The ‘grey wall’ is still the biggest barrier to a Labour government

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While Boris Johnson disgraces his office, Keir Starmer has distinguished himself with progress made and poll leads. But one key challenge looms large: Labour’s support amongst the older voters is still too weak.

The biggest single fact in British politics is that Labour currently loses amongst the over 65’s by over 3 million votes. That huge margin guarantees the Tories power. The latest poll shift has cut the Tory lead but Labour is still way behind. In fact, we’re still two points behind amongst the 50-64’s and a whopping 16% behind amongst the over 65’s.

The Tory lead is no accident. As the great Greg McClymont once observed, the Tories are past masters of building a political economy of winners and losers – and associating themselves with the winners.
And over the last ten years, the Tories have ruthlessly built a political economy based on fuelling older voters’ spending power – and wealth.

Key has been the triple lock; the ‘guarantee’ that ensures pension are uprated by the higher of the rise in earnings, inflation or 2.5%.

Mrs Thatcher infamously broke the link between pension rises and earnings. The result was massive pensioner poverty that took years for Labour to fix.

David Cameron wasn’t going to make the same mistake. While Labour declared it would restore the earnings link in the Pensions Act 2007, the measure was not brought into effect until April 2011. The Coalition’s triple lock went further. That was worth a lot of money. Over the last decade, the triple lock routed £48 billion extra to pensioners over and above what would have happened if pension uprating unfolded in line with earnings.

This massive transfer has helped boost pensioners’ consumption over the last ten years by more than anyone else. In fact, average weekly consumption amongst the over 75’s has risen by 48% since 2010. That’s way ahead of the rise enjoyed by the under 30’s (average consumption up by 32%), the 30-49’s (consumption up just 16%), and the 50-64’s (consumption up by 28%). Bluntly, the oldest have seen their weekly spending power rise most.

This strategy has actually changed the structure of our economy. A few years ago, Lucio Baccaro and Jonas Pontusson of the University of Geneva developed a way to understand varieties of capitalism by looking at differences in the components of aggregate demand. What they reported for Britain was stark;

Over the period 1994–2007, the United Kingdom relied on household consumption as the main driver of economic growth, spurring household consumption through a combination of real wage growth and the accumulation of household debt. In marked contrast, Germany came to rely on export-led growth, repressing wages and consumption to boost the competitiveness of the export sector.

As the great Prof Nick Pearce and his colleagues then flagged, the Tories’ consumption-driven economy of the last decade has been powered in large part by older people. In fact, it’s as close as the Tories have come to any sort of growth strategy. The combined effect of both growing numbers of older households and their rise in spending power – which has risen by an incredible £74 billion – now means older voters account for almost a quarter (22%) of UK consumption, up from 17% back in 2010.

Alongside, the triple lock on pensions, the great boon for older voters has been a decade of low interest rates that has helped power up house prices. That has helped transform the wealth of older voters who own their own homes. In fact, over half of older households now boast wealth worth over half a million pounds – and the proportion of households headed by someone over 65 with wealth of £1 million or over, has almost tripled. A quarter of the over 65’s are now technically millionaires.

Labour can’t win without a plan to consolidate new support amongst older voters, not least because 35 of the 77 of the seats most easy to win from the Tories are home to a higher than average percentage of pensioners.

However, Keir’s progress and the Tories’ mistakes create an opportunity. The Tories’ model is now beginning to fall apart. This year’s pension rise will be less than inflation for the first time in a decade. The social care levy proposed to fix the social care system is nothing of the sort. Older voters are the biggest users of the NHS. They are acutely unhappy about record backlogs for operations and the impossibility of getting to see a GP. Traditionally, older voters have been more sceptical of Labour’s handling of the economy and were of course far more inclined to vote for Brexit.

Even if Labour doesn’t win a majority amongst older voters, it needs to hold down the Tory lead – and not make mistakes. So loose talk about weslth taxes might be risky – it may make a lot more sense to target the wealthy with huge capital incomes (the top 10% of Britain’s richest take home 45% of capital income in Britain). Equally we need to reconfirm our social care offer and explain how to pay for it. And, of course we’ll need to get our policy straight on the triple lock.

While governments tend to lose elections, noone wins by default. And the path to power for Keir Starmer will be much easier with lots of ‘silver voters’ in his corner.

REVEALED: the UK’S 11,000 shell companies no-one knows who owns.

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Hats off to the #PandoraPapers team that’s exposed the sheer scale of the tax avoidance by 35 current and former global leaders – including a prominent Tory donor who says the BBC contributed to Boris Johnson’s leadership campaign and “was involved in one of Europe’s biggest corruption scandals”.

The Chancellor Rishi Sunak obviously defended the government’s record on tackling tax avoidance as “very strong”. What a load of nonsense.

Corruption flourishes in the dark and so one reason London is beloved is that it’s so easy to create shell companies without declaring who actually owns them. Behind this fog of mystery, company directors can get up to no good.

Now, Boris Johnson claims he’s cracking down on this sort of thing. Really? In answers to my parliamentary questions a junior minister has slipped out that in fact over 11,000 companies have still not listed – as they are required to – a ‘Person of Significant Control’. And despite this only 119 convictions for the offence has been brought. Pathetic.

As the excellent Duncan Hames at Transparency International, points out, the summer’s G7 communique yesterday recognised “the need for action on corruption, including… tackling the misuse of shell companies” (para 48). Yet there’s no legislation this session to implement the Companies House white paper reforms that would get a grip of this.

If this Government is serious about tackling corroruption it’s time to bring new laws to the floor of the Commons. Now.

Wanted: A Foreign Policy

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It’s the Foreign Secretary’s job to supply a foreign policy. Ours has failed.

The Economist doesn’t mince it’s word this week in judgement on the Foreign Secretary. It says what must be said; “Britain’s foreign secretary isn’t up to the job” it declares. Indeed, Mr Raab, claims the august news-weekly is now known to his officials as ‘5i’s’; ‘insular, imperious, idle, irascible and ignorant’.

I know from personal experience that civil servants will occasionally – in extremis – brief against their minister. But this isn’t the reason Mr Raab should go. Rather his departure is required because his job to supply a foreign policy. And in this he has singularly failed.

Though the NATO departure has been fraught with dishonour, it’s imminence was not a secret.

The US departure is not some act of new American solitude. It’s literally American strategy. And in fact it is not that new.

Since Hillary Clinton’s tenure as Secretary of State, US policy has been to pivot – or rebalance – to Asia, and ever since there are plenty in the foreign policy community ready to point out that since the policy was declared, action has fallen short of words

“Ten years and two administrations later” wrote two well placed commentators in Foreign Affairs, “it is clear that the United States has fallen short.

“In speeches and statements, the Obama, Trump, and Biden administrations have all appropriately emphasized the singular importance of Asia to the United States’ future…But such rhetoric has often been disconnected from actual U.S. policies, budgets, and diplomatic attention…What matters more is what they actually do.”

Biden knows America is no longer the world’s great cloud-herder, the Zeus-like hyper-power of the post-Soviet world. He knows he must make choices. Choices, Biden knows, are key to the preservation of American power.

“The chaotic exodus from Afghanistan need not herald U.S. global decline in the twenty-first’ writes Chatham House director, Robin Niblett; “Power in international relations is always relative. And in relative terms, the United States has far more going for it structurally and societally than its two main geopolitical rivals’.

This is true. As long as America doesn’t try to do everything. So Biden knows he must make choices, backed as it happens, by plenty of political support for a ‘global America’ which is alive and well in the United States. Amer­i­cans still hanker for leadership – as long as that leadership is shared; most Americans for example would support a defence of Taiwan despite supporting exit from Afghanistan.

So this is less Biden-retreat than it is Biden-re-aim and re-load at a different target.

America’s gameplan for Afghanistan – in place since the Obama surge – was always going to have a shelf life, regardless of whether it teetered on the razors edge. For the simple reason Henry Kissenger notes in the Economist this week;

“The United States has torn itself apart in its counterinsurgent efforts because of its inability to define attainable goals and to link them in a way that is sustainable by the American political process…. Such an enterprise could have no timetable reconcilable with American political processes”.

What is more, American analysts simply do not see Afghanistan and central Asia as the same place it was twenty years ago. They mark the risk of safe spaces for terrorism as lower (not non-existent) for the simple reason that Afghanistan’s neighbours are now far more concerned about stability.

‘Today, there is a regional order that can accommodate Washington’s absence’ wrote one expert ‘The United States’ enduring military presence also spurred China and Russia to develop their own rival institutions, norms, and practices, including security organizations such as the Shanghai Cooperation Organization (SCO) and the Russian-led Collective Security Treaty Organization (CSTO)

Which is why both Democrats and Republicans had targeted exit from the blood-fouled earth of Afghanistan as a priority.

But the reason we should have had better British planning is that the American exit was not simply an exit from occupation but the well-telegraphed advent of new tactics.

Plenty of the American security establishment is fairly confident that it has not perfected but certainly evolved effective counter-terrorism tactics that don’t require large scale occupations. As one author put it this week;

When defending withdrawal from Afghanistan, Mr. Biden made clear that he has no plans to give up counterterrorism. The infrastructure of drone and missile strikes and special forces raids is indeed ramping up again after the fall of Afghanistan, an antiseptic Frankenstein monster loosed even as the gory laboratory that birthed it closes down.

So a Pacific-America however is hardly a state secret. Which begs the question of why UK foreign policy has not adapted, especially given our efforts to stick as tight as a magnet as to our American cousins.

Once upon a time the brilliant historian Niall Ferguson coined the phrase Chimerica to illustrate the symbiotic relationship between the US and China.

But it’s RussChi that should command our attention today, and the corridor of chaos along Russia and China’s West and southern border from the Ukraine, to Crimea and the Black Sea, Syria, Iran, Kashmir, Myanmar and North Korea.

Can anyone tell us what is British grand strategy for this huge Eurasian market, the largest in the 21st century, the hottest conflict zone on earth and a space our two most important geo-strategic competitors are set to dominate? I can’t. Answering that question demands a foreign policy. We know Joe Biden’s. We know President Xi’s. We know President Putin’s. What can we say about a Britain’s? The best we can say is ‘there isn’t one’.

Competition Policy for the Common Good : Three Ways To Fix Britain’s Broken Competiton Regime

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Since the creation of the Competition and Markets Authority in 2013, competition has stalled, big companies have got ever bigger, and productivity has flatlined.

In the spiritual home, of the free market this is a problem.

And for my constituents the problem isn’t theoretical.

For them, it’s meant higher prices and lower wages for much of the last decade.

In their extraordinary study, the IMF found markups, which are a good proxy for rising market power of leading firms, rose 38% across advanced economies – but by 60% here in Britain.

That’s why I think John Penrose is right to say, UK competition and consumer choice has weakened in the last two decades.

Now as we face a decisive decade ahead, packed with challenges, we need to fix our broken competition regime.

Today, I’d like to offer three thoughts about how the central challenge:

how does Brexit Britain stay in lockstep with the Biden White House and Brussels where new regimes will re-write the rules of the last fifty years for the markets of the West.

First things first.

We have to understand the basic flaws in the economic thinking that have characterised laissez faire economics for the last fifty years.

Just as behavioural economics helps us see how markets are inherently prone to bubbles so a re-appraisal of Joseph Schumpeter reminds us that markets also tend to monopoly.

Philip Aghion’s new book on the economics of Joseph Schumpeter is a timely reminder of the basic insight some forgot.

Everyone here will remember Schumpeter’s famous dictum that capitalism is driven forward by a process of creative destruction.

What people sometimes forget is the flipside of creative destruction that Schumpeter observed, is the destruction of competition.

And in fact that shouldn’t surprise us.

Just over 20 years ago I walked into my first strategy class at the Harvard Business School with renowned professor Michael Porter.

What we were taught in Michael’s class was not so much the celebration of competition, but how to destroy it – because that’s who firms maximise profit, and post super normal returns.

Yet Michael’s class wasn’t the most popular at Harvard.

That class was a class called ‘building information age businesses’.

I literally pleaded with the professor in a rainswept Cambridge car park to be admitted to the class and I wasn’t the only one.

Everyone wanted to know how to harness new technology to build the businesses of the future.

What everyone was trying to figure out was, as the famous HBR article how to ‘use architecture to win wars’.

We were trying to lock in customers in a way that maximised the value of the business that now had unparalleled scale and scope with next to zero marginal costs.

And in the 20 years since I left Harvard we’ve now seen a combination of the lackadaisical regulators in the west and the market Leninists in the east, create a global economy that is now dominated by what I’ve called Technopolies.

In China, the market Leninists became well practised at using a whole range of tools to shelter markets, support local firms, only to now watch those firms grow if anything, too powerful.

President Xi is now taking concerted action against Jack Ma or Didi to clip their wings.

And though western politicians rail against unfair Chinese competition the truth is the West was lax.  

Our Technopolies use big tech, big brand and big data to dominate their markets and big balance sheets to buy-out the competition and lock-in customers.

Into these firms, like shovelling coal into a furnace, governments have poured hundreds of billions of pounds of free science and technology subsidies while in turn the firms poured hundreds of billions into brand-building, together creating the sort of barriers to new competition which would make Michael Porter proud.  

Today, global spending on Research & Development is in the region of $2 trillion a year. But the world’s top 1000 R&D investors account for almost a trillion of that.

Brand spend multiplies the advantage.

The world’s firms spend around $618 billion on advertising. But, the world’s largest 200 companies spend $163 billion of this, over a quarter.

Amazon now spends $27 billion on both R&D and advertising. Google’s parent, Alphabet spends a combined total of $19 billion.  How can any firm compete with that? The evidence suggests they can’t.  

Worse, these firms were allowed ‘kill in the crib’ startup competitors which threaten the data monopolies the big firms aspire to build.  

Google bought 215 businesses since 2000.

Facebook has bought 69 companies since 2007 including WhatsApp merger, which helped consolidate its data monopoly with a treasure trove of 1 billion users.

Our competition regime has been blown apart.

Now the wind is changing.

At last.

Now what we’ve heard in the reports of the last couple of years is an excellent debate about the scale, the scope, the speed and the sanctions needed by modern regulators.

John Penrose is surely right to say that it is time that we had a new competition act.

But before we get any further down the track, I want to flag three basic questions where we need a better consensus.

The first challenge is philosophical –

Andrew Tyrie proposes an overriding consumer interest duty for  stronger regulator.

That’s not the new view in Washington.

There, we see a new debate that takes aim at the  commercial power of the firm, not simply the consumer welfare enjoyed by the firm’s customers.

That a big shift from the philosophy of competition policy since Richard Bork’s 1978 book, [The Anti-trust Paradox], which argued rising prices signal harm – but if a company is lowering prices to consumers size is not a worry.

Lina Khan, the new chair of the FTC is leading this.

She’s leading what’s been called the ‘new Brandeis’ school of public policy, which recognises as Brandeis once said that

“far more serious even then the suppression of competition is the suppression of industrial liberty”.

In her 2017 paper [The Amazon anti-trust paradox] Kahn argued that harm is about more than prices.

If companies like Amazon use predatory pricing and data lock-ins to drive rivals out of business, consumers suffer from a lot of choice and competition. And so do workers.

I think this wider approach is wise because not least because it is so hard to quantify the impact of competition on better prices.

The CMA here in the UK estimates its work is worth perhaps £1 billion to consumers in an economy where we spend £1.4 trillion.

Crucially, this new philosophy welcomes us to consider broader questions of not simply monopoly but – monopsony.

The reality that in many parts of our country the predominance of certain firms in effect hold down wages in poorer communities.

Since 2000, in our country, output per hour is up 19% – but wages are up 15%.

Workers are producing more but not getting paid for it.

President Obama’s CEA was on the case;

‘There is increasing recognition among economists and policy makers’ it wrote ‘that employers often have some degree of monopsony power in labour markets”

These ‘superstar firms’ as economists like David Autor argue, drive down workers share of the national pie, hoovering up high profits and pushing wage share down.

Of course people say that if you don’t like the jobs on offer you can always move.

You can get on your bike.

But that ignores the reality that our broken housing market means people can’t afford to move.

It ignores the reality that our broken care system means that many families are tied to a place because they care for others.

In other words many workers have a Hobson’s choice – which is no choice at all.

Second we have to think about how we act faster.

When we confront firms that are determined to move fast and break things, we know that we need stronger upfront rules to police the marketplace.

Now we don’t quite know how Europe’s Digital Markets Act will settle down.

But we can see Lina Khan proposing new approaches to precautionary rule-making to prevent conduct that constitutes ‘an unfair method of competition’- especially when private litigation is unlikely to materialise.

Like for example the noncompete clauses in employment contracts that cover 28 million Americans and limit their employment options.

(See Lina Khan and Rohit Chopra, the case for unfair methods of competition rule-making).

This approach to precautionary rules based on good analysis of patterns of unfair behaviour seems to me a better approach than endless cases in courts that so many can’t access.

Now for the future, it is vital that the UK finds ways of collaborating closely with the United States and Europe to closely study – and quickly act;

To move quickly to revise rules against unfair competition that hurts consumers – or workers – backed by a strong political mandate.

This has two institutional implications.

First, we may consider whether for example, the OECD should take a much stronger coordinating role just as they have on questions of international tax.

Second we need to radically improve Parliamentary oversight.

Once upon a time we had select committees to study EU legislation. Mr Cash spent years on them.

It may now be time for specific select committee focused on competition rules.

This would allow Parliament to opine quickly on proposals which the CMA should lead, based on their scrutiny of unfair behaviour.

Finally, we will need to grip the nettle of industrial policy.

In Europe Commissioner Mellanox has already emerged as an advocate of stronger European champions. Many in Congress will make the case for American champions too.

Meanwhile, here in Britain, the government is clear that industrial policy, procurement policy, subsidies will all be more flexible – which means more available.

As we try to decarbonise the economy and solve new real-world challenges together with the private sector, the truth is that public investment will be needed to cover risky investments, that the private sector simply won’t make.

It won’t be long before we are debating unfair subsidies, or unfair contracts, or risky mergers and acquisition where important local firms full prey to foreign takeovers.

The appalling misbehaviour of Melrose closing down GKN in Birmingham is just the latest example of how today’s regime needs to improve.

Personally I don’t see good ways round this without new safeguards for the public interest.

In cases of intellectual property investments, this means the state retaining a share of the intellectual property we help fund so that the taxpayer gets a yield on the investments we make.

But on the other, we need legally in forcible obligations that by on directors personally in return four waving through mergers and acquisition is which we think pose a risk the jobs.

So let me conclude with this.

Many of these ideas are a departure from the thinking there was informed public policy for five decades.

But these ideas are not novel to economics.

Rather they seek to renew I’m much older tradition of the moral economy that once with the guide to lawmaking here in the House of Commons.

There is no better example than the debates we had here in parliament about the Limited liability Act in the 1850’s.

It was the founding act of modern capitalism.

It allowed shareholders to combine their capital without fear of liabilities when things went wrong.

It is what you might call the exorbitant privilege of companies.

But almost without exception parliamentarians who rose to speak in these debates rested their argument on how limited liability would help advance the ‘common good’.

Today, our competition isn’t working hard enough for consumer, for workers, and for citizens.

We need reforms to ensure that the privileges we grant two firms advance the good of all.

And that competition policy that actually works for the common good.

ENDS

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This week’s economic news

This week we’ve seen one of the key forward looking indicators of business confidence – the purchasing managers index for Britain’s services sector move up to a 17-month high of 53.2 for July (surpassing expectations for an increase to 51.6); Office for National Statistics data shows an 0.5% jump in June’s industrial production (the largest rise in 20 months) and Halifax says British house prices saw a 1.1% monthly rise in July.

Commenting today, Paul Krugman writes; ‘Two months ago I wrote that there were hints of a relatively quick economic turnaround in Britain. Now those hints have gotten much stronger. Basically, aggressive monetary policy and the depreciation of the pound are giving Britain a boost relative to other advanced countries’.

Finally, the Bank of England has decided to to continue with its programme of asset purchases financed by the issuance of central bank reserves and to increase its size by £50 billion to £175 billion (the ‘qe’ programme) commenting; ‘”On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling. On the other hand, the need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending”

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Why its smart to invest in jobs

Yesterday I got confirmation of the Government’s decision to award millions of pounds to Birmingham and its partners to help create 7,500 jobs – especially for young people. Today, there’s fresh evidence highlighted in the New York Times, of just why its so important to keep people in work. Economist, Till von Wachter finds;

“even 15 to 20 years later, most (workers) on average had not returned to their old wage levels. He also concluded that their earnings were about 15 percent to 20 percent less than they would have been had they not been laid off.”

“One of the main reasons for the drop-offs, according to economists, is that workers who endure a layoff are more likely to be laid off again.”

Naturally the Conservative party opposed the Future Jobs Fund…

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This week’s economic news

With this week’s news you can see why Alistair Darling has being saying repeatedly that we’re confident but cautious that growth will return at towards the end of the year. News over recent months has been mixed, but today credit rating agency Fitch reaffirmed the Government’s AAA debt rating, adding the outlook is ‘stable’; UK retail sales were up according to the ONS 2.9% on the same month last year; Nationwide reported Thursday that house prices have risen three months in a row, reporting the ‘Three month rate of change at highest level since February 2007’ and the FTSE is back at levels last seen in January. GfK NOP’s also reported on consumer confidence today, noting; ‘Consumer Confidence remains at the same level as last month, fourteen points higher than its all time low of last year, but still very low historically’.