Friday, 15 February 2013

Ed's Chart

Ed Miliband takes his cue from the chart below - I got this from the Economist (where else), they published a version of a chart that first appeared in the US.  The UK version of this chart paints an interesting picture.  The UK economy grew rapidly between 2000 and 2010 but actual average household incomes have been flat.  Miliband blames this on fat cats who are licking all the cream off the top.  He opines “Over the last three decades or so, less than 15 pence of every additional pound Britain has made has gone to an entire half of the population,”.

Much as I respect The Economist Newspaper I have to find fault with this analysis.  What is really going on here?  Firstly immigration has been the main fuel for GDP growth.  Pretty much the whole Labour boom can be linked to population growth. Between 2001 - 2011.  The England and Wales population had increased by 3.7 million, an increase of 7.1 per cent. This was the largest growth in population numbers in a 10-year period since the first census in 1801.  If you strip out the 7% population increase, incomes have tracked GDP pretty closely.

The other anomaly is that the output per worker has tracked GDP but there have been many more people working - which seems strange as average house incomes have been relatively flat. Themost likely expalnatio is that there are an increasing number of people living in the black economy, on benefits (including more pensioners) or unemployed.  As the unemployment numbers haven't moved much I would guess that more people are moonlighting and avoiding tax and the statisticians.  This would have the effect of reducing the median household income, whilst driving up the productivity numbers.  Another way of look at this is that companies have relaced people retiring with techology or cheap labour from Eastern Europe.

By reading the chart the wrong way we could be heading into a world of increased taxation of companies and wealth creators, which is the perfect way to kill the economy stone dead.  This is precisely where Miliband is going with this, in  recent speech he argued for reinstatement of the lower, 10p starting rate of tax by imposing a new “mansion tax” on expensive houses.  He should swallow hard and understand that the Labour boom was over hyped and a mostly a by-product of their unbelievably lax immigration policy.

There are stirring inside the labour party that Ed's lazy (is this a trait of all party leaders) interpretations of our economic owes will be the undoing of him.  One of his closest advisiors, Lord Glasman, said his leadership seemed to have "no strategy, no narrative and little energy".  Glasman complains: "Old faces from the Brown era still dominate the shadow cabinet and they seem stuck in defending Labour's record in all the wrong ways – we didn't spend too much money, we'll cut less fast and less far, but we can't tell you how."  We show no relish for reconfiguring the relationship between the state, the market and society. The world is on the turn, yet we do not seem equal to the challenge."

Misiniterpreting old charts that over simplify the problem is another poor sign.

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