The U.K. Election: An Outsider Looking In

Dear colleagues,

Despite the two attacks that had taken place in two months’ time, London called me to visit her fine city last Friday. A fine city it is and remains despite the third horrific incident that occurred on and around London Bridge last Saturday night. The city and its people have withstood the worst and wavered not. To reiterate, there’s no ‘reeling,’ but rather a refined resolve among Londoners to not petrify, but prevail in the face of poisonous iniquity. 

Not surprisingly, the rule of law is increasingly in focus. Prime Minister Theresa May has vowed to make life much more difficult for suspected foreign terrorists: “If human rights laws stop us from doing that, then we will change those laws.” 

All of England takes to the polls tomorrow to vote on this issue and Brexit nearly one year on. May’s Conservatives still look to win out when the last ballot is counted, but her party’s lead has nevertheless narrowed since she took office last June. Proposed pension reforms did nothing to improve her standing among those who’d just as soon not have left the EU to begin with. 

Such will be the plight of most politicians in the coming years as immigration, demographics and economic stagnancy force tough choices. Leaders’ capabilities at communicating messages clearly will thus take on greater import in ensuring voters are well-informed when they enter voting booths. 

Unless, that is, we need not be heard. In a freshly released report, “More professionalism, less populism: How voting makes us stupid, and what to do about it,” Brookings Senior Fellows Jonathan Rauch and Benjamin Wittes contend that we should move away from directly participating to a model based on intermediation and institutions: “Neither theory nor practice supports the idea that more participation will produce better policy outcomes, or will improve the public’s approbation of government, or is even attainable in an environment dominated by extreme partisans and narrow interest groups.” 

Wait, wasn’t it broken institutions that brought so many countries’ voters to the point of extreme partisanship? Apparently not, according to Rauch and Wittes. Voters are “irrationally biased and rationally ignorant.” 

Their condescending conclusion: “By itself, building more direct input from the public into the functions of government is likely to lead to more fragmentation, more stalemate, more flawed policies—and, paradoxically, less effective representation.” Just so we understand each other, from my vista in the land that gave birth to the very idea of no taxation without representation, brighter minds guiding our collective fate will ensure a better future than self-determination?? 

Let’s just say I’d hate to be tasked with delivering that message to the People whose wages haven’t kept pace with the rising cost of living. That’s still the case here in the UK just as it is back home where the most recent data reveal that teetering economic growth has been driven by low-wage sectors. That certainly backs U.S. commercial and consumer bankruptcies being up five percent over last year. (For more on strains emanating from the household sector, please see Trump's America Faces a $13 Trillion Consumer Debt Hangover in which I am quoted). 

Back here in the UK, I intend to take every opportunity as my holiday comes to a close to enjoy the beauty, history and wonder on offer. For more on the current political and economic state in the UK, please enjoy my latest weekly installment, The U.K. Elections: An Outsider Looking In. 

Wishing you well from across the pond, 

Danielle 

The U.K. Election: An Outsider Looking In

Talk about making hay if the sun shines through and through.

In 1696, William III introduced the ‘window tax.’ It was crystal clear that this dark tax was viewed with great disfavor being as it was based on the number of windows in a given home. Think of it as a first-generation progressive tax, which suited the extravagant era’s buildout of country estates. The more windows in a home, the wealthier the ostentatious occupants were, to say nothing of cheerier and healthier (did Vitamin D supplements exist back then?). So why not pony up more in taxes to help your sovereign offset the scourge of coin clipping?

Coin what?

Back in the day, coins were minted in pure precious metals. This prompted petty pilfers to shave, file and clip the edges off those coveted coins. Combine enduring effort with a red-hot melting pot and voila, fraudulent fortunes followed. The pinchers’ progeny were no doubt among the pioneers committing counterfeit currency capers.

These days we embrace the despicable denigration of our currencies. We go so far as to lavish the loftiest positions in the modern world on those whose most lauded accomplishments have been earned in laureates, not the legal authority to levy, well, anything.

‘Tis true, central bankers have assumed more power than our politicians. The question is where this will lead us all against the backdrop of a world where inequality has boiled over into illegality and depravity for our fellow man.

As all market watchers are aware, the British general elections are to be held Thursday. Intriguingly, some three million newly-registered voters will cast their calls for the first time. This should be a worrying factoid for Theresa May; the UK’s youngest voters were largely opposed to exiting the European Union last June.

The arguably inconsistent and unreliable polls will have certainly given Prime Minister Theresa May pause. One June 4th, May’s Conservative party looked to secure 354 seats, above and beyond the 326 needed for a Parliamentary majority. By Tuesday, other polls showed her party’s prospects had dwindled to 305 seats.

Intuition suggests Saturday night’s horrific terrorist attacks on London Bridge (pictured front and center in this week’s image) and a nearby neighborhood would have solidified Conservative’s lead. But the polls counterintuitively indicate a move in the opposite direction. Though impossible to predict, the least hyperbolic within the political analyst arena give the Conservatives better than even odds of winning a majority, or at the very least forming a coalition that accomplishes the next best thing.

It’s notable that May’s lead did not initially narrow based solely on events that were out of her control, as in three terrorist attacks in three months. Rather, it was her vow to make pensioners’ benefits progressive (just took a huge amount of license in simplifying her proposal) — as in those who have more can expect to collect less from the state – was met with about as much derision as William III’s window tax.

While it’s never wise to judge from the outside, some of the wisest and most patriotic suggestions floated in the United States have been from wealthy retirees who’ve suggested they need not collect Social Security to help balance the nation’s books. Moreover, May was magnanimous in her aim; she intends to use the saved state expenditures to funnel funds into raising productivity by closing the skills gap that has crippled the economy (sound familiar?)

Somehow the liberal media managed to paint May as a pariah (is it yours truly, or are the parallels multiplying?)

In one of May’s latest interviews, she reiterated her focus on what she hopes is to come: “It’s about young people’s future, it’s about ensuring we take the opportunities that will be opened up to us when we leave the EU to be a really global nation bringing more jobs, more investment into the UK. I want to see proper technical education for the first time for young people for whom that’s right.”

Connecting warm bodies with much-needed skills sets to UK’s corporate sector could well do the economy some good. Let’s hope she has wise economic counsel to help her execute her plan if the Conservatives prevail at the polls.

Luckily, one of Britain’s savviest economists is free to pursue his next career gig. Of course, the reference is to Andy Haldane, the Bank of England’s chief economist, whose term technically ended May 31st (he will remain at his post until his replacement is secured.)

How to sum up Haldane? A central banker who gets it right half the time is about as close to genius as you can ever hope for in the field given the de facto requirement that Keynesian Kool-Aid be drank before the threshold is crossed into the inner sanctum sanctorum. That applies whether you refer to the Bank of England, the Reserve Bank of Australia, the European Central Bank, the Bank of Japan or especially the Federal Reserve (though hawks may just get their chance to storm the temple – stay tuned on that count).

Of punk UK productivity, for one, Haldane has this to say in a recent speech: It wasn’t low interest rates that kept middling companies in business since the crisis hit, but rather delusions of operational grandeur. Haldane prodded the UK government to provide global benchmarks to UK firms so they could better appreciate their standing among their international peers.

“As Olympic athletes have shown, marginal improvements accumulated over time can deliver world-beating performance,” Haldane said. “Applying those marginal gains to the population of UK companies could significantly improve UK living standards.”

Sounds like May and Haldane are on the same page, though it goes without saying that low interest rates assisted in keeping ‘zombie’ companies alive in addition to an abject denial of mediocrity.

Most importantly for May, if she’s in the market for an economic advisor, Haldane is not beholden to the modern-day economics profession. Haldane likened economists’ failure to foresee the financial crisis to a, “Michael Fish moment.” Fish, for you non-Anglophiles, dismissed the chances that a massive hurricane would hit southern England in 1987. You know how this story ends. The Great Storm did indeed hit and how, wreaking mass destruction and casualties.

After describing his profession as being in, “some degree of crisis,” Haldane went on to suggest that his peers abandon their, “narrow and fragile” models in favor of a broader analysis that incorporated the perspectives of other disciplines. Hear, hear!

To be fair, Haldane went on to say that Brexit would crash the UK economy but with a lag, hence the above-referenced only ‘gets it right half the time’ bit.

If providence is propitious, May is also channeling the ghost of Margaret Thatcher, who made all manner of enemies going against the conventional wisdom of her day, especially as it pertained to the economy. No doubt it will take radical ideas to cure what ails the UK economy today.

In what can only be described as twisted irony, Mark Carney’s Bank of England (BoE) was recently taken to task for the pay raises recently ‘awarded’ to his employees which failed to keep pace with inflation. At around one percent, the most recent annual BoE employee pay raise is a pittance of the current 2.7 percent inflation rate. The average British worker bested that, with average wages increasing by 2.4 percent, which still fails to keep pace with the rising cost of living.

And yet, as is the case with his European and American counterparts, Carney is more likely to get caught out gnashing his teeth about inflation being too low, despite it clearly being too high for the average working man and woman.

The fact is Carney’s in a mighty tight corner with inflation running too hot, wages running too cold and a corporate sector petrified at the potentially poisonous ramifications of Brexit. For the moment, exports are a relative outperformer with a big boost from the weaker pound. It’s the ‘what’s next’ that matters most though — the impossible tradeoff between raising interest rates and the higher real wages that would follow, or lower for longer and the boost to short-term growth prospects too offset any Brexit fallout.

And that’s just for starters when it comes to threading needles on Threadneedle Street. As has been the case in Australia and Canada, residential real estate prices have run wild since quantitative easing unleashed animal spirits in the aftermath of the financial crisis. As a result, British households’ debt loads vis-à-vis the size of the economy have made a full round trip to record highs. But here’s the wrinkle: mortgages in the UK tend to be of the variable rate variety, In other words, Carney has to tread more lightly than his counterpart Janet Yellen if he’s inclined to tighten.

And so they straddle the Atlantic, both weighed by impossible choices, rendered more intractable yet by their own misguided foregone follies that insisted more was more, lower was better. What good has that done? To add to their intellectual egos’ injuries, both Carney and Yellen have to contend with political leaders who’ve neither the appetite nor the intent to compromise, much less kowtow, to their theoretical end games.

Looking back, it’s hard to believe the window tax withstood its own political backlash for over 150 years. But believe you me, the tax was not abolished until 1851. By then, so despised was the levy, it had assumed a new name — Daylight Robbery. Is it so hard to see that the current crop of central bankers has also managed to destroy the vista, to suck the oxygen out of the world economy as closed up homes did back then, albeit with much more sophisticated means? We can only hope our elected leaders don’t have to wait another 150 years to see the light.

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