where corruption is concerned. Should we not reward good behaviours via favourable trading terms for tropical fruit? I think we should.

If you do not get the balance correct, then the forces of popularist right wing politics can exploit the outcome. Most people in the UK are genuinely puzzled at support for Trump policies in the USA. Or they interpret it as pure racism and all the other ‘isms. However, Trump latched onto the despair of many Americans living in towns once affluent, or at least surviving, based on local industries that have now closed down with production outsourced to China, Vietnam, Laos, India, Mexico, where labour costs are cheaper. Detroit in 1950 had a population of 1.8 million. In 1990 it was still over 1 million. Today it is estimated at 670,000 people. Trump promised to reverse industrial decline through renegotiating the trade deals that have led to cheap imports, and tens of millions voted for that. It’s an attractive message although near impossible to deliver on within a 4 year term. What is a little odd is that Trump is a global capitalist so his anti-free trade stance is at odds with his personal interests. In the UK our right wing politicians are under too much influence from their funding donors, and their friends in the financial centres, to promote that path, but it is perfectly possible that Corbyn and his Momentum acolytes would take up protectionist popularism, and find an underclass skimmed off from Brexit Party/UKIP supporters willing to vote for it, especially if our EU Exit goes badly wrong.

In conclusion, free trade in all circumstances is not a good thing. It is good when it fills gaps in domestic supply chains, good when it delivers materials and manufactured products we don’t ourselves produce, good to encourage positive behaviours, and good where it encourages higher quality and greater efficiency and productivity due to fair competition. It is bad when it destroys otherwise efficient and profitable domestic industries, bad where it removes domestic capability in critical areas of national security, bad where it encourages and rewards poor social and environmental behaviours, and bad when it leads to extremist protectionism when the balance is wrong.