After a slog of a campaign which broke the mould for both
the Conservatives and Labour, the election we didn’t need produced the result
that the Conservatives didn’t want; it will potentially change the thrust of
economic policy and may have far-reaching implications for Brexit negotiations.
Without necessarily having any truck for Labour, I must confess to some
satisfaction in seeing the Conservatives run aground on the Brexit issue.
Almost twelve months after the searing experience on that sunny Friday morning
of 24 June 2016, the hard-liners on the right-wing of the Conservative Party
who lied their way to victory on Brexit, were chastened by the message handed
to them by the electorate, whilst UKIP’s brief spell as a serious political
force was effectively terminated.
I have pointed out many times that the efforts by Theresa
May and the rest of the Conservative Party to interpret the Brexit vote as a
mandate for a hard Brexit were misguided. Their efforts to take ownership of
the issue, as if Brexit was a topic only for Conservatives, were way off. The
irony is that whilst the election was all about Brexit, it was not even the
most important issue of the campaign. Austerity policy was the big story and
Conservative efforts to smear Labour’s tax-and-spend policy largely fell on
deaf ears.
I have spent the last seven years trying to get people to understand
that a fiscal policy based solely on cutting spending is only half a policy. We
have witnessed a huge rolling back of the state in recent years, and a withdrawal
of the safety net which has genuinely left a lot of people with nowhere to
turn. Jeremy Corbyn’s message was that a country which forces its poorest
people to get by on charity was failing in its duty to its citizens. You do not
have to be a bleeding heart liberal to ask what happens to all the taxes we pay
if we have slashed the social welfare safety net so much. People clearly buy
into this and I suspect it is the reason why Labour made such gains at the
expense of the government.
But before we get too carried away, we should remember that
Labour did not win the election. They outperformed expectations, for sure, and
in the battle of the leaders came out on top. As in 1974, when Conservative
Prime Minister Edward Heath ran on the slogan “who runs Britain,” the
electorate has delivered an answer that politicians did not expect. All this
raises a question of whether politicians, particularly the government, really
are in tune with the public mood. Or are they lost in the bubble of focus
groups and Daily Mail headlines which do not paint a sufficiently accurate
picture? Past experience suggests that governments which lose touch make
mistakes, and they are usually punished at the ballot box.
The Conservatives were punished yesterday but escaped with serious,
rather than fatal, injuries – at least for now. They have to learn from those
mistakes. I have to confess I did not hear much contrition from Theresa May
last night. For an obviously intelligent woman, she needs to get with the
programme – for the sake of her career if nothing else. One of the more
enlightening interviews I heard overnight was given by former Cabinet Secretary
Lord Turnbull on the radio (here
7:48:25 into the recording) who was scathing about the way May has run her
government and accused her of running it as a “fiefdom” without the necessary
experience to manage the many tasks which modern governments need to take on.
In particular he was critical of the lack of economic expertise and directly
suggested that she was not up to the job of prime minister.
As a man of great experience at the heart of government,
Turnbull’s view should be taken seriously. In his view she is not the right
person to lead the country into Brexit negotiations and when asked whether she
should stand down, his response was “absolutely” – an extraordinary thing for a
man of his stature to say. At the very least, the prime minister will have to compromise
on the Brexit strategy. Turnbull pointed out that by entering into a coalition with the DUP,
the government should abandon the policy of leaving the EU Customs Union and
thereby resolve the Irish border problem, which is high on the list of things
the European Commission cares about.
If no such compromises are made, the UK will be driven ever
closer to the cliff edge that the prime minister has said she wishes to avoid.
And if we are pushed into that position, it will be an act of supreme economic
vandalism. I fear that the prime minister will not change course, as she is
fearful of the wrath of large swathes of her party if she does. But if she does
not, the electorate will also wreak its vengeance. Faced with these twin evils, I would be surprised if the prime minister lasts in office
much longer. As the hapless David Moyes found out when he succeeded Alex
Ferguson as Manchester United manager, sometimes the better strategy is to
avoid taking the top job under the wrong circumstances. Theresa May might have
been the least worst candidate for the job as prime minister last summer, but
it does not mean she is the best person for the job.
Friday 9 June 2017
Wednesday 7 June 2017
A last word on election economics
I was asked last week by the Sunday Telegraph to rank the
economic policies of Labour and the Conservative parties as part of a larger survey group. The story duly appeared under the heading “Economists back the Tories - but remain underwhelmed” in which it was suggested that while Dixon’s “criticism of the Tories centres
around their fixation on austerity, he is more scathing about Labour’s plans.”
Whilst I am grateful for the press coverage, and my comments were reported
accurately, I do believe they were given a spin which was not warranted by the
totality of my remarks. In the interests of balance, therefore, I reproduce
below the full transcript of my answers to the Telegraph’s survey.
Tax & spending
CON 3; LAB 3 (Marks out of 10 where 10 is good and 1 is poor)
There are many good things about the Labour plans: (i) they are semi-costed so we have some indication of how much they want to spend; (ii) There is also something to be said for establishing a National Investment Bank even though it will not be able to generate the £250bn in infrastructure spending that Labour plans. Far better to use it as a conduit to fund SME lending as in Germany and the US, where the KfW and SBA operate. The bad news (and the reason I give the overall plan such low marks) is that too much emphasis is placed on taxing higher earners and corporates. In other words, the tax base is too narrow. For a party which seeks to promote equality, this is merely a “soak the rich strategy” which will change the behaviour of those caught in the tax net. It is thus unlikely to generate as much revenue as planned. In any case a penny on the basic income tax rate yields 4x as much revenue as a penny on higher earners. And whilst the idea of renationalising parts of the infrastructure sounds attractive, this will result in as many problems as it solves. The education pledge is too expensive given the current numbers going into education. Abolishing university tuition fees is a good thing, but it would have been more affordable 20-30 years ago. However, Labour deserves credit for sparking a debate on the role of the state in the economy.
This is more than can be said of the Conservatives, whose economic manifesto offered nothing new. The commitment to balance the budget only by the mid-2020s does raise a question of whether the austerity of the last 7 years has been worthwhile. The public sector is creaking at the seams and it is not in any position to withstand a further round of austerity. As the Institute for Government has pointed out “the Government is struggling to successfully implement the 2015 Spending review … [with] clear signs of mounting pressures in public services.” A policy of more austerity will be self-defeating and I would like to think that Philip Hammond will take a less draconian stance than George Osborne (the jury is out but his hands are tied by Brexit). I maintain that the commitment to reducing corporate tax to 17% is a mistake because it robs the Treasury of revenue and it is not as if HMRC is getting the corporate tax receipts it already believes it is owed.
Immigration
CON: 3; LAB 5
The idea that we can get net immigration back to the tens of thousands is economically illiterate and ultimately self-defeating although I understand why the Conservatives made the pledge for political reasons. However, targeting net immigration by focusing only on inflows, and continuing to classify students in the numbers makes little sense. It remains to be seen how a policy of “allowing us to attract the skilled workers our economy needs” is compatible with the targets. Labour is vague on immigration although they have sensibly resisted giving a pledge on numbers. The commitment to protecting the rights of EU workers already in the UK will play well in Brussels.
Jobs & pay
CON: 2 ; LAB: 2
In this day and age, governments don’t really deliver jobs – other than by setting overall conditions – and have little influence over pay, except by controlling the minimum wage. Labour’s planned figure of £10/hour is probably not unreasonable although it is a big stretch from where we are today which will squeeze smaller businesses. The Conservative strategy which does not give an outright figure, but plans 60% of the median wage, is probably less of a hostage to fortune. The Conservatives are probably more realistic in the sense that they did not talk about creating jobs but it is difficult to give marks to either side because I am not convinced that they said very much, However, both get credit for recognising worker rights though the Labour plans have a whiff of the 1970s about them (“empower workers and their trade unions”).
Industrial strategy
CON: 6; LAB: 4
Both parties sound good on paper but there is little new here. Both sides offer a tinkering at the margin approach – nobody would dispute Labour’s view that we need to improve the economy’s skill levels but this will take years to show any improvement and it was vague on how to achieve it. The Labour manifesto had nothing substantive to say on productivity, which is the UK’s Achilles Heel at present and the Conservatives score a little higher, having already announced their National Productivity Investment Fund. My concern, however, is that neither party will be able to do much in an environment where global forces will play a major role (e.g. automation).
Social care & pensions
CON: 3; LAB: 5
The Conservatives scored an absolute own goal with their initial plan on old age care provision, which was far less generous than that scheduled to come into operation in 2020. It ignored the Dilnot Commission proposal which advocated a cap on costs, thus mitigating against efforts to create a market for insurance in this area. Although they have backtracked, the damage is done. Sensible to remove the pension triple lock. Labour sound more convincing on this issue but the problem is how to pay for it. They are relying on squeezing higher earners and it is not clear whether they can afford all their commitments given the demands from other areas.
Totting up the marks, that amounts to 17/50 for the Conservatives and 19/50 for Labour (versus average marks of 23/50 for the Conservatives and 18/50 for Labour). Not exactly a ringing endorsement for either party, as the headline suggested, but not enough in my case to suggest a bias towards the Conservatives.
Tax & spending
CON 3; LAB 3 (Marks out of 10 where 10 is good and 1 is poor)
There are many good things about the Labour plans: (i) they are semi-costed so we have some indication of how much they want to spend; (ii) There is also something to be said for establishing a National Investment Bank even though it will not be able to generate the £250bn in infrastructure spending that Labour plans. Far better to use it as a conduit to fund SME lending as in Germany and the US, where the KfW and SBA operate. The bad news (and the reason I give the overall plan such low marks) is that too much emphasis is placed on taxing higher earners and corporates. In other words, the tax base is too narrow. For a party which seeks to promote equality, this is merely a “soak the rich strategy” which will change the behaviour of those caught in the tax net. It is thus unlikely to generate as much revenue as planned. In any case a penny on the basic income tax rate yields 4x as much revenue as a penny on higher earners. And whilst the idea of renationalising parts of the infrastructure sounds attractive, this will result in as many problems as it solves. The education pledge is too expensive given the current numbers going into education. Abolishing university tuition fees is a good thing, but it would have been more affordable 20-30 years ago. However, Labour deserves credit for sparking a debate on the role of the state in the economy.
This is more than can be said of the Conservatives, whose economic manifesto offered nothing new. The commitment to balance the budget only by the mid-2020s does raise a question of whether the austerity of the last 7 years has been worthwhile. The public sector is creaking at the seams and it is not in any position to withstand a further round of austerity. As the Institute for Government has pointed out “the Government is struggling to successfully implement the 2015 Spending review … [with] clear signs of mounting pressures in public services.” A policy of more austerity will be self-defeating and I would like to think that Philip Hammond will take a less draconian stance than George Osborne (the jury is out but his hands are tied by Brexit). I maintain that the commitment to reducing corporate tax to 17% is a mistake because it robs the Treasury of revenue and it is not as if HMRC is getting the corporate tax receipts it already believes it is owed.
Immigration
CON: 3; LAB 5
The idea that we can get net immigration back to the tens of thousands is economically illiterate and ultimately self-defeating although I understand why the Conservatives made the pledge for political reasons. However, targeting net immigration by focusing only on inflows, and continuing to classify students in the numbers makes little sense. It remains to be seen how a policy of “allowing us to attract the skilled workers our economy needs” is compatible with the targets. Labour is vague on immigration although they have sensibly resisted giving a pledge on numbers. The commitment to protecting the rights of EU workers already in the UK will play well in Brussels.
Jobs & pay
CON: 2 ; LAB: 2
In this day and age, governments don’t really deliver jobs – other than by setting overall conditions – and have little influence over pay, except by controlling the minimum wage. Labour’s planned figure of £10/hour is probably not unreasonable although it is a big stretch from where we are today which will squeeze smaller businesses. The Conservative strategy which does not give an outright figure, but plans 60% of the median wage, is probably less of a hostage to fortune. The Conservatives are probably more realistic in the sense that they did not talk about creating jobs but it is difficult to give marks to either side because I am not convinced that they said very much, However, both get credit for recognising worker rights though the Labour plans have a whiff of the 1970s about them (“empower workers and their trade unions”).
Industrial strategy
CON: 6; LAB: 4
Both parties sound good on paper but there is little new here. Both sides offer a tinkering at the margin approach – nobody would dispute Labour’s view that we need to improve the economy’s skill levels but this will take years to show any improvement and it was vague on how to achieve it. The Labour manifesto had nothing substantive to say on productivity, which is the UK’s Achilles Heel at present and the Conservatives score a little higher, having already announced their National Productivity Investment Fund. My concern, however, is that neither party will be able to do much in an environment where global forces will play a major role (e.g. automation).
Social care & pensions
CON: 3; LAB: 5
The Conservatives scored an absolute own goal with their initial plan on old age care provision, which was far less generous than that scheduled to come into operation in 2020. It ignored the Dilnot Commission proposal which advocated a cap on costs, thus mitigating against efforts to create a market for insurance in this area. Although they have backtracked, the damage is done. Sensible to remove the pension triple lock. Labour sound more convincing on this issue but the problem is how to pay for it. They are relying on squeezing higher earners and it is not clear whether they can afford all their commitments given the demands from other areas.
Totting up the marks, that amounts to 17/50 for the Conservatives and 19/50 for Labour (versus average marks of 23/50 for the Conservatives and 18/50 for Labour). Not exactly a ringing endorsement for either party, as the headline suggested, but not enough in my case to suggest a bias towards the Conservatives.
Monday 5 June 2017
Trump's climate clanger
Although much of the current media attention is focused on
Donald Trump’s rather unfortunate comments in the wake of the latest London
terror attack, his decision last week to withdraw the US from the Paris
Agreement on climate change was a much bigger deal. To recap, the agreement was
drawn up in the first place in a bid to limit global greenhouse gas emissions
in order to curb the rise in global temperatures and thus prevent some of the
worst effects of climate change from causing even more environmental damage.
There are 195 signatories to the treaty, with only Syria, Nicaragua and the
Vatican not having signed up. However, the US decision to withdraw not only
drives a coach and horses through global cooperation efforts on climate change,
but it raises question marks against the commitment of the US to a whole range
of international agreements.
Turning first to the climate issues, I am not a climate scientist so I am bound by the consensus of expert opinion which has done the work and drawn the conclusions. What everyone agrees on is that the earth is warming rapidly – global temperatures are around 2 degrees higher than when measurement commenced in the late nineteenth century. We also know that the amount of carbon dioxide in the atmosphere is at unprecedented levels (see chart, courtesy of NASA).
Turning first to the climate issues, I am not a climate scientist so I am bound by the consensus of expert opinion which has done the work and drawn the conclusions. What everyone agrees on is that the earth is warming rapidly – global temperatures are around 2 degrees higher than when measurement commenced in the late nineteenth century. We also know that the amount of carbon dioxide in the atmosphere is at unprecedented levels (see chart, courtesy of NASA).
The Intergovernmental Panel on Climate Change (IPCC) reckons that “anthropogenic greenhouse gas emissions … are
extremely likely to have been the dominant cause of the observed warming
since the mid-20th century.” Note that it does not say with 100%
probability that climate change is man-made, but “extremely likely” is the sort
of language scientists use when they are fairly sure. It may be that they are
wrong, but until such times as the world’s most reputable scientists change
their minds I’ll go with what they know, rather than wwhat various interest
groups believe to be true. And even if the scientists are wrong, it is a better
insurance policy to take offsetting action rather than ignore them and find out
they were right.
The science of climate change also suggests that global warming will have significant impacts on weather patterns, crop growing cycles, access to water and has the potential to disrupt the way we live our lives (for an overview of all these issues, see the Stern Review, which reported in 2006). As Stern pointed out, climate change “entails costs that are not paid for by those who create the emissions … Questions of intra- and inter-generational equity are central. Climate change will have serious impacts within the lifetime of most of those alive today. Future generations will be even more strongly affected, yet they lack representation in present-day decisions.”
Trump’s decision is the ultimate in short-term thinking designed to satisfy a tiny proportion of his country’s electorate whilst ignoring the wider consequences for their children (viz the wonderful response by Emmanuel Macron to Trump’s decision). Quite what better deal Trump has in mind for American workers by pulling out of the agreement is hard to fathom. After all, there are fewer people employed in coal mining in the US than in the green tech sector so it is not exactly a rational response to domestic issues. It is also a wider abrogation of duty to the rest of the planet, for as Stern also pointed out, solutions to the climate change problem require a global response.
There is thus general agreement that Trump’s strategy is self-defeating with regard to climate issues. But an equally serious concern is that an America first strategy runs counter to the rules-based system which underpins the world economic architecture and which has served the US so well for the past 70 years. An America which does not adhere to the treaty commitments to which it has signed up cannot expect others to play by the rules which the US flagrantly ignores. It may “only” be climate change, the implications of which will not become fully evident until after Trump is long gone, and in any case the US can always sign up again under a different president. But can the US expect all countries to adhere to the rules on global trade if for some reason it does not suit them? To what extent can the US’s military allies in Asia or Europe rely on its support?
International diplomacy is a game of give and take. Unfortunately, Trump appears to see it as a game of winner takes all. Moreover, he has not yet demonstrated that he understands the notion of cooperation on global issues (not that the British government is in any position to cast aspersions). But if Trump has any pretensions to providing leadership on a global scale, the climate change policy needs to be rethought. Future generations of voters may thank him for it.
The science of climate change also suggests that global warming will have significant impacts on weather patterns, crop growing cycles, access to water and has the potential to disrupt the way we live our lives (for an overview of all these issues, see the Stern Review, which reported in 2006). As Stern pointed out, climate change “entails costs that are not paid for by those who create the emissions … Questions of intra- and inter-generational equity are central. Climate change will have serious impacts within the lifetime of most of those alive today. Future generations will be even more strongly affected, yet they lack representation in present-day decisions.”
Trump’s decision is the ultimate in short-term thinking designed to satisfy a tiny proportion of his country’s electorate whilst ignoring the wider consequences for their children (viz the wonderful response by Emmanuel Macron to Trump’s decision). Quite what better deal Trump has in mind for American workers by pulling out of the agreement is hard to fathom. After all, there are fewer people employed in coal mining in the US than in the green tech sector so it is not exactly a rational response to domestic issues. It is also a wider abrogation of duty to the rest of the planet, for as Stern also pointed out, solutions to the climate change problem require a global response.
There is thus general agreement that Trump’s strategy is self-defeating with regard to climate issues. But an equally serious concern is that an America first strategy runs counter to the rules-based system which underpins the world economic architecture and which has served the US so well for the past 70 years. An America which does not adhere to the treaty commitments to which it has signed up cannot expect others to play by the rules which the US flagrantly ignores. It may “only” be climate change, the implications of which will not become fully evident until after Trump is long gone, and in any case the US can always sign up again under a different president. But can the US expect all countries to adhere to the rules on global trade if for some reason it does not suit them? To what extent can the US’s military allies in Asia or Europe rely on its support?
International diplomacy is a game of give and take. Unfortunately, Trump appears to see it as a game of winner takes all. Moreover, he has not yet demonstrated that he understands the notion of cooperation on global issues (not that the British government is in any position to cast aspersions). But if Trump has any pretensions to providing leadership on a global scale, the climate change policy needs to be rethought. Future generations of voters may thank him for it.
Saturday 3 June 2017
Nearly there ...
As the UK election race unfolds, latest evidence continues
to point to the Conservatives winning next week’s ballot. However, the analysts at Electoral Calculus
currently reckon that their majority will come in at 74 seats compared to an
estimate of 168 three weeks ago (the current margin is 17). One poll released
earlier this week even indicated that the Tories might lose their overall
majority by winning fewer seats than they have now, although this was generally
dismissed as an outlier. But the shift in the polls has rattled the markets,
and foreign investors now see a risk that the election will not be the foregone
conclusion it seemed a few weeks ago (see chart).
As I noted back in April (was it really that long ago?) this
election is being fought purely for tactical reasons – and indeed the prime
minister admitted yesterday that the decision to call yet another plebiscite
was driven by Brexit-related reasons. In my view, this is nonsense. The rest of
the EU does not care how large the PM’s majority is: The UK will still be in a
minority of one in the Brexit negotiations. But the size of the majority
matters for May herself. A parliamentary majority around 50 (still decent,
let’s not forget) would be seen as the equivalent of a draw. Anything less would
put the PM in a difficult position as she has to deal with the right-wing of
her party, which has a habit of making life difficult for Conservative prime
ministers. In effect, she needs a big win to give her a personal mandate.
So why are the polls narrowing? It can simply be boiled down to two factors: personality and policies. As George Parker wrote in the Financial Times today, “Theresa May thought a snap election would empower her, but what started in April as a quest for a “strong mandate” to deliver Brexit is threatening to leave her diminished. Polls suggest the more people see of her, the less popular she becomes.” Her main opponent, Jeremy Corbyn, started out as a no-hoper who couldn’t be trusted to run a bath, let alone the country, yet he is the one who has looked at ease in dealing with the hostile questioning (the odd brain fade during interviews notwithstanding). Corbyn has had to deal with questions about his past support for terrorist organisations and his willingness to press the nuclear trigger in the event it becomes necessary, and all-in-all has come out of it rather better than most people expected. This does not make him prime minister-in-waiting, however. Corbyn has spent the whole of his parliamentary career (34 years) opposing the mainstream of his party on most key issues. He will struggle to find sufficient MPs loyal to him in the unlikely event he becomes PM.
So if the personalities are not very appealing, we must judge them on their policies. Here again, both sides are found wanting. In summary, the Conservatives propose too much austerity and Labour promises too much tax-and-spend. Neither has talked enough about the single biggest issue facing the UK during the next parliamentary term – Brexit. Indeed, the prime minister seems to be asking the electorate merely to trust that she will “deliver the best deal for Britain.” That is not good enough. I would be more inclined to listen to a politician who acknowledges what economists have been saying for the last four years, that Brexit comes with a cost – a big one – and that they have a plan to deal with it. A party which proposes that “no deal is better than a bad deal” does not cut it.
Meanwhile, Labour’s tax-and-spend policy is open to the criticism levied by Conservative politicians that “there isn’t a magic money tree” to fund their plans. This is, of course, spot on although if I were Jeremy Corbyn, I would be pointing out that senior Conservative politicians such as the Foreign Secretary only twelve months ago supported the idea that leaving the EU would immediately mean that the UK could devote an additional £350m per week to the NHS. The manifesto analysis conducted by the IFS last week provided a pretty damning assessment of the fiscal plans of both sides arguing that “neither sets out an honest set of choices.” Though as an aside, I found this blog piece by John Weeks an interesting insight into the shortcomings of the IFS’s analysis.
As we head towards polling day, I get the sense that many people are unenthused by the choices on offer. I almost have feelings of nostalgia for Screaming Lord Sutch and his Monster Raving Loony Party. Unlike Lord Sutch, the MRLP is still with us, however, and amongst their manifesto (or as they call it, manicfesto) commitments for 2017 are a pledge to “nationalise crime to make sure it doesn’t pay,” “reducing the alphabet to 23 characters. This will start by cutting the letters N. H. and S” and giving atheism charitable status on the grounds that it is a “non-prophet organization.” I’ve heard worse.
So why are the polls narrowing? It can simply be boiled down to two factors: personality and policies. As George Parker wrote in the Financial Times today, “Theresa May thought a snap election would empower her, but what started in April as a quest for a “strong mandate” to deliver Brexit is threatening to leave her diminished. Polls suggest the more people see of her, the less popular she becomes.” Her main opponent, Jeremy Corbyn, started out as a no-hoper who couldn’t be trusted to run a bath, let alone the country, yet he is the one who has looked at ease in dealing with the hostile questioning (the odd brain fade during interviews notwithstanding). Corbyn has had to deal with questions about his past support for terrorist organisations and his willingness to press the nuclear trigger in the event it becomes necessary, and all-in-all has come out of it rather better than most people expected. This does not make him prime minister-in-waiting, however. Corbyn has spent the whole of his parliamentary career (34 years) opposing the mainstream of his party on most key issues. He will struggle to find sufficient MPs loyal to him in the unlikely event he becomes PM.
So if the personalities are not very appealing, we must judge them on their policies. Here again, both sides are found wanting. In summary, the Conservatives propose too much austerity and Labour promises too much tax-and-spend. Neither has talked enough about the single biggest issue facing the UK during the next parliamentary term – Brexit. Indeed, the prime minister seems to be asking the electorate merely to trust that she will “deliver the best deal for Britain.” That is not good enough. I would be more inclined to listen to a politician who acknowledges what economists have been saying for the last four years, that Brexit comes with a cost – a big one – and that they have a plan to deal with it. A party which proposes that “no deal is better than a bad deal” does not cut it.
Meanwhile, Labour’s tax-and-spend policy is open to the criticism levied by Conservative politicians that “there isn’t a magic money tree” to fund their plans. This is, of course, spot on although if I were Jeremy Corbyn, I would be pointing out that senior Conservative politicians such as the Foreign Secretary only twelve months ago supported the idea that leaving the EU would immediately mean that the UK could devote an additional £350m per week to the NHS. The manifesto analysis conducted by the IFS last week provided a pretty damning assessment of the fiscal plans of both sides arguing that “neither sets out an honest set of choices.” Though as an aside, I found this blog piece by John Weeks an interesting insight into the shortcomings of the IFS’s analysis.
As we head towards polling day, I get the sense that many people are unenthused by the choices on offer. I almost have feelings of nostalgia for Screaming Lord Sutch and his Monster Raving Loony Party. Unlike Lord Sutch, the MRLP is still with us, however, and amongst their manifesto (or as they call it, manicfesto) commitments for 2017 are a pledge to “nationalise crime to make sure it doesn’t pay,” “reducing the alphabet to 23 characters. This will start by cutting the letters N. H. and S” and giving atheism charitable status on the grounds that it is a “non-prophet organization.” I’ve heard worse.
Monday 29 May 2017
Whose Brexit is it anyway?
Although last year’s Brexit referendum was initially
proposed by the Conservatives, it was conducted across party political lines as
MPs were allowed to vote with their conscience. And as we all know, the
question on the ballot paper simply asked whether the UK should remain part of
the EU or leave the EU. No thought was given to the form which Brexit should
take. For a long time, Theresa May simply relied on the slogan “Brexit means
Brexit” without giving any further indication of what that meant. By the time
of her Lancaster House speech on 17 January, we finally got more insight when
we were told that the government’s negotiating position would be based on the
principle that “No deal is better than a bad deal for Britain.”
Most economists are horrified by that stance. It is simply not credible to assume that the rest of the EU is going to back down in the face of UK intransigence. What is more, this statement has made its way into the Conservative election manifesto. So either the Conservatives are committed to driving the UK economy over the edge of the cliff in the event they do not get the deal they want, or they will be forced to break the pledge upon which basis they were elected (assuming they win next week’s election).
But rather than treat the Brexit negotiations as a single party issue, there is a strong case for cross-party representation in the UK negotiating team. Indeed, if we accept the claims of those who believe Brexit is the biggest single issue facing the UK since World War II (maybe a slight exaggeration but you get the point), surely it deserves a similarly united national response. It would certainly help to assuage the 48.1% who voted against Brexit that their concerns will be listened to.
Whilst Labour believes the UK should continue down the path which their political opponents have already carved out, it does at least believe that “leaving the EU with ‘no deal’ is the worst possible deal”. It also makes the sensible suggestion that the UK should seek to remain part of organisations such as Horizon 2020, Euratom, the European Medicines Agency and Erasmus, and advocates protecting the rights of foreign nationals already in the UK. The Liberal Democrats are even more direct and parts of their manifesto sound like they wish to overturn the result. But at least the “aim for membership of the single market and customs union” sounds like a rational economic plan. The Scottish Nationalists have not yet released their manifesto, but you can be pretty sure that their aim will be to ensure that Scotland remains part of the EU.
On the basis of these varying degrees of support for the EU, my suggestion would be for the UK government to assemble a cross-party negotiating team, perhaps weighted by parliamentary representation. Based on the latest analysis by www.electoralcalculus.co.uk, this would imply giving the Conservatives a 60% weighting; Labour 32%; the SNP 8% and the Lib Dems 0%. I do not expect this to happen, of course. As Philip Stephens noted in the FT four weeks ago, “Theresa May is dangerously disdainful of dissent” pointing out that “Mrs May assumes a monopoly of wisdom on setting Britain’s terms for EU exit. The record suggests she can claim anything but.” Ben Chu in today’s Independent suggests that the whole Conservative manifesto strategy is designed to bolster the prime minister’s position rather than looking after the UK’s best economic interest. In effect, we face a principal-agent problem whereby the agent (in this case the prime minister) has an incentive to work in her own interests rather than the principals who commissioned her (the electorate).
One solution to the principal-agent problem is to provide a high level of transparency – the prime minister’s insistence that she does not intend to reveal details of the discussions on a rolling basis surely adds fuel to Chu’s suspicion. Fortunately, we can rely on the rest of the EU to deliver that transparency. Giving the principal a stake in the outcome is also another useful solution. The issue (as noted above) is whether May’s objective is to secure her own or the national interest. A final check is thus to impose greater accountability. Packing off Conservative party representatives to Brussels for two years who then come back with a deal which is set to be rubber stamped by parliament is simply not enough. I thus maintain that at the very least other political parties should be represented during the negotiations, who are not bound by some form of parliamentary omerta. Some issues are too important to be left to politicians. This is one of them.
Most economists are horrified by that stance. It is simply not credible to assume that the rest of the EU is going to back down in the face of UK intransigence. What is more, this statement has made its way into the Conservative election manifesto. So either the Conservatives are committed to driving the UK economy over the edge of the cliff in the event they do not get the deal they want, or they will be forced to break the pledge upon which basis they were elected (assuming they win next week’s election).
But rather than treat the Brexit negotiations as a single party issue, there is a strong case for cross-party representation in the UK negotiating team. Indeed, if we accept the claims of those who believe Brexit is the biggest single issue facing the UK since World War II (maybe a slight exaggeration but you get the point), surely it deserves a similarly united national response. It would certainly help to assuage the 48.1% who voted against Brexit that their concerns will be listened to.
Whilst Labour believes the UK should continue down the path which their political opponents have already carved out, it does at least believe that “leaving the EU with ‘no deal’ is the worst possible deal”. It also makes the sensible suggestion that the UK should seek to remain part of organisations such as Horizon 2020, Euratom, the European Medicines Agency and Erasmus, and advocates protecting the rights of foreign nationals already in the UK. The Liberal Democrats are even more direct and parts of their manifesto sound like they wish to overturn the result. But at least the “aim for membership of the single market and customs union” sounds like a rational economic plan. The Scottish Nationalists have not yet released their manifesto, but you can be pretty sure that their aim will be to ensure that Scotland remains part of the EU.
On the basis of these varying degrees of support for the EU, my suggestion would be for the UK government to assemble a cross-party negotiating team, perhaps weighted by parliamentary representation. Based on the latest analysis by www.electoralcalculus.co.uk, this would imply giving the Conservatives a 60% weighting; Labour 32%; the SNP 8% and the Lib Dems 0%. I do not expect this to happen, of course. As Philip Stephens noted in the FT four weeks ago, “Theresa May is dangerously disdainful of dissent” pointing out that “Mrs May assumes a monopoly of wisdom on setting Britain’s terms for EU exit. The record suggests she can claim anything but.” Ben Chu in today’s Independent suggests that the whole Conservative manifesto strategy is designed to bolster the prime minister’s position rather than looking after the UK’s best economic interest. In effect, we face a principal-agent problem whereby the agent (in this case the prime minister) has an incentive to work in her own interests rather than the principals who commissioned her (the electorate).
One solution to the principal-agent problem is to provide a high level of transparency – the prime minister’s insistence that she does not intend to reveal details of the discussions on a rolling basis surely adds fuel to Chu’s suspicion. Fortunately, we can rely on the rest of the EU to deliver that transparency. Giving the principal a stake in the outcome is also another useful solution. The issue (as noted above) is whether May’s objective is to secure her own or the national interest. A final check is thus to impose greater accountability. Packing off Conservative party representatives to Brussels for two years who then come back with a deal which is set to be rubber stamped by parliament is simply not enough. I thus maintain that at the very least other political parties should be represented during the negotiations, who are not bound by some form of parliamentary omerta. Some issues are too important to be left to politicians. This is one of them.
Sunday 28 May 2017
Being Wayne Rooney
Wayne Rooney is one of the most famous footballers in the
world. He is the record goal scorer for his club, Manchester United, and for
the English national team, and has won everything worth winning at club level
(including 5 league titles, an FA Cup and the Champions League). However, over
the last 12 months, questions have increasingly been raised about his continued ability
to cut it at the highest level which has raised speculation that he will leave
Man United at the end of the season. Not that football journalists know
anything – The Guardian reported earlier this month that he would leave the club at the end of the season
having suggested just three months ago that he has no intention of leaving.
Meanwhile the fans, not exactly models of consistency themselves, are generally
in agreement that it is time to go.
But whilst the fans treat usually football decisions in the context of the on-field activities, there are in reality a lot of other economic factors to consider. Look at it from Rooney’s point of view. He is 31 years old and reported to be paid around £300k per week on a contract believed to run until June 2019. Even if we assume this figure is around £260k, as reported in a number of media outlets, this means he can expect a gross income in the region of £27 million even if he never kicks a ball again. From the club’s perspective, it would appear to make sense to offload their highest earner if he is no longer able to perform at the level demanded of him. Indeed, as of mid-2016, the club was paying out £203 million per annum on wages – implying that Rooney accounted for just less than 7% of the total.
But Man United also earned £268 million in commercial revenue – primarily sponsorship and retail activities (here for more detail on the club’s accounts. It is slow to load, but worth it for an in-depth look at the accounts of a major football club). We should be in no doubt that Rooney has helped sell a lot of replica shirts. But now that he is no longer in the England squad, his commercial value will undoubtedly have slumped. Footballing considerations aside, the club appears to have little to gain financially by keeping him on. Of course, no other club in Europe is going to pay Rooney £13.5 million per year so unless he decides to join the exodus to China, where silly money is apparently on offer, what to do? The rational response would be to hang around for the next couple of years and bank the cash. Fans forums would, of course, be inundated with comments suggesting that he is only in it for the money and that such actions will tarnish his legacy. But frankly, you can trash my legacy for £27 million any day.
Rooney’s logical response to this criticism should be to ask the fans what they would do in the same situation? If your employer told you not to come in to work for the next two years whilst still paying your salary, most people would say it is illogical to refuse. After all, you could travel; learn a foreign language; do further study or take up a new hobby. Failure to understand the rationality of this position is a form of cognitive bias, defined as “a systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion.” It is not just football fans who suffer such biases, of course. Financial markets are riddled with them, which goes towards explaining why many investors make decisions which they can justify at the time but with hindsight appear ridiculous.
As it happens, the rumour mill is in full swing suggesting that various clubs are currently bidding for Rooney’s services. He may indeed be tempted to go elsewhere: It is not as if he is short of money so he can presumably afford to take a pay cut. The motivations for him wanting to do so are fully in line with evidence from psychology which suggests that factors other than money can motivate sportspeople. Like actors, sportsmen (and women) are motivated by adulation. So long as he continues to be reasonably well paid, Rooney might be tempted to trade off some of his extraordinarily high current salary for a lower one and a continued presence in the public eye.
Still, it’s a nice problem to have. As for me, if I were faced with Rooney’s decision I’d take the money on offer from Man United. In fact, I would take a small fraction of his salary in order not to play football. Now you might say that I am not as good a footballer as Wayne Rooney so am in no way as deserving. But that is only true on the field of play. When both of us are doing nothing, I’m just as good as he is.
But whilst the fans treat usually football decisions in the context of the on-field activities, there are in reality a lot of other economic factors to consider. Look at it from Rooney’s point of view. He is 31 years old and reported to be paid around £300k per week on a contract believed to run until June 2019. Even if we assume this figure is around £260k, as reported in a number of media outlets, this means he can expect a gross income in the region of £27 million even if he never kicks a ball again. From the club’s perspective, it would appear to make sense to offload their highest earner if he is no longer able to perform at the level demanded of him. Indeed, as of mid-2016, the club was paying out £203 million per annum on wages – implying that Rooney accounted for just less than 7% of the total.
But Man United also earned £268 million in commercial revenue – primarily sponsorship and retail activities (here for more detail on the club’s accounts. It is slow to load, but worth it for an in-depth look at the accounts of a major football club). We should be in no doubt that Rooney has helped sell a lot of replica shirts. But now that he is no longer in the England squad, his commercial value will undoubtedly have slumped. Footballing considerations aside, the club appears to have little to gain financially by keeping him on. Of course, no other club in Europe is going to pay Rooney £13.5 million per year so unless he decides to join the exodus to China, where silly money is apparently on offer, what to do? The rational response would be to hang around for the next couple of years and bank the cash. Fans forums would, of course, be inundated with comments suggesting that he is only in it for the money and that such actions will tarnish his legacy. But frankly, you can trash my legacy for £27 million any day.
Rooney’s logical response to this criticism should be to ask the fans what they would do in the same situation? If your employer told you not to come in to work for the next two years whilst still paying your salary, most people would say it is illogical to refuse. After all, you could travel; learn a foreign language; do further study or take up a new hobby. Failure to understand the rationality of this position is a form of cognitive bias, defined as “a systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion.” It is not just football fans who suffer such biases, of course. Financial markets are riddled with them, which goes towards explaining why many investors make decisions which they can justify at the time but with hindsight appear ridiculous.
As it happens, the rumour mill is in full swing suggesting that various clubs are currently bidding for Rooney’s services. He may indeed be tempted to go elsewhere: It is not as if he is short of money so he can presumably afford to take a pay cut. The motivations for him wanting to do so are fully in line with evidence from psychology which suggests that factors other than money can motivate sportspeople. Like actors, sportsmen (and women) are motivated by adulation. So long as he continues to be reasonably well paid, Rooney might be tempted to trade off some of his extraordinarily high current salary for a lower one and a continued presence in the public eye.
Still, it’s a nice problem to have. As for me, if I were faced with Rooney’s decision I’d take the money on offer from Man United. In fact, I would take a small fraction of his salary in order not to play football. Now you might say that I am not as good a footballer as Wayne Rooney so am in no way as deserving. But that is only true on the field of play. When both of us are doing nothing, I’m just as good as he is.
Wednesday 24 May 2017
Age concern
Without wishing to trivialise in any way the horrific
bombing in Manchester, the suspension of the UK election campaign came at a
fortuitous time for the prime minister who was undoubtedly on the ropes on
Monday regarding her U-turn on plans to fund care for the elderly. Dealing with
old age care is an issue of major economic importance, and I did note last
weekend that “tackling the problems of an ageing society will require us to
think differently on tax and social insurance issues.” But it is worthwhile
digging into some of the economic implications of an issue which not only
affects the UK but is a problem for all ageing societies.
To remind you of the story so far, the Conservative manifesto last week suggested that those requiring long-term old age care would be required to run down their assets to “a single capital floor, set at £100,000, more than four times the current means test threshold.” The implication is that households will have to pay a lot less than they do today. Whilst that is true of the current system, it omits the fact that under legislation already on the books “from April 2020, there will be a cap limiting the amount people will have to pay for their care and support”. Moreover, the threshold beyond which people receive no financial support is due to rise from £23,250 to £118,500 (these reforms were originally scheduled for 2016 but local authorities balked at the additional costs this would impose, hence the delay until 2020).
To remind you of the story so far, the Conservative manifesto last week suggested that those requiring long-term old age care would be required to run down their assets to “a single capital floor, set at £100,000, more than four times the current means test threshold.” The implication is that households will have to pay a lot less than they do today. Whilst that is true of the current system, it omits the fact that under legislation already on the books “from April 2020, there will be a cap limiting the amount people will have to pay for their care and support”. Moreover, the threshold beyond which people receive no financial support is due to rise from £23,250 to £118,500 (these reforms were originally scheduled for 2016 but local authorities balked at the additional costs this would impose, hence the delay until 2020).
In other words, a significantly more favourable plan is already scheduled to come into play in 2020 than that proposed by the Conservatives. As it currently stands, someone who has lifetime care costs of £150,000 could
lose up to 90% of their accumulated wealth. Raising the support threshold and
imposing a cap significantly reduces this proportion. By contrast, the
Conservatives’ plan placed no such upper limit so that all but the final
£100,000 of an individual’s assets could be used to fund their care needs. I am
indebted to the FT’s economics correspondent, Chris Giles, for working out the
tax rates on assets in different care systems (see chart). What is evident is
the magnitude of the costs under the current system (the green area) versus the
proposals set out by the Dilnot Commission in 2010 (black line). Last week’s Conservative plans (red line) help those at
the lower end of the asset scale but they are far less favourable compared to what was proposed in 2010.
The idea of scrapping the cap caused an outcry for both good and bad reasons. The bad reason is the notion that today’s generation of pensioners be protected so that they can hand over their stock of assets to future generations. Whilst this may reflect an instinctive desire to help one’s offspring, there is no reason why today’s tax revenues should be used to ring-fence bequests to future generations. A better objection is that the absence of a cap promotes unfairness due to the fact that for any given wealth cohort some will be afflicted by illnesses which require extensive old age care whilst others will not. For example, an unfortunate pensioner who suffers from dementia may require many years of care whereas someone with the same assets who dies suddenly at the same age will not face the same care burden. There is no sense of social insurance: people are very much on their own.
Whether the reaction of the public and politicians was motivated more by the latter than the former matters less than the fact that the Conservatives responded to the groundswell of opposition by announcing they would indeed place an “absolute limit” on care costs (without saying what the limit would be). What is absolutely not true is the prime minister’s assertion that “nothing has changed from the principles on social care policy that we set out on our manifesto.” In fact, everything has changed. The principle of a cap means that we have some notion of risk pooling rather than one which forces individuals to bear full personal liability.
A more pertinent question is how this should be funded, which is the bit no-one talks about. The Dilnot Commission pointed out that there are three ways to fund old age care provision. The obvious way is to do what we do now – raise the additional revenue from general taxation, which will mean higher taxes. A second option would be to change the balance of spending away from other items and towards care provision. However, a third option would be to introduce a specific tax increase which should be paid “at least in part by those who are benefitting directly from the reforms. In particular, it would seem sensible for at least a part of the burden to fall on those over state pension age.” Dilnot further suggested that “it would be sensible to do so through an existing tax, rather than creating a new tax” which would most obviously suggest targeting inheritance tax.
I am not even averse to the idea of levying a specific tax in order to build up a social insurance fund, although governments are generally very bad at ring-fencing revenues for specific tasks. Whatever the ultimate outcome, the UK government clearly has to think more carefully about generational outcomes than it has up to now. The current pay-as-you-go option is not fit for purpose. But nor is a system which mitigates against a market for social insurance. There is plenty to ponder but it certainly will not be resolved before the election, and it is increasingly a problem which all industrialised countries have to face up to. Ageing societies don't come cheap.
The idea of scrapping the cap caused an outcry for both good and bad reasons. The bad reason is the notion that today’s generation of pensioners be protected so that they can hand over their stock of assets to future generations. Whilst this may reflect an instinctive desire to help one’s offspring, there is no reason why today’s tax revenues should be used to ring-fence bequests to future generations. A better objection is that the absence of a cap promotes unfairness due to the fact that for any given wealth cohort some will be afflicted by illnesses which require extensive old age care whilst others will not. For example, an unfortunate pensioner who suffers from dementia may require many years of care whereas someone with the same assets who dies suddenly at the same age will not face the same care burden. There is no sense of social insurance: people are very much on their own.
Whether the reaction of the public and politicians was motivated more by the latter than the former matters less than the fact that the Conservatives responded to the groundswell of opposition by announcing they would indeed place an “absolute limit” on care costs (without saying what the limit would be). What is absolutely not true is the prime minister’s assertion that “nothing has changed from the principles on social care policy that we set out on our manifesto.” In fact, everything has changed. The principle of a cap means that we have some notion of risk pooling rather than one which forces individuals to bear full personal liability.
A more pertinent question is how this should be funded, which is the bit no-one talks about. The Dilnot Commission pointed out that there are three ways to fund old age care provision. The obvious way is to do what we do now – raise the additional revenue from general taxation, which will mean higher taxes. A second option would be to change the balance of spending away from other items and towards care provision. However, a third option would be to introduce a specific tax increase which should be paid “at least in part by those who are benefitting directly from the reforms. In particular, it would seem sensible for at least a part of the burden to fall on those over state pension age.” Dilnot further suggested that “it would be sensible to do so through an existing tax, rather than creating a new tax” which would most obviously suggest targeting inheritance tax.
I am not even averse to the idea of levying a specific tax in order to build up a social insurance fund, although governments are generally very bad at ring-fencing revenues for specific tasks. Whatever the ultimate outcome, the UK government clearly has to think more carefully about generational outcomes than it has up to now. The current pay-as-you-go option is not fit for purpose. But nor is a system which mitigates against a market for social insurance. There is plenty to ponder but it certainly will not be resolved before the election, and it is increasingly a problem which all industrialised countries have to face up to. Ageing societies don't come cheap.
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