Economic Blindness

The start of 2013 has brought more mild, cloudy and [here in the Peak District] drizzly weather. Just a dawn on which to take the BBC's TODAY Programme with the morning tea.
One of several depressing items was a discussion by Economists about the phenomenon that is thrown up by British economic statistics. Employment is at its highest level in recent decades: but perceived productivity has declined and the national product is not increasing significantly [indeed, it may just have 'flatlined' over the whole of 2012].
Wages are increasing overall at less than the government's indexed figure for 'inflation', and a high percentage of the workforce are attending their workplaces for less than the 35 hours a week that sensibly can be classified as full-time employment. Some firms have put reliable, trained employees on 'short time' to keep them on-side in case business improves; but the majority of part-timers are engaged on that basis. Many of the part-timers receive only the statutory minimum wage per hour; and for the majority there is no pension provision. The new catch-all pensions legislation will draw many such people into basic schemes: which implies that a further deduction will be taken from their wages and put into a pot with a promised yield in retirement that will be derisorily small. The loss of even a couple of percent of an exiguous wage will have a depressing effect on overall 'cansumer demand' in the economy, when multiplied by millions of affected individuals; but the sums gathered for investment by the pension providers will not be sufficient to create investments that will absorb significant numbers of the unemployed into new jobs and thus increase demand through their enhanced spending.
Wage-earners are still buying imports on an heroic scale: everything from East African fruit, veg and flowers to web using technology from the Far East.
Any increase in the real wages of empoyed people, or in the number of employed people, would most likely increase the deficit on the balance of payments: so in a seriously depressing sense the government is contributing to its target of deficit reduction by keeping a pretty tight cap on incomes.

This is the context in which the Economists this morning discussed these recent economic data. One of them had recently publiched a Paper with a mind-blowingly complex title, replete with pseudo-scientific terminology adding up to zero usefulness. They spoke of productivity as if there was no qualitative difference between the various categories of output: as if it did not matter what was the level of notional value-added by different firms' plant. This is in line with the textbook assumption that all output is of widgets: it is almost impossible for non-Economists to understand the primitivism of this lack of thinking.

To say that "the productivity of the British economy is declining" is to say that products and services are sold for a declining number of money-units per unit of output. This means that prices of goods made in British factories are falling. This does not necessarily mean that fewer units of output are being sold; it can equally mean that goods are being sold for lower 'factory gate prices'. How could such a thing occur?
A] It could mean that global competition is forcing factory owners to lower the prices at which they sell their branded goods Or
B] it could mean that firms have been bought by foreign owners who buy the output as being part-processed [though it is physically complete] and then ship it to the export markets where it will be sold, and the magic transformation by which a pile of coats or a cartoon feature film becomes a branded commodity [in the terms of my own analysis, a quon] takes place outside the UK - it may even notionally be reinported to the UK as a quon - so that the final, most significant 'addition of value' is ascribed not to the UK factory but to the corporate owner's success in transfer pricing the product offshore. Or
C] it could mean that rising wages and other industrial costs in China are making it viable to start or restart or increase the output of basic industrial products in the UK; which only have modest price tags such that an increasing proportion of British factory output is of modestly  priced goods [what I describe as marcoms].

All those three possibilities point to a sharp decline in the profitability of British industry, and in the taxes that firms can pay to the state, and the level of wages they can pay to employees: all of which presage declining investment, declining public and social services, and diminishing real wages.

The policy options that are being presented to the government, and to the opposition, and to the Bank of England display the economic ignorance of Economists.

Hard times are ahead of us: and mitigation will only become feasible when the proven principles of Political Economy are reinstated as the basis of policy.

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.
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