Can Burnham’s ‘business friendly socialism’ grow the economy?

is Manchesterism a map for transformation? Is part of what needs to happen, distribution or redistribution from older to younger? Yeah, I think to some extent, Andy Burnham and the turnover of Prime Ministers over the last decade is a symptom of the problem and the problem is. Support for this episode comes from Octopus Energy and the founder and CEO Greg Jackson is with us now. So Greg, talk to me about Kraken, what is it and why is it spinning off from Octopus Energy? When we built Octopus, we also built a software platform, like an operating system like iOS or Android on your phone to enable energy companies, utilities starting with Octopus, but frankly, anyone in the world to be much more efficient to use vast amounts of data to be able to become more innovative and to serve their customers better. That piece of software is Kraken. We've used it not only for Octopus, but companies in the UK like EDF and EON have used it to improve their business too. But you know what, it turns out over time companies realised that they were licensing from a competitor and so we've had to spin it off so it can reach its full potential. Yeah, makes sense, Greg, thank you. Right, we're going to go to the episode. Hello and welcome to the Resties Money with me, Robert Preston. And me, Stefan Gauvin. Now, it's obviously everyone's talking about this, looking likely that Andy Burnham's going to become the 59th Prime Minister of the United Kingdom. He's got a hell of his job on his hands. It's one we talk about a lot on this show. So what's his problem and how might he solve it? To talk about this, we've got Paul Johnson back with us from a director of the Institute for Fiscal Studies. Lots of you want to ask him, Robert? Yeah, and look, what's so timely about this is Paul has just started a project, which is about how we get the growth rate up. He's just finished a report showing quite how appalling the economic performance of the UK has been over the last 20 years. And it's the first stage of a set of work about how we recover, how we rehabilitate. And so here's our interview with Paul Johnson. And maybe it'll set the agenda for the new Prime Minister. Paul, good to have you back. Lords to get through with you. I know one of the things we want to talk about obviously is the problem Andy Burnham has to solve. You've been working with the prosperity alliance and you've got some interesting research that's just come out on the wealth gap and the prosperity gap. So first of all, do you want to set the scene for us in terms of what you think the problem is that we have in this country that needs solving? Yeah, I think to some extent Andy Burnham and the turnover of Prime Ministers over the last decade is a symptom of the problem. And the problem is that we've not got better off for about 20 years. So average earnings today are very similar to what they were 20 years ago. 10 maybe 15,000 pounds a year less than they would have been. Had growth, had incomes, continued to rise as they did in the 50 years before the financial crisis before 2008. So we've broken a sort of generational contract. So young people in particular have struggled as a result of this. They've seen their earnings flatline. And if they're graduates, they're obviously paying a 9% tax in addition on anything that they're earning. And they haven't benefited from the wealth boom, which has been helpful to the older generation. So the problem we have effectively is one of very little growth over a very long period of time. It's not surprising under those circumstances that the electorate is frankly pretty fed up. And that's I think what we should understand when people talk about a cost of living crisis. What they're talking about is a living standards crisis, which they're feeling because as soon as something, if the tall difficult happens, the Iran war or what have you increases in energy prices, because they're not sealant increase in living standards for such a long time. That feels like a real squeeze. So just to clarify what you're saying Paul is that average salaries would be about 10 to 15 grand a year more if we'd have carried on the trajectory we had. Yeah, I mean it's huge. It's like 25 average average salaries which is getting on for 40,000 now. They'd be 50,000 or more if salaries had continued to rise as they had pretty much every year in the 50 years before the financial crisis. Now that wouldn't affect be true of everybody and maybe that's a slight overestimate, but it's undoubtedly the case that we're much worse off than we might reasonably have expected to be 20 years ago. And it's particularly of course hits as I say working age people, particularly that younger group. And it makes it much harder for them as well to accumulate the sort of that housing and the pension and the other wealth that the older generation got used to doing. Yeah. Now there are multiple issues raised by fundamental growth problem which we talk a lot about. The big simple question can these problems be wholly addressed by what you might call a growth strategy or does there also have to be some rebalancing because the other trend which you know you and I've talked about for years is how relatively speaking older people have done significantly better than younger people and is part of what needs to happen in a sense distribution or redistribution from older to younger because I would argue that probably if you're an older person listening to this podcast even though you may have done better than young people over the last 15 years you probably don't feel as though like you know life is wonderful and you're sort of living in clover. It's one of the reasons why whenever there's a debate about the triple lock, the formula for raising the state pension pretty much every politician runs away from saying we need to reform it. Yeah. I mean I do think that the fundamental issue here is growth and it's easy to say and it's much harder to achieve. I mean no one's pretending that it would be very easy to get growth back onto a high trajectory. We can talk later about the weight in which you might do that but I do think the fundamental question is about making sure that we have economic growth. That economic growth then wealth becomes more important relative to income. It becomes much harder to fund the welfare state. It becomes harder to fund defense and the electric gets fed up. In terms of redistribution yes there's probably a case for I mean I think most people would most certainly people who look at this most technocrats and policy wants would say well the triple lock really doesn't make very much sense and at some point it has to stop because you know if you carry on it adding fun item it would literally take up the entire economy. So you have to stop at some point and we need to decide where to stop but actually I think we almost kind of over focus on the triple lock. I mean where do we really spend money on older people? Yes the state pension but it's less than in most European countries but where else are we really increased spending? It's been on health now we need health I mean I'm not saying we shouldn't try and keep people alive though we haven't done it very productively. I mean efficiency, productive productivity in the health services collapsed over the last seven or eight years. We also clearly paying for social care all those kinds of things at one level because the population's aging we're going to have to do more than that but whilst we've increased spending on the older group we've hit young graduates with big loans and big repayments we cut benefits for younger people but most importantly most importantly they just haven't had a pay rise. And just on that point just to remind everyone the triple lock is obviously the state how much the state pension goes up by it's sharing it's based on either it's a minimum of either 2.5% average earnings growth or CPI inflation and so the point is it's a minimum of 2.5% every year and what you're saying is that is not sustainable but it's not the biggest worry because we've heard obviously Andy Burnham say he's going to stick with the triple lock. It's clearly not sustainable forever now what we need for the state pension is if you have what level do we want it to be it's currently about 30% average earnings now maybe we think the right number is 33% or maybe we think it's 30% what do we think it is we should say that's where we want to get to and maybe we keep the triple lock until we get there and then we stick at that point it's turned out the triple it's been quite expensive over the last 15 years partly because we've had such a bizarre economy if we'd had the triple lock for the 15 years before it was introduced it would cost almost nothing because earnings would generally above inflation and would generally above 2.5% so you just increase it year in year in line with earnings but as it's happened over the last 15 years quite often 2.5% has been the biggest number in that calculation and sometimes inflation has been bigger than earnings growth and sometimes earnings growth has been bigger than inflation with the result that it's just kind of ratcheted up so it's also kind of unintended that it was quite as different as it's turned out to be. One of the paradoxes of the correct focus on on young people and the fact that their earnings and wealth is so massively underperformed over the last 15 to 20 years is of course that the government has recently pushed up the minimum wage for young people and attracted a lot of criticism including from the man Alan Melbourne or I mean well it wouldn't say it's criticism from him but he has raised a concern that we hear a lot from employers that the problem with attacking low-wage. wages for young people through just putting up the minimum wages, at this particular juncture where the economy is flatlining and lots of employers say, "Well, we can't afford these young people." And all it does is exacerbate the unemployment among young people. So there is this chicken and egg thing, as it were. How do you get young people's earnings up? If you're not in a sense, can I have that kind of market intervention? Well, of course, I mean, then the national living wage has been growing pretty fast over the last decade. It's now one of the highest in the world. I mean, it's amazing. 30 years ago, we didn't have any minimum, and now we've got one of the highest in the world. It's interesting what it's done. It's increased the earnings of low earners, as you'd expect. But it's really compressed between the bottom and the middle. So, and that's created its own problems for employers because we're now, it's remarkable having had years of worry about inequality. We're almost have too much equality in the bottom half of the labour market. So the gap between someone in the middle and someone at the bottom is much smaller today than it was 20 years ago. And that means, of course, that offered employers are complaining, "Well, I can't get someone to accept a promotion to a more difficult and responsible job, because I only give them 20 p.m. hour or whatever it is more for doing it." So that compression is itself an issue. And why have you got the impression, because you forced that increase in the minimum wage, but you haven't got the increased productivity, which, as it were, gives a good reason for increasing pay elsewhere. Now, when it comes to younger people, I think a lot of us were quite, I mean, I'm broadly in favour of a reasonably significant minimum wage. I mean, it was certainly until recently it didn't appear to have had much effect on employment. I think we're certainly at the limit to what you can achieve with that. But I think a lot of us can turn when the government increased it very significantly for the youngest workers. Yeah, I'm sorry I'm talking about it, but exactly because when you're an employer, actually, when you've got 20-year-old, you need to train them. You need to put quite a lot of effort into them, and part of the deal is always being, well, they don't know very much then, but they also get quite a lot from the work, and then they'll progress later. But if as an employer, you've got a choice of 20-year-old with no experience, and a 25-year-old with a bit of experience, and you have to pay them the same, well, you're probably going to go for the 25-year-old. And also just that point on that, because even like the 16 to 18-year-olds, and we've seen this in our business, it's been double-digit increases in their wage, which on top of national insurance contributions and business rates and energy bills and everything else, and there's a choice between what you can afford. It's often the young person that you can't afford, because you've got to pay the energy bill, you've got to pay the business rates, you know, everything else, and that's, that's then obviously seeing this uplift in unemployment. And, you know, I think part of the reason why we have so many needs is because those entry-level jobs are just not there in the way they were. I mean, you see these swings in policy to some extent. I mean, 30 years ago, we were really worried about people being out of work, because we had quite high levels of out-of-work issue. And actually, some reforms of the welfare system were done to try and bring people into work, particularly loan parents, for example, many more loan parents in work than used to be. The case, historically, we haven't had a bigger problem with needs as many European countries. And I'll be swung into another place where actually partly because of policy, partly for other reasons, we've ended up with the reverse. We ended up with a sort of world in which we had many fewer people out of work and an issue around in-work, low pay. And now we've kind of gone back to a world where we've kind of solved the low pay bit in the sense that the minimum wage has gone up, but we've gone back to the period where, particularly for young people, we've got higher levels of people out of work. And the policy often takes, it's often slew to respond to these trends. Yeah. I mean, so, I mean, the big question, therefore, is if the problem is that living standards have been rising too slowly for those, particularly on sort of middle incomes, is the solution more governance intervention or less governance intervention? Well, I mean, the solution obviously is a complex one. And in the end, it is better, better policy across a range of things. So one of the things that's holding living standards down, of course, is that there's been big, big, big tax rises over the last few years and continuing on through this decade. Now, as a direct effect, we're just taking money out of people's pay packets, now, as an indirect effect, we're taxing employers, more we're creating problems in the economy. There are other things which really matter. So number one, I would say, is house building and actually having a rental sector and a housing sector where people can afford to live. So one of the big issues for younger people, particularly, is the is the cost of housing. And that affects both their living standards directly, but it also affects the capacity of the economy to grow if you don't have enough housing. And then there's a whole series of things around employment regulations and rental regulations and the regulation of utilities and infrastructure and transport and education. I mean, there's no silver bullet here. I mean, there's no silver bullet. And this is the political problem that to do all of the things that I would argue you need to do on these, they're not short term going to have a big effect, but they may be short term, particularly difficult and see that you get the benefit five or ten years down the road. And we've seen political cycles, just, you know, they barely managed five days, no five years. I mean, there's a ton of stuff, you know, in terms of individual policies to talk about. I mean, housing obviously is terribly important. There's obviously the question of, you know, social versus private, which is pretty important. How much should the government be investing directly itself in low cost housing? I mean, probably my favorite moment of the Make a Feel by election was the Count Binface intervention where he said that he would promise to build at least one affordable home. It's a sort of slightly captured what's been going on in the housing market. We need to get Count Binface on, you know. I mean, I'll give you a very clear answer to that. The answer is housing is not for you, housing is housing. It's housing. It's because one of the things that's interesting about Burnham, you know, we're talking actually to Doug Alexander, a member of the cabinet who's supporting Burnham, and he did point out something which should be encouraging, which is in Glasgow, it takes something like 50 weeks to get permission for house building. And in Manchester, it takes, I think 15 weeks. So he has had an impact in Manchester when it comes to speeding up permissions. One's impression is in London, it takes 15 years. It Burnham, you know, does for the country, but apparently they claim he's done for Manchester, which is speeding up permissions for house building. That would be a good thing. It absolutely would. I mean, there are other issues around house building. I made a quip there about London. I mean, we're really struggling to build anything in London at the moment. That's partly to do with planning, but it's also partly to do with the cost of land and the cost of meeting social housing needs and requirements and so on. And regulations on on on high rise buildings, all of which has made it very expensive to build. And actually, you oddly enough, the price of housing in real terms has come down somewhat. So you need to act on quite a number of issues there. But why do I say, why do I say housing rather than affordable housing? Of course, we want housing to be affordable, but the best way of making housing affordable is to increase the supply of housing. And one thing we, I gotta just ask you on that because one of the things that is really striking to me is the difference between Britain and America when it comes to the living standards of young people. Now, those kinds of young people may not have been going up quite as fast as for previous generations in America, but actually, they have been rising relatively rapidly in America. How much of that is to do with the fact that they have a more active housing market and house building market in America? Well, it's partly that. And of course, that varies in different parts of America. If you go to San Francisco and Silicon Valley, they certainly don't have anything approaching affordable housing and partly that reflects some of the difficulties about building in particular areas. But I mean, the main reason that young people in America have been doing well is the earnings have been rising, productivity's been rising and the economy has been growing. Now, America is a much more unequal society than here and actually there's a much, much bigger gap between rich and poor there. But the electorate on the whole is seeing that their living standards are rising in a way that they're not here. Well, they don't have the Jenny Z problem that we have indeed Paul, we love talking to you. We always feel we're making progress in solving the country's problems, but there's more work to do after the break. And obviously, housing is part of this whole idea of Manchesterism, which Bernan refers to as this business-friendly socialism. And essentially, what you're seeing in all of this is you can't leave it to the markets. If you want higher growth in areas that don't have it, you need to have strong public control and direction over the investment in those areas. And, you know, the productive economy comes from more intervention in transport and energy and water education and as we've just been talking about housing. But what do you reckon is Manchesterism a map for transformation? What do we know from, you know, what's happening, Manchester? I think there are three things that seem to have worked pretty well. One is just the whole devolution of powers to a a mayoral authority on a substantial scale. And I think Andy Bernan wants to do more of that. And there's a good thing. I think there's plenty of international evidence that more devolution is effective. It's risky because people can screw up, but in the long run it's probably a good thing. And what extra powers should mayors have? So there's quite a lot already in Manchester and actually having single budgets that they can spend across areas that they want to. So more freedom and there's still, there's still quite a lot of constraints on how they can spend their money. Possibly some tax devolution, they can actually raise some of their resources. The second thing that I think we can learn from Manchester is they've been very, very positive about building in the centre of the city particularly. And this is way predates, but the population of central Manchester has grown from very little to, you know, I can't remember the numbers very little to a little big number over the last 30 years. I mean like from, you know, 5,000 to 100,000 or something. I don't quite those numbers, but very, very big. And you go to Manchester, which I need do quite a lot. And there's lots of big new, you know, high rise buildings there with lots of people in them. And the third thing, which I think is going to wear a lot of this idea of state intervention comes in is from the regulation of the bus network. To be, you know, this is something that's called a mis- have known and argued for four decades and why it's taken so long for this to happen in cities outside London and for governments to make the change in the law is to allow it to happen is is something of a mystery. But to be clear, all this is not public ownership. This is essentially publicly organising things so that they're providing a public service. Can I just add to that as well? Because obviously I lived in sulphur for quite a while and was part of the cohort that moved with the BBC to sulphur and this obviously predates Burnham as well. And it was, this was this investment which really completely changed sulphur, you know, and before long talking to, you know, the leaders there, they were talking about how there were now kids in the area who were actually working in the BBC and working in the media who before wouldn't have had that chance. And that really changed the regeneration of that area. And that again was before Burnham came in. Although it's worth saying a lot of the towns sort of around Manchester have not benefited from that. I mean, you go up to some of those areas which I have done and they knew they still, even despite the transport still feel very distant from Central Manchester and some of the poorest areas are still there. So, you know, they're still clearly more to do. I mean, look, it's great that the beam network has been a success and as you say, there is absolutely no question that better organised cheaper transport infrastructure has a positive impact on productivity and it's one of those measures that you can take that you know is over time going to make people better off. But how does the beam network lessen translate for you? So, I don't know, the price of gas or I was going to come on back. It's a serious question about public ownership and the utility. So, I mean, the first thing to say is that part of the problem with the water sector, I mean, there's lots of problems with the water sector. But regulation over, certainly over the 2010s really kept prices down a lot with the result there wasn't much investment and you've got a choice here between how much investment do you do and how much do you pay for it and governments for very good reasons in terms of, you know, keeping bills down. I actually regulated this to ensure that the focus was on keeping bills down rather than on providing the best service. Now, there's always, whenever I come on this podcast, I talk about trade-offs. If we're going to have a better water system, we're going to have to pay for it one way or the other. You can't get away from the fact, from the choice about how much you put into spending on the water sector and the water sector, all the energy sector, they are heavily regulated. Now, I think you can perfectly reasonably argue that they're badly regulated and indeed this government got a huge report from John Connlet, formerly the Bank of England, about fundamental change to the regulation of the water sector. I mean, it has its own issues. You've got a lot of control already. Now, the question is, you know, what would be the value of changing the ownership? Well, there's clearly an enormous upfront cost in changing the ownership in the sense that you bring an awful lot of debt onto the government balance sheet. And there's not a lot of evidence actually that water companies in England, which are privatised, have done a great deal better than water companies in other parts of the United Kingdom, which are different ownership structures. So, you know, we'd start from where we are. I certainly would not be spending a large amount of time and a huge amount of treasure on trying to re-nationalise these things. So, if you're thinking about the energy sector. So, what I would just say, where there is the potential for competition to drive efficiency, I always thought that privatising water was a terrible mistake for the simple reason that, you know, nobody's going to dig the roads up for a second set of pipes. I don't disagree with you in some sense. I mean, I don't think there was any strong case for privatisation. I think the question is, given where we are, is the most effective thing you can do with the water sector spend probably a hundred billion pounds, that's the sort of government estimate to re-nationalise the whole thing? Yes, you're right. In the short term, you look at the kind of bill that would fall over government for nationalising, it looks huge. But by definition, right, the cost of capital for the private sector is going to be higher than the cost of capital. We think still for years to come for the state. And therefore, if you've got to do this massive investment programme, the question is, isn't it better for it to be funded effectively by the state than by the private sector? Well, you have to ask whether it would be funded by the state. I think there's a real political economy question here. So, if you have, I mean, I'm not arguing very strongly in one direction or another, but it seems to be there's definitely not a kind of slam-dunk argument, given where we are for nationalising. Because you then have to say, let's assume we take this on and we know that there's a very big investment programme required. And then the investment in the water pipes has to fight for treasury money against the Ministry of Defence and the Ministry of Transport and the Ministry of Housing. And that, you know, would with the pipes win, I don't know. And whereas if you've got a regulated sector as we have at the moment, you can actually pretty much force that private. Now, that's a political economy argument rather than an economics argument. But actually, that's one of, I think that's a pretty strong argument. You are right that historically, the treasury has tended to be really bad at funding long-term investment programmes with its water, not one of the reasons that they're actually privatised was because they had been such chronic under investment in things like the railways when they were in public ownership, right? Exactly. And so, of course, history tells us that the culture of the treasury fights against the kind of long-term investment you want. If, however, and this seems to me to be the fundamental point about what Andy Burnham really stands for and what he's going to deliver, if he believes that when it comes to the living stands and millions of people actually public ownership will drive down essentially what all of us pay for this stuff. And then he can take control of the treasury. It's a wholly new approach to government. What I'm raising is the question of how radical he's going to be and whether he is likely to go down that route. Two things. I mean, first, politicians are strange beasts in the sense that they seem to think that because they are, you know, they think they're good people and will do the right thing, then it's great to bring everything within the army of their government to do it. I mean, we had this discussion, I think, maybe the last time I was on this show about the government looking wanting to be able to direct pension funds to how they should invest. Now, this government thinks they're good guys and will do the right thing. Do they really believe that they think that Nigel Farage would do the same thing? The same question I think for Andy Burnham. If he brings more into public ownership because he thinks he's got the right policies, does he think the government's the next 10 or 20 years would do? But the second issue in terms of thinking about the cost of living and so on is I really worry that this issue about let's spend lots of money to hold builds down. It's really, it's focusing on the symptoms and not the cause of this constantly. So we started the conversation about the real problem is that we haven't had growth in the economy for put on a per capita basis for 20 years. Will nationalizing anything really help that? I don't think it will. Will sorting out the supply side will sort out the tax system will sorting out investment incentives will sorting out. Education says all of those things will tackle the fundamentals and it really worries me if we end up focusing huge amounts of political and economic energy on changing ownership structures in a way which I don't think would actually help with economic growth in the long run might not damage it but I don't think it would help with economic growth. I think you just lose the focus on what would actually make the real difference and it's very tempting as a government to say I can control that price. I can tell them to keep the price down but then you either means no investment or it means that the price going to burst out later on which is actually kind of what's happening a bit with water at the moment. We held prices down for a decade and the result is we've now got conversations with the water companies in which they're having to increase prices just to keep the water flowing. Yeah and at that point isn't it? It's the short termism and the fact that we deal with the symptoms not the cause. In the next episodes we are going to talk to you Paul about the constraints that Andy Burnham has in terms of fiscal roles, labour manifesto, also who his chance to might be and what impact that might have. So that is going to be in our next episode with your Paul so don't go anywhere and that's it for most bye bye. Goodbye. [BLANK_AUDIO]