The 2020s: Disruption? You ain’t seen nothing yet!

The Resolution Foundation launched its Economy 2030 Inquiry last week. The 2020s, it says, will be a decisive decade for the UK in a way that no other decade has been since the 1980s. It listed five ‘seismic’ changes that will hit the UK economy between now and 2030, any one of which would have a significant impact but which, taken together, pose a serious challenge. 

These are:

  • Covid-19 and its aftermath;
  • Brexit;
  • The transition to a Net Zero Carbon economy by 2050;
  • An ageing population;
  • Rapid technological change. 

At the moment, the relentless focus on the first two risks crowding out discussion of the other three. Before Brexit and the pandemic, most articles and conferences on the future of work focused on technology to the exclusion of almost everything else. Now everyone is talking about remote working and the future of the office. A few mention demographics, though given how long we have known about the population ageing, it still strikes me as odd that it rarely appears on the agenda. Climate change and the shift to Net Zero barely gets a look in. 

Getting the economy to Net Zero will be a massive undertaking. As the Resolution Foundation points out (my emphasis):

The UK’s commitment to bring all greenhouse gas emissions to Net Zero by 2050 will require an immense set of changes, including the transformation of agricultural and industrial processes, shifts in consumption patterns, and an end to the dependence on carbon-based energy that facilitated the birth of an industrial society 250 years ago. Again, urgency is needed: 60 per cent of fuel supply (oil and gas industries) and half of surface transport decarbonisation needs to happen during the 2020s.

The investment needed will be significant and much of the up front cost comes during the next fifteen years. Though the projections suggest these investments will eventually pay for themselves through the savings made, the report estimates this will take until the 2040s. That’s fine for governments and large businesses that can take a longer term view. For smaller firms and most individual households, 2040 might as well be forever. 

Chart by Resolution Foundation

It’s not clear how the cost of these investments are to be split between the government, companies and households. 

The question of how the costs of this and other infrastructure will be split between the state and private sector is absolutely crucial, but almost totally unresolved.

As Frances pointed out recently, the world will have to transition from a carbon-intensive to a metals-intensive economy. Cutting the use of fossil fuels requires a massive amount of metal. We have barely begun to think through the environmental implications of this, let alone the way that jobs will be destroyed, created and, perhaps most importantly, changed.

This will be the point at which the move to decarbonise the economy starts to affect people’s day-to-day lives. The UK has made significant progress on decarbonisation in the last three decades but most of the changes have happened in places where most of us don’t see them. As long as our lights come on when we flick the switch, few of us stop to think where the electricity is coming from. This next phase will be where decarbonisation gets personal. 

Much of the focus of the recent discussion has been on transport and the proposed switch to electric cars, public transport and cycling. The other big change, though, will come in people’s homes. It is unlikely that the UK can achieve a carbon net zero position by 2050 while most of the country still uses fossil fuels for heating. According to National Grid, 20 percent of UK carbon emissions are created by heating buildings. The International Energy Agency has proposed a ban on the sale of gas boilers after 2025. The UK government hasn’t gone that far yet but it has indicated that it will stop the installation of gas boilers in new build homes from 2025. 

This is but one example of the scale of the challenge ahead. As the Resolution Foundation comments:

If we are to hit the 2050 Net Zero objective and realise the wider benefits, while avoiding huge economic costs, there must be a surge of progress in the 2020s: we need to move, for example, from installing almost zero heat pumps each year, to installing 3,000 every single day by 2030.

It also neatly illustrates the massive unanswered cost question. Who pays to replace existing boilers? The government, the energy company or the householder?

If the finances haven’t been thought through, even less thought seems to have been given to the workforce implications. The manpower and skills challenge of rapidly shifting the economy to Net Zero is something rarely discussed. If the UK Commission for Employment and Skills were still going, this is one of the things they would probably have looked at but the government, in its wisdom, shut them down in 2017. Does this country have the people who can make this surge of progress happen? Does it have enough of them and do they have the right skills?

The problem is compounded because the 2020s is also the decade in which the UK’s long-anticipated demographic shift starts to affect the size of the workforce. US generational labels (Baby Boomer, Gen X etc) don’t work in a UK context. True, there was a spike in the number of births after the Second World War but our big population bulge came during the 1960s. That’s why people of my generation remember primary school classes of over 40. 

You can see this bulge working its way through our population pyramid. At the turn of the millennium, those from that 60s born generation were in their thirties. Over the course of this decade they will all turn sixty and many will start leaving the workforce, taking their skills with them.

Chart by ONS
Chart by ONS

In recent decades, we have relied on migration to pad out our working age population. Most of the UK’s employment growth after the 2008 financial crisis came from those born elsewhere. But the combination of Brexit and the Covid pandemic has reduced the number of immigrants. The pandemic also appears to have encouraged many of those migrants who were here to return home. Michael O’Connor and Jonathan Portes reckon 1.3 million have left the UK since January 2020. Some dispute their figures but, given that this is the same duo that identified the discrepancy between NI numbers and immigration figures a few years ago, I’m inclined to give them the benefit of the doubt. The pandemic has disrupted the usual immigration surveys but Michael’s analysis of HMRC numbers suggests that a disproportionate number of EU nationals have disappeared from the payrolls and are probably no longer here.

Chart by Michael O’Connor using HMRC data

Employers are already warning of a labour shortage and, while it is likely that immigration will increase again as the pandemic subsides, it probably won’t return to its pre-Brexit level. The laws are more restrictive, the political climate less favourable and the economic conditions in many countries have improved relative to the UK. Furthermore, the UK isn’t the only place planning significant reductions in carbon emissions. Net Zero by 2050 has been, or is soon to be, enshrined in law in a number of countries. They are likely to want to keep hold of their people with the skills to make it happen.

So if we have a looming skills shortage and can’t rely on immigration to plug the gap, that suggests a massive re-skilling programme might be on the cards. The government says it’s keen on re-skilling. It has promised to revolutionise skills and training opportunities and even suggested re-training ballerinas as cyber-something-or-others. But, while politicians seem to think re-skilling is a get-out-of-jail card, the truth is that this country isn’t very good at it.

UK business has, for many years, had a buy-not-build culture. In most organisations, the instinctive reaction to a skills gap is to go out and hire someone. As the Industrial Strategy Council remarked last year:

The percentage of skill-shortage vacancies reported by employers has remained at 22 per cent or above since 2013, yet the UK stands out internationally for its preference to recruit rather than train.

Consequently, employer investment in training has fallen and, when combined with occupational shifts that have removed mid-level career development roles, the result has been a degradation in the opportunities for people to develop new skills on the job. As Resolution Foundation research last year found, very few workers retrain for new occupations and, for non-graduates, any form of career development is becoming a rarity. Where employers offer them training, it is most likely to be on health and safety. 

All of which suggests that, if there is to be a great re-skilling to tackle climate change and shift the economy to Net Zero, the government will have to step in to cover employers’ lack of investment. The trouble with that being that governments don’t have a great track record in this area either. 

If there is a financial and a skills challenge in reaching net zero, there is also a serious public opinion problem. While people have finally come round to the view that climate change is happening and something needs to be done, they are a lot less keen on actually paying for it. A recent YouGov poll found a majority across all age groups reluctant to consider increased taxes or higher energy bills despite accepting the seriousness of the climate change threat. 

So the UK will need to see a surge of progress to reconfigure its carbon-based economy during the same decade as its largest age cohort starts to leave the workforce, its supply of migrants slows and its trade and diplomatic relationships are still in a state of flux. All this against a background of weak productivity and a woeful lack of investment in both capital and labour. Public opinion is nowhere near prepared for the magnitude of the change because politicians and commentators have not discussed it in any detail. 

As the Economy 2030 report remarked:

The economic turbulence that people, places and firms face as we recover from Covid-19, exit the EU, and see decarbonisation reach into citizens’ lives, goes beyond anything seen in a generation.

We like to think we know how to handle change. Those of us working in the corporate world talk about it all the time. We tell ourselves that we have lived through a time of epic change, a VUCA period where the pace just gets faster every year. Disruption is where it’s at these days! We have had so much change to manage we had to invent something called change management. It’s nonsense, of course. On a number of measures, the last few decades have been reasonably stable. The next decade, by contrast, is likely to be disorderly.

If the government is serious about Net Zero, the decarbonisation measures will start reaching into our lives very soon. It is likely that this will take the country by surprise. Our people have no idea what’s coming, many of our companies are unprepared and our government appears to have no plan for funding, for the workforce or for getting the public on side. What could possibly go wrong?

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Labour’s problem is not the Red Wall – it’s the Grey Wall

The Labour Party is in danger of losing its nerve again. Ten years ago, the story that Labour spent all the money and caused the country’s massive debt was allowed to go unchallenged. The Labour Party, paralysed by the shock of the election, failed to fight back. By the time the party had recovered its composure and started to challenge the narrative of fiscal incompetence it was too late. No-one was listening.

This time the story that is going unchallenged is that Labour has lost the support of the working class. Worse still, the Conservatives are becoming the party of the working class. The great class inversion is the story of the moment. When even Keir Starmer says that Labour has lost the trust of the working class, well, it must be true, mustn’t it? Since the elections earlier in May, Labour has collapsed in the opinion polls. Of course it has. The story has become self-fulfilling.

But is it true? Are the Tories really now the party of the working class? Is Labour now only the party of metropolitan poshos?

The data don’t bear any of this out though. Christabel Cooper has looked at the British Election Study data from 2019. It shows the Conservatives doing better among all income groups except the poorest and especially well among the richest.

General Election 2019 vote by household income

Chart by Christabel Cooper using British Election Study data

But look what happens when you strip out retired voters. The split between Labour and Conservative voters is about where you would expect it to be, with the tipping point somewhere just above the median income.

General Election 2019 vote by household income – excluding retired voters

Marios Richards did an analysis of BES data for the under-55s, using gross personal incomes. It’s a similar picture, with a Labour majority among lower earners. As Jonn Elledge notes, of the working class voters that are working, Labour still has the largest share of their support.

It’s retired people that swung the vote for the Conservatives. There are a lot of them and a larger proportion of them vote than in younger age cohorts. As Marios points out, after adjusting for turnout, the median age of voters at the last general election was 53.

What these income figures don’t tell us is the impact of housing costs. Around three-quarters of those aged over 65 own their own homes outright. They may be income-poor but they are asset-rich. Without the need to spend on housing costs, their state and occupational pensions can leave them quite comfortably off, especially if they live in areas where the cost of living is low. As the Resolution Foundation’s Intergenerational Commission found, once you factor in housing costs, pensioner household incomes are slightly better than those of working-age people.

Chart by Resolution Foundation

There is a cohort of voters whose working lives coincided with the period when middle earners got the largest slice of the economic pie. A lot of those middle earners didn’t have degrees because they could get relatively well-paid jobs without needing the sort of qualifications their counterparts would need to do similar jobs today. Furthermore, they were able to buy property relatively cheaply by today’s standards and the government helped with the sale of council housing and mortgage tax relief. In the decades when the 1945-55 cohort were in their early twenties, it was much easier for two people on average earnings to buy property than it is now.

Chart by Joe Sarling

Joe Chrisp has broken the voting patterns down by age and housing tenure, again using BES data. In broad terms, older people are more likely to vote than younger people, homeowners are more likely to vote than renters and graduates are more likely to vote than non-graduates. The data indicate that the majority of younger non-graduate renters did not vote.

Chart by Joe Chrisp

Looking at the breakdown of both main parties’ support, it is clear that older non-graduate homeowners form the largest section of Conservative support. As Joe points out, some of those people in the dark blue section in the 2019 bar were also in the dark green section in the 1992 bar.

The home-owning baby boomers who propelled Major to victory in 1992 (when they were under 55) are now the bedrock of the Tory coalition as they age. In 2017, approximately half of its voters were homeowners over the age of 55 without degrees.

Chart by Joe Chrisp

A similar breakdown of the Labour vote shows that Blair captured some of the non-graduate home owner vote in 1997 but a lot of it had been lost again by 2010. The caricature of the typical Labour voter as a young urban graduate is some way wide of the mark. Graduates are still a minority of the Labour vote. The majority of Generation Rent, it seems, doesn’t bother to vote.

The Resolution Foundation’s analysis of the 50 ‘Blue Wall’ seats that were gained by the Conservatives from Labour in 2019, in the North, Midlands and Wales, showed that these seats had a higher rate of home ownership than constituencies that stayed Labour.

Our cultural references, and especially those of our politicians and commentariat, seem to be stuck in the 1970s. When we talk about the working class, we still have an image of a man in a donkey jacket standing outside a mine or a steelworks. When TV news channels travel to small towns in the Midlands and North and interview people during the day, they find people who look and sound like we think the working class should look and sound. Some of them can usually be relied upon to have a go at the Labour Party. Many of them may have once had working class jobs but, as home owners with good pensions, these days, they are not too badly off. As a result, they are largely insulated from the economic threats faced by the younger population. As Jonn put it:

A retired Teesside steelworker can be working class in terms of their family, career history, self-image and so forth, while still having a different set of economic interests to a 25-year-old renter on a zero-hours contract. 

Some have argued that this means the Labour Party is finished until the Boomers die off but this is a bit premature. Labour’s critics are right in that it should have done better among those of working age with low incomes. As Joe’s charts show, there are lots of non-voters to go at. All those non-voting renters should be fertile ground for the Labour Party.

There is little point in getting embroiled in what it means to be working class, as arguments will go on well into the night without resolution. It’s perhaps worth going back to some core principles though. One of the reasons the Labour Party was formed was because landlords and corporations were oppressing and exploiting people, often with the collusion of the state. There is still a lot of that going on. The Windrush Generation, the Cladding Scandal and the unbelievable corporate abuse at the Post Office spring to mind.

The pandemic has disproportionately affected all the people you would expect it to; lower paid workers, the young, ethnic minorities and those in rented accommodation. Covid has laid bare some of the UK’s systemic inequalities. As Torsten Bell put it:

We may be in the same storm but we are clearly in different boats.

Chart by Resolution Foundation

The Labour Party needs to get more of people in these groups out to vote. It won’t do that by telling everyone that it has lost the support of working people. The story that Labour spent all the money and left the country in debt never really went away and the party paid a heavy price for allowing that meme to take root. Stories like this, once they become established, spread like Japanese Knotweed and are just as difficult to kill.

Labour hasn’t lost the support of working people but it has lost the support of the retired. That will make it more difficult to win elections but starting from a clear understanding of what has happened in the last decade goes some way to helping decide what to do about it. The cause of Labour’s election losses isn’t the Blue Wall or the Red Wall, it’s the Grey Wall.

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Jenrick’s conjuring trick

“Just like that!”

Robert Jenrick made a big fuss about statues a couple of weeks ago. In a Sunday Telegraph article, he promised to save statues and street names from “town hall militants and woke worthies”. So great is the danger, he is proposing to change the law. Any attempt to remove “heritage assets”, he said, would require planning permission and a full public consultation.

The previous Saturday, the day before this article was published, Mr Jenrick’s department made a major announcement. It wasn’t about statues though. The new policy announcement is the Right to Regenerate – a proposal which would give ‘the public’ (in other words anyone) the right to force the sale of ‘underused public land’. It was couched in fluffy community language but it didn’t take long for the professionals to see through it.

From the Architects’ Journal, here’s Tim Sloan:

It doesn’t take long to see how misguided these proposals are. Why only public land? Why isn’t the government also going after the private developers and housebuilders allowing their assets go to waste?

It’s difficult to see how any publicly owned assets that are released won’t end up going to developers – the only people with the time and money to properly pursue councils to dispose of what they don’t have plans for themselves.

And Holly Lewis:

This proposal will further strip local authorities of vital assets with the potential of serving niche interests rather than the public good.’

Once again serving up policies that favour time and cash rich communities, this proposal does nothing for the most needy – those that local authorities should be in a position to support through creative reuse of buildings and spaces that they control.

Former RIBA president Ben Derbyshire warned of a potential horror story, describing the policy as a ‘wolf in sheep’s clothing.’

Right to Regenerate is, effectively, a land-grabbers’ charter. Well-resourced companies, deploying expensive legal advisors and geospatial surveys, would be able to identify ‘underused’ buildings or pieces of land. They would then have the legal right to force councils and other public bodies to sell them and would be given a first refusal option to buy any property they identified.

Of the two proposals, the one given most prominence on the Ministry of Housing, Communities & Local Government website is Right to Regenerate. It’s currently sitting in the ‘Featured‘ spot on the website. The statement about statues, although it came out a day later, has all but disappeared. It’s not even on the website’s menu. You need to do a search to find it. It’s clear, then, which of the two policy announcements the civil servants believe is most important and most likely to lead to policy changes and legislation.

From the media reaction, though, you would conclude the opposite. You can probably guess which of these stories got the most column inches. The Right to Regenerate barely made it beyond the trade press and was pretty much done by the middle of the week. They were still talking about statues and ‘woke mobs’ on Marr the following Sunday and there are still articles about it appearing almost two weeks later.

Notice something else though. The Right to Regenerate announcement contains no mention of a planning process or public consultation. It appears, then, that Robert Jenrick plans to give you the right to oppose an attempt to take down a statue or change a street name but when it comes to developers helping themselves to bits of your local park, you’ll get no say because that will be their ‘legal right’.

Here we see the Culture War in microcosm. You get to have your say on stuff that doesn’t really make much material difference but when it comes to matters involving money, land or other resources, you don’t get a look in.

We know, though, that most Conservative MPs don’t really care about ‘culture war’ issues. Most of them are more socially liberal than the average voter.

American political scientist Alan Wolfe famously said:

The right won the economic war, the left won the cultural war.

But that’s because the right didn’t really care about the culture war. Both Thatcher and Reagan preferred to fight on the economic front. It was far more important to deregulate the economy and tame the unions. Let the left have their diversity, discrimination laws and ‘political correctness’.

The right likes to let the left ‘win’ on culture war issues because it enables them to talk up the threat of the country going to hell in a politically correct handcart even when a Conservative government has been in power for a decade. The last thing the Conservatives want is to stop people taking down statues. You need the odd statue-toppling or street name change to convince people that the baying woke mob really is at the door.

As planning lawyer Nigel Hewitson pointed out, most historic statues are listed, so there are already significant administrative barriers to removing them. But that wasn’t really the point of Mr Jenrick’s article. Its real purpose was to reignite the war on wokeness, not to trail a serious policy. That was done the previous day.

David Olusoga described the fuss over statues as theatre but a conjuring trick might be a more suitable analogy. Conjurers use sleight of hand and misdirection to divert the audience’s attention from the mechanics of the trick. By proclaiming his defence of statues that no-one is actually aiming to pull down, Robert Jenrick diverted most people’s attention. His forced privatisation policy has barely been discussed.

In 1852, Karl Marx made an astute observation about English Toryism:

The Tories in England long imagined that they were enthusiastic about monarchy, the church, and the beauties of the old English Constitution, until the day of danger wrung from them the confession that they are enthusiastic only about ground rent.

It’s as true today. The economic war is what really counts.

Next time you hear a government politician or one of their think-tank outriders banging on about statues or some other manufactured culture war outrage, ask yourself what else is going on. It will probably be something important, something that involves actual money and resources. Follow the money. Look for the ground rent. That’s where the real story will be.

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Corporate purpose: a new dawn or a defensive ruse?

Is the corporate zeitgeist changing? After 30 years of shareholder primacy and focus on shareholder value, the language seems to have shifted.

In what may be a sign of the times, the FT has started a Moral Money Forum, focusing on long-term and sustainable business. Its authors, Gillian TettBilly Nauman and Patrick Temple-West, remarked: 

There have been so many announcements this year about the corporate world embracing ESG principles that it is temptingly easy to roll your eyes whenever a new survey drops. But sometimes, Moral Money remembers to stop being (almost) blasé and marvel about a crucial point: today’s corporate zeitgeist looks notably different versus two years ago, never mind a decade back.

Mark Carney talked about corporate purpose in his recent Reith lectures. He too senses a shift in the zeitgeist:

My sense is we’re at a stage where we have companies that in many respects are looking for pursuing purpose, but solving problems for society and, therefore, they will be profitable over the long term. 

The question is, for some, will they go further, do they actually give up some profit for broader purpose or broader means? 

His comments were in response to a question, not from a tree-hugging campaigner or journalist, but from a fund manager at Legal & General:

Now we’re seeing the rise of companies who are less interested in, I’d say, pure profit maximisation, and instead are pursuing profit with a purpose. 

BlackRock CEO Larry Fink made these comments in his 2020 letter to CEOs (emphasis from the original):

Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.

The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.

Here’s Harvard Law School’s Thoughts for Boards of Directors in 2020:

2019 may come to be viewed as a watershed year in the evolution of corporate governance. The focus on stakeholder governance has shifted from the question of whether a board of directors should take into account the interests of other stakeholders, to how a board should do so.

It was even top of the agenda at the annual conference of the corporate rich in Davos, with the World Economic Forum publishing The Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution:

The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.

Perhaps most surprising was the statement in 2019 by Business Roundtable, an association of CEOs from large US companies, which has generally adopted a free-market tone in the past. In 2020, Business Roundtable clearly reiterated its intention to break with its past and redefine the purpose of a corporation:

On August 19, 2019, 181 CEOs of America’s largest corporations overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder return.

In its place, the CEOs of Business Roundtable adopted a new Statement on the Purpose of a Corporation declaring that companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.

A number of papers have been published on this subject by business law academics in the US, interested in its implications for corporate governance and for the potential re-definition of what a company is for. Harvard professor John Ruggie concludes:

The rapid expansion of corporate globalization has plateaued; it is unlikely to be fully restored any time soon post-COVID-19. The construct of the corporation itself is in flux again. Markets are pricing in more of the external costs of corporate operations; ESG investing is becoming a market-moving factor; and leading corporates have moved well beyond traditional CSR to take more seriously the relationship between their own sustainability and that of the social and natural environments in which they operate. The repurposing debate noted at the outset of this chapter is not mere virtue-signaling; it is an indicator of directional change, even if not a final destination.

The trajectory of corporate law and securities regulation is tending toward greater recognition of stakeholder interests.

It is tempting to dismiss all this as another fad. Those of us who have been around for a while will remember Corporate Social Responsibility, Stakeholder Capitalism, Enlightened Shareholder Value and various other concepts and initiatives that we were told were going to nudge, cajole and persuade businesses to behave more ethically. 

This time, though, something is different. More people are talking about it and those people hold more senior positions in the business hierarchy. ESG (short for Environmental, Social and Governance) and related concepts like corporate purpose and investor stewardship have been creeping up the agenda over the last half-decade and have reached the top of it over the last two years. It’s not just a few academics and thinktanks talking about this. The idea of corporations having a purpose beyond simply making profit has gone mainstream. It’s pretty clear that something is going on. Corporate Purpose is where it’s at these days.

It seems that the idea of companies having a purpose other than profit and being accountable to a broader range of people than just shareholders has become almost orthodox. This has all happened fairly quickly. After three decades or so of shareholder primacy, suddenly everyone is talking about stakeholders and purpose. It feels like one of those rapid fashion shifts we used to get. Someone going on about shareholder value now looks a bit like the bloke buying a pair of flares just as everyone else starts wearing drainpipes. 

Although the widespread discussion of corporate purpose is relatively recent, it is possible to track a shift in the mood music over the past couple of decades. The 1980s saw the high tide of Thatcherism, Reaganomics and of Milton Friedman’s view of shareholder primacy. The corporate governance reforms of the early 1990s were primarily about protecting shareholders’ interests from the greed, malevolence or incompetence of corporate managers. 

The 1990s also saw the first widespread use of the term ‘Corporate Social Responsibility’, with its implication that perhaps companies did have some sort of social duty after all. In the 2000s, the concepts of Stakeholder Capitalism and Enlightened Shareholder Value appeared. The 2006 Companies Act, while re-affirming the primacy of shareholders, placed a duty of directors to consider the interests of employees, suppliers, customers and the wider community and to take into account the environmental impact of their decisions.   

In the aftermath of the financial crisis, the sense that something was deeply amiss with capitalism saw the focus of regulation shifting to investors. In the UK, reports by David Walker and John Kay suggested that shareholders have a duty of stewardship towards the companies in which they invest, sharing responsibility with directors for the long-term development of the company. The 2010s saw the introduction of the Stewardship Code and the emphasis on Environmental, Social, and Governance (ESG) investment criteria.

Which brings us to 2020, with the drawing together of these strands into the idea of corporate repurposing and the championing of corporate purpose by academics business leaders and  large investment management companies. 

So what’s going on? Is this really, as Larry Fink says, a fundamental reshaping of finance, with the implication that the nature of capitalism is changing, or is it simply a PR exercise by corporations trying to deflect criticism in a post-crash and now post-Covid world? 

Can companies simply ignore corporate purpose and dismiss it as the latest fad? Probably not. This has a momentum behind it that was missing with CSR, Stakeholder Capitalism and other previous attempts to reform the way companies are run. You only have to look at the quotes at the beginning of this piece to see that corporate purpose is far more of a Thing than anything that went before it. Executive search firms are reporting that candidates are asking about the social purpose of the companies. As we have already seen, major investment managers are asking about it too. Might a clear corporate purpose with a social dimension and commitment to wide group of stakeholders become a prerequisite for attracting both talent and capital? 

What might the impact of the Covid pandemic be? Will companies retrench and ruthlessly cut costs as they try to rebuild their balance sheets? Or will the increased public scrutiny of organisations restrain them? I have heard the quote ‘people will remember what we did’, or variants of it, attributed to a number of senior executives. It is certainly true that many in the corporate world are keenly aware that people have paid a heavy price for this pandemic, while governments propped up economies and companies.

I also wonder about the conflation of corporate purpose with business ethics. A company producing landmines might say that its purpose is very clear but whether that fits into the WEF’s definition of serving society at large is debatable. 

And is there, as one former investment manager and business school professor said to me, a contradiction between the various duties placed on directors and shareholders?

There are deep conflicts of interest here. From the point of view of a pensioner looking for high returns, the best investment is a solid monopoly that screws the customers and passes on costs to the public. This is in direct conflict with customers, who want good value products, and citizens who want the company to behave ethically. We can’t solve this conflict by writing a better stewardship code.

The statement by Business Roundtable inevitably drew flak from the left but also from the right for “demoting shareholders” and pandering to “liberal activist investors”.  Larry Summers reckoned it might simply be a ruse to hold off higher tax and regulation. The term ‘purpose washing‘ has appeared as a descriptor for practices which, as with greenwashing, are insincere and use the concept as marketing spin.

It was this piece by Harvard Law School’s Mark Rowe that struck a chord with me though. He notes that public opinion is shifting and that anti-corporate rhetoric is a feature of both right-wing and left-wing populism.

It’s plausible to wonder, therefore, whether the Business Roundtable is recalibrating their statement of corporate purpose to help put big business lower on populist target lists.

Anti-corporate ideas are in the air, and they do not originate from the political leaders who are expressing them. They will persist regardless of how any leader fared.

All this might seem odd when the power of organised labour is at a low ebb. While there is definitely more open hostility towards some companies now, there doesn’t seem to be an immediate threat to the power of corporations or to the rewards reaped by those who run them. Perhaps the shock of 2016 and the realisation that politics now matters to business in a way that it hasn’t for the past 30 years has focused the minds of corporate leaders. Or maybe they believe they might actually burn the planet if they carry on as they have been and that, even with their wealth, they will have few places to hide. Whatever the reason, the corporate world has sniffed the air and senses a change. Whether anything changes beyond the tone of press releases and annual reports remains to be seen but, wherever it leads, something new is afoot in the boardrooms of the world’s major companies . 

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Brexit bureaucracy – it’s not a bug, it’s a feature

After four years during which Brexit dominated UK news, it still seems to have taken British businesses by surprise. As evidence of the disruption mounts, business groups are calling on the government to ‘do something’ to sort out the mess. According to the Observer, some even think we can re-open negotiations with the EU. The CEO of Marks and Spencer remarked, with typical British understatement: 

Tariff-free does not feel like tariff-free when you read the fine print.

All the talk of ‘new’ red tape and regulations betrays a fundamental misunderstanding about what happened on 31 December. These regulations are not new. They are the normal rules of trade. Membership of the EU’s customs union and single market effectively gave us immunity from these rules when we traded within its borders. The reason the EU built a trade wall around its borders is so that trade can move freely within it. Once goods are within the EU, the customs union means that they have already had their tariffs paid and the single market means that they have either been made or imported according to a common set of regulations. Therefore they can be moved around the EU without any further checks. 

By triggering Article 50, the UK set itself on a course to rip up that immunity, at which point, the normal rules of trade reappear. Somebody (I think it was Jacob Rees Mogg) said that the vote for Article 50 was a vote for No Deal. In a sense he was right because Article 50 destroyed the legal basis of our trade with the EU and left a blank sheet of paper in its place. We were left with the same trading relationship as Venezuela until something else was negotiated. What we have negotiated is better than No Deal but it is a long way from the ease of trade that we once enjoyed.

We have a Free Trade Agreement (FTA). Like all FTAs, tariff-free trade only applies to goods wholly or mostly made in the countries party to that FTA. Therefore, if your business is bringing in goods from Asia, attaching a design and logo to them, then re-exporting them to the EU, there will now be tariffs on those goods. There is much talk about tariffs being ‘slapped on’ British exports. Again, this is to misunderstand what is happening. Those tariffs are the normal terms of trade. They would apply under any of the FTAs we have agreed. Despite what our prime minister says, we have not negotiated tariff-free trade with the EU or anyone else. You can only have tariff-free trade on everything if you are inside a customs union.

This Rules of Origin question isn’t something that has been dreamt up overnight. Trade experts have been warning about it for years. Sam Lowe wrote about it in March 2018. As he explained, free trade agreements don’t actually mean free trade. 

Without an EU-UK customs union British exporters will face a new barrier to trade: rules of origin. No amount of positive thinking and innovative solutions can eliminate this problem.

In October 2019, former Australian trade negotiator Dmitry Grozoubinski produced a handy diagram to explain it.

A trade agreement, even one that eliminates all tariffs, doesn’t mean countries can do away with customs checks on shipments from one another. This is because while they have no tariffs between themselves, they may have vastly different tariffs on other countries. 

The diagram below illustrates why this could be a problem. In it, Country B has Free Trade Agreements eliminating all tariffs with countries A and C. Country C wants to sell something to Country A, but doesn’t want to pay the 10% tariff. So it sends the shipment via Country B, avoiding the tariff.

To prevent that, Country A needs to maintain a goods border with Country B, to check that any incoming goods are actually eligible to take advantage of their trade agreement (they really come from Country B). 

So even if we have FTAs with other countries, it still doesn’t mean that we can bring in their goods and re-export them to the EU. 

This presents the UK with some difficulty because a lot of what this country exports is made from imports. As the Institute for Government (IFG) pointed out in 2017, around a quarter of the value of UK exports was accounted for by foreign components. In those sectors where the UK is more closely integrated into a global value chain, the figure is significantly higher; 44% of the value of UK car exports comes from imported products. It was always likely, then, that some of our exports would attract tariffs under a free trade agreement.

A FTA was only ever going to mitigate the effects of tearing up our EU membership. Leaving the EU’s customs union and single market reintroduces barriers to trade. As the Resolution Foundation remarked, this means that much of the economic damage of Brexit was already baked in. 

Of course, big Brexit decisions will also be taken in the coming weeks, with the OBR expecting a no deal Brexit to permanently knock another 1.5 per cent off the size of the UK economy, on top of the 4 per cent that is baked into the forecast assuming a deal is done. This means the economic scarring from the worst-case Brexit outcome would be almost double the long-term cost of the coronavirus crisis.

The trouble is most of those of working age have little experience of life before the EU. We have traded tariff-free for as long as most people can remember and free of any checks at all since the implementation of the single market almost three decades ago. The single market was in place by the time the channel tunnel opened in 1994, so the UK has traded under its terms for as long as there has been a land border with the EU. On 31 December 2020, the trade framework that existed for much of people’s working lives was torn up. It seems that many have not yet grasped what this means.

It is unlikely that any of this will change significantly. Whatever ‘sorting out’ business groups hope the government will do is unlikely to make much difference. The bureaucracy involved in our new trading agreement with the EU is not a bug. It’s a feature. It is meant to be like this. Outside the single market and customs union, things are more difficult than when you are inside them. That’s the whole point. 

Lobbying government or MPs won’t do much good as there is not much they can do about it. It’s not like before, when we could complain about EU rules and exert some influence to get them changed. This is now an agreement with an external trading bloc signed by our sovereign government. That, too, was the whole point.

None of this is new and none of it should come as news to businesses. There have been articles, videos, online panel discussions and live events, many of them free, running for the past four years. There really is no excuse for not understanding this stuff if your business is, in any way, dependent on trade with Europe. 

We have been told that the UK will prosper outside the EU because it has exceptionally creative and entrepreneurial business leaders. Let’s hope they arrive on the scene soon because, at the moment, a lot of our business leaders still don’t appear to have understood what the hell has just happened. 

In mitigation, our government has not served its companies well. Politicians have been constantly reassuring business that everything will be fine. Perhaps a lot of people believed the prime minister when he said we were going to have tariff-free-trade. As the IFG’s Jill Rutter said, there was a lot of political pressure being applied to downplay the likely downsides of Brexit. Even so, basing the fate of your company on the guarantees of a man who said ‘fuck business’ and who was once sacked for lying might not be the soundest of business judgements. Not everyone was so credulous. As Pernille Rudlin, an expert on Euro-Japanese trade noted, Japanese companies in the UK have been preparing for Brexit for years and many moved parts of their operations to the EU in anticipation.  

Nevertheless, as that great business guru David Brent would have said, we are where we are. Paul Weller’s words have rarely seemed more fitting:

What you see is what you get
You’ve made your bed, you’d better lie in it
You choose your leaders and place your trust
As their lies wash you down and their promises rust

The public got what the public wanted, or, at least, an interpretation of what it looked like a small majority of those who turned out to vote might have wanted in 2016. That involves increased red-tape, greater difficulty exporting and most likely, a lot of businesses going bust.

There really is no going back from this now. It’s not going to get ’sorted out’. Any easing of restrictions will only be temporary. The deal has been signed. This is Brexit. It is what it is and now we have to live with it.

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The outcry over LTNs is not a culture war – it’s more serious than that

Map by LiveWestEaling

We knew the latter half of 2020 would see arguments about Brexit, lockdown restrictions, masks and the US election. What we didn’t foresee was that, in many places, the row of the summer and autumn would be about Low Traffic Neighbourhoods – LTNs for short.  I had never heard of Low Traffic Neighbourhoods until June of this year, when I was told that one had been proposed for an area near where I live. Even after someone had explained it to me, I still didn’t really get it. It was only when I saw this map that I realised what Ealing Council was trying to do.

It is a very cleverly designed traffic system that ensures everyone still has motor vehicle access to their homes but makes it impossible to use the side roads to drive between any of the major routes. As with so many things, there was not much discussion about it until the day the roads were blocked. Then it all kicked off. I soon discovered it was kicking off all over London and in many other cities too

The speed at which LTNs have suddenly become topical is due to the speed at which they have been implemented. Councils were given special powers to set up LTNs with a week’s notice and to carry out the consultation period after the implementation, using something called Experimental Traffic Orders. As could have been predicted by anyone who knew anything about human behaviour, the people being experimented on didn’t like it very much. 

Local authorities came in for a lot of stick. There was a suspicion in our area that Ealing Council was using the Covid pandemic as cover to implement a radical cycling agenda, the council leader being a keen cyclist. But, while some councils might have been enthusiastic, the drive for LTNs has come from central government. Local authorities have been strongly advised to implement such schemes and told that their transport budgets may be cut if their schemes don’t measure up. The speed of implementation is accounted for by the fact that there was a narrow window to bid for government funding. Councils were therefore in a race to get financial support to implement the schemes. The losers risked a double whammy of failing to get funding and therefore seeing their budgets cut next year for not doing enough about ‘active travel’.

If that sounds far-fetched (which it did to me when I was first told about it), check out the initial statement from Grant Shapps in May:

The government expects local authorities to make significant changes to their road layouts to give more space to cyclists and pedestrians.

Followed by the detailed report, signed by a smiling Boris Johnson, in July:

There will be first hundreds, then thousands of miles of safe, continuous, direct routes for cycling in towns and cities, physically separated from pedestrians and volume motor traffic, serving the places that people want to go. 

And how are councils meant to do this?

Low-traffic neighbourhoods will be created in many more groups of residential streets by installing point closures – for example, bollards or planters – on some of the roads. It would still be possible to access any road in the area, but motor traffic would not be able to use the roads as through routes. Streets within low traffic neighbourhoods will provide clear, direct routes for cyclists and pedestrians promoting walking and cycling. 

What if the councils drag their heels?

Many schemes take too long to get started and too long to deliver once they have been started. All future funding will be conditional on work starting and finishing by specified dates.

Those councils that don’t implement enough schemes will face the wrath of Active Travel England, a new Oftsed-style inspectorate:

From next year, Active Travel England will also begin to inspect, and publish annual reports on, highway authorities, whether or not they have received funding from us, grading them on their performance on active travel and identifying particularly dangerous failings in their highways for cyclists and pedestrians. 

Active Travel England’s assessment of an authority’s performance with respect to sustainable travel outcomes, particularly cycling and walking, will be taken into account when considering funding allocations for local transport schemes. We will consult on introducing new criteria to measure local highway authorities’ performance in respect of sustainable travel outcomes, particularly cycling and walking, when considering funding allocations for local transport schemes. 

Nice transport budget you’ve got there. Wouldn’t want anything to ‘appen to it, would yer?

The government is not messing about here! It is determined to see Low Traffic Neighbourhoods implemented and it will beat councils up if they don’t comply. It’s no wonder, then, that hundreds of Low Traffic Neighbourhoods have appeared all over the country in the space of a few months.

In many areas, opinion has been bitterly divided. The vitriol on social media appears, to me at least, worse than that over Brexit. Bollards and planters have been vandalised and people have been threatened. This has led some to characterise the battle over LTNs as another front in the culture wars. It’s a compelling story – yet another divide between the Remainers and Brexiters, the conservatives and liberals, the Somewheres and Anywheres. Now we can add the petrolheads and white van men on one side and the eco-warriors and cycling lobbyists on the other. 

Compelling but wide of the mark. As a proxy for the other culture war divisions, the LTN controversy doesn’t really work. The text of the article that appeared in the Observer with the ‘culture wars’ title actually went to great lengths to explain how diverse the supporters and opponents of LTNs are. My area has become, in many ways, the epicentre of the resistance to LTNs. It is from the neighbouring Northfield ward that the legal challenge to LTNs has come. Two veteran local campaigners both of whom I have got to know recently as they have been very helpful to me and my neighbours over our own local difficulties, have found themselves on opposite sides of the LTN argument. The one leading the charge against LTNs is a leftie Remain voter whose hero is Tony Benn. At 71 percent, Northfield was the 22nd most Remainy ward in the UK. Another area where there is a significant anti-LTN movement,  Lewisham, voted 70 percent for Remain. If the data is available, someone with more time than I have might want to map the referendum vote against level of opposition to LTNs. Given that most of the LTNs are in urban areas, I’d be surprised if it showed that the Remain/Leave split is much of a predictor of views on LTNs. West Ealing is not Farage country by any stretch but many of its residents don’t like LTNs.

It is also likely that social media is giving a distorted sense of the level of polarisation. Most of the people I speak to have mixed views but Twitter and Facebook seem to be split into hostile camps. Research on the discussion of LTNs on Twitter by social network analyst Jimmy Tidy found that 50 percent of the activity on Twitter came from just 20 accounts. A few very convinced and very vocal people are shaping the online debate.

The politics around LTNs are similarly complex. Ealing’s Labour council and most of its Labour councillors that have expressed an opinion are in favour of LTNs. One of its Labour MPs has criticised the schemes. Conservative councillors in Ealing and Hounslow have attempted no confidence motions against the Labour administrations, yet it is difficult to accuse councils of doing anything other than what the Conservative government told them to. The claim that many of the LTNs are poorly designed doesn’t really stand up. Yes, planters and bollards are a nuisance but that’s what’s recommended in the government report. Sure, they inconvenience people but that’s what they are supposed to do. They are meant to discourage people from driving along side roads and from making short journeys by car. The inconvenience is not a bug, it’s a feature.  Grant Shapps has flipped backwards and forwards, colluding with his party’s councillors while still trying to stick to the government line. He has admonished councils to implement LTNS, threatened to punish them for ‘poorly designed’ schemes, told them to get on with it and not be derailed by noisy opponents, threatened to reclaim the money granted if they don’t consult, then re-iterated his earlier threat to hammer their budgets if they don’t get with the LTN programme. Perhaps a man who ran businesses under assumed names finds it easy to dissemble but the mixed messages are certainly confusing for everyone else. 

Some of this will, no doubt, strike those of you with long memories as a bit odd. This is a Conservative government deliberately making it more difficult for people to use their cars. Margaret Thatcher, it is said, was not particularly interested in public transport, because ‘our people drive’. The Tories, being the party of the more affluent suburbs and smaller towns, were also the party of the habitual driver. Whatever else, this campaign for Low Traffic Neighbourhoods doesn’t sound very conservative. 

Things have changed since the 1980s though. After a fall in the mid 2000s, traffic levels are increasing again. It is likely that Covid will encourage more people to take to their cars, given that it is the only way you can move about while self-isolating.

Chart by Department for Transport

In London, the entire net increase in traffic has been on minor roads. The development of satellite navigation and associated apps have opened up streets where previously only those with local knowledge would drive. Using real-time data, powerful algorithms are diverting vehicles down whatever roads are available in a given area. Traffic has become like water, flowing along the shortest route to a given destination and automatically changing direction when obstacles are placed in its way. It is reasonable to assume, at least in London, that without sat nav, the increase in traffic would not have been possible. 

Chart by Department for Transport

This presents a problem for councils of all political colours that had been trying to reduce the level of traffic in their boroughs for some time and, until recently, thought they were succeeding. It also doesn’t bode well for the UK’s carbon emissions target.  Achieving that would have been difficult enough even with a gradual decline in road traffic. The jury is still out on whether or not LTNs have much impact on the level of traffic or vehicle emissions. Supporters will point to Walthamstow as an example but the very fact that the same survey comes up so often is indicative of how little robust evidence there is. There is some evidence to suggest that, over time,  LTNs discourage car ownership but the authors of the study carried out in London concede, “Sample size for LTN areas is small and hence uncertainty about effect magnitude is large.”

But even if LTNs were proven beyond doubt to reduce levels of traffic and emissions, I suspect it would have little impact on the debate. LTNs require a significant shift in behaviour and such things are not generally popular.

The row over Low Traffic Neighbourhoods may turn out to be a storm in a teacup. Maybe we will just get used to them or perhaps the opposition will kill the idea stone dead. The outcry does draw attention to an important question though. Most of us recognise, at least in the abstract, that we will need to change our behaviour if we are to have a hope of even slowing down the rate of climate change. The government’s emission targets will be unachievable without reduced car use. But that ‘we’ is abstract and somewhere in the future. I’m reminded of St Augustine, who is supposed to have said, “Please God, make me good, but not just yet.” Supporters of LTNs point to a survey (which I can’t find online) that says most people are in favour of such schemes. Opponents argue that a majority of people who actually live in LTNs don’t like them and point to the large turnouts at demonstrations. It is quite possible that both are right. 

When cities have been designed and lifestyles have been built based on decades of assumptions about the availability and speed of car use, it is very difficult to change behaviours overnight. Yes, I know reducing the number of short car journeys is a good idea but not in my area, or, at least, not yet. Yes, I know we have to save the planet but right now I need to get to West Ealing Sainsbury’s for my weekly shop and I’m annoyed that I have to do a 270 degree journey to get there. The row over LTNs isn’t a culture war, it’s a microcosm of a much more fundamental question. How the does a society built on fossil fuels shift its behaviour quickly enough to have an impact on the looming climate change catastrophe? It’s a question that’s not going to go away. 

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The almost-but-not-quite recovery

The latest forecast for the UK economy from the Office for Budget Responsibility shows an almost-but-not-quite recovery. It starts off v-shaped with a rapid bounceback, then becomes tick-shaped as the recovery slows. The tick has a long tail and, over the course of the forecast, it never quite gets back to where the OBR thought it would be before the Covid pandemic.

Chart by Office for Budget Responsibility

It was always likely that there would be rapid growth after the easing of the lockdown and the development of a Covid vaccine. Pent up demand delivers unprecedented growth after the unprecedented fall. The problem is how much of the economic damage has longer term effects. This is what the OBR describes as ‘scarring’.

As Chris Giles explained at a Zoom event I went to a couple of weeks ago, businesses face the problem of stranded capital – capital that was highly productive this time last year but is suddenly unable to do its job. City centre offices and passenger trains for example. The same could be said of human capital. Skilled workers in sectors like hospitality and retail are unable work. The question to which no-one really has an answer yet is how much of this capital will be permanently stranded. 

If assumptions and attitudes shift then so will employer, employee, consumer and investor behaviour. Even if there is a Covid vaccine, will the knowledge that a pandemic happened and might again make people more cautious? Will we be happy to pile onto crowded trains again, with our faces inches from someone else’s? Are we going to go back to city centre offices every day? Will we cram into crowded pubs? Will we shop till we drop again now that we have discovered we can order so much stuff while sitting at home? Our return to confidence looks likely to be almost-but-not-quite, so things never quite get back to where they were. For businesses with investments in stranded capital, this will be bad enough. For the stranded human capital – the people with skills they worked hard for but can no longer use – the impact will be devastating. Despite all the enthusiasm for re-skilling, changing sectors and occupations is a lot more difficult than it sounds.

As the OBR explains:

 The pandemic is quite likely, however, to leave lasting ‘scars’ on supply capacity. These can arise through a variety of channels, including: 

deferred or cancelled investment in physical capital and lower innovation as a result of the heightened uncertainty and increased levels of debt incurred during the pandemic; 

the destruction of valuable firm-specific capital and knowledge arising from business failures; 

a loss of human capital due to sustained unemployment as the economy restructures away from contact-intensive sectors; 

earlier retirement from the labour force prompted by the pandemic; and 

increased loss of days worked due to sick leave as it becomes unacceptable to turn up to work showing virus-like symptoms. 

The combined effect of all this is a hit to productivity, investment and employment. It is this that accounts for the almost-but-not-quite nature of the recovery:

The set-back to the recovery is deeper and more durable in our central forecast. But after an effective vaccine becomes widely available in the second half of 2021, output recovers to its pre-virus peak by the end of 2022. However, output never returns to the March path, mainly reflecting our 3 per cent scarring assumption. 

The Resolution Foundation summed it up succinctly:

The UK economy is set to shrink by 11.3 per cent this year, the biggest decline in over three centuries. Welcome news on vaccines means the economy will bounce back, but the recovery will be ultimately incomplete, with the economic ‘scarring’ leaving it permanently 3 per cent smaller, or £1,400 for every adult in Britain. 

But wait, there’s more. The forecast assumes that the UK will conclude a ‘typical’ free trade agreement with the EU. If, instead, it leaves the transition arrangements on WTO terms on 31 December, the growth path looks even weaker. 

Chart by Office for Budget Responsibility

Coming on the back of the pay stagnation after the financial crisis, the outlook for earnings is horrendous. The OBR’s forecasts see real average employee earnings not getting back to their 2007 level until 2026. That is nearly two decades of pay stagnation.

Chart by Resolution Foundation

As Resolution Foundation chief executive Torsten Bell remarked, what we are seeing here is the effect of three once-in-a-generation economic shocks. The combined effect of the financial crisis and its aftermath, Brexit and the Covid pandemic have left our economy permanently scarred. 

Covid has provided a smokescreen to cover up pre-existing problems. (This is true at company level too.) Things that were going wrong before the pandemic can easily be blamed on it. Were it not for Covid, we would have been discussing the fact that the economy had stalled and, most probably, gone into a mild recession during 2020. The economy hit the buffers during 2019 and shrank on Boris Johnson’s watch.

By February 2020, it was slightly smaller than when he took office and, under the threat of Brexit, showed no sign of recovering momentum. It might seem a bit mean to say it, given that the prime minister was very ill with the disease, but, in some ways, Covid got the government out of a hole. It can now blame the almost-but-not-quite recovery on the virus when at least some of it is due to the weakness of the economy beforehand and the self-inflicted wound on Brexit on top of it.

This is what the three once-in-a-generation economic shocks look like in a historical context. Per capita GDP growth for the first quarter of the 21st century will be lower than the preceding three. It looked almost as bad as this based on the forecasts before the pandemic because much of the damage had already been done.

Source: Bank of England and OBR Economic and fiscal outlook – November 2020

The 2008 recession wiped out most of the growth of the early 2000s and the economy never really recovered. After the pandemic, we will get a glimpse of what post-recession growth used to be like before we return to the per capita 1-1.5 percent GDP growth that seems to have become the norm.  

For an economy still based on the assumption of post-war growth rates and a population which still believes that, somehow at some point, we will get back to that again, this is going to present some significant challenges. The government will get away with blaming Covid for a while but it can’t get do that indefinitely. Eventually, people will notice that things aren’t ‘getting back to normal’. They will see it in their pay packets, living standards and job prospects. 

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The recovery won’t be V-shaped

Last week’s GDP figures showed the depth of the economic contraction during the lockdown and the extent of the bounceback afterwards. The decline was unprecedented but so was the subsequent growth. This is what happens when you switch the economy off then switch it back on again.

By most accounts, the recent figures were disappointing. Much of the bounceback was due to the partial recovery of the hospitality industry, aided by government subsidy and fine weather. The resurgence of the Covid virus and renewed restrictions in some parts of the country don’t bode well for the prospects of a continuing recovery.

Aside from Lockdown 2, though, there are other reasons to suspect that talk of a V-shaped recovery might be over-optimistic. The big scary slump on the ONS chart draws attention away from what was happening before the pandemic. Zoom in on the two years before the lockdown and it is clear from the most recent data that GDP growth hit the buffers well before March 2020. The economy had already shrunk on Boris Johnson’s watch and it was smaller on the eve of the lockdown than it had been a year earlier.

Source: ONS GDP Monthly Estimate

The Institute for Fiscal Studies and the Resolution Foundation published reports over the summer showing the state of pay and employment just before the pandemic. For living standards, the picture was dismal. Average pay, having just hit its pre-crisis level, was on the slide again and household incomes had fallen slightly in 2018-19. The only bright spot was continuing high employment without which, as the IFS remarked, the picture would have been even worse.

The only thing good about the UK’s economic performance after the recession was record high employment rates and even that now looks likely to fall victim to the pandemic. Today’s release by the ONS shows the impact of the crisis feeding through into the headline employment numbers. All the indications suggest that, even with continued government support, unemployment is set to rise sharply, with the lower paid suffering the biggest hit.

The government is making much of re-skilling. There’s a set of parallel narratives going on at national, organisational and individual level which depicts the pandemic as just what we need to shock the country, its companies and its people into new ways of working. The post-Covid economy will look very different but companies will pivot to take advantage of new opportunities. (Everybody’s pivoting now and if you’re not you really need to get with the programme.) This will shock the economy into renewed high productivity as zombie companies go under and the workforce reskills to take advantage of the new jobs available. That’s why the government is so keen on reskilling – hence its new advertising campaign showing shop-workers and ballet dancers retraining as cyber experts. Company failures and redundancies are re-framed as opportunities. This is just the kick up the backside you/the company/the country needed to move on to something bigger and better.

It’s a great story. No doubt older readers will remember something similar from previous recessions. Governments always pledge to help those people displaced by economic restructuring to re-skill and take on new jobs. I have long suspected, though, that the main beneficiaries from such initiatives are the companies awarded the contracts to run the schemes. 

The cold reality is that workers don’t tend to re-skill when they lose their jobs. As recent Resolution Foundation research showed, very few people change occupation and even changes in the same occupation between sectors are unusual. For the most part, when people lose their jobs, they move down the occupational hierarchy rather than up it, accepting lower paid and lower skilled jobs.  Even before the pandemic the IMF cast doubt on the ability of workforces around the world to re-skill quickly in the face of automation. Assuming that rapid re-skilling is possible, it is likely to require massive government investment. The recent record of employers on training provision is pretty poor. A few might put resources into retraining but, if previous behaviour is anything to go by, most won’t. Beware of government skills-washing. A great re-skilling is unlikely.

What we are likely to see, then, is significant displacement of people, similar to that which occurred in all previous recessions apart from the 2008 one. This will reduce demand, increase feelings of insecurity and slow down the recovery.

As Philip Inman said last week, the underlying problems with the UK economy are still with us. It is still beset by dismal productivity and a lot of its high performers of the past are in decline. Chris Giles noted two years ago that the UK’s leading edge companies and sectors are no longer as leading edge as they were. 

To make matters worse, hard on the heels of Lockdown 2 we will be switching parts of our economy off again as those firms dependent on exports and cross border supply chains will be hit with new trade barriers. Various estimates have been made as to the economic impact of Brexit but, whatever happens in the negotiations, trade will get more difficult and that is bound to impact on economic growth. The UK is the only country in modern times that has pursued a policy of making trade more difficult. A questionable policy at the best of times but bordering on the insane during an economy-wrecking pandemic. 

Add all this to the continuing fear of the virus which, as the IFS noted in its Green Budget today, is still significantly suppressing demand, and the V-shaped recovery is looking very unlikely.

I particularly liked this quote from Ruth Gregory at Capital Economics:

We expect the new Covid-19 restrictions to mean that the economy does little more than move sideways in the final three months of the year, leaving economic activity marooned 7.5% short of its pre-crisis level.

Moving sideways is a succinct description of what is going on. Some sectors are booming, while others are collapsing. A few workers may transfer from the collapsing ones to the booming ones but most won’t. Some firms will do very well but the overall aggregate is an economy which will remain smaller than it was for some time.

All of which suggests that the recovery, such as it is, will be more tick-shaped than V-shaped. Even the IFS’s most optimistic scenario doesn’t anticipate the economy recovering to its pre-pandemic level until the beginning of 2022. 

Chart from IFS Green Budget

An already weak economy has been flattened by a pandemic and then hit while on the ground by a self-launched missile from three years ago. There are serious doubts about the UK’s ability to recover from this and it is unlikely that we will see much improvement soon. It looks like we could be in for a long and grim haul.  

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The end of the furlough and the new social divide

“It’s begun,” said Resolution Foundation chief executive Torsten Bell, as the increase in unemployment fed through into the labour market statistics for the first time. He also reminded employers that there were 45 days to go until the end of the Job Retention Scheme, so consultations for any large scale post-furlough redundancy programmes would need to start now.

Until recently, the ONS labour market releases have had a slightly out-of-time look to them. Employment was still shown as being at record levels when we knew it wouldn’t be for much longer. The claimant count was rising but the employment numbers barely moved. The time-lag in labour force data and the furlough keeping many people employed, at least on paper, concealed the extent of the Covid-19 impact on jobs. (The Resolution Foundation did an excellent explainer a couple of months ago on why the employment figures seemed to be giving conflicting messages.)

Most commentators seem to agree that the employment situation is about to get quite a lot worse. Rising redundancies, falling vacancies and figures from HMRC that indicate a drop in the number of employees suggest that the labour market outlook will start to look a lot grimmer as we go into the autumn and the furlough comes to an end. No doubt newspapers already have their Halloween Horror headlines ready to roll when the Job Retention Scheme ends on 31 October.

There is already evidence that the lower paid sections of the workforce were most adversely affected by the lockdown. They are likely to be hardest hit by the coming employment contraction.

Source: Resolution Foundation, The Full Monty, 29 June 2020.

The speed at which organisations were able to make changes during the lockdown has whetted the appetites of some senior executives for further rapid and radical restructuring. Changes that would otherwise have taken years were implemented in weeks.  My data for this is anecdotal but I sense that a certain amount of ‘opportunistic restructuring’ is likely. Now that the initial shock the pandemic has subsided and managers are no longer as focused on simply keeping things going, some are looking at ways the crisis might give them an opportunity to re-design their businesses. This is perhaps borne out by the latest CIPD Labour Market Outlook, which shows an increase in the number of companies expecting to cut staff.

Meanwhile, many of those in managerial and professional roles are planning for a future in which they spend a lot more time working from home than they did before the pandemic. The reluctance to go back to the workplace is particularly strong in places with long commutes which are dependent on public transport, like London and New York. Some financial and professional services firms are preparing to make working from home the norm.

Recent data suggest that, even though the furlough is unwinding and people are returning to workplaces, many of those who have been working from home are not in any hurry to go back to their previous commuting patterns. Before the lockdown, only 7 percent of UK employees worked from home. Companies are now reporting that close to 40 percent of their employees are working remotely and that figure hasn’t fallen by much even as the lockdown has eased.

Chart by Resolution Foundation

In its April report on the economic impacts of the coronavirus, the Resolution Foundation divided the workforce into four sections:

  • Key workers in public-facing roles;
  • Workers in shutdown sectors;
  • People working outside the home – in other words, people who carried on working but couldn’t do their jobs from home;
  • People working from home.

That third category has been the least remarked upon throughout the crisis. We clapped the NHS staff and other frontline workers but there were many who were less visible, working to keep things going. The effort from manufacturing and distribution was particularly impressive. After the initial panic buying, we rarely ran short of much. Companies increased production to restore the supplies of food, soap, toilet paper and other products to the supermarket shelves.

It now looks as though this divide will solidify. It is unlikely that we will have any permanent solution to Covid-19 for some time. Frontline workers will continue to be at risk, many office workers will avoid returning to work and some of the shut down sectors will remain shut down. It may be that the Resolution Foundation has identified the new social divide of the 2020s.

Last autumn I participated in a number of discussions about the future of work, which tended to look at it in terms of changes over the next five to ten years. Now it is difficult to envisage what workplaces and employment might look like a year from now. The Covid pandemic has changed our assumptions and, as Edgar Schein told us, when assumptions change, culture and behaviour changes. As a result, some parts of our economy will not go back to normal. Some of the jobs that people used to do that we thought of as part of everyday life will no longer exist. It’s difficult to see how this will play out but the divide identified by the Resolution Foundation may be an indicator. By next year, we might have settled into a pattern  – the frontline workers, the workplace workers, the home (and occasional commute) workers  and the displaced. The implications of all this for the management of people, social cohesion, living standards and, for some, basic survival, are subjects I will return to as this story unfolds. As ever, though, it is likely that, whatever the re-ordering of work looks like, it will bring most pain to those at the lower end of the income distribution.

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Britain’s reputation trashed for the sake of a three word slogan

Theresa May was horrified by the idea of a trade border between Great Britain and Northern Ireland.  “No United Kingdom prime minister could ever agree to it,” she said. No sovereign state, least of all one that still claimed world power status, could allow a part of its territory to be severed from it and governed, even if only on matters of trade, by someone else.

Two years later, though, a UK prime minister did exactly that. He agreed to a customs and regulatory border in the Irish Sea. He then sold it to the electorate as ”a great new deal that is ready to go” and enthusiastically recommended it to parliament, which duly voted it into law. A matter of months later, the flaws in the plan and its inherent threat to the unity of the UK have become clear. What Theresa May saw immediately, Boris Johnson has only belatedly acknowledged.

The UK leaving the EU meant that there would have to be a customs border somewhere between the UK and Ireland, either on land, between Northern Ireland and the Republic, or in the sea, between Great Britain and Northern Ireland. Once the UK was outside the single market and customs union, there would have to be import/export paperwork, border formalities and checks somewhere between the two.

Trade experts explained this soon after the Brexit vote. There was no way for the UK to leave the Single Market and Customs Union and avoid a trade border. David Cameron’s aide, Matthew O’Toole, saw this coming before the referendum but his warnings fell on deaf ears. The government was always going to be faced with the Brexit trilemma. It could pick two but it couldn’t have all three. Something had to give and in the end it was circle number 3, so we ended up with Option A.

The Brexit Trilemma

 

The EU made it clear early on that it would not sanction any agreement with the UK that recreated a land border of any sort in Ireland. Once it had committed to that line, there were only three ways there could be a Brexit arrangement that applied to the whole UK. Either the UK stayed in the single market and a customs union with the EU, the BRINO or EU Minus option, it stayed in a customs union and had a single market arrangement for goods only, the Jersey Option suggested by Sam Lowe and John Springford in 2018, or it left altogether with no deal with the EU on anything, a relationship similar to that of Venezuela.

It is, with a little imagination, possible to envisage a way in which the government might just have pulled off an all-UK clean-break Brexit. It would have needed some clear guiding principles and a well thought out strategy to match. It would have required a long lead time to build up the infrastructure and staffing necessary to cope with a No Deal trading relationship and to prepare UK organisations for the level of change. A declaration of intent in 2016 to leave the EU at the end of the budget period on 31 December 2020, or possibly even later, would have given a breathing space in which to prepare. Above all, the government would have had to level with the public about what was to come.

There would have been an outcry. The Northern Ireland peace process was very much an international effort and there would have been widespread disapproval of anything that threatened it. Even so, the UK government could have constructed a reasonable argument to say that the Good Friday Agreement is over 20 years old and was concluded in very different circumstances. It would be unconscionable for such a treaty to prevent a sovereign nation from leaving a trading bloc when its people had expressed their wish to do so through a democratic vote. There would have been complaints about the UK breaching a treaty but the government could have put forward a moral case for doing so. It would not have convinced everyone but it would have been good enough for many.

This, though, would have required a government with strategic capability, moral principles and candour. It would have required planning, preparation and honesty about trade offs, with the UK public and with international partners. Unfortunately, this government lacks all these qualities and capabilities.

Instead, it signed a deal handing over part of its territory to the partial jurisdiction of an external power, while trying to pretend it hadn’t and telling its voters that everything would be pretty much the same. When the reality of what it had agreed became clear, it then pretended that the bill it had signed into law a matter of months earlier was a terrible idea and introduced legislation to renege on the deal. Therefore, instead of making a reasoned case for repudiating a treaty the country signed more than twenty years ago it is now making a hasty case for repudiating one it signed little more than twenty weeks ago. Instead of possibly being found guilty of breaking international law, it is now such a dead cert that the government has already admitted it in parliament. While some in the international community might have seen the UK’s point of view if it had made a reasoned argument for an all-UK Brexit and taken the time to make its case diplomatically with allies and trading partners, doing it this way makes us look ridiculous and offends even this country’s closest friends.

Peter Foster reported in the Financial Times on an unpublished civil service document, which warned the government some of the ways in which the Withdrawal Agreement would affect Northern Ireland.

Under the Northern Ireland protocol, which was agreed to enable Brexit without creating a hard border on the island of Ireland, the UK agreed the region would follow EU state aid law for any matter that affected goods trade.

However, civil servants warned ministers in the January briefing document that Article 10 of the Northern Irish protocol that covered state aid could give the EU power over state aid to UK companies operating outside Northern Ireland.

A decision to subsidise British companies servicing Northern Ireland clients might fall within the scope of the agreement, or granting aid to any company in Great Britain exporting to Northern Ireland or with a subsidiary in the region.

Kit Malthouse was on BBC Breakfast earlier today warning that exports from Great Britain to Northern Ireland could become illegal when the Northern Ireland Protocol is implemented. He’s right, at least in theory. If UK food standards were to diverge significantly from the EU’s, some exports might be banned. Were that to happen, though, UK exporters would also be locked out of the entire EU so they would have a lot more to worry about than not being able to sell to Northern Ireland. It’s an unlikely scenario. Perhaps Mr Malthouse was only using it to illustrate a point of principle. The trouble is, his prime minister conceded that principle at the end of last year.

The implications of the Northern Ireland Protocol were always clear. The EU even published a set of slides to explain it. In Part VI, the fact that Northern Ireland will still be governed by EU legislation on product requirements, agricultural production and state aid is spelt out.

It also sates that:

Northern Ireland can be included in the territorial scope of the UK’s independent trade policy, provided that this does not prejudice the application of the Protocol.

It’s glaringly obvious what takes precedence here.

The Withdrawal Agreement makes Northern Ireland, in many ways, a separate country. It is a partial surrender of sovereignty over part of the UK’s territory. Even the DUP, surely the stupidest political party in any European legislature, spotted this in the end. Late in the day, it finally dawned on them that the project they have been getting excited about for years isn’t going to include them. The rest of the UK is quitting the EU but their bit is being left behind. As Tom McTague said, the price of Brexit is Northern Ireland.

There is now no way out of this which doesn’t involve all the problems we would have had from a properly planned No Deal exit, together with the complete shredding of our international reputation and the probability that no-one will take this country seriously again. Even as he insists that songs celebrating the old empire are sung at the Albert Hall, Boris Johnson has set England on a course to where it was before the empire began: a peripheral European country walking a delicate line between stronger world powers. He accuses the EU trying to break up the UK. The truth is that Boris Johnson has already done that. His agreement and the treaty that he promoted have cleaved the UK into separate jurisdictions. His attempt to backtrack on the deal may further threaten the UK’s unity. If the country is becoming a rogue state, it adds weight to the arguments of those who want to leave it. Polls are already showing rising support for Scottish independence. ‘Let’s leave the ship before it sinks’ could be the sentiment that finally seals it.

Twelve years ago, the UK provided global leadership in the financial crisis. It may be a stretch to say, as some did, that Gordon Brown saved the world but the world came to London, at his invitation, to work out what to do next. Since then, first David Cameron, then Theresa May, have thrown away much of this country’s diplomatic capital. Boris Johnson is now hell-bent on destroying what is left. If he pushes ahead with his plan to renege on his own agreement even our closest friends will distance themselves from us. No one is going to listen when British politicians bang on about the Mother of Parliaments or the Rule of Law. Like the songs at the Last Night of the Proms, it will look like a façade from the past. Peel back the curtain and there is nothing there. We used to joke about the Perfidious Albion tag. It’s not funny any more.

Boris Johnson left Northern Ireland under EU jurisdiction so he could get the Withdrawal Agreement signed and claim he had got Brexit done. The details of the agreement were always clear and it was obvious that it would mean a trade border in the Irish Sea. His attempt to row back on the deal in a matter of weeks fools no one. He is destroying this country’s international reputation for the sake of a three-word slogan. That tells you all you need to know about his government.

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