Monthly Archives: October 2010

Socio-economic conflict

Democracy isn’t perfect, but as a means of keeping a large population working together more or less as a team, it is the least bad system we know. Such is the received wisdom. One of the major faults of democracy is that it sometimes allows a majority of beneficiaries to vote in measures that they know will have to be paid for by other people. The people paying may have no choice if they are a minority, or otherwise without power, and simply be unwilling victims of a selfish majority. Such is the situation facing much of the west right now. Many countries have overspent, with governments investing large amounts of borrowed money to ensure votes from large parts of the population, knowing that the price would be paid by other future governments and by different parts of the population. Now that the time has come for savings to be made, we are seeing some very selfish squabbling indeed, with everyone wanting someone else to pay the bills, leaving them undisturbed. The results in some countries are not pretty, with street demonstrations and rioting. The UK hasn’t gone that far yet.

There are some basic principles that most people give at least lip service too. The weak and the deserving poor must be protected, and those that are able to do so should carry more of the burden. No major political party disagrees significantly with that, though they differ enormously when defining poor and deserving. Until recently, there has also been a consensus that children should be protected. Now that appears to have vanished. The debts that have been incurred by the adult generations are to be handed on to their kids, who of course have no legal say in the matter. Various groups of adults blame each other for the mess, but it is the future generations who will suffer most of the pain. Any suggestions of reductions of benefits, pensions, pay, jobs or public services are being resisted furiously, but if everyone insists that we must delay repayments, then it is today’s and tomorrow’s kids who are being left with much of the bill. And of course, if the services and benefits are eventually reduced, as they must, those same kids picking up the bill won’t even benefit from them.

This does not seem a sensible, moral, or sustainable approach to democracy. If unwilling generations are forced to pick up large bills for benefits only available to their ancestors, we can be pretty sure they will rebel. Inter-generational conflict will see young people refusing to pay for the luxurious benefits their elders voted for themselves.

The same is true of any other sectors of society. All must see that they are having a reasonable package of price and reward. This is important, as it is this balance that make democracy stable and prevents revolution. No sector should be seen to benefit unduly at the expense of others.

Some people have gained much more than others from the various decisions that accrued the debts we now face, indeed some of the costs can be attributed to vote buying. For example, much of the debt is due to generous pension commitments in the public service. While private industry long ago recognised that increasing lifespans have made traditional final salary pension schemes unaffordable, and abolished them, the public sector has conspicuously carried on large scale recruitment with terms and conditions associated with lifespans that became out of date in the 1960s, knowing they were unaffordable (increasing longevity has caught noone by surprise) , and understating costs by using different pension valuation formulas than the private sector (e.g. 8:1 instead of 20:1). It does not seem unreasonable for those paying the bills to demand that terms and conditions such as pensions, holidays, pay and bonuses, be realigned to a more sensible baseline. All wealth generation arises in the private sector, so it makes little sense to provide public service conditions more generous that their equivalent in the private sector. Of course, those living very comfortably at the expense of others can’t be expected to surrender their comfort without a struggle, but if public sector staff are seen to be very comfortable while those who have to pay them suffer, conflict is inevitable as stresses increase.

Similarly, benefits and welfare are already being addressed to ensure that those who are able to work (including those who are sick or disabled but who retain some saleable skills and abilities) must do so before they can claim state support, and to ensure that working will always make them wealthier than idleness. In a wealthy society, provided that everyone looks after themselves as far as they can, the state can easily ensure that everyone can afford survival with reasonable comfort. Ideally, welfare provides a basic existence for everyone, and then everyone could add to their personal comfort by making whatever contribution they reasonably can. This would be affordable and sustainable and would not disincentivise personal effort. It will take time to deliver this principle, but we are heading in that general direction.

But inter-generational problems will prove far more problematic than those between private and public. Inter-generational conflict in fact is already overdue. For me, the biggest surprise about the French demonstrations against pension age increase is not that they are happening, which isn’t surprising at all, but that young people have also joined the demonstrations. It is the young who are being left with the huge bills, and they ought to be demonstrating in favour, not against pension age rises. Today’s retirees are retiring at the same age as their parents, but unlike them, they will cost far more than they ever paid in. They are in effect demanding a huge unearned windfall, paid for by younger people. The older ones on the demonstrations may hope to benefit similarly themselves, but it is near impossible that younger people will be able to do so, yet they are being expected to pay the bills for those older people fortunate enough to do so. When someone else gets a big cake free, and you have to pay for it, it is not unreasonable to be annoyed. It is very surprising if you demonstrate in support of them getting the cake. The young French may be a little sluggish in realising the situation they are in, but they will catch up eventually. In the UK, the retirement age increase looks like it is being accepted, but it still leaves the young with huge bills. With the duration of the payback times being considered, many of the kids who will have to pay the bills are in school, and aren’t politically aware yet, but as they come on stream politically and realise the enormity of the debts they face entering adulthood, we should expect them to start complaining. We may well see a Europe-wide rebellion against older population, and demands that they pay for themselves and their own retirements.

Immigration is an interesting issue too. The papers are full of stories about resentment of perceived advantages enjoyed by immigrant populations, but most of the stories are from communities that are under stress with limited employment or housing. The economics are interesting. On one side, someone immigrating and becoming a citizen gains a share of all the accumulated wealth of the country built over the centuries, and we may also pick up some liabilities to overseas family. On the other hand, we get the benefits of their education and skills free, and presumably benefit from any wealth they bring with them, plus their future contributions, and perhaps those of their families. And we gain also from their overseas links and networks, helping trade and reducing military threats. Set against that, some people emigrate, with the reverse economics. Of course, the two groups don’t match. Emigration often happens in retirement, when people have a lot of wealth. Immigration tends to be of younger people with lower wealth. And of course, there is a lot in between in both directions. It is this that presents the biggest problem. Many people who immigrated to the UK to get a better life are now going back, because conditions there are improving while conditions here worsen. This new flow may be called remigration. It is strongest in those areas that are most useful, such as engineering and medicine. Remigration is a threat to the economy, because we tend to lose those immigrants who make the greatest contributions, leaving skills shortages, but we still are left with the costs of the lower contribution immigration. Adding to this, intergenerational conflict, if left unsolved, could lead to a large brain drain as young people decide to leave for lower tax regimes elsewhere, leaving behind the debts they were to be saddled with. If we lose the most able people from society, we not only lose their economic contribution but also face a skills shortage. The nightmare scenario would see the UK becoming an ill-funded retirement home, with lots of expensive old people, lots of people needing state support, a lot of people just about paying their own way, and too few wealthy taxpayers to pay for the difference.

So it is rapidly becoming apparent that society has many stresses to face over the next decade, and obvious that some communities in France are already at the point of rebellion. The first trouble is resistance to change. But soon some parts will realise that they want change and demand it, then trouble won’t be against the state but between communities. The degree to which that spreads to the UK, and to other pressures, is debatable, but we will soon see.