The not so new illiberalism

Authoritarianism seems to be on the rise, says Chris Dillow, citing the rise of Donald Trump and the Brexit vote. After 30 years of tub thumping about liberty, a style started by Margaret Thatcher and Ronald Reagan, today’s politicians, he observes, seem to have gone very quiet about it.

One reason for this might be that libertarian ideas were never that popular in the first place. Of course, if a pollster asks someone about their own freedom they say they want as much of it as possible but that doesn’t always extend to freedom for others.

Selling social libertarianism to the British has been difficult. Politicians like Roy Jenkins who led the socially liberal measures of the 1960s were way ahead of the electorate. It took until last year for the British Social Attitudes Survey to show that the majority in favour of capital punishment had finally disappeared. For most of the last 45 years, had that question been put to a referendum, the death penalty would almost certainly have been re-introduced. It took until the mid-1990s before a majority agreed that abortion should be legal other than on medical grounds, and that majority seems to have stabilised at around 60 percent.

Attitudes to homosexuality took a while to change too. Only 5 years ago, Ipsos MORI found that those who thought same-sex relationships were not wrong at all were still in a minority.

ipsos-mori-generations-same-sex-relationships-a-2

We are now just about at the point where, if asked, the public might vote for the socially liberal measures of the late 1960s but it has been a long time coming. Liberals sometimes talk of a progressive majority in the UK but if there is one, it’s very recent and not very big.

If people are lukewarm about social libertarianism, economic libertarianism is even further out on the fringe. Radical deregulation, state shrinkage and privatisation sound like mainstream ideas because they are espoused by some very wealthy, powerful and influential people. Every so often, therefore, a think-tank will publish a report, a politician will make a speech or a journalist will write an article advocating deregulation and a much smaller state. But, despite all the speeches and column inches, the voters are really not interested in significantly reducing the size of the state. Over the past 30 years, all the small-state advocates have managed to do is increase the proportion of the population that  thinks taxation and spending should stay the same and reduce the proportion that thinks it should increase. Even that has started to reverse over the last couple of years. Support for cutting the state has never gone above 10 percent.

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Chart by British Social Attitudes survey

Contrast this with the re-nationalisation of utilities and transport, which has, for 20 years, been dismissed as a throwback. Until Jeremy Corbyn’s election as Labour leader, few mainstream politicians had advocated it and, apart from the odd article in the Guardian, it seemed to be permanently off the political agenda. Anyone supporting re-nationalisation was dismissed as a crank.

The trouble is, despite two decades of omertà on the subject, most voters still think it would be a good idea.* There is even a small majority in favour among Conservative voters.

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Chart by YouGov

It is the state-shrinkers not the re-nationalisers who are the eccentrics. The only reason it looks the other way round is because the former have more editorships and think-tank funding.

The voters that delivered the Leave verdict were a coalition of traditional shire Tories and working-class Labour voters. Economics is part of the story but by no means all of it. There are clear clusters of attitudes and values which correlate strongly with the Leave vote. They are anything but libertarian.

Ill-vs-Good

Chart by Lord Ashcroft Polls.

Last year, British Social Attitudes looked at the factors behind the rise in UKIP support. It found not only that authoritarian attitudes were strong among UKIP voters but also that they were not that far out of step with the rest of the population.

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UKIP’s website used to describe the party as libertarian and its constitution still does. Its supporters, though, have firmly rejected libertarianism in both its social and economic forms. The same could be said of Leave voters generally. These are not people who want less state, they want more. A lot more.

More border force staff, more prisons, more police officers, more nationalisation and more money for the NHS.

Professor Alan Wolfe’s excellent quote, which sums up the politics of the last 30 years, sheds some light on this:

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

Or, as David Goodhart put it, when he presciently predicted the emergence of a ‘post-liberal majority’, this period saw a victory for the social liberalism of the left and the economic liberalism of the right. The trouble is, most voters were never really that keen on either.

*That doesn’t necessarily mean it would be a good idea but that’s an argument for another day.

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‘I own you’ – work as subordination

“I own you,” Philip Green is alleged to have said to one of his employees, who then replied, “Slavery was over a long time ago.” Which it was, of course. Slavery was abolished in the British Empire in 1834 and the feudal bondage of serfdom much earlier in 1574.

Even so, the idea of workers belonging to their employer was a long time dying. As James Fisher said a couple of weeks ago in his article Work as Obedience, the social and political belief in subordination is a neglected strand in studies of the history of work. The idea that the demise of serfdom gave way to a society based on contract labour is an over-simplification, to say the least.

One of the most profound social changes during this period was the overall increase in the number of people engaging in wage labour. According to the standard liberal narrative, this brought about a fundamental transition in the form of work from status to contract: from labour performed according to social status to labour performed according to a negotiated contract.

Many historical narratives exaggerate the extent to which this move from status to contract represented genuine progress for the labourers themselves. Political commentators were clear in the seventeenth century that wage labourers were not free. The historian Christopher Tomlins, among others, has challenged the legal history associated with the status-to-contract narrative, arguing that the defining relationship in the development of English and American labour law was between master and servant, not employer and employee. The master-servant relation was part of a series that governed the patriarchal household, replicated between husband and wife, and parent and child. This master-servant relation was explicitly one of power and domination. Servants were under the authority of their masters and acted according to their will like mere extensions of the master’s body.

Until the last quarter of the 19th century, harsh laws effectively tied workers to their employers, or masters as they were more often known. Until 1867 a worker who ‘deserted’ his employer, what we would describe as walking off the job or just leaving without due notice, was guilty of a criminal offence and could be flogged or imprisoned. Penalties for masters who breached contracts had to be enforced through the civil courts where the restrictions and burdens of proof were so great that few were ever challenged. In Britain’s 18th and 19th century economy, which we tend to think of as the cradle of free-market capitalism, workers could still be tied to master and to place.

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Chart by Suresh Naidu and Noam Yuchtman

Of course, this worked well for some employers although perhaps it was not to the benefit of the economy as a whole, given that it impeded the movement of labour and therefore the deployment and development of skills and knowledge. More importantly, though, it was regarded as the natural order of things. It kept people in their place and upheld the social order. To many, the idea that bands of free labourers could wander around the country, stopping where they pleased and negotiating pay rates with whichever master they chose, was deeply disturbing.

It is only 140 years since these coercive labour laws were abolished and the idea of one person being owned or being under obligation to another was a feature of working relationships for hundreds of years before that. It would be surprising, therefore, if some of the attitudes that underpinned the idea of master and servant did not persist. As James Fisher concludes:

Today, work retains this sense of obedience (if only implicitly), of toiling under abstract social obligations that are specified in practice by the wealthy and powerful. It manifests itself in the belief that we have a duty to work hard regardless of both the specific ends and the conditions of work itself.

In business-school theory, organisations are run for profit and therefore seek to maximise efficiency and profitability. In practice, though, they are power structures in which hundreds of people have their own different agendas. The horrible truth is that, among them, are people who get off on dominating others. Most don’t do it to maximise the company profit. Many don’t even do it to increase their own remuneration. Management abuse is often simply about ‘owning’ other people. Clever bosses can dress up publicly humiliating employees and making them do demeaning things as ‘morale building’ or ‘performance management’ but it rarely does anything other than destroy morale and diminish performance. Many people still seem to believe that positional power in a large organisation confers upon them some kind of rights over other human beings.

The legacy of master and servant law and its forebear, feudal serfdom, runs deep. Even in 2016, I suspect that the phrase “I own you” is uttered more often than we would like to think. And, for every bombastic bully that utters it, there are several more that think it.

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The quest for Sir Phillipe’s gold – a short medieval yarn

Scene: In a dark and damp castle, a nervous courtier approaches the king…

“Forgive me, your majestie, but I bring grave newwes.”

“More bad tydingges? Cah! What occurreth now?”

“Ye estates of Sir Phillipe le Vert are laid waste, Sire. What once were lush and fertylle producers of plenty are now crumbled into duste.”

“This is indeed a tragedyie. How has it come to pass?

“Thy servants are tryingge to get to ye bottome of this thyngge, Sire, but Sir Phillipe has proved somewhat evasive?”

“Evasive?!!”

“Verily, Sire, he accuseth your majestie’s inquisitors of lookingge at hym in a funniyye way and he blameth ye catastrophe and desolation on Dominique la Chapelle.”

“Dominique la Chapelle? Who in all my kingdomme is he?”

“Unknown to us, Sire, but we are told he is somethingge of a rogue and a knave. It is he that ran ye estates in ye last year before ye destitution.”

“A year is but a short tyme for an estate to go to ye ratte shitte.”

“Indeed so, Sire. Sir Phillipe must be called to accountte for his part in this thynnge. And I fear, Sire, that worse is to come. There is nothingge left to provide for Sir Phillipe’s villeins and their families. Their alms must now be met by your majestie’s exchequer.”

“Forsooth! And how does thou recknoneth the cost of this?”

“A not inconsiderable number Sire. To make good ye shortfall in ye alms will require an amount close to one year’s taxes and tithes.”

“Zounds! Then we must make Sir Phillipe payy it!”

“Thy ministers have been making this very point, Sire. Alas, to date Sir Phillipe has offered to payy but a token amountte.”

“A token amountte? The cur!”

“And Sir Phillipe has threatened your majestie’s chief inquisitor, Francis de Champ, with grave and terrible retribution if he persisteth with his charges of pillage and plunder against Sir Phillipe.”

“My patience weareth thynne. Seize Sir Phillipe’s gold!”

“Therein lyeth ye problemme, Sire. Sir Phillipe hath taken his gold to a principalitie beyond ye lands of ye Languedoc. There he stores it in his Ladyyie’s chamber, far beyond ye reach of even your majestie’s most intrepid knights.”

“When I knighted Sir Phillipe he swore an oath allegiance. By putting his gold in a secrette playce beyond reach of his king, he has behaved with dishonour.”

“Indeed, Sire, but he currently lodgeth under ye protection of foreign princes…”

“To ye Tower with him!”

“As you command, Sire. (If we can catch ye buggre, that is.)”

 

Disclaimer: This dodgy medieval yarn is purely a work of fiction. Any resemblance to real persons, living or dead is purely coincidental.

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Taking back control – if only for a day

John Lanchester has a long piece in the London Review of Books reflecting on Brexit. It’s worth making the time to read it in full but this piece struck a chord:

To be born in many places in Britain is to suffer an irreversible lifelong defeat – a truncation of opportunity, of education, of access to power, of life expectancy. The people who grow up in these places come from a cultural background which equipped them for reasonably well-paid manual labour, un- and semi- and skilled. Children left school as soon as they could and went to work in the same industries that had employed their parents. The academically able kids used to go to grammar school and be educated into the middle class. All that has now gone, the jobs and the grammar schools, and the vista instead is a landscape where there is often work – there are pockets of unemployment, but in general there’s no shortage of jobs and the labour force participation rate is the highest it has ever been, a full 15 points higher than in the US – but it’s unsatisfying, insecure and low-paid.

There’s work but it’s not like work used to be:

This new work doesn’t do what the old work did: it doesn’t offer a sense of identity or community or self-worth. The word ‘precarious’ has as its underlying sense ‘depending on the favour of another person’. Somebody can take away the things you have whenever they feel like it. The precariat, as the new class is called, might not know the etymology, but it doesn’t need to: the reality is all too familiar.

This is the story that the economic statistics don’t always show. Sure, the employment rate is at a record high and inequality has barely risen since the early 1990s but the experience of work has changed. The sense that somebody can take away what you have almost on a whim makes people feel less secure. Of course, it has always been possible to sack people and evict them from their houses but go back a couple of decades and it was a lot more difficult to do so in practice. Furthermore, people had more of a sense that they had some say in the matter and some form of redress against unfair decisions.

Many years ago, I read an article (I can’t remember where) applying the concept of property rights to jobs. It was an intriguing piece, arguing that organised labour had challenged the employer’s ‘ownership’ of a job. It was no longer his to do with as he saw fit, a part of it ‘belonged’ to the worker. This was certainly the case when it came to disposing of employees. Unions often resisted the right of employers to sack people. In some industries, such as printing, they even told the employer who to hire. The job was as much the ‘property’ of the worker as the employer.

To stretch the analogy even further, you could argue that there was even a sense of hereditary rights over jobs. Many of the large industrial organisations recruited from families. In the company I worked for at the end of the 1980s, entire extended families were employed. Fathers, brothers and sons as engineers or on the labouring gangs, mothers, sisters and daughters doing clerical jobs in billing or dispatch. Some of them rose  through the ranks to become managers. It was very unwise to slag off a manager in public because you could never be sure whether or not the people you were talking to were related to him.

The longer you had worked for the firm and the better your reputation, the more likely it was that you could get friends and family members jobs as well. This didn’t do much for workforce diversity but it did give people a stake in the system. Loyalty to the company paid off in the form of patronage. Being able to get your son or nephew a start at the works reinforced the status gained from working for a recognisable company, like Ford, or a big utility like the local electricity board.

Something similar happened with housing. Go back 25 years and most people who didn’t own their homes lived in council houses. They had secure tenancies with fixed rents. Priority was given to people who had lived in an area for some time. You can argue about whether this was fair or not but, as with jobs, there was (and still is in some places) a sense that these homes belonged to people and to their families. They might not have been people’s property in the legal sense but their residents certainly had a sense of ownership.

Underpinning all of this was a lot of talking and listening. Paul Bivand and I were discussing this just after the referendum. There were joint committees of managers and trade union reps at national, regional, local and plant level. There is much talk now of Employee Voice but there was plenty of it in the unionised workplaces. The people sitting on these bodies came from the same backgrounds as those they represented. Sometimes even those on the management side had originally come from the shop-floor. In the company where I worked at the end of the 80s, on the joint committee for the London area, the management side was headed up by a staunch Labour supporter and the union side by a member of the Conservative trade unionists.

All this began to fall apart in the late 1980s and early 1990s. Liberal legislation is sometimes blamed but really it only played a minor role. The company where I worked, for example, was criticised by the CRE for recruiting from families. It had done it for so long that it barely occurred to anyone that the practice made it less likely that people from ethnic minorities would be recruited. That said, ideas of meritocracy and the drive for shareholder value would probably have done for such practices anyway. At the same time, union power declined, due in part to government policy but also to the disappearance of many of its strongholds as industries were restructured and jobs automated or offshored. All this happened remarkably quickly. Unions which had seemed all powerful a dozen years earlier were on the ropes by the early 1990s. As Paul Mason said, in his review of the Shane Meadows film This is England 90, a lot was about to change:

I recall feeling on that day that a lot of certainties were falling apart around me: the deference and hierarchy that had kept protests self-controlled, even during the fractious 80s. The social solidarity that enforced law and order in working-class towns, the maleness and the straightness of public life were fading; recreational drug use was flaunting its smiley face across mainstream culture.

This new fluidity meant that, when the economy recovered in the mid-90s, the labour market would become more stratified. The rungs on the earnings ladder separated rapidly, leading to sharp and rising wage inequality. It trapped the poorest but – as the free-market model found its stride – enabled the return of upward mobility by the 2000s.

If they’ve been lucky, the real Lol and Woody will be living in a nicer part of Sheffield having survived several episodes of layoff, retraining, outsourcing and offshoring. The real people I remember from the riots and raves of 1990 – mainly the clever non-graduates who populated the trade union movement – are now ward sisters, chemical engineers, shift supervisors in highly automated factories. Whatever the job title, most are working with a raw material that barely existed in 1990: digital information. The ones who didn’t escape will be living a life you know all too well from the benefit-porn documentaries: poor, hopeless and stuck; dazzled by the celebrity circus, perennially hounded by the DWP.

Many will no doubt take issue with this, pointing out that there has been no noticeable increase in inequality since the early 1990s and that, with the exception of the mid 2000s, real household incomes rose faster for those on lower incomes than for those in the upper deciles.


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Chart via Resolution Foundation: Living Standards 2016

But while that is true, it doesn’t tell the whole story. The cost of rented housing has risen faster than incomes and the proportion of the population in council housing has shrunk. As Declan Gaffney pointed out a couple of years ago, the caseload for most benefits has fallen since the early 1990s while that for working age housing benefit has risen sharply.

caseloadchart

Chart via Declan Gaffney

This chart tells the story of our times. The proportion of people on out-of-work benefits has been falling for the last two decades. The majority of people are now in some form of paid employment but these jobs are supported by tax credits and in-work housing benefit.

Furthermore, as the Joseph Rowtree Foundation found, a lot of people regularly move in and out of low paid work. Compared to most other countries in Europe the UK has relatively few people trapped in persistent poverty. This is because we share our poverty out more evenly. Most people don’t stay on a poverty-level income for long but typically around a third of the population will have had some experience of it during the last four years. It is no wonder, then, that people feel insecure.

This brings us to the nub of it. As John Lanchester said, the new work doesn’t do what the old work did. It feels less secure. Employment protection comes from the courts, if you can afford them, not from your own representatives. Employers may ask for your opinion and take an interest in your morale but they do so because they think it will improve productivity, not because of your bargaining power. The fact that an experiment in employee empowerment and a neo-Taylorist workplace autocracy can operate under the same corporate roof shows just how arbitrary people management policies can be. In the past, employers had to talk to worker representatives. Nowadays they do so because they think it might improve their profits. Tomorrow they might change their minds.

It’s the same with housing. The proportion of people in council housing and other social housing continues to fall. Even the secure tenancies that once went with council houses are now under threat. Those in rented accommodation have very little protection against eviction. To cover rent and bills, many find themselves relying on tax credits and housing benefit.

That sense of control, of ‘property’, over jobs and homes has gone, taking with it the sense of permanence and rootedness that employment once gave people. Nowadays there is the sense that it all depends on the favour of someone else and could all be taken away from you at any point. Even if you are in a permanent job, your employer could sack you tomorrow and you’d have to pay to go to court to sort it out. He might decide to abandon the employee engagement programme and introduce the Sports Direct approach to management. If you are on zero hours or agency employment, he might just stop phoning you. The landlord might evict you next week or the government might tell you the house you have lived in for years is no longer yours. Or it might decide to take away your tax credits and housing benefit. Just like that!

The point about all this is that it is someone else decision. The protection people might once have had, through their trade union reps or tenants’ associations, has either gone completely or is much less powerful than it once was. In short, there was a time when people had more control and a lot of them can still remember it. Whether the slogan ‘Take Control’ was a clever but cynical pitch, as John Lanchester says, or just a stroke of luck, it clearly struck a chord with people who have been feeling a loss of control for years.

It was when I read this piece by Lisa Mckenzie, a week before the referendum, that I feared the game was up. I grew up in Nottingham and I already knew from friends and relatives that there was a groundswell of opinion there in favour of leaving the EU. Lisa Mckenzie put these feelings in context. Voting for Brexit, she said, was the only way people who felt powerless could change anything.

[T]he EU referendum debate has opened up a Pandora’s box of working-class anger and frustration. It is clear that the Westminster politicos are quite unnerved by this. Even I am surprised by how the referendum has captured the attention and the imagination of the same people that only last year told me they had no interest in the general election “because ‘they’ are all the same”.

In the mining towns of Nottinghamshire where I am from, the debate again is about Brexit, and even former striking miners are voting leave. The mining communities are also worried about the lack of secure and paid employment, the loss of the pubs and the grinding poverty that has returned to the north. The talk about immigration is not as prevalent or as high on the list of fears as sections of the media would have us believe. The issues around immigration are always part of the debate, but rarely exclusively.

From my research I would argue that the referendum debate within working-class communities is not about immigration, despite the rhetoric. It is about precarity and fear.

Working-class people in the UK can see a possibility that something might change for them if they vote to leave the EU. The women in east London and the men in the mining towns all tell me the worst thing is that things stay the same. The referendum has become a way in which they can have their say, and they are saying collectively that their lives have been better than they are today.

Suddenly, people had power in their hands. The sort of decision that was usually reserved for politicians had been handed to the electorate. They could make a choice which would have a direct effect on the future of the country. That, only one month later, that choice has already lead to a complete change of government ministers and has had repercussions around the world, shows just how much power the voters were given. They voted so that something, anything, might change. Briefly, people who had seen their control over their lives ebb away were granted immense power. And they used it.

Whether it will make their lives any better in the long run remains to be seen. I think it unlikely. The damage caused by leaving the EU will almost certainly hit the poorer areas hardest. That said, I retain just enough optimism to hope that, rather than shrugging off the anger, our shaken up political establishment might pause and reflect. Rather than condemning people for doing something so destructive, shouldn’t we be asking why they were so angry in the first place?

Update

On a similar theme to this, Anthony Painter has written a good piece on insecurity and the new world of work in which he draws on data from the British Social Attitudes survey. There are a couple of particularly interesting findings here.

Firstly, the study finds an increase in feelings of insecurity among older workers and those in more routine jobs.

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The age difference might be because older workers can remember when they had greater job security than they have now and the younger ones don’t miss what they have never had.

Secondly, the sense of control over the organisation of their work has risen among professional and managerial workers but declined for those in routine jobs.

Screen Shot 2016-07-27 at 16.50.52This reminds me of a discussion I had with Chris Dillow a while back on whether workplaces are more controlled and regimented now than they were 20 years ago. I suspect that your view of this will depend on the type of work you do and how many layers there are above you in the corporate hierarchy.

In general, though, these findings suggest that working class and older workers feel they have less control and security at work than they once did.

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It’s beginning to feel a bit 2012-ish

The gig economy is back, it seems. Yesterday’s ONS employment data showed self-employment at a record high both in terms of absolute numbers and as a percentage of total employment.

Self Employment Jul 2016

Source: ONS Labour Market Statistics, 20 July 2016

For a while it looked as though the post-recession increase in self-employment was unwinding. As the number of employee jobs rose, self-employment fell. Then about a year ago the numbers began to rise again. Shortly afterwards, at around the turn of the year, the rate of increase in employee jobs tailed off.

Employment May 2016

Source: ONS Labour Market Statistics, July 2016

The slowing down of employee hiring may be due to concerns over the referendum and Brexit. The rise in self-employment may be a result of companies switching to using contractors while they wait to see what happens. It may also be, in part, a response to the increase in the minimum wage. It’s still too soon to say how far this is a temporary blip or a symptom of something longer term.

The forecasts don’t look good though. As the Resolution Foundation reported yesterday, since the referendum result most of the economic forecasters have revised down their projections for GDP growth. Some are even predicting a recession.

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Most also expect slower employment growth and their forecasts suggest a return of the pay squeeze in 2017. Average pay is still not back to its pre-recession levels and it now looks likely that it won’t be for some time. The long pay squeeze will be even longer than we thought.

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Given that self-employment incomes collapsed after the recession and there has been little sign of much improvement since, an increase in self-employment is likely to depress overall earnings even further.

The UK economy, like those of many other countries, still hadn’t fully recovered from the crash in 2008. A few months ago, with per capita GDP finally clawing its way back to its pre-downturn level, we were at last getting to the point where we could believe the Great Recession was over. The last thing we needed was a major upheaval like leaving the European Union.

Of course, it could be that all the forecasters turn out to be wrong. Maybe, once we ‘just get on with it’ and leave the EU, the economy will soon be back on track. The trouble is, no-one is quite sure what just getting on with it means. The process of disentangling the UK from the EU will be fiendishly difficult. As Patrick Wintour pointed out, even the simplest option, which would still not be popular with many Leave voters, is subject to 32 potential vetoes.

It’s difficult to see how this could be over quickly. The long period of limbo is likely to be a drag on the economy for some time.

We may not see a recession and, even if we do, it is unlikely to be anywhere near as bad as the one in 2008-09. But, if things are not quite 2009-ish, they certainly have a bit of a 2012 feel about them with slow growth in employee jobs, stagnating pay, rising self-employment and, as seems likely, very low growth. Let’s hope that’s as bad as it’s going to get.

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The great pensions cock-up

It must be nearly 30 years now since my boss asked me to review all the company’s standard HR letters to make sure they complied with the law and company policy. It’s the sort of project you give to a recent graduate who hasn’t the experience to do much else.

As an example, my boss showed me the standard early retirement letter. Whoever had written it had simply copied over the standard ‘congratulations on your retirement’ letter and inserted the word ‘early’. The trouble with this, my boss said, was that early retirement counted as a dismissal, even though the employee had agreed to it. “People don’t early retire,” she explained, “the company early retires them.” Therefore the letter had to contain all the usual caveats about unfair dismissal claims that would go in a normal redundancy letter.

This set me thinking. At the time, lots of people were being early retired. I began to realise that what I had at first assumed was a generous company benefit for long-serving employees was actually a way for managers to sack those they considered to be dead wood without having a difficult conversation about performance. Then I had another aha moment. Under early retirement, at least some of the payment was covered by the pension scheme, so the cost of getting rid of people didn’t hit a manager’s budget in the way that standard redundancies would. He could therefore cut his headcount and still make his numbers.

Eventually, an embarrassingly long time later I’m ashamed to say, the penny dropped. The company had been keen to push up its share price and wanted to show that it was becoming lean and mean. At that time the pension fund was fat with surplus wealth. By using some of it to cover redundancy costs, the company could make impressive cuts to its workforce without hitting its profits.

I don’t remember anyone kicking up much of a fuss about this at the time. Perhaps the unions were happy to see their members get decent payoffs and didn’t think much about the longer-term consequences. Maybe they did complain but it wasn’t considered newsworthy.

The company I worked for was far from unique though. Raiding the pension scheme to finance downsizing was not unusual during the 80s and 90s. A 1999 Cambridge University paper by Michael Pollitt noted that the headcount reductions during the privatisations of this period were achieved almost entirely through voluntarily redundancies and early retirement:

[The government] was able to compensate most of the early losers – there were very few compulsory redundancies and generous early retirement and there were voluntary severance packages for those who left privatised firms as they downsized.

Workers do not seem to have got lower salaries as a result of privatisation if they remained with the company while those who left were re-employed elsewhere in the economy (unemployment fell from 1986) or went to early retirement.

Outgoing pensions minister Ros Altman cited this as one of the reasons for the dire state of occupational pensions in a recent article on her blog:

Then we come to the role of employers. They too could not resist getting their hands on the tempting pool of assets sitting in the pension funds. They used these to hide the costs of industrial restructuring in the 1980’s and 1990’s, by giving people generous early retirement benefits (paid for by the pension scheme).

As if that wasn’t enough, companies also started taking pensions holidays, claiming that the surpluses in their schemes would be more than enough to cover the retirement costs of the future. To make things that bit worse, Nigel Lawson decided to tax pension scheme surpluses just at the point when companies should have been building them up. As  Matt Hitchens of the Intergenerational Foundation says, the term ‘pensions surplus’ was a misnomer:

What looked like surpluses were actually necessary buffers for the increased costs of scheme maturity, when there would be fewer people paying in and more taking out.

Companies were instantly disincentivised from buttressing their funding position, exactly the opposite of what should have been happening. Companies were also buoyed by the appearance of surpluses, and took contribution holidays (when they didn’t add to the pension pots) throughout the 1980s and 1990s, believing that their funding position was so strong that they could afford to do so. As it turns out, they could not.

This has left companies with huge pension deficits. According to Oxford University’s Brian Bell, it is costing employers £42 billion a year to shore up underfunded pension schemes. The amount they are having to pay to keep their pensions afloat has almost doubled since 2003. This, he says, accounts for much of the decoupling of wages from productivity and overall employee compensation. While the amount of total compensation may be keeping pace with productivity, once the pension schemes have taken their cut there is precious little left for pay increases.

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This means that very little of the rise in overall compensation goes to those currently employed:

[T]he increase in non-wage compensation may provide no, or few, benefits to the currently employed. Because a substantial part of these payments are to cover deficits in pension schemes for past workers and those already in retirement, current workers benefit little from these payments.

He uses British Airways as an example:

BA spent £55 million funding a deficit in a scheme that provided a benefit to only 2.5% of their UK employees. If this money had not been required and had instead been distributed across the entire workforce as a pay increase, it would have represented a 3.8% rise. Some have ironically described the airline as ‘a pension deficit with wings’.

As the Resolution Foundation remarked, in its Intergenerational Commission report published yesterday:

The fact that younger workers have very limited access to the generous ‘defined benefit’ occupational pensions that were standard for many workers in previous generations may feel unfair in itself. But the impact runs deeper still. The circumstances that led to these schemes closing – consistent underestimates of rising life expectancy; low stock market returns; a long-term decline in interest rates; and overconfidence on the part of both companies and the government (meaning that both raided pension funds for other projects in the 1980s and 1990s) – resulted in large funding gaps. As a consequence, many firms now have to set aside large sums of money from today’s revenues to fund yesterday’s promises.

Importantly, a substantial amount of this money will form the retirement income of past workers and those already in retirement. In other words, billions of pounds each year is being extracted from the productivity (and therefore the potential earnings pots) of today’s workers to pay the retirement incomes of yesterday’s. While a similar principle underpins the State Pension – each generation’s taxes pay for the retirement of previous generations – the fact that younger workers are much less likely to hold defined benefit pensions means that this private sector generational transfer won’t be repeated.

Pension raids and contribution holidays, together with some bad planning and short-sighted tax policy, have left pension funds with a massive gap. Companies are now trying to cover this using money that might otherwise go towards pay rises. Those they employ are working to cover the cost of benefits they are unlikely to see themselves while seeing their own pay stagnate. The FT reported earlier this week that, because of the hit share prices have taken, Brexit will only make this worse.

The gains from the pension raids mostly went to swell the bonuses and share options of senior executives who have long since retired. Even the later baby boomers who came after them may not be so lucky. There is already talk of cuts to retirement incomes. According to the FT, one sixth of private pension schemes are close to insolvency and “will almost certainly end up in the Pension Protection Fund.” In other words, the liabilities will end up with the state and the pension incomes will be reduced. For those younger still, the likelihood of retiring with any sort of defined benefit scheme looks remote. Some of the middle managers who were sending out those early retirement letters in the late 80s will be coming up for retirement around now. Little did they know that every one was drilling a tiny hole in their own pension pot through which the funds would eventually leak away.

To call this the Retirement Heist, as one US journalist has described similar happenings over there, makes it sound more coherent and planned than it was, or, at least, than the British version was. What happened in Britain was as much cock-up as conspiracy, a mix of a bit of greed and a lot of short-sightedness. A few people did very well out of it. Many more benefitted from comfortable retirements, rightly because that is what they were promised. The rest of us won’t be so lucky.

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Leave vote may do more damage to the poorer regions

On the weekend after the EU referendum, the BBC asked a middle-aged Welsh voter whether he was worried about Wales losing its EU money. The man replied that it was “our money anyway”.  Presumably, by this, he meant that the UK contributes more to the EU than it gets back so the money could be said to have come from British taxpayers in the first place.

But will Wales get that money back after the UK leaves the EU? The Welsh government has said that “every penny” of the lost EU money must be replaced by the UK government. David Cameron’s response was not encouraging. Whoever succeeds him as prime minister, he said, would not be able to guarantee that funding.

It is now looking very likely, as the IFS warned before the referendum, that the economy, and therefore the tax take and the public finances, will be severely hit by the Brexit vote. As a result, there will be less money available anyway. Just as worrying for the regions outside London, though, is that the call for devolved powers for London are getting louder. Amidst the silly noise around the idea of London to become a city-state, there are serious proposals for the capital to have more control over its own finances and the newly elected mayor is putting his weight behind them. A majority of Londoners were in favour of more devolution before the referendum. The Brexit vote is likely to harden that opinion.

The trouble is, if London keeps more of its tax revenue, then the rest of the UK will get less. Given that the pot is likely to be depleted anyway, that could have a serious impact on other parts of Britain.

A report by Centre for Cities published today found that the UK is even more dependent on taxes from London than it was a decade ago. London now accounts for 30 percent of the country’s tax revenue. A report in 2014 by the Centre for Economics and Business Research found that, taking account of revenues and public spending across the UK, London and the South-East were subsidising the rest of the country.

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Those in Scotland may argue that this does not take account of the oil revenue but that’s an argument for another day. For Wales and the English regions, though, London keeping more of its tax revenue would have severe consequences.

The regional household disposable income figures published by the ONS in May showed the proportion of income coming from social benefits in each region. This figure includes pensions so you would expect it to be higher in areas where people have retired but even so, the difference between London and elsewhere is marked. In London, 12.6 percent of income comes from social benefits. In the North East it is 23 percent, in Wales 24 percent.

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The ONS definition includes charities and colleges (the NPISH sector) which most people would not consider to be households. The Family Resources Survey, albeit with a smaller sample size, concentrates on households only. It also breaks out state benefits and private and occupational pensions. The resulting picture looks even worse.

Bens & Pens

Source: Family Resources Survey, 2014/15 , published 28 June 2016

On top of the reliance on state benefits, around 10 percent of household income in some regions comes from occupational and private pensions. Much of this is the legacy of deindustrialisation. The factories, mines and steelworks may have gone but their ghosts are still there in the form of their pension schemes, still topping up the local economies of the areas where they used to employ people. In some local authorities, pensions account for a quarter of the area’s income. The jobs of people in the shops, pubs and cafes depend on pensioner spending. But many of those generous pension schemes are now being wound up. In an area where a high proportion of income is from state benefits, what happens when those occupational pensions have gone?

The bitter irony of all this is that, on the whole, the areas most dependent on social benefits are those that voted most strongly to leave the EU.

Leave & Social Benefits

Sources: ONS Regional gross disposable household income, May 2016 and Electoral Commission EU Referendum Results. England & Wales, NUTS3 regions.

This is not really surprising, given that older and poorer voters were most likely to vote Leave. It does mean, though, that those areas where the Leave vote was highest may be among the worst hit by the consequences of leaving, or even just preparing to leave, the EU.

The Guardian reported recently from Ebbw Vale, a town which voted overwhelmingly for Leave but which has few immigrants, high unemployment, severe economic problems and is heavily dependent on EU investment.

It’s a town with almost no immigrants that voted to get the immigrants out. A town that has been showered with EU cash that no longer wants to be part of the EU. A town that holds some of the clues, perhaps, in understanding quite how spectacularly the Remain message failed to land. There’s a sense of injustice that is far greater than the sum of the facts.

And a town which my well have just voted to trash its own economy.

With the local economies of many parts of the country dependent on what the ONS describes as non-productive sources, a worsening of the country’s fiscal position is likely to  hit them hard. If Londoners, a majority of whom voted Remain, decide they want to keep more of their money in London, that will only make things worse. When you start talking about ‘our money’ you raise the question, what do we mean by ‘we’, ‘us’ and ‘our’?

To answer the Welsh voter interviewed by the BBC, what used to happen was that the EU took a lot of money from rich Londoners and gave it to poorer parts of Wales. There is now no guarantee that those rich Londoners will keep on handing that money over. On top of the deep divisions brought out by the referendum, a recession might make us that bit more selfish about what we do with our taxes. Sadly, that means the poorer parts of the country are likely to suffer the most.

 

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