London Swings Again! – British music in the 1990s

Lately, inspired by Dominic Sandbrook’s books about the 1960s and 1970s and the onset of nostalgia that accompanies early middle age, I’ve been thinking about Britain in the 1990s with a view, possibly, to something at the end of it. Here’s a sample…

With its leaders incapable of leading anyone anywhere except the bedroom other magnetic poles in British society exerted their pull on national attention. One was popular music and the craze of ‘Britpop’

Britpop was a group of bands who found fame from about 1993, peaked in 1995, and were finished by 1997. Beyond the fact that they played guitars and were British these bands had very little in common. The fey tweeness of Cast or The Bluetones was a million miles from the raucous pub rock purveyed by Reef or Ocean Colour scene; the intelligence of Blur or Radiohead was far removed from the uncompromising stupidity of Oasis or Shed Seven. The same went for the fans. The make up wearing, vaguely goth types who listened to Suede or Pulp were the sort of people lager swilling Oasis fans in Ralph Lauren shirts and ice white Reebok Classics beat up.

A common factor was a cheap sort of pseudo-patriotism which would soon generate the horrible phrase ‘Cool Britannia’. Noel Gallagher of Oasis had a Union Jack patterned guitar and his brother Liam appeared on the cover of Vanity Fair in March 1997 with then wife Patsy Kensit in a bed with Union Jack bedclothes. The headline swooned ‘London Swings Again!’ There was more to this than knowing postmodernism, a popular excuse in the 1990s for serving up old tat in a cloak of irony. Elastica’s Justine Frischmann said “it occurred to us that Nirvana were out there, and people were very interested in American music, and there should be some sort of manifesto for the return of Britishness” In April 1993 the cover of Select featured the usually intelligent Brett Anderson of Suede draped in a Union Jack atop the headline ‘Yanks Go Home’

1995 was the year. It was to Britpop what 1967 was to flower power or 1977 to punks. The success of Blur’s Parklife and Oasis’ debut album Definitely Maybe in 1994 had lit the fuse. In ’95 Britpop exploded into national prominence with the releases of Blur’s The Great Escape and Oasis’ (What’s the Story) Morning Glory? as well as a host of other albums by Britpop’s B list like Cast and Supergrass, both of whose albums produced infectious hit singles titled Alright. Also in the charts were Radiohead and The Verve, who would soon deliver Britpop’s funeral oration, and acts like Pulp and Paul Weller, both of whom had been struggling for attention until they were immolated in the Britpop backdraft. That summer teenage boys gathered round CD players to hear Noel and Liam Gallagher being rude to each other during a radio interview on a disc called Wibbling Rivalry. As bootlegs went it wasn’t exactly Bob Dylan at the Free Trade Hall.

The highpoint of the highpoint came on Monday August 14th 1995 when the Britpop behemoths of Blur and Oasis went head to head with singles released the same day, Country House and Roll With It. It was no surprise to see NME hyping this up as the biggest clash since Hitler took on Stalin but the event even made the 6 O’clock News, interest stoked by rude things Liam and Noel had said about the various members of Blur. In the event Blur took Number 1 and were declared the winners of the Battle of Britpop. By the end of the year that looked mad as (What’s the Story) Morning Glory?, released in October, sold 347,000 copies in its first week (it was still selling 200,000 copies a week in early 1996) while The Great Escape was a bit of a dud. By the end of the decade the judgment of August looked sounder as Blur continued to release interesting music while Oasis didn’t.

There wasn’t very much new in floppy haired teenage boys swaying to guitar music as would have been obvious to anyone familiar with The Beatles. Indeed, the Britpop bands were as generous in acknowledging their influences as The Rolling Stones and Beatles had once been in acknowledging Chuck Berry. The people who teased me for liking The Beatles in my first year at secondary school went out and helped their Live at the BBC album top the charts in 1994 after Oasis said they liked them. Kids, who were supposed to rebel against their parents, were now raiding their record collections for 1960s bands like The Kinks, The Who, and The Small Faces. My Generation had been adopted by a new generation.

One thing Britpop did have was an unrivalled ability to celebrate itself. Events such as the launch party of Pulp’s Different Class held at Britpop HQ The Good Mixer in Camden passed into the memory even of people who weren’t there. You constantly heard that Camden was swarming with music stars but when I started going there in search of these stars in 1995 all I found were other suburban kids like me looking for the same stars. The 1990s was, like my dad said of the 1960s, “like a big party you could hear going on in the next street”

A lack of originality was hard wired into Britpop which was, in retrospect, an entirely reactionary phenomenon. Anyone looking for invention in British music would have gone to the dance scene. One of the richest musical legacies of the 1980s had been the fusion of indie music with elements of dance music imported from New York’s club scene. New Order, who emerged from indie band par excellence Joy Division, were a classic example. Happy Mondays and The Stone Roses carried it to its fullest on tracks like Step On and Fools Gold. Former punks Primal Scream’s dance infused 1991 album Screamadelica was one of the musical highlights of the decade.

The 1990s saw the fracturing of this. Dance music and indie went their separate ways and dance took the inventiveness with it. While Oasis churned out the music of Slade with the lyrics of the Electric Light Orchestra bands like Massive Attack, Portishead, and Faithless, were recording music genuinely unlike anything heard before. Borrowing much from a continental tradition of electronic music these bands made records that were as suitable for the dinner party as the ten hour bender.

Neil Tennant of the Pet Shop Boys observed that music had always evolved with technology; Mozart had written for the new-fangled harpsichord, Elvis for the new-fangled guitar. In drum and bass technology facilitated one of the most bracing musical genres of the decade. The award of the Mercury Music Prize to Roni Size for his album New Forms in 1997 was a belated and, it felt, grudging admission of this.

But when looking back one must always be careful not to mistake what the noisiest commentators say people were doing or thinking for what people were actually doing or thinking. Most people weren’t listening to Bentley Rhythm Ace or Goldie. Manufactured pop bands like Take That and the Spice Girls outsold almost any given Britpop band. In the rivalry between Take That and East 17 the ‘boyband’ genre even had its own version of the Blur vs Oasis schism. In their favour, with records like Back For Good and Stay Another Day, these boybands had at least one good song in them which is more than could be said for later acts like the dreadful Westlife.

If these acts seemed old fashioned so did Britain’s musical tastes. The bestselling singles of the 1990s look like a list of bestselling singles from an earlier decade. In 1990 and 1995 the biggest selling singles were versions of Unchained Melody (by The Righteous Brothers and stars of popular TV show Soldier, Soldier Robson and Jerome respectively), a song written in the 1950s.  In 1994 it was a cover of Love is All Around a song first released in the 1960s and in 1998 it was a new song by Cher, a singer who had her first hit in the 1960s. In 1992, 1996, and 1997 the biggest selling singles were versions of songs first recorded in the 1970s.

It was the same story with albums. (What’s the Story) Morning Glory? was the decades biggest seller by some distance but the other top selling albums were greatest hits compilations by ABBA and Madonna and pap like Celine Dion, Simply Red, Robson & Jerome, and The Corrs.

Same as it ever was. Just as in the 1960s Sgt Pepper’s was outsold by the soundtrack for The Sound of Music and Mull of Kintyre sold more copies in the 1970s than Anarchy in the UK, the British record buyer remained a conservative creature.


A profligate president

“C’mon, let me drop you home”

Bearing epithets such as “prudence”, “capability”, and “the Iron Chancellor”, there was once a time when Gordon Brown was taken very seriously indeed. Now, an economic collapse later, his reputation is shot and his book about the global economy after the credit crunch can be found at the bottom of bookshop bargain bins for a distinctly deflationary £2.99.

George W. Bush, by contrast, was rarely taken seriously. Bush himself was aware of his limitations (and to preempt the obvious jokes, that’s something more politicians could do with) and gave a longer leash to subordinates like Dick Cheney and Donald Rumsfeld than either his predecessor or successor.

The same applies in The 4 per cent Solution: Unleashing the Economic Growth America Needs. Bush has not written a book about the global economy after the credit crunch; instead, ever the CEO, he has assembled a collection of leading economists and got them to write one. So we have Nobel Prize-winning economist Robert Lucas on economic growth past and present, fellow Nobel laureate Gary Becker on immigration (and Standpoint contributors Amity Shlaes and Michael Novak on, respectively, Calvin Coolidge and the moral superiority of free markets).

The puzzling thing is why Bush ignored all this when he was in office. There is a chapter on sound money when, with White House encouragement, base money in the United States grew by more than 33 per cent between 2001 and 2005, fueling the housing boom. There is a chapter on sound government finances when Bush turned Clinton’s budget surpluses into deficits with the largest expansion in Federal entitlement spending since Lyndon Johnson’s Great Society.

The irony is that Brown, a man once taken so seriously, produced such a squib of a book, while Bush, a man widely seen as a nincompoop, has produced something much more substantial. If only he’d acted on this wisdom before the event.

This article originally appeared in Standpoint

It’s anything but the economy, stupid

Wrigley Field, Chicago, 2040 AD

Walking around the ruins of the old Roman town of St Albans can make you feel like Shelley’s “traveller from an antique land”. As you look down into the remains of the Roman amphitheatre, where the town’s inhabitants flocked in the second and third centuries AD, you wonder what those people thought and talked about as Roman Britain approached its collapse.

You’d like to think they talked about that looming collapse. Perhaps they did. It was, after all, the existential issue of the day. But looking at behaviour in another, contemporary, troubled great power, you do wonder.

The United States government hasn’t balanced its budget since 2001. In the past ten years, starting in 2002 when Republicans controlled the Congress and the White House, Federal government debt has more than doubled from $6.5 trillion to over $15 trillion, or nearly $51,000 for every US citizen. Since September 2007 that debt has been increasing by nearly $3.9 billion a day. The Congressional Budget Office reported last week that in 2012 the Federal government’s debt increased by over a trillion dollars for the fourth year running.

Over the same ten year period the dollar has lost about 25 percent of its value. The rampant credit creation of the Federal Reserve which fuelled the housing bubble has created $1.4 trillion of new base money since 2000. At the moment most of this is sitting on banks’ balance sheets but if it emerges into the wider economy the US will have an inflation crisis.

Likewise, if the foreigners who hold nearly a third of America’s debt decide to dump these depreciating assets, the dollar will collapse.

These are the existential issues for the United States as November’s presidential election nears. But to look at the media you’d never know it.

Instead the American media has lately been preoccupied with a fast food chicken chain. More precisely, it has been preoccupied with what the president of that chain thinks of gay marriage.

“Who cares?” might have been the appropriate response. If you’re a Chick-fil-A shareholder and you don’t agree with him, sell up and invest somewhere else. If you’re a customer, go and buy your artery clogging food down the street. Capitalism, more so than any other system, gives you scope to exercise your morality.

Instead the views of one guy became a minutely discussed national news event. Democrats in a number of cities called for local branches of Chick-fil-A to be shut down, a curious course of action in the face of high unemployment. Supporters of Dan Cathy’s views had a Chick-fil-A Appreciation Day where they filled their faces to show solidarity. They should have called it Cholesterol for Christ.

Then, last week, media attention fixed upon the previously little known Republican Representative from Missouri, Todd Akin. In an interview with a local TV station Akin aired the unusual view that women couldn’t become pregnant through “legitimate rape”.

Worryingly Akin sits on the House Science Committee. This provides yet another argument for leaving more to free markets and less to government. Under free markets science ends up in the hands of people like Bill Gates and Steve Jobs. Only government could put someone like Akin in charge of science.

Neither gay marriage nor rape should be belittled as issues. Laurie Penny, not someone I’m given to quoting approvingly, noted in a moving blogpost that between ten and twenty percent of women in America have experienced rape, 90,000 in 2008 alone. This is awful and ought to be tackled.

But neither should silly remarks from a silly man like Todd Akin drown out the great existential issue in American politics: the economy.

And America’s solvency ought to matter to everybody. It ought to matter to Democrats who care about redistribution of wealth: watch your economy disappear over a cliff and then try and redistribute nothing; see how far that gets you.

It ought to matter to neo-conservatives: America’s economic wellbeing is a sine qua non of American strength. The United States did not become rich because it had powerful armed forces; it got powerful armed forces because it was rich. If the wealth goes so does the power.

And, most importantly, it ought to matter to every ordinary American citizen who will suffer if the economy continues on its current, Hellenic path.

But instead of this discussion we have the ongoing row about Mitt Romney’s taxes. With unemployment stuck above 8 percent and poverty at record levels, Obama’s supporters are trying to turn an election that should be about how much money Americans have in their pockets into one about how much money Mitt Romney has in his.

President Obama’s economic track record has been dismal so you can’t blame him for running away from it. Bill Clinton’s strategist James Carville famously said it was “The economy, stupid” but Obama and his supporters are desperately trying to shift the focus of this election to anything but. And the Republicans have been lead-footed enough to let them.

Ultimately, Americans have a decision to make. What matters most: Tax returns or job reports?

This article originally appeared at The Commentator

Class war, Adam Smith, and the Marginal Productivity Theory of Distribution

Father and son

There is a pleasure almost cruel in seeing someone deploy irrefutable logic to destroy an opponent’s arguments. I felt it this week reading George Reisman’s Open letter to Warren Buffett where the well booted doctrines of Karl Marx got another kicking. By now Marx and his followers ought to be used to this sort of punishment at the hands of Austrians. Eugen von Böhm Bawerk produced his devastating destruction of Marx’s economics, Karl Marx and the Close of His System, back in 1896.

But Paul Samuelson was right when he said that “Karl Marx can be regarded as a minor post-Ricardian”. Marx simply took the aggregative, labour value theory based economics of David Ricardo and took them to their dismal and erroneous conclusions. And when Reisman writes “The doctrine of class warfare is a derivative of the exploitation theory, whose best-known proponent is Karl Marx” we ought to point out that it is found also in Ricardo’s predecessor Adam Smith.

Class War in The Wealth of Nations

Book One, Chapter VIII, of The Wealth of Nations is titled ‘Of the wages of labour’.  Smith charts the development from a situation of subsistence production where “the whole produce of labour belongs to the labourer” via the emergence of private property (which gives rise to rent) and stock (which gives rise to profit) to one where a payment for a good must be divided between the labourer (wages), the landlord (rent), and the stockholder (profit).

Smith goes on to say that “It seldom happens that the person who tills the ground has wherewithal to maintain himself till he reaps the harvest. His maintenance is generally advanced to him from the stock of a master, the farmer who employs him and who would have no interest to employ him, unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit” Smith says that “The produce of almost all other labour is liable to the like deduction of profit”.

Here we have the genesis of the Marxist theory of the workers alienation from the means of production, exploitation, and ‘class war’. Workers do not receive the full product of their labour as they did in the “early and rude state of society which precedes…the accumulation of stock and the appropriation of land”. Instead, this product goes to the stockholder as profit and the labourer receives wages.

With wages, Smith states, “The workmen desire to get as much, the masters to give as little as possible”. We have Marx’s “contending classes”. Smith goes on

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily…In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long-run the workman may be as necessary to his master as his master is to him, but the necessity is not so immediate.

Smith argued that wages would rise when an economy was growing but otherwise he posited a clear general tendency for wages to feel only downward pressures. From this flowed the idea of the ‘subsistence wage’ with which Malthus earned economics the tag of “the dismal science” and Lasalle’s Iron Law of Wages. Wages will stagnate, Smith argues, and profits will rise. Warren Buffett would not disagree.

But looking at the passage from Smith we can see much wrong with it, or at least, much that has no application today.

First, Smith says that stockholders are “fewer in number” than labourers and thus have a kind of oligopoly power. The error here, perhaps less when Smith was writing, is to regard labour as homogeneous. It isn’t. Skills, like capital, can be specific to a certain role and, thus non-transferable. Just as a “tractor is not a hammer”, Joleon Lescott is not Mariah Carey. You wouldn’t consider putting Mariah Carey on Darren Bent at corners and you probably wouldn’t want to hear Joleon Lescott sing Without You.

It follows that workers with different skills are not substitutes for one another; they are not, in other words, in competition. No brain surgeon ever accepted a lower wage from the fear that the hospital might hire a juggler instead.

Of course, where labour is unskilled it is homogeneous and we would expect to see the increased competition for jobs and resultant low wages which we do. At this skill level, also, capital can be substituted for labour providing a further downward pressure. The answer here is not to raise the banner of class warfare but to accumulate skills.

Second, Smith says that stockholders “can combine much more easily”. However, in practical experience, such cartels are always plagued with problems as we see with OPEC. If a cartel sets a minimum price there is always the temptation for one member to sell below that price and capture the market. Although here we are considering the case where a cartel is setting a maximum price for its labour inputs, the analysis is unchanged as we shall see.

Wages and the Marginal Productivity Theory of Distribution

Thirdly, Smith contends that “In all such disputes the masters can hold out much longer”. This might well be true but the question has to be asked; why would they? If, by hiring a worker at £30,000 per year a stockholder would increase his profit by £40,000 per year, why would that stockholder hold out, throwing away £10,000, in an attempt to drive the worker down to £20,000?

It could be said that the stockholder will lose out on £10,000 this year but will gain £20,000 in every subsequent year. But Smith said that stockholders were “fewer in number”, not that there was only one, so there are those cartel problems. Thus, if, in the initial period, stockholder A is willing to forgo £10,000 and hold out for a wage of £20,000 stockholder B will step in and offer the worker £30,000. He will make £10,000 profit while stockholder A makes nothing. There is a saying about stepping over a dollar to pick up a penny, in this case stockholder B picks up both.

Indeed, if the worker adds £40,000 to profits it makes sense for the stockholder to employ them at any wage up to that (tax wedges notwithstanding). We have arrived, as economists did after 1870, at the Marginal Productivity Theory of Distribution. This simply states that a factor (labour or capital) will be paid to the value of its marginal product.

So, if hiring a first barman generates £100 a week extra profit for a pub landlord that barman will be paid up to £100. If, however, hiring a second barman adds only £80 a week the marginal product of bar staff has fallen to £80 a week and so will the wage even of the first. If hiring a third barman adds just £50 a week and no one will take the job at that wage no one else will be hired and £80 a week will be the wage.

Of course, if there are two barmen earning £80 a week one could go on a cocktail course. His mojito’s might prove a draw, his marginal product will rise and so will his wage. By doing the course, ‘upskilling’, the first barman is differentiating his labour from that of barman two. Their labour is heterogeneous.

Smith himself saw a situation where in a growing economy, one in which the profits of stockholders were increasing, demand for labour would also increase. In this case “The scarcity of hands occasions a competition among masters, who bid against one another, in order to get workmen, and thus voluntarily break through the natural combination of masters not to raise wages”.

However, as we’ve seen, because of heterogeneity on both the labour (due to non-transferable skills) and stockholder (due to cartel issues) sides of the wage bargain it is this which is the general case and not the previously enunciated tendency for wages to fall and profits to rise. Because some ‘hands’ are skilled at some things and other ‘hands’ at other things there is at any given time a “scarcity of hands” in any profession requiring a modicum of skill. And because we have a number of potential “masters” we have at any given time “competition among” them.

Both profits and wages can rise together and the zero sum thinking of Marx and Buffett can be discounted. But Adam Smith’s role in this thinking should not be forgotten either.

This article first appeared at The Cobden Centre

Is the bond bubble the biggest yet?

Forever blowing bubbles

In March 2000 the NASDAQ Composite index broke. From a peak of 5,048.62 on March 10th, 24 percent up on late 1999, the NASDAQ Composite had slumped to half that by the end of the year.

The bursting of the dot com bubble sent unemployment shooting up from less than 4 percent in late 2000 to 5.75 percent in late 2001. And it stayed there. Indeed, American unemployment didn’t peak until mid 2003 when it hit 6.25 percent.

As unemployment refused to budge and inflation slowed in early 2001 Alan Greenspan acted. Between January 2001 and June 2003 Greenspan slashed the Fed funds rate from 6.5 percent to 1 percent where it stayed until June 2004.

The effects are well known. With the economic foundations in place for an asset boom, institutional factors took over to decide which asset would do the booming. In this case government action like the Community Reinvestment Act, government bodies like Fannie Mae and Freddie Mac, and a minefield of moral hazard in a financial sector which knew it would be bailed out of any trouble, combined to direct the flood of credit into housing.

All booms and busts follow this pattern. An expansion of credit unsupported by real savings provides an economic base for a boom bust cycle and the institutional superstructure dictates which asset or assets will be the locus.

Since the credit crunch of 2007, and especially since the collapse of Lehman Brothers in 2008, central banks around the world have indulged in a massive expansion of credit not backed by savings. This looks very much like the foundation for another boom bust cycle. Where will it originate?

The trick is to follow the money and this means examining the institutional factors. Central banks have pumped their money into banks, who have sat on it, and, via Operation Twist, the EFSF, Quantitative Easing, or whatever, into government bonds. Is this where we will see the next bubble?

Let’s take a moment to explain how bonds work. If I want to borrow £100 I can issue a £100 bond with a maturity of one year, meaning that a year from now I will have to pay the buyer of the bond £100.

But I am unlikely to be loaned the full £100 by the person who buys the bond. If they did they would be giving me £100 now in return for £100 365 days from now. But to a buyer these two things, £100 now and £100 next year, are not the same.

The reason for this is time preference which is the basis of interest. If you are offered £100 which you can have today or £100 which you can have next year (the situation our lender is in) time preference dictates that you will prefer to get the £100 today. In other words, even though £100 is £100, time has a value so that the same thing offered at different points in time will be valued differently.

Put simply, something today is valued higher than the same thing at some future point. A bird in the hand is worth two in the bush, as they say.

To offset your preference for the £100 today over the £100 next year I would need to change the offer so that you give me £100 now and I repay £105 next year. An interest rate of 5 percent has emerged.

So if you issue a £100 bond you might only get £95 for it, this being the bond price. But you will still have to hand over £100 on maturity; the £5 difference is the interest, or the yield in bond market parlance. (The yield would be given as 5.26 percent as it would be a percentage of the bond price not its face value)

From this it should be obvious that bond prices and yields move in opposite directions. If the price rose to £96 the yield would fall to £4 (4.16 percent) and if the price fell to £94 the yield would rise to £6 (6.38 percent). In some cases bond prices can rise above face value giving a negative yield, meaning that lenders are paying for the privilege of lending.

Bonds prices are subject to the same supply and demand pressures as any other. So when demand rises/supply falls we will see higher prices and lower yields, and when supply rises/demand falls we will see lower prices and higher yields.

Let’s step back into the real world. Greek bond yields are high because few believe they will get the face value on maturity which, given Greece’s hideous debt problems, is a reasonable assessment. There is little appetite for Greek bonds and, with budget deficits of 8 percent of GDP, there is plenty of debt for sale. Germany, meanwhile, has a relatively sounder economic outlook and low (even negative) yields.

But Britain has Greek levels of debt and German interest rates, a new bond market conundrum. One reason is that of the vast expansion of credit undertaken by the Bank of England since at least 2008 much has flowed into British government bonds. Currently the Bank holds about 25 to 30 percent of British government debt.

A bubble is where asset valuations become divorced from the fundamentals of that asset’s ability to produce a return. A government with sound finances backed by a robust economy should enjoy low bond yields. But does this sound like Britain’s government or economy?

By pumping bond prices up and yields down this monetary action has helped inflate a bubble in bonds just as surely as previous credit expansions have inflated other bubbles.

Is the bond bubble the biggest yet?

This article originally appeared at The Commentator

More on Maggie

It was

One of the great pleasures of the internet is to see Baron Tebbit, former Chairman of the Conservative Party, saying something like “I was disappointed to read the view of viewtoday, David Simpson, Jangly Guitar Part and others…” Well, if it’s alright for Norm it’s alright for me so I thought I’d take some time to engage with some of my critics.

The thrust of my article for The Commentator last week was that when someone tells you about the party they have planned for when Margaret Thatcher pops her clogs it is generally a sign that they haven’t thought about the matter very much, at least, not in any serious or original way. There was little in the responses to indicate that this observation is wrong and much to suggest it is entirely correct.

Over on twitter @BirleyLabour saw it as an example of “Tory hate for Sheffield” despite the fact that I am from Sheffield and am not currently a member of the Conservative Party (and when I am I’m not a Tory). Still, it’s nice to see the Sheffield Labour Party’s long tradition of idiocy being upheld.

@DaveTomHodges said it was “somewhat odd to write a piece proclaiming the longeivity of Thatcher’s ideas at a time they’re most discredited economically” I asked him which ideas he meant exactly (my answer would have been monetarism, but there you go) and got in reply “why that would be the low global growth over the last 30yrs as a starter. Economic extremists on both sides are v.dangerous!”

For starters, I don’t think low economic growth was one of Thatcher’s ‘ideas’. It might have been a consequence (though I’d argue against that) but it’s not as though she thought sometime before 1979 “Hang on; what we need is lower economic growth” In fact, she is often slated for putting the pursuit of economic growth above any other considerations. The charges against Thatcher are rarely coherent.

Secondly, though, what has economic extremism one way or the other got to do with it? It doesn’t matter whether your ideas are extreme or not, it only matters whether they are right.

After that young Master Hodges drifted into the last refuge of the Thatcher Bashers, some stuff about Chile and Pinochet.

Another vocal critic on twitter was @glynsmith3. His intial response was “Thatchers achievements mmmm. no sorry she’s just an evil cow who destroyed many peoples lives #witch” which rather proved my initial point. He went on to tweet “you are one selfish dickhead. 5 million unemployed, but at least your fucking happy eh.#torywanker” (proving my point again – and it was 3 million) before tweeting “no abuse from me” He eventually asked “pray tell why Thatcher was so good. i did ask 30 messages ago” which suggests he hadn’t actually read the article which had got him so angry in the first place.

I ought to say that not all the response was bonkers. I was pleased to see a few of my fellow Sheffielders agreeing in the comments (Andrew Cadman, Chrisuk1943, and Phil).

And not all the anti responses were barking. My friend Phil, a thoughtful fellow, reflected on Facebook that “the experience of leaving school and trying to find a job in a city affected as Sheffield was circa 1982 gives me the right to dislike someone who caused that affect” This demands more of a reply.

I don’t think anyone would disagree that Sheffield in the early 1980s was a grim place to be. The question was to what extent that was Thatcher caused it. If she didn’t then celebrating her demise is pretty daft.

Thatcher was elected to tackle two problems; inflation and excessive trade union power. The tool she used to tackle inflation was the doctrine of monetarism. This diagnosed the cause of inflation as being growth in the money supply and prescribed the cure as being the slowing of this growth. However, a decline in the growth rate of the money supply would lead to higher interest rates and higher unemployment.

That is, in fact, exactly what happened under the first monetarist government Britain had; Labour in 1976. That year Jim Callaghan, Thatcher’s predecessor, was forced to ask the IMF for a bailout. One of the conditions of the IMF’s loan, not unreasonable given the inflation of 25% the previous year, was a slowing in the growth of the money supply. The Chancellor, Denis Healey, obliged (he had no choice) and unemployment quickly shot up to a post war record of 1.5 million in 1977 where it more or less stayed until Thatcher was elected. Inflation, meanwhile, fell to 8% in 1978 before Labour went on a pre election credit binge and it started heading upwards again.

So given the experiences under Callahan/Healy as well as Thatcher/Howe, we can safely say that the defeat of severe inflation means higher unemployment. There is no other way. If you believe that the inflation Britain was plagued by in the 1970s needed to be defeated you cannot hold the subsequent unemployment against Margaret Thatcher.

You might, however, think that the price was too high and that high and increasing inflation was preferable to the unemployment that was an unavoidable part of getting rid of it. Celebrating Margaret Thatcher’s death because of the unemployment she oversaw only makes sense if you believe this.

The trouble is that economic theory had come to predict and the practical experience of the 1970s had borne out that using a bit of inflation to reduce unemployment only worked for a short time (that short time getting shorter with every dose) and that each dose had to be higher than the one before*

Indeed, this insight came to Jim Callaghan before Thatcher was even elected. In 1976 he told the Labour Party conference that

“We used to think that you could spend your way out of a recession, and increase employ­ment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of infla­tion into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment”

That was Thatcher’s belief put as well as she ever put it herself.

Quite simply the path of ever higher inflation was the path to national ruin. Thatcher saved us from that at a dreadfully high cost. But anyone who tells you it was available cheaper is having you on.

* The reasoning behind this was that if people expected inflation of 5% they would factor it into their calculations and only nominal magnitudes (prices) would change, real ones (output, unemployment) wouldn’t. So, to spur an increase in output or employment the inflation would have to be unexpected so if 5% was the expected rate the actual rate would need to be, say, 8%.

However, once people factored in the 8% rate the next stimulus would have to be up higher, say 10%…

Is the developed world merely illiquid or actually insolvent?

Coming up empty

Wherever you look in the world today you see economic problems. And whether it’s Britain, Europe, or the United States, with governments struggling under spiralling debts, what power there is to solve or at lease ease these problems is said to rest in the hands of central bankers.

Central banking grows out of maturity mismatch in banks. For example, you might pay £100 into a bank and be able to withdraw it at any time. The bank, on the other hand, might lend it to someone with a repayment date decades in the future, a mortgage for instance. If the bank has loaned your £100 out with a maturity of 30 years, if you turn up before those 30 years is up, the bank cannot give you your money.

In this case the bank faces a problem of liquidity. It has the assets (in the form of future mortgage payments) to cover all the claims that depositors could make against it. But it might not, in fact it rarely will have, enough liquid cash on hand to meet these demands if depositors all made them at once because these payments are not due until some point in the future.

It was because of repeated shortages of liquidity which lead to bank failures and economic disturbance that central banks evolved their role as ‘lender of last resort’ to the financial sector (many, like the Bank of England, had come into being solely to fulfil the ‘lender of last resort’ role for the government).

When banks were faced with depositors trying to withdraw lots of deposits against assets which wouldn’t return until a future date, central banks would tide them over. In the words of Walter Bagehot in his 1873 book Lombard Street, central banks should “lend freely at a high rate, on good collateral”

It should be obvious how far modern central banking has deviated from Bagehot’s principles. True, lending could hardly be any freer, but rates are at all time lows and the collateral stinks. But there’s a more fundamental problem: central banks were designed to assist with liquidity crises – what we may be seeing is a solvency crisis.

Solvency refers to whether an institution has enough assets to cover its liabilities. If it doesn’t, if a bank, for example, is owed mortgage payments of £9 billion but has liabilities of £10 billion, it is insolvent. There is no way, even if it could liquidate its £9 billion of assets into cash immediately, that it could cover its liabilities.

Governments around the world are racking up vast debts even on official figures. Between 1990 and 2009, according to a McKinsey report, government debt rose from 57 percent of GDP in 1990 to 67 percent in 2009 and from 32 percent of GDP to 59 percent in Britain in the same period. Coming up to three sluggish years later those figures are up to around 100 percent for the US and 85 percent for Britain.

But it’s not just governments. In the US financial debt was up from 24 percent to 53 percent of GDP between 1990 and 2009. In Britain it was up from 60 percent to 154 percent of GDP. Household debt in the US rose from 59 percent to 97 percent of GDP over the period; in the UK, from 65 percent to 103 percent. Corporate debt in the US rose from 65 percent to 79 percent of GDP and in Britain it rose from 66 percent to 110 percent of GDP.

So those figures for national indebtedness which we often hear, usually around or hurtling towards 100 percent of GDP, is only the government part of the story. All told, the indebtedness of the US is around 300 percent of GDP and for Britain the figure is close to a staggering 500 percent of GDP. And this doesn’t factor in long term liabilities like pensions. It is a story repeated around the developed world.

Are these countries really suffering from a temporary tightness of cash which can be helped with a little central bank greasing? Or are they drowning in debt? Are they merely illiquid or are they actually insolvent?

As Mitch Feierstein puts it in his excellent recent book Planet Ponzi,

“Above all, where excessive debt is the problem, there exists one and only one solution: less debt. If that means that dumb creditors lose money, that’s good, a positively beneficial outcome. Simply put: too big to fail is too big to exist. The failure of some creditors will remind all the others that credit discipline matters, just as it always has done, just as it always will.

In particular, we need to relearn an old lesson: that you cannot solve a problem of excessive private sector debt by getting the government to take it over. Or by extending government guarantees to soften the hit. Or by printing money to bail out failed financial institutions. Or (in the case of the wonderfully named EFSF) by creating a rescue fund that contains no funds, only guarantees, and which is itself going to be as highly leveraged as those Eurocratic minds can devise”

The grim possibility exists that there may be too much debt in the world ever to be paid off. That means default, either overt (the PIIGS) or covert via inflation (everywhere else). Either way, there are lots of people are going to find out that their assets aren’t worth anything.

This article originally appeared at The Commentator

Thatcher’s achievements will long outlive the spite of Sheffield’s sons and daughters

You want a lump of cole rather than a welfare payment? 

“When Thatcher dies they’ll have to build a dance floor over her grave for all the people who want to dance on it.” When I was told this in a pub some years ago it wasn’t the sentiment that struck me but that fact that the unimaginative fellow speaking might have thought it was the first time anyone within earshot had heard that rib tickler.

I was born in Sheffield in 1980 and through family and support of an underachieving football club I retain ties to the place and its people. I have heard Sheffielders, some quite reasonable folk, say that they wish the Brighton bomb attack had succeeded; I have heard them joke frequently about Thatcher’s dementia.

One told me that if there was a God he would believe in him if Margaret Thatcher died. But, if there is a God, shouldn’t he believe in him anyway? And unless he was ascribing to Thatcher powers of immortality, her death is a certainty and, thus, so is his eventual embrace of theism.

You won’t find logic where none exists. The visceral hatred of Margaret Thatcher isn’t based on anything resembling rational thought. As one Sheffielder once put it to me “I dont understand all this stuff about GDPs, Taxes, RPI etc etc. All i know is that growing up in Sheffield in the 80s. Thatcher demolished a once proud city & left alot of its inhabitants pennyless, jobless & without hope. You can argue about stats all day. But that was the reality of it all. People loosing their, jobs, homes & pride.” (sic, sic, sic…)

That’s why people in places like Sheffield will be celebrating Margaret Thatcher’s death. There’s just one problem. It’s wrong.

For starters, feel the parochialism. Thatcher was bad for Sheffield ergo she was bad. Never mind the rest of the country. Never mind the GDP growth of 23 percent or the increase in the median wage of 25 percent during her time in office. For most people the Thatcher years were ones of prosperity. That’s why she regularly tops polls of most popular Prime Ministers.

This is not to say that this person’s view is worthless. But it is to say that an opinion formed simply by looking up and down your street might not be too useful.

Then, just how proud actually were places like Sheffield before Thatcher came along? How proud can any city be when it is, essentially, a vast welfare case getting by on the wealth transferred to it from other parts of the country?

That was the truth of the industrial situation in these areas. Take coal. Just before the First World War the mines employed more than 1 million men in 3,000 pits producing 300 million tonnes of coal annually.

By the time the industry was nationalised in 1947 700,000 men were producing just 200 million tonnes a year. To improve this situation, in 1950, the first Plan for Coal pumped £520 million into the industry to boost production to 240 million tonnes a year.

This target was never met. In 1956, the record year for post war coal production, 228 million tonnes were produced, too little to meet demand, and 17 million tonnes had to be imported. Oil, a cheaper energy source, was growing in importance, British Rail ditching coal powered steam for oil driven electricity, for example.

Jobs were lost in numbers that dwarfed anything under Thatcher. 264 pits closed between 1957 and 1963. 346,000 miners left the industry between 1963 and 1968. In 1967 alone there were 12,900 forced redundancies. Under Harold Wilson one pit closed every week.

1969 was the last year when coal accounted for more than half of Britain’s energy consumption. By 1970, when the Conservatives were elected, there were just 300 pits left – a fall of two thirds in 25 years.

By 1974 coal accounted for less than one third of energy consumption in Britain. Wilson’s incoming Labour government published a new Plan for Coal which predicted an increase in production from 110 million tonnes to 135 million tonnes a year by 1985. This was never achieved.

Margaret Thatcher’s government inherited a coal industry which had seen productivity collapse by 6 percent in five years. Nevertheless, it made attempts to rescue it. In 1981 a subsidy of £50 million was given to industries which switched from cheap oil to expensive British coal. So decrepit had the industry become that taxpayers were paying people to buy British coal.

The Thatcher government injected a further £200 million into the industry. Companies who had gone abroad to buy coal, such as the Central Electricity Generating Board, were banned from bringing it in and 3 million tonnes of coal piled up at Rotterdam at a cost to the British taxpayer of £30 million per year.

By now the industry was losing £1.2 million per day. Its interest payments amounted to £467 million for the year and the National Coal Board needed a grant of £875 million from the taxpayer.

The Monopolies and Mergers Commission found that 75 percent of British pits were losing money. The reason was obvious. By 1984 it cost £44 to mine a metric ton of British coal. America, Australia, and South Africa were selling it on the world market for £32 a metric ton.

Productivity increases had come in at 20 percent below the level set in the 1974 Plan for Coal.

Taxpayers were subsidising the mining industry to the tune of £1.3 billion annually. This figure doesn’t include the vast cost to taxpayer-funded industries such as steel and electricity which were obliged to buy British coal.

But when Arthur Scargill appeared before a Parliamentary committee and was asked at what level of loss it was acceptable to close a pit he answered “As far as I can see, the loss is without limits.”

Source: The BBC

Falling production, falling employment, falling sales, and increasing subsidy; that was the coal industry Margaret Thatcher inherited.

She did not swoop in and kill perfectly good industries out of spite. Industries like coal and steel were already dead by the time she was elected. Thatcher just switched off the increasingly costly life support which had kept these zombie industries going.

When Margaret Thatcher dies the streets of Sheffield will flow with ale. But the next day the revelers will wake up with headaches and Margaret Thatcher will still have crushed Arthur Scargill, will still have helped win the Cold War, and will still have shown the supposed inevitability of socialism to be the dimwitted sham it was. And those achievements will last longer than the hangovers.

This article originally appeared at The Commentator

Milk madness – Take 2

Moo are you lookin’ at?

I’ve moaned before about how people generally ignore my articles about monetary economics but that if I write about fiscal policy people get very excited. Well, now I suppose I can add dairy farming to my list of ‘hot button’ topics.

It isn’t hard to understand why. This is one of those cases which economic development continually throws up where the benefits of an action, in this case lower milk prices, are spread over a wide section of society while the costs are concentrated. If, say, milk prices fall so that a pint of milk becomes 3p a litre cheaper (assuming, for arguments sake, that 60 million people drink three litres a week) then the benefits to society will be £280,800,000 pounds a year but only £4.68 for each individual.

But if the costs, on the other hand, are concentrated among a relatively small number of dairy farmers such that each one stood to lose an annual income of £30,000, you can see that they would be incentivised to act more strenuously in fighting against the change than consumers would be in fighting for it. You see this wherever benefits are diffused and costs are concentrated. You always have. It’s what EP Thompson’s ‘The Making of the English Working Class’ was all about.

Still, that shouldn’t mean that wooly thinking goes unchallenged and what struck me about some of the reaction to my article for The Commentator was how confused it was. On the one hand I was accused of defending the iniquitous outcomes of a brutal free market. On the other, I was told that there was no free market in milk and was accused of defending cartels. This should immediately alert you to the standard of argument your opponents are about to deploy.

The first set of arguments were about the price itself, specifically what it reflected. Flatpackhamster argued that because of collusion among buyers the price was being kept below its ‘proper’ price. But in my article I had argued against the idea of a ‘proper’ price as something that could be objectively ascertained. In this I was drawing on a tradition of economics which is now 140 years old and which holds that value is purely subjective. The ‘proper’ price is whatever the contracting parties judge it to be. Thus, if two parties agree to a price of £1 per litre it is no less a ‘proper’ price than if they agree to a price of £5 per litre.

This subjectivity also applies to the prevailing market price, something trapezium struggled to understand. When you add the subjective judgments of all the market participants you do not get something which actually is objective. This is, to repeat, because there is no such thing as objective value. If 50 million people like Marmite and 10 million people don’t you have not derived an objective ‘fact’ that Marmite is nice.

Another argument, made by several but most clearly by Vimeiro, was that there was no free market in milk “because of the two layers of cartels operating in the middle” (between dairy farmers and consumers). This is a curious argument. After all, when we buy clothes made in China I imagine very few of us buy them directly from the Chinese factory worker who sewed them.

But what of the cartel argument? This is stronger but there is a simple answer to it. If we want to restore market power in the face of relatively few buyers what we need is relatively few sellers. Indeed, as my article said, with productivity increasing in the dairy industry faster than demand you will see fewer dairy farmers. There really is no alternative. In other words, if we allow the market process to work the cartel argument vanishes.

Also, despite what was suggested Charles Barry and others, the fact that supermarkets sell milk at different prices to what farmers sell it for is not evidence of evil price gouging. They are, after all, selling different products. Would you want to drink milk straight out of a cow’s udder? Me neither. It has to be processed, pasteurised, homogenised, treated, and bottled before it arrives on your supermarket shelf. The untreated milk the farmer sells to the processor is a different product to the drinkable milk sold in supermarkets. Hence, and quite obviously, why they are different prices.

The same point applies to cowmangav’s argument that because spot prices are above the offered contract prices these new contract prices are somehow ‘wrong’. The spot market is so called because transactions are settled ‘on the spot’. So, if the spot price is, as cowmangav says, 32 ppl then the buyer will hand that amount over and get their milk right now. The contract price, that which milk buyers are trying to lower and dairy farmers are trying to keep at the present level, is, according to cowmangav, 24 ppl. But, crucially, if a buyer pays this now, unlike in the spot market, they will not get their milk until some point in the future, points spread out over the length of the contract. This leaves room for uncertainty about future market conditions which the spot price does not have to reflect. Hence, it will be a different price. To put it another way, if I want to sell you a cake which I will give to you today, would you pay me more or less than if I sold you a cake which you couldn’t eat until next year?

Cowmangav actually gives an example of this in action. He says that “Milk production in the UK is currently running 4 to 5 percent below last year due to weather effects. This has caused milk procesors (sic) to have to pay 32 -35 ppl on the spot market to get extra milk” So, at some point in the past, buyers committed to paying farmers 28 ppl for milk. But, because of weather, the farmers are unable to deliver so buyers are being forced into the market to get the milk they need at 32 to 35 ppl. Buyers are paying anywhere from 14% to 25% more for their milk than they thought they would be. Can anyone be surprised that the contract price would deviate from the spot price?

There is a further point to be made in response to cowmangav. If the current contract price of 28 ppl is ‘fairer’ than the proposed contract price of 24 ppl, does that not mean that the spot price of 32 to 35 ppl is ‘unfair’ as well? It is, indeed, instructive to note that he doesn’t use this as an argument that the spot price is too high. Apparently a price is only ‘artificial’ when it benefits someone else.As Adam Smith put it back in 1776

“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people”

That’s special interests for you.

I drew quite a bit of fire for my Commentator piece. I’m not too concerned, as I say, when the costs of an action are concentrated those who will bear them will fight hard. And besides, one of the commenters also dismissed Adam Smith, so not bad company to be in.