Sunday, 18 May 2008

The Age of Growth

"Economic advance is not the same thing as human progress."
Sir John Harold Clapham (1873- 1946)

In the UK and all over the world in the past ten years, we have witnessed sustained economic growth, in which we are continually told by our leaders benefits us all and leads to increased prosperity. GDP, Gross Domestic Product, is a measure economists use to determine the total value of goods and services in an economy. It's a measure of how much monetary value our country produces. The UK economy has been growing consistently for quite some time now. However does all this growth really benefit us all as the economists and politicians would have us believe, and is it right just to look at this statistic.

GDP measures all economic activity, regardless of whether it actually benefited society. Take for example if an economy has expanded over a few years, and a person has been keeping hold of a plot of land. The value of the land may have doubled in those few years and the owner may decide to cash in and sell the land - this figure would appear in GDP. But what has happened here? Nothing. It's the same plot of land that has not changed in any form. Yet that is deemed to have benefited and grown the economy. Just like when we increase the police budget due to rising crime. This doesn't really benefit society, as it shows there are rising social problems that in turn have to have more money spent on in order to contain them, however it is still termed as growth.

Recently a lot of the GDP growth has been down to the astronomical levels of debt our society is in. People have bought new homes, new kitchens, gone on expensive cruises, bought flash new cars, gone on shopping binges etc. Now when you look at all the above, they are all consumables and are included in economic growth, but have any of the above actually improved our lives? GDP is a metric, in essence, that wants you to spend more, consume more by using more resources, buying things we don't need or don't necessarily use. How many of us have goods we never use? We are an overspent society in which we buy things we don't need. It has become so easy to borrow and spend that has fueled this wasteful consumption rather than having a more balanced approach and saving to invest in long term beneficial growth. Robert Kennedy gives a good account of the misgivings of GDP growth in a speech he made, and how we have all become subservient to the metric.

Our economy has grown strongly however we have seen more depression among our youth, increased violent crime and more relative poverty. So much for 'growth' being the answer to vastly improve our living standards. It's by far the most misleading statistic abused by our government to claim they are improving our lives.

Wages can be seen as a good indicator of the quality of peoples lives and the productive capabilities of an economy. If they increase we can live more comfortable, if they go down then we live more on the margin and have less money to save. Average wages are around 24-25K a year. However this is a measure of the mean value, add up every ones wage across the country and divide by the number of people. These are the statistics the government use. However the rich are getting richer and earn more and more. These skew the mean and give a false picture of the 'average' wage. Take for example six people who earn the below:

Six Peoples Earnings
10,000, 15,000, 22,000, 27,000, 36,000, 500,000

The value at the end is the high earner, who skews actual earnings of the majority of people. If you calculate the mean value of the above you get:

(10,000 + 15,000 + 22,000 + 27,000 + 36,000 + 500,000) / 6 = £101, 666.66

What would happen if we take the median of these values as most people earn in the region of 20,0000. Well the median is the middle value so that would mean an average wage of:

Median £22, 000

As can be seen from the above figures there is a considerable difference. The above example is a bit extreme as there is such a small sample, however it illustrates the point. Unsurprisingly our government use the mean figure, however a more accurate way of determining average wages would indeed be the median, as the majority of the population earn roughly the same amount of money and this would provide a more accurate picture towards earnings. With the rich getting richer over the past decade I suspect that people are in fact earning less than what is reported by the statistics and told to the public. I have worked with people who have not had pay rises for 4-5 years. And the public sector think they have it bad.

This static wages issue listed above has not been a huge issue in recent years due to the deflationary world that we now live in. The China effect, coupled with the ending of the Cold War and advancements in technology, in particular the Internet, have made goods and services cheaper. This has hidden the stagnation of peoples wages as workers have seen their purchasing power increase even if their paycheck hasn't. This is now beginning to turn as commodities climb higher. UK Inflation is now at 3% and expected to rise further making a mockery of the governments claims earlier in the year of low inflation and that we could afford to cut rates. Reality is, for the short term the MPC have to keep an eye on this situation and ensure the commodity inflation does not feed through to other areas of the economy. Electronic goods may well still be getting cheaper but for how long? Wage demands are going up in Asia and for the medium term these goods will increase in price, especially if Asians develop a taste for consumerism.

Regarding commodity prices, who knows how high they will get. All I do know is that our use of fuel and food has not weakened. In fact with countries like China consuming and growing more, it has led to further demand in essentially finite resources. There are people who believe we have reached "peak" oil. Essentially the theory runs that supply has now reached its peak, however demand is still growing. It is best explained with the illustration of a graph. The graph below shows the production of oil in the north sea.

As can be seen we have passed the peak production point, yet we are using more oil and demand increases at an exponential rate - due to growth. In effect the remaining oil is depleted at an even faster rate, chasing the graph down. Now imagine, the worlds combined oil supplies had reached peak as above? Where would more oil come from to feed the demand, and what happens when a product is in demand, but there is a shortage of it? Essentially the price goes up to a point to curtail demand. If the above situation is true then Oil at $120 plus will look very cheap indeed. With global economies so reliant on fossil fuels this would show up as extreme price rises in the commodity and countries would in effect grind to a halt. However I'm not sure about peak oil. If Oil keeps rising in price, people just won't use it. It's not like food or water. I for one would just work from home more, commuting less into work, or take public transport. Also due to the high price of Oil, more investment will come from people to find more. But there is usually a lag in this so Oil may rise quite a bit more in the short term. One day we will run out, and it will be in my lifetime.

This is what happens when you worship growth with more countries concentrating on growing. In the end the demand on the worlds resources is unsustainable unless we learn to slow consumption and develop new ways to fuel our energy needs. There is a good video to watch on youtube about growth. Its an eight part video, however I would highly recommend you watch it all as it describes the problems we will face.

The only commodity that is falling in price is of course land. As the economy shrinks so the value of land goes down. As I have already explained in a previous post the house price rises we have seen recently are not for the actual house, but for the land they sit on (see graph below).

Classical economists such as Adam Smith always said land prices would rise as there is only a fixed amount of land for a growing economy, that increases in wealth. This is also a factor that skews the growth figures as people inevitably speculate on land prices. An interesting point about land has been put forward by Fred Harrison, who uses the works of classical economist, David Ricardo, to explain how land enriches the wealthy or "free riders", and therefore there will always be relative poverty unless the issue of land is tackled. We should tax land by its value, thus distributing wealth through society and leading to a much fairer and efficient economy thus getting rid of regressive taxes such as VAT, council tax, NI and income tax. I strongly recommend you watch this video as it explains the whole scheme. A true eye opener if you are not aware of this and another of capitalism's dark secrets. Fred Harrison predicted the housing crash of 1990 and warned then chancellor Nigel Lawson in the mid 80's when it would occur and warned Gordon Brown in 1997 that the next crash that would begin 2008 so his ideas should not be dismissed. He calls a depression in 2010.

Growth is predicted to fall significantly this year in the UK, but is this as bad as the media and economists would have us believe? People will loose their jobs, homes and purchasing power will be reduced significantly due to the credit contraction that is taking place. However we will consume less pointless consumable goods that are made from the earths resources. Over the past decade we have been incredibly wasteful. Spend, Consume, Conform, Buy, the ugly side of the thatcher reforms during the 80's. Wouldn't a better philosophy be to save a little, invest, reuse and to challenge convention. This is what previous generations did. Ironically GDP growth grew faster back then. That's because our previous generations produced goods and created wealth. From 1965-1970 GDP increased by around 43%, however 2000-2005 GDP only increased by 25% even with an explosion of cheap money and lots of credit. As mentioned in a previous post, western economies are struggling to continually grow their economies exponentially.

So how should we measure our economies prosperity if not the growth? We need more specific measurements. Important measurements like happiness are hard to measure and metrics and statistics can always be misleading and used inappropriately. The current economic measure quite clearly doesn't work however. It doesn't matter how large you make the state and the welfare reforms that you put in place or how much you grow the economy by, the inequality gap just increases as New Labours "Third Way" politics has proved. That's why a logical way for taxation, as Fred Harrison states, is to tax land. That way enterprise is taxed less, people are taxed less relating to their incomes. If the rich wish to live in nice areas then they have to pay for the privilege. The current tax system lets them get capital gains in land values and they unusually manipulate the tax system to avoid tax on their income. If you tax land, they can't get away from that tax. Everyone gains and more opportunities are given to everyone creating a more efficient and meritocratic system.

The Green party are the only political party in the UK that would use this taxation system on land and the only party that consistently believed in sustainable renewable energy. Mainstream politics has hijacked the green agenda recently as it has become another middle England fad. Its just become another designer consumable good. People are more worried about global warming than the real issue of depleting our planet resources. Regarding climate change I would be more concerned about the fact our planet warms and cools on its own accords - remember Britain at one time used to be a tropical rain forest and went through the Ice Age.

People always dismiss the Green Party as a bunch of hippies that don't get jobs within society. But have a look at their values. I would also have a set of values similar to their own. Contrast this with the Labour party values who we have voted in for the past 3 general elections. Bear in mind that they have been in charge for the past 11 years so really have had plenty of time to make the changes they say they stand for.

Social justice
Have we seen any real progress on this front? The divisions in society have increased in my opinion.

Strong community and strong values
Prescott's pathfinder housing plan is a good example of how Labour values communities. Demolishing old homes for the sake of companies profits in order to increase land values for people who already have too much money.

Reward for hard work
Our financial sector has done well on this front with record bonuses. Of course all that hard work they did in the past decade has all come undone and the general public now have to pick up the pieces after Labour let the city get out of control.


Rights matched by responsibilities

I won't even bother with the last two points as they are not really specific values. Within the current century we will have to assess the way we view our societies prosperity. Growth is not always as good as it may seem and usually within Capitalism only benefits the few.

"Growth for the sake of growth is the ideology of the cancer cell."
Edward Abbey

Wednesday, 7 May 2008

When I'm 65 or will that be 67 or 70?

“The trouble with retirement is that you never get a day off.”

Abe Lemons (American basketball college Coach. 1922-2002)

At the turn of the 20th Century Lloyd George, then Chancellor of the Exchequer, introduced the first state pension. Before this people had to either work in old age or rely on their children to support them. This was during a time when the Liberal party were in government and many social changes were introduced to try and provide more equality in society. The state pension has remained since, with a few changes along the way. However the system that was introduced around 100 years ago has become a ticking time bomb in most Western Economies. With people living longer due to advances in medicine, and declining birth rates this is probably the most understated issue that we will all face over the next 15-20 years.

For an economy it is vital to have sufficient numbers of working people. After all these are the people who produce the goods and the trade that provides wealth within the economy. These people pay the taxes that provide money to hospitals, schools and other important services that we all take for granted. Economies can cope with reasonable numbers of people not in productive work, but if some population demographic was to radically change over the next couple of decades, say there was a lower ratio of working people compared with the total population, then what would happen? Obviously less goods would be produced, thus less trade thus less wealth in society. Also the wealth created within society would be used more as a proportion for less productive aspects to support this new aging population. More health costs, as ever increasing medical treatments are developed, more money to support the older members of society. So how is the above going to happen?

Well for one, we are all living longer - that is common knowledge. To die before 65 these days is considered a young death. This means people claim their pension longer, thus are a burden on society longer. The baby boomer generation - people born through the late 40's up till the 60's. All these people are due to retire over the next couple of decades and they make up a significant number of the population. They also represent a large number of currently employed experienced positions within industry. The next demographic band is simply not large enough to replace them all which will further drive up wage demands for certain jobs and lead to lower production for the money paid. We have a declining birth rate, with younger people choosing to have children later in life, also having fewer due to the associated costs (a perception of our society - we have plenty of money for food and clothing - its modern ipod and mobile phone youth culture - materialistic goods that are not required in raising a child) or "career" choices. Younger people are also choosing to stay in eduction longer thus many are not starting work until well into their twenties rather than their teens (although we do need as a society a band of educated people - maybe not as many as we currently produce). In recent years we have witnessed many families where both parents now work. This has supported GDP growth in recent years but its a short term one time boost. Our working population can't increase over night. This is why the government has been so welcoming to immigrants. Without them over the coming decades our economy would probably fall apart.

With all the above its no wonder the government has decided the retirement age needs to rise over the coming decades. What does the above mean then. Quite simply we are going to have to work longer with the age eligible for the benefit raising all the time. If you think the state pension is going to improve, forget about it. It's low for a reason and it will only go lower in relative terms. The alternative to the above is that we raise taxes to prop up the existing system. This will put even more burden on the working population and take out more money that could be used to drive the economy (either in savings or consumption). In the future there will be more taxes, as more people retire the taxation pool will shrink. My advice is if you haven't got a private pension then start one up. The sooner the better (read about the power of compounding to see why - Einstein even marvelled at it's power). And when I say pension I mean a liquid diversified pension, not the latest fad which is buy to let portfolios in property. It's simply too illiquid and not diversified. Investors don't lock up all their money in a single sector, in illiquid investments, they move money around quickly and grasp opportunities.

Why not property? Well for one we have just witnessed the biggest boom in property over the past ten years and the only way is down - for a long time. All the above I have mentioned will put our economy under considerable strain. We have had a decade of pretty sluggish growth, 3-4% tops. Many western economies over the past decade have been struggling to keep their economies growing even though we have created huge amounts of debt. We have reached a point I feel where this can only get worse. The UK may well have seen the peak in property for a long time. George Soros even states the end of the Leveraged boom by stating the western economies have reached saturation point. Credit isn't going to get cheaper in the long term. We have just had the biggest credit binges in history along with historically low interest rates. Therefore for house prices to continue to rise GDP would have to rise, but as I have mentioned this is looking very doubtful. How can an economy become more productive when there are less workers? Unless we invent an army of robots to drive productivity however this is very unlikely in the medium term future. You need to think of GDP growth as exponential growth. Its not linear as people commonly think it is. If the economy grows 3% per year it grows from a start of 100% to 103%, then to 106.09% to 109.2727% - it compounds year to year, ever increasing. Once you understand this then you realise it becomes very difficult to keep growing exponentially forever. In fact unsustainable and impossible as there are only finite resources on our planet especially as more of the worlds wealth increases.

What is also going to be a future problem that will put further pressure on our economy in the future is the growth of Asia. What happens when their economies grow using up more and more natural resources? We only have one planet with finite resources, yet we grow our economies exponentially. Recently the price of food, oil etc have been on the rise. In the future we will have to pay more and more for these commodities, eroding more of our disposable income, while our economy struggles to grow. The days of cheap food prices have gone. We have had science alter our agriculture technique (GM crops etc) but there is only so far technology can take you. With the above it is no wonder I am pessimistic over the price of housing. The UK property market has probably reached a peak for at least the next 10 years, however it could be a couple of decades. Your income will be diverted more to commodity goods rather than mortgage or rental payments. Just as recently when food and clothes have been cheap relative to the historic trend, this meant people had more disposable income to service debt. This will go into reverse over the coming decades.

Sure the commodity bull market may downturn in the short term and China and fellow Asian countries will have a bad recession maybe a depression sometime over the next couple of years but for the long term all the above will hold. China is set up for the long term to grow more and more, and at the current rate will be the largest economy in the world within a couple of decades. Its the sheer manpower that is powering the growth and strain on the worlds resources. This will put further strain on the worlds resources. There has been massive investment in the infrastructure in China, which is far superior to ours, making it a more appealing economy to invest in.

Its not just working power you need to grow an economy. It also requires capital (money) for investments in the economy. However as the population ages, older people become more conservative in their investments as they have a more short term view. Young people are prepared to take risks as they can afford to place savings and pension funds into higher risk, higher return investments. But what will happen when more of our population ages and choose to shun these risky investments. Quite simply more innovative but risky business can not start up as the capital is not there. This could be a real problem for the economy creating further drag. Especially if people carry on living as we are now - with record low savings. Although the de-leveraging process has recently begun so cash is again king.

I think the most interesting comment I heard recently was from the Governor of the bank of England. People say he is too much of an academic but he generally talks sense. He is saying too many of our nations talented youngsters over the past number of years have been looking at the financial sector for a job rather than productive sectors of of the economy. This trend has to be reversed and we need to reduce our reliance in finance. If we are to keep supporting the ever aging population we need to be more productive and invest in technologies that improve production. If not, then our economy will stagnate for decades. The quote at the start of the article may become true for my generation - maybe we will never be able to afford to retire, unless we all save more.