Wednesday, 2 April 2014

A 19th Century Institution Confronts 21st Century Problems

The publication in mid-March of a report by the Public Accounts Committee on the latest episode in the outsourcing saga (Contracting Out Public Services to the Private Sector, HC 777, 2013-4) represents the latest attempt by the institutions of parliamentary scrutiny in the UK to come to terms with the astonishing phenomenon of the new contractual state and the accountability issues which it has created.
The dimensions of this new contractual state are now well established.  The combination over the last thirty years or so of the privatisation boom and the outsourcing boom have created whole new areas of corporate enterprise and brought into existence new corporate giants.  The PAC report itself documents some dimensions of the phenomenon.  Government in the UK spends £187 billion on goods and services provided by third parties each year; about half of that is estimated to be directly connected to outsourcing contracts. The four outsourcing giants Atos, Capita, G4S and  Serco between them held government contracts worth around £4 billion in 2012-13.  Any financial configuration of this size and rate of growth raises obvious important issues of  accountability. The Public Accounts Committee, under successive chairs, notably David Davies, Edward Leigh and Margaret Hodge, the present chair, occupies an honoured position in this struggle: a string of PAC Reports over the years have thrown light on successive and costly fiascos in the outsourcing system and in public procurement more generally.  Democratic politics would be poorer without these interventions.

But the history of the Committee, and indeed its latest report, show key weaknesses of the accountability system.  In a sentence: this is a 19th century institution, with a 19th century set of values, trying to make sense of a 21st century world.  The PAC is an unusual Committee.  Most of the present range of House of Select Committees are creations out of the post-1979 reforms set in motion by Norman St John Stevas as Leader of the Commons.  The Public Accounts Committee, by contrast, traces its origins back to the middle of the 19th century.   It is a creation of the great budgetary reforms associated with Gladstone’s tenure as Chancellor of the Exchequer, and it reflects his famous insistence on the importance of economy in public spending – on the importance of ‘saving candle ends.’  The key House of Commons resolution,  of 1862, which still governs the Committee’s mission reads in part as follows:

‘There shall be a standing committee designated "The Committee of Public Accounts"; for the examination of the Accounts showing the appropriation of sums granted by Parliament to meet the Public Expenditure, to consist of nine members, who shall be nominated at the commencement of every Session, and of whom five shall be a quorum.’  

In 1866 Parliament created a key institutional connection which continues to shape the Committee’s work: it appointed the PAC as the overseer of the work of the Comptroller an Auditor General, who in modern Britain has morphed into the head of the National Audit Office.  As a glance at the hearings that underly the most recent report show, it is investigations by the NAO which now provide the main grist for PAC hearings and subsequent reports.

These 19th century origins have had two fatally narrowing consequences as the PAC has struggled to come to terms with the new contractual state.  The first is that the original ‘saving candle-ends’ emphasis on austere economy has turned, in the age of neo-liberalism, into a single minded focus on the extent to which outsourcing is governed by competitive markets, and the extent to which competition delivers ‘value for money’ –  delivering the most economic candle ends that money can buy.  This latest report, like earlier PAC investigations, is essentially about why the competitive market doesn't seem to be working in outsourcing. The second fatal narrowing consequence is that the work of the Committee has become focused on fiascos in the outsourcing system.  A subsidiary reason for this is that the investigation of fiascos, and the chastisement of senior executives in public hearings, makes for good media soundbites.  All modern chairs of the Committee have become minor media stars delivering excoriating judgements on firms’ failings on TV news and on the Today programme. And indeed the exposure of fiascos, of which there are plenty in the contracting system, is a legitimate task of the PAC.  But the overconcentration on media focused exposes, in the manner of a kind of parliamentary version of Private Eye, risks missing the bigger accountability issues raised by the rise of the huge outsourcing system.  Documenting that G4S keeps losing prisoners, or that it made a pig’s ear of the contract to provide security at the London Olympics, certainly provides good copy. But a focus on fiasco draws attention away from more important issues. Most of the contracting that takes place in the outsourcing business does not involve fiascos, for the very good reason that it is largely about making money from carrying out safe, easy to organise, mundane services: just how difficult can it be to administer the pension payment system for teachers?  Outsourcing means handing over to a small number of corporate giants a set of licences to print money.  And the relationships which govern the award of those licences, and more importantly the contractual conditions under which they are awarded and scrutinised, are largely missed in the search for candle end savings and the exposure of fiascos.

Pooter.

Monday, 17 February 2014

Introducing The Foundational Economy

The Guardian has just begun a series of articles following the ‘Enfield Experiment’.  That experiment attempts to use local authority initiatives to reverse a long history of economic decline in one of the most depressed parts of the supposedly booming London economy.  At its heart is a new conception of the obligations of business: one that stresses the obligation of enterprises as various as utilities and supermarkets to organise themselves to put  some of the profits they make from the community back into that community, in the form of business for local suppliers and jobs for local residents.

The Enfield Experiment is based in part on a developing argument being unfolded by researchers at CRESC. The notion that business has social obligations is hardly new, but the CRESC argument gives it added point by observations on the changing character of  the economy in the last three decades.  There are many ways of classifying economic sectors, plainly, but one key set of sectors has been created by the recent rise of two phenomena.  The first is the contract state: the vast extension, in the age of privatisation and outsourcing, of business activity which operates as a franchise sheltered by a contract with public authority.  That of course describes the way most utilities now operate in Britain. The second is the rise of the regulatory state: the rise of a web of regulations governing the terms under which business can operate, and often conferring on enterprises regulated protection from competitors: the classic example is the way planning regulations in effect confer local monopolies or duopolies on  supermarkets established in particular local communities.

The CRESC researchers dub all these activities part of  the Foundational Economy, and for an obvious reason: they involve the production and delivery of goods and services that are the very foundation of what we consider to be civilised life in Britain.  And they are not only foundational to everyday civilised life: if we think of utilities like energy, water and rail transport they are also foundational to the operation of the wider economic system.

One of the many paradoxes of the Thatcher Revolution is that it not only helped create and expand the Foundational Economy, through its development of the contract state and regulatory state; it also created the Foundational Economy as a series of sub-sectors sheltered from competition.  The Thatcher Revolution, in the name of privatisation and competition, vastly expanded the areas of business life carried on under the protective shelter of  public franchises: whether those franchises are openly acknowledged, as in the rail industry, or are implicit, as in the local monopolies conferred on supermarkets by planning law.  And it vastly expanded these sheltered areas of economic life in the name of individualism (‘no such thing as society’ in Mrs Thatcher’s words) and free enterprise, denying that enterprise had any wider obligation beyond the PR exercises of corporate social responsibility.  Yet a moment’s reflection shows that the licensed enterprises operating in the Foundational Economy enjoy huge social privileges; their operations have huge social consequences; and as a consequence they should be made to recognise their huge social obligations.
The Enfield Experiment is a first small step along the way to clarifying those obligations, and as the Guardian’s report shows it is paralleled by initiatives in other local authorities.  But this is not just a matter of localism.  The Foundational Economy is a national phenomenon, and it needs to be addressed by a debate about how we manage that national economy, and by policy measures that use state power to reconfigure the social obligations of business.

Note: to follow the CRESC argument further see  Andrew Bowman, Julie Froud, Sukhdev Johal and Karel Williams, The Foundational Economy: Rethinking industrial policy .  Manchester: CRESC, 2013, downloadable at: http://www.scribd.com/doc/122563517/The-foundational-economy-rethinking-industrial-policy-Andrew-Bowman-Julie-Froud-Sukhdev-Johal-and-Karel-Williams.

Pooter.

Thursday, 5 December 2013

Boris Johnson: Cheer Leading For Inequality

When he gave the annual Margaret Thatcher lecture Boris Johnson’s praised inequality in a calculated way. He was positioning to challenge the Tory leadership from the right, if and when Cameron and Osborne fail to increase Tory seats at the next election.

Perhaps in an attempt to block Johnson’s manoeuvring, George Osborne, in a softer way, repeated those sentiments in his comment on Johnson’s lecture: inequalities of outcome are inevitable; the important thing is to ensure equality of opportunity through schooling:

"I think there is actually increasingly common agreement across the political spectrum you can't achieve equality of outcome, but you should be able to achieve equality of opportunity… You should give everyone, wherever they come from, the best chance, and, actually, education is the key to this."
This is partly wishful thinking when schooling in so many ways reinforces inequalities driven by catchment areas and the residential segregation of different income groups. But the more troubling point is that the Tory Right are now trying to break with the Westminster consensus in several ways.

First, the five Tory back benchers who wrote Britannia Unchained have blamed our lazy workers for continuing underperformance: “The British are among the worst idlers in the world. We work among the lowest hours, we retire early and our productivity is poor. Whereas Indian children aspire to be doctors or businessmen, the British are more interested in football and pop music”.

Now Boris Johnson praises the deserving rich who are smarter so that they will inevitably succeed against the masses who, on his account, have low IQs not a deficient work ethic. Johnson presents us with the cornflakes pack account of social reproduction and income inequality:

“Whatever you may think of the value of IQ tests, it is surely relevant to a conversation about equality that as many as 16 per cent of our species have an IQ below 85, while about 2per cent have an IQ above 130. The harder you shake the pack, the easier it will be for some cornflakes to get to the top”

This analogy rests on a farrago of unjustified assertion about competitive struggle, half-truth about the contribution of the rich and sleight of hand about the IQ evidence topped off by a failure to distinguish between income and wealth inequalities.

1. Johnson’s whole argument is framed  in a familiar way by the assertion that our country and individuals within it are all engaged in ceaseless, striving competition:

  “Like it or not, the free market economy is the only show in town. Britain is competing in an increasingly impatient and globalised economy, in which the completion is getting ever stiffer. No one can ignore the harshness of that competition, or the inequality it inevitably accentuates; and I am afraid that violent centrifuge is operating on human beings who are already very far from equal in raw ability, if not spiritual worth.”

This is really a quite peculiar perception which hardly fits the facts. The balance between internationally exposed and sheltered activities in Britain has been decisively changed by the competitive failure of British tradeable goods. Real manufacturing output has not increased in the past forty years and manufacturing now accounts for no more than 11% of GDP; our export success is narrowly concentrated in financial services from London finance whose activity brings public risks as well as private rewards.

Johnson’s argument completely ignores the sheltered “foundational economy” of private and public organisations producing everyday goods and services. Pipe and cable utilities, transport infrastructure, food processing, supermarkets, health, education and welfare altogether now employ 40% or more of the workforce. In these sectors, pay relativities and minimum wages are not determined by competition from Guangdong Province but are a result of social choices intersecting with business models

2. Johnson tries to legitimise income inequality by making disputable claims about how “the rich” contribute to society through paying taxes.

“ When Margaret Thatcher came to power in 1979 they ( the rich) faced a top marginal rate of 98% and the top 1% of earners contributed 11% of the government’s total revenues from income tax. Today, when taxes have been cut substantially, the top 1% contributes almost 30% of income tax, and indeed the top 0.1%- just 29,000 people- contribute fully 14% of all taxation. That is an awful lot of schools and roads and hospitals paid for by the super rich”

We‘re fairly sure the 30% figure exaggerates the contribution of the rich. A quick google  search highlights a BBC story from 2009 which suggests that the figure is below a quarter for the top 1%. The 30% figure does not come from any kind of academic source since but seems to have been put into circulation by a stockbroking firm Oriel Securities which explicitly says it is doing “non independent research which constitutes marketing communications “

And the 30% of taxes claim represents the same sleight of hand as in the old trade narrative about London finance’s contribution which we dissected in our Alternative Banking Report of 2009. London finance highlighted its 30% contribution to corporation tax and ignored the fact that its contribution to all taxes paid was half as large and a sector like manufacturing paid more. So it is in this case where Boris Johnson highlights share of income tax without discussing the broader picture. Mrs Thatcher did not reduce state expenditure’s share of GDP, but cut income tax rates and shifted the burden of taxation onto regressive consumption taxes. So the share of all taxes paid by the rich is much lower than 30% and it is the poor and middle income groups who are paying for their own schools and hospitals

3. Johnson’s category of “ the rich” conflates inequality of income and wealth; if we dis-aggregate the two groups, the relation between IQ and income is positive but the relation between IQ and wealth is almost certainly non existent


Here is a standard sociologist’s take on the correlation between IQ, income and wealth. 
There is a loosely positive correlation between IQ and income, but it is not immensely strong. That is because, for example, there are many examples of institutions which pay modest wages to high IQ individuals – public universities being one good example. But the more interesting finding is that the correlation between IQ and wealth is completely absent. And the obvious explanation for that is because wealth is inherited without conditions as to intelligence, diligence or anything else.

Inherited wealth is the big problem for the new social Darwinists like BoJo. Not least because the past 30 years of widening income inequality will be followed by congealed wealth inequalities because the rich cannot easily be prevented from having children who will often be dim scions. These inevitabilities would be best addressed by a system of death duties and inheritance tax which (unlike the present regime) could not easily be dodged by setting up a family trust.

The fundamental problem is always the economic and social reproduction of inequality. But that is always invisible in Johnson’s discourse.

Dyfal Donc and Stanley

Saturday, 30 November 2013

The Banking Crisis As An Elite Debacle – Again.

The troubles of the Coop Bank remind us that crisis and fragility are still engrained in the banking system.  Evidently setting things right is about more than finding a technocratic fix.  That just confirms the results of arguments already in the public domain by researchers from CRESC and associated with Manchester Capitalism

Another month, another banking scandal, and another round of the blame shifting game.  The Reverend Paul Flowers must now be on Fred Goodwin’s Christmas card list: he has replaced Goodwin as the nation’s  favourite demonised banker. Since he does not have a knighthood of which he can be stripped we must wait to see whether the Methodist Church  ritually unfrocks disgraced ministers; or perhaps he will be stripped of the Institute of Bankers Part 1 Diploma which he gained in the 1970s.  All the manoeuvring between the regulators and the parties to shift blame for the Cooperative Bank fiasco brings a strong sense of déjà vu, a rerun of what happened after the great banking crisis of 2007-9.  Like modern Bourbons the financial elite and its political allies have learnt nothing and forgotten nothing.

For some years now my colleagues in CRESC at Manchester have been exploring the sources of  these crises.   Our conclusion  is that none of the standard explanations make full sense of what was going on and,  as the Coop fiasco shows,  is still going on. These standard explanations, oddly, unite establishment policy makers, radical critics and academic observers.  They come in three forms.  First, crisis as accident, a view inspired by Perrow’s classic study of ‘normal accidents’.  Second, crisis as conspiracy: a view now common on the left which treats the political parties as the catspaws of the financial elite.  Third, crisis as calculative failure: a view particularly common among reformist regulators who view the root of  all problems in the failures of the risk estimation models used at the height of the manic banking boom.  All three point in the direction of  technocratic solutions to the problems of banking regulation.  But what the Coop fiasco hammers home is that technocratic solutions have limited effect: we are now nearly five years into reformed  technocracy  and things are still going badly wrong. Our argument – and the reason we speak of the crisis as an ‘elite debacle’ – is that the crisis has, and continues to have, deeper roots in the mind world of elites, financial, regulatory and political.  

And that mind world is shaped by influences far removed from the rationalities of the textbooks of financial economics or the deliberations of technocrats.  It is at heart driven by forces over which actors have little control and little understanding.  The most obvious example of that is the financial system itself  which, far from being the result of  financial innovation produced by financial engineering is essentially the product of bricolage, in the sense used by Levi-Strauss: structures and practices are not designed but improvised  without any central guiding rationality. The result can be seen in the system which produced the crash and which still retains its essential features: a system marked by huge volume in trading, by inordinate complexity, by opacity in modes of trading and by dangerously high levels of interconnectedness.

This systemic irrationality is compounded by an irrational culture of  government decision making in Britain, a culture which has produced hubristic styles of leadership.  We mean ‘hubris’ here in its exact core sense:  excessive self confidence in one’s own judgement arising from a lack of contact with reality.  In delegating control of economic policy decisions such as interest rate setting, financial regulation and trade policy to newly empowered technocratic elites, politicians have freed themselves from everyday mundane reality, to concentrate on big picture ‘strategy’ – a word which trips effortlessly off their tongues.  What all this meant in practice in the years leading up to the great crisis was that, in plain English, political leaders in the Treasury did not have the foggiest idea of what was going on.  Hence the shock when the whole thing ended in tears after 2007.  And the case of the Coop shows that hubris and lack of reality still shape how political elites approach financial regulation: how else to explain the insistent pressure from Treasury Ministers to the Coop to expand, seemingly oblivious of its near bankrupt condition?

What is to be done?  Two things, both of which briefly surfaced in the crisis, and both of which have receded.  First, the irrationalities of  the financial system – complexity, opacity, magnitude – need attacking – an attack that was briefly contemplated in the aftermath of the crisis in the calls by figures like Andrew Haldane for a simpler financial system.  Those calls have now greatly diminished in volume and influence, especially under the new Mark Carney at the Bank of England.  Second, democratically elected politicians need to recognise their responsibilities.  It won’t do to hand over the responsibility for decision to technocrats and simply deliver big picture speeches about strategy.  But to get to that latter change we will probably need a different kind of politician.

Note: The blog draws on the published work of  the research team at CRESC, the ESRC Centre for Research on Socio-Cultural Change at the University of Manchester.  The two main publications drawn on here are Ewald Engelen, Ismail Ertürk, Julie Froud, Sukhdev Johal, Adam Leaver, Michael Moran
and Karel Williams, ‘Misrule of experts? The financial crisis as elite
debacle’ Economy and Society, 2012, 41:3, 360-82; and Ewald Engelen, et al, After the Great Complacence: financial crisis and the politics of reform. Oxford: Oxford University Press 2011.

Pooter

Wednesday, 13 November 2013

Doing What’s Easy: The Unbalanced And Unstable 2013 Recovery

“We cannot go on with the old model of an economy built on debt. An irresponsible public spending boom, an overblown banking sector and unsustainable consumer borrowing on the back of a housing bubble were the features of an age of irresponsibility that left Britain so exposed to this economic crisis. They cannot be the sources of sustainable growth for the future…We will build a more balanced economy which does not depend so heavily on the success of financial services, and where all parts of the country share in the gains…In the coming months we want to unite the country behind this new British economic model” George Osborne (2010) ‘A New Economic Model: Eight Benchmarks for Britain’, p.1.

Back in February 2010 the Chancellor wrote the above as a preface to a document which outlined the Conservative vision of a new economic model for Britain. The theme of rebalancing featured prominently in the eight benchmarks outlined in the document, which were to provide the gauge against which the performance of a Conservative government might be judged[1]. But with our economy apparently on the mend, we seem much further from the kind of sustainable model described in Osborne’s 2010 vision. We have instead done what’s easy and embarked on a strategy of reflating the housing bubble, predominantly in London, creating all kinds of uncertainties going forward.  

The basic post-crisis story is one of a two speed economy. This can be seen in the regional breakdown of the UK’s GVA growth (GVA being the standard ONS measure of output). The two charts below show that in the pre-crisis period between 1997-2006, London and the SE accounted for 37.3% of all GVA growth. Post crisis, this figure rises to 47.7%. If we were to strip out inflation, the picture is even more bleak with many regions still below their pre-crisis peak, illustrating just how far London has pulled away from the rest of the UK economy since the crisis. I am fairly confident the 2012-2013 picture will, if anything, show London taking an even greater percentage of national GVA growth.

Figure 1


The regional GVA figures only run up to year end 2011. But it is possible to get a sense of the form and extent of the current recovery using output GVA by sector. Figure 2 below shows that by end of year 2012 only three sectors had recovered their pre-crisis output performance: i) Agriculture, Forestry & Fishing (which represents a negligible part of the UK economy in monetary terms and broadly reflects rising commodity prices) ii) Business Services & Finance and iii) Government & Other Services. And even here growth was concentrated in a few narrow areas: motor vehicle repairs, admin and support services and real estate (mainly in London, but more on that later). Meanwhile health and education spending kept government services on the up. However since 2013 there has been broader sectoral growth (figure 3), particularly in professional, admin and support services and also in the wholesale and retail trade. Some growth is to be expected as concerns about the Eurozone crisis recede, as pent up demand relaxes and business confidence improves. But the precise form of the recovery and its sustainability are shaped by government programmes. So are we seeing the kind of economy that Osborne envisaged?

Figure 2


Figure 3

The answer to that really depends on the way the economy moves. Growth in one market or region can unexpectedly transmit confidence, investment and job growth to other parts of the economy in ways that are difficult to predict. But I am not too confident about this scenario and the immediate signs do not augur well.

The particular form of the recovery in the UK has been shaped by three central interventions: Quantitative Easing, Funding For Lending and Help To Buy. First, QE which was supposed to (among other things) lead to more lending to the productive economy, fostering a ‘march of the makers’.  This was supported by Funding for Lending, which to date has pumped a total of £17.6bn into banks and building societies. Neither has met their perceived aims. Net lending to business has in fact been negative on an annual basis since QE began in March 2009 with little deviation from that trend as Funding for Lending was rolled out in July 2012 (figure 4). Corporates have instead paid back bank debt and bought back shares by issuing bonds to massage EPS figures and trigger bonuses for the board; meanwhile investment is still pretty insipid – hovering at around 20% below the August 2007 figure. Unsecured lending to individuals however has increased: credit card loans were up 4.5% on an annualised basis in August 2013, while other unsecured loans were up 4%. Secured lending has also been rising steadily since mid-2012, perhaps showing some benefits of Funding for Lending; but there is evidence to suggest that these mortgage-related loans have been regionally concentrated in the London area, pushing up prices above the already eye-watering pre-crisis highs – which takes us to Help To Buy.

Figure 4
Source: Bank Of England ‘Trends In Lending’ October 2013, p.4

Help To Buy equity loans and mortgage guarantees have effectively pump-primed housing demand (with negligible effects on supply). Via the equity loan, government lends homebuyers up to 20% of the purchase price of a new build house up to £600,000. The more controversial mortgage guarantee provides banks with free insurance on up to 15% of the value of any mortgage loans issued. All of this is geared towards top-down growth - encouraging the upper middle classes to dis-save in the hope that ‘dwellings investment’ (private new builds plus extensions on private houses) would restore confidence and kick start consumption spillovers. This is also why the government has also been so keen to relax planning regulation on building extensions.

The benefits of all three interventions have disproportionately accrued to London. Figure 5 shows an index of average regional house prices rebased to August 2007, illustrating just how far London has pulled away from the rest of the UK housing market: prices in the capital are now 14% above where they were back then. This has not just been driven by hot money from rich, foreign investors in the prime market where 60% are cash buyers. Despite the hullabaloo about prices in Kensington, the prime market in London is only around 7% of the capital’s total; in fact London is the region with the lowest percentage of cash buyers in the country by a distance (24% vs 39% in the SW). This means a greater proportion of buyers require borrowing in London relative to elsewhere. And although transaction volumes appear to rise and fall in lock step across the country, London’s volumes are now the highest relatively at around 62% of the August 2007 peak compared to other regions which run from the low 40%s to high 50%s from peak (figure 6). So London has a higher number of transactions relative to peak with a smaller percentage of cash buyers.


Figure 5

Figure 6

The house prices and the growing volume of transactions in London have been driven by an expansion of secured lending, under-written in various ways by government. This has been reinforced by an expansion of unsecured credit, also underwritten by recent interventions. These, in turn, have kicked multipliers into the London economy. But can this last?

It is difficult to escape the image of London breaking free from its moorings in the national economy, just as the value of its real estate becomes detached from any fundamentals. If London real estate is 14% higher than peak on just over 60% of volumes, then London houses look increasingly like a kind of (state-subsidised) collectors market bubble whereby it is the imagined attributes of the asset within a relatively small community of buyers that drives prices beyond underlying fundamentals. The fundamentals in question are wages. As figure 7 shows, median house prices are now virtually unsustainable at around 9 times FTE earnings in London; with the Midlands, North and Wales hovering around a more modest 5.5X to 6.5X. We should also not forget that intra-regional inequality is just as important as inter-regional inequality. London has rafts of low and modestly paid workers – and at the lowest paid end, those conditions are worsening (figure 8). These income constraints represent a kind of risk threshold – prices can continue to rise relative to income, but they can only do so at greater risk of collapse. Only this time when the bubble goes pop, the government and the Help To Buy generation who have invested some equity will be the ones who take the downside.

Figure 7

Figure 8


So here are some troubling questions:

1. London prices are 14% above the pre-crisis August 2007 level on just over 60% of the volumes. Can those low volumes support high prices over the longer term? Or alternatively can volumes increase without prices falling, given the income constraint? Either way, the sustainability of the price boom (and the multipliers that accrue during an uplift) look shaky.

2. If prices were to waver, how would government respond, given it has taken on a £130bn contingent liability – equivalent to 8% of GDP - through the mortgage guarantee scheme? Should it extend its equity involvement to 25% or 30% to make mortgage payments more manageable for households and bring in a greater volume of buyers? Should it extend larger guarantees to the banks to lubricate the wheels of debt issuance and ensure prices move upwards? What looked like an initial injection to spark the recovery, very quickly becomes mission creep.

3. Inflation is an inconceivable threat in the short to medium term, but what about in 5 to 7 years time? Government, as an equity holder in the UK’s housing stock and guarantor of banks’ mortgage loans, now has a vested financial interest in stable/rising house prices. Given that high house price to income ratios are only sustainable in a low mortgage interest rate environment, how might government respond if the Bank of England concludes that interest rate rises are necessary at some point in the future? Or what happens if ruptures in the interbank/money markets reappear and cause mortgage rates to rise? Even modest rate rises could lead to mortgage defaults, collapsing confidence, fire sales and falling prices when households are geared to the max in a low rate environment. By taking a directional bet on property, government is invested in a ‘close to zero’ interest rate regime, irrespective of what uncertainties lie ahead. This stores up all kinds of potential economic and political tensions going forward.

Through Help to Buy and other interventions, government has gone long Britain. That may sound like a good thing, a patriotic thing even, but it is not. This is an all-in move by the Chancellor, which is a problem. Like any complex system, an economy needs buffers and release valves to prevent overheating or interference in one area that might cause total seizure. His interventions have done the opposite. What if Eurozone problems resurface? What if another bank is hit by unexpected losses, and LIBOR rates rise? This growth model is not built with what ifs in mind; there are few system redundancies to deal with the unexpected. We are long house price growth, long low interest rates, long consumer appetite for debt, long the Eurozone, long bank stability, long consumers’ ability to transcend their financial constraints and keep buying more expensive houses.

Finally, what of Osborne’s noble ambitions set out at the top of this post? When push came to shove he bottled it. He did what was easy: state intervention to help rebuild fractured supply chains and invest in growth requires skill, guile, political and economic nous and courage to fend off the vultures. The de facto part-nationalisation of the private housing stock (and that’s what Help To Buy is, in effect) to prop up an over-heated property market and save the banks from further write-downs is the easiest thing you can do as a Chancellor in such times, with an election looming. This recovery looks much less like the new model promised by Osborne, and much more like an unstable version of the old one.

Stanley



[1] Although the original link to those eight benchmarks has disappeared from the Conservative website, it is possible to access the whole report via the search function.