Archive for the 'Economy' Category

h1

Jumping at shadows

Sunday, May 3rd, 2020

April is the cruellest month. At least, that is what the authorities hope. The government has carefully signalled that it intends to begin a slow relaxation of the lockdown, if Britain continues to move out of its total eclipse by Covid-19 into a penumbral recuperation from the most ferocious aspects of its onslaught.

The government has to wrestle with two conflicting risks when making its decision. If Britain comes out of lockdown too early, it might risk a resurgence of Covid-19. If it waits too long, the economic damage – already huge – would be needlessly made worse.  

Only a fool would envy them this responsibility. The evidence remains confused and far too little is known about this disease to be confident how any policy will play out. The government might make its decision carefully, on all available evidence, with the best available advice and still get this wrong. The chances are that it will.

You can see the stresses of government on the point in the fifth test for lifting lockdown. Originally it was formulated as “confidence that any adjustments to the current measures would not risk a second peak in infections”. Then it was reformulated as “confidence that any adjustments to the current measures would not risk a second peak in infections which would overwhelm the NHS”. Put more bluntly, will the government hold off until it is confident that the death rate won’t increase, or will it let the death rate increase, so long as the NHS can keep operating?

The government still seems to be working on the basis that it can restore the British economy by decree. That seems unlikely. For the British public are frightened. Polls show that the British public are the least enthused by the idea of reopening the country before the virus is contained – just 23% of Britons supported the idea. 50% of Germans were open to the idea, as were 53% of Italians.  

Britons are backing their words with their deeds. Roughly 20% of children were eligible to remain in school as children of key workers or with special educational needs. Fewer than 1% of schoolchildren are in fact going to school. Parents are unwilling to take any chances.

Some people are no doubt champing at the bit to get back to normal. Many others will be wary. Some will not be coming out of self-imposed lockdown until they have sufficient confidence that they are safe enough. Not everyone will stake their lives on the reliability of this (or any) government’s judgement. The optimists would have you believe that you have nothing to fear but fear itself. This is untrue. A slow lingering death by drowning in your own body fluids seems like plenty to fear to me.

This has both short and medium term consequences. Even if Covid-19 is quelled by social distancing measures, far fewer will be wanting to rush back on crowded trains into bustling metropolises, far fewer will be wanting to eat out in busy restaurants and drink in packed bars, coughing companions in opera houses and theatres will be still more unpopular, the buzz of a crowd at a football match will feel threatening to many rather than unmissable, the crush of gigs will be seen as high-risk activities.

(We are all going to become more conscious of rental costs. For example, when we eat out, we will find ourselves paying much more for the square footage around the table. Many will be happy to pay for the feeling of health security if the experience in the restaurant is of high enough quality. This is going to make the experience of going to restaurants much more of a luxury than it previously was.)

Providers of in-person social entertainment and recreation are facing carnage. Even if many are willing to return to their previous social habits, many will not be. The loss of trade will be substantial for most.  Only the strongest will survive. Even they will need to be lucky.

What will those people who fear social interactions want to do instead?  Well, I suggest they will prefer not to travel too far from their homes, they will prefer to live, shop and work in smaller towns rather than the very biggest cities, they will prefer to work from home if they conveniently can and they will prefer to socialise privately in small groups. They will consume their entertainment still more online.

I recognise that many will not have a say in the matter, at least so far as their work is concerned. A big slab of the economy relates to those who have to come into their workplace. Such workers will need to get past their personal preferences. (If you’re gung-ho to end the lockdown, consider carefully how you propose to tell such workers that they have to go to work even if they feel unsafe and even if there is a substantial risk that they could catch Covid-19. It’s not the most comfortable communication for a government to issue, is it?)

Many employees, however, will have agency about how and where they work. And at that margin, we can expect to see a substantial move for some time away from previous working practices. That margin will be more than enough to affect the viability of the businesses that service such employees.

This means that the biggest cities, and especially London, are likely to recover more slowly than the commuter towns around it. Within the largest cities, the suburbs are likely to recover more quickly than the centre. All of this would be in the short term a complete inversion of long term trends.

How enduring might those trends be? That for now is wholly unclear.  Much will depend on how long term a threat Covid-19 remains, and how entrenched new behaviours become. It would, however, be darkly ironic if, just at the moment that every politician is talking of the crisis that towns are facing, the country is instead at the start of a period of inner city decay.

Alastair Meeks




h1

Suddenly the possible economic catastrophe becomes centre stage

Wednesday, April 15th, 2020

The cost of fighting the coronavirus

It has always been the case since the the scale of the crisis became clear that making saving lives the priority was going to come at a huge economic cost.

The OBR report yesterday with all its projections starts to quantify the challenge ahead and in the meantime the new Chancellor has to find a way of balancing what appears to be the irreconcilable.

Sunak starts with a lot of goodwill on his side after his performance so far in the job. He doesn’t have any baggage and his ratings have been very high. What this means is that the public can probably take things from him that they would find less palatable from other political leaders. This is a fantastic asset for the young Chancellor and he must not squander it.

This is how the Times leader assesses what was said.

Rishi Sunak, the chancellor, stressed yesterday the hardships ahead and that the economy will take a significant hit. That’s why his policies are aimed at mitigating it. The Treasury will guarantee loans (and some grants) to business and subsidise companies to keep on labour that they do not currently need. This is the right course to enable the economy to pick up. But these firms need the money fast, and there is a case for the government taking up 100 per cent of the guarantee rather than 80 per cent. By leaving 20 per cent with the banks, it is slowing the flow of cash to companies, many of which are on the brink.

It is going to be a choppy road ahead and the public will more accept the hardships that are to come if they have confidence in their leaders. If that goes there could be massive problems.

Mike Smithson



h1

Trouble over bridged waters. Boris Johnson’s plan to link Scotland and Northern Ireland

Wednesday, February 12th, 2020

While love can build a bridge, it’s far from clear that Boris Johnson can.  He planned one across the Thames, but that was scrapped.  Then he mooted one across the English Channel, to be shot down quickly.  Now he is shelling out public money to investigate the possibility of a bridge across the North Channel between Larne (half an hour from Belfast) and Portpatrick (50 lightyears from anywhere).  Is it going to be third time a charm for Boris Johnson?

The omens are not good.  The first reputed attempt to build a link from Northern Ireland to Scotland ended in its destruction after Finn McCool found that he had bitten off more than he could chew.  If giants should come to grief on such a project, what chance for mere mortals?

It’s not as though there is a compelling economic need.  It won’t by itself shorten the time to get even from Belfast to Glasgow and any infrastructure projects to address that would drastically increase the cost.  Most people would carry on catching the plane to Glasgow or London or wherever. For those who must drive, there are perfectly good ferry services.

At a mooted cost of £20 billion for the bridge, there would probably be more economic benefit giving each inhabitant of Northern Ireland and Galloway a lump sum of £10,000.  You’d have change left over too.

Perhaps the intention is not economic but to build a physical connection between Britain and Ireland that the Northern Irish can feel.  Boris Johnson wouldn’t be the first. Though he would not appreciate the comparison, Russia recently built a bridge across the Strait of Kerch to connect Crimea to Russia and the physical link to the conquered territory is certainly part of Russia’s motivation.  With Scotland continuing to flirt with independence, however, even this rationale looks to have shaky foundations.

I’m not an engineer so I’m not going to do more than list the apparently formidable difficulties of building such a bridge.  The lousy weather, the currents, the width of the channel, the need to have a bridge of sufficient height to allow shipping to pass under it, all these are normal considerations.  Abnormal considerations include the unusual depth of the channel and the fact that it has been used as a dumping ground for very large quantities of explosives and nuclear waste. To a non-expert, it sounds a daunting undertaking.

All of which leads me to the conclusion that this project simply isn’t going to happen.  So why is the government talking about it? The problem resembles that confronting Sherlock Holmes in the Speckled Band.  If a bell-cord does not ring a bell, it is just a rope. Similarly, if a feasibility study into a bridge is not going to result in a bridge, it is just an announcement.  Its purpose is simple: the government wants us to talk about it.

It serves two purposes.  First, the public can only talk about so many stories at any given time.  If they’re talking about bridges or trains, or even the Coronavirus, they’re not talking about Brexit.  The government wants to move the conversation on from the last few years. You can understand why. Construction projects are perfect for this, because everyone has views on the idea and the ideas behind them are easy to grasp.

In some ways the ridiculousness of the proposal actually assists in this aim, as all the many drawbacks are talking points.  Would the IRA seek to blow up the bridge by depth-charging the munitions dump? Would the disturbance caused by the bridge’s foundations lead to Dublin Bay prawns becoming radioactive?  All grist to the mill for those wanting to get the country talking about new things.

The second purpose is less noble.  The government’s entire election prospectus was built around getting Brexit done.  Its current claim is that it has done so (implausibly, given that the dismal grind of negotiating the ongoing relationship with the EU is going to consume this year, but let’s leave that to one side).  That leaves a vacuum at the heart of government, a vacuum that could last for five years. That needs to be filled with an impression of energy. The government is deep in debt, so eye-catching initiatives are going to have to be cheap in the main.  That means announcements rather than action.  

Announcements of infrastructure work well on this front too.  No one expects them to be fulfilled in the short term. In the meantime, they can imagine how the bridge would glitter, span the miles majestically and stretch like a silver thread out into the invisible mist.  It doesn’t have to be built to be politically effective as other populist heads of government long ago worked out. Donald Trump’s wall has served him well. Silvio Berlusconi twice announced building a bridge between Sicily and the tip of Italy.  In this context, being all fart and no follow-through is entirely harmless, even beneficial.

Expect more of this stuff.  The government needs to give an impression of energy.  That impression doesn’t need to be borne out by action.  Judging by Boris Johnson’s track record, it won’t be.

Alastair Meeks




h1

Ethics man. God, mammon and investing

Sunday, February 9th, 2020

Those snowflakes are at it again.  Students of St John’s college, Oxford, have called upon their college to disinvest from companies that extract fossil fuels and thus contribute to global warming.  In response, the principal bursar has told them that could not be done at a drop of a hat, but he’d gladly turn off the gas in their halls of residence if that would make them feel better.  It seems that it would not.

Contrary to the implication of the principal bursar’s sneer, it would be entirely possible for the college to disinvest from fossil fuel companies if it wanted to, and to do so quite quickly if the will was there. It presumably simply does not want to.  

Scrutinising the origin of funds is not a recent activity.  The Emperor Vespasian caused murmurs of disapproval when he taxed the urine from Rome’s public conveniences, which was used by tanners.  Part of the revenues of the Bishop of Winchester in the Middle Ages came from brothels in Southwark – in Henry VI Part 1, the Duke of Gloucester accuses him with the words “Thou that givest whores indulgences to sin”.   Both faced down their critics. Vespasian wafted away the criticism, and the smell, with the sentiment: “money has no odour”. Those medieval sex workers were called “Winchester geese”.

Investors talk a better talk these days.  Not all of them walk the walk. How can campaigners ensure that they do well by doing good?

You won’t stop investors putting money into something that will produce good returns consequence-free.  So anyone who is perturbed by the activities of some companies and who wants to choke the supply of capital to such companies will need to reduce the returns that these companies produce or increase the negative consequences of investors seeking them from these companies.

Many campaigners, including St John’s students, have turned their attentions to the investors.  In the past some have taken this to extremes: investors in life sciences companies have been the targets of terrorist attacks from extreme animal rights activists.  Currently, fortunately, most campaigners are working within the law.

Private investors can do as they please.  Those who hold funds on behalf of others, however, whether charities, pension funds, or Oxbridge colleges, are constrained by legal duties as to how they invest.  So they need to look over their shoulders.

Classic statements of the law are Vespasianic.  Trustees, we are told, should act in the best interests of the beneficiaries as a whole, holding the ring between different classes of beneficiaries.  They should approach this from an investment perspective, with the rider that trusts may have regard to wider considerations affecting the particular trust – so cancer research charities can properly rule tobacco stocks off limits.

It is unfortunate that the legal guidance we get depends on the cases brought.  The tone was set by a pensions case brought by Arthur Scargill, who chose to argue his own case in court.  Even the judge later admitted that he might not have been quite so trenchant if the case for the miners had been argued with more legal expertise.

In recent years, there has been a growing appreciation that investment aims and ethical concerns do not need to be in opposition to each other.  With that in mind, the government has been focussing on ESG (environmental, social and governance) considerations, making pension schemes, for example, disclose in detail how they take these matters into account in their investment strategy.

I regret that the government chose to label ESG in that order.  If the first item had been governance, the public could much more easily see how that was relevant to investment decision-making.  A company without proper controls is easily understood to have investment risks.

Instead, all the attention has been grabbed by “environmental”.  That makes people think of Greta Thunberg hugging a polar bear, when it is really more about the externalities of company behaviour and how sustainable they are, given the likely regulatory responses.  Investing in car manufacturers that make only petrol and diesel engines now looks to have a relatively short shelf life as a strategy, as the market moves to electric.

These are matters that the investment managers have been looking into for a long time, though they have not done so in a particularly structured way until recently and many of them still struggle to express their approach in a single overarching statement when asked.  As a matter of common sense, however, if you are looking for long term returns, you need to look at long term risks.

Those concerned about the impact of corporate activities should take note.  If activists put their energy into making companies accountable for their external impacts, those companies would become correspondingly less – or more – attractive investments as a necessary consequence.  It would also, more importantly, tackle the concern about their activities at source. 

One simple way of doing this would be by modifying the rules about remoteness of damage.  If statistical evidence were sufficiently robust to show a causal link between a corporate activity and a harm (public or private), why should the company not be expected to pay for its contribution to that harm?  At present that is an incredibly stiff challenge and the courts are quick to find that intervening acts (such as the decisions of consumers) discharge such companies of any legal responsibility. The courts handle the use of statistical evidence in employment cases when considering whether there has been indirect discrimination.  Why not do so here too?

This idea need not be confined to those companies whose activities contribute to global warming.  Fast food companies might need to help pay for clearing up litter. Personal loan companies might need to deal with the consequences of too easy credit.  Bookmakers might need to help pay for the consequences of gambling addictions.

All this would of course need campaigners to win a political debate.  That, however, is surely right. If policy is to be changed in any of these areas and to see a cultural shift in the view of corporate responsibility, it should be done through the front door.  Guilt-tripping investors without directly debating the public policy question is only going to get campaigners so far.  

Alastair Meeks




h1

A tale of twelve cities. The perplexing underperformance of Britain’s second tier

Sunday, February 2nd, 2020

Output Growth Paths (1971-2015)
Source: Core Cities UK, CE Calculations
From Cambridge Econometrics’ Report: “The Economic Performance and Resilience of the UK’s Core Cities”

The red deer’s mating habits are an exemplar of Darwinian selection.  Every autumn virile stags, their veins coursing with testosterone, compete to claim the right to the herd’s females.  The battles can be fearsome, sometimes even deadly. The victor, the alpha male, then claims the right to father the next generation, thus perpetuating his genes.

However, there is only one stag with only one pair of eyes, and many hinds.  As Benny Hill so wisely observed, a woman’s needs are manifold. So hope remains for the defeated beta males.  If the alpha male is distracted, a beta male with guile and speed may yet get his way with one of the females. (Such a beta male is technically known as a sneaky fucker.)

As of 2020, London is Britain’s – indeed Europe’s – unchallengeable alpha city.  Its economy dominates Britain’s (London’s economy is comparable in size to that of Switzerland’s).  It has its problems and they are the problems of success. Any city in Britain that tries to take it head-on is likely to find itself suffering an ignominious defeat.

If all of Britain were doing as well as London, it would be basking in a new golden age.  It isn’t. On a GDP purchasing power parity per capita basis, the north east and Wales are poorer than parts of Turkey.  Britain’s economy resembles a pig holding the string of a big helium balloon in its mouth. It may be lifted up onto its hind legs, but there is no real hope that pigs might fly.

What of the next tier of British cities?  Are they contributing what you would expect to Britain’s prosperity?  

There are those who subscribe to the idea of beta cities, just like beta deer, drawing up lists of cities minutely graded in an urban pecking order.  It’s not a perfect analogy – smaller cities like Cambridge are quite capable of competing in clearly defined areas at the very highest level. Unlike stags, cities can choose their methods of competing.  For large cities with broadly based economies, however, it is a convenient shorthand.

So let’s look at Britain’s sneaky fuckers.  Eleven of them have banded together under the banner of “core cities”: Birmingham, Manchester, Glasgow, Leeds, Liverpool, Belfast, Cardiff, Bristol, Newcastle, Sheffield, and Nottingham.  Edinburgh is conspicuously absent.

To answer the question I posed above, no, these cities are not contributing what you would expect to Britain’s prosperity.  Never mind London, the core cities’ growth underperformed by something like 30% relative to the country as a whole between 1971 and 2015.  

Interestingly, London’s performed as badly as the core cities (given its relative starting point) until the mid-1990s and only decisively outpaced the nation as a whole from the time of the great financial crisis of 2008.  London’s success over the last generation was not preordained.

Its example seems to show that cities can move from laggards to pacesetters in the right conditions.  So why did London perform in lockstep with the other large cities for many years and, even more importantly, why did it suddenly motor away from the mid-1990s onwards?  Is London uniquely placed or is it that London is the only large city in Britain to have followed the right policies?

We can rule out one well-worn explanation.  First, you hear that London has in some way crowded out other big cities in the UK.  Given that London languished in the same way as Britain’s other larger cities for decades, we can infer that London, just as much as other larger cities in Britain, suffered from structural disadvantages that were absent from the country as a whole.  At least initially, crowding out by London was not the problem.

Just now, infrastructure is being touted as a panacea.  Obviously infrastructure improvements would help, but their benefits should not be overstated.  Birmingham is well connected by road, rail and air. It has a lower GVA per head than Liverpool, which is remote and hard to get to.

As that Cambridge Econometrics report notes, Britain’s larger cities struggled with deindustrialisation as manufacturing declined relatively.  This was always going to be harder for the core cities than London, since they were more reliant on manufacturing, but they remain overweight in that sector compared with the rest of the country, which by way of contrast now makes up a negligible part of London’s output share.

The core cities have always had a larger share of the public sector than the rest of the country.  Fifty years ago, so did London but in the intervening period it has transferred many of the national public sector functions elsewhere in the country.  By 2015, London’s public sector made up just 14% of its output share, compared with 22% for the country as a whole and 25% for the core cities.

Perhaps when the public sector included many productive industries in public sector corporations, it could help to power economic growth.  Nowadays, however, employment in such public sector corporations is about a sixth what it was 50 years ago, with an increase in the education and NHS workforce instead.  The reshaped public sector has not been a powerful engine of growth, and with their greater reliance on that and manufacturing, the core cities have suffered accordingly.

What London managed, and managed supremely effectively, was to build its financial and professional services sector into one with unbeatable critical mass.  This gave it the economic momentum to build out into other new sectors, overcoming the innate disadvantages of large cities that have a heavy economic heritage with a doubtful future.

Was this good luck or good judgement?  The good player is always lucky. It was not the only city in Britain to manage this trick. Edinburgh (which still stands aloof from the core cities) has similarly thrived and off the back also of the financial services and professional services sectors.  Just as London has grown faster than the rest of Britain, Edinburgh has grown faster than the rest of Scotland. You’d have thought the great financial crisis would have poleaxed Britain’s great financial centres. The opposite is true: both London and Edinburgh have widened the gap.

Conversely, perhaps because they did not have the civic structures in place to allow them to do so, the core cities have not to date shown the guile or speed required to let them profit from the opportunities that have presented themselves to them.  By relying too readily on the safe options of the public sector and the existing manufacturing base, they have implicitly elected for managed decline.

Liverpool and Bristol have had a directly elected mayor since 2012. The metropolitan mayors in the West Midlands, Manchester and Sheffield have now been in office for nearly three years.  The first office-holders have generally shown energy and given a voice and sense of purpose for their local areas. It is far too soon to judge whether they will transform their areas’ fortunes but the early signs are cautiously encouraging.  Let’s hope they succeed. The economic underperformance of the core cities is among Britain’s most intractable problems.

Alastair Meeks




h1

Covered market: the politics of towns

Sunday, January 26th, 2020

Since the election, talk of towns has been the talk of the political town.  Labour politicians and Conservative politicians alike have concluded that is the key to political success right now.

This apparent unity conceals a string of latent ambiguities and confusions.  What are towns? The Conservatives were mocked when they recently launched their Town Of The Year competition in Wolverhampton, which has been a city for nearly 20 years.  The optics could certainly have been better.

Lisa Nandy has made the problems of towns one of the main planks of her campaign for the Labour leadership.  She is a leading light in Centre For Towns, a think tank “dedicated to providing research and analysis of our towns”. That organisation lists 894 settlements in Britain that it considers towns, It reserves the word “city” for Britain’s 12 biggest cities.  (Wolverhampton is a town on their classification.) When most people are talking about towns, I doubt they are thinking of Kingston-upon-Hull, Salford, Southampton or Plymouth.  But all of these are “towns” on the Centre For Towns definition.

Next, what are the problems of towns?  And here we see a confusion between three entirely separate crises.  These three crises have come simultaneously to produce a sense of despondency and decline.

The first aspect of this is the impact of austerity.  Following cuts by central government, councils have pared back their services.  Libraries are being closed, potholes are not being filled, subsidised bus services are becoming skeletal.  The public didn’t notice much for quite a while but they are noticing now.  This is a common problem up and down the country.

Separately, right now we are seeing a crisis in retail as spending moves from the shop floor to online services.  This also is affecting every part of the country. It is particularly visible in the high streets of our urban centres and has a big effect on community life.  Some famous names, like BHS, have gone bust (we can expect more to follow). Others, like Debenhams and Marks & Spencer, have closed down their less profitable shops as they scramble to fight off the challenge of Amazon.  The effects are felt disproportionately outside the very largest centres because smaller places have smaller markets.

Thirdly, some towns are suffering from a crisis of identity.  Towns were founded for a purpose. If a mill town doesn’t have a mill any more or a seaside town no longer has tourists, they urgently need to find a new one.  Some have managed it, some have not. The ones that have not are in deep deep trouble.

The first problem is actually quite easy to solve for the government.  It simply needs to reverse the cuts to local government spending. If the government is serious about improving local infrastructure, there are few measures that it could take that could have as speedy and useful effects.  It might seek to ensure that the money is not moved elsewhere by hypothecating grants to local government, but if the government is going to hose money around on infrastructure projects, this is a good place to start. Where the money is going to come from is a separate problem but since no political party is now the least bit concerned about fiscal responsibility, let’s not be worrywarts.

The second problem is probably a problem that the government should not try to solve directly.  The public lament the sad state of their local high streets even as they speed in their cars to the out of town shopping centres and order their goods online.  The retail sector will reach a new equilibrium in due course between online and bricks-and-mortar spending. This is not a problem requiring government regulation.  

There is an opportunity here.  Britain suffers from having far too many identitikit towns and cities, dominated at ground level by the fascias of retail chains.  As the retail chains withdraw from the high streets, local character can be restored. Government should be looking to encourage new uses of town centre buildings (whether as offices, as private residences or something quite different).  In thriving towns, this evolution will be accepted as stoically as every past evolution of town centres. They could look far more interesting than they do now.

The third problem, that of failing towns, is not a general problem, it is highly specific.  It is also the hardest of the three to deal with. To be cynical, the success or failure of government is unlikely to hinge on it.  Too few Parliamentary seats depend on this problem being resolved. It is, however, what many people subconsciously have in mind when they think of the problems of towns, so the government needs to have some form of plan.  I’m sure it will have some fine words. I’m less sure that they will amount to all that much.

The opposition, however, would probably be ill-advised to place too much emphasis on towns. If the government gives proper attention to it, it has a good chance of making a difference to towns’ prospects that the public gives it credit for.  Labour could easily see a focus on towns backfire on them.

The problems of the large cities outside London look much more intractable and in the long term are much more important for Britain’s future.  Much of Britain’s underperformance can be attributed to their underperformance. Perhaps more attention should be given to them.

Alastair Meeks




h1

Infrastructure: the Conservatives’ necessary but misplaced priority

Saturday, January 18th, 2020

The Custard Factory is one of Birmingham’s more striking developments.   Its current incarnation is as Birmingham’s answer to Shoreditch (a question that probably did not need asking).  Its history, however, stands as a warning to the government, a warning that it almost certainly will not heed.

The Custard Factory’s name is not, like so many new developments, the product of a random buzzword generator, but a simple statement of its origin.  Until 1964, Bird’s Custard was manufactured on that spot. And then as a direct result of government industrial policy, it desserted the site.

In the decades after the Second World War, Birmingham’s economy boomed.  In 1961, Birmingham household incomes exceeded those of London and the south east.  Successive governments fretted about how Birmingham and London were leaving the rest of the country behind.  Central government took direct measures to spread their success to more deprived regions. First they restricted industrial development, then they restricted office development.  The city of a thousand trades was booming and this was a crisis. Introducing the order placing restrictions on office development in 1965, the government minister saw this as a “threatening situation”.

In words that now seem prophetic, the MP for Sutton Coldfield at the time opposed the measure:

“This Order is a kind of penalty on the success of the West Midlands and Birmingham, imposed admittedly by the Government in order, as they believe, to help somewhere else. There is a growing anxiety in Birmingham that the Government may have carried too far this process of siphoning off the prosperity of the Midlands to other areas. I can give examples which are germane to this Order. In Birmingham on Monday I heard of firms, which provide employment similar to that affected by this Order, being forced to leave the city. These firms, to a considerable extent, are firms which are independent of cyclical fluctuations of trade.

The manufacturers of Bird’s Custard, a food product, who have been in the city for a great many years, were quoted as an example. The motor industry, on the other hand, is a cyclical industry and whilst Birmingham is very prosperous, it and the Midlands, to the extent of dependence on the motor industry, are living dangerously in their prosperity. Therefore, it hurts these areas the more when industrial and commercial employment of a non-cyclical kind leave the area. Such a movement can prove a great future potential loss to the city and surrounding area.”

The Order was highly effective, at least so far as Birmingham was concerned.  Birmingham no longer has the problems of success. It has a lower GVA per head than the national average – and lower than Liverpool, for example.  It was, however, much less effective at boosting the economy of struggling areas, many of which have remained in relative decline to this day.

55 years on, and Britain has another government looking to siphon off the prosperity of successful regions to struggling areas.  There isn’t much evidence that the government has any better idea how to do it this time than it did in the 1960s.

The government seems set to divert infrastructure spending away from the areas of the country that are prospering to the forgotten north.  This isn’t a new idea either. Nor did it prove a particularly successful idea either. At the same time as Birmingham’s business was being run off, the Humber Bridge was commissioned.  Hull and Grimsby are better connected to each other, but both still languish economically. A lot more than infrastructure is needed to breathe new life into depressed areas of the country.  Past experience has shown that if you only build a field, they won’t come.

The government doesn’t really have a choice.  Its newly-elected backbenchers made great play in their local campaigns of fighting for infrastructure investment.  If they don’t deliver, they’ll be up against it at the next election. If you’ve successfully won seats on the basis that your opponents have taken their voters for granted, you really can’t afford to take them for granted yourself.

This gives the government two big problems.  First, if it is going to invest in infrastructure in previously forgotten areas, it is going to come up with a clear rationale for how it is going to prioritise investment.  Previously, governments have worked on the basis of a cost-benefit analysis (which is why London has done so well – as by far the most prosperous and successful area of the country, projects can easily demonstrate bang for buck).  If that metric is to be abandoned, what is going to be put in its place? The government has as yet given no clear statement of principle but without one, the likelihood of pester power winning out is high, with projects allocated on the basis of influential backbenchers’ ability to buttonhole ministers.  Majestic herds of albino pachyderms can be sighted lumbering towards us on the horizon.

And second, if improving infrastructure is a necessary but not sufficient condition for reviving failing areas of the country, what else is the government going to do?  Shooing business away from London won’t work. Wooing it away might. Again, however, the government has so far shown no trace of having thought about how it might do this.  

The big risk is that the government will fail to provide the investment in infrastructure that the successful parts of the country need and instead provide investment in infrastructure in the declining parts of the country without providing the additional support to provide the economic turnaround that they urgently need.  The country has enough problems at the moment without massively misallocating resources at a time when the public finances are already under serious strain. The government needs to set out some very clear principles. And soon.

Alastair Meeks




h1

Fingering the index. A proposed technical change that is hugely important

Sunday, September 8th, 2019

There was some important news this week. You probably missed it in all the nonsense about Brexit. It is quite boring but that doesn’t excuse you from the responsibility of knowing about it. This news will almost certainly affect you directly financially.  

For a decade, statisticians have been undergoing an extended collective nervous breakdown about inflation and how to calculate it. Britain had been very early to look at this problem and had come up with a solution which it badged under the name of the Retail Prices Index (RPI to most of us). It has its origins before the First World War.  

Candidly, it is now showing its age. There are substantial problems with the way in which it is compiled, but perhaps its most fundamental flaw is mathematical. You and I think of producing an average by totting up a total and then dividing it by the number of items you added up. This is called the arithmetic mean and this is how RPI is produced. Unfortunately, when you are calculating an average rate of inflation, this method will, all other things being equal, overstate the underlying rate of increase, because people will tend to buy cheaper goods instead of paying for the more expensive item.

In these circumstances, the generally accepted better method is to use what is known as the geometric mean. You can’t do this in your head. You multiply all the different numbers together and then take the nth root of the product, where n is the number of items.

More modern methods of calculating inflation use the geometric mean. This underpins the Consumer Prices Index, which is the EU’s standard way of calculating inflation. As a result, CPI is thought to be a more accurate measure of inflation. More accurate, however, is not perfect. There are problems with the compilation of CPI too (less serious ones, admittedly). The difference is on average something of the order of 1% a year.

This would have been a matter of technical interest only, were it not for a grenade thrown by the coalition in 2010. It elected to move the increase of all state benefits and pensions to CPI, citing its superior accuracy. The massive long term saving in costs for a government that was committed to austerity no doubt had nothing to do with it. 

Curiously, the government continued to increase rail fares annually by RPI and student loans continue to bear interest by reference to RPI. You will note that the government benefits from paying its obligations by reference to CPI but collecting its due by reference to RPI – a neat if unscrupulous form of arbitrage. The government has continued to issue gilts by reference to RPI.

And there the government left matters, airily claiming that it was not for the government to disturb private arrangements. This was of no help at all to private pension schemes, many of which found themselves lumbered with a measure of inflation that was officially spurned but which their rules, usually drafted generations earlier, required them to use (we have seen a string of cases in the High Court about how to interpret pension scheme rules on this point – as a pension lawyer, I can only applaud government actions that result in increased need for pension law advice, but my clients no doubt feel less enthused about this development). Many long term private contracts have pricing structures that are denominated by reference to RPI. The government had opened a can of worms and had not provided a terrarium.

Ever since then, the geeky great and good have been trying to fill the gap the government created. New and different measures of inflation have been conjured up and later discarded. One consumer committee advised officialdom that RPI should be redefined to reflect the modern era. Not only was this advice spurned, the committee was promptly disbanded following its unhelpful suggestion.

To be fair, the cautious statisticians had a point. If RPI is redefined in a way that reduces its rate, the returns on gilts will be correspondingly reduced.  Buyers of gilts might well argue that such jiggery-pokery constituted a partial default on Britain’s debts – social death for a G7 country and something that might affect credit ratings and future borrowing costs.

So the story of the last decade has been one of slow decline for RPI, as official bodies progressively downgraded it and yet no one had the heart to euthanase it.

This week, the Statistics Authority pulled off a coup de théâtre. It disclosed that it had advised in March that RPI should be discontinued, and in response the Chancellor has asked it to consult with a view to redefining RPI so that it is, from a date between 2025 and 2030, to be calculated on the same basis as CPIH (a modified form of CPI that unlike CPI allows for housing costs). 

Six years after the consumer committee had been disbanded for the temerity of suggesting that RPI should be redefined, the Statistics Authority have basically taken up their suggestion. The difference between RPI and CPIH is roughly 0.7% a year on average.

The intention is that by phasing in the change over such a long time period, the accusation that Britain is defaulting on its debts can be avoided. It will probably work (and with gilt yields so low right now, the government can probably afford the risk of a bit of a fuss even if that’s wrong). If the consultation goes as suggested, that will be good news in the long term for students with debts and regular rail passengers.

What of pension schemes? Well, those pension schemes whose benefits are still calculated in part or in full by reference to RPI will see a saving in their costs in the long term. On the other hand, they will almost certainly have substantial gilts holdings that will produce in the long term lower returns for the same reason. They may lose on the swings what they gain on the roundabouts, or perhaps even more.  

And anyone who has a pension that is index-linked by reference to RPI is facing a hidden loss of value.  The change is right in principle, but a lot of pensioners face losing out in the long term. Because it’s boring and technical, most of them almost certainly won’t notice at all.  But the sums could be very substantial indeed: 0.7% a year adds up to a lot over time.

Anyway, I’m sure you’d rather talk about Brexit. Just check your wallet before you do.  

Alastair Meeks