#101: The pay paradox

WHY GOOD BUSINESS CAN BE BAD ECONOMICS

Though we’re past the #100 mark, there’s a string of topics crying out to be discussed. Future articles might look at what the market economy really is – and what it isn’t – and perhaps take in the “gig” or “sharing” economy as well. I’m also thinking about doing something rather outside normal parameters, looking at where businesses should (and shouldn’t) seek to invest.

Here, though, we look at a critical paradox. It’s critical, because it goes a long way towards explaining why countries like Germany prosper whilst countries like Britain don’t.

Economics is full of paradoxes. Perhaps the most famous is the “paradox of thrift”. If you save or I save, that’s prudent and commendable. But if we all save, and do too much of it, that’s bad, because demand will slump, to the detriment of the economy. Actually, what this really means is that we want a “Goldilocks” amount of saving. If there’s too much of it, we’re stifling demand – but if there’s too little, we’re not investing enough.

Here’s another paradox, less widely recognized (indeed, seemingly hardly recognized at all), but actually much more important. Let’s call it “the paradox of pay”. This is important, and certainly merits discussion, because it’s a major factor depressing performance in a number of Western economies.

The pay paradox

Here’s how it works. If you’re running a business, keeping down pay can be a good thing. As a business, wages are likely to be one of your biggest costs, indeed very probably the biggest of the lot. So, if you keep your wage bill as low as you possibly can, your profits will increase.

That sounds good.

If all employers do this, however, business, and the economy, are the losers. Small pay packets mean weak consumer spending, and the consumer typically accounts for 60-70% of the GDP of a Western developed economy. If you undermine wages, then, you undermine sales.

No so good.

Henry Ford famously understood this. That’s why he paid his workers more than the bare minimum. If he didn’t, reasoned Mr Ford, how would they ever be able to buy his cars?

There’s a revealing story about this, in a different car plant in a different era. A manager proudly unveils the first production robot, and says to a trades union leader: “try to persuade that to join your union!”

To which, of course, the union man replies: “try persuading it to buy a car!”

The truism, of course, is that workers and consumers are the same people.

Micro and macro

Actually, the “paradox of pay” really amounts to the difference between microeconomics (the economics of the firm) and macroeconomics (the study of the whole economy). Low pay can be good microeconomics, but is always bad macroeconomics.

It can make sense for a company to minimise its wage bill. But it is idiotic for a country to do the same.

There are, however, simpletons who think that an economy should be run like a business. So, if it’s good for businesses to minimise wages, it must be good for a country to do the same. The theory – a pretty half-baked one – is that, if we can keep down the wages of people making (say) cars in our country, we keep those cars cheap, thereby increasing our ability to sell them on the world market.

Actually, this theory is worse than half-baked. Observation reveals that low wages don’t make for national competitiveness or prosperity. If they did, Ghana would be richer than Germany, and Swaziland more prosperous than Switzerland.

In reality, there are perfectly good reasons why a high-wage economy like Germany is more prosperous than a low-wage country like Ghana. For a start, demand is stronger. The German worker has more money in his or her pocket than his Ghanaian counterpart, increasing his ability to buy goods and services produced by other German firms. Moreover, the higher the average level of pay, the higher both quality and productivity are likely to be.

From this, an obvious truism follows. A company like Mercedes or BMW can never turn out cars cheaper than a plant in a, say, Vietnam. If Germany’s car-makers (or any other German sector) tried to compete on price, they’d fail.

So, being sensible people, they don’t. They compete, instead, on quality. This is the obvious (indeed, the only rational) course of action for a developed economy. Competing on quality makes sense.

Trying to compete on price is, frankly, pretty crazy.

The price of a fallacy

Some countries – the obvious examples being America and Britain – don’t seem to grasp what, to a German, seems perfectly obvious. Instead, they assume that getting wages down must be a good thing. Pursuing this policy involves maximising the supposed “openness” of your economy, and backing “globalization” to the hilt. By all means ship out skilled jobs from Derby to Delhi, if profits increase. Go ahead and outsource work from Cleveland to Calcutta for a short-term boost to the bottom line. “What’s good for American (or British) business”, the slogan runs, “is good for America (or Britain!)”

It’s a persuasive slogan.

It’s also, in economic terms, drivel.

The point, you see, is that running a country isn’t the same as running a business. Businesses can benefit from low wages. A country can’t.

This said, a lot of businesses are too smart to succumb to the low-wage mantra.  Many enlightened firms recognize that getting good staff – skilled, innovative, productive, dedicated and committed employees – can’t be done on the cheap. The pay-off in terms of quality and productivity can far outweigh the cost of paying good wages to attract and retain the best.

A fool’s paradise

If a country follows the low-wage route, a string of adverse consequences quickly follows. It’s a chain-reaction process.

For starters, outsourcing skilled jobs undermines consumption. One seductively-easy way of countering this is to fill the consumption gap with credit. Countries that follow the low-wage mantra tend to succumb pretty soon to a policy of making credit both cheap and easy to obtain. This involves both low interest rates and “deregulation” of the lending industry. This in turn results in soaring indebtedness and escalating risk.

It also depresses tax revenues, and undermines productivity, whilst skewing the economy away from activities at the high end of the value-added spectrum. You end up with very little manufacturing, but plenty of pedicurists and pizza-deliverers.

What results is an economy with low skills, feeble productivity, and too much debt (does that remind you of anywhere?). You find yourself in a position where each incremental unit of GDP comes at a high cost in additional borrowing (say, getting on for £6 of new debt for each £1 of growth). Tax revenue weakens, resulting in big fiscal deficits and escalating debt.

You can try to offset the deficit by cutting public spending, of course, but even a passing familiarity with Keynes should convince you that voluntary “austerity”, by depressing demand, is likely to be counter-productive. Some of the weaker Eurozone countries have had austerity imposed on them by their inability to devalue. Other countries have embraced austerity voluntarily, out of sheer folly or desperation.

As well as depressing the economy, too much austerity is likely to depress voters, the end result being that you’re out on your ear. Frankly, if you’ve been following the fool’s mantra of a low wage strategy, that’s nothing more than you deserve.

At some point, meanwhile, someone notices that people are struggling to cope with servicing their bloated debts, so you cut rates even further, now to levels that are a long way below inflation. Doing this might be unavoidable, but it’s still akin to handing a bottle of gin to an alcoholic.

One consequence is that, whilst asset prices balloon, returns collapse. This opens up huge chasms in pension and other provision, which can be impossible to bridge even with a high savings ratio, let alone with a savings ratio that has crumbled under the onslaught of impoverishment.

At this point, with foreigners wondering whether to go on bailing you out with capital infusions, and the locals beginning to wonder whether inflated house prices don’t amount to realizable riches after all, hopefully some nice people turn up with a waistcoat that laces up at the back.

Wisdom and folly

So there you have it. Paying low wages might, at the micro level, help you to make cheaper washing-machines (though whether it’ll help you to make high quality ones that people actually want to buy might be a different question).

At the macro level, though, low wages have a string of adverse effects. They undermine quality and productivity. They’re likely to push debt up sharply, inflate asset prices and depress returns. They’ll certainly undermine demand, stifle growth and undercut tax revenues, and they’re highly likely to degrade the value-adding profile of the economy.

The Germans, amongst others, clearly understand this. The British authorities, equally clearly, don’t. It will be interesting to find out whether Mr Trump and M. Macron understand it, too.

#100: Defining times

BUILDING THE NEXT CRISIS

Reaching the 100th article in the series seems a good time to provide an overall “wrap” of the economic situation, as seen through the prism of Surplus Energy Economics. The conclusions may not be particularly cheering, but they should at least have the merit of clarity.

We can now be pretty sure of at least three things.

First, the long rise in world prosperity is over. Real economic output does continue to increase, but only very gradually, and is now being matched by the rate at which the population is expanding.

Second, prosperity will carry on rebalancing towards the emerging economies. Citizens of China and India, for instance, continue to enjoy increasing prosperity, though not at rates as high as reported levels of growth in per capita GDP. By contrast, and with very few exceptions, prosperity in the Western developed economies has passed its peak, and is now declining, albeit at rates which vary markedly between countries.

Third, the financial crash of 2008 is unfinished business. Essentially, the burden of debt forced central banks into policies of ultra-cheap money, and these have had precisely the effect that could (and should) have been anticipated – indebtedness continues to rise, provision for the future has been sabotaged, and bubbles are emerging across a broad range of asset classes. As well as adding huge amounts of debt, we are pillaging futurity, because of policies which cripple returns on pension and other provision.

We cannot yet know when the sequel to the global financial crisis (GFC) will occur. It is in the nature of the system that seemingly-unsustainable conditions can last for a lot longer than seems logically possible. Equally, however, a crash can occur with very little prior warning, and in ways that may not be predictable.

We may, though, be inching towards greater visibility about how and where the catalyst is likely to emerge. It’s becoming increasingly apparent that the United Kingdom is much the most vulnerable domino in the series. If you’re looking for a single lead indicator for the next crunch, the value of Sterling may be the one to watch.

Overview – the two economies

If you understand the surplus energy approach, you’ll appreciate that we need to think in terms of two economies. The first is the real economy of goods and services, and is an energy system, not a monetary one. The cost at which energy can be accessed determines the level of prosperity that we can achieve.

In tandem with this is the financial economy of money and credit. Obviously, money has no intrinsic worth. It commands value only as a “claim” on the output of the real economy. Creating money doesn’t add prosperity – it merely dilutes existing claims on that prosperity. Expanding the sum of credit simply creates claims on a future economy that will not be able to honour them. This establishes an inevitability of claims destruction – in other words, a crash.

The following chart illustrates the energy situation. What the chart shows is the ECoE – the energy cost of energy – for petroleum, renewables and the overall energy mix. If 20 units of energy are accessed, but one unit is consumed in the access process, then the ECoE is 1/20, or 5%. What this means for prosperity will be addressed shortly.

#100 01 ECoEjpg_Page1

ECoEs move in ultra-long-term trends, almost wholly unrelated to the market price of energy at any given time.

Prices are subject to both short- and long-term cyclicality.

Cost, on the other hand, is driven by a combination of depletion and technology. Depletion pushes cost upwards, because we exploit the highest-quality, lowest-cost sources of energy first, only moving on to costlier sources once the cheaper ones have been exhausted.

Technology operates to reduce costs, but it does so within the envelope set by depletion. New techniques can improve how we operate within the laws of physics, but cannot overcome those laws. Thus, hydraulic fracturing enables us to extract oil from shales far more cheaply than we could have extracted those same resources in the past. Technology does not turn a marginal resource like shale oil into the equivalent of a giant, simple field in the sands of Arabia. That is simply not possible.

Overall ECoEs seem to have been rising since the mid-1960s. Back in 1965, the average ECoE was probably only about 1%, meaning that we consumed a single unit of energy in accessing 100 units. Those days of abundance are long gone. For oil alone, ECoE is estimated to have risen from 2% in 1980 to 8.8% by 2010, and could hit 15% by 2020. Oil is a premium fuel, and is therefore worth using even when it is costlier than some other sources.

The cost of renewables has fallen sharply, making the best renewables cost-competitive with fossil fuels. But renewables still account for only 3% of world energy consumption. This proportion is set to go on rising markedly, but there are locations and applications which will remain extremely challenging. Similarly, technological progress will continue, but it would be a mistake to extrapolate forward a rate of progress that has been achieved from a very low base.

The nature of energy cost

As the preceding chart illustrates, the overall ECoE cost of energy is rising pretty exponentially. But, because the world economy is a closed system – after all, we’re not trading with Mars – this cost doesn’t leave the system. So it isn’t directly analogous to the “cost” of running a home or a business.

Rather, it is an economic rent, which means that it restricts choice. Prosperity is the residual between economic output and the required level of investment in energy supply. (This is “required”, of course, because without energy there wouldn’t be an economy). If, out of each $100 of output, we had to spend $2 on energy, we would be left with $98 to use as we wish. If the energy cost rose to $10, we’d still have our $100, but could exercise choice over only $90 of it.

In the same way, someone can become poorer if the cost of essentials (such as food, water and energy) rises more rapidly than his or her income. This is why prosperity is not the same thing as per capita GDP. This analogy is a good one, because the cost of energy plays a big role in the supply of essentials. The energy content in the food or water that we must have is higher than in things that we don’t need, but simply want. From this, it follows that the cost of essentials is a major transmission mechanism between ECoE and prosperity as we experience it.

The financial economy

From this, you might think that we can measure prosperity simply by deducting ECoE from GDP. Alas, it isn’t quite that simple, because the financial economy (recorded by GDP) isn’t the same as the real economy of goods and services.

The existence of the financial system enables us to time-phase activities in a way that wouldn’t be possible in a hand-to-mouth economy based on barter. We don’t just live in the present, but inherit from the past, and must provide for the future.

This time element is a great virtue of finance but, in the wrong hands, it is equally capable of becoming a serious vice.

It has now been in the wrong hands for a dangerously long time.

Beyond immediate consumption, an economy perpetually undertakes futurity activities. These include investment (which should increase future productivity) and the related concept of saving, which we need to do, not just to tide us over hard times, but also to prepare us for old age. On the other hand, we can borrow (or otherwise incur future obligations) if it seems beneficial for us to do so.

To work effectively, all of these ‘futurity’ activities need both long-term thinking and a properly functioning market.

Unfortunately, the powers that be have, over two decades and more, evolved a system in which neither of these predicates applies.

First, planning for the future has been weakened by an ideology of short-termism.

Second, a functioning market in futurity has been undermined – indeed, virtually destroyed – by monetary policies geared solely to the management of existing debt. Obviously, manipulated interest rates block the signals that the market is supposed to transmit. This leads us into making faulty decisions.

“Triple D” – plundering the future

It’s important to note that debt isn’t the only (or even the most important) component of our relationship with futurity. Taking the United Kingdom as an example (albeit rather an extreme one), the factor that poses the greater economic threat could be unfunded forward pension (and other) commitments well in excess of £2.5 trillion, rather than aggregate debt of £4.9 trillion.

Debt can be inflated away, if you don’t mind the costs of inflation – and if your creditors don’t take umbrage over being bilked through “soft default”. But you can’t inflate away futurity deficits like pensions in the same way, because they are effectively index-linked.

As well as encouraging borrowing by making it cheap, slashing interest rates – in Britain, from 5.75% ten years ago to just 0.25% now – has destroyed the ability of pension funds (for example) to make the sort of returns required to match current contributions to future needs.

The whole theory of pension provision is that, having invested X amount now, returns on this investment give us a lot more than X in the future. If, during his or her working life, someone had to put aside exactly the amount that they would need in retirement, the process simply wouldn’t work. The demands made on us in our working years would just not be affordable.

Artificially low rates, therefore, destroy the equilibrium between the present and the future. (They also block the essential process of “creative destruction”, miss-price risk, and manufacture bubbles).

Moreover, artificially low rates mean that our provision for the future deteriorates at exactly the same time as our future obligations to repay debts increase. If you add to this a third ingredient – an inability to organise the provision of care for an ageing population – the result is a potentially lethal cocktail.

We can call this toxic mix “triple D” – debt, deficits and demographics.

The great self-delusion

Obviously, mortgaging the future (by plundering our futurity reserve) boosts the present at the expense of the future. This means that recorded GDP figures are inflated by this process.

This is analogous to the way in which banks behaved in the years preceding 2008. By selling toxic instruments to themselves via off-balance-sheet SPVs (special purpose vehicles), banks created “profits” (and hence bonuses) at the expense of their own balance sheets.

Entire economies are now replicating this practice.

To work out what is really happening to the economy behind the smokescreen of plundered futurity, we need to calculate the extent to which recorded GDP has been flattered by the cannibalization of the collective balance sheet. What we are looking for is the proportion of GDP that would remain if the credit taps were turned off. That’s the underlying, “organic” or sustainable level of output.

The SEEDS system has an algorithm for measuring this. Its results are very probably conservative, because they conclude that, over the last decade, only about 19% ($18 trillion) of global borrowing ($98 trillion) has been used to inflate consumption at the expense of futurity.

Even so, this is enough to suggest that world GDP (in PPP dollars) was only $88 trillion last year, 25% below the reported $117 trillion. It also means, of course, that aggregate debt as a percentage of underlying GDP is probably nearer 300% than the reported 220%. In any case, measurement of debt isn’t by any means the same thing as measuring futurity.

Prosperity and the coming denouement

Having adjusted GDP for the plundering of futurity, we can deduct the economic rent of ECoE to measure prosperity. “Prosperity” is defined for the individual as ‘income, after essentials, that the person can choose how to use’. For the economy as a whole, prosperity is sustainable (borrowing-adjusted) GDP, less the economic rent of ECoE.

Globally, and in inflation-adjusted dollars, prosperity per capita was almost 4% higher in 2016 than it had been in 2006, but this rate of improvement has been decelerating towards zero. Aggregate world prosperity is still growing, but now only at a trend rate of around 1% annually, which is roughly the same rate at which the global population is expanding. So individual prosperity, on a worldwide basis, has stopped growing.

The next chart illustrates this, setting out – in per capita terms – three measures of economic output. The first, in blue, is the financial economy as recorded by GDP. The black line adjusts this for the estimated impact of “plundering futurity”, with the accompanying trend in debt shown by the yellow columns. Finally, the economic rent of ECoE is deducted to arrive at prosperity, shown in red.

#100 02 per capitajpg_Page1

 

These, of course, are aggregate measures, covering wide disparities of experience. At the positive end of the spectrum, citizens of China and India became, respectively, 58% and 48% more prosperous between 2006 and 2016. Prosperity in these countries is continuing to grow, albeit at rates a lot lower than in the not-too-distant past.

At the other extreme, individual prosperity in the United Kingdom declined by 13% between 2006 and 2016. British prosperity can now be seen to have peaked as long ago as 2000, since when the total decline has been 17%. Over the last decade, prosperity has also fallen by 9% in Italy and Spain, by 8% in the Netherlands, and by 7% in both the United States and France.

Some of these national circumstances repay investigation. Spanish prosperity fell sharply because the country was more exposed than most to the ravages of debt-fuelled expansion in the years before 2008, but has now returned to stability. The Italian economy has suffered from decades of declining competitiveness, something which – before Italy joined the Euro – was customarily cushioned by gradual devaluation of the lire. Membership of the single currency effectively forced Italy into painful internal devaluation (a.k.a. “austerity”) instead.

The outlook for France will hinge on the as-yet unclear direction of policy under President Macron. The risk here is that M. Macron will opt for the wage-depressing policies that pass for “reform” in the neoliberal lexicon. In other words, he might follow Britain in trying to create a low-wage economy. Doing this necessarily undermines demand, impairs productivity and increases household dependency on credit.

The continuing decline in American prosperity means that Mr Trump simply cannot deliver on his commitment to improve the lot of the average household. Mr Trump is an outsider, but this does not guarantee that he will not pursue the same policies that have failed in the past.

The most significant (and worsening) decline in prosperity, however, is that of the United Kingdom. For at least two decades, the British economy has been managed with remarkable incompetence. The UK just about dodged a bullet in 2008, but may not manage to do the same next time – and that next bullet could now be pretty close. Exactly why Britain is quite so vulnerable will have to be left to another article, but there are plenty of reasons to question the sustainability of the British economy.

Conclusion

As we have seen, the world has ceased becoming more prosperous, because increasing ECoEs (experienced in the rising cost of essentials) have dragged down growth in the real economy to a rate matched by population expansion. Within this, countries like China and India continue to become more prosperous whilst, in much of the West, people will keep getting poorer.

We’ve been trying to buck this trend by plundering futurity, spending borrowed money whilst running policies which cripple returns on pension and other provision for the future. This has been an exercise in futility, and must in due course lead to a sharp correction in the form of claims destruction.

Nowhere is this more evident than in Britain, so anyone seeking a single lead-indicator for the next crash could do a lot worse than watch the value of Sterling.

 

 

#99: While time allows – part three

THE “”HOW?”, THE “WHY?” AND THE “WHERE?” OF THE BRITISH ECONOMY

Although the focus here is avowedly global rather than local, it isn’t difficult to justify another examination of the British predicament. The situation is, after all, quite remarkable. Having opted for withdrawal from the European Union (“Brexit”), Britain now finds herself on the brink of critical negotiations without a credible government to do the negotiating.

The horrific fire in Kensington shines a disturbing spotlight on economic and social policy assumptions, as well as on disparities between rich and poor. With the economy deteriorating, there is no consensus on what to do about it. Rather, the “Brexit” affair revealed the rancorous nature of divisions within society.

In order to examine the economic situation in a succinct way, this discussion looks at three issues in sequence. The first is the state of the economy. The second is how it got where it is. The third is what, if anything, might be done to put it on the road to recovery.

An economy in trouble

The economy of the United Kingdom is in a pretty parlous state, which makes it all the more remarkable that economic issues were given little or no attention in the recent election. Labour did propose some changes, but the workability of nationalization, in particular, has to be debatable. The Conservatives essentially offered more of the same, which would have ensured continuity along a path of proven failure.

Growth seems to have fallen sharply, and may now be nearer to zero than to prior forward assumptions of around 2%. Reported growth (of 12%) over the decade to 2016 comes with serious caveats. The expansion in GDP between 2006 and 2016, expressed at constant 2016 values, was £203bn, but this was accompanied by a £1.18 trillion expansion in debt, equivalent to £5.80 of net borrowing for each £1 of reported growth.

Of this borrowing, businesses accounted for just £40bn, or 3% of the total. The vast majority of borrowing was attributable to government (86%) and households (11%). Both are consumption-related forms of borrowing, strongly implying that growth has been flattered by the simple spending of borrowed money.

Adjusting for this, SEEDS estimates underlying GDP in 2016 at £1.51 trillion, 22% below the reported £1.94 trillion. Though large, the £420bn gap between these numbers isn’t hard to find. Underlying trend growth for 2016 is estimated at 0.4% – which is lower than the rate at which the population is expanding (0.7%) – and seems certain to fall still further, given the challenges going forward.

This is bad enough, but the implications for individual prosperity are even worse. The cost of household essentials has been rising at roughly twice the rate of reported inflation, implying that a steady rise in ECoE – the energy cost of energy, emphasised in the Surplus Energy Economics approach – is undermining prosperity. Adjusted also for the increase in population numbers, SEEDS puts average per capita prosperity last year at £20,600, a fall of 13.4% since 2006 (at 2016 values, £23,900). No other major economy has fared this badly.

This SEEDS view is corroborated by a host of “conventional” economic data. Average real wages have been declining since 2009, and no-one seriously expects this to change in the foreseeable future. The current account is heavily (£85bn) in the red, whilst productivity is lamentable. Reported debt (of £4.88 trillion) excludes huge shortfalls in public- and private-sector pension provision, and the tax base seems to have deteriorated to the point where the government cannot fund public services to the standards to which people have become accustomed. There is a very real prospect of “stagflation”.

The reason why – a damaging policy vacuum

In terms of effectiveness as a system of representative democracy, Britain’s political processes have some significant weaknesses. Elections to Parliament are conducted on a first-past-the-post (FPTP) basis which guarantees the dominance of the two established parties. The upper chamber isn’t elected at all, which impairs its ability to advise and restrain. There is no American-style “separation of powers” between the executive and the legislature.

The biggest single weakness with this system is that it relies on confrontation between the two major parties. Tragically, this historic antagonism disappeared in the mid-1990s, when the opposition re-styled itself “new” Labour, and adopted the same economic tenets as the Conservatives. As a result, a politically-influential check on the incumbent economic orthodoxy ceased to exist.

Lacking such a challenge, pro-market economics morphed into a dogma which extended prior policies into dangerous extremes. Even more than the United States, Britain became the poster-child for “liberal” economic ideas taken to their (il)logical conclusions.

The resulting orthodoxy had some glaring weaknesses. It misunderstood risk, deregulating the financial system to the point at which Britain lectured other countries on the supposed virtues of “light-touch” regulation. It assumed that public services could be managed along lines of internal quasi-competition, and welcomed private encroachment into the role of the state. In a climate which emphasized “spin” over substance, government horizons became excessively short-term, which caused particular problems in fields as different as debt and energy. It failed to distinguish between making money and adding value. The virtues both of prudence and of the mixed economy were rejected.

Like any form of extremism, this extended exercise in orthodoxy had serious consequences. The economy became increasingly unbalanced, with value-productive activities like manufacturing displaced by real estate, “out-sourcing”, and simply moving money around. Public services were fragmented, whilst the fiscal system increasingly favoured speculation over innovation. In the mistaken belief that Britain could compete with emerging economies (EMEs) on the basis of price (rather than quality), real wages were allowed to deteriorate, which undermined the tax base whilst encouraging an undue reliance on consumer debt.

An avowed policy of “openness”, together with a lack of concern over debt, resulted in asset sales and overseas borrowing being used to finance trade and income deficits with the rest of the world. This in turn created a self-reinforcing deterioration in the current account, as returns on past capital transactions turned relentlessly into outward flows.

To an unquantifiable (but undoubtedly serious) extent, the logic of economic policy eroded ethics, particularly where the treatment of customers and employees was concerned. This is why banking (but other industries too) became scandal-prone, and neither in the public nor the private sector was much done to enforce accountability. Thus, when a business is discovered to have engaged in dubious practices, it is invariably the shareholders, not the decision-makers, upon whom sanctions are imposed.

The prevailing orthodoxy described here can be identified as the cause, not just of Britain’s economic woes, but of many of its social problems as well. Thus, inequalities between rich and poor, and between young and old, can be traced to the same economic extremism which has undermined prosperity, reduced real wages, prompted excessive borrowing, channelled investment into the “capital sink” of overvalued properties, created asset bubbles, worsened working conditions and security of employment, and eroded the tax base.

The abandonment of confrontation, then, set Britain’s political elite free to embark on an increasingly extreme and dangerous economic path.

Is there an escape route?

Given the scale of the economic and social harm inflicted by a political consensus around a failed orthodoxy, the election of Jeremy Corbyn as leader of the opposition Labour party should have been welcome even to Conservatives – the return of Labour to its social-democratic (or perhaps socialist) roots should help ensure that extreme policies no longer go unchallenged. Changes now seem inevitable, and this has to be positive. What matters, though, is whether the right kind of changes will take place.

Labour has declared itself hostile to the over-domination of important sectors by small numbers of players. The party is surely right to target rail, water and energy, and could usefully add telecoms to the list. Unfortunately, Labour’s preference for nationalizing these sectors seems less than ideal. The public might be better served by breaking them up, such that no single player has a share of 10% or more of any important market.

Similarly, Labour’s preference for imposing higher taxes on “the rich” needs to be nuanced differently. The real problem isn’t income inequality so much as the imbalance between income and assets. Increasing taxes on high incomes is likely to be counter-productive. Instead, and whilst Mr Corbyn might contemplate a wealth tax, the real imperative is to rebalance fiscal and other incentives towards innovation rather than speculation. Logically, taxation of capital gains should be increased, not least because many of these gains have been the direct result of monetary policy – in other words, the authorities are surely entitled to claim a sizeable share of asset gains that they have themselves created.

If higher taxation of capital gains is imposed, there are several glaringly obvious areas in which these proceeds can be used in the interests of economic regeneration. One of these is a much-needed programme of building homes at affordable rents. Another is to reduce the tax burden on small and medium enterprises, most obviously by freeing them from the regressive Business Rates levy. A third would be to reduce the taxation of low wages, which ideally would include merging income tax with NI (national insurance).  Another would be to reintroduce dividend tax exemption for pension funds, a pro-saving policy which had been accepted by all parties prior to Gordon Brown’s notorious 1997 “tax raid”.

Perhaps even more importantly than these “mechanical” measures, Britain needs a renewed emphasis on ethics, and needs to legislate enhanced protection for employees, customers and tenants. This needs to be accompanied by enforcing much more accountability on decision-makers, not just in business, but in the public sector as well.

Will such desirable changes happen? Perhaps ironically, the sheer scale of Britain’s current problems gives some grounds for optimism. The rise of Jeremy Corbyn to unchallenged leadership of the Labour party has effectively smashed one half of the unhealthy consensus around a mistaken economic orthodoxy. The loss of Mrs May’s majority may prove to have been a humbling as well as a crippling blow to the other half of that consensus.

Meanwhile, public opinion is palpably shifting against perceived “unfairness” between rich and poor. The chancellor having stated that “economic” considerations will guide negotiations about “Brexit”, it is to be hoped that he did mean economic factors, not simply ‘profit’.

The final issues have to be those of whether the necessary changes can occur harmoniously, and without a swing to opposite extremes – and whether the economy can respond in the limited time which Britain still has at its disposal.

Even if the right lessons are learned, and quickly, it’s going to be – in the words of the Iron Duke – “a damned near-run thing”.

 

 

#98: While time allows – part two

CAN THE UK ESCAPE A ‘BRITMUDA TRIANGLE’?

If you’ve read the preceding article, you’ll understand how institutionalized thinking – a product of rigid orthodoxy within a closed environment – seems completely to have blinded Britain’s political elite to the very possibility that voters might “defect” en masse to the collectivist alternative offered by Jeremy Corbyn.

This raises at least two important issues. The first is the extent to which the same sort of “institutionalized folly” – the inability to “think the unthinkable” – has been operative elsewhere.

Obvious examples here include the authorities’ blindness to the escalation of risk ahead of 2008 – a blindness which, at least arguably, still persists – the near-unanimity with which the “experts” wrote off Donald Trump as a “joke candidate” with zero chance of success.

The second (and more pressing) question is where Britain goes from here – and the answer to this question must depend, in large part, on whether or not the governing elite is going to remain in the myopia of institutionalized group-think.

Put simply, is this election result going to shock the establishment (in politics, business and finance) into reality? Or will denial go on?

The dangers of denial

When an incumbent regime suffers a shock setback, some of the reactions are predictable, and are far from helpful. There is an almost automatic tendency to try to shift the blame.

So, quite predictably, we’ve been told that the election defeat was wholly the fault of Mrs May and her immediate circle, so is not a reflection of broader failure.

Equally predictably, we’ve heard that the opposition (in this instance, Jeremy Corbyn) didn’t play fair, the implication being that the voters were fooled (which is pretty close to saying that the voters are fools). We saw the same pattern after last June’s referendum on “Brexit”, with defeated Remain supporters arguing that the Leave campaigners cheated, and that those who were duped into voting for “Brexit” were old, poor, poorly-educated and losers (or, in a word, idiots).

This really won’t wash. The failure of an elite to see something coming doesn’t make their opponents dishonest, or the voters foolish. Where expectations and outcomes differ, it’s usually a fair bet that it’s the expectations that were wrong, not the outcome.

We needn’t revisit the causes of popular discontent with the incumbent government. People disliked falling real wages, disliked austerity in the public services, and were angered by a perception that a minority were prospering at the expense of everyone else. They saw no evidence that the Conservatives were going to do anything to address these grievances.

This makes the surge in Labour support wholly rational. Of course, the Conservatives can respond by persisting with the illusion that the voters, duped by unscrupulous opponents, got it wrong.

Doing this would have two consequences. First, it would prevent Conservatives from changing their policies in response to voter demands. Second, and consequently, it would condemn them to protracted irrelevance. Evidence from the past suggests that parties do indeed tend to condemn themselves to marginality in exactly this way.

A ‘Britmuda triangle’?

The practical realities, now, are three in number. First, and despite any deal that Mrs May might put together with the Democratic Unionists (DUP), Britain is condemned for the immediate future to a caretaker administration subject to almost total policy paralysis. No government can undertake any bold policy when a tiny number of its MPs can pull the rug from under it.

Such stasis is bad news at the best of times – and could be desperately bad news now, in what looks a lot more like the worst of times.

Second, and pretty obviously, it is hard to see how a paralysed government, demoralized and frightened of its own shadow, can hope to be an effective negotiator over the post-“Brexit” relationship with the EU.

Third, and despite any claims to the contrary, the British economy is in very big trouble, and now seems virtually certain to deteriorate further.

Last year’s sharp fall in the value of Sterling has now fed through into reported inflation of 2.9%, meaning further declines in real wages. The response of the forex markets since the election result has been comparatively muted, but this does not by any means eliminate the risk of a currency crisis. Indeed, it seems that the comparative stability of recent days may reflect a widening expectation that the Bank of England will have to raise interest rates, primarily to counter inflation, but also to shore-up the pound.

Higher inflation and higher interest rates, plus a waning of confidence and a flight of capital, are the consequences of a currency crisis, but they can also happen without one.

Consumer spending, which has been the engine of the British economy in recent times, is flagging palpably, and can only get worse if confidence wanes, interest rates rise, and property prices fall. The political situation almost guarantees that the fiscal deficit will be larger, for longer.

Even before the election, reported GDP growth had fallen to all-but-zero, and some of us believe that such figures tend to put an over-optimistic gloss on underlying trends anyway. Business confidence at home is said to have crashed since the election result, and there seems no reason why foreign investors shouldn’t take a similar view.

A perfect storm in prospect

In short, the UK now faces a “perfect storm” of stagflation, rising interest rates, weakening confidence and political paralysis – plus, of course, imminent “Brexit” negotiations, and rancorous division within the public.

There are old sayings to the effect that “you bought it, you name it”, and “you broke it, you pay for it”. In this spirit, it is incumbent, both on the Conservatives and on the supporters of the current economic system, to come up with solutions.

Of course, if you believe that the Corbynite programme would rescue the situation, you can afford to be more relaxed about this than if you don’t. If the patched-together minority government falls quite soon, and if the Conservatives persist with denial, then a second election, and a victory for Labour, start to look pretty likely.

Those who doubt the merits of nationalization, an expanded state, higher taxation, higher public spending and bigger fiscal deficits, on the other hand, should be very worried indeed. The economic outlook is more than risky enough to prompt a further swing to the Left by voters in search of solutions.

Can Conservatives respond?

An effective response from the Conservatives needn’t mean an abandonment of the market, because what has passed for pro-market economics in recent years has been far closer to corporatism than capitalism anyway.

Government has done precious little to break-up sectors where over-concentration reduces competition to the detriment of consumers. It has presided over the idiocy of a developed economy trying to compete on the basis of cost rather than on the basis of quality, which is the only viable competitive option for such a country. If anything, the Conservatives need to re-learn the principles of markets that are competitive, free and fair. Policy has exacerbated, rather than tackled, a lamentable bias towards speculation over innovation.

At the same time, Conservatives need to recognize that, in economics, extremes are seldom, if ever, a good idea. There is abundant logical and historical evidence supporting the concept of a “mixed economy”, which blends the best of the private and public sectors, rather than leaning too far in either direction.

There are, then, three things that Conservatives need to do.

First, they need to re-learn the difference between capitalism (in its competitive market sense) and corporatism (which is more “law of the jungle” than Smith).

Second, they also need to re-learn the importance of the mixed economy.

Third, they need to recognize the legitimacy of redistribution, which at the moment is required more in terms of wealth than of income.

 

 

#97: While time allows – part one

BRITAIN AND THE PRICE OF INSTITUTIONALIZED FOLLY

As was explained in the previous article, the outcome of the British general election was eminently predictable. Yet the Prime Minister, her advisors, her colleagues and the “experts” – that is to say, supposedly the “finest minds” in government and politics – did fail to predict it.

They seem genuinely to have been gobsmacked by a result which any intelligent observer should have seen coming.

This debacle cannot be blamed entirely on Theresa May, tempting though that must be to those who share responsibility. To be sure, her plan to stay in office with the help of the DUP (the Ulster Unionists) does make her look detached from the real world. But the decision to call an unnecessary election was not taken by her alone. We can assume that ministers and advisors concurred with her assessment that triggering a vote would deliver a greatly increased majority. Professional analysts and commentators, collectively known as “the experts”, clearly thought so, too.

This, then, was an extreme case of shared folly. An impartial observer might well wonder whether these people are fit to run a whelk-stall.

Unfortunately, international capital markets may now be starting to wonder much the same thing.

We need to understand this collective loss of wits, and not just because the British public deserve better. There is every likelihood that political farce could, within months, turn into economic tragedy.

From crass to crisis?

The dangerous nature of the British predicament needs to be spelled out. The economy runs an entrenched (and worsening) current account deficit, which last year was £85bn, or 4.4% of GDP. This gap must be filled by matching inflows of capital. Debt and equity injections from abroad have ceased to be a choice, or a luxury. In effect, they have become a necessity, a subsidy and a lifeline.

Even before this fiasco, there were plenty of reasons why foreign investors might have considered pulling the plug. Those reasons can only have become more persuasive since Thursday’s vote.

This, it must be stressed, is not a purely academic argument, of interest only to economists. Stasis in the capital or “financial” account is not the norm. So, if the inflow of capital ceases, then in all probability it will turn into an outflow.

Accordingly, the biggest danger now is a “Sterling crisis”, with capital flight taking hold. If you think that a currency, or an investment, might collapse, your natural and logical response is to pull your money out before it happens. We can expect a lot of other adverse economic consequences but, short-term, a currency crisis has become the risk that dwarfs all others.

In this event, a slump in the pound could turn into self-fulfilling panic. If this were to happen, Sterling would tumble, inflation would spike, and interest rates would soar, something that a country with Britain’s amount of debt simply cannot afford. Property prices, which already look wobbly, could be expected to slump if rates rose, putting part, at least, of the banking system into jeopardy. The Sterling value of debt denominated in other currencies would escalate, quite possibly beyond levels of sustainability.

The reality, then, is that an economic crisis could threaten the United Kingdom within a very short time. Averting this requires policies, and it requires a government capable of implementing them.

The barest minimum required now is a demonstration to the markets that somebody competent is in charge. That “somebody”, pretty obviously, isn’t Theresa May. But neither is it the charismatic Boris Johnson, or the cool-headed Phillip Hammond, or anyone else within the collective failure-machine that the government high command has become. And neither, before anyone asks, is it Jeremy Corbyn.

Institutionalized thinking

What, then, is the mind-set that led to this mess? By far the likeliest answer is “institutionalized thinking”. This needs to be explained.

The collapse of the Soviet Union provides a textbook example of institutionalized thinking. To any objective observer, the failure of Soviet-style command economics was very obvious indeed, many years before 1989. Unfortunately, though, the USSR was not being run by objective observers. It was being run by men whose whole political lives had been lived within the confines of a collectivist orthodoxy. That the system might actually fail was not thought about, because it had become – quite literally – unthinkable to those within the institutionalized bubble.

This is not simply a case of people ‘believing what they want to believe’. It is more fundamental than that. It is group-think, within tramlines created by orthodoxy, and imposed by practice.

The same kind of institutionalized thinking which blind-sided the Soviet leadership seems to have taken over the British political elite. To these people, the very idea that millions might vote for Jeremy Corbyn was – again, literally – unthinkable. Within their institutionalized terms of reference, ideas such as nationalization, or imposing heavy taxes on the wealthiest, or reversing privatization, or challenging the tenets of what passes for market economics, were simply mad. Accordingly, therefore, only a lunatic fringe would vote for it.

When millions did precisely that, it must have seemed as though a chasm had opened up where solid ground had once existed. A phrase involving “rabbits” and “headlights” characterizes what seems to have been happening in Whitehall and Westminster since Thursday.

Though a shock, the ”Brexit” vote was not sufficient to shake this mindset because, within the elite, leaving the EU was not unthinkable. The majority of the high command did favour continued membership, but enough of its members supported “Brexit” to make the idea real and credible.

That the voters might also turn their backs on the long-established economic orthodoxy, however, was not something that the high command had ever considered.

Are there solutions?

If there is a historic parallel with what is now happening in Britain, that parallel is 1974. In that year, a second election was called, but it was hardly more conclusive than the first. A Labour government limped on, supported by Liberal votes in Parliament. Nothing much changed, because no-one was in a position to change anything.

By 1976, a lot of influential commentators around the world had reached the conclusion that Britain was probably finished. The ensuing second “Sterling crisis” (the first was 1967) was resolved only with a strings-attached bail-out from the IMF. The institutionalized governing mindset didn’t change, however, and was only rooted out by the new broom wielded by Margaret Thatcher in the aftermath of the 1978-79 “winter of discontent”.

This time around, a rescue by the IMF would be out of the question. Not only are the numbers at stake simply too big, but international capital flows are now vastly larger, and dramatically more rapid, than they were back then. If the markets decide that Britain and the pound are financially toxic, then that – as the saying goes – is that.

This, clearly, is case where prevention is not only better than cure but, is very probably, the only choice on the table. There is no room for complacency – a major economy really can lurch into chaos if things are handled badly enough, especially if serious structural weaknesses already exist.

So somebody needs to get a grip, and soon – but that isn’t going to happen from within the rarefied confines of the political bubble. Mrs Thatcher, and her guru Sir Keith Joseph, were outsiders in the 1970s, people whose ideas differed completely from those of the contemporary political establishment.

Something similar is needed now. Thinking as radical as Sir Keith’s is required, and it will need to be taken up by someone as resolute as Mrs Thatcher.

This is not to say, of course, that a return to Thatcherism is the answer. Very clearly, it isn’t. Neither do Mr Corbyn’s ideas offer a solution. In both instances, turning back the clock won’t work.

Somebody had better come up with something new – and quickly.

A new settlement?

The outlines of a new model aren’t hard to sketch. If Britain is going to stop short of Corbynite collectivism, it is clear that the economy needs to be run along market lines. Equally, though, the current version of the market economy is finished, for two very good reasons – it is failing economically, and it is being repudiated politically.

In all probability, what needs to emerge is a renewed commitment to a “mixed economy” model which takes the best from both the private and the public sectors. Political reality will demand greater redistribution, and an ending (and probably a reversal) of the privatization of public services. Somewhere along the line, fixes need to be found for a system which rewards speculation at the expense of innovation.

For this to happen, many cherished privileges will have to be sacrificed. If there is good news here, it is that the country could hardly become more bitterly divided than it already is – and that “Brexit” can give policymakers greatly enhanced breadth of options.

 

#96: May’s day – or mayday?

THE CASE FOR REFORM – NOT REVOLUTION

If memory serves, bookmakers offered odds of 200-1 against Jeremy Corbyn becoming leader of of Britain’s Labour party, a contest he then won by a very comfortable margin. Though their politics are diametric opposites, Mr Corbyn and Donald Trump do have one thing in common – an uncanny ability to put red faces on the “experts” by pulling rabbits out of electoral hats

As recently as a week ago, some of these experts were suggesting that Labour might struggle to get even 25% of the vote. This was a prediction which always flew in the face of logic. My hunch has long been that pollsters would understate Labour’s support by at least 5%, because many of Mr Corbyn’s most committed supporters are not the kind of people who answer pollsters’ questions. If that rule-of-thumb is right, he could yet confound the pundits again, this time by becoming Prime Minister after Thursday’s vote or, at the very least, by taking away the government’s slender majority.

It isn’t hard to understand why Mr Corbyn might garner a large enough proportion of the vote to pull off a shock. Average wages have been falling adrift of inflation since 2009, and of the cost of household essentials for even longer, and security of employment has been weakening for at least as long. Rightly or wrongly, many people think that a wealthy minority is prospering at the expense of the majority. These are fertile conditions for a popular repudiation of “the establishment”.

Strikingly, this is an election which, as the Prime Minister’s critics allege, quite probably was only called because incumbent Conservatives expected a huge victory. If this is the case, it’s another instance of the same sort of complacency that we have witnessed before, notably over the Scottish independence referendum and the “Brexit” vote on EU membership. As so often in recent times, the establishment – in this instance, the government, its advisors, the “experts” and the mainstream media – just don’t seem to “get it” where the popular mood is concerned.

There really is no excuse for such complacency. Where purely economic issues are concerned, there are two factors guaranteed to make an incumbent government unpopular. One of these is hardship, and the other is a perception of unfairness – and both have been present in abundance in the UK in recent times.

Hardship, at least, is factual. According to a recent report from the Joseph Rowntree Foundation, 19 million people – almost a third of the British population – are now struggling to get by on “inadequate” incomes, up from 15 million (25%) six years previously. Comparing 2016 with 2009, a 12% rise in average wages has been exceeded both by CPI inflation (of 16%) and by the cost of household essentials (22%). By the latter measure, at least, the average wage-earner has now been getting poorer for a decade. This is a longer period of deterioration even than the 1930s, and might be unmatched since the 1840s, or even earlier. Neither does anyone really expect a reversal any time soon, not least because of the increase in inflation following the slump in Sterling after the “Brexit” decision.

Anyone who thinks that this can make an incumbent government popular needs to get out more.

If hardship is electorally bad, perceptions of unfairness are truly toxic, and such perceptions cannot be countered by official statistics. A fair summary is probably that, whilst income differentials haven’t widened over the past decade, inequality of wealth certainly has. Monetary policy, including ultra-low interest rates and “quantitative easing”, has inflated the value of assets – and you can only benefit from this if you had assets in the first place. Back when ZIRP and QE were introduced, those of us who believed there was an imperative political need to accompany asset-inflating policies with higher taxes on the resulting capital gains (and lower taxes on income) were ignored.

The popular narrative, then, and rightly or wrongly, has been that policy has benefited a wealthy minority at the expense of the everyone else. Until quite recently, government ambition in this field was limited to helping the very poorest, which is no answer at all to those who, whilst not in absolute poverty, are hard-pressed to make ends meet.

Beneath the surface issues, a motivating perception is that politicians of all parties have abandoned “the working class”. Under Tony Blair, “new” Labour adopted essentially the same economic policies as the Conservatives, and sought to claim radical credentials on grounds not of redistribution but of “identity politics”. This sense of abandonment by “the establishment” has included not just economic but social issues as well, notably immigration. The estrangement between governing and governed almost certainly proved decisive over “Brexit”, where each and every plea from politicians, business leaders and “the commentariat” for a “Remain” decision probably drove more voters into the “Leave” camp.

One of the more striking features of the “populist” – or simply “popular” – backlash against Western elites has been the failure of politicians of “the left” to capitalise on it. Essentially, social democratic parties are perceived to have sold out – and it’s hard to be a credible campaigner on issues of economic inequality once you’ve bought the second home in Tuscany and packed the children off to expensive fee-paying schools. This is one of two reasons – the other being immigration – why angry voters have veered to “the right” rather than “the left”.

This is where Jeremy Corbyn is different. Because its stilted, “first past the post” voting system effectively reinforces established parties and prevents the rise of a Syriza, a Podemos or an FN in Britain, very limited routes exist for a popular backlash against the elite. The “Brexit” referendum was one such opportunity, and voters took it. But the only other realistic democratic route for challenging the establishment was to seize control of one of the major parties, and this is what Mr Corbyn did.

In the election called by Mrs May, a big part of what is really being put to the test is the extent to which the voters want to kick the establishment in the teeth.

The irony is that Mrs May is not a quintessential establishment candidate in the mould of Tony Blair or David Cameron. She seems to recognize the need for reform, and for narrowing the divisions which have widened alarmingly between the winners and losers from two decades of essentially neoliberal policies in a context of globalization. When she famously told her party to its face that it was widely seen as “the nasty party”, many seem to have failed to recognise that her call for changes to party policy would extend to the economy as well as to social issues.

As the election campaign has unfolded, the sure-footedness of the Corbyn camp has contrasted strikingly with the stumbling of the Conservatives. Voting choices are as often about perceptions of competence as they are about policy. Apparent attempts to frighten voters away from Mr Corbyn seem to have misfired, whilst he has been as determined to distance himself from his own party’s recent past as from his opponents.

The view taken here, which will not surprise readers, is that the Western elites have failed, and nowhere has their failure been more conspicuous than in America and Britain. Allowing market capitalism to mutate into corporatism has been damaging, both socially and economically. A large part of Donald Trump’s appeal was simply that he wasn’t an establishment figure in the mould of Hillary Clinton. In Britain, Jeremy Corbyn has been winning over voters simply by distancing himself from the elite. He has set out to prove, were proof necessary, that he isn’t another Tony Blair or David Cameron.

In reality, Mrs May isn’t another Blair or Cameron either, but this differentiation has proved difficult to establish.

Mr Corbyn is right, then, about many of the ills that he identifies. The economy has indeed been mishandled, which is one reason why Britain is now – in the words of Bank of England chief Mark Carney – dependent on “the kindness of strangers”. The economy has become progressively less balanced, with a continuing decline in manufacturing output contrasting with growth in the real estate and financial services sectors. The majority have indeed suffered, not just through deteriorating real wages but also through the increasing casualization of employment as well. The authorities – though ironically Labour, not the Conservatives – did bail out bankers as well as banks.  Not enough has been done to break up the domination of critical sectors by small numbers of companies, or to ensure that those at the top – not just in business, but in the public services as well – are held to account for their mistakes. There has been a failure to recognize that secure, well-paid employment is a necessary basis for robust demand.

Where Mr Corbyn goes wrong is in his solutions. In this respect, by far the most dangerous of his proposals is nationalization. He seems not to realize that a current account deficit of 4.4% of GDP, or £85bn, means that Britain must – stress, must – attract matching capital inflows. In a very real sense, the UK depends to a truly frightening extent on foreigners – those overseas investors who buy British businesses, invest in Britain, retain their profits in Britain, and lend Britain money.

There are plenty of reasons why foreign investors might already be getting nervous. “Brexit” may not be a bad thing, but the uncertainty around it is undeniable. One of the more persuasive bear arguments lies in the deterioration in wages, because low-and-falling real wages are bad news for any business trying to grow its sales. The current account and fiscal deficits combine to suggest that neither the economy nor the government appreciates the need to live within its means.

The danger of a Sterling crisis is quite palpable, as is the failure of politicians and planners to recognize its implications. If the threat of nationalization turned the inflow of capital into an outflow, there is a very real danger that Sterling could crash. If this happened, not only would inflation spike – to the detriment of wage-earners – but interest rates could soar as well, the latter causing the property market to crater.

Britain does need to wean itself off a diet of cheap credit by moving rates up – not least to counter the alarming deficits in pension provision – and would benefit, over time, from letting property prices drift lower.

But nothing would be gained, and a huge amount could be lost, if these things happened suddenly, in an atmosphere of panic. Britain survived “Sterling crises” in 1967 and 1976 – but the risk of “third time unlucky” is perilous.

From an avowedly pro-capitalist – but anti-corporatist – perspective, Britain needs to break up (but not nationalize) over-concentrated sectors, do much more to help small and medium-sized enterprises (SMEs), empower consumers, tilt the balance towards innovation and away from speculation, and re-commit itself to the mixed economy. But swinging from failing corporatism back to already-failed collectivism isn’t the solution.

The best outcome – the one likeliest to pluck the flower of safety from the nettle of danger – would be a Conservative government with a workable majority, led by someone committed to popular capitalism rather than to corporatism, and robustly opposed by a Labour party that has gone back to its roots.

The worst outcome could be a government committed to nationalization, barely opposed at all by a Conservative party tearing itself apart in a welter of recriminations.

 

Manchester

The next article to appear here is written and ready to go. But I feel we all need to pause because of the tragedy in Manchester.

I cannot have been more than about five years old when I was caught up in a bombing. A warning had been given, and we all filed out to safety before the bomb went off.

At that age, you just don’t understand what’s going on.

Decades on, I still don’t understand. Human beings have our differences, and we argue for our opinions. That’s natural.

But I cannot peer into the darkness of soul that can inflict murder and mayhem on innocent people, so many of them children.

My sympathies are with the bereaved and the maimed, the frightened and the bewildered.

Compared with this, nothing else matters.