Inequality of power versus inequality of income

The left’s analysis that says inequality is the key to understanding Brexit, Trump and much else needs to make a distinction between inequalities of power and inequalities of income. Many populist voters in the USA and Europe have cast their votes against concentrations of unaccountable or dogmatic political power in the elites that control their societies. That is different from an attack on those who have made lots of money from being good at sport, entertainment or business. Senior executives of large companies owned by other people are often seen in the same category as government politicians and officials, whereas entrepreneurs offering new goods and services are seen differently and usually more favourably.

In the USA the Trump voters rebelled against the political correctness of the Democrat regime, and condemned the big money politics and large salary government they are paying for through their taxes. In The Euro area voters rebel against the austerity politics of much of the zone, as it struggles to meet Germany’s demands for lower wages and little borrowing to stay in a currency with competitive Germany. On both sides of the Atlantic populist voters are often critics of the prevailing climate change theory, disliking the way it results in dear energy and ever more regulations affecting how they live their lives. Populist voters also resent the way their thoughts and language are controlled, with many topics now subject to a politically correct mantra not shared in their hearts by these voters.

Brexit was a vote to take back control, with many people fed up with the laws, controls and spending plans of a Brussels government we cannot influence as we wish or throw out of office for failure. Brussels has still not apologised for the Exchange Rate Mechanism crash it caused which hit many families and businesses in the UK.

I welcome laws against racial and religious hate speech, as I do think stopping unpleasant words can create a better climate, making violent acts less likely. In other ways I am on the side of those who think these governing elites have too much power and use it in ways which damages people’s freedoms and incomes unnecessarily. High taxes are not usually the poor person’s ally, as they hit them as well as the rich. Some regulations designed to improve conditions for all succeed in blocking more jobs and enterprise. Allowing too many migrants in to a country to get jobs can make it more difficult for people already settled there, and does add to the resentments of those on low pay or no pay.

One of the things the elite finds most difficult to understand about the Trump phenomenon is how he can make more and more outrageous statements as the elite see it but not suffer with his core voters. That is to miss the main point. Mr Trump is seen by many of his voters as someone outside the governing elite trying to get it to respond and think more like the people he represents. When he makes a statement no normal politician would make because it is offensive to us or because we see it is not politically correct so carries political risk, many in his base cheer him on for breaking the conventions. They realise tweets do not in themselves achieve anything, but they also expect Mr Trump to try to find ways of cutting taxes, removing barriers to enterprise, to police the borders better and do all the things that constitute Trumponomics. “Making America great again” was about boosting the growth rate, having more jobs at home, raising living standards.

What we don’t yet know is whether Trump supporters will be tolerant if he carries on speaking out without winning more of the battles he needs to win to grow the economy. In Greece where Syriza was elected to bust Euro austerity policies they failed but retained considerable support for trying. Mr Trump will probably do better than them, as he goes about deal making for a more prosperous USA. Carrying a major tax reduction for all later this year will be an important moment for this Presidency. If he does the UK will need to make sure it remains competitive on tax.

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Understanding the Trump phenomenon

Listening to the “liberal left” trying to explain the Trump phenomenon is a frustrating experience. Of course I agree with them that all elected politicians should condemn any efforts to whip up racial hatred. What interests me is they say that the big Trump vote was only possible because of the large inequalities they see today. These must be inequalities thrown up by the last eight years of Democrat rule, as there was no Trump insurgence eight years ago. Presumably they would argue that today’s inequalities build on inequalities in earlier decades which were not large enough or obvious enough to produce a Trump. They see the Trump phenomenon as a protest vote against these inequalities.

There is a germ of truth in what they are saying. Many people who were fed up with low wages or no wages voted for Mr Trump.They did not however vote for him to protest against inequality. They voted for him to cut their taxes and fire up America’s economy so they can get a bit richer. They voted for him in the full knowledge that he is a very rich man, was going to be surrounded by many other rich men, and favoured cutting the taxes the rich pay as well as the taxes lower paid people pay. They were not jealous of Mr Trump’s riches. They want some of them to rub off on them.

The germ of truth comes in these voters attitudes towards Mrs Clinton. There were two types of privilege and wealth on offer in the two contrasting Presidential candidates. Mr Trump offered the version of entrepreneurial riches, acquired by himself or some would say with help from his father’s business acumen. This is completely acceptable to most Trump voters. They do not mind if an entrepreneur makes large sums and pays himself fabulous money. Nor do they baulk at soccer or baseball stars, singers or actors earning great money either. They willingly pay for their services, and have the choice not to.

The type of privilege they object to is privilege that comes through political office and big budget politics. The lurid rhetoric of Trump supporters, often going beyond the tough language of the campaign proper, concentrated on “the swamp” of Washington, seeing it as a source of corruption. Mrs Clinton herself faced endless disobliging chants and allegations, as she was the perfect representative of those with families that draw big salaries from the state and live in a world of big budgets from party financing. Voters thought big politics had let them down, was syphoning off too much of their money through taxes they had to pay, and was rewarding for those in it, not for those it should seek to serve.

Trump voters worried about easy migration because they think wages have been depressed too much. They worried about trade systems which allow so many foreign imports, because they want to help make those things at home. They worried about just how much they have to pay to Washington in taxes when they need to spend more on their own needs. They will not mind if Mr Trump allows rich people to become richer, as long as they become richer too.

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The value of A levels

Some time ago after giving a talk I was asked by a student at one of our top universities if I thought the A levels I had were of the same value and difficulty as the ones he had most recently obtained. I was both pleased to have a question out of the ordinary, and worried about how to answer it.

I decided to answer it factually. I said that every year A level marking is moderated and assessed by the Examiners, with a view to being fair between the years. In theory if a paper has been more difficult than past papers the required marks are lower, and vice versa. I had no evidence or analysis to question that thesis that standards have been approximated year by year.

Duty done, I then asked him a question. I asked if if he was implying that standards had risen and my A level was inferior. He laughed and told me he thought his A level had not been to the same high standard or difficulty as mine. I thought it sad that a clever and probably hard working student felt like that about his recent qualifications. He of course had the luxury of knowing he was going on to get a more prestigious qualification, a degree from a great university. To those leaving education at A level similar thoughts would be more upsetting.

Mr Gove decided that creating advanced qualifications with a high proportion of course work rather than exams might lead to less rigour. Whilst most people would work hard and make an honest account of themselves, and most teachers will lead, teach and mark professionally, there is more danger of abuse in course work. You could cheat by getting others to help you too much with the course work or even dictate it to you. You could benefit from favouritism in marking – or suffer from bad relations with your teacher assessors for reasons unconnected with the standard of your coursework. You could benefit from being asked to do the work again before formally submitting, if it was not good enough the first time. Mr Gove therefore decided to move A levels back to reliance on final exams.

I remember the A levels I took well. They depended entirely on the final exam performance. It meant you needed to both understand and remember the course material.It was also a flexible exam based system in the subjects I took. If you had reached a higher level than that required you could be awarded a high mark even if you had not answered covering the basics in the way the marking system was designed to capture. There were no single right answers, as the examiners recognised the complexity of the questions and the range of answers that could be interesting.

The two years of the sixth form to pass those exams were the best and and most formative of all my years in formal education. I just hope today’s A levels are a similar challenge and spur to students. I still use the techniques of economic analysis I first studied then, and still can place what I am currently doing in an historical context from the History course. I remember the material because I needed to learn and understand to pass the exam. A few years ago I took an A level equivalent professional exam. That was reliant on rote learning with the doctrine of the right answer. Where the problem was mathematical requiring you to memorise a formula and apply it to data that made sense. Where it was multiple choice between arguable answers it was more hazardous and less sensible. It was not nearly such a worthwhile educational experience.

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Real incomes rise just a little to June 2017

The ONS presented a healthy picture of employment growth in the year to June 2017. There are 338,000 extra jobs in our economy. Unemployment has fallen by 157,000 on the year. Many of the new jobs are full time jobs.

It also showed a small rise in average weekly pay, though it reported the figure as 2.1% up on a year. This left average earnings behind prices by 0.5%.

However, Figure 9 of the same ONS report provides a graph of average weekly earnings adjusted for price rises by putting the figures into a common 2015 price level. This shows June 2017 at £490.5, a little up on June 2016 at £488.2. This is confirmed by the average weekly pay figures in current prices reported at the top of Section 8. That says “average total pay for employees in GB was £506 a week (June 2017) up from £493 for a year earlier” That is an increase of 2.6%, in line with prices as measured by the CPI.

It is interesting that using June on June produces a different answer from using quarter on quarter which they highlight. It provides some light on why retail sales, consumer spending and jobs have increased when so many forecasters were expecting the opposite.

As some of you have pointed out, it leaves the unanswered question of why did the Treasury forecast big job losses following a pro Brexit vote and an Article 50 letter? It also raises the issue of which of these contrasting portraits in the same official document give the more accurate picture of what is happening?

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Fare rises and Network Rail’s derivative losses

Yesterday the RPI for July told us that rail fares will go up by 3.6% next year. As I reported yesterday on this site, costs have been mounting at the nationalised Network Rail which supplies the expensive track, stations and train slots. The railways will want this substantial fare rise, which always bears heaviest on commuters. Off peak and leisure travellers can benefit from highly discounted fares designed to try to fill the many empty seats outside peak hours.

Rail travellers paying those fares will not be amused to learn that the losses Network Rail have been making from their derivative dealing continue. According to the last accounts Network Rail lost another £116 m on “movement in the value of cash flow hedge derivatives”, compared to a £232 m loss the previous year. (Accounts page 95) The total fair value of derivatives they hold rose again last year, from £963 m to £1102 million. (Accounts p 97). The liabilities on derivatives rose from £1408 million to £1529 million. The notional amounts were of course much greater, rising from £17,094 m to £17,974 million. (Accounts pp 120-121 Note 19)

I am surprised Network Rail continues to run such large positions in derivative instruments now that its financing is all secured by the government. The present management have inherited both foreign currency borrowing and index linked borrowing. Their predecessors took out various derivative positions in interest rates and currencies with the results I have reported before by quoting their Accounts, now updated for the most recent year.

I continue to ask why do they do this. What benefit is this to taxpayers who supply 70% of the revenue and who own 100% of the shares of this business?

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Inflation stays stable at 2.6% on the CPI

The BBC did its best this morning to talk inflation up, inviting on interviewees prepared to say inflation would rise owing to a weaker pound. They were wrong. Inflation stayed stable, with food prices dipping a little. The rise was sustained by Council taxes and associated housing costs and utility bills contributing. These are largely domestic costs given the switch to renewables and the high UK labour content of utility service and local government.

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The poor performance of Network Rail

Network Rail had a disappointing last year. Their accounts for 2016-17, published in July reveal that they were £172 m net or £424m gross below target financially. Their operating costs rose by £124 m or 4.6%, well ahead of wage inflation. Total debt was up by £4.7bn, and debt costs were £370m more in the year. Much of this was the impact of the higher inflation rate on the index linked borrowing they decided to do in past years.

Worse still from the travellers point of view, they had to report cancelled trains in excess of target. Only 87.6% of trains were on time, well below target. Whilst it is good news no staff member was killed on the railway, under general safety they reported 680 injuries which was worse than target.

The railway is spending on increased capacity which drives debt higher, as does the failure to raise productivity and control costs. They are in consultation with the government over how to spend £450m on digital signalling. This could offer a much cheaper and more efficient way of increasing capacity. Lines currently only take 20 trains an hour, leaving the tracks unused for much of the day to allow safe braking. With better signals and controls, given the fact that trains are all going in the same direction on any piece of mainline, it should be possible to run 25% more trains on the same track with new systems. Indeed, with better brakes, lighter trains, better signals and sensible timetabling it may be possible to increase capacity by 50% to 30 trains an hour on any given piece of track.

I look forward to early decisions on how to step up this approach to capacity. I also look forward to the management having better success at raising the quality and curbing the costs of running the railway.

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Moderating this site

I asked the service provider to protect this site from an excessive number of commercial and automated responses. They have come up with the picture question system which some of you dislike. I also have to go through it each time I moderate and find it works OK. I do not have available another system to keep out so many unwanted responses.

I moderate this site when I have the time. I will repeat again. Long posts, posts with allegations about people and institutions that need checking, and posts referring to electronic sources I do not know may take longer. I leave those until I have more time, which may not be the same day depending on my other duties. Sometimes I just delete them if they look too difficult to understand and check.

I do now sometimes just delete a post from someone who has written multiple posts the same day to cut down my reading time. People who write several shorter posts without material that needs checking may secure more postings as my aim to speed moderate as many as possible may favour them over someone who writes one or two long posts. I am trying to put up a range of views and interesting material from as many as possible, but will tend to err on the side of caution over allegations.

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The costs of population growth

There have been various studies of migration arguing that migrants that come to the UK make a net contribution, paying more in income tax and National Insurance than they receive in benefits. These studies ignore the wider picture and do not look carefully enough at all the budgets involved. They are not based on a very pleasant premise when they imply we only want the migrant if they do “make us a profit”. It is a pity their calculations are also simply wrong.

When we invite someone into our country we wish them well and want them to live to a decent standard of living reflecting the society they have joined. This means they do need adequate housing, their children need school places, the family requires access to an NHS surgery and if necessary an NHS General Hospital. If just one or two migrants arrive there is sufficient slack in the system , but when 250,000 additional people a year turn up the country has to get on and build the extra homes, schools, surgeries and other facilities they need. We also require extra roadspace and railway capacity. I see this in my own constituency where we have had to provide extra schools and surgeries as the new homes are built.

None of these items comes cheaply. A migrant couple will need a flat or house which will cost say £200,000 to build and provide. They may need a school place for two children. That could have a capital cost of £45,000. We are currently spending massive sums on increasing rail capacity in London and on HS2, and are beginning to spend more on road capacity. Some part of this is the result of an expanding population.

The figures calculated on revenue costs are based on the fact that public spending does transfer money from working age people to the elderly in more need of pensions and NHS care. It also transfers money from people without children to those with children at school. Migrants who work here for a few years, have no children and then move away may indeed make a net contribution to the revenue budget, but they will need expensive housing and transport capacity on capital account which needs to be put into the calculation.

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Mr Trump’s threats

It is not easy being the world’s superpower. Mr Trump swept into office on a programme of America First. He envisaged doing good deals for the USA. He did not seem keen on military interventions around the world of the kind favoured by the Clintons and the Bushes, by the State department and the Pentagon. Many people warmed to the idea that the west had intervened too much. Maybe the west had resorted to arms in too many cases where it did not have the political ability and influence to settle things well after its force had dislodged dictators or unsettled evil regimes.

Mr Trump has avoided escalation of military involvement in the Middle East. He has tried rapprochement with Russia, though this has been badly knocked by outraged Democrat opposition seeking to allege that it was all to do with Russian help for his election campaign. Just as it seemed he was turning to the main economic matters which dominated his election statements, the absurd and unpleasant dictator of North Korea decides to provoke and taunt the USA with stories of breakthroughs in weaponry, tests of missile systems, and his usual threatening language.

US policy seemed to be based on the diplomatic playbook. The State department engaged with the UN and the leading powers Russia, China and Japan to back an important UN Resolution. This pledges all to seek diplomatic solutions, whilst imposing much tougher sanctions which seek to block one third of all North Korea’s exports by value. There are also travel bans and other restrictions imposed on 9 senior officials and four institutions of the North Korean state.

It therefore looked as if it came as a surprise to the US establishment when Mr Trump started talking of massive military responses should North Korea threaten the USA and its allies and territories. They soon came into line with their President and pictures emerged of the kind of weaponry the US could deploy from Guam and their carriers if need arose. This builds on the traditional exercises conducted annually with South Korea under previous Presidents to display to North Korea ability to fight and resolve to defend.

Some think Mr Trump was right to speak in the kind of language the No0rth Korea dictator uses. Others think it is unhelpful and gives too much publicity to North Korea. I would be interested in your views.

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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