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.

Work and Wages

With total unemployment in the United Kingdom well in excess of six million, including one in five of under-twenty-fives, the cost of maintaining them all - even at a low standard of living - is a major cause of the still-growing budget deficit. It is highly desirable that at least two million of those people should get jobs, raising their standard of living and paying taxes. There is much talk of creating those jobs; but staff are being shed from the civil service, the armed services and the health service, so it is hoped that other sectors of the economy should generate employment. The private sector - business - is showing little sign of major job creation. In the few segments of the market where there is opportunity for employment there is an evident employer preference for immigrant labour. The available jobs are mostly in entertainment, hospitality and services, where emphasis is placed on personal attributes of clean appearance and willingness to work hard at peak periods. Native British unemployed products of comprehensive schools are perceived by employers not to possess these characteristics. It is even reported that many graduates do not meet employers' requirements for literacy, articulateness. smartness and diligence.

Manufacturing industry has been through half a century of decline: many skills have died out and 'habits of industry' that used to be cited as a great attribute of British artisans have become extinct. There is a fashion for people to be given 'apprenticeships'. For many centuries apprentices used to work alongside craftsmen and learn skills on the job. In the twentieth century industrial apprenticeship took on a more institutional form, where apprentices [including graduate apprentices] were put through a sequence of jobs in the works in parallel with study part-time of relevant technical subjects. As industry diminished the good schemes attracted more applicants and now the few surviving exemplars [like that at Rolls-Royce] stand out as remarkable opportunities for employment. The 'real' schemes are highly competitive and attract excellent candidates: they bear no relationship - other than the use of the word apprentice - with the charade that is in mind for the masses. Without access to the appropriate industrial plant, or to experienced trainers, or to skilled supervisors the new apprenticeships will largely be classroom based, with simulated work situations and rare factory visits. Candidates will recognise it as a sham, and there is no chance of such a scheme creating a mass supply of skilled women and men who could operate new factories: even if the necessary capital and desirable patented product concepts could be conjured into existence.

The present government is following its predecessor in looking to 'the third sector' - not-for-profit firms, and charities - to create jobs, with financial assistance from the government. At a cost of billions of pounds, this will enable a few people to get useful job experience; and it will condemn hundreds of thousands to disillusion and cynicism. Unemployment is a horrible experience, even for a few months: when it lasts for years its psychologically and morally destructive. If the surrounding circumstances include fake apprenticeships, subsidised non-jobs in charity and a penal attitude by the state to claimants for benefits, the destructive impact of unemployment is enhanced. Only 'real' jobs in 'real' industry and commerce - and genuinely useful roles in charity and the public services - give job satisfaction. Such jobs are only created by the investment of capital and the engagement of protected intellectual property ik as defined in Personal Political Economy. Tragically, there is no sign that this is in the offing for the British people.

The USA also has a huge problem of unemployment, and many failed schools. Hundreds of thousands of the unemployed are dysfunctional from an employer perspective. But most of the employed in the USA work hard: and those who are seeking employment expect to work hard. The average US employee has many fewer days per years of annual holiday than do Britons or continental Europeans; and the torrent of Latino immigration ensures that employers can expect to get a full days work for the pay that they offer. Despite very significant de-industrialisation, the US remains a formidable centre of manufacturing, especially in high-value-added sectors. Nobody on the eastern shores of the Atlantic should read into America's unemployment statistics the same dire picture as is to be inferred from British data. The relationship of work to wages in the USA is an example from which Britain can learn beneficial lessons: any idea that 'they are in the same boat as we are' is deeply mistaken. Americans are right to be deeply concerned about the current state of  work in their country; but they have the means to ameliorate their relatively benign situation far more readily than we do in Britain.

Intelligence and Common Sense

Quarter of a century as a university academic and two decades in the City have taught me that some of the people of highest academic attainment, who can be hugely articulate, are either obtuse on some issues, or unconsciously filter unwelcome realities of everyday life from their observation, or uncritically accept political opinions [as was the case with many of the scholarly communist die-hards of the nineteen-sixties and seventies]. Some remarkably able individuals combine all these characteristics. I have no idea whether or not Rowan Williams falls into one or more of these categories, but his behaviour and utterances indicate that he may well fall into the range.

His outpouring in the Financial Times today is an example. He writes as the Archbishop of Canterbury, aware that the heathen press [largely by quoting 'liberal' Christians] has gleefully dissected the conspicuous failure of the Chapter of Saint Paul's Cathedral to cope with the aftermath of the chaos by which the police allowed rent-a-crowd to come to rest next to their church. Appropriately he expresses sympathy with a carefully constructed argument for reform of the global economy that was recently promulgated by the Vatican. Much of this is simply restatement of classical church doctrine: some of which has been seen as impractical in an essentially secular business world. Rowan Williams chooses to add an emphatic endorsement to the Sarkozi-led campaign to introduce a global 'Robin Hood Tax' on all banking transactions.

The concept of a tax on transactions was adumbrated forty years ago by James Tobin, who proposed that there should be a levy on foreign exchange transactions which were growing in number and volume on a purely speculative basis, unrelated to the requirements for foreign currencies in 'real' international trade. The objective was to check the growth of the economically pointless money-making scam, which brought good earnings to the clever dealers who were creating a new market; and healthy profits to the firms that bankrolled their dealing. The current 'Robin Hood' proposal is not closely related to Tobin's idea. The context is the aftermath of a near-collapse in what is called 'the banking system', which is still being played-out with millions of jobs lost and declining living standards being imposed on the people of dozens of countries that had broken the Iron Law of Wages. The general public have become increasingly well aware that at least some people who are rather confusingly described [and stigmatised] as 'bankers' are still receiving remuneration that is a great multiple or nurses' or teachers' wages for performing 'socially useless' functions. The Sarkozi idea is to 'punish' the 'banks' with a tax on all transactions, the money to go to socially desirable causes in the 'real economy' [or maybe, actually, to help governments to service the debts that they have incurred in rescuing the banks].

Such a tax would merely be a nuisance. If it is imposed on transactions like paying wages, putting money into personal accounts and taking it out, issuing mortgages and other everyday 'retail' transactions, it will simply be levied on the [relatively] poor;  making them marginally worse off. If it is imposed on 'wholesale' transactions by some countries and not by others, it will simply remove trade and national income from the taxing countries to those that do not charge it. And if it is levied at the rate that is proposed [around 0.3% of the deal] it will not be at all painful for the financiers. It is a silly idea, based on misunderstanding reality.

There is a ground for a much larger tax - more than 10% [maybe much more] - on all those transactions that are unquestionably the issue of betting slips: derivatives, most swaps, and all futures that do not explicitly assure funding for demonstrable transactions in the 'real economy'. All this 'casino banking' should be recognised for what it is: gambling. It should be regulated in each country by the Gambling Commission - or the equivalent - and it should simply be banned in countries where gambling of other kinds is prohibited. It does not provide any 'financial service' to the economy that produces human subsistence. Some derivatives are used to 'hedge' some socially-useful transactions by pension funds and other essential agencies: alternative 'products' can be used for these purposes, and these should be used after exiting positions can be unwound during a transitional period. If the gambling continues, and with it the risk of instability in the finance sector is potentially increased, the citizens of the countries where it is permitted will at least be able to see the extent of the risk to which they are exposed because the tax returns will show how much is being transacted in this speculation. If there is some socially-useful aspect to this whole business, as some defenders of the system have claimed, it will also become clear and the regulatory system could be adjusted accordingly.

Price Inflation: the Peak?

Today sees the publication of a figure reporting the increase in prices between September 2010 and September 2011. Even on the scaled-down index that government now prefers shows this to be in excess of 5%.

The only significant segment of the population whose incomes will at least have increased to match price increases are the elite at the top of organisations who are able to negotiate bumper increases: senior executives in companies and the owners of successful businesses. It is notorious that their incomes have increased by more than inflation [on average] usually as a 'package' of a generous salary combined with a bonus linked to an easily-changed performance target, generous expenses and large contributions to the 'top hat' personal pension fund. Despite the envy and anger that many people express about this disparity, it is notable that many jobs exist in luxury shops, restaurants and other services that supply the rich: the British super-salariat and the many rich foreigners who resort to London as a place to spend parts of the year. If that trade was reduced dramatically unemployment would rise as activity declined in London and around the major racecourses and golf clubs, and in the many firms and farms that supply the luxury trades. The great majority of employees have accepted static wages, or just slight increases, rather than try to force their employers to pay them more that might lead to a reduction in the number of people employed. Even so, there is a growing apprehension that in the absence of rising demand firms will begin to shed labour that they have 'hoarded' over the past couple of years in order to keep their skills base intact.

Economic growth is negligible, consumer demand is declining for many everyday products, and there is no sign that this pattern will change. Just now, the Bank of England has begun to extend the pattern of quantitative easing by which the money supply is expanded. While there is a vigorous debate on how far this activity will assist growth in the 'real economy' there is very little doubt that it will cause devaluation - a further drop in the value of the pound against other currencies - so imports to Britain will become more expensive and that will add more to the pattern of price rises in this import-dependent country. There is no sign of an end to the grim round: and the government has no plan to change policy.