An audio recording of last week’s spiked debate on consumerism, with me on the panel, is now available online. Click here.

This is my book review from Friday’s Financial Times.

Big Money: 2.5 Billion Dollars, One Suspicious Vehicle, and a Pimp – On the Trail of the Ultra-Rich Hijacking American Politics, by Kenneth P Vogel, PublicAffairs, 2014, RRP$27.99/£18.99

There is a tension at the heart of democratic politics that is hard to resolve. In the electoral sphere everyone is equal. Both Bill Gates and the poorest pauper have the same number of votes to cast in each election. But by deploying their enormous wealth in political campaigns the rich have a far greater capacity than the average citizen to influence electoral outcomes.

In the US, many politicians from both the main political parties have long realised this discrepancy poses challenges for democracy. That is why restrictions on campaign finance go back at least as far as the early 20th century. The trouble is that such regulations can have unintended consequences that can reasonably be described as bizarre.

Big Money tells how massive contributions from a few ultra-rich individuals came to play a greater role in the 2012 presidential election than ever before. But the start of the tale goes back to a law passed in 2002 that was, paradoxically, designed to diminish the influence of big money in politics. The story also involves Barack Obama, who had long argued against the corrupting effect of large campaign contributions, becoming a consummate player in the game.

The Bipartisan Campaign Reform Act of 2002 put strict limits on the amount of money that could be contributed to political parties. In addition, it included other regulations, such as restrictions on the funding of television and radio adverts.

Several years of uncertainty about the legality of political funding followed, but this was clarified by two Supreme Court rulings in 2010. The most important of these, known as Citizens United, barred large donations by the wealthy to parties but allowed them to contribute to independent organisations instead. These groups, which became known as super-Pacs (political action committees), were not permitted to co-ordinate with the politicians or parties they supported.

The results of this legal shift were dramatic. Super-Pacs blossomed, campaign spending in the 2012 election surged to unprecedented levels and political consultancies enjoyed a fees bonanza. Traditional political parties were also undermined as much of the money and campaigning switched to the super-Pacs. The new organisations in effect became shadow parties themselves but were accountable to their donors rather than any membership.

Mitt Romney, the Republican candidate in the 2012 presidential election, was supported by the prototype super-Pac. Restore Our Future was nominally independent, as it had to be by law, but was set up and run by some of Romney’s former aides. It proved successful in raising tens of millions of dollars to support the candidate’s presidential bid.

Although President Obama condemned the Citizens United verdict in his 2010 State of the Union address, he had his own super-Pac support within months. For the Obama campaign team allowing the creation of such an organisation was the lesser of two evils: it was either that or risk losing the 2012 race to the well-funded Romney camp. Admittedly Obama had been supported by wealthy donors in his 2008 presidential bid, but the emphasis then was on getting smaller donations from grassroots supporters.

Kenneth Vogel, chief investigative reporter for Politico, the news organisation, does an excellent job in untangling this story. Much of the book consists of reportage, with him trying to attend secretive meetings between ultra-wealthy donors and electoral candidates seeking funding. Often he was barred from entering or ejected after being identified as a journalist.

He is commendably non-partisan in his reporting. Vogel sketches the shadowy fundraising worlds of both of the main parties. He also reports on the intense factional rivalry that sometimes exists within their respective camps. Republican donors, for instance, include fiscal conservatives, mainstream business people and social conservatives, and there are often heated disagreements between them on key issues.

But the book’s strength as a piece of reportage is also its weakness. It is unlikely that, with the passage of time, 2012 will be seen as the turning point that Vogel portrays. In retrospect it will probably be viewed as another step in a long process of retreat from mass politics, rather than as representing a fundamental shift.

It is a long time since the American public was actively engaged in the political process. The dominance of big money and professional campaigning is at least partly the result of this depoliticisation.

The Financial Times has published two articles by me today. The first is a discussion of Oxfam’s claim that the world’s 85 richest individuals own as much wealth as the bottom half of the population. The second is a review of a book on campaign finance in America. You may need to register (free) to read them. I will upload the full text of the articles at a later date.

I will be participating in a debate on the Global 10 billion – something to celebrate? at the Mantownhuman summer in London at 12.30am on 16 July. The other panelists will be Danny Dorling (a professor of geography at Oxford university) and Philippe Legrain (the author of Immigrants: your country needs them).

The emergence of London as a centre for trading in the Chinese currency points to both the strengths and weaknesses of the British economy.

It is certainly a coup for London that the Chinese authorities have agreed to launch direct trading between the renminbi and the pound on the capital’s foreign exchange market. This will build on a process that has gone on for several years with London already responsible for two-thirds of renminbi payments outside of China and Hong Kong – albeit the total amount is still small.

The announcement of the agreement was timed to coincide with an official visit by Li Keqiang, the Chinese premier, to Britain. In an article in the Times he praised, among other things, Britain’s “dynamic financial sector”.

It is not hard to see why the development of London as a renminbi trading centre is beneficial for both sides.

For London it is essential if it is to maintain its role as a truly global financial centre. According to estimates from TheCityUK, an organisation that promotes British financial services, London accounts for about 40% of global foreign exchange turnover. It is hard to imagine the City maintaining its leading position in this market if it does not have a prominent role in trading the currency of the world’s second largest economy. Although the renminbi’s international use is limited at present it looks bound to increase substantially.

It is also important for London to have a significant share in all the main segments of financial services. As financial centres go it is akin to supermarket – offering a wide range of products to all those who use it – rather than a niche or even a regional player. Only New York can match it is this respect. Even leading Asian centres, most notably Hong Kong and Singapore, are not quite truly global.

It is also clear why the Chinese authorities are keen for renminbi trading to be established in London. If China is to be a global power it needs its currency to be traded internationally. It cannot simply confine the use of the renminbi to domestic transactions.

Yet although the two sides benefit from their relationship it is asymmetric. London needs Chinese business far more than China needs London.

China has other alternatives if it wants to encourage the emergence of renminbi trading hubs outside of Asia. No doubt other centres, such as Frankfurt and Luxembourg, would be willing to serve in such a role. These places do not have the weight of London in global finance but they are likely to be happy to oblige their Chinese clients.

In contrast, London desperately needs the renminbi business if it is to remain a global financial centre. And Britain is heavily dependent on London’s financial prowess for its continuing prosperity.

Despite all the talk in recent years of rebalancing the British economy back towards production this has not materialised in practice. According to official figures production industries – which include manufacturing and mining – decreased from a 42% contribution of GDP in 1948 to 15% in 2012. Although a return to the position in the late 1940s is extremely unlikely there is significant scope for some swing back in the opposite direction. This would involve Britain increasing its capacity in high technology production.

Services, in contrast, have come to play an increasingly important role in the British economy, with financial services particularly central. As TheCityUK points out, the financial and professional services sector is Britain’s leading export earner, contributing significantly more than any other sector.

This is both a considerable achievement and an indication that Britain’s economy has become severely lop-sided.

This blog post was first published on Fundweb yesterday.

A Piketty primer

19 Jun 2014

For those who cannot face reading Thomas Piketty’s 700 page tome on inequality – and there must be a huge number of buyers who have just left it lying on the coffee table – a quick primer. His interview on the BBC Hardtalk programme gives a good quick “cheat” on where he is coming from. Essentially he is a mainstream technocratic economist:

  • He is staunchly pro capitalism and for market forces. At one point he suggests his goal in raising inequality as a problem is to protect capitalism.
  • He supports inequality in principle. His concern is that it might reach a point where it could go too far.
  • He is intolerant of criticism. Note his attempt to dismiss critical remarks by the Financial Times (although those points were themselves very narrow and technical).
  • He takes an instrumental role of education. Seeing it as having a role in narrowing inequality.
  • He has friends in high places. Having been invited to the White House and other influential forums.

It is also worth noting that he was an economic adviser to Ségolène Royale, the Socialist party candidate in the 2007 presidential election in France (and she is in turn a former long-term partner of François Hollande, the current president).

Market reactions to the decision by the European Central Bank to reduce interest rates and introduce additional unconventional monetary measures can be broadly divided into two: those who welcomed the moves and those who welcomed them but said they were insufficient. Both sides misconstrue the nature of the eurozone’s economic problems and so cannot offer any viable solutions.

Indeed despite the disagreements over the scope of the ECB’s measures both sides share much in common. They make the common mistake of assuming that the crisis is largely one of insufficient liquidity and falling prices. From this flawed premise they conclude incorrectly that central banks can play a key role in reversing the process.

 For the sensible people who do not follow the shenanigans of central banks obsessively the ECB took two sets of measures. First, it reduced the interest rates it sets to historical lows including moving one key rate into negative territory. In effect commercial banks will have to pay for the privilege of depositing cash with the central bank. Second, it announced a raft of unconventional measures to bolster liquidity although it stopped short of talking about quantitative easing.

It should be clear by now that, despite all the talk of recovery, the developed economies are facing at least one lost decade in economic terms. Symptoms of the crisis were already becoming apparent in 2007 with house prices falling in America and the run on Northern Rock bank in Britain. Although the eurozone had already suffered as part of the global crisis it was readily apparent by 2010 that it was, in addition, facing its own particular challenges.

Looking forward it seems clear that it will take at least several years before anything resembling normality reemerges. For one thing western central banks are still pumping huge amounts of liquidity into their economies to keep them ticking over. The main thing that differentiates the ECB is that it is reluctant to acknowledge that its measures are a form of QE.

The fundamental problem western economies face is not deflation – that is merely a symptom of a sluggish economy – but economic stagnation. Economic restructuring is necessary if there is to be a new round of dynamic growth. Yet, as a recent study by the European Commission showed, corporate investment within the European Union is still well down on its 2008 level.

Extending easy credit, essentially what central banks are doing, can only act as a short-term palliative. It the long term it only makes matters worse.

In addition, the eurozone still retains its structural flaws. Binding fundamentally different economies into a currency union tends to create imbalances. The credit bubble that emerged in the peripheral eurozone countries in the run-up to 2010 had its origins in this arrangement.

Central bankers cannot resolve either the underlying economic challenges facing western economies or the particular structural weaknesses of the eurozone. These are matters which politicians need to play a leading role in solving. Unfortunately they would rather shirk their responsibilities and hide behind central bankers.

This blog post was first published today on Fundweb.

I will be participating in a spiked debate on celebrating consumer choice at the Grand Committee Room, Westminster Hall, London on the evening of Monday 23 June. The other panelists are Julian Baggini (philosopher and author), Helen Dickinson (director general of the British Retail Consortium) and Harry Wallop (journalist and broadcaster).

This article was an accompanying box for a recent Fund Strategy cover story I wrote on emerging markets.

The debate about the rising middle class in emerging economies often gives a misleading impression of the scale of prosperity that has been achieved.

It is true, and welcome, that people in the developing world have become much more affluent in recent decades. But the middle class is a long way from its western namesake. By some measures it is living at barely above subsistence levels rather than enjoying the living standards associated with the term “middle class” in the developed world.

Part of the problem is there no widely agreed measure of what constitutes the middle class. It is usually defined in relation to income but the threshold for entry to the middle class varies widely. This creates potential for confusion.

Perhaps the best place to start is the most inclusive definition of middle class. That is those who live above the $2-a-day poverty threshold. It is according to this definition that everyone who is not on the most meagre subsistence is counted as either middle class or wealthy.

It is important to recognise that this is not $2 in cash terms. Technically it is in 2005 international dollars at purchasing power parity. In practice this means the equivalent of what $2 what have bought in America in 2005.

This statistical procedure is used because the purchasing power of a dollar differs from country to country as prices vary. Therefore calculating a standard dollar means it is possible to make international comparisons. It also means that ‘$2 a day’ in these terms is probably significantly less when expressed in real money.

However, it has the advantage of making possible a meaningful comparison between income levels in America and in emerging economies. Martin Ravallion, a former research director at the World Bank, pointed out in a paper that the poverty line in America was defined as $13 a day in 2005 (The Developing World’s Bulging (but Vulnerable) ‘Middle Class’, World Bank Policy Research Working Paper 4816, January 2009). The level today is about $16.

In other words, many of those generally defined as well into the middle class in the emerging world – those with an income of $6,000 a year or more – would be considered below the poverty line in America. On the negative side, this means the emerging world is still a lot poorer than the ebullient discussion of a rising middle class often implies. On the other hand, it suggests there is still a lot of potential for catch-up growth.

Indeed, it is possible to work out roughly the difference between income levels in the advanced and emerging economies. The advanced economies account for about half of the world’s output and 18% of its population. Emerging economies account for the other half of the output but about 82% of the population. Therefore, on average, the advanced economies have an income per person of about 4.5 times that of the emerging world.

Finally, there are other ways of gauging entry into the middle class than an income threshold. According to one authoritative estimate there were about 160m cars in the G20 (largest) developing countries in 2010. Taking families into account, that would probably amount to a middle class of about 550m-660m people.

The gap between the living standards of the emerging middle class and even the average person in the West remains substantial.

I will be introducing a discussion of Adam Smith’s Theory of Moral Sentiments at the IoI Economy Forum in London on 25 June. Everyone welcome. This follows on from a discussion of The Wealth of Nations on 27 February.