This recession could be long and deep

If, like me, you have spent some of your lockdown time catching up with stuff you recorded earlier in the year, you will have experienced that strange sense of watching something from a bygone age. The adverts, in particular, feel like they belong in a different world. Was it really only February when we were still going to pubs and restaurants and getting excited about major football, rugby and racing events?

The official employment statistics issued earlier this week had a similar feel. Because of the time lag in collating survey data, the most recent figures are from the January to March period, only the last 2-3 weeks of which were affected by the coronavirus lockdown. They showed a joint record level of employment, at 76.6 percent, in line with the previous trend of rising employment rates. What would have been worthy of comment only three months ago was barely mentioned. It was a snapshot of the olden days. We know things aren’t like that any more.

Fortunately the ONS also started reporting on HMRC data a few months ago and this gives us some more up-to-date information. The rising employment of the last half decade has come to an abrupt halt and the beginning of a collapse in employment is already visible.

Chart by ONS

The claimant count data gave a similar picture, showing a sharp spike at the beginning of April, taking the numbers above those we saw during the last recession.

Chart by Resolution Foundation

Next months data, showing the position in April and early May will be even worse as the full impact of the lockdown becomes visible.

It was a similar story for the GDP data published last week. The ONS release has a series of charts showing the economy contracting sharply in March.  This, too, is likely to look even worse in next month’s figures. 
Chart by ONS

The revised data for the previous quarter show that the economy had already stopped growing in the final months of 2019. The coronavirus lockdown poured cold water on a fire that was already going out. This doesn’t bode well for a bounceback once the lockdown ends. Last month’s optimism about a V-shaped recession, with a sharp downturn and a rapid rebound, was short-lived. Even the chancellor is now saying that it is “not obvious there will be an immediate bounceback”.

It is likely that pent-up demand will lead to a short-term economic bounce once the lockdown ends. Maintenance tasks that have been on hold will finally get done. People will get their hair cut, fix the car and call in the plumber. Companies will carry out a backlog of routine but necessary activities. Beyond that, though, the extent of the recovery depends on how confident people are about the future. Will people commit to major purchases like houses and cars? Will companies risk major investments? The fact that things were staring to slow down in the months before the coronavirus outbreak suggests that they might not. If they decide to wait and see the recovery is likely to be slow.

The big problem forecasters face is the unpredictable impact the coronavirus and the lockdown will have on human behaviour. Recessions and recoveries are, for the most part, caused by shifts in human behaviour. Confidence plays a big part. The last recession started when people lost confidence in certain financial instruments. This one has started because we have lost confidence in our ability to move around without catching a life-threatening infection.

It was Edgar Schein who explained to us, 35 years ago, that culture is a pattern of shared basic assumptions and beliefs. Because these are unspoken, those who share them don’t realise they are doing so. They just carry on assuming. They only stop assuming when the beliefs they have taken for granted are challenged. Even then, they will cling to these beliefs even in the face of powerful evidence. These assumptions and beliefs underpin the behaviour that produces the unwritten rules, the rituals and the visible artefacts that define the society. This is why changing culture is so difficult. Long-term behavioural change only happens when the assumptions and beliefs behind that behaviour change.

What we are seeing now could become a major cultural shift. Apart from those in particularly exposed occupations, most of us in the developed world, with clean water, clean living space and good sanitation, went about or daily business on the assumption that we were not likely to be infected with anything. Like all deep rooted assumptions, it was so deep rooted that infection barely crossed our minds. If we worked in city centre offices, we would get off filthy trains, go to work at our keyboards, pop out and buy a sandwich, sometimes (but not always) wash our hands and then eat the sandwich while bashing away at the keys we had been touching all day. We would then go to meetings where we would shake hands with, or even kiss, colleagues who had been doing the same thing. We knew, intellectually, that we would probably get a cold at some point during the winter yet it still came as something of an irritation when it happened. If we were unlucky enough to get flu or a stomach bug, we would respond with indignation. ‘How the hell did I get this? I bet it was that restaurant we went to at the weekend.’

That assumption has now been turned on its head. We leave the house now under the assumption that there is a good chance we will catch something and that, if we do, it is likely to be extremely unpleasant or fatal. This risk may be lower than a lot of people think, especially for younger age groups but, for the moment, that is beside the point. People fear this disease and that fear has changed our assumptions. When we leave the house, we react to people in a different way. We get a taste of what it is like to live in a dangerous neighbourhood. We look upon strangers with suspicion and are wary even of people we know. Suddenly, we see other people are a risk in a way they weren’t a few weeks ago. We applaud the bravery of essential workers because, in the course of their jobs, they are going out and mixing with people in a way that would scare the hell out of a lot of us. As we clap, many of us are thinking, ‘Thank God I don’t have to do that.’

Though this shift in assumptions has been rapid, the reversion to previous assumptions, where we once again do not see other most other people as a risk, is likely to be very gradual. Even if we find a vaccine for the coronavirus, which may not happen, or if it becomes less potent over time, there will always be the question, ‘What if there is another one out there?’ After all, this one seemed to come from nowhere. How long will it be before people are prepared to get on crowded trains or aeroplanes? Will people shake hands again? Will they happily sit together in offices and meetings? I’d be willing to bet that the (relatively recent in the UK) practice of kissing one greeting will cease. Even if people do relax their guard and decide that the risk has passed, they will do so gradually and one-by-one. Some people may never do so.

The return to normal, then, is likely to be a slow process even if scientists tell us that the serious risk has passed. One of the details that seems to have got lost in the discussion of the lockdown that people began to change their behaviour before the government told them to. A study by the Centre for Cities showed that the proportion of people travelling into city centres for work and leisure fell significantly during the week before the lockdown.

Studies from the US have produced similar findings. To an extent, then, people started locking themselves down before they were told to. Many will be reluctant to return to normal until they are sure the coast is clear. That is not likely to happen for some time.

The trouble with a modern economy, though, is that it only works if a lot of things work together at the same time. Supply chains and public transport are obvious examples but schools are a crucial part of the dependency map too. People are showing some reluctance to go back to work or to send their children back to school. The planned opening of schools on 1 June now looks doubtful. And if the schools aren’t open a lot of people simply won’t go back to work.

The longer this goes on, the more difficult it will become for many organisations to restart operations. Skills will atrophy and the team cohesion needed in the workplace will start to dissipate. The threads that hold an organisation together are difficult to maintain remotely and the task becomes harder over time. Video conferencing and remote contact can only go so far. We are facing a gradual loss of organisational capital.

The return of the economy to anything like its pre-crisis level looks like it will take a long time. It was already showing signs of weakness before the coronavirus pandemic and the shift in our cultural assumptions, even if it is temporary, will make the revival a slow and piecemeal process. We didn’t get a bounceback after the last recession and it is unlikely that we will see one this time. If I had to predict the shape of the downturn I would go for a bath-shaped recession, a similar shape to the last one, with a sharp fall, a bump along the bottom and then a very gradual recovery. Only this time the bath will be a lot deeper.

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Don’t make the self-employed the punchbag of the next recession

Two months ago, few people had heard of Rishi Sunak. He is now about to go down in history as the most interventionist peacetime chancellor. His plan to pay 80 percent of the wages of employees kept on by their employers will help to mitigate the impact of the inevitable recession that will follow the shutdown of most business activity. But it has left a lot of people asking ‘what about the self-employed?’ They have been ‘hung out to dry’ says Paul Mason.

Self-employment passed the 5 million mark at the end of 2019 and now accounts for more that 15 percent of those in work. While the rise in self-employment has been celebrated by politicians and commentators as a success story and a sign of entrepreneurialism, there is a story less often told. A lot of the self-employed are skint. Or, if not totally skint, they are not earning very much.

The rise in self-employment hasn’t been matched by a rise in self-employment earnings. Most of the increase in the number of businesses in the UK since the start of this century has come from firms under the VAT threshold. The number of employing and registered businesses has increased roughly in line with the size of the workforce. The big rise in self-employment has seen a steady increase in the number of low turnover businesses.


 Source: Department for Business, Energy & Industrial Strategy, Business population estimates 2019

People often assume that the self-employed are minted because a few self-employed people earn a lot of money. However, most don’t. A report by the Institute for Fiscal Studies (IFS) last summer found that the mean annual self-employed income (£30,000) was just below the mean employed income (£31,000). However the median self-employed income was only £14,000 – much lower than the employee median of £22,700. The mean figure for the self-employed is skewed by a small number of very high earners at the top, usually working in partnerships.

Strip out the partnerships and the numbers look even worse. The figures for sole traders, who are around 85 percent of the self-employed, are even lower, with a mean income of £21,000 and a median of £13,000.

Sole trader incomes were particularly badly hit after the recession. Since 2008, the aggregate sole trader profit has fallen in real terms. That’s an astonishing fact. There are 800,000 more of them than there were in 2008 but they are making less in total than their counterparts did in 2008. I’m reminded of those nature programmes where, as the oasis dries up in a drought, more and more animals arrive to drink from the rapidly shrinking pool.

Consequently, the average real-terms profit for sole traders has fallen.

Chart source: Who are business owners and what are they doing?” – Institute for Fiscal Studies

As the IFS remarked:

These falls in profit are consequential: they represent falling living standards for individuals and households, and falling value added from the sole trader sector of the economy.

While the image of the rich, tax dodging self-employed businessman may persist, the majority of the self-employed are likely to be on lower incomes than those in employment. Many are people who were already struggling to get by.

The restrictions brought in to combat the coronavirus outbreak will hit them hard. Entitlement to the equivalent of statutory sick pay and the removal of the minimum income floor for Universal Credit will help. As the Resolution Foundation explained:

With this change, UC can essentially play the role of a means-tested unemployment benefit or an earnings-replacement benefit for the self-employed. This change will make a significant difference to some families’ incomes should work dry up for the self-employed.

While that might help the very lowest earners it will still leave many self-employed people dangerously exposed. According to the Telegraph the chancellor is “racing to plug “gaps” in his latest support package for businesses and workers, as he faces claims that he has “left behind” the self-employed.” This will be more difficult when dealing with people whose incomes are not assessed through PAYE and what emerges probably won’t be as generous as the support for the employed. Nevertheless, among the 5 million self-employed are a lot of people who are going to need help and it would be unfair to leave them out.

The incomes of the self-employed took a big hit after the financial crisis and have still not fully recovered. As I said a few years ago, they became the punchbag of the last recession. Let’s not make them the punchbag of the next one too.

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The Hoaxer

(With apologies to Simon and Garfunkel)

I am just a rich boy,
And my story’s often told,
I quit management consulting,
To write mendacious columns for a pot of gold.
All lies and jests,
Still folks hear what they want to hear and disregard the rest,
And so it’s best,

To lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie lie lie.

I betrayed my own dear leader,
And I tricked the DUP,
My shabby Brexit deal,
Means there has to be a border in the Irish Sea.
Still every day,
I cheat, the commentators shrug ‘That seems to be his way’,
And so I say,

Just lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie lie lie.

My promises are lavish,
But I’ll never see them through,
The fifty thousand nurses,
Will be forgotten by next season’s winter flu.
Yet still I win,
Opinion polls are saying I’m a cert to get back in,
So it’s no sin,

To lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie lie lie.

By stirring up the credulous,
I deflect all the blame,
My opponents scream with outrage,
But they still haven’t realised it’s just a game.
All fear and hate,
By the time they twig I will have won and it will be too late,
Manipulate,

And lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie lie lie.

In the morning stands the Hoaxer,
It’s just coming up to four,
The seats they are declaring,
Just another handful and he’s through the door.
The verdict nears,
The carpetbaggers laugh but for the rest it’s pain and tears,
And five more years,

Of lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie lie lie.

Lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie,
Lie lie lie lie lie lie lie,
Lie lie lie lie lie.

(Repeat ad nauseam for the next 5 years.)

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Whatever happened to The Debt?

Remember The Debt? The Debt was a really Bad Thing ten years ago. The sheer hugeness of it was going to drag the country down, cripple the economy, turn us into a pariah on the international markets and bankrupt the country.

The Conservatives managed to weaponise The Debt so successfully that it was able to beat Labour in two elections. Despite the evidence being pretty flimsy, the Labour Party never managed to kill the story that it was to blame for The Debt. It also helped to cajole the Liberal Democrats into coalition. After all, it was a national emergency. Time to pull together. Stop all the party infighting or The Debt will get you.

Nobody talks about The Debt any more. Even the chancellor barely mentions it and the threat of a downgrade by Moody’s, which would have seen panic headlines ten years ago, hardly made the news. It hasn’t gone away though. In real terms it’s bigger than it has ever been and as a percentage of GDP it has only recently started to fall. It’s certainly a lot bigger than it was in 2010. Ten years ago a debt-to-GDP ratio of 60 percent was going to cripple us. Nowadays, it seems, 80 percent is nothing to worry about. Politicians in both the main parties are now so relaxed about it that they are happy to see it grow again.

uk-debt-gdp-2019

Chart by Economics Help

The Resolution Foundation and the Institute for Fiscal Studies have both attempted to calculate what the main parties’ manifesto commitments would mean for the public finances. Both the Conservatives and Labour are promising to increase spending. The Resolution Foundation noted that the word ‘Invest’ appeared more often in both manifestos than ‘Brexit’, ‘NHS’ or ‘Environment’. The trouble is, neither party is keen on increasing taxes to pay for it.

As Chris Giles pointed out, while the Conservatives plans are a lot more modest in terms of spending than Labour’s, there is a big expensive promise in their manifesto:

3. The Tories have no costing for social care

The Conservative manifesto contains one expensive pledge on future financing of social care, by saying that “nobody needing care should be forced to sell their home to pay for it”. The party does not cost this pledge. Labour’s proposal of free personal care — help with daily living but not accommodation costs — was costed at £10.8bn a year, indicating that this is a large omission by the Tories. The Conservatives therefore have a large hole in their manifesto costings, which implies additional tax increases, more borrowing, or public spending cuts elsewhere.

Then there is Brexit. On Page 5 of the Tory manifesto, in bold, it says:

“We will not extend the implementation period beyond December 2020.”

Almost nobody with any experience or knowledge of trade deals believes that it would be possible to agree one with the EU in such a short time. Former trade negotiators have warned that the UK is likely to be in another Brexit crisis this time next year as the deadline looms and a trade deal still hasn’t been negotiated.

The Conservative commitment, then, is almost a guarantee that there will be a severely disruptive hit to the economy at the end of next year. Once you factor the lower economic growth into the manifesto costings, says the IFS, the public debt level under the Conservatives is likely to be even higher than under Labour.

Screen Shot 2019-12-02 at 16.57.30

A party that spent the best part of ten years banging on about The Debt is, apparently, now happy to see it rise. Everything, it seems, must be sacrificed on the alter of Brexit. The Debt is yesterday’s news.

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Johnson’s Suez

Brexit meant there was always going to be a trade border somewhere between the UK and Ireland. Unless the future relationship was to be so close as to make Brexit pointless, a UK outside the Single Market and Customs Union meant that there would have to be customs and regulatory checks on trade passing between the two. Valuable time was wasted trying to find magical technological or legal solutions to the Brexit trilemma, most of which should never have been taken so seriously by so many people for so long.

The problem is that any kind of border is unacceptable to a lot of people. It doesn’t matter how visible it is, or how unobtrusive the cameras are, how discreet the border patrols are  or how far from the border the searches take place. Simply knowing that the border is there is bad enough. As Matthew O’Toole tried to explain to tone deaf English people, before and after the referendum, this is about identity.

We might wish for a world in which more of Northern Ireland’s people shared a collective identity, but that is not is the world we live in. Nations are imagined communities, to use an old truism. The people of Northern Ireland have, over time, constructed separate psychological spaces for their identities. And part of the reason for enduring political instability is that neither monolithic identity can win. Both are inherently insecure.

People who feel Irish live in the island of Ireland, but not the state called Ireland. People who feel British live in the British state, but not on the island of Great Britain.

The Good Friday Agreement was an inspired and elegant fudge which enabled people with both identities to feel part of the country they believed they belonged to. The Common Travel Area along with the EU’s Single Market and Customs Union enabled people to travel freely for work, trade or leisure. Once the peace process ended the need for security checks it was possible to abolish the border completely. As Matthew O’Toole said, this enabled people to forget the border even existed.

The agreement is fastidious in keeping Northern Ireland within the UK until a majority votes otherwise. But it is expansive when describing the right of people there to be part of the “Irish nation”. To make people who feel Irish relaxed about Ireland being partitioned as a matter of legal fact, the agreement sought to soften the border in people’s minds: to help them imagine it wasn’t there.

Brexit means that is no longer possible. There would either have to be a land border Northern Ireland and the Republic or a border in the Irish Sea between Northern Ireland and Great Britain. Somebody was always going to end up being disconnected from their own country. If there were a land border, an Irish businessman from Derry would now have to complete paperwork to trade with a company in Dublin, another city in his country. If there were a sea border, a British businessman in Belfast would now have to complete paperwork to trade with a company in Birmingham, another city in his country.

To say that this is all fairly trivial misses the point. Symbolism is important in most cultures but particularly so in Northern Ireland. As Jonathan Powell said, any form of border is a threat to somebody’s identity:

The DUP has a perfectly legitimate complaint against the border between Northern Ireland and Britain because it undermines its identity. The Irish are rightly never going to agree to a border with the EU. And a hard border between Northern Ireland and the Republic would reopen the issue of identity underpinning the Good Friday agreement.

Brexit was always going to destroy the delicate balance achieved by the peace process and the Good Friday agreement. Even if the suggested technological solutions had delivered all they promised it still wouldn’t have been enough. Identity and symbolism can’t be wished away. Even a completely invisible border policed by magic robots would be too much. Just knowing there is a border between you and the rest of your country is enough to rekindle the old hostilities.

Someone, then, was always going to lose out. In the event, it was the unionists. According to the deal negotiated by Boris Johnson there will be a trade border in the Irish Sea between Great Britain and Northern Ireland. There is an attempt to fudge this by saying that Northern Ireland will be part of the UK for customs purposes but this is a face-saving formula. The customs and regulatory checks will take place in Irish Sea ports not on the Irish border. Our British businessman in Belfast will be the one completing the paperwork to trade with his country. We’ve ended up at Point A on the Brexit Trilemma.

It’s not only Northern Ireland where symbolism matters though. The image of Britain as a world power is bound up with our national identity. Even people who consider themselves progressive or anti-imperialist make assumptions about the UK’s place in the world. For the most part, deft diplomacy enabled the UK to transition from global power to global influence and to maintain its seat at the top table of nations. As the only country to be a member of the Western military alliance, the English speaking world and the European Union, the UK sat at the intersection between powerful groups or countries. This gave it considerable influence. While its military power might not be what it was, the UK was still a global player, ‘punching above its weight’.

As well as deft diplomacy, though, the UK expended a considerable amount of blood and treasure to stay at that top table. At least some of the rationale for maintaining the nuclear deterrent was to keep this country on the UN Security Council. Who knows whether the nuclear deterrent would work in a modern war or even if it did whether it would be any use but we don’t ask such questions because we have to have nukes. It’s simply what world powers do. Likewise, while there was a lot of talk about protecting the rights of the islanders and even some suggestions of oil wealth in the South Atlantic, the real reason we went to war over the Falkland Islands was because we could not be seen to be pushed around by a middle-ranking Latin American countries. World powers don’t have bits of their territory nicked by tinpot dictators.

Yet here we are about to concede a part of our country to be governed by trade rules set in another country. OK, it might not look like a big deal but it is symbolic. When it comes to trade, Northern Ireland will be yanked out of UK jurisdiction. Some aspects of its law will be made elsewhere. Make no mistake, this is a capitulation. The hardliners in the British government would have loved to be able to tell the EU and the rest of the world to shove the Good Friday Agreement and leave the EU with No Deal but they knew they simply didn’t have the power to do so. For all the talk of Blitz Spirit, they knew that, in the end, the people wouldn’t wear it. Sure, many of them don’t really like the EU but they don’t actually care about it that much and certainly not enough to see their living standards hit. There is little tolerance for economic disruption and hardship. Politicians know that and know they will get blamed. Voters have short memories. Many will forget how much they wanted to leave the EU when the factories start closing and the jobs start disappearing. Johnson’s government knew they had to make a deal and the only way they could leave the EU’s trade framework was by leaving Northern Ireland behind. As Tom Mc Tague said, the price of Brexit is Northern Ireland.

This will not be lost on the rest of the world. The decline in Britain’s diplomatic stock and global influence that began under David Cameron has now reached its ignominious conclusion. A country that pretends to be a world power has had to concede partial control of part of its territory because it had no choice. No other major country has a customs border running through it. World powers don’t have parts of their country governed by other countries.

The fact that this has been imposed on the UK severely diminishes the country’s global prestige. Like the man who ostentatiously walks out of his job only to find he can’t even get another one at his previous salary, the UK found that its international clout didn’t carry as much weight as it thought. As Fintan O’Toole said, Brexit is a long overdue reckoning for Britain. The limits of its power have suddenly and clearly become exposed. The UK’s global pretensions have been marked to market.

This has been brought about by a leader who presents himself as a patriot and quotes Churchill. The man who taunted others with the word ‘surrender’ has agreed to split the country. The man who wrapped himself in the Union Jack has pulled the string that may unravel the united Kingdom. The world will see this deal for what it is, another point marking the UK’s long decline. With the same unseemly haste that Britain pulled out of India, fled from Palestine and backed down on Suez, Boris Johnson has cut and run on Brexit, leaving part of the UK behind as he went. The man who said there would never be a border in the Irish Sea has just signed up to one. He didn’t really have much choice. The border in the Irish Sea will be a constant reminder of Britain’s diminished status, forced upon it as the price of its unhappy divorce from its neighbours.


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Brexit is the road to nowhere, whoever is driving the car

Brexit has ground to a halt. Theresa May will put her deal to Parliament again and it will fail again. At this rate we will come to the end of the extension period having achieved nothing. Which isn’t surprising, given that very little has really changed in the past two years.

Why has there been so little movement? Simple. Brexit is a really bad idea. Some of our politicians have known this for a while and the reality is beginning to dawn on many others. The trouble is, they haven’t got a clue what to do next.

People have come up with various analogies to illustrate the near impossible situation in which we now find ourselves. Perhaps the most famous is Hugo Rifkind’s ‘submarine made out of cheese’:

Perhaps a better way of understanding it, though, is to imagine that people had voted to get rid of motorways. After all, few of us like motorways. It’s much more pleasant to drive on A and B roads. If someone promised that it would be possible to get where you needed to go just as quickly on A roads and that you need never drive on a motorway again, there would be plenty of takers. After all, many of us have fond, half-remembered recollections of the days before motorways. Quiet roads and gentler speeds. Pootling through the Cotswolds, along tree-lined lanes, stopping at a little cafe or some woods by the road for a picnic, Dad having a chat with the petrol pump attendant on a crisp spring morning, the sun just poking through as the mist rises over the Fosse.

It’s even possible to construct a cod-economic argument against motorways. After all, the UK’s per capita GDP grew at a faster rate in the decades after the Second World War than it did from the mid-1970s. The more motorways we had, the less our economy grew. And just look at all those booming economies with much lower motorway density than the UK, such as India, China and Singapore. Motorways, who needs ’em?

The trouble is, after having voted narrowly to get rid of motorways the problems start to become clear. Motorways are baked into the business models of many UK firms. They assume that it will be possible to get from one point to another in a certain time. Many companies warn that getting rid of motorways will put them out of business. Others point to the devastating impact on just-in-time supply chains. Modelling by civil servants predicts a significant hit to the economy and, in the case of a sudden ‘cliff-edge’ closure, localised shortages of food and medicines.

Some politicians put forward compromise plans, such as a phased transition period or a ‘name only’ option under which all the motorways will be re-branded as ‘A+ Roads’. The ultras are having none of it though. They dismiss the warnings as ‘project fear’ and insist that the motorways be closed immediately as its ‘what the people voted for’. A TV presenter remarks that we managed fine in the 1960s before we had motorways. “It’s not the end of the world. We won’t starve,” say rich businessmen who can afford to go by helicopter or private plane. A bombastic and hitherto unknown MP pops up, decrying motorways as a foreign idea and saying that his dad didn’t fight at D-Day only to have a Nazi road system imposed on Britain.

The hardliners come up with ever more preposterous explanations as to why a sudden closure of the motorways would have barely any impact, often citing crank science or convoluted interpretations of obscure laws. A consultant appears offering to implement an as yet untested technological solution that would somehow enable A-road journeys to be done at motorway speeds but with none of the tedious unpleasantness. It could be done ‘if only governments had the will’ he insists. Despite most other experts dismissing this as a ‘unicorn solution’, his comments are seized on by hardliners as ‘proof’ that the motorways could shut tomorrow and life would go on as before.

MPs are split. At one extreme is a small but growing group who realise that the whole idea is crazy and should never have been suggested in the first place. At the other extreme is a group of ultras. They are a mixed bag, ranging from those harking back to a semi-mythical Golden Age of British Motoring, through to the financier-politicians paying lip-service to the nostalgic dream while salivating at the prospect of making a killing by building new toll roads. One MP, while publicly sticking to the patriotic rhetoric, advises his investors to get out of the industries that will clearly be damaged and to invest instead in those companies preparing for the new world of privatised highways.

In the middle is the bulk of MPs who know that closing the motorways will screw the country but who don’t want to be seen as going against the ‘will of the people’. They struggle frantically to find a compromise that will minimise both the economic damage and the risk to their political careers. Arcane ‘solutions’ are debated, voted on, rejected, amended and them debated again. The MPs hope that if they string it out, eventually something will turn up. Against all logic, some of them put their faith in a new leader somehow being able to sort something out. None of this will make any difference. It is a circle that can’t be squared. No matter how many people voted for it, it is impossible to close the motorways without severely damaging the country.

A ridiculous story? Well, yes, but not that much more ridiculous than the impasse we find ourselves in over Brexit. Membership of the European Union and the frictionless trade that goes with it is baked into companies’ business models just as surely as the assumption that they can use motorways to move their goods. The economic arguments for Brexit and the fairy-tale technologies and made-up legal arguments that will make it work are every bit as preposterous as the suggestion that we could close motorways and carry on as before. There really is no way of doing Brexit without damaging our economy and/or unravelling our country, unless we stay so close to the European Union that there seems little point in leaving. The options are, to varying degrees, bad so it’s no wonder we can’t get a majority for any of them.

None of this is going to change, regardless of who wins the Euro elections or whether a Tory leadership contest or a general election gives us a new prime minister. Whoever replaces Theresa May will be up against the same problems. However tough their talk, the reality remains the same. People have been promised the impossible – leaving the EU without any negative economic or geopolitical consequences. As a result, there is now no way out of this dilemma without significant political damage to parties and individual politicians. By far the least damaging option for the country would be to revoke Article 50 and stay in the EU. The political fallout will be horrible whatever happens but dealing with it after a chaotic Brexit would be so much worse. How long it will take for this penny to drop is anybody’s guess. Perhaps we need another leader to fail before the reality becomes so stark that even the most blinkered of MPs can see it. The road to Brexit leads only to stagnation and chaos. It’s time to turn off and take another route.

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The privatisation of capitalism

Donald Trump doesn’t listen to big business. Unusually for a Republican president, he seems to be ignoring the business lobby altogether, as Edward Luce reported in the FT:

Groups such as the Chamber of Commerce, and the Business Roundtable, complain loudly about Mr Trump’s immigration crackdown, his tariff wars and government shutdowns. The White House pays scant attention.

At least, he’s not listening to the sort of big business that presidents have usually listened to. His business friends are different:

It is not as though Mr Trump lacks business friends. But they differ from the traditional crowd. Almost none run publicly listed companies. They tend to be property developers, private equity billionaires, casino magnates, and heads of family-owned companies. They swim in different waters to C-suite executives.

Perhaps this isn’t surprising as an increasing amount of the country’s wealth is now located in those waters.

An increasing share of US capital nowadays is going to private companies. Over the last two decades the number of US listed companies has almost halved. Initial public offerings are no longer the obvious route for private equity-funded companies. PE firms either hold their stakes for longer or sell them to other private groups. The rise of the mega­fund, meanwhile, has allowed public companies to go private. Amazon may have had to go public to reach the $1tn valuation it briefly touched last year. It is by no means clear that Uber or WeWork must follow suit. In each of the last eight years, the amount of equity withdrawn from the US stock market has exceeded the equity raised — a trend known as “de-equitisation”.

De-equitisation is the process by which shares and in some cases entire companies are ‘bought back’ and thereby removed from public trading. Norma Cohen wrote about “the death of the cult of equity” last year. She noted that in both Europe and the US, the value of shares being bought back has exceeded the value of new share offerings for some time.

Between 2000 and 2017 some $821bn of new equity was added to European markets via initial public offerings. That, though, has been dwarfed by the $4.96tn of equity withdrawn from the market, mainly in the form of share buybacks, divestments or as a defensive response to an unwanted suitor. A portion of that, $429bn, has been withdrawn through companies delisting.

In the US — where the $40.3bn value of IPOs last year, was the highest since 2014 — public market activity barely made a dent. Between 2000 and 2017 roughly $4.88tn was withdrawn, which compares with the total value of new shares floated at $697bn. Even emerging markets are not immune; the data show that since the turn of the century $3.79tn has been withdrawn. That has more than offset the issuance of IPOs totalling $1.26tn, with 2017 raising the most new equity capital for issuers in any year since 2010.

 

Some commentators are even talking about the death of public markets. This piece by and on FTAlphaville last year also noted the sheer scale of buybacks:

We are tired of hearing that there is nothing inherently wrong with buybacks. There’s also nothing inherently wrong with tequila, but take too much of it at the wrong time, and you’re probably making bad life choices.

In the last week both Bernstein and Goldman Sachs have predicted that buybacks in the US will either reach or exceed $1t in 2018. Investors have been eager to explain that this capital is not disappearing. It is merely rotating out of equities and into other assets. But this is just an accurate restatement of the problem: public markets are shrinking.

Furthermore, they argued, stock markets are becoming places where investors go when they want to get money out of a company, not when they want to put money in:

Increasingly, companies don’t list on public markets because they need the money. They list on public markets because their early owners want a liquid market for their own shares. The listing is not an entrance into big capital. It’s an exit for the big capital that’s already there.

Take Spotify, for example:

When Spotify listed on the NYSE earlier this year Daniel Ek, the CEO, published a letter that basically said “Meh.” He wasn’t ringing any bells or doing interviews, he explained, he was just going to keep doing his thing, because Spotify was not raising capital. We’re not calling Mr Ek out on this. He was just saying something in plain English that’s been true for years.

Could this be the start of a shift in the way capitalism works?

What we’re seeing now is that corporations have access to enough private savings of wealthy citizens that they’re walking away from the deal. The pace of this year’s buybacks are only a piece of that story.

Last year, asset management company Schroders published a report, What is the point of the equity market? It notes the ‘savage’ pace of de-equitisation and the corresponding rise of private equity:

The private equity industry has grown substantially in scale and accessibility and now competes much more acutely with the public market. Global private equity assets under management rose more than fourfold between 2000 and the middle of 2016 to $2.5 trillion4, a record high. Although still small relative to the $36 trillion market capitalisation of MSCI All-Country World public equity index, private equity has grown 2.5 times faster over this period.

An important development has been the ability of companies to raise sums of money privately that previously would not have been possible outside of public markets. Facebook raised $2.4 billion before its $16 billion IPO in 2012, Twitter $800 million before its $1.8 billion IPO in 2013 and Google a scarcely believable $25 million before its $1.9billion IPO in 2004. However, in just the past few years the figures have skyrocketed – Didi Chuxing, a Chinese transport technology group, has raised $17 billion privately and Uber $10.7 billion. The ability to raise such huge sums privately defers one potential need for a public listing.

This may sound like a dry and esoteric subject but the potential implications are huge.

Firstly, there is the question of transparency. The more business takes place in companies which don’t have to report their activities, the less we know about what business does and the less publicly accountable it is. People might complain about what quoted companies do but at least there is some publicly available information about their activities, even if journalists and regulators sometimes don’t spot it until it is too late.

Secondly, as one investment blogger mused, are companies only being sold publicly when most of the growth potential has already gone? The Schroders report raised a similar concern:

Public market investors are now accessing companies at a much later stage of their development than in the past, if they are able to access them at all. Given that growth is generally most rapid in those earlier years, it is highly likely that public market investors are missing out on returns as a result. Aggregate stock market returns are likely to suffer, with savers standing to be the biggest losers.

A former investment manager I spoke to recently told me that this is exactly what is happening. He was rather more blunt though. Investors, he said, essentially dump companies onto public markets when they have extracted most of the value from them. Given that we have an ageing global population that is reliant on stock market performance to pay its pensions, if stock markets are increasingly made up of stuff the rich don’t want any more, will they provide the returns necessary to support an increasing proportion of the world’s people?

And thirdly, what about corporate governance? Most of our corporate governance reforms of the past three decades have been aimed at encouraging a longer-term outlook and curbing the excesses of public companies’ managers. Having realised that there is a limit to the impact non-executive directors can have, the UK government introduced the idea of shareholder stewardship. The Stewardship Code encourages institutional shareholders to act as joint stewards with company boards over the companies in which they invest. There is something almost quaint about this. Institutional investors with vast portfolios are even less likely to have an insight into what goes on in individual companies than the part-time non-executive directors are. But if the highest value companies are moving out of the public sphere anyway, what’s the point of applying increased regulation to the ones that are left? Isn’t it like building a dam half way across a river?

It is still early days and, as the Schroders report said, equity markets are not finished yet. But a shift of capital away from public markets  is bound to have ramifications for business and society. The global super rich eschew public health, public education systems and public transport. If they are checking out of public markets too, the 21st century variant of capitalism might turn out to be very different from the one we have been used to.

Many of us have tended to regard Donald Trump as a throwback, appealing to outdated notions of nationalism and elected by ageing voters with ageing ideas. But what if he and, more importantly, the people who support him, represent the future shape of western capitalism? Might his ascendency be another symptom of power shifting to a new type of corporate interest? Perhaps historians will remember Mr Trump not as a diehard reactionary but as the first private equity president, the logical result of shifts in wealth and power already evident by the early 21st century.

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