Friday, 24 April 2015

Maybe Cameron Wants to Lose?

Who’d be a politician?  With expenses fiddles getting harder the pay is well below your going rate in the outside world, you are assumed to be an idiot or out for your own selfish goals, and on Twitter and elsewhere extraordinary abuse rains down on you.

And every few years, you have to pitch to keep your job in an election.  Which is fine, until you realise that the only winning strategy is to lie, and lie hard.

Take the economy, for example. In almost every developed country the last 30-40 years have seen a horrible stagnation of living standards for most of the population.  Left wing or right wing government?  Makes no difference as the reasons why this is happening are all global (there are a few billion people in developing countries willing and able to do a significant proportion of the West’s jobs for a fraction of the wage rate) and there ain’t nothing going to stop it.

Sure you can inflate the economy in the short run, governments have been doing that since democracy began: boom before the election, bust after it; tax cuts before it, tax increases afterwards…  But that’s hardly a responsible way to run the economy, creating huge debt levels that will hang over your successor’s rein (yes you, Mr Blair!).

As for the things that might actually make a difference like education or health, these are institutions so huge, and so hard to influence and manage, that little is going to improve over the course of a parliament.  And voters pretty much insist that you don’t change anything anyway. 

So yes it might be fun to be a politician for a while, and making it to Prime Minister has its benefits (lucrative speaking tours await you after you get fired), but once you’ve done that for a few years, why stick around?  I bet Sam Cam is hoping she’ll get her husband back rather than have him go through the mill of public abuse for another term.

Wednesday, 18 June 2014

Supply and Demand – the lost art of economics

Earlier this month the Bank of England published ( a paper titled ‘The UK Productivity Puzzle’.  In summary, British productivity has not recovered post recession as it ‘normally’ does and the Bank of England appears not to know why.

Productivity is important, indeed crucial for the economy.  In the end you cannot consume more than you produce, and to get richer - by which we tend to mean to consume more per person - you have to produce more per person.  In other words productivity growth is ultimately the only way for living standards to rise.

So why has productivity failed to recover?  The paper looks at various factors in a pretty complicated way but seems to me to skirt around the most obvious reason: in economics looking at underlying supply and demand is often the easiest way to solve a problem.

Traditionally productivity has been driven up by investing capital to add machinery or equipment to make labour more efficient.  For example, at the beginning of the industrial revolution this meant applying capital to agriculture, such as the combine harvester, which meant one person could do the work of many.

This only makes sense to do if the investment cost eliminates enough expensive labour to be worthwhile.  If however the relative cost of capital and labour moves, then the cost/benefit of investing can shift discouraging organisations, both public and private sector, from applying capital.

Since the recession began this has happened, and in a dramatic way relative to previous past economic cycles.   We all know that most people are much worse off compared to 2008 – real wages on average have fallen by 6%, and by more than this at the lower skilled end of the labour force.  In other words, the supply curve has shifted to make labour much cheaper.

Meanwhile capital has become much more expensive, not simply in terms of interest rates (the typical mark up over base rate is now multiples of where it was), but also in terms of arrangement fees and more fundamentally availability of capital.  Anyone running a business or even reading the relevant press will know that bank lending has fallen sharply and many companies find it simply impossible to raise capital.  In this case the supply curve has shifted to make capital more costly or inaccessible.

With labour cheaper, and capital less available than before 2008, it is inevitable that investment has fallen and productivity stalled.  There is no mystery to the effects of supply and demand that are driving this.

Where do we go from here?  Can productivity be improved by making capital a little easier to access (but presumably not as easy as credit was available in the boom – after all too much leverage was at the heart of the crash)?  If think so, if only marginally.

But what of labour costs?  Here there appears to me to be a bigger supply and demand effect at work, one that will most probably hold back real wages for decades to come.

Last time we had a recession, back in the early 1990s, the world was a lot less global, China and India barely beginning their growth surges.  Now, for most low/medium skilled jobs there is a genuine alternative to move the work outside of the UK, maybe to the developing world, perhaps to Eastern Europe.  This means UK workers are competing with a global labour pool numbered in the billions: supply has exploded.  Even traditional professional jobs, such as research, accounting and legal work, can be placed in lower cost economies than the UK.

This surge in competition leaves relatively few such jobs in the UK (essentially only those that can’t be moved offshore like the office cleaner), and still the same number of people seeking work of that kind.  Supply flat (or even up slightly with immigration) but demand down dramatically – a dynamic guaranteed to lower pay levels.

And with billions around the world willing to do this work for less than £10 a day, the likelihood is that real wages will fall further for many in the developed world over the coming decades.  The UK is ultimately like a high priced corner shop competing with the low cost supermarkets in emerging markets.  There will only be one winner.

With labour costs unlikely to rise, capital investment will remain relatively unattractive.  Productivity is likely to stall and living standards remain flat at best.  A gloomy prospect perhaps, but one that explains the productivity puzzle.  

Wednesday, 24 April 2013

High pay in the Indian Premier League: could Test cricket fight back?

For a teenage fan the arrival of Kerry Packer’s World Series Cricket in the 1970s was crushing.  The England team’s heart and my Kent favourites, Knott, Underwood and Woolmer, suddenly disappeared and the subsequent big Ashes wins against a second string Australian team were devalued.  Back then I didn’t understand that Test players were poorly paid and faced awkward financial choices for their families. Ultimately, the lasting legacy of this painful episode was a huge increase in players’ pay: Packer had identified an economic gap and helped to correct it.

35 years on, we again see leading cricketers being tempted away from Test cricket, this time towards the Indian Premier League.  In 2012 the West Indies touring team lacked Chris Gayle, and the May Test series in England will always be threatened by the diary clash with the IPL. 

Given this, it’s interesting to look at the financial decisions faced by the players.  The highest profile contract dispute of 2012 was Kevin Pietersen’s.  Undoubtedly there were many factors involved, but consider the following: KP earns around £500,000 a year on a central contract with the England and Wales Cricket Board but £1.3m in a few weeks with the IPL.  If KP chose he could play T20 competitions around the world and easily amass £2m a year.

Yes, we’d all love to play for England, we’d all do it for free…  but that’s easy to say if you have another career.  To put it another way, would you pay £1.5m (KP’s forgone income) to play for England?  Maybe for a few years, but surely not as you approach retirement. 

It is probably unnecessary and undesirable that England players earn enough to banish all thoughts of the IPL, but the gap could be narrowed for the benefit of the game.  According to the 2011 annual report the ECB had income of £146m, up sharply due to better commercial and TV deals.  The England cricketers paid by the ECB received £6.3m.  This is an average of £225,000 for each of the 28 players – you can see the Packer legacy there.  But at less than 5% of the ECB’s revenue, it hardly seems equitable given the spectator and commercial pulling power of leading cricketers.

Indeed the ECB is in fine financial health having made a £15m profit in 2011.   It is to be congratulated on that and plays a critical role in building the fabric of cricket in England and Wales, supporting the counties, women’s cricket and disability sport in a way few national bodies could match.  I for one would not want to see these areas undermined, and shudder at the thought of a game where players get 50% of revenue, a figure commonly exceeded in football.  However using half the profits to boost senior player pay would more than double their earnings: the gap with the IPL would be narrowed, players no longer asked to sacrifice family security to represent England, and the latest Packer style economic gap would be closed.

Saturday, 19 January 2013

Chelsea Pitch Owners - Recent Share Sales

Given the appalling way in which shares were issued prior to the Chelsea Pitch Owners EGM in 2011, enabling people connected with the club to buy up around a third of the votes cast in an effort to take control, it is not surprising that many, myself included, were concerned when shares sales restarted last summer.

With these anxieties in mind, and ahead of the CPO AGM later this month I have obtained an up to date copy of the shareholder register and analysed it.  Broadly my conclusions are that the new shares seem likely to be going to the right types of new shareholders:

  • of the 384 shares issued since summer 2012, around 280 have gone to people buying 1 or 2 shares each; that's over 70% to 'small' shareholders
  • contrast this to the period before the contentious 2011 EGM when 80%+ of the 2500+ shares issued went to people buying 10 or more shares, in fact mostly to those buying 50-100
  • of the recently issued shares only one holder bought more than 10 (he bought 50), another bought 10, and two members from the same family bought 10 between them; everyone else bought 5 or less
  • it should be noted that it is possible that some of the extra shares issued have gone to existing shareholders to raise their stakes above 10 shares, but I couldn't find any in a quick search
  • none seem to have gone to the people linked to the club who bought shares in October 2011; none of the new larger buyers appear to be connected to the club, although again this cannot be certain
In summary it is likely that the vast majority of new shares have gone to numerous small shareholders, probably genuine fans unconnected with the club.  By selling nearly 400 in one year a good start has been made in negating the power of the block of 1500-2000 bought by parties connected to the club in 2010. If this can be repeated next year and for the several years to come we will see the CPO return to its original intent: fans, independent of the club, owning and active in voting to control the CPO.

As a result I will be voting in favour of allowing the CPO to issue up to another 1000 shares in the next year.  This is not without risk (ultimately the club will know before we do whether a new vote on moving grounds is imminent, and could snap up available shares at short notice), and it would be good if the CPO board set out its plans to counter this (eg how are new applicants vetted?), but on balance I think it is a risk worth taking.

Which leaves it up to ordinary Chelsea fans, who are being reached via CPO adverts in the match day programme and season ticket renewal mailings, to take the opportunity to buy a share or two.  That way the future of the club's ground will be in the hands of genuine supporters.  

I'd urge all CFC fans, and especially current CPO shareholders, to encourage those they know to get involved and buy a share. 

Friday, 1 June 2012

Economics 101 – A Recap On The Current UK Economic Situation

We are on the brink.  The UK is in recession again, tax rises and public spending cuts are biting, unemployment – especially amongst the young – seems intractable, for many living standards have fallen sharply and the outlook is for worse to come.

Why Is This Happening?

Has the economic growth prevalent for around 250 years since the industrial revolution come to a halt?  Actually no.  Overall the global economy is in fine shape, with annual growth around 3-4% a year (a rate that means the living standards of the 7 billion people on earth double roughly every 20 years).

So the world is moving on fine, shifting people out of dollar-a-day poverty at a record speed.  But Western Europe, Japan and some other developed countries are not growing.  Why is this?

Mainly because countries like China and India can undercut us.  Their labour is cheaper and so they can make things for less than we can in the UK.  Us consumers tend to like a bargain, and so we have bought imported goods and through those choices closed down much of the manufacturing (and increasingly service) base of the country.

In many ways this is a good thing.  If there is extra money to go around wouldn’t we, morally at least, prefer it to go to people earning a fraction of our income, rather than us?  Not that moral comfort gets the bills paid.

So the Western world’s share of global wealth is declining, and all we can hope for is that this happens in a way that isn’t too painful.  If it goes too fast our share will decline so rapidly that our living standards will fall; if we are lucky, then we’ll merely stagnate.  Cheery, eh!

Not much can be done about this trend, and there is plenty of it left.  It ain’t going away soon, as the following link to a TED video shows ( ).  And once India and China finally catch us there are plenty of others left to join them, including most of Africa, if it can get its act together. 

Meantime we’ve all been assuming that the growth trends of the last 50 years will continue, sort of expecting the typical post-war year on year improvements in our economy.  When this doesn’t happen there is a strong reaction as illustrated by the horror expressed that the UK economy has gone in to a double dip recession.  Politicians have heard this need of ours and gone out of their way to keep growth going for as long as possible, not least so that they have a good shout at getting re-elected.

Unfortunately this has had a side-effect that even when we can’t grow that fast the politicians have felt they have to keep boosting the economy.  To some extent we’ve all done it by living beyond our means.  Borrowing money is sometimes sensible, for example to take out a mortgage, but governments, businesses and individuals have taken on debt way beyond sensible levels over the years.

As you would if you went wild on the credit card, life was good while we enjoyed all this spending… and borrowing.  You can look like you are doing well, keep up with the Jones, boost GDP figures to unsustainable levels.

Until the bank manager called and asked how we’d pay it all off.  We wondered if we might borrow some more, have some more time to reduce the loan.  As we neared our credit limit the answers became more and more severe, and for those countries that finally lost the confidence of their debtors (such as Greece, or Leeds United) the consequences were catastrophic.

Worse still we’ve not only got record levels of debt, but we’ve made promises that we can’t keep in areas such as pensions, health care and looking after the old and disabled.  If these commitments were put on the country’s balance sheet overall levels of debt would double again.  It’s not surprising that politicians would rather not do so, really.

We've overspent (and in a way participated in a form of generational theft; our past high living standards will have to be paid for by our children in the future), and this will have to be dealt with through painful measures such as cutting back spending and raising taxes.  There can be some debate as to the speed of the cutbacks, but only at the margin.

This, of course, is not the first time we’ve dug ourselves a huge financial hole.    In fact you can see these little booms and busts as the slight wobbles in the growth trends of post was UK in the TED video link.  Look out for the ‘crashes’ of 1974, 1990 and 2000.

But, what is different this time is that the difficult remedies take place in the context of global competition, which means our trend rate of growth is close to zero (rather than 3%), and cuts mean a genuine reduction in living standards, not just a slowing in their growth.  People tend not to like that.

As the doctor might say, this is going to hurt.  A lot. 

Thursday, 23 February 2012

A Plea For Higher Taxes

‘What we’ll do is create a system under which our most successful and knowledgeable people are highly incentivised to…. err…. quit…’

No, this isn’t another bleating businessman complaining about the 50% tax rate. Quite the opposite in fact. My view is that tax rates are too LOW in one critical area: capital gains tax for entrepreneurs which runs at 10%.

We are frequently told that new businesses are a great source of growth, that they create new jobs and help society. I imagine that’s true at the macro-economic level (although no-one ever seems to mention that new businesses normally expand at the expense of old ones, that a new job at Amazon means less people working at HMV shops – this is the fundamental competitive nature of economic growth).

Having started one company and worked with numerous entrepreneurs I can confirm that creating new businesses requires very considerable skill and effort. Most fail, a number just about get to the level where they break-even for the hard work put in, and a small number really flourish.

This latter group is where the pay-off lies, in terms of jobs and long-term success. Maybe five years down the track the owner, who has probably risked everything financially, worked 60-80 hours a week and not taken more than a week’s holiday a year, is finally seeing a financial return. S/he will probably not get a big salary or bonus, but can start to take out sizeable dividends – maybe £250,000 a year or more.

Then comes the hammer blow. On that £250,000 they’ll pay around 50% tax, maybe more. Fair enough in these straightened times. Or, they could leave the cash in the business, find a buyer and pay 10% tax. Even at a modest price for their business this can have the effect of making a sale of the business the equivalent financially of 10 or more years’ dividend. Why slog on when the tax system basically incentivizes you to sell out?

The result is that up and down the country very capable, hard-working and successful business owners are throwing in the towel. The businesses they run may continue to do well after they sell out, but there is a tremendous loss of knowledge and expertise as the new owners take it on.

Madness really.

Saturday, 28 January 2012


In the lucky life that I live both my children have gone to private primary schools, and will similarly continue their independent sector education at secondary level. For the last few years we have had a seemingly continuous set of important checkpoints as they have gone through school test, interviews and entrance exams that will determine where they will go. Realistically all the schools they might attend are good, but the 'better' ones have a higher success rate in getting in to top universities, the next stage of the educational conveyor belt.

Neither of our kids seemed too bothered about where they would head, until they reached the age of nine. Then, almost as if a switch had been flicked, they both set themselves challenging targets for which schools they wanted to go to. They were clearly influenced by the league tables, and by the perceived pecking order amongst their peers. No doubt they also reflected our values as parents - we would support them come what may, and are happy for them to aim high even if they subsequently fail. We also see academic success and discipline as a good thing.

So they worked hard, REALLY hard. They had tutors to assist them. They volunteered for more difficult homework when given a choice. They developed their extra-curricular activities as these would help them in interviews. Sometimes they got stuck, tired, or seemed to fall behind. But mostly the challenge was satisfying, maturing and, frankly, an excellent distraction from computer games.

So how did they do? The results are not all in, but they did fine. But the most interesting thing is that they ended up no higher up their class than before. How come? Because all the other parents did the same thing. The whole class improved enormously as a result of pupil, parent and teacher effort.

This, of course, was true of all the other candidates - effectively all 500 applicants for the 100 slots at each school had put their backs in to it. No one was individually any better off by the end of a couple of years of intense preparation; but the overall standard of the group was way ahead, and the kids had all learnt how to work towards a goal, to learn some useful skills, to stick at something worthwhile, to struggle with it and, ultimately, to get in to a good school.


Inevitably I know relatively little about the equivalent selection process for state schools, and it is always dangerous to blog about a subject where you have limited knowledge. I’d be grateful for feedback on this attempt at extrapolating the benefits of competition in private schools to admissions for the majority of children.

As I understand it, with a few exceptions, admission criteria for government funded schools must NOT include capability or potential. No interviews are allowed. There are better and worse schools, and parents clearly know this, but with the exception of religious discrimination, pretty much all a family can do to manipulate the system is to try to move closer to their favourite school.

There is no incentive to study hard; no reward for parents who help with homework. A kid in a poor area with poor schools can't get to a good school in a better area by applying themselves. Richer families in nice areas get their kids in to nearby good schools, even if they are lazy academically.

Worse still the group as a whole has no incentive to improve to their full potential, leaving them all at a lower level.

I’m not arguing here for a return to grammar schools, where the top 10% were creamed off; I’m not suggesting that academic performance should be the only criteria for admission (personally I prefer potential as the main driver). But imagine a world in which all state schools held an entrance exam, however good they are. Even if your kid was only aiming for a mid-rated school you would have a substantial incentive to have them work hard and strive for improvement, for fear they end up in the worse local school.

And the logical effect should be that, rather than improving parental skills at pretending to live close to the good school, most kids would shift up a level in terms of performance and work ethic – surely a useful outcome.