The charmed life of these failed auditors and accountants without accountability

Based on a quick inspection of the books, there doesn't seem to be a great deal of accountability demanded from the British auditing profession.

In March 2017, the giant audit firm KPMG signed off on the annual accounts of the construction giantcum-outsourced services provider Carillion, saying they gave a "true and fair view" of the state of the company's affairs.

For this work, KPMG received a fee of £1.4m. This followed £1.4m of fees recouped the year before. In fact, KPMG had been Carillion's auditor every year since it was founded in 1999. You don't need to be an accountant to work out that that adds up to a very lucrative client relationship.

But in July 2017, just four months after the annual accounts emerged, Carillion announced to the stock market that its contracts to provide services were worth a remarkable £845m less than they had previously been valued on its books.

That bad news shattered Carillion's share price and, ultimately, led to the collapse of the entire company earlier this month, dumping pensioners into the official state-run lifeboat scheme, leaving tens of thousands of employees facing redundancy and forcing civil servants to scramble to pick up hundreds of dropped contracts to provide school dinners, maintain prisons and a host of other services.

How did KPMG not identify this massive overvaluation of contracts? Was it because they took Carillion's estimates at face value? If that's the case, what's the point of the external audit? Are the auditors merely called in to rubber stamp what the company tells them? Moreover, KPMG was not the only auditor of Carillion's numbers. 

Its 2016 report relates that it had a special "internal" auditor too, in Deloitte, with which it worked even more closely than with KPMG. So why didn't Deloitte pick up on the dodgy contract numbers? When two blue-chip auditing firms apparently can't detect a near £1bn overvaluation of assets (financial difficulties that many hedge funds without access to Carillion's books had apparently identified since they were placing big bets on the stock price going down) there's a problem.

There's nothing unusual about these spectacular auditing failures. KPMG signed off on the books of HBOS multiple times in the years before the bank's bad loans eventually blew it apart in 2008. The auditor was even invited to investigate allegations of excessive risk-taking from an internal HBOS whistleblower, Paul Moore. It dismissed them. Indeed, all the UK's big banks were thoroughly audited before their balance sheets tore like tissue paper before a tsunami during the 2008-09 financial crisis.

The Financial Reporting Council, which after intense political pressure was brought to bear, announced this week that it will investigate KPMG's performance over Carillion. Yet the lessons of experience of this regulator are anything but encouraging.

Previous probes by the FRC have produced nothing but clean bills of health for auditors. "In nearly every major financial scandal we've had since the financial crisis, the FRC decides none of its charges have done anything wrong," notes Jim Armitage, city editor of the Evening Standard. Worse, these rulings come with no reports or published evidence, making a mockery of the FRC's claims to "promote transparency".

Many have pointed out that such indulgence in the face of failure might have something to do with the fact that the board of the FRC is dominated by former auditors and the big corporate customers of auditors.

Perhaps it's naive to imagine it could be otherwise given the need for professional experience in such a body. Yet the plain fact is that this model of self-regulation for this industry has failed.

The life of an auditor seems to be a charmed one. You pick up large fees for "checking" the books of your client. But when the company collapses you don't share any of the financial pain or blame. 

Yet what is the point of audit without accountability? It's no use to shareholders. It's no use to employees and pensioners of the company. It's no use to other stakeholders, such as suppliers and customers. The only value, at least the only value that's discernible from a glance at the dismal past decade, is to the senior managers of the client firm and, of course, to the auditors themselves.

Does the economics profession need a ‘reformation’?

Economics, we’re told, requires a reformation, just as Christianity needed Martin Luther’s revolutionary door-nailing challenge half a millennium ago. An “unhealthy intellectual monopoly” in mainstream economics, rather like corrupt medieval Catholicism, must be torn down.

Self-described “heterodox” economists have been making the case for years now; for decades in some cases. But is it right? The problem with such revolutionary demands, it has always seemed to me, is that they generally tend to be annoyingly and unhelpfully inexact in their definition of “economics” and “orthodox economists”.

Who are they talking about? Academics? Civil servants? The staff at multinational organisations such as the IMF and the OECD? Wall Street and City of London analysts? Think tank number-crunchers? Lobbyists? Consultants? They are not all the same. All perform different functions and practice economics in different ways. If a chef sends you to the market to buy him a red snapper he won’t be pleased if you bring him back a sardine, even if they both come under the rubric of “fish”.

Reading the list of “33 Theses” affixed to the door of the London School of Economics (a wry echo of Luther’s apocryphal Wittenberg bit of DIY in 1517) by the Rethinking Economics group earlier this month, two things stand out.

First, it’s a vigorous assault on what James Kwak has called “economism” – the idea that supply and demand curves are the only analytic tool one ever needs and that issues such as imperfect competition, missing information, psychological biases and institutional complexities, and myriad other wrinkles in the free market ideal, can be safely and confidently brushed to one side. This nonsense is generally promoted by right-wing think tanks funded by rich libertarians who want to pay less tax.

Second, the thesis-nailers are attacking a particular branch of macroeconomic theorising and forecasting, which tends to make simplifying assumptions for the purpose of creating tractable models. These assumptions include a single “equilibrium” for the economy and “rational expectations” among a homogeneous collection of economic actors.

On both counts the critique has some justification, especially the first. Economism really is distressingly common in public debate. Yet the problem comes in conflating these kinds of approaches with the work of the entire profession. As a group of distinguished and eminent academic microeconomists (people who generally conduct empirical analyses of labour markets, tax policy and consumer behaviour) associated with the Institute for Fiscal Studies and University College London have written, it’s simply untrue to imply that they and hundreds of thousands of their mainstream colleagues are guilty of the sins of economism outlined in the 33 Theses.

And many mainstream macroeconomic theorists and forecasters (who, it should be stressed, only account for a minority of academic economists) are well aware of the pitfalls of the basic “neoclassical” modelling assumptions.

The intellectual monopoly charge made by the heterodox group is grossly overblown, as is the claim that there exists a quasi-religious intolerance of dissent among most mainstream practitioners.

Academic economics is far from perfect, of course. The top-journal publication process, with inordinate delays between submission and acceptance and often unreasonably doctrinaire grounds for rejection, feels unfit for purpose. And given the importance of publication in such journals for a young scholar’s career advancement, this is a genuine problem.

It’s not totally outlandish for the heterodox to claim that a conservative caucus within the academy sometimes uses its power here to stifle contrary perspectives and methodologies, or, at least, to maintain a rather regressive grip on the economics faculties of the most prestigious and wealthy universities.

There have been specific problems with the undergraduate teaching too, where too little of what’s in textbooks has been relevant to the subjects students are actually interested in. Though it’s a shame those who want a pedagogical reformation generally fail to acknowledge the first-rate new CORE textbook, put together by a team of practising mainstream academic economists led by Sam Bowles and Wendy Carlin. A student who absorbs the CORE would struggle to recognise the caricature of the profession outlined in the 33 Theses.

There are deficiencies and blindspots among policymaking economists too. But, again, the thesis-nailers are out of date, in as much as they claim that issues such as inequality, financial bubbles and environmental sustainability are ignored. Researchers at the OECD and the IMF have, in recent years, produced some influential work on the economic perils of excessive inequality. There’s some tentative evidence of a more pluralist approach from the Bank of England too (as anyone who has read the speeches of the Bank’s chief economist, Andy Haldane, will know) though much more needs to be done.

It’s worth pondering why any of this matters. Rival schools of thought and intense methodological disagreements are common in many subjects. Yet calls for a reformation in mathematical research, say, or the teaching of English literature, rarely generate much of a stir outside the academy’s corridors and seminar rooms.

A big part of the explanation is the umbilical link between economics and policymaking. Economics is politically influential in a way that other social sciences are not. But, again, it’s essential to be precise here in what the problem is. As the IFS/UCL economists point out, we surely want policymakers to make judgements about benefits reforms and spending plans based on rigorous evidence on the likely impact. We should want high quality empirical and theoretical research on international trade relationships to influence politicians and political debate when it comes to momentous decisions such as, for instance, the UK leaving the EU’s single market.

Specific problems, it is true, attend macroeconomic policymaking (the setting of monetary and fiscal policy) which inevitably requires some forecasting. Our current level of knowledge over how to measure economic “slack” in an economy, the behaviour of the labour market and the roots of our national productivity malaise leaves a lot to be desired. And policymaking economists should probably be more open-minded here to fresh ideas.

Yet that does not (despite the impression given by an unfortunate amount of mainstream political news coverage over the past decade) apply to fiscal policy, where, as Simon Wren-Lewis of Oxford University ceaselessly stresses, the consensus among serious mainstream academic macroeconomists is that state spending cuts when economies are mired in recession and when interest rates are zero, generally does more harm than good.

Fiscal mistakes have generally been made where politics and ideological zealotry have overridden impartial and mainstream economic advice, not when politicians have bowed before some kind of malevolent neoclassical academic monopoly.

To give them their credit, the heterodox thesis-nailers make many good individual points about how economics should, and should not, be done. More pluralism would indeed be welcome. Some of these economists are often engaged in interesting and important research themselves. The heterodox deserve a break. Yet they would also do themselves a favour if they were to rein in the daft generalisations about the state of mainstream economics.

This article appeared in The Independent on 26/12/17

How technology eased the deadweight loss of Christmas

Christmas is upon us. Will Santa bring you what you asked for this year? The chances are much improved these days – at least if you’re an adult.

Barely a day goes by without the leviathans of Silicon Valley attracting opprobrium for some social crime, whether it’s destroying our attention spans, pushing fake news or tearing apart communities – you name it.

But this is also a time of year when the convenience and value these internet technology firms bring to our lives actually comes into focus.

In a book published in 2009, the economist Joel Waldfogel laid into the inefficiency of gift buying for relatives at Christmas. “We make less-informed choices, max out on credit to buy gifts worth less than the money spent, and leave recipients less than satisfied,” he complained in Scroogenomics. Christmas is, he complained in the jargon of economists, a festival of “deadweight loss”, the term economists often use for waste.

Yet Amazon has delivered a way around this deadweight loss – at least for adults who want to buy gifts for each other. For those who don’t know, its “Wish List” function allows you to browse the “everything store” and put some of the items you’d like on a special list which you can then share with your friends and family.

Top it up through the year and there’s a good chance you’ll be pleasantly satisfied on Christmas day. Your relatives may well have got you something you actually want. The surprise element might be there too, if like me you tend to forget what you put on your wish list on a whim back in March.

Online shopping is another way technology has made many of our lives in the festive season merrier. In 2008, online sales as a proportion of all retailing was 4.2 per cent. In November it hit an all-time high of 17 per cent. Expect it to go higher still in this year’s Christmas shopping period.

No doubt there are some people who actually enjoy schlepping through the town centre laden down with bulky bags and parcels. But for many it’s much nicer to get the clobber delivered to one’s home by a delivery man: less deadweight Christmas-time loss.

Waldfogel’s thesis was criticised by other economists for missing the point: namely, the intrinsic value of the act of exchanging gifts at Christmas. One woman’s deadweight loss is another’s social “signal” of love and affection.

Yet technology can facilitate both. Our daughter received a birthday party invitation recently which asked for no presents for the child, but a donation to a chosen charity instead. Go online. Enter the code on the invitation. Make a donation and an automatic message goes to the family to notify them.

It won’t be for everyone, but imagine, parents, if this caught on: no more last-minute trips to Toys R Us to buy some piece of moulded plastic, uncertain about whether the child has it already, uncertain over whether another parent is buying the same piece of plastic, unsure about whether it will even get played with. Just a few clicks online instead, and much of the deadweight loss involved in children’s birthdays is instantly wiped out.

And this goes for charitable giving more generally. 

Making donations to charity, such as The Independent’s Help a Hungry Child Appeal, is easier than it ever has been thanks to the internet. As contactless technology rolls out, it should become simpler to donate to street fundraisers too. Boris Johnson’s “Penny for London” scheme failed, but the large potential for contactless charity microdonations surely remains.

These are the kind of subtle ways in which technology – for all the undeniable new social headaches it brings – is enhancing our lives and experiences. So merry deadweight loss to one and all.

This article appeared in The Independent on 24/12/17

Bundling is profitable for cable firms and internet streamers. But is it a bundle of fun for customers?

Imagine a business model that enabled your firm to compel customers to purchase things from you that they wouldn’t otherwise buy. To sellers it probably sounds like a dream. To buyers it sounds like a bad joke. But it’s neither a dream nor a joke. It’s called bundling.

Many people purchase a satellite or cable TV subscription for a particular piece of content – maybe live Premier League football matches or episodes of Game of Thrones – and watch none, or little, of the other stuff available as part of their subscription.

Even the most voracious devourers of entertainment will only ever consume a small fraction of what they have access to as part of their packages. There are, after all, only so many hours in a day, even for telly addicts.

Consumers would be better off financially if they only paid for what they actually consumed. But under this arrangement the media companies would be worse off. So instead of offering pay-as-you-watch deals, they bundle.

Sky in the UK and the big cable companies in the US have extracted large profits from this selling practice in recent decades. They’ve used their exclusive rights to some forms of sports broadcasting or other premium entertainment content to effectively compel customers to buy bigger packages.

But new technology in the form of internet streaming subscription channels now presents a commercial challenge to these bundlers. In the US, financial analysts talk of “cord cutting”, to describe Americans ditching their expensive cable connections in favour of cheaper streaming services.

The epic deal last week by Disney to buy most of Rupert Murdoch’s Fox movie and TV assets and also his share in the streaming service Hulu was heavily motivated by the rise of Netflix and Amazon Prime.

Disney is preparing to invest in its own streaming platform, leveraging its vast catalogue of exclusive films, TV shows and sports rights.

Yet streaming has not killed bundling, but rather re-invented it in a new form. The streaming companies, of course, have their own bundles. If you want access to their own burgeoning exclusive content, you have to buy the whole package. These are cheaper than satellite or cable bundles, though the cost soon adds up if you have more than one.

So what should we make of media bundling from an economic perspective? Bundling is essentially a way of firms to extract the “consumer surplus”, a reference to the difference between the maximum customers would be willing to pay for something and what they would be asked to pay in conditions of perfect competition.

Of course, as this implies, consumer surplus extraction is only possible because competition is imperfect and sellers have some degree of market power. So should we consumers be outraged at the existence of bundling? Should we be demanding regulatory intervention to prevent it happening?

It depends. High profits for media companies from bundling might be seen as socially useful if the surpluses are re-invested in quality cultural or educational content that might not otherwise be made. This kind of welcome cross-subsidy was common in the era when print newspapers (a form of content bundling) had a virtual monopoly on this distribution of written current affairs content. 

Plenty of superlative, but expensive, foreign and specialist reporting was sustained in that way in the pre-interent era. But if the excess profits from bundling only end up lining shareholders’ pockets this becomes a transfer that simply harms consumers.

And if the practice of bundling serves to stifle competition, blocking potentially innovative new firms from coming into the market, that’s even more damaging to consumer welfare in the long term.

This represents a huge challenge for market regulators in this revolutionary era of instant digital content delivery  and the penetration of online giants such as Amazon into a stunning range of new commercial sectors.

The competition authorities in the US and Europe took on the software leviathan Microsoft in the late 1990s and 2000s over its bundling practices. Are they prepared to do the same with the Silicon Valley giants and entertainment conglomerates of today? And should they?

A great deal of the coverage of the Disney-Fox takeover has been from the perspective of the companies themselves and their powerful leaders. Is this the beginning of the end of the Murdoch empire? How long will Disney’s veteran boss Bob Iger stay in his post? Reasonable questions. But a little more consideration to the economic interests of the little people – their customers – would also be in order.

This article appeared in The Independent on 17/12/17

Everyone’s in favour of regional economic rebalancing for the UK – until someone suggests actually doing something about it

We’re all familiar with nimbys: people who are in favour of new housing developments so long as it’s “not in my back yard”. But now they have some competition in the disingenuousness stakes from the “YBNTs”.

Almost everyone claims to support regional economic rebalancing in the grossly over-centralised UK. And it’s pretty plain that this is unlikely to be achieved without moving some operations out of the over-stuffed capital city of London, with the onus on central government to take a lead.

But propose transferring specific resources and one immediately starts hearing: “Yes, but not that.” What the YBNTs seem to envisage is a form of immaculate rebalancing, which involves no disruption whatsoever to the capital and its workers. They were out in force this week after Labour suggested moving “some functions” of the Bank of England out of London to Birmingham.

The first thing to note is that Labour’s “some functions” proposals were misleadingly written up by the (London-based) media as Jeremy Corbyn wanting to move the entire Bank, wholesale, to Birmingham.

We had the same kind of hysterical media reaction when the BBC moved its sports and children’s TV operations to Greater Manchester in 2004. There were similar wails when the Government said this year it wants to shift “part” of Channel 4 out of London. And don’t even mention the idea of migrating Parliament up north while the asbestos-ridden Palace of Westminster is extensively repaired. In the end MPs refused even to move across the road, never mind decamping to the Bull Ring.

It’s amusing to see how business journalists and political commentators, who can usually be relied upon to preach the abstract economic ideal of mobile workforces and invigorating commercial churn, suddenly turn into Mick Cash on a bad day when the possibility emerges they might have to move themselves.

It’s true that regional relocations can fail. The transplant of most of the Office for National Statistics out of London to Newport a decade ago has not been a success and the agency plainly lost some valuable expertise in the transition.

Yet, as a relocation prospect for staff, the third largest city in Wales is very different from Manchester and Birmingham, the second and third most important urban hubs in the country.

As regards the Bank, one of the objections to Labour’s suggestion is that the regulator-cum-policymaker’s current berth in the heart of the City of London represents an intangible benefit that must not be jeopardised. But have they ever considered that this proximity might actually be a source of weakness, opening up the Bank to excessive lobbying and regulatory capture by the hundreds of firms surrounding its Threadneedle Street fortress?

Conversely, following the complainants’ proximity logic, why is the Bank’s physical distance from manufacturers in the North-west, Midlands and North-east, not a disadvantage for its policymakers? As the Bank of England itself frequently tells us, its job is to set interest rates for the whole country, not for one sectional or regional interest.

And the history of the Bank and the Government in this regard is hardly unblemished. The strong pound in the 1980s onward reflected the boom of the City of London in the Thatcher era of deregulation. But the overvalued currency was harrowing for UK manufacturing. 

And in the post-1997 era of operational independence, even the former Governor, Mervyn King, has openly wondered whether the Bank might have got it wrong in tolerating a super-charged currency, and all its associated distortions, in the years leading up to the financial crisis.

This is not a clinching argument for relocation. It’s facile to claim that if the Bank’s HQ had been historically based in Birmingham we would have avoided the financial crisis. But it supports the case for keeping an open mind.

Each relocation proposal should be scrutinised carefully and judged on its merits. The tone matters. And the tone reveals. The suggestion of a shift of some resources to one of our major regional economic hubs should really not be provoking the pearl-clutching reaction we have seen in recent days. And the fact that it does merely underscores our inordinate national over-centralisation problem.

This article was first published by The Independent on 12/12/17

The strange economic views of Conservatives on disability

Having spent eight months merely to get to the starting line for talks with the European Union on the vital issue of post-Brexit trade arrangements, British ministers are not, perhaps, in a good position to speculate on the lack of productivity of others.

But that didn’t prevent the Chancellor Philip Hammond suggesting before a parliamentary committee last week that one of the causes of our dismal national productivity performance in recent years has been the fact that there are more disabled people in the labour market than there used to be.

This is almost certainly wrong arithmetically, as the economist Chris Dillow pointed out in his reliably brilliant Stumbling and Mumbling blog. The numbers of classified disabled people in the jobs market has grown since 2013, from around 2.9 million to 3.5 million. 

But even if one makes the most extreme (and unrealistic) assumptions about the average lower productivity of these new entrants to the job market relative to the rest of the workforce, one cannot explain anything more than a minor slice of the UK’s yawning 20 per cent productivity shortfall relative to the pre-crisis trend.

Economists remain unsure of the reasons for our productivity disaster. But none of the multitudes of experts who have delved into the figures have come out arguing that increased employment of disabled people is worthy of even a passing mention.

Among the most frequently cited culprits are under-investment in new kit by companies, a lack of lending by weak banks, and “zombie” companies kept alive by low interest rates

Another plausible candidate, put forward by the Oxford University economist Simon Wren-Lewis, is that excessive spending cuts by the coalition and Conservative overnments have suppressed productivity-inducing demand – something that, of course, puts the blame at the door of Philip Hammond and his fellow ministers rather than disabled people.

Given the terrible stigma that already attaches to the disabled in the jobs market, a point made extremely powerfully here by my Independent colleague James Moore, why raise the issue at all in the context of a discussion of UK productivity?

There actually seems to be an unhealthy obsession in Conservative circles with the supposedly low productivity of the disabled. Back in 2011 the egregious backbench Tory MP Philip Davies suggested during a debate on the Employment Opportunities Bill that disabled people ought to be able to offer to work for less than the minimum wage in order to help them get onto the jobs ladder.

The former Conservative welfare minister Lord Freud was, similarly, caught claiming in 2014 that some disabled people are “not worth” the regulatory minimum hourly salary.

Rosa Monckton, writing in the bible of the Tory-supporting classes, The Spectator, earlier this year, argued that people like her disabled daughter, Domenica, should be allowed to work below the minimum wage.

Spot a pattern?

Some might have also spotted a conceptual problem with these various narratives. How can disabled people be simultaneously priced out of the labour market by the minimum wage and responsible for dragging down our national productivity at the same time?

Is it plausible to argue the minimum wage is serving to exclude disabled people from the jobs market when their participation rates have been rising? Yes, the increase could conceivably have been higher without the minimum wage. But very much higher?

And are disabled workers, on average, even less productive than the able-bodied? One empirical study of workers in an Australian call centre found that not only were disabled workers in the group just as productive as the rest of the workforce, but they tended to stay in the job for longer.

Other studies have found some evidence of lower productivity, but also unwarranted pay discrimination by employers. One significant theme that emerges from the literature is that the group of people classed as “disabled” is so heterogeneous, with such a broad range of capabilities, that it’s not a good idea to generalise.

A particularly important practical distinction is between those who were born disabled and those who became so later in life, because these groups tend to face pretty different sorts of challenges in the labour market.

But the way this issue is dealt with by some politicians suggests evidence and research are not really of much concern. Some elements within the Conservative Party appear to have a strange and unpleasant ideological conviction that the disabled, in general, ought to be paid less.

This article appeared in The Independent on 10/12/17

The problem of modern poverty is that work doesn't pay enough

The poor you will always have with you. Yet as a society we can have more or less poverty. And it’s a depressing fact that British poverty has been on the rise again in recent years.

A new report from the Joseph Rowntree Foundation (JRF) highlights that a long period of reduction in poverty (defined as those living on less than 60 per cent of median incomes after housing costs) came to an end around 2010.

The child poverty rate fell from 33 per cent in 1996 to 27 per cent in 2010. But it has now risen again to 30 per cent. Pensioner poverty two decades ago was 30 per cent. It dropped to 13 per cent in 2012 but has since crept up to 16 per cent. For the population as a whole the poverty rate glided down from 24 per cent in 1995 to 21 per cent in 2014. But it has now edged back up to 22 per cent.

The poor, with more essentials in their regular outgoings, have faced higher effective inflation rates than the more prosperous over the past decade. For those on the breadline, the latest above-inflation increase in rail fares announced by the train operating companies will feel like yet another kick in the teeth.

To a large extent this increase in poverty is a consequence of benefit cuts in the years of coalition and Conservative austerity. And the real-terms cuts in tax credits still in the pipeline, which the Chancellor Philip Hammond declined to alleviate at last month’s Budget, are set to increase the numbers in Britain living in poverty still further. Yet government cuts are not the whole story when it comes to underlying UK poverty trends.

It probably sounds rather odd to hear about a rise in UK poverty given that, as government ministers frequently remind us, more people than ever are in work. But dig into the detail and it emerges that employment is by no means the shield from poverty in modern Britain that we might imagine it to be.

As the JRF research shows, 2.7 million of the four million children in poverty in the UK live in households where an adult works. In fact, of the 13.9 million people in this country who are in poverty, some 3.7 million (a quarter) are actually in employment.

Some say poverty in working households reflects the fact that the adults don’t work enough hours.

It's true that work by the Institute for Fiscal Studies has identified a surge in part-time employment by low-income working-age men over the past two decades. In 1995 only 5 per cent of men on low hourly wages worked part-time. Today 20 per cent do. What explains this dramatic shift? The truth is we don’t fully understand it. But it seems unlikely this group has decided, en masse, to put their feet up and accept the financial consequences of a deep decline in weekly take-home wages. If they could do more hours they probably would.

Moreover, other IFS work suggests that the prevalence of poverty among working families with children stems from weak earnings among full-time male earners in single-earner households, rather than an explosion of part-time work. 

The labour market does not seem to be providing the opportunities and rewards it used to, particularly for lower earning men. The tax-and-benefits system has taken up a degree of the slack by boosting the incomes of the low-paid through tax credits. The minimum wage has helped too. But the underlying problem of a labour market that is not providing for those at the lower end is significant and seems to be getting bigger.

What’s the answer? Halting the working-age welfare cuts is an obvious imperative. Ramping up social-housing construction should alleviate this group’s punishing housing costs (as a share of their income). Further increases in the minimum wage are useful, although they cannot be the dominant lever of assistance. For the long term, a serious step-up in public and private investment in skills is sorely needed. To some extent the poverty problem today is chickens coming home to roost; underspending on education and training have almost certainly contributed to weak productivity and low pay.

For the immediate term, more stimulative government fiscal policy to support demand would likely help. The surge in part-time work among low-income working-age men is further evidence of a degree of hidden slack in the economy.

Perhaps the first job, though, is to change our public discourse. Despite propaganda to the contrary, poverty in 21st century Britain is not the consequence of a feckless or work-shy section of the population. It is the consequence of work that does not pay enough and a labour market that is not providing the opportunities that we need it to.

This article was published in The Independent on 05/12/17

French to displace English as the world's first language? Probablement pas, President Macron

Est-ce que c’est possible? The French President Emmanuel Macron wants to make French the “first language of Africa” and “perhaps the world”.

“The radiance, the attractiveness of French does not just belong to France,” he proclaimed to students in Burkina Faso last week.

Macron may have shattered the mould of the formal French political system when he established an entirely new political party and sensationally stormed the Élysée Palace earlier this year, but when it comes to French language promotion, the familiar old elite Gallic script endures.

The French establishment alternates between chauvinism and paranoid defensiveness when it comes to its mother tongue. After Britain joined the common market in the 1970s English dethroned French as the primary means of communication within the bloc, putting noses in Paris out of joint. An attempt to designate French as the European Union’s benchmark legal language a decade ago failed. But some in France are now sensing that Brexit opens an opportunity for another crack at a Francophone restoration in the EU.

Within France, the language is policed by an official Académie of the great and good, which periodically updates a blacklist of distasteful Anglo-Saxonisms such as “le weekend”. The domestic law has even been deployed in the cause of defending the language. In 2006 a French subsidiary of General Electric was fined €500,000 for issuing one of its software manuals in English.

Yet, unfortunately for Macron and any of his compatriots who are dreaming of a Francophone future, such bureaucratic and legal levers are unlikely to be effective.

Two economic concepts explain the spread of language: network effects and path dependency. Network effects describe how the network becomes more useful the more people join it. If an increasing number of people speak a tongue it becomes increasing worthwhile for others to speak it too if they want to communicate efficiently. Path dependency describes how initial conditions can have a profound influence on outcomes over a long period. 

Today’s pre-eminence of the English language in international commerce and culture stems from the fact that Britain created a globe-spanning empire in the 19th century, which then effectively gave way to an Anglophone cultural hegemony in the early 20th century with the economic predominance of the US. These initial historical conditions, combined with network effects over the decades, are the reason English dominates international communication today.

It could have been different. There’s nothing uniquely or universally accessible about English. For all its glories, the tongue of Shakespeare is by no means the easiest language to learn. What if France had emerged as the dominant seafaring European power in the 1800s? What if French immigrants had settled in the colonies of what became the United States, rather than English ones? A small change in those initial conditions might have resulted in us all speaking French today. We might have been set on a different path.

But why can’t things change? Why shouldn’t France “disrupt” English and become the lingua franca of the 21st century? The French investment bank Natixis forecast a few years ago that the numbers of the world population speaking French could overtake English, Mandarin, and Spanish and become the language with the most speakers by 2050. This was essentially based on projections of rapid growth in the population of Africa (where French is commonly spoken due to the legacy of French 19th century colonialism).

Yet path dependency and network effects are more powerful forces than demography. It’s true an African born in the coming decades might grow up speaking French. But there will remain extremely powerful incentives for that same young African to also learn English if they have aspirations to travel, study abroad, or work in firms that are linked to the global economy.

After all, even today there are more native Mandarin speakers (982 million) than native English speakers (375 million), but English’s domination (with 1.5 billion total speakers worldwide) is as strong as ever, even with the economic rise of China.

The Chinese Communist dictator Mao notoriously argued that power grows out of a barrel of a gun. When it comes to the power of a global language, military domination certainly had a role in the early days, in establishing those initial conditions, those colonies and empires. But today a language’s power is mainly drawn from the peaceful network. One thing it certainly doesn’t flow from is the diktats of French bureaucrats and politicians.

This article was originally published in The Independent on 03/12/2017