Friday, April 27, 2007

A Tale of Two Economies

US first quarter GDP figures came out today. Their economy grew by an annualised equivalent of 1.3% in the first quarter (i.e. a growth of 0.323% during the first three months of the year). At the same time Core US inflation (i.e. excluding energy and food) rose to 2.2%, while the GDP deflator increased to 4%, the highest in 16 years.

All of which leaves the Fed in a very uncomfortable situation. Unlike the BoE, the Fed has twin goals - to keep growth going and to keep inflation low. The need to keep inflation low usually trumps keeping growth going (as it is hard to rein in once it has started), which means the Fed will probably opt to keep their interest rates where they are, rather than cut as the markets anticipated last year. How a slowing US will fare with interest rates staying pat is anyone's guess. There's much chatter at the moment about why it doesn't matter, because pundits believe that the world economy has decoupled from the US one. But the US economy is not only very very large (a $12 trillion economy), much of the world (especially Asia) is dependant on it. It's hard to see a slowdown in such a large chunk of the world's economy not affecting the rest.

In the UK meanwhile, first quarter growth came out at 0.7% (or 2.8% annualised equivalent) - about double the US rate. Our headline CPI (including energy and food) came out at 3.1%.

Energy costs look like they will come down though. Two months ago British Gas announced it would cut gas prices by 17 per cent and electricity prices by 11 per cent. Yesterday it said it would cut electricity prices by a further 6 per cent, and gas prices by a further 3 per cent, with immediate effect. EDF today announced they would be cutting too. Of the big six energy companies, only Scottish Power has not announced a cut. However, Scottish Power did say that it's customers "could expect good news soon".

All of this should start to cut the CPI. I expect the BoE will still raise rates to 5.5% in May to demonstrate that they take inflation-fighting seriously. But they will at the same time be keeping a worried eye on the Americans.

Tuesday, April 24, 2007

New York to copy London

New York is to copy London and introduce the Congestion Charge, as Ken Livingstone proudly tells us all in today's Guardian.

According to the Guardian:

New York's plans were introduced by Arnold Schwarzenegger, the governor of California, who presented himself as an "environmental warrior"

Mr Schwarzenegger is to address the Tory conference in September. Hopefully this "environmental warrier" will lecture the Tories on how silly they were to oppose Red Ken's congestion charge.

Ever since the Labour government came to power, and Ken Livingstone became mayor, London has been steadily gaining on New York, and is now widely believed to have left New York for dust, not just in terms of property prices, city deals, initial public offerings, the amount of foreign exchange traded, and investment banker pay, but even in areas where New York took her status for granted, like the world art market. Earlier this year, a panicky New York sent a delegation to London to study why London had shot ahead. New Yorkers themselves have been chattering about this for awhile.

Last November, streetsblog, a blog dedicated to improving New York, noted that Ken Livingstone's goal was to make London a leading example of how to combat climate change, and that this was contributing to London's overall status - and lo and behold, Mr Schwarzenegger declared that by introducing the congestion charge "New York leaps to the forefront of cities dedicated to attacking climate change and protecting our environment".

Expect New Yorkers to start copying everything London does, in a bid to keep up. Imitation really is the sincerest form of flattery.

Thursday, April 19, 2007

Tory Attempts to select London Mayor Candidate Collapse - Again

The Tories were supposed to have been revived by the Bullingdon Boys and were said to be full of bright ideas. Last April they announced that they would have Open Primaries to select a candidate for Mayor, where members of the public would vote. But the public proved indifferent, and no decent candidates put themselves forward.

They tried to get radio DJ Nick Ferrari to stand, but wanted him to commit too early. As a result, he pulled out last August. According to the BBC:

He said he would look again at the idea in 12 months time as the situation might be different if he was an independent candidate campaigning for a much shorter period of time.

"The Conservative Party has got this wrong," he said. "They have got a bunch of people who are not even names in their own households.

"They have botched it. They have gone 12 months too soon."

Mr Ferrari said he had a conversation with Conservative headquarters to see if there was any movement in the timetable and was told there was not.

And now it looks like they have "botched" again.

According to the FT,

Conservative leader David Cameron’s attempts to find a candidate to contest London’s next mayoral election appear to have blown up in his face, after hopes of getting Greg Dyke, the former BBC boss, to stand on a joint ticket with the Liberal Democrats unravelled.

.............At a meeting between Mr Cameron and Sir Menzies Campbell, Lib Dem leader, on Wednesday, Sir Menzies rebuffed the Tory approach, saying a joint candidacy would deprive Londoners of a choice. A Conservative official said Mr Cameron had been told it was against the Lib Dem constitution.

The Lib Dem rejection are a humiliating setback for the Conservative leader, who is struggling to find a candidate to take on Labour’s Ken Livingstone in the 2008 mayoral election.

Mr Dyke confirmed he had been approached by the Tories about standing as a candidate and discussed with them the possibility of a joint candidacy with the Lib Dems. He told the Financial Times: “The answer is I’m not a candidate. They [the Tories] came and talked to me, said ’would you be interested’ and I said I wouldn’t stand as a Conservative candidate.

My Dyke said he had told the party, however, that, were the elections “an opportunity to do something interesting, as Conservatives and Lib Dems together, and do it as an independent candidate, then potentially that was interesting”.

Mr Dyke of course had his resignation accepted by the BBC board over the Andrew Gilligan affair. His fault was that he'd neglected to check whether Gilligan's story stood up before backing him. At the time he said:

"I don't want to go. But if in the end you screw up you have to go."

Oh dear. If the Tories can't even select a candidate for the London race, are they actually capable of running that city - or the country? They also don't seem to have any decent candidates who are prepared to stand aganist Ken. Even "screw-ups" like Greg Dyke won't stand as conservatives.

Thursday, April 12, 2007

American Capitalism

I was struck by the following passage in a column by Washington Post columnist Harold Meyerson:

On March 28, Circuit City announced that it was laying off 3,400 of its salesclerks. Not because they had poor performance records, mind you: Their performance was utterly beside the point. They were shown the door, said the chain, simply because they were the highest-salaried salesclerks that Circuit City employed.

Their positions were not eliminated. Rather, the store announced that it would hire their replacements at the normal starting salary. One can only imagine the effect of Circuit City's announcement on the morale of the workers who didn't get fired. The remaining salesclerks can only conclude: Do a good job, get promoted, and you're outta here.

It was, in short, just a normal day in contemporary American capitalism.

Over at Wal-Mart, the employer that increasingly sets the labor standards for millions of our compatriots, wage caps have been set for certain jobs, and many longtime employees are now required to work weekends and nights in the hope that they'll quit. A memo prepared by a Wal-Mart executive in 2005 for the company's board noted that, "the cost of an associate with 7 years of tenure is almost 55 percent more than the cost of an associate with 1 year of tenure, yet there is no difference in his or her productivity."

The above could never happen in Britain. Labour laws plus the Social Chapter means that you can only be made redundant if the position itself is eliminated, and if you are made redundant you have to be compensated with a redundancy payment (something that doesn't happen in the USA).

There's a world of difference between American capitalism and the British version, something that those who carelessly lump the two countries together should note.

Americans traditionally put up with the harshness of their job market because salaries and job opportunities in general were higher than in Europe. What was the point of job protection if you couldn't get a job in the first place, the argument went, and they used to point to the high unemployment in Britain and Europe through the 80's and early 90's.

But they are no longer better off compared to Britain. Here at last there are jobs aplenty, higher incomes, combined with solid social protection. Under New Labour there is no longer any need to choose between opportunity and a safety net. We are currently among the luckiest people on earth, with an effective and indulgent government that runs the economy well, protects us and patiently puts up with our grumbling. Our prime minister even lets people shout at him in studios, to submit petitions for him to "stand on his head juggling icecream", does skits to entertain the populace on Comic Relief, and indulges the rank and file in the army when they want to sell their stories about how they got neck-flicked by Iranians. Is there another government on earth as indulgent?

And yet still we gripe. The danger is that as a nation we discount all the good things and get so caught up at being cross that the government has not delivered the bliss of nirvana itself, that we ditch what the rest of the would literally die to have. We are at the same point the Americans were at the end of the Clinton administration, when a spoilt nation's obsession with trivia led the population to change party, seduced by the thought that nirvana lay in "compassionate conservatism". There were warning signals about Bush's character (eg his fondness for executions) but the Americans ignored them and instead of nirvana, they got a version of hell.

We are currently living in one of the balmiest periods of British history. The question is, are we smart enough to realise this and to make sure it continues, or will we foolishly throw it all away? There are warning signals about the characters of the Bullingdon Boys too. Are Brits shrewd enough to heed them?

Wednesday, April 11, 2007

10 Years of New Labour - Debt as a % of GDP

Labour's critics like to claim that the reason that the economy has done well in the last ten years is because government debt has increased. But how true is this?

The following table on debt as a % of GDP comes from Eurostat. Please note that in accordance with EU code ESA95, Eurostat includes all PFI debt as part of consolidated government debt. Therefore the figures quoted for the UK will be higher than those produced by the UK Treasury. The figures also include all local government debt and state government debt as well as federal government debt, therefore the figures for the USA will be higher than those generally published by the US Treasury, which quote federal debt but not state debts. The aim behind these figures is to give a true picture of debt by including all possible sources of government debt. All figures are as at December 31st of the year in question.

As before, the comparison in the following table is with other mature economies with a similar sized population (to see the entire EU's data, click the link above).

Year UK USA France Germany Spain Italy Japan

1994 48.6% 74.6% 48.4% 49.3% 61.1% 124.8% 79.7%
1995 51.8% 74.2% 54.6% 57.0% 63.9% 124.3% 87.1%
1996 52.3% 73.4% 57.1% 59.8% 68.1% 123.1% 93.9%
1997 50.8% 70.9% 59.3% 61.0% 66.6% 120.5% 100.3%
1998 47.7% 67.7% 59.5% 60.9% 64.6% 116.7% 112.2%
1999 45.1% 64.1% 58.5% 61.2% 63.1% 115.5% 125.7%
2000 42.0% 58.2% 56.8% 60.2% 61.1% 111.2% 134.1%
2001 38.7% 57.9% 56.8% 59.6% 56.3% 110.9% 142.3%
2002 37.5% 60.2% 58.2% 60.3% 52.5% 105.6% 149.5%
2003 38.9% 62.5% 62.4% 63.9% 48.7% 104.3% 157.6%
2004 40.4% 63.4% 64.4% 65.7% 46.2% 103.9% 164.0%
2005 42.4% * 66.6% 67.9% 43.1% 106.6% *

* indicates data unavailable

Germany's position deteriorates as a direct result of unification, when they embark on massive construction projects in Eastern Germany. Debt starts to fall as Schroeder takes over in 1998. but the post 2002 recession scuppers progress. Miterrand hands over a pretty good position to Chirac in early 1995, but things immediately deteriorate, with the post 2001 recession worsening things. Italy however makes valiant efforts to reduce debt, regardless of recession. In the USA, in the Clinton years debt starts to fall, but post 2001-recession means that debt starts to rise again. Much US debt is hidden in the state finances, and their overall position is not much that different to France and Germany, ironical given how Americans like to criticize the French and Germans. Japan is a complete and utter horror story - like Italy they face an aging population with the overall population falling, but unlike Italy, they worsened the level of debt that their future smaller population will have to bear.

Spain achieves stonking success - but it's worth noting that they are net recipient of EU funds, whereas the UK taxpayer managed to reduce debt even while being net contributers to the EU. However if Spain manages to keep up their record when EU funds are withdrawn this year, they are surely contenders to become one of the most important EU countries in the next decade, especially as they have a substantial population (circa 40 million).

The UK makes solid progress in reducing debt as a % of GDP, even while spending a lot on new hospitals and schools. One could argue that if no new schools and hospitals were built the debt would be even lower - but can a civilised country continue with it's infrastructure crumbling? The rebuilding of the last decade rivals that of the public building done during the late Victorian period. I believe that people in future decades will benefit and be grateful for it in a similar way that mid-20th century people were grateful for the Victorian expenditure. Debt in the UK too has crept up in response to the global recession of 2001-3. But fiscal policy is being tightened over the next three years, and debt should start falling again. And it's worth pointing out that in 2005, debt as a % of GDP was a full 9.9% lower than at the end of 1996. Something the Tories would be crowing about if it was they who had achieved it. Overall New Labour has improved the position compared to the one they inherited, even while rebuilding the infrastructure, and they have also kept debt lower than all other major economies of a similar size, bar Spain. People across the planet would give their limbs for such a record.

Previous articles in this series:
10 years of New Labour - Labour Productivity
10 Years of New Labour - Financial Services Regulation
10 Years of New Labour - Economic Growth Since 1997
10 Years of New Labour - Employment

Saturday, April 07, 2007

Bullingdon again - Osborne was a member too

The Daily Mail reveals (complete with photo) that Gideon George Osborne was a member of the Bullingdon Club too, in 1992. As the Mail says, it deals a blow to the Tory attempts to portray the current version of their party as "classless", especially as Bullingdon is "open only to sons of aristocratic families and the super-rich.".

As described in the previous post on Cameron, Bullingdon specialises in the feudal pursuit of trashing other people's property for the "fun" of distressing them (Bullingdon destruction has included smashing up 17th century restaurants and destroying a Stradivarius), and then buying them off to demonstrate the members are above thelaw and can do whatever they want.

What is it about the characters of the current Tory leadership that draws them to clubs like Bullingdon? I can't imagine Mrs Thatcher or John Major joining any club that indulged in vandalism (indeed the very idea of people destroying private property would have horrified Thatcher's bourgeoisie sensibilities).

Tories are trying to spin the disapproval in the Mail and elsewhere as class envy. Actually it is not. Nobody minds if someone is born rich. What they mind is rich people refusing to socialise with middle-class and poor people (Bullingdon for instance wouldn't have admitted Stephen Hawking as a member) and they mind rich people treating the poor and their property with disrespect.

There is a world of difference between someone like Bill Gates, who was born to a wealthy background, channelled his energies into building a company that revolutionised the way people used IT and then started giving his money away to the poor in a massive attempt at philanthropy; and someone like Gideon Osborne, born to a wealthy family, joined a club exclusively for the rich that specialises in distressing the poor by vandalising their property, and now spends most of his time in childish sneering at more talented people.

A Bill Gates would be worthy of leadership, a Gideon Osborne shouldn't be let anywhere near power. Liberal democracy is all about protecting people's private property. It's only in feudal societies and dictatorships where your property can be destroyed or confiscated at will. Trashing property for fun is the sort of thing Kim Jong-il would enjoy.

I also feel very sorry for ordinary Tory members who come from the middle and working classes. How dreadful it must be for them to know that no matter how talented and clever they are, they have no place at the Tory top table (as evidenced by Cameron freezing them out in favour of ex-Etonians and other public school people). But you can't help wondering at their cowed spirits. Why don't they stick up for themselves? Why don't they demand that the shadow cabinet is more representative of the Tory party as a whole. Do they like being second-class in their own party? Do they like doffing their caps to Gideon and co? If so they have even less in common with the rest of Britain in the 21st century than first appeared.

Wednesday, April 04, 2007

Corporate Profitability at a Record High

The FT today reports that corporate profitability is at a record high:

Official figures on Tuesday showed the net rate of return on capital in non-oil UK companies rose to 14.7 per cent in the fourth quarter last year; the highest rate of profitability since quarterly figures were first published in 1989.

Including profits made on North Sea operations, the 15.1 per cent net rate of return for the whole of 2006 showed UK corporate profitability was at its highest level for more than 40 years.

I thought it was important to point this out amidst the ongoing row about the pensions crisis. It's hard to believe pension funds are in "crisis" when the shares they invest in are so profitable. Return on capital is calculated based on pre-tax operating profit, but the overall corporate tax framework and macroeconomic conditions play their part in increasing operating profit.

There had been a lot of emphasis on the abolition of ACT, but no coverage at all of the fact that it was done to simplify corporate taxation and it was accompanied by and paid for a cut in corporation tax. Dividends to shareholders (including pension funds) are paid out from profits after tax. A cut in corporation tax means that companies can either choose to pay a higher dividend, or to retain the money within the company to grow the business to improve future profits and hence future dividends. In the long term this is better for the pension fund shareholders than keeping corporate tax high to pay for a tax credit to pension funds.

The fact that corporate profitability is at a 40 year high proves that the government's strategy of cutting corporation tax (which is now 28% compared to 33% in 1997), combined with providing a steady macroeconomic framework, is the correct one for the long term health of Britain. Is there anyone out there who wants to put corporation tax back to 33% to pay to reinstate the dividend tax credit for pension funds? I doubt it.

10 Years of New Labour - Labour Productivity

It is often noted that British productivity per hour is lower than that of other major developed countries, and the Labour government's stated aim was to improve this. So how has the government done?

Eurostat have calculated productivity based on GDP in Purchasing Power Standards (to remove currency distortions), per hour worked, relative to the EU-15 (i.e. relative to the average of the 15 Western Europe EU member states). The index is set at 100, and if the index of a country is higher than 100, the country's GDP per hour worked is higher than the EU-15 average and vice versa. As before, the comparison in the following table is with other mature economies with a similar sized population (to see the entire EU's data, click the link above).

Year UK USA France Germany Spain Italy Japan

1995 89.9 109.5 116.0 108.9 93.6 104.9 76.4
1996 90.8 110.6 115.3 109.8 93.0 103.2 77.0
1997 91.8 110.1 116.9 109.1 90.4 102.5 77.3
1998 92.7 111.0 118.3 108.2 89.6 102.6 76.4
1999 93.4 112.3 117.6 107.9 90.2 101.9 77.3
2000 94.4 111.5 119.2 106.7 87.5 101.1 77.2
2001 95.7 112.2 120.4 106.6 87.7 99.9 77.4
2002 98.3 111.9 120.8 106.3 88.4 96.9 77.1
2003 98.0 113.6 116.8 111.2 88.9 92.5 77.3
2004 99.7 115.3 117.3 109.7 88.5 90.9 80.8
2005 * 116.7 * 109.3 89.1 89.8 *

* indicates data unavailable.

Britain's story is one of steady improvement. Unlike our competitors, we never really falter. This has a lot to do with how steadily the UK economy has performed. As noted in The Times last August, "It is well known that when markets droop, employers are initially disinclined to shed labour. They fear that if and when business improves, their good workers may be difficult to recover. Consequently, in a recession either working hours or working rates must be cut." This explains the faltering in France, Germany, the USA and Italy after 2000.

Of course Spain has had steady growth throughout this period too, but their productivity falls. But this could be explained by the extraordinary change in their labour participation rates (see previous post). Employers always pick the best staff first, but as labour markets tighten, they end up being forced to employ the not-so-productuve. The challenge when you have tight labour markets, is how to improve training, so that the less productive can be brought up to scratch, and how to automate things, so you are less dependent on unproductive people. Productivity in Britain improves faster after 2000 than before, mainly due to the huge take up of IT around the millenium, and the introduction of IT into the public services.

The conclusion must be that the Labour government has largely achieved their goal of improving productivity and has brought Britain to the EU-15 average. We've improved the most out of the countries listed above (productivity per hour in 2004 is 10.9% higher than in 1995). The pivotal achievement again seems to be avoiding the world recession of 2001 - if we hadn't our productivity would have fallen as it did in France. Governments show their mettle by how they perform when world conditions get tough. The other theme emerging from this series is steadiness. Growth has been steady, improvements in employment have been steady, improvements in labour productivity have been steady. Perhaps we should nickname this period "The Great Steadiness".

Previous articles in this series:
10 Years of New Labour - Financial Services Regulation
10 Years of New Labour - Economic Growth Since 1997
10 Years of New Labour - Employment