Ferraris for all

Margaret Atwood, a Canadian writer and activist, has had a non-fiction book published on debt. Payback: Debt and the Shadow Side of Wealth is a collection of essays based on the annual Massey lectures she gave this year. From what I can gather it is against “greed” and pro-environmentalist. For an extract click here.

Labels: book, debt, environment, finance

There follows my review of Fantasy Island by Larry Elliott and Dan Atkinson (Constable & Robinson 2007) in the 10 September issue of Fund Strategy.

Larry Elliott and Dan Atkinson see Tony Blair as having turned Britain into a "fantasy island" during his decade in office. The two economics editors, Elliott at the Guardian and Atkinson at the Mail on Sunday, argue that Britain's apparent economic and social health is largely illusory. New Labour has, in their view, simply disguised problems and stored them up for the future.

Fantasy Island sees New Labour as responsible for five minor fantasies and two master fantasies. The minor fantasies relate to inflation, the knowledge economy, the public sector, work and defence. The master fantasies relate to debt and the environment. Behind all these fantasies is a common theme of excess. As Elliott and Atkinson argue: "There is a surfeit of consumption, a surfeit of speculation and a surfeit of deceit".

Before examining these fantasies in more detail it is important to note that this is a broadly sympathetic critique of New Labour. The two authors, who are not members of any political party, praise the organisation for its record on civil partnerships and the minimum wage. They also endorse its overseas record in relation to the Good Friday agreement, Kosovo, Sierra Leone and African development.

What they object to is Labour's habit of pretending two opposites are not opposite. For example, on the one hand New Labour preaches the virtue of people living within their means. On the other hand, it has presided over a huge build-up of household debt. Yet New Labour denies there is any contradiction between the two.

It is certainly possible to sympathise with Elliott and Atkinson's charge of self-delusion against New Labour. Its pronouncements are riddled with inconsistencies. Fantasy Island's strength is that it outlines many of these contradictions well. For instance, New Labour says it is against privatisation but, in its own covert way, has played a big role in privatising welfare services. The Private Finance Initiative has involved private companies in welfare provision at the cost of saddling the public sector with a heavy debt burden.

But the characterisation of New Labour's outlook as "fantasy island" in a way misses the point. If anything defines the party it is a lack of a broader vision of how to run society. It is the Ideas Lite party. To the extent it believes in anything it is regulating individual behaviour and imposing restraint on society. Labour has given up on taking control of the "commanding heights" of the economy and instead wants to tell people how to recycle their rubbish or what food to eat.

It is New Labour's lack of any principles that helps explain why it can take up apparently contradictory positions with such ease. Beyond its avid belief in social regulation it is highly pragmatic. All its leaders care about are the perpetuation of their own cliques and the survival of the party's electoral machine.

What Elliott and Atkinson are really saying is that Labour should be more consistent in its campaign against excess. Their starting point is the old environmentalist canard of limited resources: "living within our means has to start with acknowledging what the planet can and cannot bear." From this premise they go on to argue that it is necessary to start planning for a more frugal future.

Yet this underlying assumption is false. There is no finite amount of resources on the planet or limit to the extent to which humanity can exploit the Earth. The richer and more advanced we are the better able we are to utilise the planet to our advantage.

The pattern is clear in relation to energy but it could equally apply to other natural resources. Pundits have for decades predicted the exhaustion of oil supplies yet new sources of crude keep on being discovered. New fields are found, extraction technology improves and new sources, such as tar sands, are utilised. When oil does eventually run out there is no reason why it cannot be replaced with other sources of energy such as nuclear power or hydroelectric power. There is no fixed amount of energy in the world.

The same approach can be applied to climate change. For Elliott and Atkinson, as with so many others, this is seen as the ultimate factor limiting consumption. But much of the technology needed to tackle the problem already exists. There are already many sources of energy that do not emit greenhouse gases. There are also other technologies, such as modern flood defences, that can protect humanity against the impact of rising sea levels. What is missing is the resources for this technology to become widely used. More economic growth and prosperity should provide us with such resources.

No doubt technology will improve further still as long as science and experimentation are encouraged. One way to see the history of humanity is of ingenuity enabling it to overcome what were previously seen as insurmountable problems. In the longer term it may even be possible to use advanced technologies to control the climate.

Yet Elliott and Atkinson's starting point is the mistaken idea of natural limits rather than having a positive vision of creating a better society. Although they are reluctant to spell out the consequences of this world view it presumably means more austerity and restraint. It means curbing the growth in living standards and perhaps even cutting them in absolute terms.

From this perspective it is possible to see the true content of the authors' critique of New Labour. For them its problem is that it is not New Labour enough. It should not just preach austerity but follow it through in practice. Gordon Brown, until recently known at the "Iron Chancellor", does not have enough mettle.

What Elliott and Atkinson propose in place of Fantasy Island could be called Nightmare on Fleet Street. Their vision is even more bleak and limited than that of New Labour. In that sense Fantasy Island is a remarkable achievement.

Labels: book, debt, economics, Fund Strategy, review

It seems there is a crack in the near universal consensus in favour of microcredit (extending tiny loans to third world entrepreneurs). Newsweek reports that a backlash is growing:

“Critics on the left charge that micro-finance privatizes social safety networks, while conservatives dismiss it as charity disguised as enterprise. Wonks weigh in with studies like "The Myths and Magic of Microcredit" and "Money Is Not Enough." Insiders turn on the industry. Loïc Sadou-let, a former World Bank economist who worked in microfinance in Guatemala, estimates that only about 300 of nearly 25,000 microlenders have reached financial "sustainability," meaning they are able to cover all costs.”

A critical essay by Thomas Dichter, an international aid expert, is also available on the Cato Institute website. In his view most such credit is likely to be use to fund consumption rather than investment.

Labels: consumption, debt, development, finance

Nicholas Kristof, a New York Times columnist, demonstrates tragically low horizons in relation to fighting poverty. He advocates using websites such as kiva.org and globalgiving.com which allow Westerners to lend small amounts of money to third world entrepreneurs:

“From my laptop in New York, I lent $25 each to the owner of a TV repair shop in Afghanistan, a baker in Afghanistan, and a single mother running a clothing shop in the Dominican Republic. I did this through www.kiva.org, a website that provides information about entrepreneurs in poor countries - their photos, loan proposals and credit history - and allows people to make direct loans to them.”

A PDF version of his article, from the kiva.org website, can be read here.

Labels: debt, development, finance

Yesterday spiked published an article by me about the panic on household debt levels in Britain. To read the piece click here.

Labels: debt, spiked

There follows a comment by me on household debt from the 4 December issue of Fund Strategy.

Tucked away in the latest issue of a dusty journal lies a healthy corrective to the often hysterical discussion of household debt. An article in the Organisation for Economic Cooperation and Development's Economic Outlook shows the debt situation is not nearly as serious as is often assumed.* To the extent it could become a problem, it is likely to be because of broader economic factors rather than the debt situation in itself.

Most sensationalist coverage of household debt follows a similar pattern. It starts with sensational-sounding figures on the size of the debt burden. Often it claims that debt levels are at an all-time high. Rarely is the discussion of debt put into its proper context.

For example, the fact that debt is at record levels reveals less than it seems. As the economy grows it is unusual for many indicators not to be at record levels. Economic output is usually at its highest level ever, corporate profits are generally at record highs and the economy is often more productive than ever.

Nor are figures on their own particularly revealing. The claim that personal debt in Britain is growing by £1m every four minutes sounds impressive but says little. How many people is this debt burden spread across? How high are their incomes? What assets do they have?

As with most statistics, skill is needed to ensure that comparisons are meaningful. For instance, looking at debt levels relative to GDP in an international or historical context makes more sense. It is also instructive to compare debt levels to levels of household assets. That way the overall health of household balance sheets can be properly examined.

The OECD makes several useful points to put the debt discussion into context:

* Favourable financial conditions and buoyant housing markets have bolstered household debt. In addition, financial liberalisation has meant that credit has become more widely available.

* Household wealth has risen sharply as a result of higher property values and a stockmarket recovery. In addition, home ownership rates have increased, so debt is spread across a larger number of people.

* Although debt service levels have risen, mortgage delinquency rates have trended downwards over the past decade.

* Surveys show that most debt is held by households better able to manage it.

None of this means that debt could not become a problem but if it does so it is likely to be because of broader economic factors.

Higher interest rates, falling house prices and drops in income could all turn debt into a serious economic problem. But at present, for the economy as a whole, the burden looks manageable.

* Available at www.oecd.org

Labels: debt, Fund Strategy

There follows a comment by me on the third world development from the 27 November issue of Fund Strategy.

First we had Brics, now we have Chindia. The first term, coined by Jim O'Neill of Goldman Sachs in 2001, has become widely accepted as an acronym to cover Brazil, Russia, India and China. Chindia was coined by Jairam Ramesh, an Indian politician and economist, and now is the basis for several funds.

As a shorthand way of indicating the countries included have huge populations while remaining relatively poor, such terms are fine. But there are many important differences between them. Brazil, unlike the others, is not growing particularly fast. Russia, unlike the others, is heavily dependent on one commodity - oil - and related products. India, despite its rapid growth, has appalling infrastructure and a weak industrial base. China stands out as by far the largest and most rapidly growing economy.

In other ways, too, the discussion of these countries is often distorted. A typical fund manager presentation on any of these countries starts by noting their huge populations. It then raises the spectre of such relatively poor countries moving towards Western levels of consumption. "Just imagine if every family in China buys a food processor," runs the argument. "The share price of the Shanghai Acme Food Processor Company is bound to rocket."

Such discussions are back-to-front. The primary determinant of consumption is production. In other words, it is necessary to work out how the barriers to raising production can be overcome before considering how much consumption can rise. The only reason China can consume so much more than in the past is because its output has risen rapidly.

Admittedly the level of production does not put an absolute limit on consumption in the short term. Up to a point it is possible for countries to borrow overseas to help subsidise their current consumption. It is also possible, as in China today, for individuals to save heavily rather than go all out to consume.

Despite these modifications, the fundamental point remains that production determines the level of consumption over the long term. Therefore, a consideration of such factors as the level of investment and the ambition of the governing class are crucial in assessing development prospects. If the level of production rises, consumption levels are likely to follow. Stagnant output, in contrast, means that the consumption story will fail. The simplistic story of the Brics and Chindia told by many financial institutions misses out the key elements in the development process.

Labels: china, debt, Fund Strategy, india

The Conservative party has launched a “tossers” website to help people avoid getting into debt over Xmas. It is designed to dissuade us from “overspending” by curbing our “inner tosser”.

This initiative could, with some justification, be dismissed as a stupid stunt by an organisation which has lost any sense of political direction. But it does have a horrible logic to it. Curbing what is seen as “overconsumption” is a favourite theme of today’s politicians.

Labels: consumption, debt

Today I debated consumer debt on the Jeremy Vine show on BBC Radio 2. The peg for the debate was a report from Datamonitor, a business research group, which estimated that the average British resident has £3,175 of unsecured borrowing. That is about twice the average in continental Europe.

I argued that debt was not a problem for most people as long as the economy was growing strongly and unemployment was low. In addition, much of the anti-debt campaign has a puritanical edge to it: a dislike for ordinary people buying luxury goods. However, this does not preclude a small minority having debt problems. Usually these are a result of changes in life circumstances such as divorce or unemployment.

My opponent was David Nellist, a former Labour MP. He presented debt as a huge problem for ordinary people; seduced by advertising and enticed by junk mail.

Labels: debt, media appearances, radio

Philanthropy seems to be in fashion. Bill and Melinda Gates have donated huge amounts to ending global poverty. Warren Buffett has followed their lead. Bono and Bobby Shriver seem to be trying to popularise the movement further with their Product Red campaign.

The latest high profile event in London is Tuesday’s Fortune Forum dinner at Billingsgate including Bill Clinton, Michael Douglas, Deepak Chopra (spiritual guru), Zac Goldsmith (eco-toff and editor of the Ecologist), and a comeback performance by Yusuf Islam (formerly Cat Stevens). For those who are interested prices start at only £1,000 a plate.

On the face of it what could be wrong here? The wealthy are giving substantial amounts of money to worthwhile causes such as curing AIDS and malaria, tackling climate change and reducing global inequality. But closer examination shows that a dirty deal is implicit in this arrangement: the rich will give a little money to the poorest of the poor in return for the mass of the population giving up the ambition of broader development. Unpicking this arrangement will be one of my tasks over the coming months.

Labels: debt, development, ethics, health, inequality