Back to class warfare in Britain


Bloomberg News

The big thing dominating political debate in Britain isn’t – as in most of Europe – unemployment, but the unaffordable cost of living. So far, most of the ideas offered to address the problem are wrong-headed.

Last Tuesday, for example, theatrically outraged members of the British parliament cross-examined leaders of the payday lending industry, asking them if they are “rapacious” and unscrupulous Dickensian-era loan sharks, using short term loans to trap large numbers of people into debt spirals to make money.

At the same time, the environment minister followed the water-utility regulator in calling on water companies to limit price increases, arguing that they made too much profit. And Labour Party leader Ed Miliband gave a big speech in which he proposed building “a different kind of economy” in Britain, in which the government would intervene to create a “race to the top” for wages, instead of trying to compete with China and India.

The average Briton, Miliband said, is now 1,500 pounds (about $2,400) worse off each year than at the last election in 2010, and the current government is too wedded to the interests of the rich to address the problem. The Office of National Statistics says real wages fell 8.5 percent between 2009 and 2012. Conservatives, meanwhile, have been highlighting the views of Miliband’s father Ralph, a Marxist academic.

In other words, Britain’s ideologically driven politics of class warfare are back after a brief respite during the booming Blair years. In the space of a few weeks, Miliband has proposed a price freeze for energy companies and a cap on the interest rates that lenders can charge, as well as steps to increase the minimum wage, reduce the number of low-skilled immigrants coming to Britain, and set up state-backed regional banks like in Germany.

A new study from the London School of Economics suggests the persistence of Britain’s class obsession should be unsurprising. It tracked the stickiness of high-status surnames at Oxford and Cambridge universities from the years 1230 to 2012, to figure out how quickly the advantages of class and inheritance in Britain dissipate. It turns out the answer is at least half a millennium – about 400 years more slowly than previously thought. The Baskervilles, Darcys and other great families of the Norman Conquest remained elite for a very long time.

I suspect that unless living standards start to rise substantially in the next year (the current increase in economic growth rates won’t cut it), Miliband’s back-to-the-future case for change will be hard to defeat at the next election in 2015.

The honest answer to most of Miliband’s proposals is that they address only the symptoms of a wider problem: productivity in Britain is falling, business investment is anemic, and the high value industry in which Britain excels – finance – is still tangled in the debt crisis it helped to create. The answer to these problems is to invest more, raise productivity, fix the banks and diversify the economy. Yet these things are hard to do and don’t make a good election manifesto.

So, the bad practices of pay-day lenders mostly aren’t the reason why more Britons are using them and getting into financial trouble. The existence of the industry isn’t the problem; the need for it is.

The even more-heated debate over power companies is equally problematic. Britain is underinvested in generating stock, and has set itself one of the most ambitious climate change targets to meet, with the cost coming out of energy bills. So are prices too high? Probably not: Household electricity prices in the United Kingdom. are 15 percent lower than the average in the 14 comparable countries of “old” Western Europe, and 36 percent cheaper than in Germany. So the debate has focused on profits: The utility companies are raising prices by about 9 percent this year – are they doing this to make excess profit?

Greenpeace, not a pro-business organization, recently calculated that the combined profit that each of the six big power companies makes from generating and selling energy in Britain ranged from 4 percent for EON, to a little more than 9 percent for Electricite de France, in 2012. That doesn’t scream excess profits – but it does if you want to get elected.

The bottom line is that real wages are falling and a growing number of people can’t afford basic utilities that are taken for granted in a developed economy. Prime Minister David Cameron and his government haven’t done enough to speed the recovery, and Miliband has some of the right answers, such as his focus on vocational training. Yet many of his proposals, such as making it harder for companies to fire employees, betray old interventionist reflexes that will turn a cost-of-living crisis into a jobless one.

No political party can respond to falling real wages by saying “wait patiently until productivity rises” and expect to win votes. Instead they are targeting immigrants, “fat cat” utility companies, and “rapacious” pay-day lenders. Good luck with relying on those remedies to address the problems of this century’s global economy.

Marc Champion is a Bloomberg View editorial board member.

© 2013, Bloomberg News

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