Six months on

Returning to new posts after six months in which the unassailable logic of monetary policy has been proven once again….a storming return to growth within the UK economy,  boosted by an unrelenting flood of cheap money and low interest rates. So what if it is consumer, housing and debt fueled – growth has to start somewhere. The doom-mongers, this one incliuded, proven wrong again.

The criticisms are easy to trot out now – little sign of investment (which fell over 5% last year) or exports (where the deficit hit a record at the start of 2014). Unemployment falling close to 7% but productivity per hour worked stagnating. Hence real wages languish.

In which case a more interesting insight comes from the idea that one of the effects of the crisis has been to crystallize the problem of inequality between generations. One of the ways this has is happening is through the current dynamics in the pensions market.

The gist of this argument starts with a positive – that, contrary to what the simple data on wages and incomes tell us, companies have indeed increased the amount they allocate to labour as growth has returned. The crisis therefore has not caused a further erosion of the benefits accruing to labour in the never-ending struggle with capital. This is because wages are only part of the picture. Employers also make commitments to pay pensions – basically, deferred pay. Once these payments are taken into account, according to a recent Treasury report, labour costs have been rising recently.

But beneath this aggregation lies an inter-generational con. The extra payments being made in pensions are for current retirees, because of the under-performance of final salary pension schemes. And these are, in effect, being paid for by depressing the take home pay of current workers.

Twenty years ago one of the core components of a post-grad economics training was a module of dynamic mathematical modelling which lead to the conclusion that invested pension schemes were always superior to ‘pay as you go’ systems. This was because each generation invested some of its current income which, in time, provided the nest egg for retirement. Using retirement savings for productive investment was far better than the post-war welfarist model of expecting the current working generation to simply pay the retirement incomes of the previous, which amounted to no more than an unproductive transfer payment. As always the complexity of the maths was in contrast to the simplicity of the conclusion – which you could see as either an example of the elegance of economics or its limited powers of insight. The point is that the theory did not deal with the reality of pension schemes where the returns were fixed and did not depend on the investment return – the fundamental flaw which has now resulted in another type of ‘bail out’, with the returns privatized but the costs socialized.

The parallel with the bankers is perhaps stretching the point – and a focus on inter-generational tensions is disingenuous, obscuring the genuine need to increase the share of income for labour, both for current and past generations. And the inter-generational divide quickly morphes into the usual one of class when we remember that many in the current generation will sense a way out from their encumbered domestic conditions through the release of all that inheritance income. But it’s an ominous future if you’re not born into a family with assets to spare.

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