How to fix the UK economy

 

Photo by Alexander Grey on unsplash.com

Will Hutton seems to have a clear idea of what needs to be done with Britain. He has written his own book (Britain after Brexit, This Time No Mistakes), and as if this wasn’t enough, in a review of two titles addressing the same problem (Great Britain? How we get our future back, by Torsten Bell, and Left Behind, A new economics for neglected places, by Paul Collier), he made several specific recommendations for getting the UK economy to grow. I’m no expert in analysing the problems of the UK economy, but it’s interesting to see what others recommend. And, in all modesty, perhaps I can add a personal angle to the conversation.

Should we worry about the UK declining?

The first assumption seemed to be that the UK needed fixing. I was struck on a holiday to rural Portugal how wealthy that country had been to create so many lovely buildings (up to around 1800, as far as I could see) and yet how poor it was when we visited (this must have been around 2010 – things have no doubt changed now). If a colonial empire was really so lucrative, was there any alternative to economic decline once the colonies became independent?

What does nationalism have to do with it?

I was struck by the way all commentators agonized about how to improve the UK economy. Does it matter? There has been much talk in government circles about encouraging pension savers to invest in UK companies, something that seems to have gone completely out of fashion. But why should anyone invest in UK shares if the performance of the UK economy is so dire, compared to the USA? I read somewhere a figure of just 4% of UK pensioni funds invest in UK stocks, and I was surprised – until I read that Canadian pension funds have an even lower proportion of investment in their own country.

But let’s see the specific recommendations first to bring British economy back to life. I’ve based it on Hutton’s review of the two books, which usefully summarizes the main arguments.

Will Hutton seems to have a clear idea of what needs to be done with Britain. He has written his own book (Britain after Brexit, This Time No Mistakes), and as if this wasn’t enough, in a review of two titles addressing the same problem (Great Britain? How we get our future back, by Torsten Bell, and Left Behind, A new economics for neglected places, by Paul Collier), he made several specific recommendations for getting the UK economy to grow. I’m no expert in analysing the problems of the UK economy, but it’s interesting to see what others recommend. And, in all modesty, perhaps I can add a personal angle to the conversation.

Should we worry about the UK declining?

The first assumption seemed to be that the UK needed fixing. I was struck on a holiday to rural Portugal how wealthy that country had been to create so many lovely buildings (up to around 1800, as far as I could see) and yet how poor it was when we visited (this must have been around 2010 – things have no doubt changed now). If a colonial empire was really so lucrative, was there any alternative to economic decline once the colonies became independent?

What does nationalism have to do with it?

I was struck by the way all commentators agonized about how to improve the UK economy. Does it matter? There has been much talk in government circles about encouraging pension savers to invest in UK companies, something that seems to have gone completely out of fashion. But why should anyone invest in UK shares if the performance of the UK economy is so dire, compared to the USA? I read somewhere a figure of just 4% of UK pensioni funds invest in UK stocks, and I was surprised – until I read that Canadian pension funds have an even lower proportion of investment in their own country.

But let’s see the specific recommendations first to bring British economy back to life. I’ve based it on Hutton’s review of the two books, which usefully summarizes the main arguments.

Will Hutton seems to have a clear idea of what needs to be done with Britain. He has written his own book (Britain after Brexit, This Time No Mistakes), and as if this wasn’t enough, in a review of two titles addressing the same problem (Great Britain? How we get our future back, by Torsten Bell, and Left Behind, A new economics for neglected places, by Paul Collier), he made several specific recommendations for getting the UK economy to grow. I’m no expert in analysing the problems of the UK economy, but it’s interesting to see what others recommend. And, in all modesty, perhaps I can add a personal angle to the conversation.

Should we worry about the UK declining?

The first assumption seemed to be that the UK needed fixing. I was struck on a holiday to rural Portugal how wealthy that country had been to create so many lovely buildings (up to around 1800, as far as I could see) and yet how poor it was when we visited (this must have been around 2010 – things have no doubt changed now). If a colonial empire was really so lucrative, was there any alternative to economic decline once the colonies became independent?

What does nationalism have to do with it?

I was struck by the way all commentators agonized about how to improve the UK economy. Does it matter? There has been much talk in government circles about encouraging pension savers to invest in UK companies, something that seems to have gone completely out of fashion. But why should anyone invest in UK shares if the performance of the UK economy is so dire, compared to the USA? I read somewhere a figure of just 4% of UK pensioni funds invest in UK stocks, and I was surprised – until I read that Canadian pension funds have an even lower proportion of investment in their own country.

But let’s see the specific recommendations first to bring British economy back to life. I’ve based it on Hutton’s review of the two books, which usefully summarizes the main arguments.

First, the government must lead as a “public investor … so that it supports private investment”. That is easier said than done. Successive governments have tried public-private partnerships, usually with disastrous results. The present government is showing itself unwilling to take responsibility, for example, with the water industry, leaving it in private hands.

“Economic dynamism is linked … to socially cohesive societies”(these are Hutton’s words, although he is paraphrasing Torsten Bell).

 It doesn’t look like that in the US, with huge variations in income but vast wealth creation for some.

We need a regional policy to redistribute wealth. Easier said than done; I was in Boston, Lincolnshire, and I’m not sure what expenditure could change things.

“Destructive privatization has run riot” – “we need to change the fiscal rules so the government can borrow for investment”. Agreed, but the current government is not placing big enough investment in place.

Raising taxes, including council tax reform, increased capital gains tax, taxing electric vehicles. Unfortunately, the new government has already demonstrated that relatively small changes are greeted with screams of woe from the wealthy.

British companies must invest more, and they must invest in longer-term projects, not just for results in the short term. Great idea, but impossible to regulate by government.

Share ownership in UK companies should include a critical mass of influential owners, who can sustain the long-term strategy of companies. My reading of any investment is that sensible investors are in the minority. The majority are looking for a quick win, without any relationship to actually building the economy.  

Pension funds should be consolidated, so they can make some more risky investments safely. I’m not sure I am convinced by this argument. Pensions are not risky investments, for the most part, even without being consolidated.

More generally, he write about “contributive justice”, the idea that citizens contribute to a common purpose. Now, at the level of a residents’ association, there is plenty of scope to provide this kind of beneficial activity. But how can I contribute to the success of the town where I live? It looks to me as though this has already been established by central government bypassing local authorities, by setting up bodes that are not directly accountable to the electorate, but which benefit from central allocation of funds – the local example is the Greater Cambridge Partnership.

Does it fall within contributive justice to invest in UK stocks? Should I express my patriotism by restricting myself to a lower pension? This hardly seems a sensible option, either for an individual, or for a pension provider.

All in all, the views of the analysts and critics don’t appear to be stress-tested against the real world, where if you make the slightest increase in fuel duty, you are confronted by mass demonstrations that bring the country to a halt. There is no justice in this, but there is mob rule that you cannot ignore. So my fear is that nothing much will happen with all the above, and in the meantime, the rich continue to find out way of staying rich and getting richer – without any redistribution of wealth.

'The dubious appeal of ESG investing is for dupes only'

Some months ago I took a deep breath and moved my pension from a traditional pension provider into an investment fund. I wouldn’t call myself a skilled investor. I didn’t look very hard at the options, but before choosing which fund to put my money in, I did glance at the biggest investments within each of the available funds to see what where the money was going. I was shocked when the first fund I looked at had for its largest single investment British American Tobacco. I couldn’t believe it. Instead, I chose an ESG (ethical, social, and governance) fund, that invests only in companies with these goals. Was I wrong? According to the FT, I am “a dupe”. 

In an opinion piece in the FT, 24 August 2020, entitled “The dubious appeal of ESG investing is for dupes only”, Robert Armstrong gives some reasons for rejecting ESG investing. In so doing, he reveals some of the values at the core of the Financial Times.

 Why not invest in ESG funds? Because, according to Mr Armstrong:

1. They do not provide “adequate” returns
2. They provide cosmetic, rather than real change
3. Behind ESG and stakeholderism lies a dangerous idea: Shareholders’ economic interests and the social good always harmonise over the long run.

Armstrong’s argument is that since economic interests and social good do not always harmonise, there is no point in seeking for them ever to harmonise.

First, let's confirm the terminology. “Stakeholderism”, also referred to in the article as “stakeholder capitalism”, is defined in Investopedia as follows:

Stakeholder capitalism is a system in which corporations are oriented to serve the interests of all their stakeholders. ... Supporters of stakeholder capitalism believe that serving the interests of all stakeholders, as opposed to only shareholders, is essential to the long-term success and health of any business. 

Mr Armstrong has a PhD in philosophy, so you would expect him to know how to argue a point. He is also chief editorial writer, so you can assume he offers a fairly standard FT approach. Here he argues that companies ultimately make decisions for shareholders, not stakeholders, and this commits them to making short-term policies. As he memorably states:

 it is obvious that shareholders’ and stakeholders’ interests can conflict. If they did not, there would be far fewer lay-offs announced and far fewer oil wells drilled.

For some perhaps unconscious reason he describes drilling an oil well as a necessary short-term activity for a company. I know it is a common phrase, used without thinking, but drilling an oil well is the very thing that investors in ESG companies hope will not happen. We don’t drill oil wells any more, Mr Armstrong. I would suggest the goals of ESG investors (certainly my goals) are as follows. I want companies to carry out their activities for the long term. I mean by that a sustainable activity, not one that results in the destruction of the planet (the example of Rio Tinto destroying a 46,000-year-old Aboriginal cave in Australia to expand their iron ore mine springs to mind). Perhaps Mr Armstrong regards that destruction as an understandable and necessary short-term activity that companies will do.

In any case, he states, we have “democratic action and the rule of law” to fall back on, in case companies misbehave. Although nobody lost their job at Rio Tinto after this environmental disaster, so perhaps there is no law against destroying cultural heritage. In any case, the law is usually a few years behind the latest commercial practices. Perhaps that explains why the FT regularly reports on the activities of tobacco companies and praises them when their profits increase – see, for example, “BAT beats profit forecasts as US stimulus bolsters sales” (30 July 2020). The “US stimulus” they refer to is government unemployment support during the coronavirus pandemic, which “has meant smokers have not been forced to switch to cheaper brands, smoke less or quit”. Perhaps if you follow Mr Armstrong’s principles, than companies like BAT should carry on doing what they do, and continue being one of the biggest dividend payers in the FTSE 100. You would be a dupe to think otherwise. 

Postscript: about a week later, the Chief Executive of Rio Tinto was sacked.