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Just the good bits, please
Dec. 15th, 2010 06:50 pmIn a not particularly perceptive piece on the possibility of Ireland and Greece defaulting (and the desirability of them so doing), Andrew Walker, "Economics Correspondent, World Service" (whatever that means) quoted Mario Blejer, ex-governor of the Argentine Central Bank, who in turn quoted Allan Meltzer:
Now that is actually a very deep quote, because it says something about the modern attitude to capitalism and the modern attitude to religion. "Yes, we like it, but just the good bits, please".
This in turn reflects a misapprehension of reality that I see in businesses, politics, poker and, sadly, economics. In fact, just about the only place where I don't see it is when four experienced gamers are hunched around a German board game. If it's a zero sum game, if I gain, someone else has to lose. So what matters is not how good something is for me, but how good it is for me relative to how good it is for everybody else.
I recall, for example, one poker writer, many moons ago, arguing in favour of limping in Hold 'em because it allows you to see three-fifths of the cards for only one-quarter of the rounds of betting. Of course, the argument is specious, because it allows everyone to see three-fifths of the cards for a quarter of the rounds of betting. Indeed, it's often the limpers in tournament poker who decry "bingo poker", whereas in fact the "bingo players" are just willing to push thinner edges. And most of the thin edges in Hold 'em are pre-flop.
In business I have seen the more shallow of thought argue, with a straight face, that they want to boost "X" as a proportion of income next year (call that advertising revenue, for example), to which you respond "so you want to reduce the emphasis on subscription revenue?". To which they answer, "Oh no, subscription revenue is just as important as it was before". To which you say, "Er...."
But, back to capitalism and "just the good bits". When times are good, or indeed when times just appear to be good, economies seem to embark on a campaign of self-deception that capitalism is all good bits and no bad bits. Fallacies of logic abound, along the lines of "A will benefit more than B, but B will not benefit any less than A". The whole lie is concealed beneath the frequently spouted nonsense that "it's all about growth". Growth, of course, is the nigger in the woodpile here, because it gives people a chance to claim that the game isn't zero sum at all. Unfortunately, the "growth" gets spent in many different places.
So, when it all blows up, no-one wants "the bad bits" of capitalism. Investors want to be "made whole" on their bonds because, they say, to fail to do so would cause a global collapse and, anyway, it had been counted as Tier 1 capital and there was no plan B about Tier 1 capital ceasing to be Tier 1 capital. Meanwhile the taxpayers, many of whom had bought houses on 100% mortgages and enjoyed a standard of living for a decade that their productivity didn't justify, immediately say: "nothing to do with us. Why should we pay?". If you are in the Labour Party, I think you follow Gordon Brown's old trick of making every £1bn worth £3bn, because that seems to be roughly the number of times that Philip Green's wife's money has been spent in solving the current economic crisis.
And the holes keep getting bigger. One of the most frightening reports in the past 48 hours has been the theoretical £100bn hole in the Local Government Pension Scheme. Now, I'm panicking less about this than I might have four or five years ago, if only on the grounds that there are more pressing things to worry about -- such as Spain's economy totally blowing up. This deficit is real, but it's not a deficit that is going to kick us in the balls this year, or next year, or even in the next five years. It is, in other words, something that we can, with a clear conscience, sweep under the carpet for a few years. There's another factor in play here, which is that the deficit is so large because interest rates are so low. Assessing liabilities over a long period is notoriously difficult under current accounting schemes, and the FRS17 system used to come up with this £100bn number would have come up with only £42bn just three years ago. Private companies and plcs with defined benefit schemes are compelled to use FRS17, and it could be argued that this is a bit of a nonsense -- a rolling average of interest rates over 10 years might be a better system.
The UK government, meanwhile, uses its own sleight of hand, in that it permits the Local Government Pension Scheme -- a defined benefit scheme that is funded (albeit by far too little), as opposed to the Civil Servant's defined benefit scheme, which is a totally unfunded black fucking hole -- to use a different actuarial valuation from that which it imposes on the private sector.
OK, so let's sweep it under the carpet for five years. But what then? Basically there are three parties involved here.
"Capitalism without losses is like religion without sin. It doesn't work".
Now that is actually a very deep quote, because it says something about the modern attitude to capitalism and the modern attitude to religion. "Yes, we like it, but just the good bits, please".
This in turn reflects a misapprehension of reality that I see in businesses, politics, poker and, sadly, economics. In fact, just about the only place where I don't see it is when four experienced gamers are hunched around a German board game. If it's a zero sum game, if I gain, someone else has to lose. So what matters is not how good something is for me, but how good it is for me relative to how good it is for everybody else.
I recall, for example, one poker writer, many moons ago, arguing in favour of limping in Hold 'em because it allows you to see three-fifths of the cards for only one-quarter of the rounds of betting. Of course, the argument is specious, because it allows everyone to see three-fifths of the cards for a quarter of the rounds of betting. Indeed, it's often the limpers in tournament poker who decry "bingo poker", whereas in fact the "bingo players" are just willing to push thinner edges. And most of the thin edges in Hold 'em are pre-flop.
In business I have seen the more shallow of thought argue, with a straight face, that they want to boost "X" as a proportion of income next year (call that advertising revenue, for example), to which you respond "so you want to reduce the emphasis on subscription revenue?". To which they answer, "Oh no, subscription revenue is just as important as it was before". To which you say, "Er...."
But, back to capitalism and "just the good bits". When times are good, or indeed when times just appear to be good, economies seem to embark on a campaign of self-deception that capitalism is all good bits and no bad bits. Fallacies of logic abound, along the lines of "A will benefit more than B, but B will not benefit any less than A". The whole lie is concealed beneath the frequently spouted nonsense that "it's all about growth". Growth, of course, is the nigger in the woodpile here, because it gives people a chance to claim that the game isn't zero sum at all. Unfortunately, the "growth" gets spent in many different places.
So, when it all blows up, no-one wants "the bad bits" of capitalism. Investors want to be "made whole" on their bonds because, they say, to fail to do so would cause a global collapse and, anyway, it had been counted as Tier 1 capital and there was no plan B about Tier 1 capital ceasing to be Tier 1 capital. Meanwhile the taxpayers, many of whom had bought houses on 100% mortgages and enjoyed a standard of living for a decade that their productivity didn't justify, immediately say: "nothing to do with us. Why should we pay?". If you are in the Labour Party, I think you follow Gordon Brown's old trick of making every £1bn worth £3bn, because that seems to be roughly the number of times that Philip Green's wife's money has been spent in solving the current economic crisis.
And the holes keep getting bigger. One of the most frightening reports in the past 48 hours has been the theoretical £100bn hole in the Local Government Pension Scheme. Now, I'm panicking less about this than I might have four or five years ago, if only on the grounds that there are more pressing things to worry about -- such as Spain's economy totally blowing up. This deficit is real, but it's not a deficit that is going to kick us in the balls this year, or next year, or even in the next five years. It is, in other words, something that we can, with a clear conscience, sweep under the carpet for a few years. There's another factor in play here, which is that the deficit is so large because interest rates are so low. Assessing liabilities over a long period is notoriously difficult under current accounting schemes, and the FRS17 system used to come up with this £100bn number would have come up with only £42bn just three years ago. Private companies and plcs with defined benefit schemes are compelled to use FRS17, and it could be argued that this is a bit of a nonsense -- a rolling average of interest rates over 10 years might be a better system.
The UK government, meanwhile, uses its own sleight of hand, in that it permits the Local Government Pension Scheme -- a defined benefit scheme that is funded (albeit by far too little), as opposed to the Civil Servant's defined benefit scheme, which is a totally unfunded black fucking hole -- to use a different actuarial valuation from that which it imposes on the private sector.
OK, so let's sweep it under the carpet for five years. But what then? Basically there are three parties involved here.
The contributors (at the moment the 1.7m people currently employed).
The withdrawers (not sure how many of the 2.3m non-contributing LGPS members are currently withdrawing -- about 1m?).
The taxpayers.
At the moment the penalty for making up this deficit is, in principle, being loaded onto the contributor (those still working). But the weighting would have to be so large to bring the system back into balance that the system would effectively collapse. That would bring the burden onto the taxpayer. At the moment, the people already retired are considered "sacred cows".
But there is one way to eliminate that sacred cowdom -- good old inflation. Effectively I can see the nominal levels of pension being kept the same (even "increasing in line with headline inflation") while purchasing power is slowly eroded. Inflation is, of course, the great saviour of many an overspending society. It transfers money from creditors to borrowers very effectively (albeit not necessarily efficiently). Unfortunately, savers have got wise to this, and many an investment (including pension promises) is now "index-linked".
How can government get out of this? It is, as I've mentioned before, not dissimilar to the Guaranteed Annuity Rate problem faced by Equitable Life. One possibility is to fix the index (see the current move to CPI from RPI), while another way might be to "cap" it at something like 5%. That way if you get inflation of 7%, the erosion, or shift in wealth, comes in at 2% of annual income per year.
Does that solve the imbalance? Not really. The hole in the LGPS alone is in FRS17 terms about 7% of GDP, and even on Birksian rolling interest rate estimates must be higher than 3% of GDP. If we add in the "hit and hope" unfunded Civil Service, we can't be far light of 10% of UK GDP. A 2% a year erosion of real income for pensioners won't make much of a dent in that.
But there's light in the darkness. One bright spot is that, believe it or not, we can probably cope with a deficit of 10% of GDP. As long as it doesn't get any worse. On the downside, with generous redundancy offerings likely to zoom up as a result of current "cuts", the deficit is indeed going to get worse.
It's all about the "just the good bits", please. No-one has yet come to terms with the fact that in a game of winners and losers, which is what capitalism is about, some people will be losers. At the moment, it's the taxpayer who looks set to be the sufferer.
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