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Econoblog
Discussion and analysis of the latest economic issues.
By Sean O'Grady, Economics Editor of The Independent.
By Sean O'Grady, Economics Editor of The Independent.
Harsh as it is on the staff who are losing their jobs at Lloyds, the move is inevitable.
It isn't as obvious as in our car factories or high streets, but we have too much banking capacity in this country and too many people working in it and, it has to be said, too many still earning huge bonuses on the back of de facto taxpayer guarantees on their businesses ad the risks they run.
Put at its simplest, our banking sector has to slim down, because there isn’t enough money being made in the sector to go round. Less capacity means better profits and more sustainable jobs in the e longer run. It is painfully unjust that things should have come to this - support staff, not always well-paid being scrapped because the of the errors of those paid ten or twenty times what the clerks, but that is where we are.
It isn't as obvious as in our car factories or high streets, but we have too much banking capacity in this country and too many people working in it and, it has to be said, too many still earning huge bonuses on the back of de facto taxpayer guarantees on their businesses ad the risks they run.
Put at its simplest, our banking sector has to slim down, because there isn’t enough money being made in the sector to go round. Less capacity means better profits and more sustainable jobs in the e longer run. It is painfully unjust that things should have come to this - support staff, not always well-paid being scrapped because the of the errors of those paid ten or twenty times what the clerks, but that is where we are.
Nothing illustrates the Government's central dilemma over the economy better than the Royal Bank of Scotland.
RBS's results were predictably awful, and boss Stephen Hester was right to warn that recovery for the bank would be a marathon rather than a sprint. But what about the UK's economic recovery, seemingly increasingly marathon-like?
Here the Government has divided loyalties and instincts. As the majority shareholder in the bank they want it to reduce its losses and build up its capital - so it can be sold off at some point. However, as custodians of the wider economy they also want RBS to lend freely, maybe to some of the more marginal cases, just to help the economy move ahead. Yet that approach might lead to yet more bad debts and losses.
Rather insensitively Hester spoke dismissively about lending more to business on the Today show this morning in his interview with Evan Davis. Well, he is entitled to his view, but ministers and their agency UKFI that looks after our stakeholdings cannot have things both ways.
They need to tell Hester what it is they want him to do - fix his bank or help fix the economy.
RBS's results were predictably awful, and boss Stephen Hester was right to warn that recovery for the bank would be a marathon rather than a sprint. But what about the UK's economic recovery, seemingly increasingly marathon-like?
Here the Government has divided loyalties and instincts. As the majority shareholder in the bank they want it to reduce its losses and build up its capital - so it can be sold off at some point. However, as custodians of the wider economy they also want RBS to lend freely, maybe to some of the more marginal cases, just to help the economy move ahead. Yet that approach might lead to yet more bad debts and losses.
Rather insensitively Hester spoke dismissively about lending more to business on the Today show this morning in his interview with Evan Davis. Well, he is entitled to his view, but ministers and their agency UKFI that looks after our stakeholdings cannot have things both ways.
They need to tell Hester what it is they want him to do - fix his bank or help fix the economy.
Though the Bank of England and its Governor, Mervyn King, would never use such language, they are spooked.
Spooked that is both by the continuing weakness in the economy, which contracted again in the third quarter of the year, and out still defiantly bust banking system, which means that credit is scarce and dear for those who need it from a bank (if you can go to the stock market you'll be OK though).
The increase of £25bn to £200bn in the quantitative easing programme - so called printing money - brings the total to almost three times the original estimate of how much money would be needed to get the economy moving - estimated at £75bn when the policy was launched only last March. They might have gone further - another £50bn, but this is big enough news.
The credit crunch, in other words, is far form over, and is just one of the big factors - along with our vast debts and over reliance on the City and housing for prosperity - that will squeeze our living standards for the next few years. Even the bank’s moves are unlikely to change that. The party, in case you hadn’t noticed, is over and isn’t going to restart for many years.
Spooked that is both by the continuing weakness in the economy, which contracted again in the third quarter of the year, and out still defiantly bust banking system, which means that credit is scarce and dear for those who need it from a bank (if you can go to the stock market you'll be OK though).
The increase of £25bn to £200bn in the quantitative easing programme - so called printing money - brings the total to almost three times the original estimate of how much money would be needed to get the economy moving - estimated at £75bn when the policy was launched only last March. They might have gone further - another £50bn, but this is big enough news.
The credit crunch, in other words, is far form over, and is just one of the big factors - along with our vast debts and over reliance on the City and housing for prosperity - that will squeeze our living standards for the next few years. Even the bank’s moves are unlikely to change that. The party, in case you hadn’t noticed, is over and isn’t going to restart for many years.
Forget, if you're not inclined to do so, the merry go round of billions of pounds circulating between the government and the banks they own.
As Evan Davies devastatingly pointed out to Alistair Darling on the BBC Radio 4 Today show this morning, if the banks get into more trouble with their bad debts, then any "penalties" they pay to the government or new big losses they incur will have to be underwritten by the Government, which owns huge chunks of them, in any case.
As Evan Davies devastatingly pointed out to Alistair Darling on the BBC Radio 4 Today show this morning, if the banks get into more trouble with their bad debts, then any "penalties" they pay to the government or new big losses they incur will have to be underwritten by the Government, which owns huge chunks of them, in any case.
The point here is that what’s done is done; Royal Bank of Scotland and Lloyds Banking Group have amassed vast quantities of "toxic" debts, and the Government - taxpayers in other words - now own them, the losses that is. They're ours now. That pass was sold long ago. We're lumbered with them whether we break the banks up or not. It was always going to be better to cordon these off in a sate owned bad bank, and let the good bank that’s left over be sold back to the private sector.
This is what the government is doing with Northern Rock. It means more competition, and a well capitalised new bank that will actually be able to lend to small businesses and first time buyers. That's good. The break up of Lloyds and RBS - bringing back the old Williams and Glyn's Bank or the Cheltenham and Gloucester - are more to do with EU pressure for more competition, but these new banks, if they are to prosper, will have to be cleansed of bad debts - "good banks" - too. Again they should be more willing to give you a mortgage or loan than their cash-strapped loss making state-owned former parents. So a positive move by the Treasury.
None of this is much of a deal for the taxpayer, but then again, it was never going to be.
This is what the government is doing with Northern Rock. It means more competition, and a well capitalised new bank that will actually be able to lend to small businesses and first time buyers. That's good. The break up of Lloyds and RBS - bringing back the old Williams and Glyn's Bank or the Cheltenham and Gloucester - are more to do with EU pressure for more competition, but these new banks, if they are to prosper, will have to be cleansed of bad debts - "good banks" - too. Again they should be more willing to give you a mortgage or loan than their cash-strapped loss making state-owned former parents. So a positive move by the Treasury.
None of this is much of a deal for the taxpayer, but then again, it was never going to be.
New Bank of England policymaker Adam Posen is an honest man, which is nice. He has just about admitted that while the e banking system is broken there is very little the authorities can do to help small businesses. Big forms can go to the stock market to tap funds; but how many corner shops and plumbers can do that? The Bank's policy of quantitative easing - printing money - seems to be working, but only for a slice of the population. No-one has any easy answers to this, but at least Posen is telling us the truth about how it is. An encouraging start.
Gatwick, let us be sure, is worth far, far more than the £1.5bn that BAA's Spanish owners Ferrovial have got for it from the private equity group Global Infrastructure Partners, even if parts of its business are heavily regulated.
Long term, it has tremendous scope, this neglected alternative hub for London. True, most of the reason for the sale was pressure from the Competition Commission, and it will be good news for travellers that BAA's London monopoly has been broken. However, the timing and terms of this sale are another matter, and its smacks of certain desperation on the part of the heavily indebted Ferrovial to raise cash fast, even in current relatively depressed conditions.
Global Infrastructure Partners would not be the first private equity group to seize such an opportunity. A number of questions seem to arise here:
What other airports will Ferrovial selling a hurry? What happens to flights if Ferrovial go bust? Does the CAA or Department of Transport know what to do? And why don’t we follow Boris Johnson’s advice and start thinking about a wholly new and more satisfactory answer to the problem of getting people in and out of London - ie a new airport in the Thames Estuary - "Boris Island".
Long term, it has tremendous scope, this neglected alternative hub for London. True, most of the reason for the sale was pressure from the Competition Commission, and it will be good news for travellers that BAA's London monopoly has been broken. However, the timing and terms of this sale are another matter, and its smacks of certain desperation on the part of the heavily indebted Ferrovial to raise cash fast, even in current relatively depressed conditions.
Global Infrastructure Partners would not be the first private equity group to seize such an opportunity. A number of questions seem to arise here:
What other airports will Ferrovial selling a hurry? What happens to flights if Ferrovial go bust? Does the CAA or Department of Transport know what to do? And why don’t we follow Boris Johnson’s advice and start thinking about a wholly new and more satisfactory answer to the problem of getting people in and out of London - ie a new airport in the Thames Estuary - "Boris Island".
Good, bad or indifferent? The only sense in which the latest figures on the public finances could be described as good or encouraging is that they were slightly better than the every worst city fears. That's it. Like being told you’ll only have to have one foot amputated instead of the two.
On every other measure they are grim - worse than in our peace time history, worse than Treasury estimates, worse than most other advanced nations, if not all. The nation is not bust, to be fair, but it does men that the "fiscal squeeze" when it comes - next year on - will be much tougher than most people admit. That means longer waits for operations on the NHS, larger class sizes, higher bus and train fares (as London has just found), local arts and sports projects cancelled or postponed, parks less well looked after, - and higher taxes, especially council tax and maybe even road pricing.
That's the real cost of the national debt.
On every other measure they are grim - worse than in our peace time history, worse than Treasury estimates, worse than most other advanced nations, if not all. The nation is not bust, to be fair, but it does men that the "fiscal squeeze" when it comes - next year on - will be much tougher than most people admit. That means longer waits for operations on the NHS, larger class sizes, higher bus and train fares (as London has just found), local arts and sports projects cancelled or postponed, parks less well looked after, - and higher taxes, especially council tax and maybe even road pricing.
That's the real cost of the national debt.
It's not fair but it really has to be done. The Financial Services Authority’s decision to restrict self certification mortgages and ensure that borrowers really can pay back their debt will, undoubtedly, work against younger first time buyers, and especially the self employed and freelance workers.
It's difficult to get a mortgage now if you haven’t got a humongous deposit of 25per cent, which means about £40,000 in London. The point, though, is that lax mortgage rules helped get us where we are now - the "sub prime" mortgages doled out to the underclass in the US, often cynically exploiting ignorance and creating "bait rates" - tempting teaser interest rates for the first year or two before the bills get massively inflated to unaffordable levels. We had a bit of that over here too, but mercifully it only reached about 5 per cent of the mortgage market, against closer to 20 per cent in the States.
We said "never again" when the sub prime phenomenon crashed and we need rules to make sure it does not happen again, because unaffordable mortgages are bad for everyone – banks, home buyers and, as we see, ultimately taxpayers. We have to err on the side of caution. The FSA has done the right thing; pity it wasn’t so wise a few years ago…
It's difficult to get a mortgage now if you haven’t got a humongous deposit of 25per cent, which means about £40,000 in London. The point, though, is that lax mortgage rules helped get us where we are now - the "sub prime" mortgages doled out to the underclass in the US, often cynically exploiting ignorance and creating "bait rates" - tempting teaser interest rates for the first year or two before the bills get massively inflated to unaffordable levels. We had a bit of that over here too, but mercifully it only reached about 5 per cent of the mortgage market, against closer to 20 per cent in the States.
We said "never again" when the sub prime phenomenon crashed and we need rules to make sure it does not happen again, because unaffordable mortgages are bad for everyone – banks, home buyers and, as we see, ultimately taxpayers. We have to err on the side of caution. The FSA has done the right thing; pity it wasn’t so wise a few years ago…
Is now a good time to sell your car? No. A good time to sell your house? Er, equally no. A good time to sell a business? Well, no again. A good time to sell government assets...?
Agreed, the proposed fire sale of the likes of the Tote and the Channel Tunnel fast link won’t happen for a year or two, but even then few believe the economy will be back to the sort of boom conditions needed to get a decent price for national assets. Is the Government so desperate for cash that we need to raise £3bn out of our deficit of £175bn this year by selling off some prize assts fro next to nothing? Seems so, sadly. Funny how Labour opposition front benchers such as Gordon Brown used to rail at the Tories for selling off our nationalised industries for a big discount to their "friends in the City".
I think the National Audit Office ought to look at this one, under the general heading of ministers’ duty to maximise returns to the taxpayer…
Agreed, the proposed fire sale of the likes of the Tote and the Channel Tunnel fast link won’t happen for a year or two, but even then few believe the economy will be back to the sort of boom conditions needed to get a decent price for national assets. Is the Government so desperate for cash that we need to raise £3bn out of our deficit of £175bn this year by selling off some prize assts fro next to nothing? Seems so, sadly. Funny how Labour opposition front benchers such as Gordon Brown used to rail at the Tories for selling off our nationalised industries for a big discount to their "friends in the City".
I think the National Audit Office ought to look at this one, under the general heading of ministers’ duty to maximise returns to the taxpayer…
Our story on the dollar has had a satisfyingly positive response; denials from all the official sources, as you might expect, but confirmation from the markets, where the dollar has tanked.
In other words, the markets have spoken, and they can see the writing is on the wall for the dollar, long-term. Maybe the only surprise in all this that it has taken the world so long to wake up to the changed economic realities.
In other words, the markets have spoken, and they can see the writing is on the wall for the dollar, long-term. Maybe the only surprise in all this that it has taken the world so long to wake up to the changed economic realities.
Only in Britain. Only in Britain could the Government knowingly victimise our biggest manufacturing company.
Selling kit to kill people with isn’t a great way to make a living but given where we are now, it is the best we've got; good for jobs when unemployment is soaring; good for the balance of payments in a nation accustomed to living beyond its means; good, maybe, for our international clout. Can you imagine the French equivalent of the SFO going after their Thales or the Americans prosecuting Lockheed or Northrupp? No. Of course not. Says it all, really.
Some of us are starting to miss Tony Blair, who at least had some regard for the British national interest.
Selling kit to kill people with isn’t a great way to make a living but given where we are now, it is the best we've got; good for jobs when unemployment is soaring; good for the balance of payments in a nation accustomed to living beyond its means; good, maybe, for our international clout. Can you imagine the French equivalent of the SFO going after their Thales or the Americans prosecuting Lockheed or Northrupp? No. Of course not. Says it all, really.
Some of us are starting to miss Tony Blair, who at least had some regard for the British national interest.
Having just returned from a vacation in Burgundy I can quite understand why President Sarkozy wants the world to move away from grey stats such as GDP and move to a new definition of economic progress based on the concept of “happiness”. (Actually there’s rather a good joke about the French pronunciation of happiness, but I’ll leave that for now.)
He has asked some fine economists, such as Joseph Stiglitz and Armatya Sen to help him out with this one. You can see why. The French have worse unemployment than us, and have done for decades, probably more racism, more social exclusion and deeper structural issues (long term) wit their dependence on unviable agriculture and manufacturing, much of which will eventually fall victim to the rise of China and India. Now I happen to think that the French have better cuisine, at all levels, fine wines and a more civilised approach to life, at least in the countryside. Their way of life is enviable in so many ways. But so much of that is subjective; who is to say whether a burger is better than a baguette with runny cheese, really? I know which I prefer, but I don’t think tasty food can compensate for mass unemployment.
Happy birthday? A year ago the US authorities let Lehman Brothers go.
The excuse, offered recently by US Treasury Secretary Tim Geithner – in those days head of the New York Fed - is that the US Government and its agencies didn’t have the legal means to save it, nor a buyer. Well, that didn’t stop them saving just about every other sizeable US institution, and, as we all know, if the US President wants something, he usually gets it.
Still, it went, and the only good thing that can be said about the sound of the financial rubble tumbling down around their heads is that it made the world’s governments take the banking crisis seriously. After all, the credit crunch was already over a year old when Lehmans flopped, and it was high time they took an interest. So they did; massive public spending and borrowing; recapitalising troubled banks; insuring toxic assets; setting up “good banks” and “bad banks”; cuts in interest rates to almost zero; huge injections of cash into the financial system; nationalisation of banks and rescues of car companies.... and more.
Quite a bit has been done in the past year, then, and it does seem to have worked. Parts of the world are nudging out of recession now. The question is, what happens when all that vast panoply of state support for the economy starts to be withdrawn? By the second birthday of the Lehmans collapse we ought to have a pretty good idea…
The excuse, offered recently by US Treasury Secretary Tim Geithner – in those days head of the New York Fed - is that the US Government and its agencies didn’t have the legal means to save it, nor a buyer. Well, that didn’t stop them saving just about every other sizeable US institution, and, as we all know, if the US President wants something, he usually gets it.
Still, it went, and the only good thing that can be said about the sound of the financial rubble tumbling down around their heads is that it made the world’s governments take the banking crisis seriously. After all, the credit crunch was already over a year old when Lehmans flopped, and it was high time they took an interest. So they did; massive public spending and borrowing; recapitalising troubled banks; insuring toxic assets; setting up “good banks” and “bad banks”; cuts in interest rates to almost zero; huge injections of cash into the financial system; nationalisation of banks and rescues of car companies.... and more.
Quite a bit has been done in the past year, then, and it does seem to have worked. Parts of the world are nudging out of recession now. The question is, what happens when all that vast panoply of state support for the economy starts to be withdrawn? By the second birthday of the Lehmans collapse we ought to have a pretty good idea…
It's very difficult not to suppress great feelings of betrayal when you look at what happened to MG Rover.
The treachery of the Phoenix Four is obvious; though it wasn't just their greed, but the way that they squandered the time and resources that they did have available. They spent an awful lot of time and money on real fringe projects such as a Rover 75 kitted out with a massive v8 engine from the Ford Mustang and the MG SV, a bizarre supercar a bit like a TVR with, at best, a tiny market. They were unlucky with their Chinese partners, true, and a fire at their engineering partners, but the real failure was their inability to focus, if you'll pardon th e pun, on a new mid range Ford Focus competitor. More than most, the motor industry is a product-led business, and MG Rover was weakest in that segment of the market.
The other betrayal, I have to say, was by our government.
In France what happened to MG Rover would have been unthinkable. French local authorities and government agencies invariably buy French; the public does too; and their ministers feel not a moment's doubt about supporting their national champions, Renault and Peugeot via subsidies of one sort or another. By contrast we had the most cussedly free trading free market bunch running this country since the Peelites of the mid nineteeth centry. A tiny fraction of the state support now being offered to banks and foreign car makers might have saved Rover either in 2000 when BMW were looking for funds, or later. Our current scrappage scheme will have sent over £200mn to foreign car companies by the time it's over - that is without creating a single manufacturing job in this country. But there was never a hope that the Treasury would approve even modest help for what was left of our motor industry. No wonder MG Rover never stood a chance.
The treachery of the Phoenix Four is obvious; though it wasn't just their greed, but the way that they squandered the time and resources that they did have available. They spent an awful lot of time and money on real fringe projects such as a Rover 75 kitted out with a massive v8 engine from the Ford Mustang and the MG SV, a bizarre supercar a bit like a TVR with, at best, a tiny market. They were unlucky with their Chinese partners, true, and a fire at their engineering partners, but the real failure was their inability to focus, if you'll pardon th e pun, on a new mid range Ford Focus competitor. More than most, the motor industry is a product-led business, and MG Rover was weakest in that segment of the market.
The other betrayal, I have to say, was by our government.
In France what happened to MG Rover would have been unthinkable. French local authorities and government agencies invariably buy French; the public does too; and their ministers feel not a moment's doubt about supporting their national champions, Renault and Peugeot via subsidies of one sort or another. By contrast we had the most cussedly free trading free market bunch running this country since the Peelites of the mid nineteeth centry. A tiny fraction of the state support now being offered to banks and foreign car makers might have saved Rover either in 2000 when BMW were looking for funds, or later. Our current scrappage scheme will have sent over £200mn to foreign car companies by the time it's over - that is without creating a single manufacturing job in this country. But there was never a hope that the Treasury would approve even modest help for what was left of our motor industry. No wonder MG Rover never stood a chance.
For a depressingly long time the choices in the British motor industry have often boiled down to the lesser of two evils. Shut Longbridge or Cowley was the choice for successive owners of what we used to call British Leyland from the 1970s on. Phoenix Four or Alchemy to take over MG Rover in 2000? (And we should learn more about MG Rover’s demise in 2005 when the official report is published tomorrow. Did Brown’s refusal to stump up some cash finish the old thing off?)
And now the choice, made in fact by GM, about what to do with GM Europe/Opel/Vauxhall. In fact the decision by GM to sell to Magna is probably one of the worse options. The Luton van plant doesn’t fit easily into any strategic vision, and when the contract from Renault/Nissan to build vans there runs out in a couple of years few would be surprised if it closed.
The prospects for Ellesmere Port are brighter though, as bright as a brand new Astra in fact. The aid given by the British government earlier to secure this new model was wisely spent. Production of the new model is underway and it ought to be secure. Most significantly, there may well be some sort of electric car built in the UK too – currently codenamed the Ampera, and based on the much published Chevrolet Volt. Providing Magna can keep up the technical cooperation with GM that too ought to secure Ellesmere Port's future for the best part of a decade. And that’s about the best we can hope for in today’s; climate. The worry will always be that the Russian interest in the consortium, which is substantial, will over time see technology and production move eastwards. That seems to be something that we will all just have to live with: Any promises made now - including to the Germans - will prove fairly worthless, we can be sure.
The prospects for Ellesmere Port are brighter though, as bright as a brand new Astra in fact. The aid given by the British government earlier to secure this new model was wisely spent. Production of the new model is underway and it ought to be secure. Most significantly, there may well be some sort of electric car built in the UK too – currently codenamed the Ampera, and based on the much published Chevrolet Volt. Providing Magna can keep up the technical cooperation with GM that too ought to secure Ellesmere Port's future for the best part of a decade. And that’s about the best we can hope for in today’s; climate. The worry will always be that the Russian interest in the consortium, which is substantial, will over time see technology and production move eastwards. That seems to be something that we will all just have to live with: Any promises made now - including to the Germans - will prove fairly worthless, we can be sure.
By the way, let's also hope that Saab, under new Swedish owners, does better than it ha sunder GM’s often confused ownership of this great brand.
Will there be a national outcry over the Kraft takeover of Cadbury? I’m not sure there should be. It’s a obviously a bit of a shame to see another great British brand name go abroad, joining Mini (Germany), Jaguar (India), Harry Ramsdens (Australia), Abbey National/Bradford & Bingley/Alliance & Leicester (Spain) and the Body Shop (France), to name but a few.
We can’t afford to be too sentimental here. Cadburys is a pretty successful manufacturing business, one of the very few left in British control, and we ought to hope that it can survive, and expand as such. I’d prefer that. But what really matters is the jobs and prosperity that the business brings to Birmingham and the other UK operations.
As it happens, I’m not so convinced that Kraft will be able to do any better than the existing set-up, but that’s where they debate needs to be, leaving aside the householders’ interests for the timing being. Way back in 1988, there was a huge national storm when Nestle bought Rowntrees, and it’s true that the Swiss didn’t allow their firms to be attacked as easily as we did ours, and there were some competition concerns. Yet if you go abroad much you’ll see more Kit Kats and the like on sale than we used to see, which must say something for the benefits Nestle brought to the York-based Rowntree concern. More Cadburys Creme Eggs and Wispas sold in Europe and the rest of the world would be a good thing. The question of foreign ownership ought to be secondary to the long term interests of a business.
On that point, Kraft has yet to win the argument, but it is a debate worth having.
We can’t afford to be too sentimental here. Cadburys is a pretty successful manufacturing business, one of the very few left in British control, and we ought to hope that it can survive, and expand as such. I’d prefer that. But what really matters is the jobs and prosperity that the business brings to Birmingham and the other UK operations.
As it happens, I’m not so convinced that Kraft will be able to do any better than the existing set-up, but that’s where they debate needs to be, leaving aside the householders’ interests for the timing being. Way back in 1988, there was a huge national storm when Nestle bought Rowntrees, and it’s true that the Swiss didn’t allow their firms to be attacked as easily as we did ours, and there were some competition concerns. Yet if you go abroad much you’ll see more Kit Kats and the like on sale than we used to see, which must say something for the benefits Nestle brought to the York-based Rowntree concern. More Cadburys Creme Eggs and Wispas sold in Europe and the rest of the world would be a good thing. The question of foreign ownership ought to be secondary to the long term interests of a business.
On that point, Kraft has yet to win the argument, but it is a debate worth having.
Should we snipe at the Government’s new “jobs guarantee”? Anything that gets a single young person into work must be a good thing, so we ought to welcome the fact that more than 150 companies and other organisations have signed up to Gordon Brown’s drive to help find jobs or training for young people out of work. ( Read more... )
Inflation up: good news! For those of us who grew up in an era when inflation seemed to threaten the very fabric of society - 27 per cent a year in the mid 1970s - such a reaction seems odd. Yet the rise in the RPI and the CPI staying constant really is very encouraging.
It means we’re less likely to go into full blown deflation and a slump, it means that we’re probably edging out of recession and it means that unemployment, bankruptcies and other indices of misery might run lower than they otherwise would. Falling prices may sound like a great idea, but not if your salary and the value of your home is shrinking too.
Just ask the Japanese, who’ve had almost twenty years of stagnation and steady or falling prices.
It means we’re less likely to go into full blown deflation and a slump, it means that we’re probably edging out of recession and it means that unemployment, bankruptcies and other indices of misery might run lower than they otherwise would. Falling prices may sound like a great idea, but not if your salary and the value of your home is shrinking too.
Just ask the Japanese, who’ve had almost twenty years of stagnation and steady or falling prices.
So new it’s old! One hundred politicians and other prominent people are backing the Compass think-tanks’ campaign for a High Pay Commission, to curb "excessive" pay. Lib Dem Treasury spokesman Vince Cable and Labour MP Jon Cruddas are among the worthies. They say that the "unjust rewards" of a few hundred "masters of the universe" exacerbated the risks the British economy was exposed to.
They’re right, but the idea of limiting pay is nothing new. The easiest way to do it is to apply very high marginal rates of tax. What shall we say? A 98 per cent rate of tax on earnings beyond say £200,000 a year? A marginal rate of that part of your income over £1m? We could have those and lower basic rates of tax, I ought to mention. Sounds good. Yet these “punitive” tax rates, which we had in the 1970s, became notorious, rightly or wrongly, for “stifling enterprise”, and were progressively abolished by the Tories by 1988. In those days many thought such rates shockingly high; now we seem to be rediscovering their rationale.
However I don’t believe that such a policy will work in the UK alone; many of these financiers are “footloose” and they’ll be off elsewhere to earn their obscene salaries; the Gulf States, or Hong Kong for a start. We need international agreement on this, and it won’t work if we concentrate on the levels of pay and bonuses rather than their structure. The rules have to relate to whether bonuses encourage recklessness. Only then will they have any chance of international consensus and being agreed by the banks. Stupid risks can be run for quite small bonuses; huge salaries can be paid where no risks are being run. In reality the two often coincide, but not always, and it’s an essential distinction. Besides, we should not mind if the banks are doing this - if the taxpayer doesn’t have to stand behind them. If they send their banks bust, that’s their affair. But the absolute levels of pay can’t be realistically regulated. I’d love to see a maximum income, which would cover footballers and all manner of plutocrats as well as bankers, but I just can’t see it working. A pity, though.
They’re right, but the idea of limiting pay is nothing new. The easiest way to do it is to apply very high marginal rates of tax. What shall we say? A 98 per cent rate of tax on earnings beyond say £200,000 a year? A marginal rate of that part of your income over £1m? We could have those and lower basic rates of tax, I ought to mention. Sounds good. Yet these “punitive” tax rates, which we had in the 1970s, became notorious, rightly or wrongly, for “stifling enterprise”, and were progressively abolished by the Tories by 1988. In those days many thought such rates shockingly high; now we seem to be rediscovering their rationale.
However I don’t believe that such a policy will work in the UK alone; many of these financiers are “footloose” and they’ll be off elsewhere to earn their obscene salaries; the Gulf States, or Hong Kong for a start. We need international agreement on this, and it won’t work if we concentrate on the levels of pay and bonuses rather than their structure. The rules have to relate to whether bonuses encourage recklessness. Only then will they have any chance of international consensus and being agreed by the banks. Stupid risks can be run for quite small bonuses; huge salaries can be paid where no risks are being run. In reality the two often coincide, but not always, and it’s an essential distinction. Besides, we should not mind if the banks are doing this - if the taxpayer doesn’t have to stand behind them. If they send their banks bust, that’s their affair. But the absolute levels of pay can’t be realistically regulated. I’d love to see a maximum income, which would cover footballers and all manner of plutocrats as well as bankers, but I just can’t see it working. A pity, though.
Oh look! Germany and France are “out of recession”. Their GDP grew in the second quarter of the year (ours shrank) and they are now, technically out of recession. Good news, because they’re our largest trading partners.
The growth seems to have been down to the “fiscal stimulus” that their governments applied t their economies – discretionary extra public spending on measures such as jobs subsidies, industry aid and car scrappage schemes. We too did some of that, but had much less headroom to do so because we went into the downturn with too much public spending and borrowing. So we were already using up quite a bit of our overdraft, if you will, in the good times.
When the bad times arrived there was less to spend. Even so, the differences can be exaggerated. We’re probably growing now too, but we won’t see that until the third quarter (July/August/September) figures are published in October. Much the same goes for America, where the Fed says things are “flattening out”. In reality we may only be a few weeks behind the continentals in returning to growth. The real point is that that growth won’t feel like much here or in other advanced economies. The difference between an economy growing a bit or shrinking a bit is not worth worrying over.
We ought to worry about how we all get back to strong sustainable growth in future.
The growth seems to have been down to the “fiscal stimulus” that their governments applied t their economies – discretionary extra public spending on measures such as jobs subsidies, industry aid and car scrappage schemes. We too did some of that, but had much less headroom to do so because we went into the downturn with too much public spending and borrowing. So we were already using up quite a bit of our overdraft, if you will, in the good times.
When the bad times arrived there was less to spend. Even so, the differences can be exaggerated. We’re probably growing now too, but we won’t see that until the third quarter (July/August/September) figures are published in October. Much the same goes for America, where the Fed says things are “flattening out”. In reality we may only be a few weeks behind the continentals in returning to growth. The real point is that that growth won’t feel like much here or in other advanced economies. The difference between an economy growing a bit or shrinking a bit is not worth worrying over.
We ought to worry about how we all get back to strong sustainable growth in future.
