Saturday, February 28, 2009

Things could only get better...

This week, LSE's John Hills and his co-authors published an assessment of inequality in Britain under New Labour:

Their conclusions are, in the end, disheartening. Although the Labour government has followed a number of pro-poor policies and there have clearly been some benefits for the poorest sections of British society, overall levels of inequality have barely improved since 1997. Morover, the study does not cover the impact of recent events, which can be expected to affect the poor - and particularly the working poor - disproportionately.

So, was new Labour just a gigantic bluff?

A blog post is hardly enough space for a balanced analysis, but a couple of points spring to mind.

First, it is probably easier to provoke a sharp increase in inequality than a sharp decrease in inequality. The collapse of manufacturing industry and the assault on trade union power, allied with efforts to contain welfare spending despite rising unemployment, brought a rapid growth of income inequality in the 1980s. But how to reverse that? The simplest way would be to increase public spending by a large amount and redistribute the sums to the poorest through welfare benefits and tax exemptions. But Tony Blair didn't try that. Why?

Two obvious reasons. The first is that New Labour was an electoral strategy, designed to win over Conservative-leaning middle class voters and create a middle-poor alliance against the Conservatives. Any extensive programme of redistribution would have burdened the middle-class with higher taxes which would have disproportionately benefited the poor. If Labour had proposed this, the middle classes may well have stayed loyal to the Conservatives, as Iversen and Soskice's theory of electoral systems and redistribution would predict.

However we may object to this strategic thinking, it has to be admitted that Labour could do nothing for the poor without getting elected, so this may have been the price to pay for power.

The second reason is perhaps more depressing. Key Labour leaders - Blair, Brown and Mandelson - seem to have positively embraced the inegalitarian implications of the UK's liberal, free market model. Their idea seems to have been that markets must be left deregulated in order for wealth to be created, and only then can government intervene to redistribute some of the fruits of that wealth. In particular, the City of London was seen as the cash cow which would pay for Labour's social policies, so outrageous City bonuses would have to be tolerated as a necessary part of the wealth creation process.

There a couple of obvious shortcomings to this reasoning. The first is that it assumes that more unequal societies are more productive, and that attempts to curb inequality will hinder economic performance. This might make sense for the US, but high inequality in Britain has meant lower productivity than in the more egalitarian European countries. In other words, there are ways of increasing both economic performance and equality, but Labour did not take these alternatives seriously. Now that the growth of the last decade has been revealed to be largely a mirage, that decision is not looking good.

Second, inequality has a self-perpetuating logic. Contrary to the 'American dream' of individuals pulling themselves up by their bootstraps, all the evidence suggests that high inequality diminishes social mobility and that the poor can find themselves trapped in a hopeless existence. Poor children end up in the worst performing schools, have poor diets and more health problems, and tend to remain poor. The rich accumulate ever greater advantages for themselves and their offspring. An economic system which allows pre-tax inequality to run wild leaves government with an almost impossible task in reducing post-tax inequality. There is simply too much to do, and the political costs of redistribution place limits on how much governments can keep post-tax inequality down.

New Labour hasn't exactly failed. But the poverty of its ambition has left poverty as the UK's number one problem, after nearly three full terms of majority Labour rule. I for one do not expect anything to improve under the Conservative government which is likely to follow this one.

Friday, February 20, 2009

Bonus malus

Why is it so difficult for so many people to accept that top financial sector executives have been overpaying themselves, and that the rest of us have lost out as a result?

Even the Independent, hardly a cheerleader for the neoliberal right, has trouble with this notion. It asks

The bonus question: Should Gordon put the public finances before public opinion on bankers' pay?

This article tells us that tax receipts last month were below predicted levels, and that falling City bonuses, on which tax is paid in January, explain much of the decline from £60.5bn last year to £53bn in 2009. No figures are presented to justify this, however, although the article does also say that income tax was down 4.3%. In the absence of any further evidence, I have no idea how the Independent can conclude that Gordon Brown faces a dilemma between paying bankers bonuses which inflame public opinion, and increasing the government's budget deficit - the core message of the article.

Of course, the collapse of the financial sector does reduce government revenue, and the government's deficit is in large part the consequence of this collapse, as the recession it has created has destroyed 100,000s of jobs and cut income tax receipts whilst increasing spending on social benefits. But the bonuses paid in recent years, if anything, have been direct causes of this current crisis, by encouraging reckless risk-taking and syphoning off bank capital into employees' pockets. And, let's not forget that in the case of the banks now effectively nationalized, the bonuses are paid with public money. Maybe that's why public opinion is a little shirty on this issue.

Public opinion isn't always right, but I think most of the time people know when they've been had. I know it's hard to accept for well-paid London-based professionals (such as journalists), but making a handful of people unfeasibly rich and letting them destroy the world economy in the process is not a smart thing to do. Maybe we shouldn't let them do it again.

Thursday, February 19, 2009

Mills and Broon...

Gordon Brown took a trip to Rome yesterday, to discuss the economic crisis with Italian Prime Minister Silvio Berlusconi. After the meeting, Berlusconi announced that 'nationalization was an option' for the banks, even though he has so far insisted that Italian banks were perfectly solvent, and indeed that there wasn't an economic crisis in Italy anyway. This may be true, since Italian economic growth has hovered around 1% ever since Silvio stepped into the political arena with spectacular effect 15 years ago. In such circumstances, who notices a recession?

Anyway, the most interesting thing about the meeting was its timing. On Tuesday an Italian court found British lawyer David Mills guilty of accepting a bribe worth £300,000 from... Silvio Berlusconi. Mills had worked for Berlusconi setting up a network of offshore bank accounts that Berlusconi's Fininvest company used for various activities it preferred to keep hidden. In a previous investigation into Berlusconi's affairs Mills had 'turned some tricky corners' (his words) in giving evidence on Fininvest's offshore accounts, and Silvio had rewarded him with the aforementioned gift. Mills' conviction for accepting the bribe logically implies Berlusconi's conviction for bribery, but that won't happen because the Italian parliament recently passed a law granting immunity from prosecution to the highest political office holders, including the Prime Minister.

In other words, Brown shakes hands with a man who has just been found guilty, to all intents and purposes, of bribery.

By the way, Mills is married to Tessa Jowell, Olympics minister. Jowell is now separated from Mills, a separation which came about shortly after the Berlusconi bribe became public knowledge. Jowell knew about the gift, but apparently didn't know that it came from Berlusconi, or indeed why.

Good to know that in such difficult times we are governed by the best and brightest.

Saturday, February 7, 2009

Ending the scandal of top pay

Obama's decision to impose a $500,000 wage ceiling on bailed-out bankers has caused some concern in the banking community. The FT reports:

“The cap is a lousy idea,” complained one top Wall Street executive. “If there is no monetary upside, who would want to do these jobs? Executives will just move to private equity and hedge funds”.

Have I missed something? Who would want to do these jobs at only $500,000 plus bonuses (albeit deferred)? Well, maybe some of the executives used to earning $20 million may not want to do these jobs, but given what has just happened - the banks losing more than they have made in profit over decades in just six months - perhaps that's the kind of talent we can do without.

The notion that multimillion dollar packages are necessary to attract talent is so boneheaded it is hardly worth taking on. The genius bankers who accumulated trillions in worthless paper and bankrupted the system did not walk off the street straight into CEO jobs, but instead worked at much lower salaries for years before making the $1.2 million corner office. So even if we assume these people are (were) the best, the logic still doesn't hold because they committed to a banking career when the rewards were much lower.

Here an analogy from another world of fast-growing gains at the top - soccer - can help make the point. 10 years ago top Premiership footballers could command basic pay of around £50,000 a week. Now, the top players get 3-4 times that. Would Cristiano Ronaldo not have bothered becoming a professional footballer if he had thought he would be earning £50,000 pounds a week rather than £150,000? Once you're very rich, there are surely diminishing marginal utility gains from extra income.

And let's not forget that even in the world of finance, most employees earn significantly less than half a million dollars. The idea that there is no-one competent in the banking system who would get out of bed for $500,000 is just too ridiculous. If this is what these people really think, then they are even dumber and more venal than we thought.

Sunday, February 1, 2009

Recession and redistribution

We're in the middle of the deepest recession since 1982/1931* (*choose your preference) and it's all bad news. Rising unemployment, collapsing house prices, falling output. What could possibly cheer us up?

Well Dean Baker has an interesting line on this: the recession is redistributing from the rich to the rest. Baker's argument refers to the United States, but works equally well for Britain.

The basic point is that the destruction of paper wealth mainly harms the very wealthy - since they have most of the wealth - and affects ordinary people rather less (unless they need to sell a recently bought house, or are just about to retire). The $14 trillion of wealth destroyed by the financial collapse (falling property prices, share prices and bond yields) means that the holders of wealth lose $14 trillion worth of claims on what the economy actually produces, leaving more of it for the rest of us.

A second redistributive dimension of the recession is that real wages - for those who have not been unlucky enough to lose their jobs, ie most of the labour force - have increased. Nominal wages are notoriously 'sticky' - some vulnerable workers may take pay cuts, but most will simply be looking at smaller, or no, wage increases. This means that most workers will have the same nominal wages as before, but lower prices, as the recession pushes down a range of prices and forces all kinds of producers and suppliers to offer big discounts. In other words, higher real disposable wages.

Add declining - correction, plummeting - interest rates, which reduce many ordinary homeowners' mortgage repayments by significant amounts, and we find that probably most of the British population is actually better off than six months back. The value of our houses has fallen, but they are the same houses, and are costing us less to maintain than they were before the recession started. Unless you need to sell, why worry?

So, is recession a good thing? Well, the downside is that the losers - those who lose their jobs or businesses and therefore take a real hit on income - are very often already in the lower income groups and can barely afford this enforced leisure. Some of the more vulnerable may turn to crime, making us all less safe. Also, the pervading uncertainty affects us all, so that we cannot really enjoy our newfound prosperity because of the quite rational fear of losing it through involuntary unemployment or bankruptcy. And of course, GDP has fallen, so there is a bit less output to go around. But just as the boom was a bit of a confidence trick, so is recession - most of us were not really that much better off before, nor much worse off now.

In any case, one good thing to come out of all this is the end of the fabulous wealth enjoyed by some on the basis of 'fictitious profits' (to use Richard Lambert's phrase), and, hopefully, an end to the myth that 'dealing' is any kind of substitute for production of goods and services that people want and need.