How is the Apprenticeship Levy doing - Sept 2018 review (Moneyweek)

The short answer is not well:

How is the apprenticeship levy doing? Badly. Last year the government introduced it in England to encourage more workplace training. The charge is applied to businesses with an annual wage bill in excess of £3m. They pay a 0.5% tax on their payroll into a £2bn training fund. They can then claim money back from the fund to finance training courses for their apprentices. The measure was supposed to encourage employers to invest more in skills. Yet the number of new apprenticeships fell by 28% in the year to June. The initial introduction period was even more disastrous: in the first three months of the levy the number of new apprenticeships dropped by 60%. Just 341,700 new apprenticeships were created in the year to June, far short of the government’s target of three million new apprenticeships by 2020.

What is the problem?

Employers complain that the levy is overly bureaucratic. Under the old system a business could take on an apprentice, pay them for their time and leave much of the out-of-job training to others. Now businesses need to claim the money spent on training courses back from the state in the form of electronic vouchers. Business groups complain that the introduction of new standards has led to a shortage of courses to spend the money on in some areas of the country. An Open University Freedom of Information request this spring found that of the £1.39bn paid into the fund by firms, just £108m had so far been paid back out, leaving the levy looking more like a revenue-raising exercise by Whitehall than a commitment to skills training. Smaller businesses, which are not affected by the levy, have been hit by a new requirement that they pay 10% of the cost of apprenticeships.

How does the system work?

From the age of 16, young people not keen on the conventional academic route can begin working in industry, with one day a week typically given over to classroom study towards vocational qualifications. Britain’s vocational education system has long suffered from low prestige, with only about 30% of young people taking vocational routes, compared with an average of 50% across the OECD group of developed countries. A government drive started under New Labour to get half of young people into university has only worsened perceptions of the vocational track. Britain’s higher education fixation is starkly illustrated by that fact that MBA students have been unexpected beneficiaries of the new apprenticeship levy. Some businesses have been reclassifying senior executives as apprentices and sending them on part time MBA courses, financed using money drawn from the apprenticeship fund.

Does anyone get it right?

Apprenticeships at the likes of Rolls-Royce, Siemens and British Aerospace are highly prized and fiercely fought over. More than 1,400 people applied for eight spaces on the BBC apprenticeship programme for the 2017/2018 academic year. Such programmes are increasingly, in the words of skills minister Anne Milton, subject to “middle-class capture”. That may not be all bad. One of vocational education’s main challenges is, as Theresa May put it in February, that the middle-class professionals who run Britain’s institutions have historically regarded it as “something for other people’s children”. What could fix that? With student debt rocketing, apprenticeships that offer degrees and a salary could change that attitude. The trouble is that such high-quality schemes are thin on the ground. In the meantime, the UK seems to be doing little to rectify skills shortages. The Construction Industry Training Board has complained of a skills gap. Yet according to the union Unite, last year 90% of those enrolled on construction courses were taking “dead end” theoretical courses that leave them without the practical skills employers need.

Is there a better way?

Germany’s famed “dual vocational training programme”, which combines a three-year on-the-job apprenticeship with academic study, does not sound all that different from Britain’s own system on the surface. Yet about 60% of young people in the country take the vocational route, more than double the figure in Britain. This is reinforced by an educational culture that regards skilled trades as respectable choices leading to a comfortable livelihood, rather than backstop options for the less academically successful. The German system also ensures that those who have taken apprenticeship qualifications can enter university at a later date.

Could that work in Britain?

Countries hoping to adopt the German system face cultural barriers to making the system work, notes Rose Jacobs in the Financial Times. They may also be unwilling to sacrifice the flexibility of their own labour markets for a system that trains workers for specific occupations. In Germany, “most positions, from electricians to nursery-school teachers, require standard training and certification”, making mid-career moves more difficult. What is the next move? From 2020 new “T” (or “technical”) levels will become a vocational alternative to A-levels. The hope is that these courses, ranging from agriculture, environmental and animal care to hair and beauty, will achieve parity of esteem with the academic qualifications. Let’s hope so. According to Paul Johnson of the Institute for Fiscal Studies, “It is our failure to get enough young people into high quality, job-based training... that creates our skills shortages... and productivity problems.” Getting this right could give the British economy a big boost.

A downside of very loose monetary policy - part of the productivity puzzle

QE and its role in the Dollar shortage, zombie banks and productivity woes

Posted on September 25, 2018

Overnight there have been some intriguing releases from the BIS (Bank for International Settlements), which if you were not aware is the central bankers' central bank. The BIS has, although it would not put it like that, been reviewing some of the problems and indeed side-effects of the QE era. So what does it tell us? Well one major point links to yesterday’s post on India and indeed to the travails of Argentina and Turkey.

The second defining feature is the rise of foreign currency US dollar credit . US dollar-denominated debt securities issued by non-US residents have been the key driver of this trend, surpassing bank loans for the first time in the second half of 2017 . The overall amount of dollar credit to the non-bank sector outside the United States has climbed from 9.5% of global GDP at end-2007 to 14% in the first quarter of 2018. Since end-2016, however, the growth in dollar credit has been flat.

So the US Dollar has been used as a new form of carry trade as people and businesses choose to borrow in it on a grand scale. Also as global GDP has been growing the 14% is of a larger amount. But to me the big connection here is the way that this pretty much coincides with plenty of US Dollars being available because the US Federal Reserve was busy supplying them in return for its QE bond purchases. Correlation does not prove causation but the surge fits pretty well and then it ends not long after QE did. Or more precisely seems to have faded after the first interest-rate increase from the Fed.

Zombie Companies and Banks

This development has been brought to you be the financial world equivalent of Hammer House of Horror. All the monetary easing has allowed companies to survive that would otherwise have folded, or to put it another way, the road to what is called “creative destruction” or one of the benefits of capitalism was blocked. A major form of this was the way that banks were bailed out, and some of them continue to struggle a decade later - but also took us down other roads: For example the debt model of the Glazers' at Manchester United looked set to collapse but was then able to refinance more cheaply in the new upside down world. Ironically it was then able to thrive at least financially as in football terms things are not what they were.

The BIS has its worries in this area too.

In this special feature, we explore the rise of zombie companies and its causes and consequences. We take an international perspective that covers 14 countries and a much longer period than previous studies.

It is willing to consider that the era of lower interest-rates and bond yields which covers my whole career and some has had consequences.

A related but less explored factor is the drop in interest rates since the 1980s. The ratcheting-down in the level of interest rates after each cycle has potentially reduced the financial pressure on zombies to restructure or exit. Our results indeed suggest that lower rates tend to push up zombie shares, even after accounting for the impact of other factors.

So cutting interest-rates for an economic gain looks to have negative consequences as time passes. How might that work in practice? The emphasis below is mine

Mechanically, lower rates should reduce our measure of zombie firms as they improve ICRs by reducing interest expenses, all else equal. However, low rates can also reduce the pressure on creditors to clean up their balance sheets and encourage them to “evergreen” loans to zombies . They do so by reducing the opportunity cost of cleaning up (the return on alternative assets), cutting the funding cost of bad loans, and increasing the expected recovery rate on those loans. More generally, lower rates may create incentives for risk-taking through the risk- taking channel of monetary policy. Since zombie companies are risky debtors and investments, more risk appetite should reduce financial pressure on them.

The reason for the emphasis is that in essence that is the rationale for QE. That is something of a change on the past but as inflation as measured by consumer inflation mostly did not turn up the central banks got out their erasers and deleted that bit. It has been replaced by this sort of thing which links to the Zombie companies and banks theme.

In addition, QE can stimulate the economy by boosting a wide range of financial asset prices. ( Bank of England )

Note the use of the word can so that even the Take Two version can be erased! But the crucial point is that yet again the Zombies are on the march via central banking support. I guess most of you have already guessed the next bit.

Visual inspection suggests that the share of zombie firms is indeed negatively correlated with both bank health and interest rates.

Why are Zombies such a problem?

The have negative effects on economic life.

a higher share of zombie firms could depress productivity growth,

Could? Later we get more of a would as we see an old friend called “crowding out” return to the picture.

Zombies are less productive and may crowd out growth of more productive firms by locking resources (so-called “congestion effects”). Specifically, they depress the prices of those firms’ products, and raise their wages and their funding costs, by competing for resources.

But there is a deeper consequence.

We find that when the zombie share increases, productivity growth declines significantly, but only for the narrowly defined zombies………. The estimates indicate that when the zombie share in an economy increases by 1%, productivity growth declines by around 0.3 percentage points.

Comment

There is a fair bit to consider here. The first is the role of the BIS in this which in some ways is welcome but in others less so.  The former is an admission of some of the side-effects of easy monetary policy, but the latter is the way we are getting it a decade late. Or in the case of Japan a couple of decades or so late! To my mind intelligence also involves an element of timeliness. Although to be fair to do quantitative research you do need an evidence base. The catch as ever for the evidence in economics is the way that some many things are varying not only with each other but also with themselves over time. Or if you prefer heteroskedasticity and multicollinearity.

As to the issues they tend to be on the back burner because they are inconvenient for the establishment. The career path of economists at central banks is unlikely to be improved by research into the collateral damage of its policies, especially ones which it may not be able to reverse. At the moment both ZIRP and QE are in that category even in the US. So should the period of QT lead to the issue below rising in volume get ready for the claims that it could not have been expected and is nobody’s fault.

On that subject I note that a bank borrowed 563 million Euros from the ECB overnight which is odd with so much Euro liquidity around. Next we come to the issue of the productivity puzzle which seems likely to have a few of its pieces with zombie companies on it. The same zombie companies and especially banks that have been so enthusiastically propped up. 

Seems to be about Brexit, is really about trade

When it comes to post-Brexit trade, the EU is not the only chess game in town

mark littlewood

The Brexit process is at an impasse. The prime minister’s Chequers proposals were shredded by other European Union leaders at last week’s Salzburg summit. Theresa May’s defiant response from the Downing Street lectern on Friday effectively amounted to saying: “Call us, we won’t call you.” The range of possible endings and outcomes as the Brexit process grinds on has expanded enormously and the only matter upon which there seems to be widespread agreement is that Chequers is not going to be the end-game. 

Three quarters of the specified two-year negotiating period have been chewed up with very limited progress. It’s common, of course, in negotiations such as these for everything to come together at the last minute, but that is no reason to believe that the final deal will be good or even acceptable. Indeed, the more the clock ticks down, the more likely it is the prime minister receives a deeply unsatisfactory “take it or leave it” offer at the last minute.

Believing that a new approach to our exit from the EU and a more proactive engagement with other trading partners is vital, my own Institute of Economic Affairs is launching a research report today. We have titled the paper Plan A+ because, although there is now considerable discussion over the need for the government to adopt a “Plan B”, much of the problem really has been that the UK’s initial handling of Brexit has simply been too narrow. It needs to link its approach to our future relationship with the European Union to our desired new trading partnerships with the rest of the globe.

The unspoken assumption underlying the government’s present strategy is that we need to focus nearly all our efforts on the terms of our post-Brexit relationship with the EU. Only once we have finally concluded a deal there should we turn our attentions to securing better trading arrangements with the Commonwealth, the United States and the wider world.

A central proposition of the IEA’s new paper is that our position as a major global trading nation means that we need to tackle all of our future relationships simultaneously, rather than in sequence.

Striking international trade deals is a vastly complex and technical area and one that the UK has had no direct experience of since entering the common market in 1973. A good way of thinking of the challenge is that we should be playing a series of games of chess at once. On one board, we are engaged in a tight tactical contest with the European Union. On another, we are face-to-face with the Trump administration. On a third, we are exchanging moves with the Trans-Pacific Partnership. And so on. If playing multiple, concurrent games of chess sounds like a challenge, then managing global trading relationships is even more complicated. In international trade talks, a move you make on one chess board has ramifications for your position on all the other boards. So, to be a good player, you need to be excellent at seven-dimensional chess.

The interconnectedness of global trade games essentially can be explained by regulations. Although we often think of removing tariffs as being the key to unlocking free trade, the truth is that non-tariff barriers are far more important. If the rules governing, say, the legal requirements of widget manufacturing are enormously different in Australia compared with Britain, then it is unlikely that you will have much trade in widgets between the two countries, even if the tariffs imposed are zero. To over-simplify, trade talks essentially come down to sitting across a table, brandishing your regulatory rulebook and then seeing what you can agree to alter, remove or align to have a smoother trading relationship with the other side before you leave the room.

If the government’s strategy is to focus on the easiest possible deal with Europe — effectively including a common regulatory rulebook, or even customs arrangements, in many areas — this greatly limits our room for manoeuvre in negotiations elsewhere. Our game of chess with the EU may well be the most important game we are engaged in at the moment, but it doesn’t follow that we should protect a pawn on our European chessboard if the cost is to lose queens, rooks and bishops on other global boards.

Britain is seeking to leave the European Union against a backdrop of paralysis in the global trading system. The present US administration is the most protectionist in generations, certainly in its rhetoric. Global trade growth has stalled and even dipped as a proportion of world GDP. The International Monetary Fund’s Christine Legarde pessimistically describes this situation as “the new normal”. Roberto Azevêdo, director-general of the World Trade Organisation, said in July that “we are heading in the wrong direction and we seem to be speeding up”.

In such a challenging international context and given the many complexities of Brexit, it is perhaps understandable, albeit disappointing, that any British government would set its sights merely on damage limitation. Actually, the opportunities are enormously greater than that. If the UK raised its ambition level and sought to be the catalyst to spread free trade across the world, it could be a powerful and successful agent for change. Alongside delivering a smooth and simple exit from the EU single market and the customs union, the UK should swiftly seek to apply for membership of the Common Progressive Trans-Pacific Partnership (CPTPP) and Nafta. We also should indicate that we will use fully fledged WTO membership to aggressively press for the removal of trade barriers.

To deliver on this more optimistic approach, the government will have to play multi-dimensional chess in a successful, co-ordinated and strategic fashion. At the moment, we are focused only on one set of talks — those with the European Union — and that game seems to be heading for stalemate.

Mark Littlewood is director-general of the Institute of Economic Affairs. Twitter: @MarkJLittlewood