Archive for the 'Economy' Category


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


What will the UK interest rate be at the end of 2019?

Sunday, August 18th, 2019

I really don’t know much about economics and the intricacies of how and interest rates are set by the Bank of England, looking at this market from Paddy Power is a bit like pinning the tail on the donkey for me.

My theory on this market is that is Project Fear turns out to be very close to Project Reality then Sterling will seriously and quickly tank as we head to No Deal.

The only time I can remember a similar situation in my lifetime was the legacy of Margaret Thatcher’s final act of European integration came under attack from the Brexiteer bogeyman George Soros on Black Wednesday.

Back in 1992 interest rates were raised from 10% to 12% then a further increased was announced to 15% so raising interest rates is one lever to stop your currency tanking, albeit in 1992 the government set the interest rates, now that power resides with the Governor of the Bank of England. The interest rate increases were cancelled the next day but my hunch any increases will last longer especially given that how historically low current interest rates are

On that basis I think the value is backing the 14/1 on interest rates being 2% or higher at the end of the year but perhaps PBers can convince where the value in this market is. Over to you.



Trump and the inverted yield curve

Friday, August 16th, 2019

2 to 10 year yield spread

President Trump would seem to have an advantage over whoever the Democrats select as his 2020 challenger: since the Second World War, nine elected presidents have sought a second term, and seven of them succeeded.

The two exceptions were Jimmy Carter in 1980, and George H. W. Bush in 1992. In both cases, the US economy was performing badly in the lead-up to the election. US voters seem to be indulgent towards their incumbent presidents, but less so if jobs are being lost. In 1980, the Ronald Reagan was able to attack Carter with a memorable line: “A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his”. In 1992, Bill Clinton’s campaign was similarly focused on the recession then affecting the USA: “It’s the economy, stupid”.

As Trump is fond of telling us, so far the US economy has been doing well under his watch. Unemployment is historically low, and consumer spending has held up well. The long recovery and bull market which followed the 2008/9 financial crisis have continued into his term, boosted by historically low interest rates, tax cuts, and Trump’s sensible decision to make it more attractive for US companies to repatriate foreign profits.

But there is a warning sign flashing a very strong danger signal for the US economy. The graph shows the difference between the interest rates on ten-year and two-year Treasury bonds. Usually this is positive – you get more interest for locking your money away for a long period, but it has just gone negative. Historically this ‘inversion of the yield curve’ has been a very good indicator of impending recession: not only has it preceded all economic downturns since WWII, but also it hasn’t given any false signals, as can be seen on the graph above where recessions are shaded in grey.

What should worry Trump most is that in each case there has been a lag, of around 6 to 18 months, between the curve inverting and the US economy entering recession. If that correlation holds, voters could be casting their votes just as the economy worsens considerably. Given Trump’s dependence on support from blue-collar workers in the central industrial belt, that could cost him his second term.

Of course there is one easy thing he could do to help avoid this. Economists don’t know much, but they do know one big thing: there are no winners in trade wars, only losers. If Trump wants to be re-elected in 2020, he’d better get on the phone to President Li and do a deal to cancel the spiral of competitive tariffs which China and the US are imposing on each other, and which is damaging both economies.

The Democrats should also heed a lesson from history, and especially from Bill Clinton’s 1992 campaign. You don’t win elections by playing to your base and calling your would-be swing voters stupid or racist. You win elections by winning the argument on the economy, jobs, and health-care.

I don’t expect either side will take my advice, though!

Richard Nabavi


Meanwhile in other news

Thursday, January 24th, 2019

What’s happening on the High Street & other developments

This month, the newspapers, television, radio and social media have been consumed by Brexit. You might have noticed.

In other news, Marks & Spencer have announced the closure of another 17 branches. Patisserie Valerie has gone into administration, with up to 3,000 jobs at risk: 70 branches are closing immediately. Santander is closing 140 branches across the UK, putting over 1000 jobs at risk. With Debenhams also closing stores and HMV in administration, many retailers are under heavy pressure and the traditional high street is being hammered.

It’s not just the high street that’s seen big news. In the last week, Sony has announced that it is to move its European head offices from Britain to the Netherlands. Dyson’s head offices are moving to Singapore. Philips Avent are to close their factory in Glemsford, Suffolk, with the loss of 400 jobs. AXA XL, an insurer, is relocating jobs to Dublin.

You can overdo the doom and gloom. On the other side of the coin, employment is touching record highs, as are job vacancies, and wage growth has picked up. The good news is less visible than the bad news because the disasters are usually big and the good news is largely comprised of many small decisions.

Many can and do choose to see these things through a Brexit prism. The desire to create new Remain and Leave parables is strong among many who have closer affinities to adherents to a faith than to rational politicians. There is something in it too.

In reality though, the continuities are more striking than the changes. Employment data, though not wages growth, have been surprisingly strong throughout this decade. Conversely, the high street has been hollowing out for a decade or more: Woolworths went bust in 2008. Both the Netherlands and Ireland have been filching work from Britain for many years too: Shell’s headquarters migrated to the Netherlands in 2004, for example.

This leads on to three important points. First, Brexit is just one motor of change at present, and not an especially big one. There are many other more powerful motors driving current trends. It might be attracting all the attention at the moment but Brexit is not solving the problems of the age, far from it.

Yet many people voted for Brexit because they perceived Britain to be going in the wrong direction. And so to my second point, which is that the process of Brexit is doing nothing to lead to the change of direction that they crave and may in fact be intensifying the previous trend. Manufacturing continues to be hollowed out, high streets continue to be gutted. If you look at where the damage is being done, the Leave-voting heartlands continue to be hammered.

For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath. Every single one of the latest 17 M&S closures are in areas that voted Leave, including Boston, Newark, Rotherham and Deal. The recent positive benefits have been felt elsewhere.

My third point follows from this. At present Leave supporters seem intent on securing Brexit as an end in itself. At some point, however, they will notice that globalisation has continued and that things have deteriorated further. What are the political parties going to say to them at that point? Brexit is not a policy but a framework which policies can inhabit.

Despite claiming the mantle of the party of Brexit, the Conservatives have been so consumed by the architectural challenges that they have not looked at what the soft furnishings might entail. Labour, less weighed down by the obsessions of a lunatic mainstream, have given some thought to this and have built much of their messaging on this around the Centre For Towns prospectus that Lisa Nandy co-founded.  

The fallout from the process of Brexit provides many challenges for the Conservatives, not the smallest of which is whether they can remain a single party and reunite around a fresh prospectus. At some point they are going to have to start thinking about the challenges that the public are actually facing on a day-to-day basis rather than engaging in theological disputes over the eschatological nature of Brexit. If they don’t, they face a rout at the next general election at the hands of the Labour party, which at least has some answers to these questions.

There are no signs of this happening. While the Conservatives remain neck and neck in the polls with Labour, they’re strategically in an awful position, lacking any forward-looking prospectus at all. This failure was exposed in the general election campaign in 2017 and it nearly cost them power. They look set to be making the same mistake again next time. They’re currently marginal favourites on Betfair to win most seats next time round (last matched at 2.08). Right now that looks like a clear lay.

Alastair Meeks


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

Wednesday, October 31st, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alastair Meeks

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


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

Sunday, October 28th, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alastair Meeks

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


Footing the bill. The challenges for freespending politicians

Tuesday, October 9th, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alastair Meeks


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

Sunday, March 25th, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alastair Meeks