Regional Economies - important reading

Devolution must be at the heart of levelling up Britain

By Eamonn Ives @EamonnIves

The town hall in Manchester, one of the UK cities which now has a Metro Mayor Photo: Ingolf Pompe / LOOK-foto

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•   Devolution alone cannot level up Britain - but it's a great place to start
•   95% of Britain's tax is raised centrally - changing that is key to solving regional inequality
•   All combined authorities should get the same powers as the Mayor of London

The United Kingdom is, in truth, a bit of a misnomer. As CapX has outlined in its excellent Rebalancing Britain series the country remains deeply divided in terms of economic prosperity.

Boris Johnson has committed addressing such disparities – declaring his ambition to ‘level up’ all parts of the nation in his first speech as Prime Minister.

It is in this context that the Centre for Policy Studies this week published a report into economic imbalance in the UK and what to do about it.

We begin with a snapshot of just how unevenly the economy performs across the regions of the UK. Gross Value Added (GVA) statistics are a robust indicator of economic performance, and reliable data has been collected them on a regional per capita basis over the past two decades.

As the graph below makes clear, London stands head and shoulders above other regions on this metric. Moreover, our analysis found that the capital’s GVA per capita grew the fastest over this time frame – while other regions’ increased by 80% on average, London’s did so by 111%.

And while of course we should celebrate the capital’s success, our report is focused on working out how other regions can enjoy that same level of prosperity.

One of the most powerful tools to help struggling areas is devolving political power. While successive governments have taken steps to hand power back to the regions, we believe that process should be extended, both geographically to take in new areas, and in terms of the powers those places have.

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As a starting point, all combined authorities – like in the West Midlands or Greater Manchester – should be able to enjoy the powers and responsibilities currently available to the Mayor of London.  Devolution in the capital since the creation of the Greater London Authority in 2000 has given City Hall more control in areas such as transport and planning, with huge economic benefits as a result.

It has also created a strong feedback mechanism, in which politicians are more obviously incentivised to facilitate economic success. Lack of skin in the game leads to all sorts of shortcomings in politics, but if a local mayor knows their future career depends on sorting out a congested transport system, they have a lot more reason to get things right.

Beyond that, we believe that the government needs to show more ambition in devolving other competencies which it has largely retained in Whitehall. Fiscal devolution, for instance, is particularly limited – as the chart below shows, the UK is now one of the most centralised countries for tax take in the developed world, with just 5% of tax raised at a local level.

In our report, we are deliberately non-prescriptive about how a more devolved tax system should operate. Indeed, this is precisely the point of devolution – the idea that local authorities are best placed to decide how to run their area. That said, likely candidates for devolution would include property taxes like stamp duty and business rates, as well as granting more powers to local authorities over how council tax is administered.

Understandably, some may worry that greater flexibility in the tax system could trigger a ‘race to the bottom’, leaving local authorities thinly stretched and under-resourced. But these fears are probably misplaced. Indeed, an extensive OECD paper on tax competition which we cite in our report found little evidence – especially in wealthier nations – that this typically occurs when countries permit such fiscal devolution.

Moreover, even if devolution of various taxes did lead to headline rates going down, that would not necessarily be a bad thing. In everyday life, we have premium and budget versions of supermarkets, clothing retailers, and transport options, with people given the choice of spending a little or a lot depending on what they want. Why should the council they choose to live under be any different?

Allowing people this choice would give local governments to get a better idea what ratepayers want from them, and how much they are willing to pay for the privilege.

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Important as devolution is, we recognise that it cannot level up Britain alone. To that end, we suggest a suite of other measures, ranging from the creation of a National Infrastructure Fund to the establishment of a new wave of Opportunity Zones – where companies in deprived areas can benefit from more sympathetic fiscal rules and business regulations.

Taken together, we believe our proposals can match the positive rhetoric of the new government in terms of wanting to level up Britain, and help to unleash the dormant prosperity in those areas which need help the most.

Fiscal impact of supply-side?

I don't agree that the 2nd World War caused the end of the Great Depression; that is very lazy economics (IMO), but the core point would make for a great conclusion in a fiscal or supply-side policy essay:

The solution to the Great Stagnation of our times is staring us in the face

• JEREMY WARNER
  

25 OCTOBER 2019 • 6:00AM

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The energy transition required to save the planet might just end up saving the economy as well

It was nearly six years ago that Larry Summers, a former US Treasury Secretary, resurrected the idea of “secular stagnation”, a concept originally formulated by the Depression-era economist Alvin Hansen to describe a prolonged period of sub-par economic performance in which growth can only be achieved via constant monetary and fiscal stimulus. This stimulus, Summers argued, would in turn make the economy prone to renewed financial crisis.

The idea was much poo-pooed when Summers applied it to our own times. Policymakers instead congratulated themselves on having avoided the mistakes of the 1930s in their handling of the financial crisis, and therefore the scourge of mass unemployment that cursed the inter-war years.

Give it time, they said, and the economy would return to “normal”. Six years on, and it plainly hasn’t. It’s true that unemployment is at historic lows in the US and large swathes of Europe, but growth and productivity are still subdued, debt is ballooning, interest rates remain at rock bottom, central banks are resuming their money printing, and the politicians are again talking about fiscal stimulus to stave off recession. 

For many people, wages and living standards are no better today than they were a decade ago, a hiatus of unprecedented duration, at least for the modern age. In a speech to the International Monetary Fund last weekend, Mervyn King, former Governor of the Bank of England, suggested that economic performance since the financial crisis had in some respects been even worse than we saw after the banking meltdown of the early 1930s, when US GDP collapsed 30 per cent and American unemployment soared to 25 per cent.

Mervyn King, former Governor of the Bank of England: the Great Recession has turned into the Great Stagnation

The depths of the crisis back then were much worse, but the recovery from it far more robust, such that 20 years after the initial implosion, all the ground lost was made up, with growth per capita across those 20 years averaging its pre-Depression trend rate of 2 per cent per annum. 

Today we are already trailing badly. For the same recovery to occur this time around would require the US to start growing by 5.5 per cent a year in the runup to the 20 year horizon, something which is plainly not going to happen. What’s more, search for yield has recreated some of the same vulnerabilities in the financial system as we saw before the last crisis – this time not in mainstream banking, which has been cleaned up, but elsewhere in the system.

Far from being eliminated, the risks from excessive debt have merely migrated elsewhere.

Into this doom-laden world steps our old friend Brexit, which many economists argue will further depress British and European growth in the years ahead.

Sajid Javid, the Chancellor, has refused to conduct an economic impact assessment of the latest deal; he is only too aware of what it will say, and doesn’t want to hear it.

According to an earlier assessment a year ago, the Free Trade Agreement with Europe the Government aspires to would reduce GDP by 4.9 per cent over the long term compared to current arrangements. This is better than the 7.6 per cent modeled for a no-deal Brexit, but worse than the 0.7 per cent assigned to Theresa May’s deal.

Javid is right to be sceptical. Like all forecasting of this sort, that assessment was based not just on arguable assumptions, but also necessarily on a steady state world where nothing else changes, which is extraordinarily unlikely. Policy and commerce will in practice adapt in unpredictable ways, some of which might prove beneficial. In any case, we will never know, because whatever happens over Brexit, there will be no counterfactual to judge it by.

For his part, Lord King said he didn’t think the long-term consequences of Brexit would be particularly large either way. “I have always been surprised about how the rest of the world thinks Brexit is so important”, he said. “It’s obviously important to the UK, but I don’t honestly think Brexit has much significance even for the rest of Europe, let alone the rest of the world.”

Brexit has undoubtedly added to the trade uncertainties hanging like a cloud over wider economic confidence. In Britain, it is also an all-consuming obsession which has sapped the energy for anything else.

Yet as an economic phenomenon, it is eclipsed by the much bigger challenge of “secular stagnation”, which is global and entrenched in nature.

One of the reasons the US was able to bounce back from the Great Depression was the stellar spending of the Second World War. The Manhattan Project alone cost $25 billion in today’s money. There is nothing comparable today to this great driver of growth, nor, as Lord King pointed out, are there any of the new ideas and institutions that came out of the traumas of the Great Depression.

I’m not suggesting that we need another war to release us from our economic funk, but there is something coming down the line that might help – climate change, and the massive investment in energy transition required to contain the problem. Saving the planet might just end up saving the economy as well.

CMA & competition law - good example for exams

Back in 2017 someone was jailed for organising this cartel; 2 years later the companies involved have been fined:

CMA fines concrete cartel £36m for pushing up prices for seven years

Joe Curtis

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A concrete cartel must pay a £36m fine for breaking competition law for almost seven years.

The Competition and Markets Authority (CMA) has ordered three firms to cough up after fixing prices between July 2006 to March 2013.

Read more: Audit watchdog calls on firms to improve reporting on climate change

They also shared the market by allocating customers and exchanging competitively sensitive information, the watchdog said.

Their ploy to push up prices also involved meetings that senior executives attended, according to the CMA.

Northern Ireland’s FP McCann must pay £25.5m, Derbyshire’s Stanton Bonna Concrete must pay £7m and Somerset-based CPM Group faces a £4m fine.

The latter pair received reduced fines after admitting they broke competition law.

The trio led the market in supplying drainage pipes and other pre-cast concrete products to infrastructure projects run by construction and engineering firms, as well as by the government and councils.

“These companies entered into illegal arrangements where they secretly shared out the market for important building products and agreed to keep prices artificially high,” CMA chief executive Andrea Coscelli said.

Read more: Watchdog hits back at claims it was ‘asleep at the wheel’ over Woodford

“This is totally unacceptable as it cheats customers out of getting a good deal.

Coscelli added: “The CMA will not hesitate to issue appropriately large fines in these cases and we will continue to crack down on cartels in the construction sector and in other industries.”

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Contestable markets and capitalism

The streaming wars between Netflix, Apple, Amazon and HBO represent capitalism at its best

• MATTHEW LYNN  DAily Telegraph 19 OCTOBER 2019 • 7:00AM

Okay, okay, I will admit most of us could probably live without Inspector Gadget 2 or The Princess Diaries available immediately and on-demand on every device we own. Even so, when Disney launches its hyped streaming service to rival Netflix early next month it will have some great content. From Star Wars to Snow White, there will be feast of fantastic programmes both classic and completely new. With Apple and HBO joining the fray as well, and with Amazon ramping up its service, streaming promises to be a battle every bit as epic as one of the fight scenes in the Game of Thrones prequel coming to HBO.

Over the next few months, there will be lots of attention on the cost of that, the stakes for the different companies, and the billions that will potentially be made or lost. But amid all the red ink that will no doubt be spilled one thing should be clear. This is capitalism at its best. We are witnessing a burst of innovation; we are seeing a new form of creativity emerge; and consumers are being subsidised by investors. Free markets don’t have many defenders at the moment. But the streaming wars will be a lesson in how they remain the most powerful way of organising an economy so it works for everyone.

Netflix was never going to have the market to itself. With 160 million paying subscribers around the world, it has proved that there is a vast demand for a pay-tv service delivered over the internet with lots of high-quality original content mixed in with a few classics. Other media and technology companies were always going to want to take a slice of that pie.

Amazon has already pumped billions into its Prime service which offers TV as an add-on to its delivery service, and that will get even better later this year when it starts showing live Premier League football. But the competition is now turning serious. Next month Disney-Plus will launch, first in the United States, and then globally, with its vast library of films and plenty of new shows.

Apple will launch its streaming service, potentially bundling it with music, and with shows featuring Jennifer Aniston (surprisingly the equivalent of a tactical nuclear weapon in the streaming wars) and Reese Witherspoon. Next year, they will be joined by HBO Max, which along with lots of new content will screen classic shows such as Friends (Jennifer again!). There will be at least five big budget streaming services to choose from.

How that plays out remains to be seen. One, two or perhaps even three might be able to operate in the market at the same time, even if it seems unlikely that all of them can find a place. Apple and Amazon’s ability to mix TV with other services might prove decisive: streaming could turn into a loss-leader for an array of other products.

Or else a completely new player might emerge that combines the best of all the different services. We will find out over the next couple of years. One thing should surely be clear, however. The streaming wars are a reminder of what a free market gets right. Here’s why.

First, it drives innovation. We are currently witnessing the greatest change in the way television is made and delivered since it first became a mass medium way back in the 1970s. The old model of advertising or licence fee funded broadcasting, organised on national lines, is dead in the water. It is being replaced by a voluntary subscription model, delivered globally. Instead of watching free British, American or German TV according to where we live, we all watch Netflix or Prime. You can go anywhere in the world and have a conversation about whether you enjoyed Stranger Things or House of Cards. You can argue about whether that is better or worse – but there is no question something completely new has been created.

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Next, it has ignited a burst of creativity. As the critics rightly point out, we are living through a golden age of television. The Crown is not quite the most expensive TV show ever made (that remains the final series of Friends – Jennifer again!) but it is very close. Roma, from Netflix, collected lots of awards, including the Oscar for best director, and Martin Scorsese’s The Irishman, released next month, presumably to detract attention from Disney-Plus, promises to be one of the films of the year.

In truth, the streaming box set is a whole new art form, somewhere between film and the novel. Some of it is rubbish. Some of it is a bit meh. But some of it is among the most exciting art being created this decade – and that is surely of significance as well.

Finally, consumers end up as the real winners. Right now, none of the streaming services makes a profit. Netflix has turned into a giant machine for taking money from Wall Street and transferring it to writers, actors and directors, and ultimately to consumers in the form of amazing programs at very, very cheap prices. Both Apple and Disney will dip into their cash reserves as they roll out their services. Sure, the plan for all those companies is to tolerate the losses for a while, and then make lots of money once they have a lock on the market. We will see. At the moment, viewers are being massively subsidised.

In the wake of a financial crash, with stagnant growth, and rising worries about inequality, free markets don’t have many defenders. Regulation, taxes and state control are back in fashion. But unfettered, sometimes brutal, always hectic, competition between companies and entrepreneurs remains a system with an unparalleled ability to drive innovation, and to provide fantastic choice at bargain prices. The streaming wars will deliver some great shows. But, more significantly, it will be a lesson in what makes free market capitalism such a powerful way of organising an economy – and that will be worth remembering as you settle down to re-watch Toy Story on Disney Plus.

One more article today - great background to global slowdown

If nothing else, carry with you into the exam the "three Ds" - at the end of the article; a great way to analyse global economics:

A global slump is coming and we don't know why.

Ed Conway The Times 19.10.19

I remember precisely where I was when it dawned on me that the 2008 financial crisis was the big one. It was a wood-panelled room in the British embassy in Washington, 11 years ago almost to the day. A senior official took a few financial journalists aside and told us that the global financial system was on the brink of collapse.

Now in hindsight, a phrase like that might sound rather appropriate but remember this was before RBS or Lloyds had been nationalised and the consensus was still that the global economy would shrug it all off pretty quickly. The International Monetary Fund, whose annual meetings we were attending, was forecasting global growth of 3 per cent — weak by its standards but nowhere near the 0.1 per cent contraction that eventually transpired. Don’t panic, they said in public. In private, that was precisely what they were doing.

Today the IMF is once again meeting in Washington and everyone is nervous about comparisons with 2008. They point out that banks have more capital to support their balance sheets and that the financial system is more resilient. Yet the noises emerging from the global engine room are rather worrying. This week the fund slashed its world economic growth forecasts for the fifth successive time. It calls this a “synchronised slowdown” rather than a recession but the global growth forecast for this year is, guess what, 3 per cent — identical to that in 2008.

Some, the IMF included, would like to blame the downgrade on “policy uncertainty”, which is one of those economics euphemisms better translated as “we don’t really know”. They namecheck Donald Trump’s trade wars with China, changing regulatory standards for carmakers and Brexit as the factors holding back growth. Yet none of these explains the scale and breadth of the slowdown.

Indeed, rather than “policy uncertainty” it might be more appropriate to talk about “policy failure”. For not only are policymakers flummoxed about what’s going wrong; even if they did know it is not clear they could actually do anything about it. Central bankers have pumped trillions of dollars into the global financial system yet inflation remains below target in most of the developed world. The rules and models that economists have relied on for decades seem to be failing. With interest rates still stuck near zero we no longer have the ammunition we once did to confront any recession. To top it all off, China and the rest of the emerging and developing world are slowing even more markedly than the West.

The engines that powered the world for the past decade are faltering. The odd thing is that this has garnered so little publicity, though given that there is so much else going on to distract us perhaps that’s no surprise. When the IMF published its forecasts this week one popular interpretation in the British press was that it was a fillip for the UK, which will grow faster this year and next than France or Germany. But only someone utterly obsessed with Brexit could interpret this as good news. It is not. Everyone is slowing but some more than others.

These days I spend much of my time travelling the country talking to businesses about Brexit. Make no mistake, some of them are perturbed by all the risks you’re perfectly familiar with. But in recent months the main thing worrying importers and shipping merchants is not Brexit but the fact that their warehouses are no longer filling up with goods from overseas. The ships coming into port are not so heavily laden, air cargo holds are increasingly empty. Global trade is grinding to a halt.

Again, the conventional wisdom is that this is down to the US-China trade war, but while that has affected the nature of some trade routes, forcing China to start importing its soybean from elsewhere, it does not explain why trade is falling globally.

So what is going on? Well, one possibility is that China’s almighty debt bubble is finally deflating, or even imploding, but don’t expect Beijing to let on about it for some time. Another is that the dollar’s strength in recent years has strangled many of the traders who rely on dollar-based finance to support the movement of goods along their supply chains, as a fascinating working paper from the Bank for International Settlements suggested this week.

The scariest explanation is that in trying to solve the last financial crisis we fuelled a deeper malaise in global economics. Our central banks printed money and governments cut taxes but rather than using this money to invest, households and businesses frittered it away on consumption and share buyback schemes respectively. These days debt levels are so high and interest rates so low that any attempt to stimulate activity is simply pushing on a string.

Jan Vlieghe, one of the Bank of England’s most intelligent policymakers, has a thesis: if you want to get your head round the oddness of the economic world you need to contemplate the three Ds: high debt levels, which make everyone especially sensitive to higher interest rates; the demographics of an ageing population with people saving more and working less; and distribution, in short the fact that much income and wealth goes to the richest, who tend on average to spend less. Put these together and you have a world where interest rates may have to stay low not just temporarily but for the foreseeable future.

The good news is that none of this amounts to a new financial crisis of the kind we saw in 2008. The bad news is that economics as we knew it seems to be broken. There’s no guessing how or when we can put it back together again.

Ed Conway is economics editor of Sky News

Great article outlining current economic risks - The Times

The law of unintended consequences could lead us into a global recession

Actions have consequences, wanted or not. If there has been one lesson to take from the International Monetary Fund’s annual meetings in Washington this week, that has been it.

A line can be traced from Donald Trump’s trade war with China to the collapse of Neil Woodford’s investment trusts. Another from Beijing’s decade of intellectual property theft to the $19 trillion timebomb of sub-prime corporate debt ticking away under the global economy. Everything is connected. It simply needs the lines of consequence to be drawn.

Let’s start at the end. If the IMF is right, another financial crisis is closer than we think. All it takes is a further escalation in the US-China trade war and a couple of rounds of American tariffs on European goods. The first of those was imposed yesterday on $7.5 billion of EU imports, from aircraft to Scotch whisky, in retaliation for Airbus subsidies. Round two would be an assault on the German car industry, which would tip the country into recession.

Berlin has countermeasures prepared and we know what happens after that. The United States began with tariffs on $10.3 billion of Chinese goods in 2017. They now cover $550 billion and Chinese duty on $185 billion of US goods geos the other way. Between them the US and China have knocked 0.8 per cent off global GDP. That’s $650 billion.

The world economy is now in a “synchronised slowdown”, Kristalina Georgieva, the IMF managing director, said. Growth is weaker than it has been since the 2009 crisis. A recession in Europe’s largest economy combined with a sharper contraction in global trade would drag everywhere down with it.

At that point, much of the corporate debt in advanced economies becomes unserviceable: $19 trillion in all, the IMF reckons. Unregulated shadow banks — insurers, pension funds and hedge funds — own more of it than they should. As borrowers default, the shadow banks would be forced into fire sales, causing a market seizure not unlike that of a decade ago.

Should the worst happen, “an internationally co-ordinated fiscal response may be required”, Gita Gopinath, the IMF’s chief economist, warned. The last co-ordinated response was in 2009, when Gordon Brown “saved the world”, as he put it.

We find ourselves here, teetering on the brink, because of President Trump, because of his trade wars. Three years ago growth was picking up and for once the IMF was upbeat. “Spring is in the air and spring is in the economy,” Christine Lagarde, its managing director, said in April 2017.

With a tailwind of stronger growth, central banks had an opportunity to raise rates, unwind quantitative easing and end more than half a decade of market distortions to bring the world back to normality. It all started so well. By the end of 2018 the US Federal Reserve had raised rates nine times and was expected to increase them a further three times this year. Instead, it has cut them twice and, having unwound some QE, is poised to buy US government debt again to fend off a slowdown.

Talk in Washington this week was that the cycle had peaked, that the economy was on a terminally downward slope and that the chance to normalise rates had slipped away. Both the eurozone and China have eased monetary policy this year, as has the US. Markets reckon that eurozone interest rates, at -0.5 per cent, will be negative until at least 2023. A record $15 trillion stock of negative-yielding corporate and government debt guarantees investors’ losses.

We are back in “lower for longer” territory, where investors have to hunt for yield in dangerous waters: be it in frontier markets such as Mozambique; splicing and dicing structured debt, like the bankers who gave us the financial crisis; or doing a Woodford by buying riskier private equity and venture capital assets that pay a better rate but cannot be liquidated. The conditions are perfect for another sub-prime bubble.

Can all this be laid at Mr Trump’s door? Not if you trace the line still further back, to Beijing’s abuse of the global trading rules with subsidies, dumping and technology theft. When China joined the World Trade Organisation in 2001, it was a $1 trillion upstart economy. It is now a $13.5 trillion superpower to rival the US and no one outside Beijing believes that it should be allowed to game the system any longer.

Mr Trump has been abrasive to China, but we should not fool ourselves into thinking that a Democrat president would roll back the tariffs and restore economic relations. Even within the G20, of which China is a member, Beijing’s trade practices and cybersurveillance have left it isolated. “If Trump had used the G20 instead of tariffs to take on China, it would have been nineteen-to-one against Beijing,” one official said this week.

So this is where we are, eighteen years on from China’s accession to the WTO and one financial crisis later, amid the biggest monetary policy experiment ever undertaken, with investors being robbed blind by assets that pay them a worthless income, a power struggle masquerading as trade wars, a global system that is falling apart and growth stalling. The lines of consequence have converged.

China’s ascendance, which led us inexorably to the tariffs that are warping global supply chains and sapping global growth, was distinct from the financial crisis, which gave us zero interest rates and populist politics. But they are intertwining, with dangerous results.

Because growth is weak, central banks cannot raise rates. Low rates and QE will drive up asset prices. Bubbles are inflating in financial markets and one day they will burst. Policymakers can see it happening and know they will never be forgiven if another crisis strikes on their watch. This time they want to get ahead to turn what would otherwise be a clean-up operation into inoculation.

To do so, the IMF says, they will need to intervene with more regulations, such as higher capital charges on corporate debt and new shadow banking controls. Rather than pull their tentacles out of the system by raising rates and letting markets function freely, the authorities will have to probe deeper and as they do they will create new distortions. Who knows what the consequences might be then.

Philip Aldrick is Economics Editor of The Times