More Farage Nonsense

Another of Nigel Farage's ridiculous claims on the ITV debate on Tuesday night was that the fact that the average worker in the UK has had a poor deal over the last ten years with wages stagnating or falling was entirely the fault of immigration.  He neglected to mention that in those ten years the UK has been through the worst financial crisis in over a century, two recessions and the largest fiscal consolidation in it's history, including a multi-year public sector pay freeze.  This of itself accounted for a significant proportion of the real-terms drop in income for most of the workforce.

He also forgot to mention that the UK is not alone in this - for example, the median male income in the USA is now lower in real-terms than it was in the 1970's.  This has nothing to do with immigration.  The main driver of wage stagnation in recent decades has been globalisation, increased competition and the growing income inequality between rich and poor.  This is an inevitable consequence of capitalism and is not a bad thing so long as governments are willing and able to intervene to redistribute income and to put a legally enforceable floor under wages.

Unfortunately the UK government since 2010 has done a poor job in this regard.  It has cut taxes for the rich instead of which it should have raised them.  It continues to allow the super-rich to avoid taxes through their use of tax havens.  It fails to collect anywhere close to the appropriate level of taxes on the UK operations of global corporations.  It has slashed corporation taxes, further contributing to an international race to the bottom, despite there being no evidence it will result in the higher overall tax take claimed.  In combination with the above it has also removed a significant number of the transfers (benefits and tax credits) that previously helped to redistribute income.  These transfers should not be considered as the drag on economic performance portrayed by the government but as a social necessity which ensures that the nation's income is shared fairly.

The government may have failed the public on taxes and redistribution but, worse, it has conned them with its 'living wage'.  The real living wage as calculated by the Living Wage Foundation (http://www.livingwage.org.uk/) is predicated on previously-existing in-work benefits remaining in place and is also set at a higher level than the government's measure; as those benefits have now been abolished, the governments living wage is nothing more than a gimmicky rebadge of the minimum wage.

So I agree with Farage that Britain deserves a pay rise but his analysis is completely dishonest.  The British public deserve better than to have to listen to any more of Farage's nonsense - rejecting it on June 23rd, then campaigning to have the UK Government collect more taxes and to introduce a real living wage would be a good start.

Giving Farage his dues

On Tuesday night's ITV debate on the UK's membership of the EU, Nigel Farage admitted that the Leave campaign's policy of reducing net immigration would lead to a lower UK GDP and a lower standard of living.  To his credit he has always been consistent on this - he has stuck to the line that "GDP isn't everything".

Farage's argument is that immigration increases competition for employment and therefore exerts a downward pressure on wages.  So, his theory goes, reducing immigration will allow wages to rise again.  This may well be true in the short term however the flip-side to this is that those short-term wage rises will cause output prices to rise and therefore sales to fall, and so will result in longer-term job losses and unemployment.  An increase in unemployment will in turn cause wages to fall back again, resulting in lower pay, lower GDP and permanently higher unemployment.

There are two ways to constrain output price rises - either by increasing productivity (output per capita) or else by restricting wage growth.  For Farage's wage increases to persist rather than resulting in unemployment would require permanent increases in productivity.  This would be reliant on investment in skills and in infrastructure, which would require money to be spent.  That extra spending would be at the cost of other spending priorities or else taxes would need to rise.  Unfortunately Farage didn't get around to explaining that part - "Vote Leave, pay higher taxes".

Without productivity improvements there will always need to be competition for employment  in order for the UK to remain competitive.  That competition is created either through immigration or through the laws of supply and demand via the mechanism of unemployment; it is unavoidable and slamming the doors shut won't prevent it.  I would prefer to see full employment with immigration than no immigration and permanently higher levels of unemployment.

Allowing free movement is the free-market solution - the laws of supply and demand will determine where people choose to migrate to.  To all intents and purposes there is currently zero unemployment in the UK which is why people come here; if unemployment were to increase in the UK (eg. if productivity increased more rapidly in other EU countries than it did here) people would naturally stop coming here to look for work.  The Eastern Bloc have far lower wages than the UK and as their infrastructure develops and more businesses choose to locate themselves there the flow of migrant labour will reduce and may even reverse - anyone remember 'Auf Wiedersehen Pet' and all the British brickies who moved to Germany looking for work in the 1980's ?  We seem to have developed short memories since then ...

So to give Farage his due he has been consistent in arguing for higher unemployment and a lower standard of living, it's just that he chose not to phrase it quite like that.

The Brexit Debate

One of the most puzzling refrains heard throughout this seemingly endless referendum campaign is 'no-one is just giving us the facts'.  Seriously?  Is that maybe because it is impossible to predict the future with any degree of certainty?  There are plenty of statistics and data out there if people care to look but Remain or Leave, it doesn't matter - both choices rely on a degree of guesswork as to what the impact will be.  It is however possible to state where we are now and how we got here; so here are some of the aspects of the 'debate' that concern me and the conclusions/questions I draw from them ...

1) Britain contributes £350 million per week to the EU budget.  Britain receives £190 million per week from the EU in agricultural subsidies, research grants, development grants and the like.  The net contribution is therefore around £160 million per week, or less than 0.5% of GDP.  Not a huge price to pay for access to an economy the same size as that of the USA and more than 500 million consumers.  Would we get a deal at that price outside the EU ?  We just don't know. ...

2) Britain joined the EU in 1973 when it's economy was known for being 'the sick man of Europe' with high unemployment, high inflation, falling exports, and failing industries. Since then, while inside the EU, the economy has recovered and is now the 5th largest in the world, behind only USA, China, Japan and Germany.  We can't know how Britain would have fared if it had remained outside the EU or how Britain will fare if it leaves but purely in terms of population size it is unlikely that Britain would have or will overtake any of these apart from possibly Germany.  So I am unsure why Brexitters consider EU membership to be a hindrance.  Will our economy be any further up the league table in 10 years time if we are outside the EU?  Unlikely - it is more likely to shrink in relative terms.

3) Because Britain has close to zero unemployment, inward migration is driven by continuing demand for additional labour from businesses.  Cutting off this source of labour, as Brexitters intend, implies wage rises to compete for a smaller pool of labour, which ultimately will make UK-plc less competitive and cause unemployment to rise.  This will have the effect of reducing wages again until they settle at an equilibrium point with a lower GDP as a result of there being fewer people in work and at lower wages.  Either that or the Brexitters' wishes on immigration have to be ignored, even if they win the referendum, in order to keep the UK competitive.

4) Only a half our current net annual inward migration figure of 330,000 comes from EU countries.  Leaving the EU is unlikely to put a halt to immigration, due to point 3 above - in fact it is likely to mean that immigration from poorer, non-EU, countries increases to meet the needs of business and of public services.  If Brexitters are concerned about cultural dilution it is only going to get worse if we leave the EU - we have more in common with our Eastern European neighbours than we do with those from outside Europe.

5) From WWII to the collapse of the Berlin Wall and the Warsaw Pact countries in 1989 the UK lived under the constant and imminent threat of conflict with the USSR.  Since then it has been the West's objective to encourage the former Eastern Bloc countries to convert into liberal democracies with market economies - welcoming them into the EU was a part of that process.  Many Brexitters aspire not just to leave the EU but to see it's break-up.  If that were to happen the Eastern Bloc countries are more likely to fall back under Russia's suffocating influence - or, worse, to see occupation/annexation as has occurred in Ukraine and the Crimea.  Without European solidarity in the form of the EU how would Europe coordinate any kind of response amongst 28 countries living at different degrees of proximity to the Russian threat?  Or are Brexitters relying on NATO for any such response, and if so don't they think that would represent a major escalation of tensions?  Personally I feel we should show more solidarity with these nascent European democracies and keep the EU together.

For the record, and as I have blogged repeatedly since the referendum was announced in 2013, I think the Brexitters will win but I think it will be the most short-sighted and depressing decision this country has ever made.  My wife and kids, luckily for them, are entitled to Irish passports so once free movement is abolished they can still tootle through passport control while I have to faff about with immigration/visas.  Or maybe once people realise what a pain travelling in Europe is without free movement it will be reintroduced - in which case, what was the point?

Will Brexit succeed in reducing immigration?

One of the many justifications offered by advocates of Brexit is that it will allow the UK to "regain control of it's borders".  I am doubtful that this is the case; it may do so, but if so it will come at a price.

Following Brexit, should that be the electorate's verdict, supporters and opponents alike will be hoping that the UK's economy continues to grow (as measured by GDP - the sum total of the nation's economic output).  For a nation's GDP to grow either the existing workforce needs to become more productive (generate more output, in terms of goods and services, at a lower unit cost) or the workforce needs to grow.  In the UK over the last 20 years or so, this demand for more labour has been met by immigration.  The UK's unemployment rate currently stands at 5.1%.  In such a low unemployment environment if a company wants to expand it's business but access to immigrant labour has been removed it will need to raise wages in order to hire more people - to poach them away from other employers.  This may appear superficially attractive, giving workers a pay rise, but in the long run it is bad news.  The UK has a long running productivity problem (currently worse than France's), which makes our exports relatively expensive.  This has led to us having the worst trade deficit in our history - we import massively more goods and services than we export.  If wages rise we become more unproductive and the deficit becomes worse - a situation which in the long run is not sustainable.

So, post-Brexit, wages will tend to stabilise at a level at which our productivity does not worsen and as a nation we are able to continue to compete.  Competition for employment is what constrains wage growth - when we no longer have immigration to provide that competition it will be provided instead by an increase in unemployment.  The market will drive up our productivity through the mechanism of falling exports leading to higher unemployment.  The final result of a Brexit followed by closing the borders will be a shrinking GDP, falling wages and higher unemployment.  That increase in unemployment has associated welfare costs which will have to come out of a smaller tax take due to the smaller size of our economy.

Overall post-Brexit Britain is not an attractive prospect, which is why I think those who vote for Brexit in order to reduce immigration will find themselves disappointed.  No government wants to preside over a shrinking economy, permanent recession and falling living standards - for this reason I believe Governments will continue to listen to the demands of business and the borders will remain open.  Globally, mass immigration is here to stay and our time would be better spent in finding ways to live with it.

Election 2015 - It's grim for Labour

Originally published May 2015.

Well what a depressing result that was. It is of little consolation but I called the result almost exactly back in March 2013 - http://theviewfromstalbans.blogspot.co.uk/2013/02/the-2015-general-election-is-far-from.html - I should have had the confidence of my own predictions to back it with money. Even Nate Silver got it wrong this time. What an opportunity missed!

So what of the future? We now have 2 years of uncertainty while the Tory party debates with itself over our future relationship with Europe; Labour's position is clear, as is that of the SNP, the Greens, the rump of Lib-Dems and of UKIP - it is only the Tory party that doesn't yet know where it stands on this key issue. In 2017 we could face the situation where the UK as a whole votes to leave the EU while Scotland wishes to remain in; that will be the final nail in the coffin for the Union - as the SNP will certainly demand another referendum at that point.

I see two major issues on the economic front - the first being the UK's continuing productivity puzzle and the second the build-up of private debt. Since 2010 wages have stagnated, though they are starting to rise again now, but our GDP per capita has not improved - our productivity is still awful (we are still behind France on this score). This harms our exports which is partly why we currently have the worst trade deficit ever recorded. This needs to be addressed by investment in infrastructure and by improved education and training to up-skill the workforce; the alternative is a low-wage economy which continues to drive wages down. But given that pressure on pay is now upwards, our productivity and exports may just get worse. Osborne needs to do what Labour proposed which is to allow himself to borrow for investment where the investment can be shown to have a positive impact on productivity; unfortunately this has been ruled out so he would need to break an election pledge to do this - but seeing as the Tories happily abandoned pledges made in 2010 when it suited them (no increases in VAT, no top-down NHS reorganisations, eliminating the deficit, reducing the debt, reducing immigration, rebalancing the economy, etc), I look forward to seeing Osborne wriggle his way out of this one too.

However, a bigger issue is the nature of the current 'recovery'. Thus far it has been driven by consumption paid for by a build up of private debt - the UK has the largest private-debt-to-GDP ratio on the planet, bar Japan. It is now back to pre-crisis levels. When interest rates start to rise this debt will become unaffordable and we will start to see defaults - just as we did in 2007-8. House prices will fall and the Banks' balance sheets will be impacted - we may we well see bank failures and the need for bailouts once again. The situation may be made worse by an additional surge of unsustainable pseudo-growth fuelled by people bringing forward their pension savings spending and a subsequent collapse in demand further down the line. We'll know whether this has been the case in a few years' time.

Another concern is for the future of the NHS. There is a financial crisis building, with 98 trusts thought to be close to insolvency. I fear that the Tories will use this as an excuse to privatise large parts of the service to reward the healthcare firms that have helped to bankroll their election campaign. This will be a disaster for the future of the service as study after study has shown that outsourcing to the private sector consistently provides worse value for money. Numerous studies show that our NHS as currently constituted is one of the most efficient and best value for money in the world. Outsourcing will therefore lead to less money begin available for front-line services, but on this point the Tories' policy decisions are likely to be ideologically-driven rather than evidence-based - a large proportion of the party has long wanted to privatise the health service in the name of shrinking the state. I fear for the future of our NHS.

So the banks and hedge funds got the government they wanted but I look forward to seeing how the Government now attempts to square the circle of their contradictory electoral pledges - slashing welfare while protecting the vulnerable, child benefit and pensions, achieving a budget surplus while cutting taxes, cutting immigration while remaining in the EU, growing the economy without immigration and without investment to boost productivity, keeping Britain open for business and investment with one foot in the door out of Europe - the list goes on and on. There'll be plenty to write about.