High Hopes?

Last week the High Pay Commission reported the results of its detailed survey of the structure and culture of remuneration in some of our largest companies. Yesterday's headline in the Independent ('The rich get richer and the poor get poorer') may result from the decisions about public spending made by the Chancellor, yet the origin of the huge increase in inequality in our society is in the way pay setting takes place in the private sector.

Perhaps it would not be going to far to conclude that while the Tory governments of the 1980s and 1990s liberated the private sector to pay top executives out of all proportion to their performance, it is the current coalition government (which has never had a majority of support) that is undermining the redistributive policies that previously held inequality in check.

The graphic illustrates the differences in pay between teachers (£34,476), cleaners (£7278) and higher level civil servants (£163,000), none of whom come anywhere close to the average pay of the CEOs of FTSE 100 companies, at £4,200,000. Perhaps even more striking is the relative increase in the pay of top executives between 1980 and 2011. The Barclays executives have seen their pay rise by nearly 5000%, while those of BP have received increases of more than 3000%.

The report is a useful source of data that helps inform the debates we are having, in these times when the struggle for value within capitalism is becoming more explicit. The recommendations for change, by contrast, are surprisingly weak. Putting employees on remuneration committees is all very well, but unless they are in a majority they are likely to be intimidated and their views dismissed. Similarly, forcing companies to publish pay ratios will aid transparency, but amongst the shameless people who head our companies it is unlikely to bring any change.

A government really concerned about inequality and the pernicious effects of high pay could easily introduce a tax regime that would make pay above some upper limit, say £1m, meaningless, since it would all be reclaimed for the public purse. But then that sort of government would be unlikely to reach power in our less-than-democratic political system.
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Defending Dissent

In support of the courage of dissenting economists I posted the news that Clive Spash had been forced to resign from his post at Australia's publicly-funded research body CSIRO almost exactly two years ago. The political disagreements over how Australia, one of the greatest carbon emitters per head of population, should address its climate sins, has resulted in the carbon tax also discussed recently on this blog.

The behaviour of CSIRO has now reached the Australian parliament, with questions raised over CEO Megan Clark's involvement with financial organisations involved in carbon trading and the fact that Simon McKeon, executive chairman of Macquarie Bank’s Melbourne office, was appointed as CSIRO’s chairman. In connection with the paper 'The Brave New World of Carbon Trading' that was at the heart of the dispute, Senator Colbeck asked:

'CSIRO’s internal review concluded that the original paper did not report new research or present empirical evidence to support all of the authors’ conclusions. The paper was also viewed as offering opinion on matters of government policy by applying a critique of neoclassical economic theory to the ETS. Therefore it was not approved for publication. Were those issues to have been rectified as CSIRO strived to do with Dr Spash, CSIRO would have supported the publication of that paper and any public comments that related to the papers findings.'

As Peter Earl notes in his post on the Real World Economics blog:

'This organisation apparently rejects institutional analysis, historical analysis, descriptive analysis and policy analysis . . . it is now evident that the fact that [Spash's] critique was levelled against the use of neoclassical economics as foundations for the policy was the heart of the problem. Their statement explicitly supports neoclassical economic theory and rejects anything critical of that theory because it is being used to support carbon emissions trading. According to the CSIRO this was not about the content or politics!'

This is a rare explicit statement of the role that neoclassical theory plays, much more one of catechism than of scientific theory. As the global economy spawned by four decades of neoclassical theory founders between the Scylla of ecological disaster and the Charybdis of the renewed credit freeze, we need thoughtful pragmatic economists like Spash more than ever.
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OMG

The Guardian columnist Simon Rogers has produced a useful graphic, illustrating how the changes to growth forecasts announced by Osborne in the autumn statement affect our national borrowings.

This is truly scarey, especially if you notice how the GDP predictions in the later years have clearly been fixed to keep the borrowing possible in the next couple of years. As the predictions move through time it is clear that they lose contact with reality and are created post facto to make the numbers work inside the Treasury. What we will really be facing in 2014 or 2015 if we carry along the path that Osborne has set does not bear thinking about.
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A Matter of Life and Debt

There has always been something about the nature of pension calculations that is faintly unsavoury and few roles in life can be as unattractive as that of the actuary. While we all take a vague interest in our life expectancy as well as our life expectations, we frequently balance these with superstitious and childlike attempts to ensure our health and well-being, whether these take the form of prayer or sporadic bursts of jogging. For the actuary, the minute calculation of the likelihood of death from a range of causes is the bread-and-butter of life.

On Wednesday we will see millions of the people who ensure that we live long and healthy lives, and that we enjoy high standards of well-being, going on strike to protect their own security in a retirement they hope to live to see and to enjoy. Investing in a pension is itself a gamble, since a significant proportion of people die before reaching the age of 65. As retirement ages increase and the pension funds those working in the public sector have saved become the subject of the acquisitive attention of politicians, the risks can only increase, making the prudential decision to invest for your old age a much less appealing one.

A rational government would applaud the regularity with which those working for the public sector save for their old age, rather than attacking the union officials who encourage them to do this, and then defend the conditions under which those savings are paid back to them in retirement. Such a government would also value the contribution to the life of the nation made by these servants of the public, rather than consistently downplaying it relative to the 'wealth creation' of the private sector.

More typical of private-sector motivation and value-system is today's news that Rolls Royce has agreed a 'longevity swap' with its pension provider, meaning that it is gambling against its employees ability to live a long and healthy retirement. The company has transferred its unwillingness to countenance a large number of retirement years on the part of its former employees to Deutsche Bank financial services. As pension shifts from being a system of care and mutual support to one of risk and financial reward, one cannot help wondering how long it will be before we are offered a cash incentive to do the decent thing, and make away with ourselves before our allotted time. A moral hazard if ever there was one.
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Speaking Truth to Power

I have an exciting day this Wednesday and if any readers of this blog would like to join me for part of it that would be very welcome.

Back in the summer I put together some evidence for the Environmental Audit Committee's Inquiry into the Green Economy on behalf of the environmental thinktank Green House. As a result I have now been asked to give evidence to the committee members, who will ask me questions about how we might move towards a green economy.

This is, frankly, rather daunting, and it doesn't help that the sessions take place in the Thatcher Room of Portcullis House! My job appears to be to sit in the heart of government and tell them that the economic model we are working with is not only unsustainable but unjust and unstable into the bargain! The key target of government policy is entirely misguided.

In preparing for this I have come across a very interesting document called Enabling the Transition to a Green Economy. We can celebrate a small victory in that the draft version of this document was labelled as a Roadmap, something Green House criticised in our evidence. Like the report 'Keeping the Lights on' about energy a few years back, it makes clear the mental barriers to a sustainable future.

This report is not that encouraging, clearly identifying business rather than people as the key partner in the transition to a green economy. It focuses on efficiency and competitiveness, with no mention of the structural problems of a capitalist, growth-based economy. This is my clear task for Wednesday, and in the face of the evidence of the hegemony of business it is no wonder I feel rather daunted.

After the Commons I am moving down river to speak to the Occupy London protestors at their Tent City University. With luck I may be moved into the Bank of Ideas at the newly occupied former UBS building. I am calling my presentation 'The Audit-city of Hope', which doesn't quite work but you know what I mean. I hope to radicalise the demands beyond 'What do we want?' 'Better regulation of the banking sector'; 'When do we want it?', 'Within a reasonable timeframe'. My focus is going to be on building the energy to establish a national audit committee to find out who we owe the debt to and decide what proportion of it can reasonably be repaid.
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Rebalancing, What Rebalancing?

I write this post as a councillor in the local authority that faced the largest cut in its central government funding in the current funding period - a full 28% over this and next financial years. I assume this is a reward for having a Tory council and having just elected a Tory MP, as well as being a debt-free local authority. I have to hope that the good voters of Stroud draw the right conclusions and do something different with their votes next time.

Recent research from Newcastle City Council has made me feel both better and worse. Published in today's Guardian it makes the partisanship of the present government plain to see. Traditional redistribution measures, including the sharing of local authority rents and local business rates, are being abolished, leaving the richer parts of the country free to profit while those in the deindustrialised north in particular struggle. Northern cities and boroughs are losing £150 to £200 per head, while the leafy boroughs and shires of the south lose between nothing and £50 per head.

The inequalities are magnified by the fact that poorer areas are more dependent on public-sector jobs, which are some of the few well-paid jobs in northern cities that once depended on skilled manual jobs. The massive cuts to the public sector will also hit these areas disproportionately hard.

From a macroeconomic point of view this makes plain the massive withdrawal of liquidity from the local economies up and down our country that is taking place. The paradox of thrift is alive and well in Stroud, as councillors and officers alike respond to fear and threats of future austerity by leaving posts unfilled and cutting spending to add money to the growing reserve. The shade of Keynes haunts our council chambers, but nobody is listening.
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Argentina Learns not to Pampa Financiers

As the credit noose tightens, it is not surprising that commentators are seeking examples of countries who found their way out of unrepayable debts - and lived to tell the tale. In the case of Argentina, whose debts at the time of its default in 2001 were $81bn. - a record for the time although dwarfed by current debts - life after debt has proved to be a very positive experience.

The story is told in a couple of podcasts made by Peter Day for his World of Business series on Radio 4. A paper I wrote about Argentina's barter networks introduces this story. Caught in the orbit of the US dollar, Argentina was unable to allow its currency to adjust to the needs of its own economy, much as the smaller economies of the Eurozone are today. This culminated in a financial collapse in 2001, with the loss of huge amounts of savings by the members of Argentina's middle class.

What becomes clear from the podcast is that clever young economists within the Argentinian finance depart and/or central bank were alive to the causes of their crisis and took political control. As a recent report (pp. 58-62) indicates, refusing to pay socially impossible debts was a positive decision both in Argentina and in Russia. Default was the first step, followed by a decision not to become involved in debt again. Similar decisions by other Latin American countries actually threatened the future of the IMF - since without debtors a bank is defunct - until the credit crunch in Europe gave it a new lease of life.

With no possibility of receiving credit Argentina had to live from its own resources, which turned out to be a blessing rather than a handicap. With a massive and fertile land mass, and a popuation of only 40 million well-educated people, Argentina had nothing to fear in its debt-free future. As food and fodder prices have boomed, so has Argentina, with its government benefiting from a 35% export tax on soya production.

Another interesting lesson is the rapid growth in the 'informal' sector, which is a typical feature of many poor economies but less typical of a highly sophisticated economy like Argentina. This may also be a feature of the future of European economies. On the positive side it can be interpreted as self-provisioning and self-reliance, but its shadow side is exploitation and precarity.

The sting in the tale of the story of Argentina is that its economic success has enabled it to seek foreign finance. The credit vultures are circling and seeking their share of the natural wealth of the country. How far will Argentina's politicians remember their lesson and keep control of their national wealth?
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