How to save money without saving money

There are a few rather odd points in the economists’ letter to George Osborne which was published in The Times on Tuesday.

Firstly, the term ‘crowding out’ seems to be thrown around a lot at the moment. In its classic sense, it is used to describe a situation where loose government fiscal policy increases the goods market equilibrium and therefore the demand for money, bidding interest rates up and thus reducing the expansionary effect of the government expansion. There is little evidence to suggest that this is the case in the UK economy at present.

In the labour economics sense, government ‘crowding out’ seems to be used to describe a situation whereby public sector wages are significantly above the local market rate for a job, so that private sector firms are unable to recruit the staff they need. (The corollary is that public sector wages are ‘too low’ in high-wages areas such as London, which is something trade unions happily acknowledge and suggest is addressed with an increase in London weighting).

Leaving aside the fact that crowding out in regional labour markets seems not to be happening (as the recent UNISON/IDS report detailed, and as one would expect in a time of slack labour markets), there are some other puzzling aspects in the detail of the letter.

On the one hand, the signatories make it clear that the “total public sector pay bill” in each area should be unchanged, while simultaneously claiming that “any savings [would be] used to enhance local services”. As a humble economics student my maths isn’t up to much, but I’m pretty sure if A, B, C and D all remain unchanged, A+B+C+D also remains unchanged, so there can be no savings. Are they arguing that installing ten sets of regional pay negotiations will reduce overhead costs compared with one national pay negotiations body?

Picture: telegraph.co.uk

Secondly, and most significantly, I fail to understand how public sector wages can be brought into line with private sector wages in, say, the South West if the total wage bill for the South West has already been pre-determined. Hospital negotiators may decide that a clinic secretary's salary can and should be cut by (x) to bring it into line with private sector secretaries, but that leaves them with (n.x) in wages which has to be spent on other staff in the South West, whatever the ‘needs’ of other local labour markets. This runs completely contrary to the stated aims of the Chancellor (and the signatories) to allow wages to be more closely dictated by individual micro-labour markets.

The only possible explanation I can think of is that they wish for the pot of money in the South West to be redistributed from ‘overpaid’ lower-wage secretaries and cleaners towards higher-waged public sector staff (doctors, experienced teachers) where skills are less in competition between private and public sectors, even where there is no market mechanism demanding higher wages for them. This would naturally have the effect of being regressive in terms of income distribution, and possibly also of reducing economic activity as money is redistributed from those who spend to those who save. If this is what the signatories are intending, they would do well to state it openly.

Being charitable, I assume that many of the signatories have simply not read through the detail of the letter. Some may be in favour of local pay bargaining per se. Whatever the case, the political effect of their letter has been to bolster the position of a Chancellor whose aim is to abolish national pay bargaining without ringfencing existing spending levels.

Durable change a long way off for scandal-ridden UK banking system

The role of Barclays bank in manipulating the London Interbank Offered Rate (LIBOR) continues to dominate international financial media.

The bank has already attracted fines from regulators in the UK and theUSA.
But further revelations are likely as US Senate Committees are flexing their muscles, the UK parliament has launched an inquiry and the UK’s Serious Fraud Office (SFO) has announced a criminal investigation. The temptation will be to look for scapegoats and prevent consideration of the systemic factors.

Barclays has a dark history. For example, in 2010, Barclays Bank paid US$298m in fines for “knowingly and willfully” violating international sanctions by handling hundreds of millions of dollars in clandestine transactions with banks in Cuba, Iran, Libya, Sudan and Burma.

In February 2012, the UK government introduced retrospective legislation to halt two tax avoidance schemes that would have enabled Barclays to avoid around £500 million in corporate taxes. However, Barclays is not alone. Only last month, the UK financial regulator reported that Barclays, HSBC, Lloyds and Royal Bank of Scotland mis-sold loans and hedging products to small and medium sized businesses. The financial sector has been a serial offender.

Here are a few examples.

The UK experienced a secondary banking crash in the mid-1970s. The crash revealed fraud and deceit at many banks. The UK government bailed them out and in turn had to secure a loan from the International Monetary Fund.

In the 1980s, the financial sector sold around 8.5 million endowment policies, which were linked to repayment of mortgages. The products were not suitable for everyone but were pushed just the same, and the risks were not explained to the customers.

A 2004 parliamentary report found that some 60% of the endowment policyholders have been the victims of mis-selling and face a shortfall of around £40 billion. This was followed-up by a pensions mis-selling scandal where 1.4 million people had been sold inappropriate pension schemes. The possible losses may have been £13.5 billion.

The 1990s saw the precipice bonds scandal. Around 250,000 retired people been persuaded to invest £5 billion in highly risky bonds, misleadingly sold as “low risk” products. Thousands of investors lost 80% of their savings. Then came the Split Capital Investment Trusts scandal. Once again financial products had been mis-sold and deceptively described as low risk. Some 50,000 investors may have lost £770 million.

New millennium came with a new financial scandal – the payment protection insurance (PPI) scandal. People taking out loans were forced to buy expensive insurance, which generated around £5.4 billion in annual premiums for banks and provided little protection for borrowers. This scandal is still being played out and banks may be forced to pay £10 billion in compensation.

The above has been accompanied by money laundering, tax avoidance, tax evasion, fraudulent practices to inflate share prices and of course the banking crash, which has brought the global economy to its knees.

Whichever way you look at it, banks have been serial offenders and continue to act with impunity. The entrepreneurial culture of making private profits at almost any cost has had disastrous social consequences. Fines and forced compensations have just become another business cost and the usual predatory practices have continued.

There are two main drivers of the financial scandals. Firstly, markets exert incessant pressures for ever rising profits and don’t care much whether they come from normal trade, money laundering, tax avoidance and other dodges. Secondly, the idea of assessing people’s worth through wealth is deeply embedded in western societies.

Profit-related pay became the mantra from the 1970s onwards and has been a key driver of the abuses. The typical tenure of a FTSE 350 companies CEO is around four years and declining. In this time, people at the top need to collect as much personal loot as possible and have little regard for any long-term consequences. The performance related pay applies at the lower echelons as well and again encourages short-termism and neglect of any social consequences.

In principle, regulators and politicians should be able to able to check the abuses, but the UK political institutions are weak. There is little competition amongst the political parties to devise socially responsible policies.

For the last 40 years, they have all offered various shades of light-touch regulation and veneration of markets. There has been no attempt to alleviate market pressures by forcing banks to operate as cooperatives or mutuals. Corporate and wealthy elites fund political parties and have organised effective regulation and accountability off the political agenda.

The regulators of the financial sector come primarily from the same industry and have sympathies for the narrow short-term interests of that industry. After a stint as a regulator, they then return to the same industry. The revolving-doors and ingrained conflicts of interest have prevented effective regulation and accountability.

Reforming political institutions is a necessary condition of controlling banking frauds, but a durable change is not on the horizon.

Bankers try more of the same to solve crisis

From the Morning Star

Alarmed Bank of England policy-makers pressed the red button today and printed another £50 billion to try to boost the struggling British economy.

The bank's Monetary Policy Committee voted to increase the quantitative easing programme from £325bn to £375bn in a desperate attempt to drag the country out of a double-dip recession.

It held interest rates at a record low of 0.5 per cent.

They took the decision amid signs that the economy deteriorated in June, with the construction sector in reverse and the services sector suffering its worst performance for eight months.

The bank said the decision to pump more money into the economy came as Britain's output had barely grown for a year and-a-half amid signs its main export markets are slowing.

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "The use of quantitative easing is based on the assumption that our economic system is in crisis due to a lack of available credit.

"But the economy does not suffer from a lack of credit - it suffers from a lack of demand.

"Unemployment, underemployment and wage constraint have all produced a situation in which living standards are falling.

"The Bank of England's now £375bn quantitative easing programme has clearly not been used to extend credit to meet any growing demand.

"Instead, the banks have used the extra liquidity to speculate in derivatives markets and to invest in safer foreign markets. It's good for the banks, but bad for the UK economy."

TUC leader Brendan Barber added: "This will only stop things getting even worse, not kickstart the economy."

Banks are serially corrupt. But Vince Cable's shareholder plan won't work

Prem Sikka

Banks are serial offenders and can't be controlled by shareholders. Vince Cable, the business secretary, has correctly identified the problem of corruption at banks, but his policy prescription of asking shareholders to invigilate abusive organisations and executives has not worked and will not work. Contrary to Cable's claims, shareholders are traders and speculators rather than owners. They barely hold shares for more than three months and do not have a long-term interest in the business. They have been utterly ineffective at curbing corrupt practices at banks, as evidenced by the tide of scandals.

Banks are under the spotlight for the Libor scandal and mis-selling of loans to small businesses, but they are serial offenders. The mid-1970s secondary banking crash highlighted fraudulent practices, which also engulfed the property and the insurance sectors. The government bailed out the banks and in turn had to resort to loans from the International Monetary Fund.

In the 1980s the financial industry sold around 8.5m endowment policies for repaying mortgage loans. These were not suitable for all borrowers. Banking staff received commission for selling the policies. The risks were often not explained to the borrowers. Banks made profits but eight out of 10 policies failed to pay the promised returns and did not even provide the amounts needed to redeem the mortgages. A 2004 UK Treasury committee report estimated that 60% of borrowers had been the victims of mis-selling, facing a shortfall of around £40bn.

This was followed by the pensions mis-selling scandal where people were encouraged to abandon good employer-based pension schemes and join a private one instead. The £13.5bn scandal affected some 1.4 million people.

The late 1990s saw the precipice bonds scandal. Some 250,000 retired people were lured to invest £5bn in investments misleadingly described as low risk. Thousands of investors lost 80% of their savings.

The 21st century did not provide any respite from financial scandals. Payment protection insurance is still being played out; some 3 million people were sold expensive and unnecessary insurance and are battling for compensation which could top £10bn. Now we have the Libor and small-company loan scandal.

In between the above, banks engaged in organised and aggressive tax avoidance, tax fraud, money laundering, corruption and feeding misleading stock market research to investors to drum up business and higher fees – just to mention a few of their misdeeds.

Fines, penalties, forced compensations and regulatory action have become part of normal banking business and the costs are just passed on to customers. It is hard of think of any instance when shareholders have sought to curb rapacious behaviour of banks or their executives. They have always been focused on short-term gains and cared little about the social consequences of the quest for higher returns.

Democracy and public sunlight are effective antidotes to institutionalised corruption and should be applied here in large doses. If the government is serious about changing the predatory culture of banks then it needs to change the whole system of corporate governance. The market pressures for higher returns should be checked by turning all banks into mutuals and co-operatives. Employees, customers and borrowers have a long-term interest in the business of banks and should be empowered to elect and remunerate directors. Directors need to be made personally liable for the cost of criminal practices. At the moment banks are fined, but executives walk away with a stash of profit-related pay, with virtually no penalties. All major banking contracts should be publicly available so that we can all see the shady dealings.

The banking regulators have frequently come from the finance industry and are too close to banks. They act only after the stench of scandal has become too strong, and frequently they have been part of what a US senate report described as a "cover-up". This inertia should be checked through annual hearings by the Treasury committee. All policy meetings of the banking regulators should be held in the open, and information in the regulator's possession – including background papers – should be made publicly available.

The above is not a magic bullet for eradicating institutionalised corruption, but the beginning of reforms necessary to curb the worst excesses of an industry that has damaged the lives of millions of people.

This article first appeared on Comment is Free

Nude rambling, Barclays and moral hazard

In February this year, Leeds Magistrates Court fined Nigel Keer (pictured left) £315 for rambling through a popular beauty spot naked except for a backpack, boots and a baseball cap. (Read report here)

Why do I mention this case? And what on earth has it got to do with Barclays? (apart from an amusing link to 'moral hazard')

Well, the penalty handed down to Mr Keer for a minor public order offence (he provoked an onlooker to frown!) is tougher than the fine handed down to Barclays.


Barclays was handed a fine of £290 million on Wednesday for its role in conniving to fix the LIBOR rate (the interest rate used for inter-bank lending) as you may have seen (if not, a reasonable article here). 


So how is the £315 Mr Keer was fined more than the £290m Barclays fine ?


Well, the BBC's Paul Lewis tweeted this morning that Barclays fine was just ten days' profits for the banking behemoth.


So, assuming Mr Keer is an average earner, then his 10 day 'profit' (his disposable income after tax) is £205 - as the Telegraph reports that the average disposable income is £144 per week.


So there we have it, wandering scantily clad around the hills of the Leeds hinterland is worse than international banking fraud. 

A Tale of Two Frauds

In 2009, a Lancashire mother was found guilty of defrauding the state of £45,000. She claimed over £45,000 in housing benefit, council tax benefit and income support by not including her husband’s details on the claim forms.

She pleaded guilty and was jailed for 16 months.


A week ago, two men from Leeds were also found guilty of defrauding the state of £45,000. They made up false invoices and documents in order to make false VAT claims worth £45,000.

They pleaded guilty, but avoided jail. Instead they were given community sentences, and made to pay court costs.


What makes these cases interesting is that they were for exactly the same amount: £45,000 dishonestly defrauded from the state - and all defendants pleaded guilty to the charges. So why is it that benefit fraud is considered so much worse?

Why, when benefit fraud costs us £1.1 billion per year and tax evasion an estimated £70 billion, is so much more effort and opprobrium directed at benefit fraud?

Of course both crimes were wrong. But is someone who commits benefit fraud a danger to society - who needs to be locked away for over a year of their life? I don't think so.

It's the inevitable result of a society where successive governments and the tabloid media (step forward the Sun and Daily Mail) have whipped up hatred against those out of work. That prejudice is reflected in the sentences.

The same economic crime means very different time.

Jubilee nonsense from the IFS

I managed to avoid much of the Jubilee - and my strategically planned overnight break meant I was not in touching distance of a TV for the reportedly dull flotilla pageant or the queue of beknighted or wannabe-knighted pop stars serenading the billionaires of Buckingham.

One thing did catch my eye over the Jubilee weekend though: a report from the Institute for Fiscal Studies (IFS) 'Jubilees compared' - which compared 1977 (silver jubilee) with today (diamond jubilee).

This paragraph in particular raised my ire:

"We are of course much better off in this Diamond Jubilee year than we were back in the Silver Jubilee year of 1977. In the intervening 35 years, despite recent economic woes, household incomes have more than doubled. The work we do, the goods we own, how we spend our money, and how government spends our money, have changed almost beyond recognition."

It's utter bollocks! Here's just a few reasons why:

1. While incomes have doubled since 1977, some sizeable outgoings have more than doubled: housing costs in particular. In the 1970s the average house price was just under three and a half times the average wage; today it's over six times. Rental costs tell a similar story - back in 1977 about one-third of people lived in council housing and the private rental market was very small
2. (and housing costs are just one example, other outgoings like travel costs have increased massively too)
3. Incomes have not doubled in real terms for the majority. In fact, as the IFS itself points out, in 1977 the top 10% had an income worth three times someone in the bottom 10%. Today the top 10% have incomes four times the bottom 10%. And the figures are even more stark for the top 1% - who took home 3% of wages in 1977, but who now grab 9%
4. Twice as many people are unemployed today than in 1977 - if unemployment benefit had increased with average earnings since 1979 it would be over £110 per week today (instead it's £71)
5. There are more pensioners now than in 1977, but the basic state pension has decreased from 23% of average male earnings in 1977 to just 17% today

I'm not saying there haven't been technological changes or social advances that have made society better since 1977 - there have. However, we are a far less equal society now - and that matters (see Wilkinson & Pickett's Spirit Level).

The majority of working people have seen their incomes stagnate or fall - and that's predominantly because of this fact: in 1977 there were about 13 million trade union members in the UK workforce, today there are only half that.