The Enervated Economy

When I was a schoolboy the immensely tall Canadian economist, J K Galbraith, produced a book called The Affluent Economy, which had huge success. It gave a message that both North Americans and west Europeans wanted to receive: that the traumas of the Second World War and [in the case of Europe] of post-war reconstruction were pretty well over. The British had re-elected Harold MacMillan's Conservative government with their slogan "You've never had it so good!" The French were coming to a settlement under deGaulle after the traumas of losing their south-east Asian colonies and Algeria [which had been accounted part of metropolitan France]. The Federal Germans were proud of the 'economic miracle' that had been achieved under Chancellor Adenauer and economy minister Erhardt, and of their country's rehabilitation within the western alliance. Life did seem good, society seemed stable and politics were - broadly - honest.

Now, in 2017, we Brits agonise over economic growth figures as they weaken, and accept that the economy is likely to 'slow down' as wages rise more slowly than prices, and as millions of households reach their debt ceilings [especially as the banks are being urged to lower the headroom] and are thus unable to prolong the false economy in which consumer spending has been the 'driver' of the economy. Exporters are maintaining their earnings by raising the sterling prices of their products, so that they get an approximation to the pre-Brexit real-world price in external markets, rather than significantly increasing the volume of exports. This is disappointing, because in historic experience when a currency is devalued relative to others [as the pound has been since the Brexit vote] exporters from that country have been able to maintain a price advantage over their alien competitors to gain to greater share of the export market for their produce; and thus maintain employment for their factories and their employees. Indeed, in several post-devaluation periods Britain's exports have grown significantly, enabling firms to pay overtime wages to employees and sometimes to take on more staff and expand their investment plans.That is not happening now.

British industry has very few current schemes of major capital expenditure actually coming to fruition, whether the produce would be aimed at domestic or export markets. Yet, as is often mentioned in this blog, British firms are at least as innovative as at any time in history, but they are prone to alien takeover because there is a dearth of imaginative investment support in the country.

The media are celebrating the decision of BMW to keep production of the mini in the well-worn Oxford factory where it was first introduced six decades ago; but the electric engines for a new version will be imported from Germany. The innovatory element will not be British: typical of the international firms that use established plant in the UK. Even though manufacturing in Britain is continued, a foreign-owned firm can gather its cash reserves for use anywhere in the world while the UK factories are run down. So long as British labour is cheap, and the factory can be patched up, it can carry on. This is a dispiriting view, and not wholly typical of British plant today, but there is enough of it about to be worrying. The economy is increasingly enervated: lacking in energy, vigour or drive.

The announcement that new petrol and diesel cars are to be phased out completely by 2024 is no surprise; but one automatically sets beside that announcement the lack of any coherent policy to generate the necessary cheap electric power to enable the masses to run their own vehicles in 2041. In virtually every aspect of the economy a lack of vigorous innovative energy is apparent. Even the Brexiteer ministers who are supposedly planning a bright future for the UK "outside the EU" show all the signs of physical exhaustion and intellectual stagnation: of enervation.

Then, today, we get the headline news that the male human sperm count has declined catastrophically, with the prediction that reproduction may become difficult to achieve by the time petrol cars are banned. That is a cheerless prospect!

The Great Pensions Tragedy

The economic naivete of politicians is most clearly seen when financial planning for the future is brought into their arena. The political class has been warned for over forty years that the number of surviving retired people will continue to rise at least until 2030. During the same past four decades Britain's envied position as the country with the best pensions coverage in the world has disastrously been lost. The huge expansion of public sector employment, which provided those employees with the promise of generous index-linked pensions in addition to their state pensions, requires the rest of the population to pay higher taxes [and incur more public borrowing]. Meanwhile the decline in pension provision for taxpayers in private sector employment has been so precipitous that fewer people are members of optional pension schemes than at any time since the nineteen-fifties. In addition, hundreds of thousands of hereditary paupers have no access to any supplementation of the state pensions that they will receive in their sixties, in succession to their benefits.

The present coalition government has increased universal state pensions and promised to maintain their 'value' in future in line with 'inflation'; and one cannot imagine a Labour-led government reneging on that promise. No similar promise can be made by any government in respect of personal or employer-funded pensions. Inflation inevitably and inexorably diminishes the purchasing power of funded pensions over the years, and the impact is greater the more years pass after the date of retirement. A small number of pension funds are so well endowed that they have been able hitherto to increase pensions-in-payment in line with the rising cost of living, but in general pension fund trustees have asserted [and most of them have exercised] their right to make annual increases of less than officially declared 'inflation', or to freeze the amount paid out. A majority of the people who are classed as 'pensioners' are no longer members of funds managed by trustees; they are 'annuitants'': people who on retirement were given notional control of the 'pot' of cash that had accrued to their account in an employer's pension fund, to which contributions were made jointly by the employer and the employee. The recipient individual is required by law to buy an 'annuity' which is an income of a fixed sum of money each year. Most funds allow individuals to take a portion of the 'pot' as a cash sum, in which case their annual income thereafter will be reduced. As an additional complication some annuities provide limited compensation for inflation in future years, and in such cases the annuity is reduced to cover the cost and risk to the provider of having to pay the promised increases in the event of future inflation.

In response to the collapse of banking governments in most developed countries engineered massive increases in the money supply have been used to keep the banking system afloat. At the same time a huge increase in government borrowing has been needed to support the banks, and to pay both civil servants and recipients of state benefits. Government acquiescence in the continuing deindustrialisation of the economy has meant that the UK now has minimal earnings from sales of goods into international markets; yet every indication for the future is that the emergence of powerful new economies will drive up the prices of commodities that Britain needs to import. Worse still, with the abandonment of Britain's capacity to process raw materials means that imports come in prepared forms and as manufactured goods.Relative to the eighteenth, nineteenth and early twentieth centuries, and relative to population size, Britain generates grossly insufficient material exports to compete as a long-term buyer of commodities in which it is not self-sufficient. The kingdom faces both declining real standards of living and the phenomenon of dramatically rising prices for things that are material necessities for life. A glaring example of the increasing problem is in the energy market: Britain dissipated the benefits of North Sea oil largely on paying benefits to the people cast out from industry by Thatcherite-Blairite policies, and sold nuclear firms like Westinghouse to foreigners: and now cannot afford to build nuclear power stations as imported oil and gas prices face long-term increases. The phenomenon of rising prices will be compounded by the devaluation of the currency, as the country's import bill far exceeds it export earnings. Pensioner poverty will escalate; and younger people, seeing the poverty of their pensioner relatives will be disincentivised themselves voluntarily to 'waste' their current income on buying pension rights.

There is no obvious way out of this impasse. It is a stark indication of the means by which the national impoverishment prepared by generation of politicians will begin seriously to bite.
.