#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”.

 

 

66 thoughts on “#99: While time allows – part three

  1. Very perceptive arguments here, Tim. MMT can qualify them a little and it can smooth some of the issues raised. Tax issues in particular need understanding through the MMT lens, because the government can spend without treating tax as income [for the central government]. Tax is used as a measuring yardstick, so we end up with budget surpluses or deficits but that’s it. The government is only constrained by it’s laws, which are therefore self imposed and can be changed at will, assuming there is the will to change.

    Labour’s betrayal of its base, common across the left side of politics in many nations, is seen now to have been as you say a loss of checks and balances in favour of neo-liberal destruction. For me the understanding of this by the general population is behind the repudiation seen in Brexit, Trump etc. Let’s hope change builds on it.

    Here in Australia we see many of the same issues, rampant asset inflation leading to high private debt levels and erosion of the “fair go” we used to have across society. We are also “selling the farm” and the exploitation of the natural capital of the country will have serious consequences. Sustainability is just a small scene in the overall picture, but it’s what humans do, exploitation rules.
    Except it has to stop.

    Your point, making money instead of adding value, is the fundamental flaw behind the current malaise. I believe that economies, in the first world at least, had peak growth, in the adding value sense, at about the time of the moon shot. I’m not sure if this nexus was understood in the abandonment of the gold standard, but the coincidence was not random. Now as ECOE bites ever more only the financial economy seems to create wealth in the eyes of most of the population.

    Interesting times await.

    • Though this might be “perception bias” on my part, there really does seem to be a mood of change now. The British situation is a remarkably spectacular mess, to the point where change seems inevitable.

  2. Hi Tim, what did you think of Corbyn saying properties should be requisitioned? The last few weeks show he or someone with the same ideology could get into power. Surely him saying that would be a strong signal to start reducing any assets held in Britain?
    (Although this was covered in the press really it should be the front page story as the implications are huge)

    • Hello David

      Well, properties could not be requisitioned without changing the law. I think this was an expression of outrage. It is a widely shared outrage. Not far from Grenfell Tower is another high-rise where flats range in price from £1m to £7.5m, and few think this tragedy could have happened there.

      If – and I must stress “if”, as we don’t know – “austerity”, cost-skimping or private profit played any part in the tragedy, then the Conservatives could face electoral disaster. There’s also the shock that this could have happened in a London borough with an average wage of £132,000 – such tragedies are sadly common, but usually in the shanty-town fringes of “third world” cities.

      Investors might understand that JC said this in anger. But they might also think that his chances of becoming PM may have increased sharply – again. As things stand, investors already have some pretty compelling reasons for pulling out.

  3. Tim, I do so enjoy reading your offerings. It is always refreshing to read an analysis that actually reflects the reality of our plight. I have no evidence for this view other than gut feeling, but I think there is the beginnings of a real sea-change in public mood largely because the situation is now both extreme and grotesque. The fear I have is that any change that is coming may not be well thought out, nor considered with care and nuance. In other words we shall stumble from our current mess into another mess. If nothing else we are at least consistent! The real and immediate challenge is for all the mainstream political parties and much of the MSM to accept that the GFC in 2007 marked the end of an era and that the neo-liberal orthodoxy of debt-fuelled hyper-consumerism is a model that has run its course and, as you pithily put it, left the country in a remarkable spectacular mess. It is remarkable – during the period 1980-2007 we enjoyed the benefits of North Sea Oil, The Peace Dividend and The Great Moderation – and we managed to squander all of them and then some!

    • Very well put. There is no situation, however promising, that cannot be wrecked by second-rate politicians. North Sea revenues could have transformed the economy – instead they was blown on tax cuts and unemployment. What we are seeing now is a doctrine of greed colliding with a reality of lack. It isn’t very pretty.

  4. Good article Tim. I just wanted to add one thing. You mentioned how the Labour party abandoned their traditional base, well I believe so did the Conservatives abandon conservatism to chase Tony Blair’s New Labour to the middle. They also threw off the belief in small government, balanced budgets, individual freedom and personal responsibility, to the point where the ludicrous, authoritarian May can stand in public demanding the internet be censored in order to fight terrorism whilst calling herself a “Conservative”.

    Both parties pandered to political correctness, helping to create the toxic environment we have now where the media and intelligentsia refuse to allow rational debate regarding controversial issues such as immigration and religious extremism. Both parties spent and borrowed and printed in order to continue the status quo, rather than confront hard issues and a sold-out electorate.

    The truth is we have been let down by both parties, but ultimately we have be let down by we the citizenry who are ultimately responsible for those we elected. In our hubris, we rejected our moral and ethical heritage that helped to create a stable and successful society, to embrace multiculturalism and consumerism, and now we are paying the price. I believe there are many who realise this and who are starting to reject both of those in turn, so perhaps it is not too late for us to turn this tanker around, but it will be a slow and painful process.

    • Yes, indeed so. I cannot see, in the Conservatives, anything that my late father would have voted for.

      We – the British – have not covered ourselves in credit. I am disturbed by selfishness, a mistrustful attitude towards others, and obsessions with money, celebrity, trivia, consumerism and the short-term. These are additional to “traditional” weaknesses – every country has them – which include puritanism, prurience and an obsession with class and status.

      The question, though, is how far this results from the lamentable leadership imposed on us. I never understood what the British public did to deserve Blair, Brown, Cameron or Clegg.

      The elite are still at it, trying to degrade “Brexit” into “soft Brexit”, essentially nothing more than cosmetic. These people just will not accept the will of the people.

  5. Tim,
    I always admire and enjoy reading your clear viewed analysis of economic situations, it really helps me to see things in context. The plight of the UK is becoming the focus of many articles that I am now reading on-line, and none of them paint a very rosey picture.
    Your SEEDS analysis for the UK just confirms what is happening on the ground.
    If I may add my thoughts to your posed question, ” Is there an escape route ? “, then I would contend that there isn’t.
    I think this quite simply because there is no real will for change.
    Everybody still thinks that this gravey train is going on for ever, they might sense a slight change in temperature, but they cannot join the dots together. Corbyn is not the answer, although I do like the man, he is just a signpost of slight discomfort with the status quo.
    We, the readers and contributors to your very fine Blog here, all have some experience under our belts, I assume we are all in our 50’s & 60’s, well educated and have seen a bit of life. We can read the entrails and can see the dangers, but we are a minority.
    The UK’s problems extend beyond the economic and political, they go well into the social and cultural aspects of life itself.
    Problems at this level are never resolved amicably. We are now entering the stage where Push becomes Shove ! The ignored problem of enforced multiculturalism will soon come to the fore. We have passed the stage of any meaningful reform, we now need revolution.
    Engrained cultural marxism will not go quietly into the night, instead we need to go through an painful and prolonged excorcism to purge us of this evil.
    The culture of Entitlement that is so deeply ingrained in British society will not be solved by politics- it will be solved by economics.
    “Dad, lend me a Tenner”.
    “No Son, you blew the last Tenner I gave you, and the Tenner before that too.
    My savings are gone, my pension has been cut and I have got nothing left to sell.
    I am now skint too !
    Besides, you can’t go out anyway, it’s 7pm and there’s a curfew on.”

    • I thought I’d just reply and say don’t abandon hope just yet. I am in my mid-thirties and am very keenly aware of the unsustainable “economy” we have now. I talk to my friend and family about these issues, encouraging them to reject ultra-consumerism and rather than take on debt (whether secured or unsecured) to save their money and diversify their assets. A few years ago they humoured me, but now many come to me unprompted and want to talk about these issues whether economic or social. The winds are changing. There are many like me I am sure, and we are preparing for the paradigm shift that is coming.

      As Rick Rule always says “the cure for high prices is high prices”. You mention the culture of Entitlement that seems all pervasive right now. Well it may seem that way on the surface, but like all movements that run their course it will be rejected in ever increasing numbers as it becomes more of a hindrance than a help as time passes, as you say it will be solved by economics that will provide the incentive that changes behaviour.

      I fully expect my generation will never see a pension, and frankly looking at the damage it’s caused to our society I wouldn’t want one. I’d much rather make my own provisions and for my family to take care of their own than be a burden on anyone else, and I will encourage my family and friends to do the same. As this attitude grows, people will reject corporatism and big government for smaller, more local solutions.

      There is no problem that politicians can create that free-thinking individuals cannot solve.

    • A personal view is that the British economy cannot now be rescued. Countries once in the economic “front rank” can, and have, crashed into a lower tier – a classic example is Argentina – and Britain seems determined to go that way.

    • Rich,
      You are wise beyond your years, and a credit to your generation.
      You are right, I do not hold out much hope for the UK,
      but your reply has lit a candle for the coming storm. Thank you.

  6. I have been much impressed by Peter Turchin’s analysis of historical cycles – the excessive growth of elites and their control of resources, declining wages for the rest of the population, and gross inequality. A period of stagflation and then the cycles end with a reset – usually by major conflict with significant mortality. The criticism has been that his ideas were largely based on agrarian societies but I think the parallels with our situation are disturbing and much of what you have said about ECOE and the like had their equivalents in the food or resource shortages which were often the trigger for conflict.

    • Well, the SEE view is that agrarian and industrial societies are quantitively different, because of vastly enhanced access to surplus energy, but are not qualitatively different. There is a well-argued case that a soaring ECoE brought down ancient Rome, perhaps assisted by complacency, poor leadership and some form of social deterioration. The UK’s ECoE position is very weak, and it is at least arguable that the other factors are there too.

      Another interesting study is with Spain after about 1600. The inflow of gold and silver created a dependency of its own, whilst Spain didn’t develop much industry, because she could buy whatever she wanted. This might in some ways parallel what cheap money policies are now doing, most obviously to the UK and the US. It doesn’t matter, ultimately, whether you dig money out of the ground in the Americas, run the printing presses or create money on a computer – sooner or later, cheap money turns out to be an expensive indulgence.

  7. You touch on ethics. I suggest the instrumentally incompetent nature of elite management culture has a lot to do with it – including I suspect the awful tragedy at Grenfell Tower (which could prove a tipping point in public trust for the elite).
    Decison-making is dominated by professional wordsmiths – politicians, bureaucrats, media, lawyers, academics. They define problems with words and try to solve them with words. Senior civil servants think they have broken the back of a problem when they have produced a finely honed minute about it. MPs pass laws. And so on.
    And if it’s not words, it’s numbers. But, as all your work underlines, numbers are not reality either. Except for banks.
    All of this encourages an irresponsible ‘audit trail’ mindset – as long as the words and numbers are crunched and recorded, the procedures applied and the boxes ticked, no one in charge can be blamed. It seems that the management of Grenfell Tower chose by far the lowest tender for its recent refurbishment. It was a transparent procedure they will say…the contractor knew the specification he was agreeing to… But, as anyone with experience in the construction industry knows, the reality is not as simple as that.
    It’s a problem commonly associated with the public sector, but as far as I can see it is pretty much the same at the corporate end of the private sector. And the same for politicians of all parties too.

    • Agree with you entirely.

      I’ve often wondered what might have happened if the capital had been moved to Birmingham, which for a lot of years was an industrial powerhouse, and markedly more prosperous than London. We might have put a lot more emphasis on manufacturing if that had happened – but I can’t somehow envisage Brummie, much as I like it, as the “de rigeur” voice modulation of the mandarins!

    • Re. Grenfell, I think it is a turning-point, especially happening when it did – days after Mrs May’s electoral fiasco, and days before the start of “Brexit” talks. Yet the “usual suspects” are still trying to prevent “Brexit”, or water it down into nothingness. The willingness of these people to ignore the public is breathtaking.

  8. Hi Tim,

    What would your specifications be for having an industry nationalised or privatised? What are good ways/reasons to tell which industry should be nationalised and which not?

    Is it as easy as the ability to create a competitive industry? And with that in mind, what about an industry like energy which is becoming competitive (50+ companies now I think?) but the real problem is people not switching and/or getting off the standard variable rate?

    Thanks.

    • This is an important question – at least as much in the US as in Britain. I can only give outline principles here.

      Starting with break-ups, or, as it’s known in the US, “anti-trust”.

      The principle has to be market domination, and the resulting adverse effects on customers, competitors and suppliers. My guideline would be that no single company should have more than 9.9% of a market.

      In the US, “anti-trust” legislation was used, historically, to break up Standard Oil and AT&T. This was essentially a state-by-state break-up, so the result was SO of New Jersey (later Exxon), SO of Indiana (Amoco), SO of California (Chevron), SO of NY (Mobil), and so on. The looming question now is how to apply this in the tech sector – are Google, Facebook, etc to be allowed to retain huge market shares?

      One also needs to minimize artificial barriers to entry. For example, US customers need an “open skies” policy if they are to get better service from airlines.

      On nationalization, it’s worth remembering that Mrs Thatcher privatized industries, not public services, which seems a sensible distinction. So I woudn’t have privatized prisons, for instance, which are clearly public services. Essentials, such as water, are grey areas.

      So the principle could be that “businesses should be private, public services should be owned by the state, and grey areas should be tackled on a case-by-case basis”.

    • Not sure I understand the difference between an industry and a public service? Couldn’t anything be labelled a public service? I could see food production and distribution (super markets) being labelled as public services?

      Also isn’t there a further distinction to be made on monopolies, for instance if Google makes a misstep, bing, yahoo etc are there, with decent services for people to use. Is this where distinctions are made between creative monopolies, state produced monopolies (and other monopolies I can’t think of) etc?

      I saw a picture just now of Uber users going from something like 84% of the market to 77% after the issues they have had (to Lyft, a competitor).

      Isn’t there a distinction to be made where there is a monopoly but there is good competition in the wings waiting for a mistake and so the monopoly can’t make the normal monopolistic moves?

    • Taking food as an example, this is an “industry” in the sense that people choose and buy it for themselves. The best guarantors of consumer well-being in such an instance are competition and transparency, rigorously defended.

      Health care, on the other hand, can’t be wholly a matter of purchase, because most of us want to see the best care available to all, determined by need, not by the ability to pay.

  9. What are your thoughts on how a political system would work without any party?

    All MP’s are independent and have to work together to run the country?

    • Government without parties is, sadly, scarcely possible. But a major problem has been a failure to reform the system in line with the rise of parties.

      To work effectively with a party system, it’s desirable to have a separation of powers between the executive and the legislature, which Britain doesn’t have. It’s also desirable to have a second chamber elected by the voters. A more proportional electoral system would also be advantageous.

      The UK is now reaching a farcical outcome of these weaknesses. The Brexit plan, such as it is, could be de-railed by the unelected Lords, whilst the government’s survival is likely to depend on the DUP, whose voters are a tiny fraction of the UK total.

      It’s noteworthy that Britain’s parliament chamber has two sides, symbolising confrontation on binary lines. Other parliaments tend to be circular.

  10. Is there an argument, despite the current debt etc debacle, that the UK is similar to a company in the Warren Buffett quote which says that you want to own a company that an idiot could run and basically everything will still be OK?

    Does the UK have a natural wealth (from its wet ecosystem etc?) that will mean we’ll be ok whatever the politicians do? Or not at all?

    • Mr Buffett referred, I think, to very simple businesses – which doesn’t describe the complexity of a modern economy.

      If I had to define Britain’s natural wealth, I’d not be thinking in terms of physical assets, because these don’t go very far when shared between 63 million people crowded into a small island(s). Rather, UK natural wealth used to consist of a cultural inheritance of tolerance, fair play and social cohesion. One of the worst aspects of two decades and more of poor leadership is the extent to which these have been eroded.

  11. There was a debate on Radio 4 about ‘appropriating’ properties for the Grenfell Tower families.

    Firstly the power to do so exists – it requires an Order in Council

    Secondly, although it wasn’t mentioned the property is empty, used – if at all as a holiday home or similar. It seems to me that requisitioning an empty/little used property in an emergency is not an unreasonable act, so long as there is some reasonable compensation.

    Finally of course if we talk about the ‘greater good’ perhaps using the use of your London home for a few weeks of the year if it keeps the peace might be better than the resultant riots if it isn’t done.

    Unless of course the Tory Party has been infiltrated by Socialist Revolutionaries hell bent on a revolution…………………

    • A real problem is an apparent inability to coalesce around a “greater good”. People seem unwilling to make sacrifices for the greater good – for example, look at the opposition to using the value of someone’s home to fund their own care in old age. I suspect that two decades and more of the promotion of the doctrines of selfishness are now taking their toll.

  12. With a little luck, you’ll be treated like Greece.

    In a train wreck, going over the cliff, where would you like your ticket? Huh? Stop whining and enjoy the show. The view is great, come join us, we’re in the back.

    • There are some parallels with Greece, but a bail-out for the UK isn’t feasible. The sums involved are vastly larger, and the ECB isn’t involved.

      The train-crash analogy is apt, though! The elements of tragedy and farce are both in evidence.

  13. Hi Tim.

    Thanks for your answers to my questions.

    On a different point, I’ve pondered a new way of governance for countries using tech before and I’ve just seen a tweet chain that explains how this might be achieved quite soon (5-20 years?) so I thought I’d post the link to the first tweet here.

    I’m sure I come across as naive with this thought process, and maybe I am, but it’s interesting for me to think how tech could change our whole society and how it’s run.

    Thanks.

  14. Hi Tim

    You mention the Grenfell incident above and what has truly astonished me is how much the situation has changed in the last two or three weeks. Before the election there was a modicum of calm but now, and after the fire, things appear totally chaotic. I cannot see May surviving and there is an almost amusing contrast between her strong confident words and her actions and responses to issues as they arise.

    Unfortunately I think the political class has become totally debased in the last thirty years ( can anybody think that Boris Johnson would be Foreign Secretary thirty years ago?) and there are very few who have the stature to tackle these issues; so few in fact that you could count them on the fingers of one very badly mutilated hand.

    • Hi Bob

      Whilst we don’t yet know what caused the Grenfell disaster, it’s the kind of tragedy that is sadly all too common, but usually on the fringes of cities in poor, emerging economies, not in developed countries. If something like this happens in Manila or Mexico City, we usually assume that weak regulation and lax enforcement are involved. It isn’t meant to happen in cities like London.

      What we are witnessing in Britain is a shocking (but predictable) denouement. The economy has been run idiotically for at least two decades, something I put down to the enthusiastic pursuit of mistaken economic policies. Both the Conservatives and “new” Labour embraced an “anything goes” economic philosophy which is a caricature of competitive market economics. As we are now seeing, this has impoverished most people, and has put the economy at risk.

      The authorities seem to be delusional. For instance, there is a heightened risk of a currency crisis yet, to listen to (say) the BoE, they still seem to think that decisions over issues like interest rates are still in their own hands. It may not be too long before the markets take a different view. Likewise, government acts as though it will be an equal negotiating partner with the EU over “Brexit”. That seems unreal as I see it.

      The immediate results are deteriorating real incomes, the very real possibility of stagflation, and an equally real possibility of a Corbyn government. There are structural problems too, such as the affordability of pensions, and what would happen if house prices plunge.

      This economic idiocy has social and political consequences, too. The country is bitterly divided, people are understandably angry, and the UK lacks either a stable government or a workable set of policies.

  15. Tim, I have moments when I think the UK has reached Peak Idiocy and then I am disabused of the thought as the nation scales new heights.
    I believe that the country is in very deep trouble economically but when I broach the subject with friends they look at me aghast. In fact their faces register the thought that I am the mad uncle normally kept in the attic and some fool has accidentally left the door unlocked allowing me to escape and spout my deranged views to anyone who will listen. For my part I keep writing to the local press, but without much success. My latest submission read:
    ‘The recent increase in retail prices to nearly four per cent and reduction in wage growth just below two per cent lays bear the full horror of an economy that can no longer deliver an improving standard of living to a majority of its citizens.
    We are in the midst of a period of severe financial repression.
    The aim of the policy is three-fold: to rescue the banks, engineer a ‘soft default’ on debt, and transfer wealth from the poorest members of society to the richest. Period.
    The policy necessitates a continuing devaluation of Sterling, relatively high price inflation and ultra-low interest rates to establish and maintain a negative real rate of interest.
    Those relying on Bank of England notes find that their claim on goods and services is severely reduced, while those storing most or all of their wealth in Bank of England notes find their future purchasing power relentlessly diminished.
    This is a country where collectively people are getting poorer by the day; and it’s not only inevitable, but has a very long way to run.
    The United Kingdom has a trade gap of four per cent of GDP.
    We are bridging the shortfall by selling the country from under our feet and issuing bonds.
    Productivity is dire; investment is weak.
    We have an untenable budget deficit, and personal debt is reaching new heights.
    In many instances the outward trappings of citizen wealth is concealing a populace with ownership of few assets and in a perpetual debt trap.
    Media reports that Britons have ‘stopped’ spending are wide of the mark. Many Britons are spending all they have, and then some; they just aren’t getting much in return when handing over a Bank of England note.
    This is the economic reality of the United Kingdom.
    National politicians praising inward investment from abroad and high levels of employment are either knaves or fools.
    Investment from abroad is a sign of our economic weakness; full employment fails to recognise that every slave on a ship had a job.
    The British Establishment, ensconced safely ashore in their protected enclaves, has radio-control of the ship and is running it aground.
    Sadly there are not enough life-boats, and in any case all the places in the lifeboats are reserved for select members of the political class.
    Meanwhile below deck the rest of the crew and passengers are restless. Half want to abandon ship but have nowhere to go, the other half are too terrified to move.
    This is, I venture to suggest, a fair summary of the state of the nation in the summer of 2017.’
    Tim, tell me, please: have I got this wrong?

    • I’d agree with that, pointing out only that inflation is 2.9% – but wage rises are likely to drop well below 2%. Business organizations have reported a “crash” in their members’ confidence.

      No-one is listening, yet – but most seldom do, until recognition is forced upon them. They’ve been led to believe that the economy is in good shape – by people who “would say that, wouldn’t they?”

    • I’d like to add that the North Sea oil reservoirs are nearly depleted. The U.K. is now structurally dependent on importing oil and gas.

  16. “I’d like to add that the North Sea oil reservoirs are nearly depleted.”

    Presumably this means that no longer productive wells need to be de-commissioned – sounds expensive but I’m not sure who shoulders the costs.

    • In theory, oil companies have to put the sea bed back as they found it. In some instances this can be very expensive. These costs should be deductible against taxes paid, which on some fields have been at very high rates. So government could end up paying most of it.

      My supposition is that many platforms will be pushed over, becoming artificial reefs. They would have to be cleansed of pollutants, and wells plugged with concrete.

    • The Telegraph, 14 April 2015:

      Britain’s oil industry faces a deep and long-lasting crisis, according to the International Monetary Fund, which said the collapse in oil prices would stifle investment and hit production at a much faster pace than other countries.

      Analysis by the IMF and Rystad Energy showed North Sea oil producers would be among the hardest hit by the slump in prices because huge operating costs meant they could not absorb the decline as easily as countries such as Kuwait, Iraq and Saudi Arabia… The fund’s oil industry analysis showed that UK producers faced the highest operating costs in the oil producing world, equating to an average of around $40 per barrel. By comparison, operating costs were less than $5 a barrel in Iraq and Kuwait, and about $6 on average in Russia. The figures will deal a further blow to the Scottish nationalists who have claimed North Sea revenues could help sustain an independent Scotland.

      Oil prices have fallen from their June high of $115 a barrel to just $58 today. While this has led to a collapse in the use of oil rigs, most notably among US shale oil producers, the IMF said “significant efficiency gains” in the sector would help to limit falls in production.

      CNBC, 16 May 2017:

      North Sea oil output is expected to jump by a net 400,000 barrels per day (bpd) or about a fifth in the next two years, defying gloomy forecasts for the oldest deepwater basin that produces the world’s benchmark crude price… The region is expected to report its third annual production rise in a row in 2017, reversing years of sliding output…

      “The drop in the oil price forced everyone to focus even more than they were on (production) uptime and operating efficiencies which have risen dramatically over the last two years,” Premier Chief Executive Tony Durrant told Reuters, “We’ve been at over 90 percent operating efficiency and a lot of the other players are very high as well. If you roll back to 2012-2013, then the North Sea had a shocking record of about 65 percent,” he said.

      Mark Thomas, BP’s regional president for the North Sea, said in September that BP’s cost of production had fallen to about $16 or $17 a barrel from above $30 in 2014.

  17. Tim, the inflation figure I quoted was from the higher of CPI or RPI rounded-up. I am sure that nationally discussion could be aided by the construction and publication of an Essentials Prices Index – EPI. I know that you produced such an index when you were at Tullet Prebon. As you have stated previously, prosperity is the income that you have left after paying for essentials. A measure of changes in the prices of essentials would assist in better understanding the pressures bearing down on households. Finally a short anecdote. Last week the window-cleaner called on his usual two-weekly cycle and afterwards we were chatting. Normally he’s a hail-fellow, well-met, optimistic sort of chap. Last week he confessed that he’d never felt as frightened about the economic and financial situation of the country since the days of the IMF Crisis in 1976. I don’t really know what to make of this, other than the observation that the gravity of our national plight may slowly but surely be beginning to dawn on people.

    • Thanks. I still produce the UK Essentials Index, but only annually now, not monthly.

      The IMF bail-out happened in an era of crisis – the oil price hikes of 1973-74, the miners’ strike, the “three-day week”, rolling black-outs – and the political stalemate of a hung Parliament after Ted Heath asked “who goiverns Britain?” and the voters replied: “not you”. Sterling crashed in 1976, as it had in 1967. In 1976, the crisis was accentuated by a US newspaper saying something like ‘goodbye Britain, it was nice knowing you’.

      There are many differences today, but some striking similarities as well.

  18. Tim I remember a leaflet arriving at the family home in 1975 detailing how serious our inflation rate was and what the Government was going to do about it.

    Fat chance that a similar leaflet arrives about the frightening rises in the cost of essentials.

    • Just ask the Germans. What would they do?

      Short term view: we have enough fossil energy to build it and it will return more energy than the fossil energy that went into building it.

      Long term view: we wont have enough fossil energy to decommission it.

    • First of all, the decision on new nuclear capacity was should have been taken at least a decade earlier than it was – the end-of-life dates of the fleet were known, as was the probable profile of fossil fuel production. As it is, the fleet is running on “life extensions”. I’m not qualified to know how safe this is, but have heard disturbing comment on one plant in particular (which I won’t name).

      Second, the government should have funded it directly. Any such project requires an implicit guarantee from the host state anyway, so I fail to see merit in having it funded as it is being.

      Third, people better informed than me seem to think it’s the wrong design, unduly expensive and prone to problems.

      Finally, electricity from it will be too expensive. The focus is on what domestic consumers will pay, but it’s the cost to industry that worries me more.

      (Otherwise, fine).

    • Current estimated cost to decommission existing nuclear plants is over $150 billion. Probably safe to say this is a vast under estimate. Lets put this into context, HS2 £55 billion, fireproof cladding on Grenfell flats would have cost $5k extra. How much will it cost to decommission the nuclear plants we are currently building? Bare in mind that oil, coal and gas will be way past peak by then just as the World population will be hitting 10 billion. Answer: We wont. We will dump spent fuel down deep mines and put 5 mile or what ever exclusion zones round the plants and let them rot.

      ……… but who cares. As a 55 year old with no children, let the show continue for another 30 or so years, please.

  19. Thank you all for your views on Hinkley Point. I was guided by the New Scientist last year :

    ‘Why Hinkley Point is a nuclear folly of Titanic proportions’

    • If the New Scientist is saying this then you’ve got to be worried. A Cornucopian publication to it’s core. Worth reading for it’s quantum mechanics articles though.

  20. Just a extract from New Scientist regarding the building of other reactors of the same design :

    ‘Worse still, weak spots have been found in the steel reactor core at Flamanville. If it has to be replaced, the still incomplete plant would have to be largely dismantled to replace it, at immense cost to EDF. And that’s not all. Earlier this year, it was reported that one of the companies supplying components to EDF had falsified safety certificates.

    The falsified safety certificates remind me of ‘The China Syndrome’

  21. What this seems to tell us about Britain’s politicians isn’t edifying:

    – “Put off anything controversial for as long as you possibly can”
    – “Try to get someone else to pay for it, even if that costs a lot more in the long run”
    – “Don’t worry if the priority of someone else paying for it gets you a poor product”

    • You know I’ve read many reports in Newspapers – New Scientist – economy blogs and I’ve yet to come across any positive comments.

      Surely the Government’s scientific advisers must have raised a red flag – if only secretly.

      If EDF can’t get it to work we could be left with even more power shortages by the mid 2020’s.

      It is worth noting that the problem of power storage for renewables is being researched with improvements coming along all the time.

      Just imagine – say by 2025 – if we have produced a safe and economic storage battery for windmills and solar meaning that a base unit like Hinkley point is no longer required. A lot of people will have egg on their faces as Industry and families suffer.

      At worst it could make our industry uncompetitive even with a bargain basement pound.

      I’ve a feeling that it will overshoot its projected first stage commission date of 2025 / 6 – 2030 anyone?

  22. You write that, ” economic issues were given little or no attention in the recent election.”, but that’s not quite true. The Conservatives thought that the massive leads in the polls would enable them to get a majority that would allow them to tackle elephants in the room – the cost of triple lock pension and of care for an ageing society. The Conservatives normally rely on the dependability of the older voter, and felt this was their chance to tackle this generational issue. Labour did the opposite – offering all kinds of goodies and freebies to the young. It turns out of course that the public vote selfishly after all. The old wanted to keep their assets and pensions, and they young want free stuff.

    • The public do indeed vote selfishly, but then the “creed of self” has been preached at them incessantly for more than twenty years – so it may not be too surprising that they’ve swallowed it.

      Current economic orthodoxy is in the process of being repudiated by the electorate, and the current government is becoming a pantomime. This puts me in not much doubt that another election tomorrow would put Mr Corbyn in or close to power. The danger then would be of swinging from one daft extreme to the other.

    • At some point the bill is going to come in for the demographic shift in the age of our population.

      Someone is going to have to pay it.

    • The national government will pay, no worries! It is monetary sovereign, so has total control over the pound. Any law it wants to pass to facilitate or restrict its currency is legal to do so. The UK can never go unwittingly bankrupt [it would require passing a law to do that]. The government has lots of weird regulations and organizations about the money etc. no doubt deliberately sowing uncertainty in the public’s mind, but it simply has zero need to save or borrow its own currency.
      So it can choose to never go into debt [it would be wise except the banks would hate it] and it can forever pay pensions without consequences for taxpayers. As long as there is spare productive capacity in the economy, there will never be excess inflation, and in fact the spending will grow the economy and GDP.

    • I’d be grateful for an explanation of how this would work. Please correct me if I’m wrong, but would it mean not taxing people, not borrowing, but simply creating the money to pay for any public services we wanted? Want 1,000 more hospitals? Create the money to pay for them. Need 50 new warships? Order them, paying with created money.

      I must have got this wrong, but how?

    • hi Tim, ignore Johan. He is clueless, trying to mix up mainstream nonsense with MMT. They don’t mix. Forget the mainstream entirely. I can post a crit of the mainstream if anyone is interested by Steve Keen. Keep right away from it! Toxic nonsense.
      What you say is what can be done, and often is done. The infrastructure is created before it produces results, like the Railways. Build them and then use them. Same with hospitals and free education. Surely you understand that? The need is there so what people can do is go to banks and get finance. OR, the government can finance the work without have to repay anyone. The banks hate this option as they lose profit and they make sure the pollies do what suits them! But being monetary sovereign means it can easily be done. When the SHTF came with the GFC, the Fed poured buy out money into the banks, to the tune of $28Trillion! between 2008-10. That’s a lot of hospitals and healthcare, but it did not faze the Fed.
      So what is wrong with your question is that you have not looked at the benefits of building infrastructure, hospitals, even warships. Same with pensions. The money spent into the economy raises productivity and wealth. Effectively the spending pays for itself and as long as the productive capacity of the economy is not breached, there will be low inflation. I am amazed this is no longer understood, because it was even in the 19th century.

    • Dr.Tim,
      I have looked into this MMT ( Magic Money Tree theory), at the behest of our fellow poster above, as I thought that I was missing something too.
      It is true that a monetary sovereign state cannot go broke in its own currency. That is common sense. But that is about the only premise in MMT that holds water.
      The MMT theory is a neat little microcosm of the real world, and it is always explained using an insular USA as an example. What it does not take into account is the rest of the world, world trade, and the fact that not everybody wants paid in US $, and not everybody pays their taxes in US $’s either.
      Sure, HM Govt. can build as many aircraft carriers as it wants, if it pays for them in £-sterling, but the yanks will want paid for their over-rated and over-priced F-35′ jets in US Dollars. Just like the steel suppliers will want their steel to be paid in $’s too, and just about every electrical component on board will be of asian origin.
      Now, if you want to regard the nations Defecit as our “Net Spending Achievement”, then that is fine -give yourself a pat on the back, but the only thing is, calling it that is not going to make it go away. You can regard the nations Debt as money in the bank, but our creditors will still want to be paid in full.
      OK, if the £-Sterling was the only money in the world, and the UK government had sovereignty over the whole world, then everything would be fine.
      But we both know that that is not the case.
      So please don’t fret Dr. Tim, you have not got this wrong !

    • Well the more there is of anything – the less it is worth – so the pound would be worthless meaning nobody we want it. Therefore no foreign exchange – we would not be able to pay for any imports unless we paid in good we actually produce (just like the cars we made for the US markets to help pay them back after the 2nd World war.)

      It reminds of ‘The Hitchhiker’s guide to the galaxy’ where they pondered using leaves as currency – with hyperinflation occurring in the Autumn when more became available.

  23. A prediction from Chair of the Board of Governors of the Federal Reserve System – Janet Yellen
    “We’ll probably live out our days without seeing a repeat of the 2008 crisis”

    I’ve a feeling that many contributors on here might disagree.

    • Well, she may be right if she means ‘exactly the same’, but so what? Each crisis has unique features. On the face of it, it’s a surprisingly silly remark.

    • Hi Tim – yes I read about the Italian bailout and that Santander has had to step in for a Spanish bank.

      What also worries me is that UK house prices have apparently rebounded – I was hoping for a slow correction.

    • Just to add, the BoE yesterday called on banks to increase their capital reserves. There are serious banking problems in Italy, and less serious ones in Spain.

    • A complex system with more than 2 independent variables is chaotic in nature. That is a proved mathematical fact. The future state of any chaotic system cannot be predicted with absolute accurately as small perturbations can result in huge changes of state in the future. The so called ‘butterfly effect’

  24. Hinkley Point C is £2.2bn over budget and a year behind schedule, EDF admits.

    Quelle surprise.

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