FactCheck: Austerity isn’t a vote winner

19th September 2012

Claim: Public sector workers are likelier to vote Labour than Conservative, and their number is declining at a rate that should perturb Mr Miliband.

It is undoubtedly true that the public sector is shrinking (over the cries of a number of New Keynesian economists). However, whether this will boost the Tory vote in 2015 is conjecture based on the bias of those who currently work in the public sector.

Ganesh claims that you could extrapolate from this that as soon as these people leave public employment they become liable to switch allegiance because they are no longer reliant on the state. Yet having lost their jobs as a direct consequence of the Coalition's austerity policies they are surely as likely, if not more so, to become further entrenched in their opposition to the authors of them.

Claim: Take those tax credits, for example. The government is imposing a tougher means test on them; households earning more than £40,000 will see their entitlements shrink. Come the next election, those Tory candidates will encounter fewer well-to-do families with government income to jealously defend.

It is entirely possible that a number of wealthy households voted for Labour in part to defend their tax credits but that does not suggest that they will suddenly switch allegiance simply because they no longer have access to them. The argument here comes close to characterising voters as "homo economicus" where an individual makes a perfectly rational choice based on what will ultimately be of greatest benefit to them.

However, the concept of homo economicus has been under sustained attack, particularly in the aftermath of the financial crisis. Indeed the entire behavioural finance movement can be seen as an effort to debunk the myth of a market consisting of perfectly rational players.

Richard Thaler's paper From Homo Economicus to Homo Sapiens offers some interesting insights into this. He notes that while "building models of rational, unemotional agents is easier than building models of quasi-rational emotional humans" ultimately it must be more logical to base economic descriptions on more realistic conceptions of economic agents. Transforming a voting public into ruthlessly logical automatons may be an imaginative leap too far.

Claim: In poor parts of the country, government jobs are more attractively remunerated than equivalent work in business. As a result, the public sector dominates the local labour force and the Tories struggle for votes… reforms [could] make areas such as the north-east more hospitable to the party.

This is certainly Ganesh's most compelling point. An April study conducted by Policy Exchange had this to say about the North-South divide in English voting patterns:

"Commentators often talk about a North-South divide in voting. But the division is not simply to do with the North but Northern cities specifically. There are 80 broadly rural seats in the North and Midlands. The Conservatives hold 57 of them (or 71%). No Northern problem for the Tories there – their problem is in the Northern cities. There are 124 parliamentary seats in cities in the North and Midlands. Of these seats the Conservatives hold just 20 – or 16%."

It is true that this is an anomalously low base for the party relative to the rest of the country. Even if austerity merely causes voting habits in the north-east to mean revert then there will certainly be room for the Tories to gain a foothold.

Yet the short term cost to the party as a consequence of job cuts could be to set them back even further and fortify existing biases. There seems no reason why the seats would be contested Labour-Conservative rather than Labour-Liberal Democrats so some abstract hope of long term gain may well prove folly.

I agree with Ganesh that George Osborne will likely be searching for shards of light in an otherwise gloomy outlook for his party. Where I depart from him is in the claim that this somehow represents "tactical nous".

What will boost the Conservatives at the next election is the voting public being able to see signs of a sustained economic recovery. If, as a growing number of economists are suggesting, Osborne's commitment to austerity fails to deliver these by 2015 then his party may find the political cost/benefit analysis makes for unhappy reading.

 

More on Mindful Money:

The surreal logic of the eurozone crisis

Q&A – Finding value in uncertain markets

Survival of the fittest

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The Financialist

27 thoughts on “FactCheck: Austerity isn’t a vote winner”

  1. James says:

    Shaun.
    I am delighted (I write as a chartered accountant) that you have picked up the auditors. The truth is that either:
    1. The audit process could have picked up what went wrong, inwhich case it failed; or
    2. The audit process could not have picked it up.
    Either way, it shows the profession is fundamentally pointless.

    1. Anonymous says:

      I am also a qualified accountant. I totally agree that the whole approach to auditing is flawed. He who pays the piper calls the tune, which is exactly what you don’t want. The trouble is, all other approaches have their flaws, too. But at least a truly independent auditor would have said something about the crazy things that have been happening. Unless he was subject to political interference, which is another big problem, together with corruption. How the Coop managed to persuade itself to take over the Britannia is a puzzle. A suicide pill if ever there was.

    2. Anonymous says:

      I am neither an accountant nor an auditor but I note KPMG were the Co-op’s external auditors. Around the world there are 4 main groups that audit most publicly traded companies ( There were 5 until Arthur Andersen became caught up with Enron) Surely this cannot be healthy for business…….

      1. Anonymous says:

        Hi HoppingPot

        You are right to point out the unhealthy nature of the oligopoly which exists here. Yet the various regulators around the world seem to keep overlooking it….

    3. Anonymous says:

      Hi James

      I believe that we need a complete rethink in terms of corporate governance. Shareholders or members in this case as supposed to gain protection internally from non-executive directors and externally from auditors. Both have fairly clear costs but apart from public relations we are not seeing benefits especially in the financial sector where a sequence of collapses has happened in spite of them.

  2. Anonymous says:

    Shaun, Thanks for the detail of what went wrong but I am curious to know what property loans turned out to be the problem? I haven’t heard of any down turns in commercial property that would account for this.

    I couldn’t agree more with your comments about auditors! I had a number of manufacturing businesses under my control, a number of years ago, and used A. A as our auditors . I was less than impressed by their audits and the caveats that they covered all their reports with – to the point where I used to think – why do we bother! I was always much happier when our internal auditors had given the business a thorough going through as they understood the business. What I can’t understand is why the Co Op’s own internal auditors didn’t pick up the problems during due diligence?

    1. MickC says:

      No downturns in commercial property?
      With respect, outside London and its gravity field, retail, office and industrial space is floundering. A rental uplift on review is rare to say the least, renewals are slow to non-existent (why renew when the landlord is happy just to have an occupier paying the rates at least?)-and new lettings, if any, are on terms highly advantageous to the tenant.
      Much commercial property was overvalued, and mortgaged at that value. The banks do not want to revalue and crystallise the losses, or if they are doing so, are asking the owner to stump up cash to repay part of the loan so the percentage loan is still the same.
      Even if there is a prospective tenant the lenders want it to be a top class covenant (and it won’t be)……..etc. etc.
      I could go on. The reality is that the commercial property market is a disaster which hasn’t yet happened-but it will.

      1. Anonymous says:

        Interesting! I ask the question out of ignorance – especially as I read of Commercial property being a good investment! Have prices dropped and by how much?

        1. MickC says:

          Well, as ever it very much depends on location-but anything other than prime stuff has probably dropped as much as 40-50% in reality.
          The problem is that neither the owner or the banks can afford to sell at that level cos the losses would be immense. So provided the mortgage payments are met it’s a case of “don’t ask, don’t tell”. Owners are sticking in short term tenants without the lenders consent just to get cash flow to do so.
          As for being a good investment, never forget this stuff is not liquid, it is long term-and in the long term we are all dead!
          Resi stuff is prob the best investment still even at these high prices-everyone needs a place to live! And it sells quicker, if it needs to be dumped.

        2. David Lilley says:

          Commercial property funds, as in renting shops, offices and factory space, ws delivering 18% p yer on yer. But the fund I used to switch into for safety, the Halifax, suddenly dropped 14% in one day and then again some two weeks later and has never recovered since.

    2. Mike from Enfield says:

      I’m mildly surprised the external auditors didn’t do their job, rather more surprised that the internal auditors didn’t get it but I find it amazing that a time bomb like that could have been kept so (apparently) totally secret from the grapevine. Did employees never leave one company to join the other…or meet down the pub or on (golf) courses & conferences? My experience has always been that the people most likely to blab are the more senior managers and that the people most in the know are the local taxi drivers!

  3. Anonymous says:

    Hi Shaun,

    ‘The regulator of UK banks seems to have been permanently asleep at the wheel.’

    Merely another example of don’t have a public enquiry until you know the result? Carefully pick the enquiry participants? Do it via a QUANGO so it can be seen to be independent? If you are really in trouble, promise it after the next election (apologies – politics. But then again ….)?

    So maybe the regulator is simply following political guidelines and keeping his head down until a convenient/credible/saleable (pick one) solution happens along? Until then, don’t rock the unstable lifeboat, it could take on more water.

    1. Anonymous says:

      Hi DLinneridge

      Here is another suggestion for you from Yes Minister

      “If you believe the security of the realm is at risk you don’t hold a security enquiry, you call in the Special Branch. Government security enquiries are only used for killing press stories.”

      The same for public enquiries?

  4. Mike from Enfield says:

    A sign of the times is that my first reaction was… ONLY 1.5 billion!

    I am a little unsure why the Co-op’s directors went ahead with this disastrous merger. Was there something in it for them personally or was it incompetence on a scale unusual even in the British banking sector?

    I assume ‘bail-in’ is already in the lexicon as a synonym for default?

    1. Anonymous says:

      Yes that’s what I initially thought as well! A billion here and a billion there and pretty soon we are talking serious money!

    2. Anonymous says:

      Hi Mike

      Before this is over I expect the bill to be higher. These processes are like one of those oddly declining verbs and nouns…

      The section on “bail-in” is growing fast!

  5. Rods says:

    Hi Shaun,

    Another excellent blog.

    Every recession that I can remember has caused big losses for banks with commercial property. They are very happy to allow commercial property developers to borrow against their valuable assets. When the developer goes bust or need to restructure in a recession, the banks then find that the economic peak values that they leant against are a fraction of the recession value. Commercial property prices, rental income and occupancy rates are all extremely volatile where they are linked to economic cycles. Will this get better in the future? No, as I’m convinced commercial property volatility will be much worse if the UK economy gets some growth in the current or next economic cycles. Why, because all of the commercial property owners I know that have empty town / city centre office blocks, which Gordon Brown made them pay full business rates, empty or not, have wherever possible pulled them down or converted them into residential flats. So on future business cycles there will be an even bigger shortage of commercial properties, higher values and rental values, that like nectar to a bee the banks will not want to miss out on, turning massive profits and bonuses on lending on the upside and we all know what will happen on the downside yet again!!!!

    With Lloyds and Co-op it has been a case of marrying in haste under political pressure from Gordon Brown and boy are they now repenting at leisure!

    I’m sure with the Co-op there is an element that the prolonged recession has increased the number of distressed loans, but there may also be an element on how optimistic the directors were to the auditors on the quality of the loan book. IME as a director of a company, there is always a political slant on how you present things to auditors where you have also got to have the best interests of the company and shareholders in mind. So you tend to end up with the auditors and the directors all humming the same tune. There is human fallibility here, the auditors rely on what the directors tell them and directors have to be optimists to drive a business forward! I don’t know what the answer is? Business have to take calculated risks to grow and some will get into trouble and auditing has to be affordable in terms of time and money.

    I think the bailing in of bank bondholders is going to become more common as the banking crisis continues. At the end of the day commercial bonds are a risk, bought by people over 18, that in many instances pay good interest. so you pay your money and take your chances and are quite happy if the interest and the capital are returned, but can’t complain if they aren’t. That always has been and always will be part of the risk of investing. This is much better solution than bailing in depositors. The one caveat to this is mis-selling like has happened in Spain.

    1. Anonymous says:

      There is a simple method to control the risks. Just let failing businesses go bust ….

      1. Rods says:

        Totally agree that is how capitalism is supposed to work. I suspect this is what will happen with smaller banks. But successive Governments have allowed companies to merge to form quasi-monopolies and too big to fail banks. Personally, I would like to see all mergers stopped that produce a market share of more than 10%, so there are a minimum of ten competing companies, rather than the four, which we all too often get in this country now.

  6. Anonymous says:

    Shaun, Not todays topic I know but I wonder what you think about Roger Bootle’s article in the telegraph calling for a significant drop in the value of Sterling? I wonder why these people believe that if it hasn’t really worked in the past then more of the same is needed? I know of two quite reasonable sized companies that did nothing to improve their sales on the back of a lower pound but booked higher profit margins as they maintained their prices in Euros. I would bet that the same thing would happen again but the effect on imported inflation would be terrible which would push real salary drops down even further. I sincerely hope that Carney doesn’t go down this road.

    1. Anonymous says:

      Hi Pavlaki

      Perhaps Roger Bootle has simply run out of ideas!

  7. David Lilley says:

    Shaun,

    You have not mentioned the Lord Levene bid for the Lloyds branches that was twice that of the Co-op.

    Lord Levene was again on Jeff Randal Live tonight and livid that the Co-op bid was pursued and his well financed bid was rejected. If I remember well, the cost to Lloyds of proceeding with the Co-op bid was £400m.

    Another point is that the EU schedule of splitting off 600+ Lloyds branches must be completed by November.

    1. Anonymous says:

      Hi David

      It looks ever more reminiscent of the Rover debacle does it not? I hope that it has a better ending than that did.

    2. Noo 2 Economics says:

      “Another point is that the EU schedule of splitting off 600+ Lloyds branches must be completed by November” and it’s going to happen.

      I am with Lloyds and have received a letter from them informing me my normal branch will be one of those branches forming part of the new bank called “TSB” (ring any bells anyone who was around about 30 years ago?).

      They’ve even given me a time table saying amongst other things the new “TSB” will be created on 14/08/13. They reckon it will be part of Lloyds banking group until transferred into new ownership which will happen following an initial public offering (nice that the taxpayer gets to pay twice for the same product!!) at an unspecifieed future date. Presumably they can get away wiith this by saying it’s not their fault they can’t find anyone to buy the newly created group.

      1. Paul C says:

        I wouldn’t mind getting into the Banking business, it seems you get given money for nothing by the Govt and get to charge 18% loan rates to folk with good credit ratings. However I would be very uneasy about inheriting an established bankers loan book. I think I would do an internet only offer, move money on demand, pay 1% interest to depositors and advertise Basel 3 compliance in a transparent manner.

  8. Paul C says:

    Shaun,
    Well worth raising this one on the Co-op. I was surprised to see the talk of shares, maybe my historical perspective is wrong but I thought that the workers had shares in the business and they were not tradeable in the Stock Exchange, would this recent announcement mean the co-op was subject to “nasty” shareholder pressures of dividend payments and short-term performance measurement?

    On a related matter I personally bank with Smile and on the BH weekend of the 25th May (2 weeks after the downgrade) I couldn’t get my money. First my debit card was declined at the petrol station, then I went outside and tried to get cash at the hole in the wall, declined there too. I worried initially that I must have breached a limit, a little embarrassing not paying for the family get together. However a I checked my account status, nothing was wrong, no contact from the bank, no apology, no explanation. Perhaps that is really what happens when the banks fail….

    Reading some of the other blog responses, I concur that the banks are in trouble over CRE. A recovery would fix the value of CRE but as we all know the irony of the financial repression is that is displaces real entrepreneurs who are waiting for a return of a “fair dice” game..

    1. Anonymous says:

      Well worth raising this one on the Co-op. I was surprised to see the talk of shares, maybe my historical perspective is wrong but I thought that the workers had shares in the business and they were not tradeable in the Stock Exchange……….I thought that too?

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