What is the main solution to the UK’s weak productivity growth?

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Chris Giles (FT) is examining why Britain is suffering from weak productivity growth. As part of his series, he wants to hear what readers think is the main solution to the UK’s weak productivity growth since the financial crisis of 2008. Share thoughts directly with him at ask@ft.com. Some may be published in a follow-up piece.

Prem Sikka, Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex, who tweets here, has already published thoughts on the subject. Briefly:

UK company dividends are high & investment low

This lack of investment and innovation means that the country’s productivity is low. The output per hour worked in the UK is about 16% below the average for the rest of the G7 advanced economies. The UK productivity is around 27% below that of Germany – despite the UK labour force working almost the longest hours in the western world and the country is neither rebuilding its manufacturing base, nor developing new technologies.

He itemises the boardroom dominance of accountants:

Sikka then argues that short-termism, leading to the neglect of the long-term prosperity of companies and the economy, has been accelerated by the boardroom dominance of accountants.

Compared with other developed countries, UK companies are paying out the highest proportion of their earnings in dividends.

According to the Bank of England’s chief economist, in 1970 major UK companies paid £10 in dividends out of each £100 of profits – but by 2015 the amount was between £60 and £70. 

And at the same time as paying this large percentage in dividends many companies were downsizing labour and reducing investment, lagging behind the EU average:

Sikka asserts that the most effective way to disrupt the accounting-think prevalent in boardrooms is by appointing directors who are focused on the long-term – appointing employees and consumers so that they can challenge the obsession with short-term returns and promote investment in productive assets.

Giles quotes Lord Andrew Tyrie, new chair of the Competition and Markets Authority, who told companies in July to stop “ripping people off” or face the full force of the watchdog’s sanctions. His focus is mostly on regulated markets such as banking and energy, where companies are accused of exploiting vulnerable households by extracting a “loyalty penalty” if they do not switch suppliers.

Lord Tyrie told MPs during his confirmation hearing for the CMA in April that retail banking and auditing were parts of the economy that did not work in the interests of the public or productivity.

Scott Corfe, chief economist at the Social Market Foundation, a think-tank, claimed that pro-competition moves had some potential for raising productivity growth rates. He suggested that consumers should be switched between energy suppliers automatically after several years to stop companies exploiting customer inertia.

See this video: https://www.ft.com/content/ae25a5bc-9405-11e8-b747-fb1e803ee64e (possible paywall)

After noting that since the mid-2000s, British industries have become more concentrated, with fewer companies enjoying larger market shares, Giles focusses on this ‘one key question’:

Is inadequate competition contributing to Britain’s feeble growth in output per hour worked? 

 

We look forward to the next article in the series.

 

 

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“Money-manager capitalism has ‘fed political revolt’ in America and Europe: Philip Collins

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In the Times, Philip Collins* writes that western “money-manager capitalism,” (term coined by Hyman Minsky), has changed the patterns of incentives and rewards in the economy, leading to stagnation in productivity and wages by reducing the capital investment that supports their growth.

He cites Erikson & Weigel: “A decade has passed since banks and financial houses began to crumble and took Western economies to the brink of collapse, but economic growth on both sides of the Atlantic remains weak. It is still determined more by governments and central banks than the animal spirits of entrepreneurial capitalism.

Economic developments before and after the crisis that started in 2007 have fed political revolt. In both America and Europe, people are angry about their poor income growth, and they indict the “one percent” or “the establishment” for pursuing policies that benefit the rich at the expense of the middle class. They feel that the age of cost-cutting McKinsey consultants, cheap capital, and Wall Street financial engineers brought prosperity to the professional classes, but that, as a result, everyone else’s expectations were revised permanently downward: “The revolt comes from both the Left and the Right, but the underlying premise is shared: capitalism hasn’t been working for me!”

Collins then adds that business investment has been falling as a proportion of GDP since the 1970s.

”Money that ought to be invested is instead flowing to shareholders in the form of dividends and buybacks. Too rapid a recourse to mergers is generating payments for unworthy executives and creating giant companies which do their best to evade fair taxation. All the while they buttress their position with expensive and effective lobbying to keep regulators sweet”.

He cites two sets of linked consequences

  • Unemployment among the young and low-skilled has increased and wages for those in work have stagnated.
  • The vast majority of the returns from the last decade of capitalist activity have accrued to those who are already rich in assets.

This trend within capitalism itself accelerated after the 2008 crash by central banks whose incontinent monetary policy had inflated asset prices.

Under capitalism it seemed, on the whole, that things could only get better. Growth made us more prosperous tomorrow than we are today. When that promise broke, the response was a growth in radical movements to the left and right.

The obvious answer, according to Collins includes:

  • shifting the burden of taxation away from income and towards wealth;
  • imposing a higher inheritance tax, to prevent large transfers of privilege;
  • taxing the capital gain on the residential home;
  • taxing land, of all the assets the least easy to hide;
  • cutting income tax for people who take home the average wage or less;
  • and earmarking some of the proceeds for the social care system which is a disgrace in a rich country.

Michael Gove, Secretary of State for Environment, Food and Rural Affairs, considers the deeper causes of populism. He believes that the British have seen so much of what they value which is beyond economics — whether love of place and landscape or the integrity of their cultural attachments — overlooked or ignored. He advocates:

  • reform of corporate governance,
  • better pricing of environmental costs,
  • changes to investment incentives and procurement rules,
  • “smarter” regulation
  • and no access for not corporate lobbyists.

But, Collins reflects: “Conservatives often give bold speeches which herald no action.

“After the expenses scandal David Cameron diagnosed all that was wrong with politics and proclaimed a radical plan to put it right, not a word of which ever materialised.

“In her first address as prime minister, Theresa May set out the array of social issues which would define her premiership. Mired in Brexit, we are still waiting.

“There is every chance that Mr Gove’s speech on capitalism will fall into the same category”.

Collins ends, ”The reason why the Conservative Party will not act . . . (is that) it is going to have to upset some natural-voting Conservatives. A state intervention to break up successful companies, an expansive set of welfare schemes and a government dedicated to imposing taxes on wealth. It doesn’t sound very likely from this government”.

 

 

Phillip Collins is the leader writer and columnist for The Times, chairman of Demos, Visiting Fellow at the London School of Economics, associate editor of Prospect magazine journalist, academic, banker and speechwriter

 

 

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Climate change should be placed “front and centre” of the central bank’s mandate to boost green investment

A Green Bank of England, Central Banking for a Low-Carbon Economy

Delphine Strauss (Financial Times) summarises advice in this report (link to pdf above) from the campaign group Positive Money.

It recommends that climate change be placed “front and centre” of the Bank of England’s mandate so that the central bank can boost green investment.

The report has won backing from Lord Deben, who chairs the independent Committee on Climate Change which was set up by the government to monitor the UK’s progress in meeting its statutory targets for cutting emissions:

“They are right to seek some radical measures, because the issues are radical. I think that monetary policy does need to reflect these risks”, he said, adding that central banks should do more to ensure the availability of green finance and divest from fossil fuel companies that showed no inclination to change their business.

The BoE has been reviewing UK insurers and banks’ exposure to climate-related risks and supports efforts to develop international standards for voluntary disclosure.

Mark Carney, the BoE’s governor, has repeatedly warned of the physical damage climate change could wreak on the economy and the risks to financial stability that might result from a sudden revaluation of carbon-intensive assets.

Positive Money argued that this concern for financial stability will look “incoherent” unless the BoE does more to boost investment in the transition to a low-carbon economy. Its report urged the government to rewrite the mandate of the Monetary Policy Committee to include green objectives explicitly and called on the BoE to look at ways to build climate-related risks into its macroeconomic models.

The Positive Money report urges the BoE to set an example:

  • by disclosing the carbon risks of assets on its own balance sheet
  • by ending the practice of buying bonds issued by fossil fuel companies
  • and by financing green projects via quantitative easing during any recession.

It argued that the BoE has unintentionally promoted high-carbon sectors because its criteria for asset purchases favoured the bonds of large fossil fuel companies.

 

 

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Job losses in Britain: shades of things to come?

Large companies which failed during the last twelve months include:

  • Poundworld
  • BHS
  • Maplins
  • House of Fraser
  • Carillion
  • Toys ‘R’ Us

See http://www.retailresearch.org/whosegonebust.php

2007-2018 Review

Already this year over 20,000 people have been affected – and it’s only June. Add on those made redundant by Sainsburys and thousands from small and medium businesses which have failed or made workers redundant.

Time for change, acting on the combined thoughts of:

And other experienced and thoughtful people.

 

 

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Japan: a model of capitalism that manages to balance income growth and income distribution

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Jesper Koll, one of the top Japan strategists and economists, observes that Japan’s economy is performing well and deserves more attention as a model of capitalism that manages to balance income growth and income distribution. Some points made in his article, which may be read in full here, follow. 

The goal of an economy is to create and sustain a stable society. To do so, an economy must produce growth and must distribute the spoils of that growth in a fair and equitable way.

At the end of last year, the median net financial wealth for households in Japan stood at $96,000. In the United States, the same number was $50,000. The average Japanese is de facto twice as wealthy as the average American.

At the bottom end in Japan, approximately 9% of households own less than $10,000 worth of net financial assets. In America, that’s true for 28% of all households. Japan certainly does have an ‘underbelly of poor’, but relatively few are truly left behind financially.

When U.S. presidential candidate Hillary Clinton talked about “deplorables” during the 2016 campaign she missed the point: What is truly deplorable is the fact that the U.S. ruling elite, of which Clinton is a leading member, allowed this gravely destabilizing financial inequality to happen in the first place.

According to the OECD database American median incomes rose by approximately $24,000, from $36,000 to $60,000 between 2016 and 2017. Over the same period, Japanese median incomes rose from $27,000 to $51,000, i.e. a similar increase of $24,000, prospering at about the same pace.

So much for the myth that Japan has been stagnating.

The bottom 10% of income earners in Japan strongly outperformed their American counterparts: Between 2000 and 2017, the bottom 10% of income earners saw a $15,000 rise in earnings in Japan, from $17,000 to $32,000. Their U.S. counterparts got only $10,000 more income, from $18,000 to $28,000.

If you are among the bottom 10% of income earners, you are now better off in Japan than in America ($32,000 versus $28,000)

How did Japan successfully bring up the poor? The growing scarcity of labor is forcing steadfast improvement in employment offered — not part time or contracts, but full time — as well as steadfast pay increases for particular jobs at the bottom end of the employment attractiveness spectrum. General white collar sales or management jobs have seen relatively pedestrian pay increases, but truck drivers, construction workers and shipbuilders have seen their pay almost double in recent years.

(Ed) A Tokyo contact agrees that the rapidly declining working age population helps a lot. As automation is coming on a scale not imagined, a lot of countries will struggle with unemployment and that may well put Japan in a very strong position over the next 20yrs or so.

Koll comments that the government deserves credit for actively encouraging positive changes in employers attitudes. This year’s tax code changes should make it easier for spouses to seek higher incomes — not by taxing the rich but by removing a tax ceiling for the poor. The overall impact of rising female participation is already very positive in general for society as a whole, for closing the gap between the rich and the poor in particular.

The overall outcome produced by the Japanese economic system is extremely positive. Japan manages to balance income growth and income distribution unlike many other advanced economies.

Japan’s economy is working well and deserves more attention as a model for “capitalism that works.” The system is very good at bringing up the bottom of the income pyramid and generating exceptional inclusion for all in financial wealth creation.

Japan deserves the Nobel Prize for applied economics.

 

 

 

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March visitors

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People from 6 countries visited the site in March.

There were twelve times more visitors from the USA than the next largest group from the UK.

 Top posts  

Brexit: moving away from globalisation towards self-reliance.

In this post, Colin Hines draws attention to Green MEP Molly Scott Cato’s publication and launch of a report by Victor Anderson and Rupert Read: ‘Brexit and Trade Moving from Globalisation to Self-reliance’. Read more here.

Prem Sikka: a critic of the Pin-Stripe Mafia

Accounting professor Prem Sikka received the Abraham Briloff award from The Accountant and International Accounting Bulletin.

The award was presented at a conference and awards dinner in London on 4 October – The Digital Accountancy Forum & Awards 2017. Read more here.

 

 

 

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Fiscal Money

Biagio Bossone, formerly at Banca d’Italia, the IMF, and the World Bank, an international financial consultant and Chairman of the San Marino Banking Association and a member of the Group of Fiscal Money, Italy, comments on an article in the Financial Times by Martin Wolf. 

“Mr Wolf agrees that the fiscal money proposal that we have developed and promoted for years is technically possible, albeit that “it would surely create hysteria in Northern Europe”. Well, it shouldn’t.

“Fiscal money would be issued as transferable and negotiable bearer bonds, which recipients would be entitled to use for tax rebates two years after issuance. Such bonds would carry immediate value, since they incorporate sure claims to future fiscal savings, and would be immediately exchangeable against euros or usable as payment instruments in parallel to the euro.

“Under European accounting rules, they would not constitute public debt. Fiscal money would be allocated, free of charge, to supplement employees’ income, reduce enterprises’ tax wedge on labour, and fund public investments as well as social expenses.

“Fiscal money is sometimes wrongly characterised as the anteroom of Italexit. Quite the contrary — it provides a way to overcome the eurosystem’s dysfunctionalities that condemn the Italian economy to a permanent state of depression”.

Fiscal Money has been proposed to the Italian government to boost aggregate demand and increase GDP without increasing public debt

In Social Europe, journalist Enrico Grazzini examines the main differences between various proposals:

  • Fiscal Money or Tax Discount Bonds (TBDs) are issued by the state and backed by the future tax revenues. TDBs would be assigned directly to the households, companies and (only pro quota) to government administrations as the best, and maybe the only way to overcome the liquidity trap and the austerity constraints.
  • Helicopter Money involves a central bank dropping free money straight into people’s pockets, recently advocated by many economists (such as Eric Lonergan and Martin Wolf, chief economics commentator at the Financial Times) as the very best solution of last resort to increase demand and face the next possible crisis.
  • and Quantitative Easing for the People, proposed by Labour Party leader Jeremy Corbyn, who would like the Bank of England to issue new money to finance a state bank and public investment as the optimum way to expand the British economy in an equitable way.

Bossone summarises: “Fiscal Money would allow Italy to expand domestic demand and improve enterprise competitiveness, while avoiding any increase in public debt and breaches of the fiscal compact. In fact, it would make debt sustainable, reversing the effect of years of austerity, and would remove any inducement for the European Central Bank to withdraw Mario Draghi’s “whatever it takes” pledge”.

For more information go to: https://monetafiscale.it/english-version/, https://www.zerohedge.com/news/2017-10-15/italys-parallel-fiscal-currency-all-you-need-know and https://www.socialeurope.eu/fiscal-money-better-helicopter-money-qep-beating-deflation-austerity

 

 

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