UK Productivity in structural decline

Those were the final lines of a blog post on the structural productivity decline in the UK in the ‘Bank Underground’ blog.

Improving the economy’s supply potential is likely to require structural policies that are beyond their scope. [Link]

What follows is a comment I left on the blog post:

True, in theory. But, when monetary policy has one permanent foot on the accelerator (of liquidity) and keeps interest rates depressed, it is no longer feasible for monetary policymakers to argue that theirs is a cyclical aggregate demand management tool. Monetary policy has become a structural policy tool and monetary policymakers have also not pushed back on becoming or being the only game in town. Deep down, they welcomed it while they pretended to be wearing an uneasy crown.

Therefore, given theirs has become a structural policy tool for all practical purposes, they bear a large share of the blame for the structural decline in productivity.

In the United States, the share of zombie companies (firms that do not earn enough to service their debt) has risen to nearly a fifth of all companies in the last two decades [Link] – the period that has coincided with unprecedented monetary policy accommodation that has prevailed for most of those two decades.

The same must be true for the UK too and the Bank of England would do well to reflect on its role in the rise and perpetuation of zombie businesses in the UK and the structural decline in productivity in the country.

The paradoxes of liberalism

I am devouring John Gray. It will be stating the obvious to say that I am impressed. He makes me think and he makes me re-think and learn. Not much else can be asked of a writer/thinker/scholar.

In a piece written in October 2018, he dissects the contradictions in ‘liberalism’, in the context of the fact that university graduates voted for Jeremy Corbyn while John Stuart Mill, whom many invoke today as the torchbearer of classical liberalism, actually wanted a higher weight for the votes of university graduates!

So, with that backdrop, read the extracts below from this article [emphasis mine]:

The ironies here are multiple. If Labour had won, it would have presided over an eclipse of liberal values. Equipped with the resources of British state, the alt-Left party Corbyn has created would have been in a position to condone antisemitic racism and endorse terrorist movements. At the same time, the erosion of freedom of expression in universities would intensify. The progressive consensus would become immovably entrenched. Soon the contestation of received truths Mill celebrated would be barely a memory.

 At this point, a fork in Mill’s liberalism becomes visible. If only one set of values can be grounded in science, why allow others to be promoted in centres of learning? There can be little reason for giving anyone who rejects scientifically established truth equal freedom to speak or shape collective decisions. In effect, this was the rationale of Mill’s proposal for plural voting. But if those who base their values in a science of society are given overriding weight and influence, the result will be intellectual uniformity of the kind Mill attacked in On Liberty….

…The very idea that humans share a common historical destination is a remnant of monotheism. Reframing the universal clams of western religion, Mill’s secular liberalism – like his science of society – was not the result of any process of rational inquiry but an expression of faith.

Viewed historically, the liberal era was a moment in the aftermath of post-Reformation Christianity. If Europe had not been Christianised, it would most likely have been shaped by the polytheistic and mystery cults of the ancient world. Today it might resemble India. A universalistic, evangelising impulse would be weak or absent. Whether it would have been better or worse – or both – the West would not have produced political faiths like liberalism, that aim to project their values throughout the world.

Core liberal values, such as freedom of belief and expression, are by-products of early modern struggles within Christian monotheism. This fact could be passed over as long as successive versions of liberal values were underwritten by Western power. In Mill’s day they rested on European colonialism, and following the collapse of communism on the supposed triumph of free-market capitalism. The illusion persisted that the rise of liberalism revealed a universal law of human development.

In the event, a liberal world order has lasted only as long as Western hegemony. Today, non-Western powers are pursuing different paths of development, while much of the West has become the site of a paralysing culture war between hyper-liberal ideology and the forces of populism.

The time has passed when the West could dictate the terms of human development. Yet the delusion persists that the growth of wealth will give liberal values another lease on life. The sub-Marxian mantra that expanding middle classes will demand liberal freedoms as societies become richer is repeated endlessly in business gatherings and academic seminars….

.… Never mind that that middle-class graduates are demanding that liberal freedoms be shut down in the institutions that once embodied them. Best not dwell on such facts, for they suggest that a liberal world order was an historical accident that cannot be repeated. [Brilliant!]

… Anyone who looks to classical liberal thinkers to deliver the West from its present difficulties is fixated on an irretrievable past.

It is possible to envision a stoical and realist liberalism that would accept that freedom and toleration must survive in a hostile or indifferent world. Liberalism would be recognised to be a particular form of life, like the others that humans have fashioned and then destroyed, but still worth defending as a civilised way in which humans can live together.

In practice a stance of this kind is hardly possible. Liberals cannot do without the faith that they form the vanguard of an advancing way of life. The appeal of John Stuart Mill is that he allows them to preserve this self-image, while the liberal world continues to evaporate around them.

This is a near-perfect companion piece on post-truth liberalism by John Gray, published a month earlier in September 2018.

A suggestion to Wisconsin from the Middle Kingdom

H.R. McMaster was the national security adviser in the Trump administration. His forthcoming book is ‘The Battleground’. ‘The Atlantic’ carried excerpts from the book:

An extract from the excerpts:

There should no longer be any dispute concerning the need to defend against the multinational technology company Huawei and its role in China’s security apparatus. In 2019, a series of investigations revealed incontrovertible evidence of the grave national-security danger associated with a wide array of Huawei’s telecommunications equipment. Many Huawei workers are simultaneously employed by China’s Ministry of State Security and the intelligence arm of the People’s Liberation Army.

Huawei technicians have used intercepted cell data to help autocratic leaders in Africa spy on, locate, and silence political opponents. A priority area for multinational cooperation among free societies should be the development of infrastructure, particularly 5G communications, to form trusted networks that protect sensitive and proprietary data. [Link]

The article is a long one and it accords very well with Martin Pilbury’s ‘100-year marathon’.

This post is written by someone, presumably with a nom-de-plume. It is well written. It is an excellent complement to what McMaster had written.

The comment on Kissinger’s role with respect to China is a good reminder. The title of the article leaves no one in doubt as to what the content is.

For the sake of completeness, I must share the piece written by Kishore Mahbubani for ‘The Economist’. I do not agree with even a single word of it, perhaps.

Jamil Anderlini’s article in FT on the resolution that the Chinese consulate in Chicago had suggested to a senator in the Wisconsin State is a revelation. What is very educative is how it did not strike the Chinese Consul-General that such a request would not be construed as anything but bizarre. In other words, if one shut oneself off to any outside opinion or criticisms, one can really become thoroughly de-sensitised to how the rest of the world would view us. In other words, we could lose all moorings with reality.

It happens even with micro interactions. If we do not deliberately and actively seek criticisms and counter-perspectives, then we can set ourselves up for a rude shock which would come one day.

Back to China. The draft resolution itself could be found here. This is the final paragraph that the draft resolution proposed:

Now, therefore, be it resolved by the Wisconsin State Senate that

(1) it is the sense of the Wisconsin State Senate that…
(A) the State of Wisconsin stands in solidarity with the people of China who are hard hit by the novel coronavirus; and
(B) the State of Wisconsin will continue to support China in its effort to stop the spread of the epidemic; and
(2) the Wisconsin State Senate encourages the United States government to continue to follow the WHO recommendations and work together with the WHO and other countries toward the goal of preventing the virus from taking more lives.

No surprises that Europe too is finally getting the point. 

Senior Tory MPs, including Chris Pattern, the former and the last Governor of Hong Kong, too weigh in on the matter.

STCMA – 24th November 2019 edition

CNN has a long article on the travails of the pension system in The Netherlands in a world of zero to negative interest rates [Link]

Indonesia supposedly has an advantage in a world where fashions are disappearing fast (or changing fast?). I am not sure I understand this world, however:

The journey of an Adidas or Nike garment produced by Tuntex in Indonesia, for instance, can begin almost 4,000 km away in the company’s textile plant in Taiwan. The fabrics can take nearly a week to reach the sewing factories. The model worked well enough when retail stores dictated trends and operated in clearly delineated seasons. But when clothing retailers need to react to a sudden trend driven by Instagram, it creates a daunting barrier. [Link]

Simon Kuper lists eight things we could learn from beautiful minds. I like the list [Link]. Good read.

Brilliant article in ‘The Guardian’ (ht: my former student Arjun) on what home delivery mean to the world and what ‘last mile’ really means:

Progress today consists of having our food and materials wing their way to each of us individually; it is indexed to our immobility. ….

Implicit in this fixation with time is the thesis that the opportunity cost of regular shopping is too high – that the hours spent driving to the better bookstore in the next town can be spent doing something more valuable. …..

Of course, the principle of opportunity cost assumes that we will earn the value of that fee back in some way in those 12 minutes – whereas the truth is that we are most likely to squander them on Instagram. The internet promises us time, then takes it right back….

…. Online, each of us functions as a one-dimensional identity: as consumer or vendor, to consume or sell in our own bubbles, unaware of the other except as a clump of anonymised data. Even with free shipping, that is the transaction cost. …

The final triumph of home delivery will be when we forget that anything is being delivered at all. [Link]

This is similar to an article in New York Times that I had blogged on earlier, I think. The NYT article appeared in October. The story in ‘The Guardian’ appeared few days ago. My feeling is that the piece in ‘The Guardian’ is more effective. It forces reflection.

Good article in New York Times on whether reducing travel via airplanes does good things for the environment or not. I love such articles because they point out the flaws of lazy activism partly also based on ‘holier than thou’ attitudes. Remember Melisa Kwasny’s beautiful piece blogged here.

The relationship between the Czech Republic and China – good to see the changes happening. [Link]

Some very interesting recommendations for reading here.

Public Private Partnership or Patronage

My friends cum coauthors – Gulzar Natarajan and T.V. Somanathan have a joint piece – based on many of Gulzar’s readings on the situation in the UK – has many layers and nuances: from a very broad picture, ideological debate about capitalism, market economy vs. state-led growth to micro level skills in negotiating PPPs (assuming public interest is the goal or objective) and all the layers in between, it can be a good case study in economics class-rooms, public policy schools and in business schools too.

If so much debt had been built up and the monies paid out as dividends with very little real asset investment whereas the still-public Scottish Water has had a far stellar record of public service, then the question of whether the saving in terms of public deficit and deficit is really worth it, arises.

How do we even evaluate the efficacy? From the standpoint of the economy, what should be the yardstick to look at? Public debt or overall debt? Or, should one also take into account assets created with the debt?

Therefore, should good, old-fashioned financial ratios with respect to the balance sheets of corporations be deployed to evaluate whether the country is doing something right, but by reckoning these figures at the national level (including public and private sectors) rather than looking at them in isolation?

Is predatory capitalism – which is what many of the privatised utilities have practised – better than state-ownership?

Or, can it be tolerated if performance metrics in terms of provision of public services and public goods show ‘substantial’ improvement? How does one define them?

Should privatised services have different agreements between the Government and the new private owner than purely private-sector originating enterprises? – a bit like what the British government tried with China in respect of Hong Kong?

In other words, should the government continue to be co-owner of the delivery, hold itself jointly accountable and, consequently, incorporate the accountability parameters in the PPP agreement?

In the light of their piece, this edit should be of interest.

More broadly, I wonder, particularly in the case of the UK, whether the ‘ripping off’ of the public by the privatised utilities and railroads is part of the same phenomenon that had seen the big four audit firms in a big credibility crisis. I have not followed the story closely except to read the headlines. The FT has to be commended on their meticulous coverage of the crisis with audit firms in the UK.

But, without independent and verifiable and reliable accounts and their certification, arms-length capitalism has no future. Arms-around or crony capitalism has limitations. Socialism is tried, tested and failed. The world is staring down the barrel, in my view.

Thus, in global economic and political leadership, the world is confronting a big vacuum.

The ‘Enlightened’ West

Now, of course, all the 12 disciples, like Jesus himself, were Jews – yet, as this new exhibition shows, it was Judas who western art chose to depict as the Jew, often with the red hair that marked him out as a betrayer, alongside his mysteriously fair-haired, fair-skinned fellow apostles. The power of the Judas story lives on: Judas a byword for traitor, the word Jew and Judas almost indistinguishable in several languages, including German. [Link]

I am glad that this article appeared in ‘The Guardian’ (ht: Rohit Rajendran). The important thing to note for readers is how optics is used to influence us and manipulate us, without us being conscious of it – Judas with red hair and other jews are ‘fair-haired’ and ‘fair-skinned’!

So much for Western openness, tolerance, reason, racial harmony vs. Eastern (Indian) prejudice, intolerance, bigotry and untouchability, casteism, etc.

Macron bubble and protest vote in Spain

Recent French protests at the Fuel tax has multiple dimensions:

France is a high-tax country; but the question is whom does government provide relief – Macron reduced wealth tax earlier; fuel tax affects all; it is also a climate change issue; the vandalism that the protesters engaged in, targeted affluent communities, cafes and boutiques. Macron’s approval rating is one-fifth. 

Gideon Rachman on the Macron bubble that has burst. A rare piece of candour and correct opinion.

Much to reflect on the global angst and anger, manifested in the protests in France and protest vote in Spain.

Recently, Wall Street Journal has gloated that Thomas Piketty’s work on inequality has been discredited by recent research from the American Institute of Economic Research. May be, they are right. I have not seen their work. But, that makes the global angst and anger an even bigger puzzle. What is the motivation?
Wolfgang Muenchau on how the broken plane that led Merkel to catch an Iberian Air flight to go to Buenos Aires for the G-20 summit meeting is an apt metaphor for Europe. I agree with him. [Link]

A lumpy error by Tim Harford

By lumping Fed, BoE and RBI in one article, Tim Harford missed out the nuances. Trump’s sniping at the Federal Reserve is unfortunate. America needs a return to normal monetary policy because ultra-accommodative policies have created a lot of imbalances – social and economic. Asset price bubbles are back in many asset classes if not in real estate. Excessive leverage caused the problems in 2008 and leverage ratios are higher now. Eight years of near-zero interest rates and bond buying might have hidden risks in places that would be revealed only later. Therefore, normalisation of monetary policy in America is long overdue. Trump is wrong.

The Bank of England (BoE) inserting itself into the debate on Brexit has been ‘condemned‘ by Mervyn King himself, a long-standing former BoE Governor. Well, he was ‘saddened’. BoE eased pre-emptively in 2016 but the worst macro-economic consequences of Brexit have not materialised.

In India, the story is different. The Reserve Bank of India (RBI) is a creation of Parliament. It is not an independent organ of governance established by the Constitution of India. In the Westminster system of governance India has adopted, institutions created by Acts of Parliament are answerable to the Parliament through the Executive. The Ministry of Finance is answerable and accountable to the Parliament for RBI’s performance. Therefore, the MoF must have authority too, over RBI.

It had ceded the monetary policy function to a committee constituted by RBI and the Government together. The Government has signed an agreement with RBI for inflation targeting and hence the committee is responsible for setting the interest rate. The Government is not commanding the RBI to cut interest rates or intervening in this function. The previous Finance Minister in the previous government did so. He once directed the government-owned banks not to raise their interest rates when the central bank raised rates. That is blatant interference with the transmission mechanism of monetary policy.

The present Government had not acted to curb any institution that has been set up independent of the Executive, by the Constitution. Hence, the question of eorsion of institutional independence does not arise. Nor has it interfered with the monetary policy mandate of RBI which it has ceded to the central bank. One can argue on whether the central bank has excessive capital and whether there is a macroeconomic need for additional liquidity support by the central bank, etc. but the charge of ‘sniping’ is weakly founded.

Further, those who bat for central bank autonomy (independence is illusory except in the case of the Bundesbank and now the European Central Bank) should also bat for central bank accountability. In the West, central banks must be held accountable for their role in the rise of political and economic polarisation (wealth and income inequality and concentration of market power). Arguably, the former is the consequence of the latter.

In India, RBI must be held accountable for its failure to detect and take timely action on the rise of bad debts, on its monitoring of banks’ risk and compliance management systems with respect to frauds and on its regulation of non-banking finance corporations. With respect to monetary policy too, there is a reasonable case that it has been guilty of a doctrinaire approach to inflation-targeting. So, there is really no need to shed too much tears for the exit of the previous RBI Governor.

John Authers

I used to read Jason Zweig regularly. I have slipped now. Have not kept up with him lately. But, I do read John Authers. He is probably the most thoughtful market commentator writing currently. He was with Financial Times and he has moved to Bloomberg.

Without exception, his columns make you think. In more recent times, I will single out two pieces:

(1) ‘Don’t discount China’s role in the stock sell-off’. He is arguing that China’s economic weakness could be one underlying factor. Perhaps, he might have contradicted himself in the following piece where he writes about investors looking for ‘excuses’. He too might be looking for ‘excuses’ when he attributes a market move of a single day to a larger issue. There is a difference between catalysts and reasons. The reason for market crash: they are too expensive. They just cannot levitate at these levels. Expectations have gotten far ahead of reality. Period. No other reason needed. Everything else is a catalyst for this cause to create the effects.

In any case, I was more impressed with his analysis of Brexit.  He is absolutely right that ‘remainers’ cannot put the genie back into the bottle. He does not say it in so many words but things can never go back to being the same, even if a second referendum were held and it results in ‘Remain’ vote winning this time:

A second referendum seems more likely than it did. A lot has happened in the last two years, and much has been learnt. It seems reasonable to put the question again. But there is a real risk that this would result in a deeper nightmare scenario.

A second referendum might be as close as the first. A narrow victory for “Remain” would leave the country in the EU and almost half of the country with a lasting sense of injustice. A repeat of the first result would leave the country no further forward. Uncertainty would rise during the process. If the polls suggested that the country had now overwhelmingly turned in favor of staying in the EU, this calculation would be different, but there is no such evidence. [Link]

This reminds me of something that I tend to forget: sometimes, we cannot reverse certain decisions, even if we technically reverse them. Once the objective conditions have changed for good, it is impossible to restore them. So, some policy decisions cannot be reversed, even if we are open-minded about evidence and are prepared to swallow pride and reverse them. That puts the onus on getting it right the first time and also teaches us to be humble about unintended consequences and uncertainty in general.

While on the topic of Brexit, you should read Mervyn King’s op.-ed. too on the topic. He asks the UK Parliament not to endorse the deal (or, no-deal) that the British PM has arrived at. He says it is a ‘heads I lose; tails you win’ deal that UK has given the EU. It is a bit hard to sympathise with the plight of the Brits. I am reading ‘The Indian summer: the secret history of the end of an empire’. What one learns makes it hard to feel sympathetic for their travails now.

Apart from that, Mervyn King states publicly what we all know about the European Economic and Monetary Union:

the political nature of the EU has changed since monetary union. The EU failed to recognize that the euro would demand fiscal and political integration if it was to succeed, and that countries outside the euro area would require a different kind of EU membership. It was inevitable, therefore, that, sooner or later, Britain would decide to withdraw from a political project in which it had little interest apart from the shared desire for free trade. [Link]

(2) The second recent John Authers’ piece that I liked is the one titled, ‘Behind the Market Turmoil Lies Nothing But Excuses’. These conclusions are valid:

My best guess is that people were in need of an excuse to buy bonds Monday, catching others in a “short squeeze,” as many had been betting on higher bond yields. Plenty of others wanted to escape the stock market with gains while they could, and that carried on until prices had fallen enough to trigger the algorithms to buy stocks.

After years of central bank quantitative easing, there are lots of positions in markets that make little sense. Their holders have been awaiting for excuses to unload them. Keep tuned to see whether there really are convincing reasons to buy bonds or stocks. This week has been a litany of excuses. [Link]

Searching for fundamental reasons for market action is futile, especially for a market that has been rising for so long on the back of enormous leverage-based stock buyback aided by extraordinary global monetary accommodation. It simply had to end.

The hilarious paragraph of the year

Earlier this year, HMRC was embarrassed when it emerged that it had refused to assist a French investigation into suspected money-laundering and tax fraud by the UK telecoms giant Lycamobile, citing the fact that the company was the “biggest corporate donor to the Conservative Party”.

HMRC initially denied the Lycamobile story, saying: “This is the United Kingdom for God’s sake, not some Third World banana republic where the organs of state are in hock to some sort of kleptocracy.” It later conceded that the story was accurate. [Link]