Coppola Comment

What do you do when your economy is in the doldrums and you need to kickstart growth? Why, you put more people to work, that's what you do. This has been the Tories’ strategy since 2010. The sustained attack on welfare benefits has all been focused on “making work pay” - encouraging, and at the margin forcing, people with illnesses, disabilities and caring responsibilities into paid work.  But there is another way of putting more people to work, and that is to import them. In a new report , the centre-right CPS thinktank says that importing people to kickstart growth has been the unspoken strategy of successive governments since 1997. And it argues that the strategy has manifestly failed.  In my latest Substack piece , I examine the reasons the report advances for this failure, and conclude that the "put more people to work" strategy has not failed. It has in fact compensated to some degree for the catastrophic failure of innovation, capital investment and productivity si...

"We need to discuss the complete disconnect between the marginal product of labour and labour wages," said Sir Chris Pissarides, speaking on the closing panel of the Lindau Economics Meeting. I tweeted this comment. Laurie MacFarlane of the New Economics Foundation promptly responded with this chart that brilliantly illustrates Sir Chris's point: "Quite why marginal productivity theory is still taught as something which explains the real world is beyond me," commented Laurie. Marginal productivity theory says that profit-maximising firms will only employ workers who can generate at least as much additional return for the firm as they are paid. Expressed like this, it seems sensible: why would a firm employ a worker who is a net cost? But marginal productivity theory also says that the amount firms pay their workers is equal to their marginal product - in other words, that wages rise in line with productivity. This is demonstrably untrue. Wages have no...

The present period of very low interest rates is widely assumed to be temporary, a consequence of the 2008 financial crisis and subsequent central bank action. Because of this, as the financial crisis fades into the mists of time, there is growing political pressure for "normalisation" of interest rates. Here, for example, is William Hague warning that central banks must start to raise rates or face losing their independence: The only way out is for the US Fed to summon the courage to lead the way to higher interest rates, and others to follow slowly but surely. If they fail to do so, the era of their much-vaunted independence will come, possibly quite dramatically, to its end. Hague gives ten reasons why low interest rates are a bad idea. His points can be summarised thus: the "reach for yield" by savers who want higher returns drives up the price of assets higher asset prices increase wealth inequality, fuelling popular anger pension funds are struggling, ...

This chart has been fascinating me for ages. It was produced by the Bank of England to illustrate a speech by Andy Haldane . Shock, horror - we have the lowest interest rates for 5,000 years. Even in the Great Depression they were higher than they are now. These are, of course, nominal interest rates. Real interest rates are even lower - though not by much, since inflation is close to zero in all major economies. Note also the divergence of long-term and short-term interest rates. This is encouraging, since it suggests that investors view future prospects as brighter, though hardly scintillating. Central banks have been trying to close that gap with various monetary policy tools, the idea being to bring forward some of that future enthusiasm into the present day. But so far, all they have succeeded in doing is depressing expected interest rates far into the future. Now, policy makers are beginning to talk about interest rates remaining permanently lower than their long-run av...

The chart below comes from the Rockefeller Institute's report on Public Pension Funding Practices (h/t @Silver_Watchdog on Twitter) . It illustrates perfectly the point I have been trying to make for quite some time now. Pension funds are not taking on more risky investments because the risk premium has fallen, but because the risk-free rate has fallen: In fact, as the chart shows, the risk-free rate has been falling steadily for over thirty years.  This is not a post-crisis blip. It is a secular trend. Yet pension investors have not adjusted their expectations of returns as the risk-free rate has fallen. Rather than targeting a spread above the risk-free rate that reflects their risk appetite, they target an historic rate. The chart suggests that the rate they are targeting has not significantly changed since 1990. Thus the risk appetite of pension fund investors has increased. In similar vein, the Wall Street Journal mourns the passing of the 100% bond fund: Ther...

S&P forecasts a serious shortage of safe assets by 2050 if the developed nations, in particular, do nothing to adjust their fiscal finances in the light of ageing populations. This has serious implications for government and investor behaviour - and the future of the ratings agency that issued it. Here is S&P's hypothetical sovereign ratings chart out to 2050. Yes, ratings - although as we shall see, ratings will become largely irrelevant in the weird world of the future. Clearly the price of sovereign bonds will rise significantly, particularly for those in the three "A" categories. S&P doesn't indicate which nations would be the issuers of these rare breeds, but it is a fair bet that their sovereign bonds are already trading at negative rates for some distance along the yield curve. So we are looking at fully negative yields for certain countries in the not too distant future. The "A" team These countries will be paid to borrow. Of co...

  Older people tend to want their pensions and benefits protected and the burden of cuts to be borne by the young. Of course, this is only natural: Most people want government to spend more money on them than on anyone else. This applies regardless of their tax contributions (those who don’t pay tax often demand more than those who do). And it is completely understandable. After all, charity begins (and when times are hard, ends) at home. But it is also foolish. In my latest post at Pieria , I explain why older people should be demanding that governments invest in the young. 

Chris Dillow complains that the Government's proposal to subsidise childcare for households with incomes up to £300,000 is "inegalitarian and economically illiterate". Much of his argument makes sense. His observation that subsidising childcare will benefit employers as much as parents is particularly important: childcare subsidies are in effect wage subsidies, and wage subsidies are known to depress wages. And his waspish remark that the Government would rather give "yummy mummies an extra bottle of Chardonnay" than fund early years education properly rings all too true. This looks very like the latest iteration of "Help to Buy Votes" - yet more pre-election bribery of middle-class couples.  But I have to take issue with him on this (my emphasis) : Let's start from the fact that this subsidy must be paid for by other tax-payers. It's therefore not just a subsidy to parents, but a tax on singletons. This is inegalitarian not just because ...

Germany is exporting people. Well, Eurozone countries exporting people is hardly news . But Germany isn't exporting the same sort of people as other Eurozone countries. Other countries are exporting their young and their skilled. Germany is exporting its old . Economically this makes complete sense. Germany has a lot of old people and a relative shortage of the young & skilled. So it imports young & skilled people and exports old ones. After all, exporting old people is surely better than killing them . There's nothing new about this, of course. Britain has been exporting old people for years. Relatively well-off pensioners like to retire to the sun after years of tolerating British weather. The southern countries of Europe contain substantial populations of expatriate Brits, many of them retired and living on savings. The economic collapse of the southern European states has taken its toll on them, of course: many British retirees in Cyprus lost substantial amoun...