Tag Archives: economics

What I meant to say on Radio 4

Last Friday, I appeared as a guest on the Today programme on Radio 4. The subject was a report that had been done by the Institute for Fiscal Studies about how the wealth of those born in the early 1980s was half of those born 10 years earlier (when they had been in their early/mid 30s). The largest factor behind this was the inability of those born in the 80s to get on the housing ladder.

The interview was done before 7am, I hadn’t had any coffee and speaking to an audience that probably numbered in the hundreds of thousands, if not millions was rather nerve-wracking. So I stumbled over my words and didn’t make all the points I had wanted to.

This then, is my attempt to clarify and expand a little on what I had hoped to say.

The economic reality

I was born in 1983 and as such I fall squarely within the demographic being studied. I fall at the tail-end of Generation X, just a little older than those increasingly referred to as Millenials. The housing situation comes with a double-edged sword. The starting point is that rental prices are high. The effect of this is that it is difficult to save as much of one’s salary as one would like in order to contribute towards a deposit. Yet it’s a goal that is constantly moving. Moving further away. In January, the Halifax bank said that the average deposit needed for a first time buyer in my area was £91,000. More recently, the Land Registry recorded house price inflation in the 12 months to July 2016 as being 8.3%. So what ends up happening is that the real value of the savings towards a deposit is being eroded by inflation. Interest rates aren’t keeping up either. The highest rate of interest I can get on my savings is 0.75%.

As such, I cannot foresee a time within the next few years when houses may become affordable. One of the few hopes of the Brexit vote was that it would bring house prices down, but the devaluation in the pound seems to have offset any domestic instability in the market by making buying houses in the UK cheaper for overseas investors.

A fairer economics

So what needs to happen? Here are some suggestions:

  • Rent controls. First of all, curb any increases in rents and then seek to bring them down, starting with those that are most exploitative (e.g. by looking at rent charged per square foot of living space). At present, tenants are simply being milked for their cash to slake the thirst of landlords’ greed.
  • Build new houses. One of the main driving factors behind house price inflation is a lack of supply. We need new homes and they need to be built sustainably and sold affordably. There’s no point going down the “grand designs” route if all the houses you build come with a £400,000 price tag. The prices need to be linked to average local incomes. There’s also the added benefit of investment in housebuilding is invariably a boost to the economy, creating jobs.
  • Factor in house price inflation into either CPI, RPI or create a 3rd There’s a saying I use at work (nicked off a book on steady state economics): “You measure what you care about and you care about what you measure”. At present, the Bank of England willfully turns a blind eye to house price inflation. This leads to them keeping interest rates artificially low. If they cared about the economic problems caused by uncontrolled inflation, then they would start to factor it into their measures. And once they do that, they’d care about getting it right and getting it down.
  • Increase interest rates to control inflation. Linked to the above, it has to be recognised that inflation of 8% is not healthy for the economy. Incremental increases are needed to a) curb the reliance on debt and b) assist savers in going someway to stop the real value of their savers being eaten away.
  • Limit buy-to-let investors from having an unfair advantage over first time buyers. As well as the under supply of new houses, one of the problems that is contributing to the problem is that homes are being bought by those who don’t intend to live in them. Examples of such measures could include: a) penalties for property owners for not letting out empty properties, b) increased taxes on the profits from rents, c) tariffs on overseas companies & individuals buying UK residential properties, d) Legal maximum on the number of residential properties an individual can own.

Objections

The above suggestions are not universally welcome.

  • Free market fundamentalists object to the idea of rent controls as a matter of principle, as they abhor “market interference” regardless of how justified it is. The reality is that with inelastic demand in the housing market, unfettered market forces will only push prices even higher. Those who subscribe to neoliberalism, though, subscribe to a failed economics and their opinions on such matters need not be taken too seriously, as they are always driven more by ideology than they are by sound reasoning.
  • There tend to be fewer objections here. The main issue is about where houses are built. Brownfield sites are preferable. The downside is that extra supply may push prices down, though given the rampant inflation of recent years, it seems likely that it would just temper that runaway increase in prices. Even if house prices were to come down, this is not as bad a thing as some might think it is. The term ‘negative equity’ still haunts those who remember the late 80s and early 90s, but today’s recent inflation means that homeowners have already benefitted hugely, so it is unlikely that the value of their homes would dip below the amount they bought for it. E.g. Let’s say someone bought a house for £200,000 three years ago. If inflation was about 8% a year, then that house would now be worth about £50,000 more. So if a market correction brought the price down to £220,000 they would still have a £20,000 gain, even though it had decreased by £30,000 from its inflated peak.
  • I’ve heard some contest that this isn’t necessary because mortgage inflation is already factored into the RPI. However, I don’t see this as an objection holding much weight as it only takes into account those fortunate enough to already have mortgages. It does nothing to measure how much more difficult it is to get a mortgage in the first place.
  • This is the big one that people hate. It depends on whether you are part of the “haves” or “have nots”. The downside to increased interest rates is that those with existing mortgages will find they get more expensive. It would also push up the cost of borrowing for businesses. This is where we find out if the lessons of the 2008 crash have been learnt or not. Sensible financial planning, whether personal or in business, needs to take into account the possibility of interest rate rises. If you haven’t got enough headroom to be able to afford a rate rise, then your financial planning abilities should be seriously called in question. In the case of the homeowner, when enjoying the advantages of low rates, it is prudent to save some of the excess; a rainy day fund, if you will. In the case of a business, you need to have modelled your banking covenants with sensitivities built in. Not everyone will have been so sensible, and those who have indebted themselves to such an extent that they would be unable to cope with increased will find themselves struggling more than they have done in the past. Of course, it is the job of a responsible government, with the will of the populace, to support any who fall on hard times. Some people would be hurt by an increase in interest rates, but it’s a necessary consequence of a correction to the market, and there ought to be a sufficiently robust welfare state in place to ensure that nobody is made homeless or bankrupt as a direct result of any interest rate rise.
  • Here, there are difficulties of practicality. How enforceable might they be? In particular, proposal d) might be easily dodged by the having properties owned by a spouse/partner. I must confess I’ve not thought through all the possible loopholes and there’s significant improvement needed to make this a workable suggestion. Yet the principle appears to be sound. For while on the one hand, the rhetoric of the current government is increasingly xenophobic, to pander to the support they get/need from the far right, there is at the same time keenness on investment into the UK from overseas. But we need to both educate out the xenophobia that is endemic in society and be more nuanced about the nature of overseas investment. If it is a case of “put a little in, get much more out” then this should be recognised as a threat to the economy, as opposed to blaming doctors who come from overseas and do a great job in the NHS under (unnecessarily) difficult circumstances.

Political Will

The existing economic situation is a result of the economic and political will of the past. To have a hope of changing things for the better we need a fairer economic and political will now, though it will take time to come to fruition. One of these is the need to change an unhealthy mentality that sees houses as investments rather than as homes. Just a few days ago, I saw on Facebook a post from an old school friend who is an estate agent encouraging people to see how much their house had increased in value. Someone I used to sit next to at work also had an odd boast that his home made more money in a year than he did. This is the kind of thinking that has been allowed to fester for many years and will take a long time to fix. With the above measures, there should be a reduction in the rate of increase in property prices and therefore lower returns for those who have used property as a means of investment. But none of this will happen if the political consensus carries on in the same way it has done for the last few decades. There needs to be a change, but it needs to a sensible change. As we’ve seen particularly in the last year, change for the sake of change can turn up some distinctly unsavoury characters and ideas that should never become part of public policy.

Side issue: the radio experience

Having gone through the experience, there are any number of things I would have liked to have done slightly differently. I had lots of thoughts (which I’ve tried to enunciate above) but I didn’t arrive in the studio with a set of points to make. I was given some idea of the questions, but John Humphrys could ask me what he liked, having been given a briefing paper on the think tank report and on what I had told the show’s producers the evening before. So I have something of a new-found respect for the politicians who go on live interviews. They come on with a set agenda, something they have come prepared to say. While we were off-air, just before the interview, John asked me “So you’re going to say you’re broke, are you?” which I wasn’t. When the microphone was on, I could think of 3 different things I could have said, each worded in another 3 different ways, and so in trying to pluck the right words out of the air, I hesitated, mumbled and then stumbled over what I actually said. That’s why I’m ever so grateful for the existence of a backspace key on the keyboard. I was also conscious of the rumour that if Radio 4 goes silent for 6 seconds, it’s a sign that something’s gone very wrong, so every moment of silence on my part (while my pre-7am coffee-less brain was trying to work) added to the pressure I felt in the interview. I do admit to dodging one question, as it was about another member of family (who’d been invited on, but declined) where I wasn’t prepared to speak on their behalf.

Final thought

As frustrating as it is to be living a relatively miserly existence, certainly compared to friends and colleagues, I am by no means poor. There are many more who have been hurt far worse by the failures of Conservative economics. One need only look at the proliferation in the need for food banks in the last 6 years to see the damage that Cameron & Osborne wreaked upon the citizens of this country.  Whether we are rich or poor, as measured by non-liquid assets, cash or income, there is far more to life than materialism.

End Austerity Now: The Witness of One Participant

Gathering by the Bank of England

Gathering by the Bank of England

On Saturday the 20th of June, I took part in a protest march in London. It was the first march I had been on since the days of the Blair government introduced top-up fees and launched an illegal war against Iraq. Organised by the People’s Assembly, it was an anti-austerity protest directed against the planned cuts to public services.

Here is my account of the day.

The itinerary on the People’s Assembly website stated that we were to gather together outside the Bank of England at midday, there would be some speeches and then we would set off at 1pm through the City of London, down Fleet Street and Strand to Trafalgar Square, then turning left onto Whitehall, past Downing Street and finishing in Parliament Square.

I got off the train at London Bridge shortly before 12, where the first signs of a protest were visible. One or two banners were visible, but they were furled up, their messages hidden for now. Walking out of the station, there were pockets of people gathering together. In the shadow The Shard was a group of about a dozen people, with a very prominent NHA (for the National Health Action party) in its familiar shade of blue.

Going across London Bridge, there were far fewer people than expected. I recall my days of commuting this route and the east side of the bridge would be packed with medium paced, middle aged, middle class white men in suits. On Saturday, we had more guitarists and the first of the placards were visible.

Getting across to the north end of the bridge the first of the road blocks was visible, so I was able to wander down the middle of the road, which was quite liberating. Though I soon discovered it was only closed to motorised traffic as a cyclist ting-ed their bell before passing by in close proximity.

Getting to the bank of England, the crowd was huge. The junction with Mansion House is a very large one, and there were people as far as you could see (which, admittedly, as a little limited due to the banners having been unfurled). A few opportune salesmen were offering whistles for a pound. The stewards in their fluorescent tabards were encouraging people to move towards the front which I duly did until I could go no further.

I had been hoping to join with the Quakers for some of the march, but at no point did I see any sign of them. In the throng at the start, I found myself standing alongside the anarcho-Marxists and the members of the Socialist Worker’s Party (SWP). They’re not groups that I would readily identify with, but it was testament to the unity in diversity that we could stand shoulder to shoulder. From where I was stood (just between Mansion House and Poultry), I could see the big balloon that was suspended from the Fire Brigade Union’s (FBU) and there were a few Green Party signs dotted about.

The organisers had made sure there was something of a carnival atmosphere to it, with plenty of music. Every now and then, for no apparent reason, there were whooping cheers and mass whistle-blowing. It was a difficult balance to strike, as this was a protest, not a celebration. So I didn’t cheer, nor did I dance. In fact, I was quiet pretty much the whole time, apart from the occasional conversation with those around me. I was most vocal on Twitter, where I was providing updates, primarily for those who wanted to be there but couldn’t. There was some very heartwarming feedback, saying that people felt I was marching for them.

Looking round, there were some who (purely due to my own prejudices) thought might have been there to cause trouble. With any mass protest consisting of tens of thousands of people, there are often a handful who do something daft and who draw the attention of the right wing press. In this case, it was those wearing black bandana-style covers over their mouths and noses. On closer inspection, each had a logo and some words on them, and it was clear that this was to protest against state surveillance. Chatting to one bloke near me who had one on, he said that it was a reaction against the kind of surveillance that was revealed by Edward Snowden and also against the proposed snooper’s charter, which Theresa May has recommended, after its previous incarnation was scrapped during the coalition. To get the negative out of the way in one paragraph, I wasn’t in agreement with some of the tones of the banners. There was one that read ‘Fuck the fucking fuckers’ and another that called for unilateral free markets. I’m more in favour of protest by education (making sure that those to whom you are protesting understand what your complaint is, why you are making it and what you are proposing they do about it) rather than insult and I am also not a free market fundamentalist, preferring good corporate governance and a strong regulatory system in place to ensure that the business sector acts for the good of all society, not just the narrow segment of investors and analysts.

To that end, I was much more in favour of a group entitled ‘Economists against austerity’ and I’ll take a look at that group later this week.

In contrast to what had been promised, there were no speeches at the start of the march. We eventually started to move at around quarter past one, as a few people had started to complain about the prolonged standing and wanted to get their legs moving. As we got going, the throng thinned out a little, so it was less like rush hour on the Underground and a bit more civilised. The main upside was that I no longer got the whiff of cigarette smoke from nearby chimneys.

There was a sort of MC who was reading out some of the placards. A lot were from the People’s Coalition and a variety of trade unions. Some construction workers looked down on us, as did a couple of helicopters. The route was dotted with police, though their presence was unnecessary. Some looked on with seemingly stern disapproval written across their faces, others were much friendlier, chatting to the crowds and helping to direct people to the nearest public toilets.

Once we got beyond St Paul’s cathedral (we didn’t go immediately next to it, but another road down), the chanting began to subside and people marched on in relative quiet. Occasionally, there’d be pockets of noise, but being the City, we were going through an area that is generally deserted on a Saturday anyway. Off to the side of the main crowd, the route was dotted with some side shows. There was a brass band, some Hari Krishnas, a rat pack style singer doing a piece of satire on Iain Duncan Smith and someone dressed as a crab. In many ways, it reminded me of the Great North Run in terms of atmosphere.

One place in London I’d never been to before was the Royal Courts of Justice. It’s a really spectacular building, and I couldn’t help but think that justice was a theme that underpinned so many of the strands of protest.

As I went along, I marched alongside a number of different groups. There was the group Disabled People Against Cuts. One of their big concerns is the scrapping of the Independent Living Fund, which currently helps to pay for the costs that allows disabled people to live with the independence and dignity that many of us take for granted. The Conservatives wish to take this dignity away from disabled people.

Another group was Sisters Uncut. They are primarily concerned with the effects that cuts have on women, arguing that they have been unfairly targeted, as well as that not enough is being done to prevent violence against women or to adequately prosecute those who perpetrate such violence.

Coming down Whitehall, past Downing Street, the volume began to pick up again as people made various chants and songs, mainly directed against the incumbent government, some against particular members (David Cameron, Iain Duncan Smith, George Osborne, Theresa May and Michael Gove being those mentioned most frequently) and a few that were bordering on the abusive. The police by Downing Street were the most densely packed and the most stony faced. Previous to this, it was their guarding of Coutts bank that was the most superfluous (7 officers in uniform). It struck me as more symbolic, verging on the futile, to aim slogans at Downing Street directly, since it’s likely the weekday residents would be spending their Saturday at their 2nd homes in the country.

Arriving in Parliament Square, the place was pretty packed. I found a tiny spare patch of grass and sat down at about quarter to three. It wasn’t long before the speeches started. Most of the speakers I hadn’t heard of. The only one I was familiar with was Len McCluskey, the democratically elected leader of the Unite union. As I have the foresight to take a notebook with me, I couldn’t catch all the names or the details of the speeches. So I can only convey the general sense that I picked up. They were all passionately given, with a mixture of well-researched evidence and rhetoric. All were strongly pro-trade unions. It seemed to be fairly standard fare. The question was, who was listening? Because unless the anti-austerity message gets beyond those of us on the left and has the positive effect of educating and persuading those in government and those who voted for this government, then it will all be for naught.

As I had made sure I was well hydrated along the march, it became necessary to make a visit to a nearby pub to use their facilities. As I left the square, I checked with a policeman that the figure of 250,000 was correct, as had been claimed by Len McCluskey. To be precise, he said that that was the police estimate, though later reporting in the media said that the police did not make an estimate. The officer I spoke to confirmed verbally to me that “that was the estimate we were working with.” However, there were signs of an increased police presence around, with them massing in large groups outside Westminster Abbey. To me, it looked like they were getting ready to instigate a kettle. So I made the decision to not come back for the rest of the speeches (missing out on Jeremy Corbyn, whose praises had been sung throughout the march, in contrast to Liz Kendall who was roundly booed every time her name was mentioned). I headed down to Victoria to get a bus home.

There was a small group of vocal protesters (about 15-20) outside Westminster City Hall. They were being very closely watched by the police, in a ratio of 1 police officer to every 2 protesters. On hand also were the legal observers, seemingly taking the numbers from the epaulettes of the officers nearby and talking with them. Earlier, the same observers had been handing out cards advising people what to do if they were arrested. I simply stated that I would give no cause for possible arrest. As it turns out, no one else did at all as the whole event went without any trouble whatsoever. Any suspicions of possible mischief-makers were unfounded.

Here ends my observation of the day.

Reflections

It was a fantastic day to be out and extremely heartening to be part of such a diverse group of people, united in standing up for what is right. Yet the point of it was not to make us feel good. This was to ensure that the message was delivered: Austerity isn’t the best way; there are fairer ways to do politics.

There are many sub-stories that make up this narrative, many of which were represented on Saturday. Yet effective protest has to not only be large and loud, it has to be clear and clever. If the only ones who listen to the message and understand are those on the political left who would never dream of supporting Conservative neoliberalist ideology, then we are speaking to an echo chamber. We need to demonstrate the human cost of austerity to those who tacitly or openly support it, in order to bring about a change of mind.

Key to this is ensuring that the press are not allowed to twist the message. If you read the reports of the march in the Mail or the Telegraph, then you will end up with a highly distorted understanding of what went on. Many doubted the BBC would report on the march, though to their credit they did. Yet the only person they interviewed was the one chap from the right wing pressure group The Tax Payers’ Alliance, which is hardly representative of the views of the thousands who marched. This is partly why I’ve written my eyewitness account, and I hope that others will do too.

Earlier I stated that it one needs to state 3 things: what your complaint is, why you are making it and what you are proposing those in power do about it. It seems only right then to finish with a brief summary of these 3 points.

My complaint

The last 5 years of austerity and the current plans for further cuts to public services is not the result of sound, well-thought out economics. At the end of the last Labour government, after the 2008 crash, the economy was recovering. We had growth in GDP and falling unemployment. So Conservative claims that their policies were the sole factor in the recovery are untrue; things were getting better.

Some cuts were necessary, that is clear. We needed to try to reduce the debt and the deficit, very few deny that. But the manner in which the Conservative-led coalition did this was not fair. The burden of the cuts fell hardest on disabled, the unemployed and the poor. There was some good here (the raising of the personal allowance, as championed by the Liberal Democrats) but the bad far outweighed the good. This is why we have a country where around a 1/3rd of children live in poverty, where over a million meals have had to be provided by foodbanks.

This is not right. This must change.

Why make it?

I am not one of those who has been badly affected by the cuts. But that is not sufficient reason to refrain from protesting. I am compelled by a sense of decency to stand up for my fellow human beings. Many couldn’t make the protest because they were housebound. Right now, I am healthy and employed in the private sector on a salary that is more than the national average. But there is no security in this position. If I become unemployed again, or homeless, or ill or disabled, who will stand up for me?

My proposal

I have laid out my ideas at some length in A Voter’s Manifesto. In short, we first need to ensure that government supports those who most need it. This includes an NHS that provides universal healthcare, free at the point of need. It means a system of social security that helps people to have a decent standard of living when they are unable to earn enough. It is also ensuring that employers provide a living wage so that there is an end to the need for in-work benefits.

To fund this, there must be a fair tax system, where those who earn more than they need to live on pay their fair share. Where companies providing valuable goods and services at a fair price are managed and regulated well, allowing them to do business and to earn sufficient, but not excessive, profits from which they may pay their fair share of tax.

We may also need to cut some aspects of spending, but not those that the current government proposes. We can phase out the renewal of our weapons of mass destruction and scale back expenditure on those industries and government departments whose function is warfare and death. Yet this need to be done in a careful manner, so as to not increase unemployment.

In short, I want a fairer, more just society where no one is left behind.

Book Review: Capital (Das Kapital) by Karl Marx

Having read some of the great communist works early last year (The Communist Manifesto, The Condition of the Working Class in England in 1844, Socialism: Utopian and Scientific) here I finally come to the daddy of them all. Or did I?

First up, though, a confession. The version I read, in the Oxford World Classics range, is an abridgement. Marx originally intended for his magnum opus to be 5 volumes, but he only finished volume 1. Volumes 2 and 3 were substantially complete at the time of his death, finished off and published by Friedrich Engels. The volume being reviewed contains most of volume 1, a tiny bit of volume 2 and some slightly longer extracts from volume 3. I don’t normally read abridged versions, but it was not my intention to become a disciple of Marx, but rather to understand his thoughts so that I could have a more informed view of what Marx thought. After all, was he not rumoured to have said, upon hearing a particular view described as Marxist, “if that is Marxism, then I am not a Marxist”?

Marx begins with a detailed look at the nature of commodities. What are they are how they are valued. He distinguishes between different kinds of values. It’s important to keep these in mind throughout, as use-value is a different beast to exchange-value, yet we all too easily think of “value” as though it were one thing represented on a price tag. The example Marx starts with is that of a coat and of linen. A coat may be exchanged for 20 yards of linen. Yet the use-value of a coat is not the same as the use-value of 20 yards of linen, for they are intrinsically different and serve different purposes. So use-values cannot be used for comparison. Instead, we need to then consider exchange-values. So a coat may be exchanged for 20 yards of linen or for a quantity of coal or for any other commodity. But then all we have are a set of relative exchange-values expressed, essentially, in terms of barter. One may choose any one commodity to be the standard by which all others are measured. In the economics of the time Marx lived and wrote, this was gold. And we still refer to the gold standard today. Yet it might be interesting to consider what Marx may have made of something like Bitcoin.

And so we get to the concept of money. We see that money is an intangible thing but which is commonly represented by gold, and which is the means of exchange. There is a slight flaw in Marx’s analysis here as he makes a statement that the value of money does not change with time. Yet as almost anyone trained in economics or accounting will be able to tell you, a sum of money does diminish in value over time. Unless you have perfectly steady state economics (see here for more detail) then the time value of money has to be taken into account.

From here we get to the notion of capital. It is something that is tricky to summarise, as it is best dealt with by example. The kind that Marx uses is by contrasting two different types of transactions. One of these is what he sees as a precapitalist kind of transaction whereby an artisan has a commodity, sells it for money and then uses that money to buy other commodities. In contrast, the capitalist transaction process begins with money which is used to buy a commodity (C) and then gets sold on for a higher value of money (M). In chain form, the contrast is between C-M-C’ and M-C-M’. Where C’ is a different commodity from C and M’ is a different sum of money from M. Yet M and M’ are both capital. M is the initial capital and M’ is the final capital. Only then, in Marx’s analysis M’ then becomes the start of the next chain of transactions.

As an aside, it was interesting to think through more recent economic practices, particularly that of short selling, which gained notoriety during and in the aftermath of the 2008 global economic crash. That is very similar to C-M-C’ only in this case C=C’ and the commodity is sold before it is purchased.

For those of you who have some basic accountancy training, the concept is readily identifiable as the process of what happens when you roll forward the accounts of a sole trader where their initial sum is generally referred to as capital anyway. So even though Marx is rightly considered the father of communism, this is not an inherently communistic work. The fact that modern capitalists still use his methodology is indicative that in this respect, at least, his analysis was spot on.

One of the odd features of the book is that at various junctures, Marx tries to posit that there are fundamental contradictions within the capitalist system. But I had to ask myself “what contradictions?” Perhaps it is a consequence of my more modern point of view, but it seemed that the contradictions were only apparent when phrased in the particular way that Marx puts them. In other words, it was flawed questioning and the assumptions that went into those questions that skewed Marx’s thinking and creating the illusion of a contradiction when in fact there was none. One could think of Zeno’s paradoxes as a comparison.

One of the key notions that Marx introduces is that of “surplus value”. He derives this by looking at the value that a worker imparts to his work. As soon as the value imparted is equal to the value required for the worker to live off, then anything in addition is considered surplus. In other words, if (to use today’s prices by way of illustration) a worker is paid £75 per day, then Marx argues that (s)he need only work for as long as it takes him/her to produce £75 worth of goods. If, though he makes this up in 6 hours and the working day is 12 hours, then the employer, the capitalist, gets £150 of value out of the worker, but only spends £75. It is the difference between these two that Marx defines as surplus value.

You may wonder, as I did, whether this was not simply profit. It seems a slightly roundabout way of looking at it. Indeed, it is not until much later on that the admission is finally made that surplus value is the same as profit. Though the example I used above was done so deliberately, as Marx always assumes that rate of surplus of surplus profit is 100%. This assumption is never justified, though his analysis would seem to still work if a different rate were used. It is just unfortunate that his choice of 100% means that some of his numbers are easily confused.

This leads Marx to look at the exploitation of the labourer. His chapter on working conditions makes for sobering reading, as he looks at the extent to which the capitalist system sought to extract out of the worker every last ounce of work in order to generate more and more surplus value (profit). There is even an argument made that work diminishes the lifespan of the worker. Marx is not at this point talking about unhealthy working conditions, but that the mere act of work reduces one’s life expectancy. It’s an argument I found unconvincing as there are so many other factors to take in to account that a controlled experiment or study to determine shortened life seems unfeasible. So at best it is supposition.

Having looked at how capital gives rise to more capital, the question Marx then asks is “[where did it start from?]” In answering this Marx reverts back to his historical paradigm as espoused in the introduction to The Communist Manifesto. He argues that capital only arose through violence and theft. While I subscribe to the idea that there is no such thing as a neutral view of history, Marx is clearly far from it here. He seems to cherry pick his evidence and ignores a wide variety of other factors. It’s not a wholly false view, but it does come across as over-polarised and quite susceptible to critical enquiry.

The rest of the book looks in some detail at various aspects of 19th century industry through the perspective of the above analysis. The focus is inherently industrial which was certainly right for the time that Marx was writing in, though as we are now in a post-industrial age it seems that much of what he observed has now been rendered redundant. Capitalism has moved on and changed in many aspects.

It is for this reason that I would consider much of Das Kapital to be out of date. It served its purpose in a different age, but one has to pick through it to find elements that are applicable to today’s world. I would certainly not advocate throwing the whole lot out of the window, as some might be tempted to do, particularly if they continue under the impression that Das Kapital is a programme for a communist economy. Because one of the failings (possibly Marx may have intended this for later volumes) is that while the book is full of critique, he proposes very little positive change. He says “[this is wrong]” but doesn’t put forward an alternative. Also the very high focus on the industrial age of manufacture has little bearing on a predominantly service-based economy. He does attempt to address services, but is all too brief and dismissive.

So where do we go from here? First of all, at the start of the volume Marx states that he is building upon the work of G.W.F. Hegel and his development of dialectic materialism. I confess that I have neither read any Hegel nor read much about him. So perhaps it would be wise to learn a bit more in that regard before reassessing Marx. Also, it seems that the modern world is need of a critique every bit as sharp as Marx’s, but which takes into account the changes that have occurred in the last century and a half or so. For that, I think our best bet is Thomas Picketty. So it is my intention to review his Capital in the Twenty First Century at some point. Before that, though, it is only fair to hear a view from the other end of politico-economic spectrum.

The time value of money

One of the odd things about this blog is that though I work in finance, I rarely write about it. Partly this is to keep my blogging life and my work life separate, but perhaps that separation is greater than it need be. Shortly, I plan on publishing my review of Karl Marx’s Capital. In writing that review, it became necessary to critique Marx’s dismissal of the notion of the time value of money. However, I recognise that not all of you are necessarily chartered accountants or have A-levels in economics. So you may not have heard the term before. If you have, and are aware of it, you may happily go about and read something else unless you want to pick my analysis apart. For those for whom the term does not mean something precise, then I hope this will sharpen up the concept in your mind, though I apologise if this comes across as patronising.

The concept of the time value of money should be one that you find fairly instinctive. I’ll demonstrate this with a few examples. Firstly, I offer to you a sum of money, let’s say £100. You can have that today, no strings attached. Or I could ask you to wait a week and then I would give you £110. Which is more valuable to you?

You have a choice between a smaller value or a greater value in the future. Can you wait for a week or is your need for the cash flow so great that you would settle for a smaller sum, effectively forfeiting £10?

Another trade-off would be if I offer you £100 now or £101 in ten years’ time. Which is more valuable to you?

I would hope that in the first case, waiting is the better option for you and that in the second case it is better to take the guaranteed sum now. Yet all this hinges on a level of subjectivity. It can vary from person to person or from business to business. The trick is to try to find an equivalent rate whereby the current value is equal to some future value. For example, if our choice was between £100 now and £105 in a year’s time, then would you “um” and “ah”, being unable to work out which is more valuable to you. If you put the money in a bank would you get a net rate of interest of 5%? If you could get more, then it’d more rational to put the £100 in the bank and get more interest, so at the end of it you have more than the £105 you might have had. If the net interest rate is lower, is there another way by which you could get a greater return in one year? If not, then your best bet is the £105 in a year’s time.

So the time value of money is expressed as an interest rate, being the rate that you would consider reasonable for a rate of return if given the opportunity to have a different sum at a future point in time.

One of the consequences of this is that higher interest rates are associated with higher levels of risk. You may have heard the phrase, “high risk, high return”, particularly if you’ve looked at choices for pension investments or if you think back to the global financial crisis of 2008, particularly with regards to the critique that the high risk aspect was ignored by the bankers whose actions played a significant part in precipitating the financial meltdown.

In my view, a part of the reason for this was that the fundamental subjectivity of the notion of the time value of money was forgotten by the systematic use of the Black-Scholes formula for options trading. That attempted to turn finance into a science which is a category error. Risk cannot be accurately quantified and it is a mistake to try to do so. Measures such as interest rates are indicative, so one looking at bonds can tell that a rate of 7% is riskier than one offering 2%. I know this personally quite well as I had considered changing my ISA some years ago and found the best rates of interest available to UK investors were to be found in Iceland. I even got so far as to the have an application form on my living room table. But I was suspicious about the high interest rates and, coupled with the relative devaluing of the Icelandic Krona against the Pound, I hesitated. Two months later those Icelandic banks collapsed. They were offering a high return because they were high risk investments.

The other aspect to think about is inflation. This is another reason why I stated at the top that the time value of money should be fairly instinctive, even if the term is new to some. Inflation is the creeping rise of prices of various goods, services and assets. If you have a fixed sum of money then it’s value decreases over time. In my childhood, £1 could buy you four packets of sweets with change left over. Years later, £1 might leave the shopkeeper asking for the rest of the money if you try to buy a single packet. So looking at cash as the arbiter of value is inherently flawed. What we can do is ask about what is known as present value.

What this does is look at future (generally fixed) payments and ask how much is the sum of those payments worth at today’s values. For example, the rent on my one bed, mouse-infested and rather cold flat is £11,700 per year. Let’s say that that rent doesn’t change for 10 years. Is the present value £117,000? No, because in 10 years’ time £11,700 will not be worth the same as £11,700 is today. I need to employ my subjective interest rate, my measure of risk, to do a calculation. Yet even that calculation will be assuming a constant rate of risk, but who knows what the future may bring?

If anything, that’s the point. The world of finance and of economics in general contain a great many unknowns. Those who would profess to declare with confidence exactly what will happen in the future are generally false prophets. Look out for this in the economic arguments in the general election. There, politicians from party Y will declare unanimously that if party X is elected then the economy is doomed whilst at the same time asserting with equally misplaced confidence that if they are placed in stewardship of the economy (though I doubt they have the humility to use the term stewardship) then all will be well. This will be on top of party X and party Y making promises on the other’s behalf.

I wouldn’t trust either who take such an approach to finance, but I would also warn against placing trust in finance in the first place. Believe me, I’m an accountant!

(Guest Post) The housing bubble: a homeowner’s perspective

In response to my piece last week on the housing bubble from a would-be first time buyer’s perspective, my brother-in-law, Radionotme, has written from a homeowner’s perspective. 

Used under creative commons license. Picture by walknboston.

Used under creative commons license. Picture by walknboston.

As someone on the other side of the divide, as Simon puts it, I have to say I broadly agree with what he says. As with most things though, it’s not quite that simple.
To own your own home is an aspiration for most of us, although oddly in some cultures this isn’t the case at all. French, German and Japanese home ownership rates are less than 50% for example.
It is an aspiration I share, and am currently working towards.
Some would say that since I live in a house that I have a mortgage on, that I own that home. I’ll even refer to myself as a homeowner most of the time, but of course the truth is that I do not own the home. The bank, and in turn the institutions that the bank has borrowed from, own the home. If I miss a payment, then my home is at risk of being taken away from me. If I miss several, then this is virtually guaranteed. As such, I do not think I can truthfully say that I own my own home at this stage.
What I can say, is that I am fortunate enough to be on the property ladder. I agree with Simon, that renting is inherently more expensive that buying, but for different reasons. Renting is usually cheaper to start with than buying, but whereas rental costs will increase over time (dependent on market conditions), the price you have paid for a house is final, and the only changes to the monthly payments relate to the interest rate, which can go either up or down (though you may be forgiven for not realising that up is a potential direction for interest rates given the last few years!).
I am currently able to ‘enjoy’ the low interest rates in terms of how it affects my monthly payments, although I remain opposed to them when considering how they affect the wider economy. Even so, my mortgage payments take up between 30 and 40% of my take home pay.
When I first bought my home, and locked into a 6% interest rate for 5 years (oh, what a mistake with the benefit of hindsight), my mortgage payments were over half of my take home pay.
I expected however, and have so far fortunately been proven correct, that my take home pay would increase over time, and so that percentage of my salary that the mortgage payments took up, would decrease.
This plays into Simon’s figures, once you have the relevant context. Mortgages on average take up a smaller proportion of salaries, however that is in part due to people towards the end of their mortgage term won’t be paying much, when compared to those just starting out. Those people are often paying significantly more than their renting peers.
I’d also disagree that 5-10 years ago, prices were ‘cheap’. They may look that now, however even in 2003 there were warnings of an impending house price crash, and reports that houses were out of pace with wage growth. Although I’m on the property ladder, I jumped on years after some of my friends, and years before others. The ones who jumped on earlier were able to make more from the house price rises than I could, even though I bought 10 years ago, and they bought 13-14 years ago.
Finally, I take issue with the rather flippant comment that those on the property ladder don’t care about those not on it. We do, both for selfish reasons, and unselfish. I care deeply that my younger siblings, have and will have considerable difficulty getting on the ladder. I worry for my son, and whether he will be able to own the roof above his head when he grows up. I worry about the wider economy, and how the unending house price rises give rise to buy to let landlords, who have no interest but to make as much money as possible.
I agree that something needs to be done, but I have little faith that any of the main government parties are up to the challenge, or even that it is a problem that government alone can tackle. Whatever the solution though, it has to start with more ‘normal’ interest rates, that can encourage people to save, as well as to borrow.

The housing bubble: A would-be first time buyer’s perspective

Used under creative commons license. Photo by meddygarnet

Used under creative commons license. Photo by meddygarnet

Anyone who reads the economics section of the press can hardly have failed to notice the concern over house prices at the moment. While it can be easy to look at numbers and forget the humans behind them. I am just one of those humans and here I present a wholly individual anecdote, with some reflections on the wider economic scene. My circumstances won’t match everyone’s, but there may be echoes that are recognisable. And if the current housing market does not currently affect you adversely, then perhaps this may help you see things from another’s perspective. If anyone who is on the other side of the divide would like to respond, I would be very willing to host it as a guest post on this blog and give it equal publicity.

From the time I started my current career, shortly before I turned 23, I have aimed to save money. In so doing, I freely confess to having a selfish streak within me. I try to be generous where I can, so I save less than I can possibly could. The purpose of the saving has always been clear: it is for a deposit to buy my own home. Having abandoned any youthful hope of ever marrying, I know that I shall never have to spend money on a ring or two, a wedding or children of my own. Of course, that then precludes the possibility of marrying someone more wealthy who could contribute a lump sum towards the deposit. Though, given the average cost of weddings these days, if I were to contribute towards that I wouldn’t have a penny left towards a home.

So while I save, I wait. I acknowledge and am grateful that I am paid more than average salary for this country and that by virtue of having been born into the family and country that I was, I enjoy far more privilege than the vast majority of people in the world. That is just to put things in a little perspective.

If one cannot buy then the only viable alternative is to rent. Yet renting is inherently more expensive than buying. At the end of a rental period I own nothing more than at the start. With property ownership via a mortgage, when make a payment against the mortgage you have the expense of the interest but you also pay back some of the debt. When all the debt is paid, you owe nothing and you own a home outright. It takes decades to do, but incrementally, month by month, you will get there.

As someone who is forced to rent, there are several frustrations. There is what one might refer to as a ‘gap of years’. It’s not even a generational gap. Those who are 5 or 10 years older than me have owned their own homes since they were in their mid-20s, having had the opportunity to put a deposit on their homes when the prices were cheap and the deposit requirements much lower than they are now. As a consequence, it means that those who have mortgages, for an equivalent property, pay far less in mortgage repayments monthly than I do in rent.

As an indicative, rent alone constitutes about 35% of my monthly income after tax. This makes me fairly average for a renter, as a recent survey I read showed that the mode bracket for renters was 30-40% of their net income, while those with mortgages paid 20-30%.

The upshot of this is that those who need to save the most (in order to pay for the deposit) have inherently less disposable income than those who don’t need to save as much. But when this is coupled with the high rate of inflation on house prices, a wedge gets driven between those with property and those without. One of my personal irritations is the smugness I witness from some of those who were fortunate to be able to buy when they did. One person I know likes to boast that the increase in the value of his property on a month by month basis is greater than his net income. The same person then periodically ‘encourages’ me to buy, even though I have told him repeatedly that I cannot afford to do so. In his imagination, I must be able to save the tens of thousands of pounds needed in the space of a couple of months. I have tried making the point to him that now would be a good time to invest in buying a yacht and that it doesn’t matter whether or not he can afford it, he should just do it. Unfortunately, my sarcasm is rather wasted on him as he just doesn’t see the absurdity of his own (lack of) thinking.

To try to put some numbers on the matter, after some investigation, given my income, expenses and current amount of savings, I could probably afford a property up to the value of £200k. Unfortunately, the average price of a 1 bedroom flat where I live is around £330k. The answer is obvious, though, isn’t it? Move to somewhere less expensive!

If only it were that simple. Part of the reason I moved into London last year was because the overall fixed cost of living (rent + council tax + cost of commuting) was cheaper than when I lived in Sussex. Even though the rent is more expensive in the capital, the cost of train fares comes down by more than the rent goes up. So if I were to move back out of London again, then my cost of commuting goes up and therefore the amount I can afford to borrow goes down.

It could be argued that the M25 is a kind of vicious circle. Once you’re inside it, it becomes hard to leave again. A factor in this is the lack of reliability in the private train companies (Southern have been particularly bad this year). The fact that I now have 4 different routes home through London rather than the monopoly that Southern have on the Arun Valley line means that if one or two fail, I have backups I can take.

Another choice would be to move jobs entirely. I’m sure £200k would get me a decent home in my old stomping ground of County Durham. Yet an equivalent job would almost certainly not pay the same as I get in London and so again, the amount I could reasonably borrow would decrease. Then there would also be the problem of leaving a job where I have some level of job security (though is there really such a thing anymore?) and trying to secure a new one in a location where I don’t currently live.

That’s the essence of the problem. Those who got on the “housing ladder” don’t care that the bottom few rungs have come off; for them, it is up, up and away. I’m not arguing that this is inherently unfair, but it is indicative of a problem with our current economics. The low interest rates are partly what is driving this wedge between the propertied and those who aren’t. It means that those with mortgages pay little interest and those who are saving cannot keep their savings value up to speed with inflation. Ideally, the saving rate should be pegged to house price inflation, though I’m not sure any banks would be wanting to offer an 11.8% savings rate.

Another factor is the fashion for buy-to-let. Some buy-to-lets are necessary for the rental market to continue in existence, but I am yet to be convinced that the current number is right. In effect what a buy-to-let does is take a property off the market that could otherwise be bought by someone who needs to live there. Yet the person buying a buy-to-let property isn’t the one who lives there. So they are merely reducing the supply of housing which is exacerbating the problem of increasing prices.

It’s a big problem, which needs a coherent, holistic approach. Tinkering here and there is not, in my view, the best approach. So while we may come up with ideas to tax more heavily the buy-to-let landlords as a disincentive or plan the building of more homes, we need to look at the picture as a whole. Looking to the future, what we may end up with if the market direction continues as it is, is we end up with a generation who will not be able to save enough to ever afford a deposit and must wait until they bury their parents before a home of their own becomes a realistic prospect.

That’s my perspective. What’s yours?

The squeezed middle?

Used under creative commons license. Image by 'Images of Money'

Used under creative commons license. Image by ‘Images of Money’

Wednesday sees George Osborne deliver his latest budget speech. Some of it he announced on Andrew Marr’s Sunday morning show, other parts may well have been leaked by the time you get round to reading this (I’m writing this on Monday night).

In his appearance on the Marr show, aside from being fed his lines by the host who had earlier in the show demonstrated a clear and distinct partiality with regards to the Scottish referendum on independence from the rest of the UK, and aside from the fact that there was no serious or penetrating scrutiny given applied to the Conservative party policy, making the Marr Show little more than an extended party political broadcast for the Conservative party; aside from all that, I was struck by something Osborne said as part of his prepared speech.

Whilst speaking of personal taxation, Osborne spoke of the increase in the personal allowance that has taken place since the coalition came into power in 2010.

Before coming to that point though, I would like to note two things: One, the rapid increase of the personal allowance was a Liberal Democrat policy, not a Conservative one. It was a feature of the coalition agreement that the Lib Dems insisted upon. It was one of the few areas where the Lib Dems led and the Conservatives followed.

Secondly, I would add that it is probably the best thing the coalition government have done. I am in favour of lifting the lowest paid out of personal taxation. Ideally, the personal allowance should be at a level whereby no one is taxed whose net pay would not be enough to reasonably live off. The measuring of how much that is a complex matter and one that I shall not address in this blog post.

But the point that struck me was that Osborne was proud that it was reducing the amount of tax paid by the middle-to-high earners. Without getting too personal here, I will say that in my current job, on my current salary, a small part of my tax is paid at the 40% rate. This is an important point. The media will often talk about those who pay the 40p rate (i.e. 40p in the pound, but I prefer percentages for clarity) but they fail to mention that only the uppermost part of someone’s salary is paid at that rate. There is still a significant chunk that is paid at 20%.

As someone who is counted as a middle-to-high earner, am I pleased that the amount of tax I pay is being reduced? No.

Nomatter what your political persuasion, one should face up to the economic fact that we have both a large debt and a large deficit, both of which need reducing. The two essential ways of doing this are to increase revenues or to cut costs. The current government’s plan has, for the last few years, been to cut both revenues and costs, but to cut costs at a much faster rate, through their austerity plan.

Many more voices than just mine will testify to the great damage that the austerity programme has done, with people losing their livelihoods and even their lives as a result of it. In other countries, such as Greece, it has been taken to a more extreme level but has merely resulted in mass unemployment and has failed to live up to its promises.

So while some cuts are necessary (and here I would rather cut spending on Trident and other weapons of mass destruction rather than removing the safety net of social security which is relied upon by many in their hour of need) the more obvious and sensible measure is to increase revenue. Anyone who has studied economics at any level will be familiar with the idea of elasticity of demand. That is, the more you charge for product, the less demand will be. But how much demand falls off in proportion to how prices increase is measured by its ‘elasticity’. Luxury goods have a high elasticity, whereas necessities have low elasticity. Take train tickets for example. Many use trains to get to work. If the price gets bumped up by 5% we don’t get the choice to not go to work. We are forced to swallow it, increasing the revenues of the train companies.

When it comes to tax, part of modern right-wing ideology is that tax is highly elastic. They love to tell us that increasing taxes will deter rich people from coming to country (hey, that’s one way to curb immigration!) or force people to leave. In France, when they raised taxes, a few high profile people did choose to leave the country. But did it cause a reduction in revenue that crippled the country as the austerity measures did to Greece? No.

The truth is taxation is inelastic. This gives rise to the possibility that, as train companies have exploited commuters, governments could exploit all its citizens by unfair taxation. But what is fair? Surely it is in answering this question that differences between left and right become apparent, especially when we consider what our priorities are. Right-wingers such as George Osborne see fairness in prioritising that people keep as much of their gross pay packet as possible. Left-wingers such as me prioritise ensuring the dignity and the livelihoods of the poorest and most vulnerable in society.

For me, as stated once, but to reiterate the point, tax becomes unfair when the net income after tax is not enough to live on. If you have more than enough to live on, then you have enough to be taxed upon. Note that even if there was a flat rate of 40% (which is much higher than the actual effective rate of tax paid by those whose pay comes into the 40% band) then any individual would still keep more than half of their pay packet.

We also need to consider the seasonality of life. For some of my life I was in state education and not earning a salary, not paying taxes. At other times I have been unemployed and had to claim job seekers’ allowance in order to pay for my rent and food. At times like these, I was net taker from the state. At present, I am a net contributor. If I were to take a simplistic, conservative approach, and demand that I only pay tax for the services I use, then I would pay much less tax than I do now. But what about those who are currently in a season of being net takers? The young, the elderly, the unemployed, the disabled? It is to support them that we need a section of the population to pay more tax than the cost of the services the latter use. It is a recognition of this that makes me despise the term ‘the squeezed middle’. I am not squeezed enough.

To turn a phrase around a little bit, I would say: First, to each according to their need. To fund that, from each according to their ability. This is where I think our priorities should lie. The idea of tax for tax’s sake is as wrong as it is to try to separate the payment of taxes from the provision of centrally provided services.

So please George, let’s get priorities straight. For those who are out of the tax system, let’s ensure that there is a living wage paid to those in work, and a firm support net for those who aren’t. For those who are paid in excess of they need to live on, please tax us more. We can afford it.