Sunday, 19 March 2017

Meetings - why do we have  to have the stupid things given that they are almost universally perceived as one of the banes of working life?  The best article I've read about meetings was by written by Antony Jay for the Harvard Business Review in 1976 and he kicks off with the comment that "great many meetings waste a great deal of everyone’s time....long-established committees are little more than memorials to dead problems". 

Meetings can be divided into three broad types. 'Town Hall' meetings, 'Cabinet' meetings and 'Pub' meetings. The Town Mall meeting is a gathering  for leaders/bosses or others to impart information and can be as big as you like. Cabinet meetings are part theatre as little is denied but they are there to reinforce the importance of the members of the cabinet and to ensure that everyone its been by each other to sign off on an agreed plan. And a Pub meeting is a place for creative debate that rarely takes place in a pub at all. 

The Town Hall 

The boss wants to give the troops an update on the firm's performance over the last year, outline the key takeaways from the senior management team's offsite in Monaco, and send some motivational messages to help encourage everyone to work even harder in the months ahead. He or she instructs someone to prepare a powerpoint presentation with the  financial results on it, the key goals, some metrics on profitability, on the trend in the workforce, perhaps on the trend in compensation. The boss then stands at the front of the room,  goes through the slides,  and opens the floor to questions at which point a few brave souls ask a few bland questions, depending on part on how many people there are listening. 

It's possible to do these well, but it's more common to do them very badly. In the best case, the speaker is a motivational, charismatic leader  who doesn't need a powerpoint to help sell a vision of the future. If there are slides they are for reference on technical issues. The listener leaves impressed by the vision and by the passion of the visionary. 

In the worst case, the speaker hasn't really read through the slides properly in advance and so is left mumbling his or her way through them, reading off the screen. Perhaps the VC equipment wasn't tested much in advance and a technician needs to be summoned early in the presentation. There is little ad-libbing and so even less passion or motivation. There may be questions but the overall sense as the listeners leave, is of deflation. A ritual has been accomplished, because it is a ritual obligation of management to talk to the common workers occasionally, but little has been achieved and an opportunity has been missed. 

The cabinet meeting

A cabinet or committee meeting is a social structure, where a group gets together to formally reach agreement, and where the members can be seen to be reaching agreement. The group shares information which others may not have, reasserting its own exclusivity. It may have the meeting at a time and in a place where other lesser mortals know it's happening, which boosts prestige. It offers a chance for the members to reinforce their status relative to each other. But the key to these meetings is that they can only reach significant agreement if there has been sufficient preparation. Issues have been debated in smaller groups over a period of time and the purpose of the final gathering is to iron out the last wrinkles, put the finishing touches on the plan and to be seen to be in collective agreement so that there is collective accountability. No-one can easily say they were never part of the agreement.

So it's a meeting to agree something that's already been agreed.  I'm sure there are some things that are agreed at a cabinet meeting but the preparation work has been done in advance. A proposal was made, the meeting participants were canvased, their views heard. The t's are crossed and the i's are dotted at the meeting itself but the purpose is for everyone to see the body-language, and then there's photo-opportunity, or a signing ceremony or some sort of mutual affirmation.

The failure of a vast number of meetings in real life, is that they should be this kind, where the groundwork has been done long in advance, but instead there is some absurd hope that a group of 20-odd people can get together, discuss, debate and agree something from a standing start in an hour-long meeting. It's impossible for a host of reasons but the most important is that there's so much ritual involved in this kind of meeting. Who sits where, who speaks when, who is trying to impress the boss, who is competing with whom to be a bigger cheese week than they were last, and so on.  If you chair meetings of 6 to 20 people in a work environment and want to understand a bit of the underlying psychology, try asking the members whether they mind the meeting being filmed for training purposes and stick a few discrete cameras in the corners of the room. There will be people trying to get a word in edgeways who are ignored. There will be people whose sole purpose is to disagree with their competitors. There will be body-language galore as our inner ape goes into overdrive.

I've sat through some good meetings on business planning, some meetings where the homework that had been done in advance really paid off and strategic plans were proposed, debated from the perspective off everyone having already done a lot of thinking abut them, and agreement reached. I've sat in more and ones were someone was mad enough to think that 20 people could brainstorm a subject and come up with an interesting plan in an hour. Some of the most awful of these meetings, where presenters drone on, anyone who asks a question is scowled at because that makes the meeting drag on for even longer and where the only thing that is certain is that the group will not take genuine collective ownership of the conclusions, can be found in investment forecasting and strategy. A better recipe for half-hearted groupthink is hard to imagine. 

The Pub meeting 

Which is why I prefer the 'Pub' meeting, where issues really are debated and a relatively blank canvas is covered with ideas and eventually a plan. The image in my mind of a pub argument is of people jabbing fingers in each others faces, sometimes disagreeing loudly, sometimes agreeing joyously, always walking out arm in arm. 

In practice, these meetings can only happen in pubs if all the members of the group are the kind of people comfortable in a pub.  And I'm not sure that you can have even as many as ten people participating. But wherever the meeting happens the rules of engagement are the same - everyone is entitled to their opinion and is encouraged to have a say, regardless of status, age, experience, sex, ethnic background or which rugby team they support. Disagreement is encouraged. But finally, it is absolutely mandatory that everyone leave the pub able to put aside the differences of opinion and be civil to each other. 

In an office environment, the best way to run these meetings is to make the older/more senior/more vocal members of the team wait a while before entering the argument. Younger or more junior people will be nervous of disagreeing later, so need encouraging to express views. And need to know in advance their opinions are going to be sought. Those people who in a film of a meeting are quietly trying to get a word in, need to be picked out early too. It's also important to get to the most important issue for discussion early, before the group starts to flag. 

Some people will never be able to change their opinions even in an environment that encourage them to question them. That's fine, so long as they can debate without being (too) boring and aren't allowed to dominate proceedings. The debate is there to dig into the pros and cons of different opinions and also, to tease out relevant pearls of wisdom from unusual sources. The geeky end of the asset-backed research group had all the clues to impending disaster in 2007 but few firms were listening. The premise of Moneyball is the statisticians had more answers to baseball performance than experienced scouts. A good meeting creates a safe space where the views of these people can get a hearing. 

Saturday, 11 March 2017

Debt will be the death of us

As investment bank research teams ponder how much to charge for their insights, they could do worse than check out what is available for free, particularly from the growing band of central bank blogs of which the BIS' is still probably the best. Claudio Borio's speech to the NABE conference in Washington DC last week is fascinating (and free, of course).

The speech looks at the role of financial sector drag as a reason for the sluggishness of the economic recovery in many developed economies after the 2008 financial crisis. The BIS view of the world could be summed up as being that equilibrium or natural real interest rates are higher than many policy-makes believe, and this has resulted in an inability to restrain financial booms which cause a misallocation of resources that in turn, leads to painfully slow productivity gains in the subsequent economic recovery.

This is so intuitively true that it needs to be taken seriously. I've reproduced a couple of slides from this presentation and one from an earlier presentation covering the same theme. The first one shows global debt levels rising as a share of GDP, at the same time as real interest rates fall.

If I made the really simple assumption that across the economy as a whole, borrowers pay something like 3% more than the average of the real yields in long-dated government bonds and the central bank policy rate, and that inflation was around 3% in 1986 and 2% in 2015, this chart would suggest that in 1986, overall debt service costs were something like 19% GDP. And in 2015, after almost 30 years of rising debt and falling rates, they were something like 16% GDP. So, no problem then?

You could argue that it makes sense in this world, for policy-makers to accept the downward trend in interest rates. Companies and households alike would and indeed should have more debt because debt-service costs are low. Which is what's happened. Mortgages are bigger as a multiple of income than they used to be (fine if house prices rise for ever, right?) and a glance at the universe of borrowers in the corporate bond market will quickly confirm the gradual downward drift in average credit ratings. A triple-A company with little debt is not maximising the return to shareholders. Better to issue bonds and buy shares back, immediately.

The flaw, is that creditworthiness is a function not solely (or even mainly) of the ability to pay back the interest on a loan. It's about the ability to pay back interest AND principal. In other words, the size of the loan matters. Furthermore, it matters at least as much for the financial sector as for the non-financial sector. If I borrow money from the bank, the bank itself borrows that money too. And if we've learnt nothing else in the last decade, it's that that size of a bank's balance sheet matters. A bank that cares only about keeping income (from interest earned) growing faster than costs (from interest paid) will grow and grow it's balance sheet much as some did in the early 2000s. A focus on return on equity may be Ok for some companies, but not for a bank which needs to care about the return on the capital it uses to earn that money, and needs to set capital aside for the possibility that some of the money it lends never comes back.

 Just accepting that premise implies that the 'equilibrium' which sees more debt and lower rates, is an unstable one. A real equilibrium is one which applies to both the financial cycle and the real economy cycle. As in the second chart I've nicked.....
 This chart shows that real policy rates fell sharply and stayed low in 2001-2204. This is after the bubble burst and after the 9/11 attacks on the US.  Fed Chairman Alan Greenspan worried about disinflation even as the global economy started to recover in earnest and so the Us kept rates down (and the rest of us followed).  In part because inflation was was falling more than people expected, estimates of the natural rate of interest were coming down, albeit not nearly enough to justify the Greenspan-led monetary madness unleashed on us all.  But adjust them for the financial cycle and the natural rate was already rising in 2002-2003.

The crisis followed. Too much money was lent at these low rates. Too many resources were mis-allocated in a world where money was mis-priced. Here's what the BIS' experiment in setting policy to smooth the financial cycle throws out. A cycle, just not nearly such a pronounced one.

After the financial crisis and recession, the misallocation of resources that the financial boom caused/exacerbated, has led to a productivity-free economic recovery, at least in the economies most directly affected. So, estimates of natural rates have come down further. And since there's slack in the global economy, especially if we measure it on the basis of inflation undershooting expectations, policy rates fall even further. The possibility that the inflation cycle is a function of technology and the growth of global markets in goods and labour, is at most only considered in passing.

The depressing thing about this argument, is that the obvious conclusion would be that after a while we're just going to get washed way by another financial boom/bust cycle. Maybe not one whose epicentre is in the US and the UK to quite the same extent as the last one was, but that would be small comfort. It would be better to set global monetary policy with debt levels in mind, before the overall global debt/GDP level gets too much higher.

Sunday, 24 April 2016

Immigration, inequality and conceptual art

The Tate has a new exhibition called 'Conceptual Art in Britain 1964-1979' if you're interested.  A BBC Radio 4 reviewer explained carefully that conceptual art is all about the concept! One of the exhibits is of a glass of water that the artist explains has been changed into an Oak Tree.

Economics is about concepts  - notions, ideas, some of them rather abstract - and the economics of inequality is one of the most important ones. Thomas Piketty's "Capital in the 21st Century" captured the mood and helped spur a huge debate about its causes and the remedies that policy-makers should or shouldn't adopt. But at 700 pages long, it wasn't an easy read. Branko Milanovic's new book "Global Inequality, A New Approach for the Age of Globalization" comes in at 299 pages and the last 34 of those are the references and the index. It's also a book with great charts, so that the first time I opened it, I just skimmed through the picture with a cup of coffee.  For those two reasons alone, anyone interested in the economics of inequality should buy it (and read it).

There is a third, rather more serious reason,to be interested in the book. Thomas Piketty's focus was on how wealth inequality in particular grew in developed economies over time, and what policy-makers should do about it. The market, in his opinion, has and will feed widening inequality. Mr Milanovic's focus is on income not wealth and on global not national trends and is far more relevant to the world we find ourselves in. Martin Wolf reviewed the book more seriously here and talked about in a speech he gave for the Toynbee Foundation a couple of weeks ago.

The chart that Mr Milanovic is most famous for makes an appearance on the second page of the first chapter. It shows changes in income over 20 years plotted against income levels and can be loosely divided into four segments. On the left, the very poor are mostly in Africa (though you can reasonably throw Yemen, Afghanistan, even Pakistan and by now, Syria into this pot as well).  The middle of the chart shows income growth for average/below-average income groups many of whom are in newly-developed economies, notably in Asia. The group in the the 70-90th percentiles of global income levels are the poor/median income groups in developed western economies (they're  being left behind)  and the far right grouping is the top 5%, or the 1%.

The second chart shows the distribution of incomes in 1998 and 2011. Average incomes have gone up, but are still low by the standards of developed western economies. And the lack of growth in incomes in the 20-40,000 (2005) dollars per annum range is very apparent.

Apart from suggesting this is a book worth reading, I'll make a couple of observations. The first is that the reduction in global inequality levels isn't evenly-distributed; a lot of people, a lot of whom live on the other side of the Mediterranean, have been left behind. And secondly,  the political debate in developed economies is going to be shaped by how the lack of growth in median/below-median incomes is tackled.

My generation has grown up with the effects of booming trade - imported goods are cheaper and industries which can't compete in the global market-place have withered. The Philips Curve has creaked and groaned in the face of a global labour market and the profit share of GDP has boomed on the back of lower labour costs. As the UK debates how (or even, whether) to keep the last bits of its steel industry alive, the issue hasn't gone away but now the main talking point is immigration, almost everywhere. It's the single biggest political issue in both Europe and the US. It fuels the 'Brexit' voters' ranks, it holds up support for Nigel Farage, Marine Le Pen  and of course, Donald Trump. Meanwhile, those 1988-2008 charts don't even try to capture earnings gap that years of QE have opened up.

The failure of developed economies to tackle the humanitarian crisis in Syria (or Libya) before mass migration took over is miserably depressing. The response to the tide of refugees arriving on our shores over the last year, equally so. But even beyond the conflict zone, migration is  globalisation's response to global economic inequality. The poor and oppressed of the world are going to go on moving and between them, the advance of technology and the aftermath of the global commodity boom, they'll go on fuelling inequality within developed economies and all the political baggage that comes with that. Maybe that won't result in Trump becoming President, or the UK voting to leave the EU, or Marine Le Pen making a serious push for power. But without structural reform aimed at boosting the earning power of median income earners in developed economies, major victory for an anti-immigration, anti-free trade, anti-liberal party in a developed economy near you and me, is inevitable within the next 5 years or so.

Branko Milanovic doesn't make friends with all his opinions. But then, nor does Thomas Piketty and that hasn't stopped him from becoming an economics superstar. Income inequality is more important than wealth inequality and global inequality is more interesting in a global economy than only looking at national trends. Meanwhile, as for forecasts of median wage growth in high-income economies, well that's going to be a function of political choices, rather than Phillips Curves, isn't it! 

Sunday, 3 April 2016

25 multinationals and a big fat deficit

Awful balance of payments data fuel all sorts of responses - the UK doesn't make or export enough, or consumes too much. Is reliant on the kindness of strangers to finance the deficit, (Mark Carney) and is need of foreign direct investment that in turn probably depends on staying in the EU (David Smith). All fine arguments. But the surge in the  deficit in recent years is largely a result of the falling foreign income of a handful of huge multinational companies, whose incomes have fallen step by step with falling commodity prices. They finance themselves in international markets and are owned by international shareholders: Does that make a difference?

Heading for £100 per annum.... an awfully big hole 
The UK’s current account deficit reached £32.7bn in Q4 2015, which equates to 7% GDP and is the biggest deficit since records began. It takes the annual deficit to £96.2bn, 5.2% GDP. The £12.6bn deterioration from Q3 to Q4 was due to a £3.3bn increase in the deficit in goods and services to £12.2bn, a £2bn increase in the deficit in secondary income to £5.4bn and a £7.3bn increase in the deficit on primary income, to £13.1bn. It’s worth noting in passing that the UK’s net investment position now is in liability to the tune of £65,9bn, In other words, foreigners own £65.9bn-worth of UK assets more than UK investors own of foreign assets. All other things being equal over time, the bigger the net liability, the bigger the net investment income deficit will be.

The ONS’ chart of the overall make-up of the current account balance is below.

The trade account includes goods (a deficit) and services (a surplus). It's been pretty steady in recent years, though still significantly in deficit. The secondary income balance includes transfers provided with no expectation of payment, so things like bilateral aid and of course, payments to or from the EU. This series is volatile on a quarterly basis but not so much over a longer period. The primary income balance includes compensation of staff, rents, taxes and most of all, investment income.  Here’s a chart of that, and its constituent parts:

The primary income balance was in surplus as recently as mid-2013 and just glancing at the chart you can see that its deterioration coincides with a dramatic shift in the balance of direct investment income. The ONS took the trouble to publish an article to  explain what’s going on and the link is here:

If reading it all is too much bother on a sunny Sunday morning, the main points are as follows:

More than 80% of the deterioration in the current account since 2011is attributable to falls in net foreign direct investment (FDI) earnings.

Falling FDI credits over this period explain just under 80% of the decline in net FDI earnings, and the majority of that is attributable to the largest 25 multinational companies. This partly reflects the fact that UK FDI assets are exposed to movements in global commodity prices – most notably crude oil.

In my day job, I mostly ignore these niceties. The current account deficit is huge and leaves the UK dependent on foreign investors’ confidence in and appetite for UK assets. In the middle of a toxic debate about whether or not to remain in the EU, that’s bad for confidence and particularly bad for the pound. I’ve written extensively on that and the pound has indeed, fallen sharply in recent months and since the latest data were released.

But two questions are posed by the data. The first is whether we will see the current account deficit recover as an when oil and other commodity prices stabilize (or bounce)? The second is whether what 25 big multinationals do matters at a national level?

The UK still had a current account deficit, albeit a smaller one, when the commodity boom was in full flight. So in 2011 when the deficit was 1.7% GDP and commodity prices were at their peak, the headline figure masked the poor underlying  situation. Q4’s 7% deficit may overstate how bad things are, but I could average between the 1.7% of 2011 and the 5.2% of 2015 and conclude that 3 ½% GDP is a truer reflection of the underlying position. And that’s only small comfort. It’s still, in today’s money, an annualized international borrowing need of GBP 65bn.

I might be tempted to say that the UK’s £65bn underlying deficit is just the other side of the coin with regard to the Eurozone's near-£200bn current account surplus.

I might also conclude that the commodity cycle is far more volatile than FX trends, and so the idea that a weaker pound will magically solve the UK’s balance of payments problems is absurd. It would improve them a bit, but the parts that have caused the deterioration are not terrible senstivie to sterling exchange rates.

But are big global companies different? 
The second question is more difficult. Imagine a large UK-domiciled multi-national that used to earn huge amounts on its foreigh investments, but is now no longer doing so as a result of falling oil prices. So, instead of repatriating income and paying a dividend to its (global) shareholders, it will borrow money or run down cash reserves until prices recover. ,It may well also save money by reducing employment overseas, which helps improve the situation on the balance of payments without having much impact on the UK economy. If it borrows by issuing debt, does that really have much impact on the UK? Once upon a time a large UK multinational issuing sterling bonds might have been considered to squeeze out other buyers of gilts, say, but I’m not even sure that’s a relevant factor anymore.

I’m not going to argue this doesn’t affect the national accounts – it does.  A multinational that earns money abroad is bringing pounds back home and one that issues debt is adding to the demand the rest of the UK makes on the global investor community. But to what degree does a multinational borrowing money really squeeze out the UK Government? To what extent does paying dividends to global shareholders boost the UK? And while huge changes in commodity prices have clearly been a driver of the direct investment income balance, it’s also true that whether a company reinvests in its foreign businesses, or brings cash home, is a decision determined by all sorts of factors, with international tax regulations  often at the top of the pile.

All this is framed as a question and that’s why this is a blog rather than an investment bank's sell-side research note. I’m not sure I’m aloud to write ‘I don’t know’ this often in the day job!  The UK’s 7% GDP current account deficit is frankly, embarrassingly huge. There are no positives in the data but if someone asks just how hard it will be to find foreign financing for the defiit, and whether it will go on growing in the years ahead, all I can really say is that I don’t know, because that depends on the decisions of the management of a couple of dozen huge global  companies who may think that this is a good time to be borrowing at super low rates, even if that does drive the UK’s current account deficit up.

Saturday, 11 July 2015

The Age of Migration - debt, migration and flawed architecture

With Eurozone Finance Ministers discussing suggestions ranging from a temporary Greek exit from the Euro, to a request for the Greeks to come up with 'more' (more austerity, more evidence that proposed measures actually will be carried out?), there's a long day of negotiations ahead in Brussels. But that Greek debt crisis has now opened up a debate on the notion of debt restructuring within the single currency area.

There is growing pressure for Greece's creditors to allow more formal restructuring of Greek debt, which would inevitably lead to acceptance that debt restructuring, re-profiling or relief may need to be seen across the Euro Area at times. Many people who have been looking at the mountains of debt accumulated by Eurozone governments in recent years have long believed repayment of that debt is unlikely, so what's the big deal? Even a casual glance at the history of sovereign debt shows that defaults happen more often than many people realise, often occur in clusters, and the risk of them is underpriced. Furthermore, default is, by and large, forgiven faster for sovereigns than for others, understandably.  A defaulting individual or company can be cast away, never to be seen again. Literally, in the case of debtors the English sent to the other side of the world in the 19th century. But a country won't go away. Russia defaulted and then sat there on the same bit of land as before until we all decided to do business with it again.

History, furthermore, tells us that punishing a country's people too harshly and demanding they repay the debts accumulated by their parents, leaders or even themselves, is counter-productive. At worst, it builds enmity. At best, it means an economically weakened trading partner.

So if we accept that default is occasionally necessary, why be bothered about doing it in Europe? The answer, I think, is that the idea that sovereign default is impossible in the Euro Area is a big part of the architecture of the system, put there to cope with one of its very biggest structural flaws - the fact that while national central banks do not have the ability to run independent monetary policies, national governments have a lot of autonomy over fiscal policy. This is a huge flaw, 'managed' with the rules on deficits and debt. Weaken those and the flaw is exposed, and will either bring the system crashing down or be resolved itself through adoption of a new fiscal structure.

Here's a description of the conditions for a strong monetary union, which I took from the late Victor Argy:  "A strong monetary union is assumed to have a common currency and a common central bank. Capital markets are unified and independent monetary policy becomes impossible. Some independent fiscal policy continues to be feasible. And he goes on to list the conditions which make the costs of joining a union smaller, or the benefits larger. They are 1) that differences in growth rates and labour productivity are not large; 2) that intra-union trade is large; 3) that there is no long-run trade-off between inflation and unemployment; 4) the differences in propensities to inflate are relatively small; 5) differences in degree of domestic instability are relatively small; and 6) there is a significant degree of labour mobility." Grapes of Wrath. A better read on currency unions than anything I've written can be found here, in a discussion by Milton Friedman of the Euro in 1997. Some of the weakness he outlines have been tackled since then, but not all. 

'Some independent fiscal policy continues to be feasible'.  That is absolutely not what European fiscal policy looks like. Consider this. US State and Local debt totals 1/6th of Federal debt and less than 20% GDP.  So when California over-borrows, despite being the biggest state, it still doesn't cause a huge national crisis. Imagine California having a debt level of 120% GDP, and then asking smaller states to forgive a share of that debt based on their own share of US GDP. It doesn't happen because the US allows 'some independent fiscal policy'.

This problem of local control over debt and Federal control over monetary policy is a really, really issue. When I write that sovereign debt default is relatively common, I should differentiate between default on domestic debt, and default on foreign debt. There's a brief discussion of the top in this week's Economist here, Buttonwood. Domestic debt default is often counter-productive because of the damage it does to the domestic banking system, so default usually happens via the means of inflation.  Historically this was done through the effortless means of debasing the currency, more recently it's been done with the help of a monetary policies than boost inflate and weaken the currency. And most recently of all, global disinflationary forces have made it hard to do at all. Defaulting on foreign currency debt is more straightforward, and therefore more common. But in Europe, the domestic routes to de facto default through devaluation and inflation, simply don't exist. All debt is foreign because no single country controls the Euro printing press. And worse still, since more and more of any single country's debt is now held by that country's banks, this is now de facto foreign debt but defaulting will still cause havoc in the domestic banking system.

I still don't know how this weekend will play out, let alone how long the Greek debt can can be kicked down the road before we're back talking about debt. But I do know that Greece isn't the only European country whose debt won't ever actually be repaid in full and I know that changing the rules to accept that reality will either bring about the collapse of the Euro system or lead to a change in the way that European fiscal policy is operated.

Finally, a quick word about Puerto Rico. A very different debt crisis but one which really is a sign of the times. Puerto Rico's $72bn of debt is close to 3/4 of GDP and either huge compared to any US State (which Puerto Rico isn't) or manageable if it were an independent country with (which it isn't either).

What really makes Puerto Rico's debt unsustainable, and is both a cause and result of GDP shrinking in 7 of the last 8 years,  is the fact that its population is falling. Faced with a weak economy and poor prospects, people, especially young workers, are leaving the country. Check out this link  from the Pew research centre if you want some scary charts of where this is heading. When I first wrote about the Grapes of Wrath, I thought that labour mobility in the US in the 1930s (which resulted in huge numbers of displaced Oklahoma farmers heading down Route 66 in search of jobs in California) was both a sign of a monetary union working properly and yet, evidence that even in the US there was huge social strife caused by migration. I wasn't really wondering what would have happened to Oklahoma's ability to repay debts if it had been an independent country. Nor was I thinking forwards to a world where would have the degree of mobility in people, job and technology that we have now. In a technologically joined-up world, skills will spread globally and people will move to where those jobs are, as well as moving away from places with political or economic problems. This may 'the Age of Migration'. The politics of migration/immigration are increasingly important and for the countries they leave, while the economics of debt with shrinking populations will be equally important.

Sunday, 14 June 2015

Over 50s, the new thirty-year olds

I've been reading about the "older" (over-50) worker - something I've been for a few years now. 

A recent paper by the Institute of Leadership and Management  which got a fair amount of coverage in the press week starts with the encouraging observation that "Baby Boomers (aged 51–70) are seen as loyal, skilled and knowledgeable members of the workforce – but they aren’t viewed by their colleagues and managers as the ‘organisational stars’ of the future and they are perceived as having little potential for further progression or development in their organisations". Well, isn't that nice!

I recognise some of the things written in the paper although in the world of finance, I'm not sure it's all about oldish workers being seen as lacking in leadership potential. In the latest flurry of redundancies at a variety of firms, I know a number of over-50s who have lost their jobs. Nothing too shocking in that perhaps  - I know more over-50s than under-30s so the sample of my acquaintances is biased - but I do remember being surprised when I was told me over 15 years ago that there only three over 50s left on the Bishopsgate  trading floor of NatWest Markets.

What happened 15 yrs ago still happens now - when numbers need cutting, the older worker is a prime candidate. The justification is usually that organisations get too top-heavy: the number of people with  business cards that say 'Managing Director' is high relative to those who cards read 'Associate'. The management pyramid is inverted and better to lose someone who is not seen as 'an organisational star of the future' than  some bright young thing. And why not? This is the City, where dog eats dog and so on.  Mind you, if more and more people are living longer, having families later and working into well their 50s or 60s, I can't help feeling that a decade-long flow of workers from sell-side investment banks to buy-side fund managers means there's a role for the fifty-something sales-person who has known these clients for half a lifetime.

Separately, I was signed up a fortnight ago by a colleague to participate in a '100-day journey' measuring how much exercise people take. It's a team event, run by some people called GCC and my employer has decided that this would be good for the staff, or fun, or something. I was handed a step counter and sent on my way. I dutifully fill in the number of steps every day, with the intention of making sure that I take more exercise than the average. No problem there, the global GCC average is a little over 12000 steps a day. My (erratic) round of golf yesterday morning ran my total up to 16000 before lunch. Looking at average steps for various cohorts on the website I find that men step more than women and that 50-54 year-old men step more than the average man.

This isn't a complete surprise.  By and large, my generation of late baby-boomer over-50s is pretty motivated to stay in decent-ish shape. We got the message about smoking ages ago and even if the one about alcohol has been largely ignored, we have gym memberships and we force our 'dad bods' into luminescent lycra cycling clothes with far too much enthusiasm. We're (mostly) no longer taking children to the Pirate's Playhouse or the zoo on Saturday mornings - or even to football/skating/ballet.   Instead, we have time to get some exercise in before we take the children to the Oval to watch T20 (where £8 for Pimms makes the prices for ice cream at the zoo seem almost reasonable).

Another thing I recognise in my age group is that they turn up for the morning meeting.
The average age of people in a dealing room is in the 30s, but at 6:45 a.m, it's a good bit older. The young worker finds getting out of bars and clubs in time to get enough sleep and make it to the morning meeting hard. The young parent is sleep-deprived. A decade ago, when asked how long I would go on working I said I couldn't imagine stopping, but I could easily imagine giving up morning meetings. Yet I find it easier to wake up now than I used to and travelling round London after 7 a.m is almost too hideous to contemplate. Nowadays, the choice is between being at my desk early, or connecting to it from a computer far away from London.

Of course, the fact that I'm a fan of the over-50s work ethic and would happily employ them if I were an organisational star (future or present) won't change employers' attitudes towards them. But what will go on changing is the number of older people who are still working. It's going to go on growing. I may not take the children to Alexandra Palace ice rink on Sunday mornings any more, but they're not likely to be financially independent any time soon. My generation can't afford to stop working even if it wants to. But if "having little potential for further progression" means we aren't competing for the top jobs, "loyal, skilled and knowledgeable" has its merits. The over-50s I know who've lost their jobs mostly seem to find new ones pretty quickly, even if they have to take a cut in pay. In the process, they act as an anchor on wage growth across the pay scale (except for CEOs, but that's another story).

The changes in the workforce aren't limited to the over-50s male of course, it's just that this is the group I know best. If I were a woman, I might be inclined to think about the number of women who either have, or want to return to the workforce and have a deep pool of skill as well as a huge amount of motivation after taking some time away. If I were bit older, I'd point to the desire to shift the work-life balance around, without actually stopping work. Thoughts on the world from members of these groups can be found here (from @LadyFOHF on twitter) or here from (@georgemagnus1).

Mostly, I think too many employers are woefully out of touch with the way the labour force is changing and are  still wedded to an antiquated understanding of what 'work-life balance' means. They regard surfing the internet in your office as 'work' and reading The Global Economy in transition at home as 'life'. And if they think older workers are loyal, skilled and knowledgeable but have little potential, they'll end up finding out how much they have in common with dinosaurs.

Saturday, 6 December 2014

Does the (US) Phillips Curve work in leisure & hospitality?

The US employment data released yesterday are worthy of a short post. The bare bones of the report are that a strong monthly increase in employment and a modest acceleration in wage growth (321,000 jobs, wage growth from 2% to 2.1%, unemployment rate steady at 5.8%) have prompted excited headlines like the FT's... (US Heads for best jobs growth since 1999). The growth rate of employment has picked up from an above-trend 1.95% annual rate to a whopping 1.99% rate. That doesn't really answer anyone's questions about whether falling unemployment will drive wage growth up, or whether the US is going to return to less pathetic rates of productivity growth any time soon for that matter but with some cracking (i.e., low) CPI and PCE inflation likely to turn  up shortly, real incomes are rising in time for Christmas; and a 2% growth rate in unemployment will underpin GDP growth nicely above that in the coming months.

All of this you can read all about to your heart's content elsewhere. What I've been spending more time on is the make-up of the labour market, which has continued to see the strongest employment growth in the lowest-paid sectors, and some of the weakest in the highest-paid sectors. But one thing that was striking in the November data was a further acceleration in wage growth for the lowest-paid of all the sectors - leisure and hospitality. This is a sector where wages average $14.10 per hour, compared to $24.66 for all workers and over $30 in mining, finance and information. But over the last year, wage growth has picked up to 3.75% at this end of the spectrum. I've plotted wage growth in leisure and hospitality, along with overall wage growth and (inverted) the unemployment rate, in the chart below.

The picture tells a simple enough story. The lowest-paid workers in the US saw their pay levels fall in the aftermath of the recession, suffering far worse than the average. And their wage growth (let alone their wage levels) lagged until late last year. But as the unemployment rate has gone on falling, they have started to see pay rises. The Phillips curve for the overall US economy still looks pretty useless - wage growth trending sideways, while unemployment falls - but tightness in the labour market may finally be turning into more cash at the bottom end of the scale. And since those are the people who spend the largest share of any additional income (because they need to), the impact on demand may be greater.

The main causes of weak real wage growth over the last decade (technology, globalisation) would also suggest that a sector where out-sourcing jobs and replacing them with robots are both difficult, should see wages respond to falling supply of workers. So this pattern does nothing to allay longer-term concerns that the policy response to weak demand caused by weak real wage growth, itself due to major structural forces, is ineffective: An orgy of monetary accommodation has sent up asset prices (which do very little to address falling real incomes for low-income families), helped increase the profit share of GDP at the expense of the wage share and fuelled bubble-like pricing in commodities and currencies, many of which are now deflating.

However, for all those long-term, concerns, I can't think of any reason not to cheer on a boost in wage growth for the lowest-paid sector of the (US) economy at last, even if we need to see this filter up to sectors with higher wage rates before it is reflected in faster average wage growth.