The wealth divide, the damage it causes and how it came about

'The poor will always be with us.' So says Jesus in the new testament gospels. Whilst surely true, the gap between the rich and the poor just gets bigger. A couple of recent newspaper articles explore this.

Apart from basic fairness, wealth that is not spread about is bad for the economy. If wealth is spread, everyone has more and so can spend it on goods and services to the benefit of all. Wealth in the hands of the wealthy is often ‘invested’ in non productive assets like residential property often left unoccupied. Investment in farm land became unproductive when the price of land rose so far above its economic value. This happened because individuals and companies could rollover capital gains into assets that would also qualify for agricultural property relief for Inheritance Tax. In past generations wealth was invested in new industrial plant or the privately owned transport infrastructure : the railways and canals. This led to the multiplier effect much loved by teachers of economics in times of gone by.In the course of my lifetime, beginning when the Second World War was still fresh in people's minds, I have seen the gap first almost shrink in the fifties and sixties, but then open up and in recent years accelerate alarmingly.

In Britain there has always been a gap - the rich man in his castle, the poor man at his gate. Land was key. With the growth of trade and then industrialisation different people grew rich. The traders, and this includes slave traders, and those who served them. Then the factory owners, the canal and railway entrepreneurs but especially the financiers, the bankers. All the time, those working in mills, factories and mines and the many thousands working from their dwellings became only slightly less poor when the economy boomed but destitute in slumps. The Factory Acts and the trades unions slowly improved conditions. Equally British manufacturing and trading companies enjoyed a strong market position really until the start of the First World War.

There were dark clouds on the horizon. In Germany, Krupp and other industrialists were creating a vast war machine. In the USA, the benefit of a large home market was reaping rewards in establishing an electrical industry which was all too happy to supply the former imperial power. Westinghouse set up in Manchester and British Thomson-Houston in Rugby.

In addition to the cost of many thousands of lives, the war drained the nation's coffers as it, and Empire nations, provided the astonishing quantity of arms and ammunition used on an industrial scale by the Allied nations. The same would have applied in Germany. Yet, the production of war materiel maintained employment in the waring nations and importantly for them in the USA.

In the UK, jobs had already been lost in textiles as the nation's near monopoly position slipped away. Similarly in the other old staples jobs were lost in iron and steel and shipbuilding as developing nations took up the baton. The USA already had a strong steel and shipbuilding industry which had prospered from the demands made on it during the war. Germany began to rebuild itself under the 3rd Reich. Jobs lost in the northern British towns, despite some government initiatives, were seldom replaced and these once prosperous urban areas became deserts of unemployment.

Newer industries prospered: motor vehicles, electronics, chemicals and consumer products. These industries also prospered in competitor nations. Britain had lost its lead.

The Wall Street crash triggering the Great Depression was devastating for workers on both sides of the Atlantic. Winners took advantage of their strength and position. Those who avoided the crash did well.

Preparations for a Second World War brought back employment to old and new industries alike. The aircraft industry, which had been in an hiatus after bursting onto the scene in the First World War, was busy again developing new aircraft.

When war came, once again the nation was busy, but once again the coffers were further drained. America provided arms and much more, at a price.

War left Britain exhausted yet it had to find the energy for an export drive in order to pay its way. Hard work created the nation that had never had it so good, but its wasn't everyone.

The fifites and sixties saw a move away from steam powered railways and the Clean Air Acts, both of which reduced the demand for coal. Mines shut with corresponding unemployment. The steel industry grew until the sixties, but then foreign competition triggered its decline. Shipbuilding suffered in much the same way. The aircraft industry, with the notable exception of Rolls-Royce, simply couldn't compete with the American giants. 

The indigenous motor industry gave way to foreign ownership. The TV and Radio industry followed suite. The coming of North Sea Oil raised the exchange rate making exports more expensive and imports cheaper; manufacturing declined. Jobs were lost with some replaced in the low pay service sector. Coalminers and steel workers had been the aristocracy in their communities, not so warehouse, call centre or delivery workers.

Computerisation hit middle management and clerical employment.

The Thatcher revolution was predicated on inequality with rewards for hard working and ability. The reality turned out to be rather different. The Financial sector became to be seen as the saviour of the economy. Banks grew alarmingly. Deregulation led to ever more risky products and reward that was disconnected from risk. Banks allowed people to borrow beyond their ability to repay and house prices rocketed. A small number of people became very rich. The argument was put forward that this wealth would trickle down.

In 2008 the banks crashed leaving savers with losses, businesses without borrowing facilities and bankers unscathed. A number of banks merged to become even bigger. The Bank of England pumped money into the economy under the label of 'quantitative easing'. This money found its way into yet higher property prices. Austerity that followed bled the public sector, losing jobs and depleting services.

The decision to leave the EU, in effect our large home market, cost a fall in growth which in turn has resulted in lost jobs or the lack of new jobs.

Covid came as very near the last straw.

The economy and indeed the fabric of the nation is now in desperate need for repair. A parallel comes to mind of that which faced the Attlee government in 1945. Yet, as then, there are grounds for hope. We are a talented nation. There are huge challenges, not least the appetite of the UK capital markets for investment. Will Hutton has much of interest to add in his book This Time No Mistakes.

The question remains of whether growing the economy can benefit all. Aditya Chakrabortty raises questions but offers no answers. This is a complex subject and so that is hardly surprising. just to add a further layer of complexity, here is a piece exploring an alternative world view.

This Time No Mistakes by Will Hutton

I have admired Will Hutton for many years and devoured his book, The State We Are In, and his writing in the Observer. His most recent book is This Time No Mistakes - how to remake Britain.

Following a helpful introduction, Hutton begins by exploring the economic story of the USA. He looks at the freewheeling entrepreneurs: JP Morgan in banking and Carnegie in steel and their push for monopoly. [the links are to posts I have written for my History of British Manufacturing.] The monopolies were countered by antitrust legislation. The otherwise free market system though had inbuilt instability and banks and businesses crashed all too often  After four decades of spectacular growth, the Wall Street crash and subsequent Great Depression demanded action which took the form of Roosevelt’s New Deal. 

This had three main strands: regulation, the provision of credit with protection and a massive investment in infrastructure with a focus on employing those otherwise out of work.  So we have the federal mortgage lenders, the SEC and a raft of social security legislation. It worked and formed the consensus of western economics for nearly half a century. Hutton acknowledges also the massive benefit to the US economy of production for WW2 of which I wrote in War on Wheels and Dunkirk to D Day.

The consensus began to crack in the seventies with the oil shocks and inflation.  Hutton suggests that it was raised interest rates to cool inflation that led to the strengthening dollar and the flight of US manufacturing overseas. In the UK, as I wrote in Vehicles to Vaccines, it was North Sea oil that had a similar effect. Hutton suggests, in a later chapter, that UK interest rates raised for the same reason added to the strength of sterling.

The forces of the right, believing in the market and the small state, were ready in the wings and entered the scene with Ronald Reagan as the charismatic US face; much the same as Margaret Thatcher.

Neither Clinton nor Obama altered this new direction and left  a country of disgruntled former workers ready to embrace Trump's  brand of nationalism.

This very much sets the scene for the book.

Hutton then looks at the Tory years with particular focus on Thatcher and the way manufacturing was decimated. He explores the Brexit arguments and then the failed administrations of May, Johnson and Truss.

The next focus is on laissez faire and the way successive governments have embraced this doctrine combined with the straight-jacket of the small state.

In critiquing the doctrine he draws on the writing of Adam Smith, Chadwick and Engels, the action of Luddites, Tolpuddle martyrs and the Chartists, and finds practical examples of good practice in the Rochdale Cooperative and Robert Owen’s New Lanark. Interesting for me who has written on him he draws on John Ruskin's works on political economy in particular Unto his Last. Hutton of course writes on Marx and his critics.

1859 was a key date with the formation of the Liberal party. Hutton follows this by writing on influential thinkers: Green, Hobson, Hobhouse and their pupils Asquith and Keynes. 

Interestingly he quotes from Churchill's Poverty: the study of town life

“ A poverty-stricken working class could not possibly spend sufficiently to drive the economy forwards, while the aristocratic elite and upper-middle class were too small to compensate. Instead, they saved, with the savings’ surfeit flowing overseas to empire and the financing of other countries’ industries.” 

I have to observe that this is what we are witnessing in today's economy.

The growing union movement and the Liberal party found common cause and together selected Lib/Lab parliamentary candidates.

A somewhat belated fruition of this was the reforming Liberal Government of 1906-1911 and Lloyd George's budget.

I found it interesting that in 1918 when the franchise was enlarged to give the vote to some women, consideration was given but rejected for proportional representation, a topic to which Hutton returns a number of times in the book.

The interwar years contained the disastrous return to the Gold Standard and the hardship this caused. It contained too the ground breaking writing of Keynes whose influence Hutton warmly embraces. Sadly for Britain, governments did not share in the embrace but instead built tariff barriers around Imperial Preference which shielded Britain from healthy competition. The adherence to the small city remained key.

Moving to the post-war, Hutton rejoices in Beveridge and is admiring of Attlee and his government. He possibly offers warmer praise for Harold Macmillan and his Middle Way.

As a critique of post-war industry, Hutton offers this:

“ cosseted, dividend-hungry, rentier shareholders, aggressive shop stewards, disengaged finance and unenterprising managements looking for safety behind tariffs and cartels, rather than putting money into research and new products.” 

This is very much what I found in my research into British manufacturing since 1951 as expressed in Vehicles to Vaccines.

Looking at governments, he sees missed opportunities and barriers. For Wilson the barriers were the multiplicity of trades unions, but also a city wedded to laissez faire. Heath is criticised, but Hutton points out that he did want to remove barriers that reduce competition. The SDP and Blairism in practice are both filled with missed opportunities, although the Blair/Brown years did bring vital change, not least in the focus on early years in Sure Start.

Looking at a way forward Hutton would like to seeing a co-operation of New Liberal and Ethical Socialist. The fundamental shift through is from the emphasis on the 'I' to the 'We'. He draws on the thinking of the Fairness Foundation. 

There is much to be done. Hutton suggests that massive investment is needed to counter climate change, in infrastructure, skills, scientific research and levelling up. Increased borrowing would be possible if lenders could see that their money is being wisely spent. Increased taxation would be needed to service the debt. Our tax take is lower than many countries - but a poorly designed tax system needs attention. 

A sovereign wealth fund is needed. Hutton looks at how British funds and banks currently invest - most goes to real estate and overseas. This needs to be reversed.

Housing, education and health care are key issues where those already on the ladder not only have massive advantage but also live in silos removed from the rest of society.

None of this will just happen. A whole host of national and business governance issues need to be address in tandem. Hutton does not avoid the elephant in the room: we must build a vibrant relationship with the EU.

"The aim must be to create an environmentally sustainable, high-productivity Britain that is less unequal, fairer and economically dynamic, and which, while global in its reach, is firmly anchored in its own continent. That is what Britain must invest for – a ‘We Society’ around which the private and public sectors can coalesce."

How do we pay for it all?

The Chancellor has so far earmarked £200bn to bailout business and support individuals. This in in the context of total public expenditure approaching 900bn. There is a comparison with the bailout of the banking system in 2008. I think there is also one with the  two world wars where we paid whatever was needed, to quote the then Chancellor Lloyd George in WW1. We met the cost by increased taxation and borrowing. I explore this further in my blog piece on the comparisons with 1914-18 and 1939-45.
There is a difference. We are now paying people not to work, rather than work in the armed services or in the manufacture of war materiel. It is thus less wasteful. We are not consuming millions of tons of iron and steel in making tanks, ships and aircraft, or brass and explosives in makIng shells..

There remains the question of just how it will be paid for and Philip Inman offers some fascinating thoughts in The Observer. He dismisses yet more austerity and looks toward taxation. Raising taxes on individuals will reduce the amount they can spend and so further depress the economy. He adds this, which to me would seem to be key  :

“Unless, that is, the taxes are applied to households that save more than they spend, or target wealth. This is desirable, though unlikely, even from a free-thinking chancellor. Sunak is still a Tory, after all, and unlikely to sanction any attacks on core constituencies such as wealthy and older voters.”

Military historian and former editor of the Daily Telegraph, Max Hastings, said on Radio 4 that his (our) generation have been extraordinarily lucky. We should put our hands in our pockets rather than leaving it to younger and future generations.

Banking ten years on

I was lucky enough to be a student during the banking crisis which meant I had time to read about it, research it and indeed to write about it.

I remember my anger at reckless and greedy bankers. I remember too the calm reflection that pointed the finger at me, at us. Bankers may have been reckless and greedy, but we, as members of pension schemes, wanted our pensions. If we had savings, we wanted a return.

The reality though was that high returns were a thing of the past. Chinese surpluses had provided all the cash the western world needed and interest rates could be rock bottom. It didn't matter.

We have now lived through ten years of rock bottom interest rates. From time to time amazing investments appear, only to disappear. Ironically for British investors Brexit provided a shot in the arm: a weaker pound meant that the non sterling earnings of global British companies were worth more overnight. Returns have been good and will remain so, unless we decide to invest in the UK economy which, what any one says, is suffering.

As a nation we can no longer pay our way. Look at the evidence:
The NHS needs billions more just to stand still.
University lecturers want decent pensions; actually everybody does. The reality is that the investment returns simply aren't there to provide them.
We are desperately short of housing, yet houses have never been more valuable.
Government outsourcing was meant to be a panacea. Now outsourcing companies are losing money and going bust.
High Street names failing to survive

Labour wants to take over banking so that banks lend to businesses rather than providing mortgages on over priced residential property or providing ever increasing credit card debt. This is laudable but it ignores what banks have become. They are global. They make a good slice of their money from trading currency and securities and this profit provides much needed tax revenue. There is no longer the bank manager in his sober grey suit. The world has moved on.

Any government seeking to address the economic issues facing this country needs to take the country as it is, not as it was in the 1950s. It needs to recognise that it can only effect change if it works with like minded governments of like minded nations. It can do nothing alone.

The scene of the 'march of shock' following the referendum result.

Ian Jack's article is a helpful reference 

The Blame Game

It seems that there is nothing for which Mrs May is not responsible. This is profoundly dangerous scape-goating and risks hiding the real issues.

Taking a very broad brush, the tragedy in Kensington, the Brexit vote and the state of the NHS all have in common the results of austerity. Buildings seem to have been maintained on the cheap and millions have seen their living standards eroded and it seems that there is simply not enough money to pay nurses properly or provide the health service we need. There has grown up in government a mind set that says all that matters is not spending money. It is a fear that if ministers do so they will be outed for sacrificing a sacred cow.

We don’t have enough money.

Why?

The immediate reason was the need for government to pay out many millions to save the banks which were on the point of going bust in the financial crisis of 2008. Banks going bust mean countless millions losing savings. It mattered.

Having saved the banks, the Labour government set about trying to balance the books. Millions had been borrowed and, if only to pay the interest, millions had to be found. There is a choice: borrow more, raise taxes or reduce public expenditure. Borrowings already looked terrifying, raising taxes risked impeding enterprise, or upsetting core supporters, and so public expenditure was chosen. The Coalition and then the Tory government continued on the same path.

The result is the denuded public services we now face and ministers closing their ears and eyes to the evidence of experts on the safety of tower blocks, for example.

Who was to blame?

Blame must focus on the banking crisis. Unpicking the strands, we had a situation where financial institutions were struggling to keep the interest rates paid on people savings at the levels they had become used to. World interest rates were falling, largely as a result of monies flowing out from China. The backroom boys at the banks set to work to devise products that would offer high interest rates to the people and pension funds hungry for them, that is you and me. One way of doing this was to lend money at high interest rates to people probably unable to borrow otherwise – high risk lending. These loans were bundled together in such a complex way that, when they were offered as an investment, the inherent risk was hidden. These were the sub-prime mortgages. First in the USA and then at Northern Rock amongst others people began to see that ‘the emperor had no clothes’, that millions of pounds of investments were worthless. Banks had invested heavily in them and so they faced disaster. The government stepped in, borrowing massively to do so.

Who was to blame? Was it pensioners demanding high interest rates, pension schemes struggling to meet their obligations to retired workers, evil bankers who without question made a fortune in the process? A bit of each. What is certain is that it was not the NHS, it was not occupiers of high rise flats and it was not millions of people whose jobs had disappeared over the decades with technological advances and third world countries entering the market. It wasn’t the EU.

Governments, including the EU, should have applied tighter regulation and still must. De-regulation goes back to the time of Mrs Thatcher but it continued under governments of all colours since.

What do we do?

We can’t go on with austerity. We have to have and pay for proper public services as Polly Toynbee argues in her book, Dismembered. So we have no alternative than to raise taxes, from everyone not just the rich, but the rich should pay proportionately more. The LibDems were wrong suggesting a penny in the pound from everyone; but Labour were also wrong in saying the rich must pay. We are all in this together, but those best able should shoulder the greater part of the burden, not by threats but by seeing their role in a cohesive society.

Probably the major part of the deficit arising from bailing out the banks should be left and no attempt made to repay it. Adair Turner, in his book Between Debt and  the Devil, suggests this. Investment financed by new borrowing should now be made in infrastructure and in education and training to encourage enterprise which is the key to a strong economy.

We need to look very carefully at the wisdom of an economy based on individual borrowing to finance consumer spending.

We must remain in the EU for access to their markets, for the immigration we desperately need and to work with other countries to face the challenges together.

We have to accept that we have been living beyond our means and so can’t have new cars on finance every few years. We have to share out the national cake more evenly: another point that Turner makes. This will benefit the economy as a whole since the current polarisation of wealth means that millions lie unproductive in property.

It is not only Mrs May, but equally she is not the leader we need to get us out of this complex mess.

Between Debt and the Devil - Adair Turner

Money, Credit and Fixing Global Finance

Don't be put off - this really matters.

Adair Turner was appointed Chairman of the Financial Services Authority following the 2008 crash. He authored a report on the reasons for it and spent the next four years engaging with finance leaders seeking ways to avoid the same problems happening again. He knows his stuff.

His recent book, Between Debt and the Devil, is chilling. I read it in between working with refugees on Lesvos and it is all connected.

He sees a healthy economy as a prerequisite to successful life. It is the lack of this, and the tyranny of oppressive regimes that is sending millions seeking refuge elsewhere.

Inequality is highlighted as a major reason for the problems we face. In the last thirty years the rich have got so much richer and the poor so much poorer; many middle earning jobs have disappeared. Rich people are less likely to buy goods and services, which fuel an economy, and more likely to invest in property which benefits only them and the person who sold it to them. A better distribution of income enables more people to consume goods and services and so make the economy healthy and likely to grow.

Turner's main concern though is the level of debt, both personal and governmental, in the world. It is at an all time high. The UK accumulated massive debt during WWII for reasons we can all understand. This borrowing was not effectively repaid until 1970 and it was only possible to repay it because the UK economy grew strongly with the benefit if technical innovation. The debt now is even higher mainly because of the recession caused by the credit crunch which made people reluctant to spend which reduced government's revenues and so made them borrow more.

He has some revolutionary suggestions for reducing the debt burden and for avoiding it going forward. I will leave it to the Guardian to explain more and to give more detail, but in essence he is suggesting that governments should simply print more money - a one off exercise in effect to wipe the slate clean, or at least to reduce the debt to manageable levels. He is clear that it must not be ongoing as it was in pre war German and which lead to hyper inflation.

I shall follow the debate with huge interest. It really does matter.

Broke

Broke is a play by the very talented Paper Birds. It was very well received at the Edinburgh Fringe, I was lucky enough to see it at Lincoln Drill Hall.

It explores debt, how it builds and then its legacy. The writers saw a point of origin in the 1980's with Mrs Thatcher's attack on working communities and her encouragement to everyone to become middle class. It is middle class aspiration where the driver for ever increasing borrowing can be found.

They explore individual and government debt side by side.

It is frightening just how easy it is for someone, making their way through life, to gather around them the millstone of debt, and even more chilling to see just how hard it is to get out.

Perhaps more scary is their analysis of government and how a consumer economy can only function with ever increasing debt. It is the emperor's new clothes, it only works until some is brave enough to blow the whistle.

For me, the play brought back ideas contained in my blogs from 2009 when I was writing Broken Bonds, a novel about the banking crisis and its impact. My more recent blogs are about Magna Carta and the abuse of power. I wonder, was Mrs Thatcher's push for deregulation, which I still see as the heart of the problem, an almighty abuse of power?

G 20

The more you look at this whole business, the more obscene, but also the more complex it becomes. The headlines about bank bonuses talk to the protesters, but also to the thousands who have lost their jobs simply because borrowing, ordinary business borrowing, became so difficult; they talk also to the thousands more who lost their homes. Massive bonuses were wrong; but who was wrong?

As my character Ed puts it, in a University town which is the most popular pub? The one which doesn't chuck you out at closing time, of course; the one which has the loosest rule book. These tend to be the places where trouble is to be found. So too with banking, loosen the rule book and the bastards will push beyond even their wildest imaginings. The recent book City Boy would seem to confirm this in spades. It is Lord of the Flies, isn't it?

All this would be bad, but not horrific, were it not for two things. The impact is global and massive. It came about as a result of the policy of western governments to let markets govern themselves.

Surely in a civilised society we all need boundaries?

I'm going on a witch hunt

Last night I sat and watched as the select committee questioned the four bankers who are being pilloried but also skapegoated for the banking collapse. This was poor drama, far too well rehearsed and so wide of the mark it was embarrassing.
I mean how convenient for RBS to have ABN to hand? How convenient for HBOS to have questionable lending decisions? How frankly undignified to have four unquestionably intelligent men in the dock.
Does anyone seriously believe it was their fault? As always on such occasions the metaphor is to be found in sport: if the rules permit it you do it, to do otherwise will guarantee defeat and defeat would serve no one admittedly least of all those set to gain most through their bonuses. The point though is surely that deregulation had made possible the fantasies of financial engineering that filled the balance sheets of financial institutions. So it was obvious that the brightest and best would be recruited to invent ever more fantastic devices and the banks would milk them dry of profit. Was I the only one to raise a slight eyebrow at the RBS results following the NatWest acquisition. I rather doubt that results like that didn't come just from cost savings.
The point though remains that the banks did what was only natural, given the environment in which they were allowed to operate.

Dot com - remember that?

Amid the really astonishing events surrounding the banks comes a thread of memory of quite why it was the FTSE last reached the 6,000's. The context is relevant and might well age me. Dear old Phillips and Drew, a massively respected name, stuck to the principle of value investment; you know, actually looking at what a company does and assessing the quality of its earnings. They fell in the league talbes whilst the flash boys all went for momentum investment; my favourite image of the round tray filled with water which sloshes to the side to which the trays is tipping at any one time; and the more it sloshes the more it tips until...you've guessed.
Well, dot com was quintessential momentum, money piled in after money and values (what an odd use of a word) rose and rose. This is so like the other metaphor of the roundabout which spins for ever faster until some one blows the whistle and, another metaphor, the king is seen to have no clothes.
What strikes immediately as odd is how the banking sector seems to have taken the mantle of the dot coms. It is odd until we look more closely at what banking had become. Profits it seems came from clever financial instruments which defied gravity. So that they fell should be no surprise. The problem is that they were in the same banks which have serious job to do in any economy.