Tinxx

Its the Economy - again...

One could almost be forgiven in thinking that the BLS's X11 seasonal adjustment programe was run by a democrat. Just as the foreign affairs issue was starting to turn against Senator Kerry with less than complimentary comments appearing from his erstwhile Swiftboat colleagues, the economy is back on the agenda. The poor non farm payroll numbers will mean Kerry's claim that only poor jobs (and not enough jobs ) are being created is almost certain to be revisited and may well dominate the news media into the weekend. Never mind the fact that the Household survey ( as opposed to the establishment survey) shows the economy to be progressing well - greater participation rates, more jobs, lower unemployment - the headline payroll number and revisions to previous figures is all.
One particularly interesting thing about the household survey is the make up of the average unemployment data. Amongst graduates, unemployment remains at 2.7%, but for the black population it is 10.9% - up from 10.1% in June. (The figure for teenagers at 17.6% is seasonal in nature - despite the best efforts of the SA programme). My read on this would be that a significant number of those now entering the labour force - the participation rate picked up - who have not found work are probably amongst the latter group, whilst the majority of the former group were already registered in the labour force. For an economy to be employing most of its productive workers and have a flexible pool at the margin of the less skillled may be an anathema to an interventionist, but is meat and drink to a capitalist.

Gorden the Keynsian

As we come hard up against the next BoE decision to raise interest rates, it struck me that in creating the infrastructure that he has in the last 7 years, Gordon Brown has effectively placed the UK into the heart of a controlled Keynsian economic experiment. When Hayek wrote his classic Road to Serfdom, his attack on the very idea of a managed economy centred around the concern that only the "worst" people would come to manage command and control economies. In his well known letter of reply, Keynes completely misses Hayek's point and dismisses the danger of this provided that control were restricted to the "right people".

This says a lot about Keynsian thought as a political as opposed to an economic credo, but what is interesting is who these "right people" were. One of the arguments about China's loss of relative economic power in the post war era is that the ruthless efficiency of the Chinese bureaucracy in regulating its economy to a grinding halt. By contrast, the more liberal minded economic leadership of the west tended to avoid getting involved with the messy business of business (although Wilson's government came closer than most).

Brown, though, is a different matter. Having taken on board the idea that he is clearly one of the "right people," he also takes forward the concept that the business cycle is to be stabilised by government intervention. He may have granted "independence " to the Bank of England to set interest rates, but as long as he effectively controls the growth of money via the monetisation of debt and the use of "government" money to boost public sector demand, he is still in charge of Monetary mismanagement. Worse than that, with at least some constraint in money creation by public comment and market response - he is command and control directing the resources in the economy - via the tax system - towards the unproductive area of the economy and away from the drivers of growth and wealth creation.

Having inherited a "good economy" in 1997, the Keynsian Chancellor has assumed the mantle of being one of the "right" people to perfect the ideal Keynsian command economy. With a Bank of England that clearly feels the need to try and address short term problems (house prices) with monetary policy, they are simply using what should be a long run operating instrument to try and offset the control implications of the fiscal meddler. Like post war China, the UK is heading for a perfect, Keynsian economic standstill.

Worries on Wall Street or oppportunities on Main Street?

When the markets start to act like they have done in the last few days, the traders out there seem to be the ones most likely to grab the attentions of the world's press. Although I've not seen too many pictures of traders holding three phones and shouting across a trading pit, I'm sure that they are out there . Yet for all the noise on Nasdaq, what is also happening against the backdrop of market worries over earnings and growth is the re emergence of the genuine investor. By this I mean the real economy investor, not (necessarily) the market investor. As M&A activity shows signs of life, the market will wake up to the reality that there are a number of companies that simply do not trade at levels appropriate to their actual - as opposed to current perceived - value. Sooner or later, the real value investors will need to step in and it can only be a matter of time before the days of single figure p/e multiples, historically low price to book ratios and high real yields will seem a distant memory for all but those companies that genuinely deserved to be rated as such. Meanwhile, the traders will look to find technical support levels and will chase after a perceived bounce very aggressively. Anyone taking August off may find themselves wondering what they missed upon their return.

previous posting updated after recent bid activity for Abbey revealed.

When is a job a good job?

The recent US electoral posturing over the creation of "good jobs and not so good jobs" is a classic demonstration of how data is stretched beyond the limits of credibility to make a political point. When John Kerry started to campaign that the jobless recovery was not so much jobless but a poor job recovery (invoking images of middle aged ex management burger flippers in a campaign ad) he clearly touched a nerve with the emotions of middle America. Yet attempts to illustrate this with data have proven to be far harder and selective "industry" level statistics are produced to imply that the loss of high paid Technology bubble jobs to be replaced by healthcare sector jobs is a bad thing. The link to Factcheck.org may or may not be work now, but they examine this issue in some detail. Apart from highlighting the fact that if average earnings are rising how are poorer jobs being created? they do examine the limits of the statistics available about job quality and go to those limits themselves to prove their position. Now I am not wanting to take a partisan line on this because that is not the bone of contention in my view. What I would say though, is that in the US economy there has always been a very low level of unemployment amongst those with educational skills beyond basic college level. This would tend to suggest that the flexible nature of the US labour market - often held out as its great strength when compared to sclerotic old Europe - is best evidenced by the true market nature of the skilled employment sector. When a manufacturing company closes down - either for cyclical or structural reasons - its lawyers, accountants and senior management transfer to the growth areas of the economy elsewhere or become self employed relatively quickly. Funnily enough the cost of college fees, healthcare and a mortgage is a great incentive to get off the welfare lines pretty quickly when you have gotten used to a certain level of wealth and consumption. Similarly when a dot-com or service sector company closes down, its skilled workers do pretty much the same thing. There are always structural shifts in an economy like the US, but personally I would have thought that if the jobs being created were now "poorer" level jobs - that is a good thing for those who need such jobs to be provided as opposed to creating them for themselves or for those in areas of structural shortage.
There is an old phrase about the labour data in the US moving towards the shallow end of the gene pool when the long term unemployed and the "unemployable" start being employed. Unsustainable is the expression that springs to mind. When Mcdonald's changed its tills to show pictures of the food that the servers were selling as opposed to a written description of the product on the keypads it was an admission that they could no longer rely on a basic level of literacy amongst their workforce. That those previously "unemployable" workers were employed and may no longer be so is a tragedy for them, but their employment was never a sustainable reality. It is not a failure of economic policy in a market economy that the slack in the labour market has impacted the most upon the least educated and least able. If you want a different Economic model go elsewhere.

Congestion charging...

The press this morning covers the latest IPPR Report in some detail, but the headline figure of £16bn as a potential revenue level raised is the main focus - along with (for me at least) the rejection of any proposal to use such revenues to reduce fuel tax. Although this is a non official report (ahead of an officially sanctioned "independent" study due out soon) - the IPPR is a long standing favourite "Think Tank" of the New Labour apparatus. Although the non official status of this body will allow the government to hide behind the implied policy shift inherent in its recommendations, it nevertheless marks a stark change from previous official thinking in this area. Given the green lobby politics surrounding the transport issue, this should come as no surprise but some background should help here. When the initial UK Commission for Integrated Transport report was released back in 2002 (you can read it here) the major thrust of their proposals was to introduce a fairer system of charging for road use. As a consequence, it was designed to be revenue neutral compared to current levies (VED, fuel Tax etc) which accounted for some £27bn in raised revenue in 2002. Incidentally, the VED component of this is less than £5bn. There are other interesting differences too. When the CIT report was released in 2002 it promised a means of reducing traffic levels by up to 5%. Now it appears that traffic levels are seen to potentially increase traffic by up to 5% if the proposal is operated on a revenue neutral basis. In 2002 the major issue and economic cost was congestion - issues such as air pollution and global warming were minor factors in favour of this change. Now it is all about giving drivers in rural areas a better deal and improving the environment. So, this latest "Think Tank" report now suggests that traffic levels will not fall and would actually rise unless the net revenue taken increases (i.e. no reduction in fuel tax) Yet congestion should fall. Oh, and those on low incomes should not be penalised. Of course. Incidentally this great fair charging scheme was estimated to cost £180bn to impliment back in 2002. A bit of inflation should see that up to £200bn and that's before one takes into account the economic impact of putting a spy in everyone's car. Meanwhile the Treasury will probably plan to spend the extra(net) £11bn or so raised on more frontline services....

Suffocating capitalism...

In today's Guardian Leader, The Good the Bad and the Ugly the real losers in the recent by-election are identified as the Tories - not Labour. In two heavily targeted by-elections this week Labour saw former safe seats collapse in the face of a broad based opposition to much of what the electorate sees the current government as standing for. Yet for the liberal left, it is the Tories inability to increase its vote in this election that is a cause for real concern in Westminster - Tony Blair is seen as having survived a tough week. The Telegraph Leader is equally concerned at the poor performance of the Tories and calls for a serious shake up of the Tory front bench. From my perspective, I wonder if this reflects the cosy world of the Westminster Village just a little bit too much. The fact that the Liberal Democrat vote is regarded as a protest vote is almost taken as given, whilst the lack of a substantive Tory lead in either opinion polls or By-Elections at this stage in the electoral cycle is regarded as confirmation of their failure to break through. Yet little comment is made about the relatively low turnout or the fact that the Liberal Democrats are now a major focus for anti government protest in such circumstances.
It is not even as if this is about policy. The policy that dare not speak its name - small government and tax cuts - does not make the agenda of any party at present - even though for those left in the private sector it probably represents a key part of their own agenda. The reality is that across the country, Politicians are widely regarded as careerist freeloaders spending other peoples money at the whim of lobbyists and focus groups. Asking people the question of whether to spend more money or less rarely provokes the latter if that money is not seen to be returned to its owners but reallocated to another "priority". Why not build another school or hospital with the money you save on no longer employing the civil servents that you hired two years ago to do a job that isn't actually needed?
There is no differentiation between the parties on this most fundamental of issues - whose money is it? In the Gordon Brown redistributive world, it really is the Government's money to socially engineer society with, whilst for the liberal Democrats it is the hallmark of their idea of democracy that all you have to do is be a lobby group with a "good idea" and they will give you the money for it. Class sizes of 10? No problem. Paternity leave for a year? Why not. Raise taxes even further to pay for more Universities? It'll boost Britain's competitiveness no end, so lets go for it. As for the Tories - they seem so afraid of appearing to be the "Nasty Party" - the ones who don't support ever more diversity and would consider the National Health Service as an outmoded outdated, inefficient example of Soviet planning that they too are in the "...lets spend lots more but in a better way" camp.
The real message from the Euro-Elections and these recent By-Elections is that the general public is ceasing to differentiate between the parties on policy but will punish examples of deceit and betrayal. However, as the Government's involvement in people's lives becomes ever more dominating, the sense to which the electoral process might be able to reverse such a trend is all but lost. Over the last seven years, Gordon Brown has succeeded in promoting the dependency culture in the UK to a point that not only are the political class now dependent on the expansion of State involvement in every day life but so too are a substantial part of the electorate. The capitalistic, wealth generating, creative part of the economy is slowly suffocating under the burden of this and it seems that the electorate recognises that there are no politicians that seem either willing or able to save it.

Propagandists again...

Given the supposed independence of the BBC, I find it astonishing that tonight's Secret Agent is not only being broadcast at 9 pm tonight, but that all the pre publicity surrounding the programme has ensured that the content of the news agenda is, once again dominated by the story. The reason for my concern is that today is by-election day in both Hodge Hill and Leicester South and whatever one's views on the BNP (mine I suspect are the same as most sane people's) I deplore the manner in which this particular piece of journalism is used to influence the democratic process on the very day of two by-elections where race is a particularly emotive issue. The polls shut at 10 pm of course, so broadcasting the programme at 9 is surely breaching at least some guidelines on political neutrality. The programme features Jason Gwynne who appears "shocked" to discover that the BNP is not populated by Guardian reading intellectuals who eat brown rice, but by a group of racist individuals who say anti semitic things and admit to beating up Asians. Whether we like it or not, the BNP is a registered political party in the UK and just as I dislike the Michael Moore approach to political propaganda dressed up as a documentary I find the timing of the release of this particular programme to be deliberate and in that sense somewhat discomforting.

Koizumi and the LDP

The weekend elections were hardly comforting to Junichiro Koizumi, the Japanese LDP leader and prime minister. The fact that he has been able to maintain a majority in the upper house is due to his coalition partners and, whilst his coalition also retains a majority in the Lower House, much has been made of the personal slap down to JK in the face of his "arrogant management style" and his slow progress on reform. I find this character asassination interesting given the actual performance of the so called "reforming" PM over the last few years which, despite the headlines, has been minimal. I was in Tokyo at the time of Koizumi's "coronation" as leader of the LDP and what struck me at the time was quite how different the local and international perception of "reform " was. I have long been of the opinion that the LDP appointed Koizumi to ensure the dominance of the LDP and that this supposedly reformist minister accepted the faustian pact with the LDP grandees on that basis. The fact that world leaders and columnists greeted him as some kind of Japanese New Deal reformist was, frankly a little embarassing given the vested interests that he effectively represented. Now, as he slides in the polls, the media are once again expecting their own perceptions of the reasons for his failure to be his undoing. Troops to Iraq is seen by the liberal left as being the major reason for a vote against him, whilst the rise of the DPJ is seen either as a vote for a two party system (anti LDP) or a vote for more agressive reform - depending on the media commentator's viewpoint.

The reality is that politics in Japan are still about the factions within the parties - not the positional politics between them. Just because a two party system would reflect a US style "democratic" contest, doesn't mean that that is how Japan actually operates. Koizumi did his job in keeping the LDP in power three years ago. If the power groupings inside the LDP decide that he can still do that job in the future then he is secure. If other factions come to the fore within the LDP over the coming months that are against Koizumi he will find it much harder to survive.

From policy advisor to spin doctor...

Yesterday morning's edition of the Today programme featured the prospective parliamentary candidate Ed Balls talking about his friend Gordon's big plan. The previously unquotable advisor was now an ideal insider to talk about how much room for manouvre the chancellor would appear to have to cut waste and provide for frontline services. This reduction of 84000 civil service jobs certainly makes for spectacular reading - with another 20,000 jobs in the regions helping the total over the magic 100,000 mark. Its a shame that the expansion of these jobs in the first place hadn't been met by such a dilligent focus upon cost cutting and efficiency. Apparently the civil service has signed up to all sorts of target driven efficiency improvements and the chancellor has also thrown in a quick £30bn of asset sales to fund his spending plans. Firing the staff, selling off the family assets to maintain the unsustainable spending habit - doesn't really sound a particularly cunning plan to me

An Independent BoE can't control Public Sector Inflation

When Gordon brown delivers his spending review tomorrow he will do so against a backdrop of barely disguised glee about how well he has done for us all. His delivery of low inflation, uninterrupted growth, fiscal rules and an independent Bank of England are part of what he rather arrogantly refers to on the international circuit as "The British Model". Now, as he promises 2.7% public spending growth in "real terms" he is returning to the position of a "wise old Hector" of a Chancellor, determined to avoid the boom and bust of the (Tory) past and promise us all a brighter future. All good political stuff of course, but my concern is that he actually BELIEVES that he really is this savour of us all. A notorious data addict, he pours over the detail of the forecasts - keeping his largely economically illiterate cabinet colleagues in the dark. As a consequence, the "British Model" will be wheeled out tomorrow as a sure sign of how Labour is doing it right and (by implication) others are not.
As always, it is a shame to let truth get in the way of a good story, but the data does actually show that the period of uninterrupted growth and low inflation started in 1992 - not 1997. The ERM debacle in 1993 led to a strong set of fiscal rules being imposed by the new Tory Chancellor, Ken Clarke and the establishment of an inflation targeting de-facto indepependent Bank of England under Eddie George. The Ken and Eddie show was, if anything a far more open and visible process of monetary policy than that which followed. Gordon Brown stuck to all of these things in the first term of New Labour, but threw in the less savoury aspects of his political approach too - raids on pension funds, windfall taxes on privatised utilities and as many stealth taxes as you care to mention. As for the Independence of the BoE - described as terribly courageous by many at the time - it was a political not an economic masterstroke. By getting the markets off his back - "...sorry, not my interest rate policy" and maintaining the Tory spending plans "...we have to do this to avoid a crisis of the Tory's making" he simply shifted attention away from the tax and spend reputation of the labour past and laid the groundwork for the second term.
Come that second term, he has made public spending the centre piece of his socially engineered vision of Britain's future. Any critisism of his approach is rebutted as heretical given this wonderful economic legacy and the need to deliver "first class" public services. Indeed, with the Tories and the Lib Dems both now competing to "spend it like Gordon" it would appear that, politically at least, the spend side of the equation has been won. Unfortunately, the mind set of wanting to spend appears not to be easily matched with how things are to be paid for or whether the spending is actually achieving anything. Fiscal sleight of hand may yet save the Chancellor from breaking his own golden rules on borrowing, but given that this self imposed target only looks good in the context of our European peers, in reality it means very little. Unfortunately, what he is not able to deliver is any means of making sure that this spending is having an impact over and above that of pushing up public sector inflation. Pour enough of other people's money into something and things will inevitably change, but with public sector inflation now running at roughly 3 times the headline rate, his 2.7% increase in real terms (actually only 1.4% after taking existing commitments into account) is likely to be a significant contraction in properly deflated terms. Inflation - the old enemy - can be controlled via the wonderously Independent monetary policy of the BoE. However, Public sector inflation is not driven by market determined monetary conditions. It can only be controlled by the provider of liquidity to the public sector pot - the Chancellor - and unfortunately he is anything but Independent.