Friction burns

Three reports on Brexit came out last week. Two of them were risible. The one by Economists for Free Trade (the re-branded Economists for Brexit), advocating what trade expert Samuel Lowe called “unilateral tariff disarmament“, has been well and truly ripped to pieces, even by Leave supporters.

In a similar vein, a report by the Institute of Economic Affairs  assured us that we will still be able to trade tariff-free with the EU after Brexit, even without a free trade agreement. This, as Samuel Lowe said, is simply wrong;

Once the UK leaves the EU, the EU is obliged by WTO rules to apply the same tariffs as it does to any other country without a free trade agreement. It can’t do anything else. Even I, merely an enthusiastic amateur, understand this.

Neither report is worth dwelling on but, sadly, that’s just what a lot of the media did. As a result, a  report with proper evidence, by people who know what they are talking about, was blown out of the headlines. In case you missed it, which you might have done with all the fuss about the other reports, the Institute for Government’s Frictionless Trade? explains why all the UK’s post-Brexit options will make trade more difficult than it is now and why, even so, some options are better than others.

Essentially, there are three reasons why EU countries operate customs checks on imported goods:

  1. To impose tariffs and quotas;
  2. To confirm the imports’ country of origin;
  3. To ensure compliance with EU regulations.

A free trade agreement (FTA) would get us over 1 but not 2 and 3. Therefore, even with a FTA with the European Union, goods coming from the UK would still be stopped at EU customs posts.

The EU needs to check on the origin of goods to stop people using countries with FTAs as a back door to the EU. Let’s say the UK negotiates a FTA with the EU and one with the USA but there is still no FTA between the EU and USA. Without customs controls for UK goods, it would be easy to export goods from the USA to the UK and from there to the EU without paying tariffs.

A customs union would get us over point 2. By levying a common external tariff, the EU could be sure that any goods imported into the UK have already paid tariffs, so there is no need to check for their origin.

But that still leaves point 3. The EU has strict rules (those famous EU regulations) especially on the import of food. Without inspections to confirm compliance, again assuming the above scenario, what would stop US companies exporting GM foods, hormone injected beef and chlorine washed chicken into the EU, via the UK?

To satisfy point 3, the UK would have to shadow EU regulations, effectively remaining part of the single market, with all the obligations that entails, such as free movement and payments to the EU. Once we do that, there is really no point in leaving the EU at all.

There is a 2.5 option, a customs union with a series of Mutual Recognition Agreements on standards, which could significantly reduce the amount of border checks but it would not eliminate them completely. This is what Michael Barnier meant when he said that there could not be frictionless trade once the UK had left the EU. Much of the discussion about the UK’s post Brexit relationship with the EU has focused on free trade agreements and tariffs but that is, at best, one third of the picture.

Whatever option we end up with, there will be significant disruption to supply chains. As the Institute for Government report says, the UK is not an island factory. It has been in the single market for 24 years and the EU for 44. This has enabled companies to specialise and so many have become part of European-wide supply chains. As a result, many of the UK’s exports are dependent on imports.

It is increasingly the case that, to export, the UK imports. In 2011, almost a quarter of the value of UK exports came from imports (up from 18% in 1995; see Figure 3). In those sectors where the UK is more closely integrated into a global value chain, the figure is significantly higher; 44% of the value of UK car exports comes from imported products.

Of the UK car industry’s car industry’s £64 billion output, £12 billion is spent importing goods from the EU. A third of its exports to the EU are in the form of parts to go into other EU made vehicles.

So although we might talk about making cars in Sunderland, for example, it is just one part of an international factory floor. Parts enter and leave multiple times on their journey towards coming together as a finished vehicle.

In most UK manufacturing sectors, trade is deeply integrated with the EU. Brexit therefore brings considerable risks:

This integration – and the economic activity arising from it – is what is at stake when we describe the risk of introducing costs into UK–EU supply chains.

The UK’s integration into global supply chains ows in two directions:

  • downstream integration – parts or inputs imported by the UK from other countries to be used for further production
  • upstream integration – parts or inputs exported by the UK to other countries to be used for further production.

In some sectors, this level of integration is extremely high, some two-thirds to three-quarters of their supply chain.

Any disruption to this value chain will increase costs. Many companies now operate on a just-in-time basis and don’t have much slack to allow for delays. Companies within the EU can mitigate this risk by sourcing more of their parts from other EU countries, where there is very little chance of a truck being stopped. They have plenty of other countries to choose from. UK companies, on the other hand will have to swallow the increased costs at the same time as losing markets in the EU.

As the IFG points out:

[E]ven minimal increases in the cost of moving individual parts back and forth across the EU–UK border could accumulate into significant overall increases in the cost of finished products. A study by Oxera in June 2016 found that around 8% of the cost of importing goods by sea arose from customs clearance.

Nissan and Jaguar, two of the UK’s largest car makers, hold only two hours’ of stock of some items at their sites, in order to minimise inventories and save on costs. Even the threat of delays would mean the companies would have to invest in holding more inventory or localising suppliers. UK suppliers of parts face the risk of missing out on ‘just-in-time’ contracts if they cannot guarantee delivery on time.

And finding markets elsewhere won’t make up for the loss.

There have been suggestions that any decrease in trade with the EU as a result of Brexit could be offset by an increase in UK trade with other partners. There are many problems with this approach, not least that the sheer size of the EU market for UK exports means that a small percentage decrease in EU trade has to be offset by very large percentage increases in trade elsewhere.

But that pivoting strategy will be even more di cult for UK exports of intermediate products. A nished car can be sold to an Australian or to a German. But a car part can only be sold to countries that have car factories – which Australia doesn’t. As we have seen, cross-border supply chains often mean that countries specialise in particular parts of industries and the industry of another country may not be adapted or may have no need for specialised UK products.

You can’t sell parts to people who don’t make stuff.

A free trade agreement, even one like the EU has negotiated with Canada, would remove the need for customs checks because the EU would want to confirm rules of origin and regulatory compliance. The report gives an example from the chemical industry.

Steve Elliott, Chief Executive of the Chemical Industries Association, has stated that ‘the cost of providing the technical proof that a chemical or any other manufactured product originates from the EU or the UK, bearing in mind that in our case there could be several stages of synthesis involved … would clearly outweigh the benefit of duty-free sales.

And the result of this:

A range of estimates collected in the Trade and Investment Balance of Competence Review shows that ‘British firms would be exposed to a combination of administrative and compliance costs linked to rules of origin, ranging (based on existing estimates) from 4 percent to perhaps 15 percent of the cost of goods sold.

Enough to make customers in the EU look elsewhere.

As Frances says, there is something very nineteenth century about a focus on tariffs and free trade agreements. The UK economy in 2017 doesn’t work like that any more. It is no longer the workshop of the world. It is a section within a vast production line that stretches across Europe. Disrupting that will do severe damage to all its parts but it will be easier for the rest of the EU to repair its parts than it will be for us to repair ours. The more obstacles we put in the way of trade, the worse it will be. Whatever happens, this is going to cost us dearly.

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Sitcom Britain

I said years ago that if we ever had an authoritarian movement in Britain it would not have uniforms, goose-stepping marches and torchlight parades. It wouldn’t be that interesting. Ours would be a shabby poujadism, led by golf club bores, residents’ association busybodies and parish Pol Pots.

The boorish self-righteous know-all is a staple of British comedy, perhaps because every neighbourhood has at least one. It’s easy to imagine Terry MedfordMartin Bryce, Warden Hodges and Reggie Perrin’s brother-in-law Jimmy in your local UKIP branch. Basil Fawlty would have joined in the early years but left once they started letting in riffraff like Eddie Booth and Alf Garnett. But at least in the comedies even the most dislikable characters had some redeeming features and, in the end, they usually got their comeuppance, their own puffed-up stupidity eventually bringing about their downfall.

Alas, in 2017, this once-ridiculed tendency in our national culture is now calling the shots. As Rafael Behr said last week, to the rest of the world, Britain now looks urbane but unhinged. Sitcom characters, only without the comedy:

To succeed in Britain, radicalism eschews the fancy dress of martial bombast. Nigel Farage advanced the cause of Brexit not by banging podiums but by propping up the bar, nudging and winking at insurrection through a pint of ale.

Last week, the government produced two Brexit position papers described as foolish by a former government legal advisor and as destructive ambivalence by the FT. And those were just the polite reactions. As Chris Grey says, the reason for the incoherent and contradictory messages in these papers is the government’s attempt to walk a line between the national interest and the demands of the noisy Brexit fanatics:

Even the realpolitik of negotiating with the EU would not be so difficult were it not for the relentless pressure of the vociferous and ever-present Brexit ultras inside and outside the Tory party. They are so detached from reality and so implacable in their demands that even the government’s attempts to negotiate hard Brexit are regarded as a betrayal. Since they do not have to take any responsibility at all for the consequences they are free to oppose transitional periods, exit bills, or any kind of deal at all (see John Redwood here, for example). If May thought that she had bought their loyalty by rejecting the obvious, pragmatic, compromise of soft (single market) Brexit then she failed to understand that as with every concession made to them before it just produces an even wilder new demand.

This chorus, made up mostly of middle-aged men, shouts ‘treason’ at any attempt to translate Brexit into something that might limit the damage to Britain’s economy. They claim a monopoly on patriotism, wrapping themselves in the Union Jack and calling those that disagree with them anti-British.

Most distasteful of all, though, is the weaponising of ignorance. The snobbish and condescending suggestion that knowledge and expertise are somehow elitist and irrelevant to most people has taken our political debate to a new low. Plummy accents affect common cause with ‘ordinary folk’. We common plain-speaking chaps are fed up with experts, aren’t we, eh what? Oxford history graduates tweet things they surely know to be nonsense and Fellows of All Souls cast themselves as anti-Establishment. The strategy when confronted with inconvenient questions or facts, is to simply go red in the face and shout a lot, hoping to browbeat your opponent into submission. Some of the noisy old men on Twitter really don’t know what they are talking about. Worse, though, are the ones who pretend not to know things because knowing them would be inconvenient.

As if to emphasise the sitcom takeover of Britain, as soon as she came back from holiday our prime minister chose to become embroiled in the War of Big Ben’s Dong (oo-er missus). We may be 18 months away the most calamitous event to hit this country since the Second World War but our government can still find time to pontificate on a manufactured tabloid row. Never mind that the plan to repair Big Ben was signed off by parliamentary committees in 2015, that the bell has been silenced for refurbishment before or that doing delicate repair work with 120 decibel chimes going off every quarter-hour is self-evidently stupid, the pompous boors have to be appeased. Once again, those who know what they are talking about and who have done the painstaking planning are dismissed with typical bluster.

Some council jobsworths are planning to silence the town hall clock. The local rag is up in arms and retired colonels are writing letters to the Times. But don’t worry, Hyacinth Bucket and her residents’ committee are on the case. They’ll put these namby-pamby so-called experts in their place.

Hey, here’s an idea. An old Etonian hack, who has built his reputation by making up stories about foreigners and telling xenophobic jokes, somehow gets to be foreign secretary. He carries on exactly as before, which upsets lots of foreign politicians and diplomats. We could have European dignitaries with funny accents saying, “Ach so, zis is famous English joking, yah?” OK, it’s preposterous but it should get a few cheap laughs in the half hour between the serious programmes.

The trouble is, the joke is wearing thin. An aspect of our national culture that used to provide endless comedy material has gone mainstream. The bombastic, self-righteous middle-aged bore, revelling in his homespun philosophy and convinced that what he can see from his own doorstep represents a universal and timeless truth, is now calling the shots. The knowledgable and those with workable suggestions are shouted down. The people who used to provide us with midweek comedy laughs are now running the show and, when you get close up, they are really not very funny at all.

 

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Minimum overtime pay: a nudge for lazy managers

The most interesting proposal in Matthew Taylor’s report on employment is this one:

Government should ask the Low Pay Commission (LPC), in its next remit, to advise on the impact of bringing in a higher National Minimum Wage for hours which are not guaranteed in a contract.

This new higher rate should be set at a level which incentivises employers to schedule guaranteed hours as far as reasonable within their business. Businesses would still have the ability to offer zero or short-hours contracts, or to request that an individual works longer hours than those guaranteed in their contract, but would have to compensate the most vulnerable workers (those on low wages) for the additional flexibility demanded of them.

For example, if an individual is on a contract which only guaranteed them 6 hours a week, but is regularly asked to work more than this, they should be entitled to the standard National Minimum or National Living Wage rate for the first 6 hours they worked in a week, and then this new higher rate for any hours beyond
that.

So the lower the number of contractual hours, the more hours a worker would be paid at a higher rate should they be required to work overtime. And, of course, if a worker is on a zero-hours contract, every hour is above their contractual hours would therefore be paid at the increased rate. If, for example, the minimum overtime rate were to be set at time-and-a-half, anyone on a zero hours contract would be paid 50 percent above the minimum wage for every hour they worked.

This is an ingenious way of saying to employers that it is still fine to employ people on zero hours but that they must pay for the privilege and, as Gavin Kelly says, share some of the benefits of flexibility with their workers. It also gives employers an incentive to guarantee hours, and therefore income, to employees. The higher the guaranteed hours, the less you have to pay out in overtime.

This measure would call the bluff of lazy employers. Is it really that crucial that employees can be called in at a moment’s notice or is it just because bosses can’t be bothered to plan?

A recent TUC report on insecure work found that those sectors which had seen higher increases in productivity over the last five years tended to be those which had experienced smaller increases in insecure employment.

The report emphasises that correlation doesn’t necessarily imply causation. It does not mean that insecure workers make a workplace less productive. It is likely, though, that low productivity and reliance on insecure forms of work are symptoms of the same problem. Low pay and flexible labour is what enables that long tail of poorly managed and low productivity organisations to exist. Some of them probably wouldn’t have started up in the first place without it. Why train people when you can rely on someone else to do it? Why invest when you can maintain your profits by throwing more poorly paid people at the problem? Why waste time on planning when you can call people in and then send them home without pay if they are not needed?

The UK’s employment framework, with its plentiful supply of cheap labour, relatively low employment protection and, until recently, very low risk of punishment for those that flout the law, encourages too many managers to take the low road, pushing risk onto their workers.

There are signs that high employment and the tight labour market is already encouraging firms to give workers more secure employment contracts. The Resolution Foundation believes the UK has passed peak insecurity, noting that most of the job growth over the past year has been due to full-time employment.

Nevertheless, a nudge in the form of Matthew Taylor’s minimum overtime rate might speed up the conversion of precarious jobs into ones with that bit more security. It would, at least, encourage managers to think about whether they really do need a job to be as casual and flexible as they think. It would be good to see this proposal enacted. It might just be the jolt our labour market needs.

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Britain’s stay-at-home youth

Dick WhittingtonVic Brown, the Three Girls and the crowd in London Irish all moved to the capital to seek their fortunes. Or to escape from the places they grew up in. Either way, as our films and literature tell us, the young and restless tend to up sticks and move and they usually head to London.

The data we have on movements of people back this up. A report by ONS in 2014 contained this fascinating graph which shows the northern English regions losing their young people. Some move after A-levels but their number is more than offset by an influx of students. As everybody knows, the coolest universities are in the north of England so lots of people want to study there. But, as soon as they get their degrees, they are off back down south, along with their fellow students who grew up in the north. In the year to 2013, there was a net loss of 24,000 21-30 year olds to the rest of England.

A report by Centre for Cities last autumn drew similar conclusions. It shows young people with A-Levels moving to the large and medium-sized cities and graduates moving away again, with London as the main beneficiary.

Net inflow by age and qualification for city groups, 2010-2011

Chart by Centre for Cities based on 2011 Census

Once into their 30s, people start moving out of London. The graduates don’t tend to go back home though. Most of them stay close to London. As the Centre for Cities report notes:

While overall London loses older degree-holders to the rest of the country, the majority of these do not tend to go very far. Of the older degree-holders who left London, 69 per cent remained in the Greater South East.

 

Chart by Centre for Cities based on ONS data

This has been the story of many people I have known. Off to university, somewhere exciting. Swear you’ll never move to London. Move to London because there’s no interesting work locally, vowing that you’ll not stay long. 10 years later still there because you’ve gotten used to the lifestyle and the money. Marry, think about having kids. Move out of London because the schools are better and the houses cheaper. Stay within commuting range because your money-earning potential is still in London.

It’s a classic English graduate trajectory which sees graduates moving from other regions to London and then to the South-East. As housing market analyst Neil Hudson put it:

But there are signs that more recent generations don’t want to play this game any more. A report by the Resolution Foundation this week found that the proportion of graduates moving for work has declined over the past decade.

Chart by Resolution Foundation

This map, from the report, is particularly interesting. London still has a net gain of graduates from the rest of the UK but the region with the highest net gain is the South-East.

Chart by Resolution Foundation
Chart by Resolution Foundation

The reason for this is that London isn’t attracting graduates from elsewhere in the UK in the same numbers that it once did. As the report cautiously notes:

Although net graduate migration to the capital appears to be lower than it was two decades ago – with last year’s gures showing that it may even have turned negative for the first time since 2004 (we can’t be definitive because the change was statistically insignificant) – it is too soon to determine if London is becoming a less attractive place for highly-qualified young people. Current trends appear to be pointing that way however.

So one explanation for this map might be that older generations of graduates who moved to London are still moving out to the South-East but they are not being replaced by new graduates from elsewhere in the UK. The plug hole is still open but the taps are being turned off.

Those who stay in the places where they studied are more likely to join the increasing proportion of graduates that are in non-graduate jobs.

But perhaps more people are deciding that is a reasonable trade-off. The Resolution Foundation’s living standards report showed the effect that London’s brutal housing costs have on household incomes.

Even with their higher salaries, graduates in London can find that, once they have paid for their housing, they are worse off than some of their friends who stayed at home. Might it be, therefore, that more young people are deciding that the aggro of moving to London just isn’t worth it?

If there ever was any truth in the stereotype of the freewheeling job-hopping millennial, I suspect it dates from before the recession. Nowadays, as the Resolution Foundation’s Stephen Clarke says, they are spearheading the decline in regional mobility. Perhaps after Brexit, when it will probably become more difficult to recruit graduates from elsewhere in Europe, employers might be forced to offer higher salaries or even move some of their operations to where the graduates are.

This summer, another cohort of graduates will move to London and start work. It’s a well-trodden path but one that, for whatever reason, fewer young people want to take. Perhaps they have decided that the view just isn’t worth the climb.

 

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Ending the pay squeeze – could the unions make a comeback?

Strange times these. This time last year the IMF and OECD were urging governments to borrow more, now we have central bankers urging workers to demand higher pay. Reserve Bank of Australia governor Philip Lowe did just that last month. The Bank of England’s Andy Haldane didn’t quite go that far but in his speech in June  he mused on why the Phillips curve is as flat now as it was when employers had the whip hand and kept pay inflation in check with draconian labour laws. The Federal Reserve, too, is stumped by low wage growth.

The UK’s long pay squeeze has an extra dimension of weirdness. As the FT’s Valentina Romei pointed out earlier this year, this is the only major OECD country where GDP has risen since the recession but wages have still fallen.

A number of things might explain non-existent wage growth but none really works on its own. It is true that, since the recession, we have seen an increase in non-standard employment and especially in self-employment. However, the majority of those in work are still in full-time employee jobs and the number in non-secure forms of employment seems to be falling or, at least, levelling off. Most studies have found that the overall effect of immigration on wages is quite small and certainly not enough to account for the scale of the UK’s pay squeeze.

Chris Dillow has a simpler explanation; power – or the lack of it. Workers simply don’t have the clout to make big wage demands. That might sound surprising given record levels of employment and, apparently, a skills shortage which employers have been complaining about since before the Brexit vote. But even this, it seems, can’t increase worker bargaining power enough to bring about even modest wage inflation.

Part of the reason for this is the sense of insecurity that has persisted since the recession. Even those in full-time jobs feel less secure than they did a decade ago and, when combined with the rise in more insecure forms of housing tenure, it is hardly surprising that people lack the confidence to ask for a pay rise.

At one time, such fears would be mitigated by strength in numbers and confidence in long-established trade unions. But union membership has fallen to its lowest level since the government started counting in the 1970s. This is not just a feature of the UK. In most advanced economies, union density (the proportion of those in employment who are members of unions) has fallen over the last few decades.

Chart from OECD Employment Outlook, June 2017 

Furthermore, union density is much higher among older workers. In all countries except Iceland, (where trade union membership is abnormally high) the proportion of unionised workers is significantly lower among the young.

Chart from OECD Employment Outlook, June 2017 

Much of this is because the older industries with older workforces are those where the unions are well established and they have been less successful at organising in service sectors and among non-standard workers. In short, unions are weak in the areas that need them most.

But, as Gavin Kelly says, there are some signs of a revival. Unions in the USA have organised retail and fast food workers to demand a $15 minimum wage. A new wave of alt-unionism is signing up previously unorganised workers and developing new tactics. The Independent Workers Union of Great Britain union has brought a number of court cases against companies using self-employed workers. Last week the Community union launched a new section for freelancers.

Felix Martin reckons that, after decades of weakened unions, the pendulum could be about to swing back again.

[J]ust as power shifts can explain inflation’s absence over the past decade, they also suggest one should not be quite so sanguine about its prospects over the next one. The 1970s showed how a pick-up in growth is not a necessary condition of inflation. If inequalities become extreme and politics-as-usual is seen to have failed, all that is needed is a renewal of political struggle.

And if we really are seeing a shift in the political and social zeitgeist, we could see a revival of interest in organisations fighting for workplace rights. Just as the Long Depression of the 1880s saw the rise of trade unions, the co-operative movement and mechanics institutes, the Great Recession and its aftermath may contain the seeds of new forms of worker organisation more suited to the 21st century labour market. Their tactics will probably be different from those of traditional unions and employers may not find them as easy to deal with.

So while it looks unlikely at the moment, we might see the return of collective action and wage inflation sooner than we think. After all, a lot of other very surprising things have happened recently. There is a certain logic to collective action. Or forebears understood that it was the only way to combat insecurity and an imbalance of power. A new generation may yet come to the same conclusion. Trade unions may be in the doldrums at the moment but it’s still too soon to write them off.

Update:

It’s years since I’ve had a ticking off from a professor (it used to happen quite a lot, trust me) but I got one today from Professor Simon Wren-Lewis, who says that the reason wages haven’t kept pace with economic growth is because, once you allow for an increasing population, we have barely had any economic growth. The little we had was then obliterated by sterling depreciation and indirect taxes.

Real wage growth in the UK has not been lousy because of lack of union power, immigrants or higher profits, but because economic growth (properly measured) has been stagnant, austerity included raising indirect taxes and we have now had two large depreciations in sterling.

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HBO’s Confederate: What about the half that hasn’t been told?

The team behind Game of Thrones is bringing a new series to HBO. It’s set in an alternative present. In Confederate the south won the American Civil War. Consequently, the Confederate States of America and slavery still exist in the 21st century.

I groaned when I read this and that was before I was aware of the controversy it had stirred up. The objections came thick and fast and there are simply too may to go into here.

Mine, though, is this. Why make a counterfactual about slavery when so much of the real story hasn’t been told? As Bree Newsome, the activist who was arrested for removing the Confederate flag from the South Carolina statehouse, remarked:

It’s dangerous to present alternative histories when people are still not clear on the facts.

For example, few people are aware of America’s internal slave trade in the early 19th century. Our stylised image of transatlantic slavery is of the slave ships and the cotton plantations of the Deep South. But the slaves didn’t go straight from ships to picking cotton. By the time the big cotton plantations were developed, the transatlantic slave trade had ceased. Slaves, many of whom assumed they would soon be freed, were shipped to Alabama and Mississippi from other parts of the United States. Estimates vary but somewhere between twice and four times as many slaves made the journey down the American river system to the Deep South as made the original Atlantic crossing to North America.

The treatment of slaves during this period, says Professor Henry Louis Gates, was worse than that of previous centuries:

When we think of the image of slaves being sold “down the river” on auction blocks — mothers separated from children, husbands from wives — it was during this period that these scenes became increasingly common. The enslaved were sometimes marched hundreds of miles to their destinations, on foot and in chains. Indeed, the years between 1830 and 1860 were the worst in the history of African-American enslavement.

His Harvard colleague Professor Marcyliena Morgan argues that the internal slave trade, as much as the original transatlantic one, tore black people from their linguistic roots and shattered their communities. Many African-Americans retained their tribal links and even their native languages while on the plantations of the Upper South but the splitting up of families and clans as they were sold south destroyed what was left of their African identities. (For more on this see previous post.)

This was also the point at which slavery and modern capitalism connected. The American Civil War is often presented as a clash between two systems, the industrialising market economy of the north and the more traditional agrarian economy of the south. The reality is more complex. The early 19th century saw the industrialisation of slavery. The cotton plantations of Alabama and Mississippi were much bigger than the old plantations of the Upper South. Cotton production doubled between 1830 and 1837.  On some measures, the amount picked per slave per day quadrupled between 1800 and 1860. Historians argue about how much of this was due to better systems and economies of scale and how much simply to making the slaves work harder. What is not in doubt, though, is that the slave economy of the mid 19th century was on a different scale to anything that had gone before; bigger, more productive and more profitable. These were major commercial businesses that belonged to the industrial age.

None of this would have been possible if cotton growing had been a purely southern affair. It is true that the plantations, the slaves and the masters were in the Deep South but the finance that enabled the industrialisation of slavery came from elsewhere.

Historians such as Calvin Schermerhorn, Sven Beckert and Edward Baptist have followed the money on slavery and uncovered the links between 19th century capitalism and the development of the south’s cotton economy. Setting up these vast cotton plantations required capital and that could be raised by borrowing against existing assets, such as slaves. As Professor Baptist explains:

The cotton and slave trades were the biggest businesses in antebellum America, and then as now, American finance developed its most innovative products to finance the biggest businesses.

In the 1830s, powerful Southern slaveowners wanted to import capital into their states so they could buy more slaves. They came up with a new, two-part idea: mortgaging slaves; and then turning the mortgages into bonds that could be marketed all over the world.

In other words, you package up debts secured against slaves in the same way as banks packaged up mortgages on property in the 21st century. You’ve heard of mortgage-backed securities? Well these were slave-backed securities.

The financial product that such banks as Baring Brothers were selling to investors in London, Hamburg, Amsterdam, Paris, Philadelphia, Boston, and New York was remarkably similar to the securitized bonds, backed by mortgages on US homes, that attracted investors from around the globe to US financial markets from the 1980s until the economic collapse of 2008.

[M]ortgage-backed securities shifted risk away from the immediate originators of loans onto financial markets while promising to spread out and thus minimize the consequences of individual debtors’ failures. Investors who purchased latter-day mortgage-backed securities planned to share in streams of income generated by homebuyers’ mortgage payments.

Likewise, the faith bonds of the 1830s generated revenue for investors from enslavers’ repayments of mortgages on enslaved people. This meant that investors around the world would share in revenues made by hands in the field. Thus, in effect, even as Britain was liberating the slaves of its empire, a British bank could now sell an investor a completely commodified slave: not a particular individual who could die or run away, but a bond that was the right to a one-slave-sized slice of a pie made from the income of thousands of slaves.

Like modern financial instruments, these slave-backed securities spread risks and provided a means by which capital from all over the world could be channelled into the slave economy. They also enabled finance to be raised in US states and other countries where slavery was illegal because the investor no longer owned any slaves, just a bond based on loans secured against slaves. That way, British investors could still profit from slavery decades after its abolition.

As Professor Schermerhorn notes, the bonds were sold for the price of an individual slave but without the risks.

European investors who bought land- and slave-backed securities from the Barings did not run the risk that American slaveholders did that an individual  enslaved person might die, flee, or become incapacitated. They did not risk a poor harvest, pests, or floods. Bonds were issued in $500 and $1,000 denominations, about what an enslaved worker sold for on the market.

The Barings referred to here are the founders of the venerable London merchant bank of the same name. Other banking dynasties rose to prominence during this period too. Lehman Brothers went from Alabama cotton broker to New York finance house in two decades. There were vast profits to be made and you didn’t even need to own slaves to get a piece of the action.

The title of Edward Baptist’s book is The Half Has Never Been Told, a reference to how little discussed these aspects of slavery are. This period would make an interesting backdrop for a TV drama, should anyone want to tell the story. It’s not just a southern story, it’s integral to the story of American capitalism. (For more on this see previous post.)

Which brings me on to my second beef with HBO’s Confederate. It is yet another narrative that confines slavery to the southern states. Thanks largely to the American entertainment industry, slavery has become synonymous with the Deep South and its culture. That is very convenient for everyone else. It was the southerners with their funny accents, crazy religion and redneck ways that ‘did’ slavery. It was nothing to do with the rest of us. We can all point the finger at the Deep South and forget that Britain, France, Spain, Portugal and the northern US states were involved too and continued to be involved even after they had formally abolished slavery themselves.

There are lots of reasons why it would have been unlikely that slavery in the Americas would have persisted into the twentieth century but that’s a subject that needs a post of its own. But, if we really must produce a drama setting slavery in a modern American context, here is an alternative counterfactual.

Instead of winning the civil war, the southern states don’t secede in the first place. Instead, they continue with their hitherto successful strategy of hinting at secession and thereby wringing concessions out of the rest of the USA. Preserving the union proves more important to Abraham Lincoln than preventing the spread of slavery, so compromises are made, allowing the admission of new stave states to the Union. Maximilian’s French-backed intervention in Mexico gives America the opportunity of a foreign war to reinforce national unity. The territory seized from Mexico as the price of expelling Maximilian is opened up to slavery, thus buying off the discontented southerners with new land into which they can expand. Capital, both foreign and domestic, pours in to finance new plantations.

Employers in the industrial north, hit by the labour unrest of the 1880s, begin to relocate factories to slave states who are only too happy to apply the productivity boosting methods perfected on their plantations to manufacturing. Slaves are put to work on production lines. Non-slave states respond to the perceived flight of capital and jobs with draconian labour laws to prevent trade union organisation. European governments, fearful that their industries might relocate too, cave in to demands from businesses and deploy troops against their own trade unions. The existence of slavery thereby strangles the trade union movement at birth. The impoverished workers are encouraged to fear the slaves more than their bosses and tame racist trade unions emerge to preserve what little privilege the ostensibly free labourers have left.

By the late 20th century, the American south resembles something like South Africa under apartheid but, resting as it does within the world’s greatest superpower, criticism is muted. While some argue that slavery is an outrage and an anachronism, by now there is too much money at stake to change it. Slavery’s defenders argue that it is totally within the law and those investing in it are doing nothing wrong.

The story has a wonderful cast of villains. Apart from the slave owners and overseers, there are ruthless industrialists, venture capitalists calling for ever higher returns and shady trade union bosses doing sweetheart deals. High-minded professors write papers justifying slave labour while politicians mouth platitudes about the desirability of abolishing slavery and the sheer impracticability of doing so. Patrician London bankers channel funds from all over the world to the lucrative slave economy of the Deep South. Liberal intellectuals condemn the trade while fearing for the slave-based investments in their pension funds.

Preposterous? Well, yes, but no more so than asking us to believe that the Confederacy lasted for another 150 years. In fact it only lasted for 5 years. For most of its history, slavery in the Americas existed within, or was funded by, the countries that now make up what we call the free world. My counterfactual extrapolates slavery into the modern era with that uncomfortable reality intact, instead of isolating it in a fictitious pariah state.

Better still, though, would be to set a drama amidst what actually happened. Something that brings the internal slave trade and the financing of it to life, telling the wider story instead of pretending that it all happened in the Deep South and was nothing to do with the rest of us. A drama that explains just how far the rest of America and Europe was involved, even after having ostensibly abolished the slave trade. Perhaps it’s time that the other half was told.

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The tribunal fees case and why we still need unions

Yesterday’s decision by the Supreme Court declaring employment tribunal fees to be illegal came as a surprise, even to the experts.

As Darren Newman said:

Whatever side of the employment law fence you sit on, we should first of all acknowledge that this is an astounding victory for the legal team at UNISON.

They began their legal challenge in June 2013 and have lost twice in the High Court and once in the Court of Appeal. I , like many other employment lawyers, thought that they stood only a theoretical chance of winning. It was only when I saw the arguments in the Supreme Court that I thought ‘oh hang on, they might just do this’. Taking the case all the way took dogged determination, and amazing confidence in the face of some pretty negative judicial comment  – but in the end they won through. Moments of utter triumph are rare in professional life and everyone involved deserves to revel in this one.

It was indeed a great achievement for Adam Creme and the UNISON legal team who kept going even when a lot of people told them they were on to a loser.

Employment tribunal fees are now dead in the water. To revive them would almost certainly require new legislation and a government with a shaky majority and loads of other important stuff to do is unlikely to bother. The low-key response from the government suggests they have more pressing problems to worry about.

The impact of tribunal fees is clear from the statistics doggedly compiled by Richard Dunstan who has been keeping an eye on this for years. The number of cases fell sharply when fees were introduced.

Whether it will return to its 2013 level remains to be seen. It may be that pent-up demand from dependent contractors and others pushes up the level of claims. Even so, Nicholas Robertson, head of employment law at Mayer Brown, quoted in People Management, thinks it won’t:

My view is that they will not return to those levels because the Acas mandatory conciliation scheme will continue to encourage parties to settle claims before litigation. Now that the fees regime for employment tribunals has gone, I suspect employers will be more likely to settle at the Acas stage, rather than waiting to see if claimants follow through and issue a claim.

The judgment has implications beyond employment law though. The Supreme Court used this case as an opportunity to give the government a stiff lecture about the rule of law. As Professor Mark Elliott says:

The relevant part of the Court’s judgment reads as a primer — albeit a very powerful one — on what the rule of law means in this regard. Indeed, it is difficult to escape the conclusion that the Court felt it necessary to drive home some very fundamental propositions — ones that should not really need to be driven home — because the Government’s position indicated ignorance of or contempt for them. The Court thus noted numerous “[i]ndications of a lack of understanding” of the importance of the rule of law, including:

  • “the assumption that the administration of justice is merely a public service like any other”;
  • “that courts and tribunals are providers of services to the ‘users’ who appear before them”; and
  • “that the provision of those services is of value only to the users themselves and to those who are remunerated for their participation in the proceedings”.

These misapprehensions, said the Court, were evident from, among other things, Government consultation papers that had preceded the making of the Fees Order. Having noted that, the Court set about the task of establishing the demonstrable wrong-headedness of those assumptions.

I wouldn’t usually describe court judgments as entertaining but this one really is worth reading. It adopts the tone of a somewhat exasperated professor talking to group of lazy undergraduates.

The shoddiness of your previous work suggests that we will have to go over all this again:

66. The constitutional right of access to the courts is inherent in the rule of law. The importance of the rule of law is not always understood. Indications of a lack of understanding include the assumption that the administration of justice is merely a public service like any other, that courts and tribunals are providers of services to the “users” who appear before them, and that the provision of those services is of value only to the users themselves and to those who are remunerated for their participation in the proceedings. The extent to which that viewpoint has gained currency in recent times is apparent from the consultation papers and reports discussed earlier. It is epitomised in the assumption that the consumption of ET and EAT services without full cost recovery results in a loss to society, since “ET and EAT use does not lead to gains to society that exceed the sum of the gains to consumers and producers of these services”.

Now here is why the rule of law is important:

67. It may be helpful to begin by explaining briefly the importance of the rule of law, and the role of access to the courts in maintaining the rule of law. It may also be helpful to explain why the idea that bringing a claim before a court or a tribunal is a purely private activity, and the related idea that such claims provide no broader social benefit, are demonstrably untenable.

And this is what Parliament and the courts do:

68. At the heart of the concept of the rule of law is the idea that society is governed by law. Parliament exists primarily in order to make laws for society in this country. Democratic procedures exist primarily in order to ensure that the Parliament which makes those laws includes Members of Parliament who are chosen by the people of this country and are accountable to them. Courts exist in order to ensure that the laws made by Parliament, and the common law created by the courts themselves, are applied and enforced. That role includes ensuring that the executive branch of government carries out its functions in accordance with the law. In order for the courts to perform that role, people must in principle have unimpeded access to them. Without such access, laws are liable to become a dead letter, the work done by Parliament may be rendered nugatory, and the democratic election of Members of Parliament may become a meaningless charade. That is why the courts do not merely provide a public service like any other.

Now let’s go back to what we covered in the first term. Yes, back to 1215 but if you’d paid attention the first time we wouldn’t need to do all this:

74. In English law, the right of access to the courts has long been recognised. The central idea is expressed in chapter 40 of the Magna Carta of 1215 (“Nulli vendemus, nulli negabimus aut differemus rectum aut justiciam”), which remains on the statute book in the closing words of chapter 29 of the version issued by Edward I in 1297:

“We will sell to no man, we will not deny or defer to any man either Justice or Right.”

Those words are not a prohibition on the charging of court fees, but they are a guarantee of access to courts which administer justice promptly and fairly.

It’s not just Law, you’re going to have to repeat Economics term 1 too:

99. The primary aim of the Fees Order was to transfer some of the cost burden of the ET and EAT system from general taxpayers to users of the system. That objective has been achieved to some extent, but it does not follow that fees which intruded to a lesser extent upon the right of access to justice would have been any less effective. In that regard, it is necessary to point out an error in the Review Report, repeated in the Lord Chancellor’s submissions. The Review Report states that the Ministry of Justice have considered whether it would be more proportionate to charge lower fees, but that “the result of reducing fees would reduce the income generated by fees, and thereby reduce the proportion of cost transferred to users from the taxpayer” (para 307). That statement is unsupported by any evidence, and appears to be regarded as axiomatic. Similarly, in his written case, the Lord Chancellor states that, in pursuing the aim of transferring the costs of the tribunals from taxpayers to users, “the higher the fees are, patently the more effective they are in doing so”. This idea is repeated: in recovering the cost from users, it is said, “the higher the fee, the more effective it is”.

100. However, it is elementary economics, and plain common sense, that the revenue derived from the supply of services is not maximised by maximising the price. In order to obtain the maximum revenue, it is necessary to identify the optimal price, which depends on the price elasticity of demand. In the present case, it is clear that the fees were not set at the optimal price: the price elasticity of demand was greatly underestimated. It has not been shown that less onerous fees, or a more generous system of remission, would have been any less effective in meeting the objective of transferring the cost burden to users.

And given your lack of understanding in both subjects, it was perhaps inevitable that you’d fail to make the connection between them:

102. There is a further matter, which was not relied on as a separate ground of challenge, but should not be overlooked. That is the failure, in setting the fees, to consider the public benefits flowing from the enforcement of rights which Parliament had conferred, either by direct enactment, or indirectly via the European Communities Act 1972. Fundamentally, it was because of that failure that the system of fees introduced in 2013 was, from the outset, destined to infringe constitutional rights.

But, while it might be fun to watch ministers getting beaten up by judges, could this be an indication of how the court sees its role after Brexit? As Professor Elliott says:

[T]he protections offered by EU law, insofar as they are relevant, offer at least a form of guarantee of rights — even in the face of parliamentary sovereignty. But that guarantee is now approaching its expiry date, thanks to the UK’s impending departure from the EU, and its extrication from the constraining forces of EU law and the EU judicature. This, in turn, places renewed focus upon the capacity of domestic constitutional law to safeguard fundamental rights and rule-of-law values. Viewed in that light, the Supreme Court’s decision in Unison is certainly a powerful restatement of what the rule of law requires in this context — and of the courts’ preparedness to go as far as they constitutionally can in upholding it.

David Allen Green makes a similar point in the FT:

The area of law involved is greatly influenced by EU law — but the Supreme Court’s ruling is Brexit-proof. That EU law is engaged is treated as merely incidental. The judgment is based expressly on fundamental constitutional principles in the domestic law of the UK. (The UK does, contrary to popular belief, have a constitution, but it is not a codified one.)

The justices could have approached this case in a narrow technical sense but chose not to do so. They refer to Magna Carta and the great jurists Edward Coke and William Blackstone. The decision is framed in first principles being applied to the details of a particular tribunal fee regime. Even more than the Miller decision on parliament having to authorise the Article 50 notification, this is a constitutional judgment.

Far from being the “enemies of the people”, as some newspapers have called senior judges in recent times, the Supreme Court has told the government that an attack on workers’ enforcement of their rights (which is the same in practice as attacking the rights themselves) is outside the law.

And as Darren said, before the judgment:

[I]t is just possible that the Supreme Court is ready to do something dramatic and rule that a major government policy is illegal. The Court has already shown that it is prepared to put the cat among the pigeons when it comes to developing our constitutional law – think of Article 50 – and a positive result for Unison would open a new chapter in the Court’s willingness to limit the powers of the executive. It would assert the sovereignty of Parliament as expressed in Acts of Parliament as against the power of ministers to shape the law through orders and regulations slipped through with minimal scrutiny and no opportunity for amendment. It would be a very big deal and – bearing in mind the extent to which the Brexit process is likely to rely on ministers introducing secondary legislation – it would have ramifications well beyond employment law.

The Great Replication Repeal Bill, and the subsequent secondary legislation could throw up all sorts of opportunities for legal challenges. I particularly liked this comment from Cambridge employment lawyer Abigail Trencher:

One hopes this very expensive lesson may make future Governments reluctant to rely on secondary legislation to implement bold changes to the employment law landscape – which may provide some reassurance as we move towards Brexit and the concern at the extent to which future Governments may rely on secondary legislation to implement changes to employment legislation following the Great Repeal Bill.

Trouble is, this lot have proved to be very slow learners, even when the education is expensive.

But if the judiciary is to protect people’s rights and uphold the rule of law after Brexit, it can only do so if people have the wherewithal to bring cases to court. That was the original point of this case and one which, for me, is the most important lesson from it. Bringing the case required a dedicated team of lawyers and that required money. Lots of it. You can only challenge power if you have resources behind you.

In Britain (and especially England) we still have this ideal of the independent yeoman or artisan. We tell ourselves that there was a time before the fall when all Englishmen were free. It’s nonsense, of course, but persistent nonsense all the same. Its latest manifestation is the mythology of startups and the eulogies to freelancing. But small is not powerful. Unless it is lucky enough to control a particularly scarce resource, small gets walked over by big most of the time.

Here’s something I wrote 3 years ago:

Small might be very fashionable but small is not powerful. Furthermore, whatever Merrie England image you may have of autonomous yeomen and artisans, small has never been powerful. Small is only powerful when it gets together with others. Crucially, too, it only stays powerful when it stays together. Crowdsourcing and flash mobs might briefly unnerve the powerful but they are ephemeral. To maintain that pressure requires some sort of organisation. Our ancestors understood this. That’s why they formed trade unions, co-operatives and mechanics’ institutes.

That hasn’t changed. This case was only possible because a big trade union with massive resources but its weight behind it, thereby opening up the opportunity for those of lesser means to challenge their employers. Temporary coalitions, networks and crowdsourcing are all very well but the tenacity and resources needed to challenge entrenched power need something more permanent. As Gavin Kelly says:

[P]ower in the labour market still matters. In flexible market economies employers will always find new ways of shifting risk on to the workforce, often on to those least able to bear it. Unions are a rare countervailing force. They have led the way in confronting gig economy companies flouting employment law or care-providers dodging the minimum wage. In a union-free world, such abuses would go largely unchecked.

Unions are unfashionable at the moment but so far, no-one has come up with anything better. The courts and the law can only go so far. The law does not offer much protection unless you can use it and to do that you need help. If you really want to stop the powerful from walking all over you then you need some good people around you. It was the lesson that Hugh Grant’s selfish and hedonistic character learnt in About a Boy – you need backup. When it comes to disputes at work, a trade union is still the best backup you can get.

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