There are a variety of reasons for this, but what interested me was that as far as average income goes, the economy has been steady-stating for a decade already. And that made me think about incomes in a post growth economy, and if you’ll excuse the somewhat rambling nature of the following, here are a few observations.

Of all the obstacles to the idea of a steady state economy, one of the biggest is pyschological – the idea that growth implies progress, aspiration, and rising quality of life, and therefore life without growth would be static, boring and backward, and we’d never be able to improve our lot.

That’s wrong on two fronts. It’s wrong because a steady state economy doesn’t have to be static. There are no limits to qualitative progress, and a post growth economy wouldn’t be one where nothing ever changed. It’s also wrong because as the graph shows, rising incomes are hardly guaranteed in a growth economy anyway.

In a post-growth economy, the average wage might remain more or less the same or only rise very slowly. That’s because one of the main reasons that average incomes rise is not because we’re getting richer in real terms, but because the value of money is constantly eroding due to inflation. If we got a grip on the creation of money and limited the rent-seeking practices of charging interest, currency would retain its value and we’d be off that treadmill. A steady state economy would also be free of the boom-and-bust cycles that destroy wealth as well as create it.

Of course, just because the average income remains the same doesn’t mean that we’d never get a pay rise as individuals.  We’d still get promoted, and experience would still be rewarded. The average would stay the same because for everyone getting a pay rise there’s someone else entering the job market lower down the pay scale, although that’s subject to retirement ages and immigration policy as much as anything else.

In other words, your personal income might look very different in a post growth economy. You might even be better off, because the economy would be more stable and less likely to go into meltdown once a decade.

But those are all rather half-formed thoughts. Anyone got a different idea of how incomes shake down in a post growth environment?

• Britain’s post-growth future

• What’s growth done for you lately?

That’s what three systems analysts from the Swiss Federal Institute of Technology have done, and the result looks like this:

This image shows the connections between the 1,318 biggest companies in the world, mapped according to share ownership out of an original 43,000 companies. At the core are 147 super-connected companies, the ones in red. That group, less than one percent of the whole, effectively controls 40% of global revenue. No prizes for guessing which sector dominates that core group. At the top of the tree is Barclays, with JP Morgan Chase, UBS and Merrill Lynch all in the top ten.

This, says the New Scientist, gives credence to the Occupy movement’s claim that the world is run for the benefit of the richest one percent. According to this particular exercise in systems theory, that’s entirely correct.

If you want to check out the methodology, the study is online here (pdf).

Lanchester starts further back than you might imagine, with the end of the Cold War. When the Soviet Union collapsed, it was a time of “unchallenged victory for the capitalist system.” Capitalism was vindicated. With no counter-balancing ideology, capitalist countries did not need to prove that they were better or fairer than communist countries, that they had the moral high ground, or that they delivered better lives to their citizens. With that all-important ‘other’ gone, capitalism lost its conscience, and its worst excesses came to the fore. Equality went out the window and the richest began to take an increasingly large percentage of wealth created, with the political influence to match.

Out of this climate of increased risk and decreased social justice came, in Lanchester’s words, “a problem, a mistake, a failure, and a culture.”

The problem was the sub-prime market, a sector of the US mortgage market that specialised in lending to customers with a poor credit rating. It was predatory, it was foolish, but it was highly profitable for a brief time, trading off the back of a boom in property prices. The extend of the problem wasn’t known until the property bubble burst, but by then those mortgages had been packaged up and sold on.

That’s the mistake – the way that investments were ‘securitized’ by complex mathematical formulae, making derivatives that were supposedly immune to risk. Since these were consistently given sound ratings by the ratings agencies, investors were relaxed about their debts, and allowed themselves to run extreme debt to equity ratios. With so few genuine assets on the balance sheet, it only took a small number of those investments to go bad for the whole banking system to plunge into chaos.

This misunderstanding of risk was then compounded by a failure – the failure to regulate. Toothless agencies either didn’t recognise the risk, or lacked the legislative clout to intervene. Free-market lobbyists pushed for more de-regulation and greater freedom. Central banks kept interest rates low, and didn’t spot what should have been very obvious signs of bubble activity.

Finally, the culture – the attitudes of the City and Wall Street, where profits are private and losses are public; where good years are rewarded with massive bonuses, and bad years are rewarded with equally massive bonuses; where banks are too-big-to-fail and no incentive to behave responsibly.

Lanchester charts his way through this story, pausing to explain the basics along the way. He explores the history of derivatives, of deregulation, and the development of the sub-prime market, with wit and without jargon. As a non-economist, everything is tied back to how it impacts everyday life. By the end of the book, you won’t just understand the financial collapse, you’ll know what it means for your mortgage repayments and for our politics in the years to come.

I’ve read several books on the financial crisis now, from varying perspectives. This is the clearest, easiest to read description of the crisis by some distance. What makes Whoops special is that it isn’t an ‘I told you so’ from a marginalised economist, or a confession from a financier. It’s a book by a journalist who knows good story when he sees one. “What’s happened is extraordinarily interesting” says Lanchester. “It’s an absolutely amazing story, full of human interest and drama.”

If you just want to get your head round it in the simplest terms, with a minimum of slog, Whoops is the book for you.

• Freefall, by Joseph Stiglitz

• The Death of Capital, by Michael Lewitt

A few years and a financial crisis later, and the tax is back on the agenda again. And so it should be. First proposed in the 1970s as a way of slowing down overheated capital markets, it’s a good idea just waiting to happen. With the vast sums moving around the money markets, a tiny levy of just 0.05% would raise billions of dollars. This international fund could then be used for development, climate change adaptation, or any number of useful things at very little cost to the financial sector.

The latest incarnation of the idea is of course the Robin Hood Tax campaign. It’s come long way in a short time, enlisting just short of 95,000 supporters and a number of high profile backers, including Bill Gates and Desmond Tutu. Once again, the European Parliament is largely supportive. At the upcoming G20 summit in Cannes, Nicholas Sarkozy will be recommending the tax.

And guess who will be standing in the way again? Yep, that would be Britain. The City objects to a financial transaction tax. Therefore, the British government objects to a financial transaction tax. Chancellor George Osborne intends to stifle any possibility of a Robin Hood Tax – not because he opposes it in principle, he says, but because unless it’s a global tax, it will make the EU (or more importantly London) less competitive.

It won’t and its a feeble excuse. Britain already has a unilateral transaction tax on shares: Stamp Duty. That’s charged at 0.5% and it hasn’t exactly held the London Stock Exchange back. Applying a much smaller tax of 0.05% is unlikely to bring the money markets to a grinding halt.

To put it bluntly, the biggest obstacle to the Robin Hood Tax is vested interests. The Conservative party receives over half its funding from the City, and the economy is hugely unbalanced in favour of banking and finance. Their lobbying power is immense.

So the campaign is currently encouraging letters to David Cameron to tell him to back the tax at the G20. Send yours here,

In one of them, up to £100 million of damage was done to shops and businesses, along with unquantifiable damage to communities, families made homeless, and young people caught up in criminal behaviour.

The other has cost the economy £226 billion so far, and the long term consequences in job losses, business closures and bankruptcies remains to be seen.

I‘m talking of course about the wave of rioting across the UK, and the slump in London’s stock market.

I think there are all kinds of links between the two. The City and its bloated share of our unbalanced economy is the key driver in inequality and the marginalisation that ensues. (David Cameron, just minutes ago, has declared to the House of Commons that the riots have “nothing to do with inequality”, which is not a helpful development)

It was reckless lenders who caused the recession, leading to the fall in employment that has left one in five young people without a job. It was the banking bailouts that drove up the deficit and forced the spending cuts, including the Education Maintenance Allowance to young people who chose to stay in school.

Shop fronts are boarded up on the high street to protect them from the gangs, but the recession had already closed plenty of others. The riots have left dozens of households homeless after a spate of arson attacks, but they’ve got nothing on the 40,000 repossessions expected this year.

The riots are not the fault of the City and the banks, that would be a daft claim. But I do think they’re both the fairly predictable results of an economy structured around greed, and a culture that makes a virtue of selfishness.

(image from Rolling Stone)

Treasure Islands: Tax havens and the men who stole the world is the best book I’ve read so far this year. It explains a shadow financial system that is almost unknown to most of us, politicians included, but that now processes over half of the world’s trade. Over half of the world’s banking assets are held offshore, and a third of foreign direct investment. We can’t be sure how big it is, because nobody has been tracking it. In fact, not tracking it is the whole point.

‘Offshore’ is a tricky term, generally used of Carribean islands or small island territories like Jersey or the US Virgin Islands. The system is broader than that however, and includes the City of London, Delaware, or Switzerland, all of which are geographically onshore, but are tax havens in the way they function. Shaxson expands and simplifies with a definition of a tax haven as “a place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere.”

Mostly, tax havens are about secrecy, and are often described as ‘secrecy jurisdictions’. Register your business here, and you won’t have to declare who owns it, where the profits were made or who gets them, and a thousand other little tricks and tips to maximise profits and minimise tax. It’s tempting to see this as ‘sticking it to the man’. Nobody likes paying taxes after all, but tax havens essentially undermine other countries as a way of life, and plenty more besides. They are places for mafia and drug money, they hide bad accountancy and create instability, they provide escape routes for plundering elites in developing countries, and a place for dictators to stash their looted billions. Most commonly, they’re just there to hide accountancy trails and complicate international money movements, frustrating regulators and avoiding taxation.

The problem with tax havens is that they drive a race to the bottom. One place cuts business tax, and everywhere else has to do likewise to stay competitive. Another makes it easier to register a new company, or says that directors no longer need to be named, or creates a new law against breaking bank secrecy. Other countries have to follow suit, or lose business. The result is ever weaker regulation and lower standards, and it is that sort of minimal oversight that up-ended the financial system in 2007.

To give just one specific example, Ireland’s regulator had a promise with the banks that if they filed the paperwork for a new derivative by 3pm, it would be authorised for trade the following day. As Shaxson says, alternative investments are complex and the paperwork could run to hundreds of pages. There was no way the regulator was able to read the file and sign it off responsibly. It just wanted speed, and the promise of speed meant that more banks would launch derivatives out of Ireland instead of the many other places it could be done. So derivatives were released onto the market without proper oversight, and we all know how that turned out.

Treasure Islands begins with the history of how the tax havens came about. The Swiss have been at the secrecy game for centuries, partly so that Protestant kings could borrow from Catholics without their people getting upset. The modern secrecy network dates from the end of the British empire. Shaxson argues that as Britain realised its empire was crumbling, it switched tactics so that while it lost the geographical territory, it kept the money. It built a spider’s web of tax havens across the Carribean or Hong Kong, an inner ring including Jersey and Guernsey, with London at the centre. As the book suggests, “colonialism left through the front door, and came back in through a side window.”

Later chapters describe life in a tax haven, and how finance works with small places where all the relevant people can be gathered in one room, and how democracy is undermined by the need to protect the offshore business. There’s a chapter on developing countries, where the outflow of illegal funds vastly outweighs the inflow of aid. There’s a dozen blog posts in all this. Perhaps I’ll get round to a couple of them.

Finally, Shaxson argues for how to begin undoing the worst of the damage, with greater transparency, international cooperation, and corporate responsibility. It’s time to get informed about it too, and make some noise. (Groups like UK Uncut are on the case). Because “whoever you are, wherever you live, and whatever you do, this affects you” as Shaxson concludes. “Offshore is undermining your elected government, hollowing out its tax base and corrupting politicians. It is sustaining a vast criminal economy and creating a new, unaccountable aristocracy of corporate and financial power.”

Tax havens remain a huge drain on the global economy, a place for wealthy elites and global corporations to avoid paying their share. They rob developing countries of around $160 billion in unpaid taxes every year, which is more than they receive in aid.

It costs the British economy too, to the tune of £11.5 billion a year by one estimate (pdf). That’s a little crazy when you consider that many of the tax havens are UK protectorates, and the City of London is one of the most secretive financial centres in the world. At a time when ordinary people are losing local services to reduce the deficit, that’s an extraordinary thing to tolerate.

“We hope many thousands of campaigners will demand an end to the huge suffering which tax haven secrecy currently causes, especially in developing countries,” said Dr David McNair, Senior Economic Justice Adviser at Christian Aid. “G20 countries between them have the power to force tax havens to stop keeping the secrets of people and companies who dodge tax, pay or receive bribes and launder money.”

Visit Endtaxhavensecrecy.org now to send a letter to your head of state.

Part of the problem is that the developed world isn’t included in the goals, other than to throw money at them and show up at conferences. This is important, as there are some things that we’re doing that are making things worse. For example, the plan to end hunger is failing, but half of us are overweight, we throw away a third of the food we buy, and some of us are making a fortune speculating on food prices – not helpful behaviour.

Our performance on MDG number 7 is far worse. That’s the one about the environment, and of course the carbon emissions of the industrialised countries are out playing havoc with rainfall patterns and disease lines, making everything more difficult. So shouldn’t we have some goals of our own?

To redress the balance, a sustainable development professor in Sri Lanka came up with a complementary idea last month, Millennium Consumption Goals.  “We now have Millennium Development Goals (MDG) for the poor” says Professor Mohan Munasinghe. “We should extend that to the rich and make sure they consume more sustainably.” Consumption goals would give us some targets to reduce material use and carbon emissions in the richer countries, where 85% of the world’s resources are consumed.

Munasinghe doesn’t go on to list any specific targets, but Erik Assadourian at the WorldWatch Institute has picked up on it and made some suggestions. He includes halving obesity rates by 2020, doubling the use of non-motorised transport, and guaranteed healthcare for all. He also suggests greater equality and a shorter work week, something I’d love to see.

What else should we include? I might add a reduction in air travel, eliminating food waste, and creating a stable banking system. The development goals are for those whose basic needs are not yet being met. All our needs are satisfied and a great deal besides, so development for us is something of a waste. So let’s start talking about a post-growth economy, and make it a goal to end economic growth by 2025.

Anyone else got a goal to suggest?

• See also: Design for the First World

In a nutshell, De Soto argues that even if countries liberalise and open their economies to foreign investment, they will not succeed in bringing prosperity to ordinary people until they have established a formal system of property rights.

The poor are not without assets – they have homes and farms, small businesses and even quite large enterprises. The big difference between developing countries and Western countries is that the latter have legal structures and established property rights, while the former have informal and often local ownership structures. These ‘extra-legal’ structures work in the local area, but are not transferable or dependable.

“Imagine a country,” writes De Soto, “where nobody can identify who owns what, addresses cannot be verified, people cannot be made to pay their debts, resources cannot be conveniently turned into money, ownership cannot be divided into shares, descriptions of assets are not standardised and cannot be easily compared, and the rules that govern property vary from neighbourhood to neighbourhood or even from street to street.” This is easy for me to imagine. Despite being in the capital city, our house in Madagascar never had a proper address. You either knew where it was or you didn’t.

It’s not that legal structures are non-existent. They’re often there, but they’re obsolete, overwhelmed by rapid urbanisation, and inaccessible to ordinary people. De Soto’s team demonstrate this by boldly following through a series of legal procedures in developing countries.

• Applying for permission to build a house in Peru: 207 administrative steps involving 52 government departments, taking six years and eleven months. Ownership of the land requires an additional 728 steps.
• Legalizing an informal property development in the Philippines: 168 steps, 53 public agencies, 13-25 years.
• Buying land in Haiti: 111 bureaucratic steps, taking 19 years.

It’s little wonder that people don’t bother, and fall back on extra-legal structures instead. What this means however is that although people have wealth, “what they possess is not represented in such a way as to produce additional value.” Informal property rights do not allow people to monetise their assets. In a Western country, you have property deeds, and this allows you to use your assets to raise capital.

The ability to raise capital is the essence of capitalism, and in a Western country anyone can do it. You can take out a loan against your house and use it to start a business, but that’s just the start of it. The address serves as a point of contact for civic purposes such as jury duty, voter registration or taxation, for commercial purposes such as buying things and having them delivered. It means you can be found, if you default on debts or break the law. It’s a point for services, such as energy, water, or telephone lines. “Westerner’s houses no longer merely keep the rain and the cold out. Endowed with representational existence, these houses can now lead a double life, doing economic things they could not have done before.”

The ‘parallel life’ of property is so taken for granted in developed countries that it has been almost totally overlooked in the development debate, De Soto argues. Because the system was pulled together slowly, sometimes over centuries, the history of it is practically unknown. It is implicit.

Remembering that history is important, because it shows how it legal structures could be drawn up for countries without them. Crucially, the history shows that the answer is not to criminalise the millions of people who have built houses without permission, or who run small businesses outside the tax system. The key is to create a system that brings them in, respecting the existing informal ownership structures and granting them official sanction.

This is what the US experienced as the country expanded westwards. Pioneers moved and settled informally on land, and built houses and planted crops long before the legal system caught up with them. In some cases establishing ownership over an un-owned piece of land basically consisted of turning up and carving your initials on a tree. If you raised a crop on a piece of farmland, you could claim it. Known as ‘Tomahawk rights’ or ‘corn rights’ respectively, these had no legal status, but were sufficiently respected by the local communities that you could even sell the land to someone else later on.

As the US government began to bring law to the West, there were efforts to confiscate and redistribute land claimed in this way. Having occupied the land for years and investing so much in it, this didn’t go down well, and sheriffs and lawmen were run out of town. In some case the violence was against the settlers and fields were burned to move people along. Over the course of decades, the government came to see that bringing people into the legal system worked best, rather than applying land ownership structures from scratch. The famous Homestead Act of 1862 was “less an act of official generosity than the recognition of a fait accompli.”

Those sorts of struggles are being played out today in developing countries. I remember whole areas of little market stalls being bulldozed in the night to make way for buildings. The traders returned in the morning to find their wooden shacks gone and their goods being looted, but they had no rights, and had no grounds to demand compensation.

De Soto and his team have had the opportunity to put his theory into practice in Peru, and have drawn up a ‘capitalization process’ for other governments. The campaign to extend these processes is ongoing, through the Institute for Liberation and Democracy. It’s not a silver bullet, but De Soto’s idea is immensely powerful. It provides rights and the rule of law in an inclusive way, creating opportunities for the poor. By opening up and activating what the disenfranchised already own, there’s no redistribution for the rich to fear and oppose. Extending property to the poor bridges the gap between political left and right. It would bring billions of people into the global economy, and release (De Soto’s late 90s estimate) $1,392 billion of dead capital in developing countries.

Reading the book today, it strikes me that there’s another side to the debate. Creating capital requires balance, and the West has actually gone too far in the abstract representation of assets. After all, it is the ‘parallel life’ of our houses that caused the financial crisis, those irresponsible mortgages sliced and bundled and speculated against until nobody understood who owned what or what was worth. But that’s the opposite end of the spectrum, and in-between the derivatives market and Tomahawk rights there’s a middle ground where capitalism works for the poor.

All of which makes The Mystery of Capital a hugely important book, all the more so for being so clear and readable. It is one of those few books I’ve read, I can count them on the fingers of one hand, that could genuinely change the world.

Bonus season has been contentious for a little while, and big bonuses were being paid well before things started to come unstuck in 2007. Some 4,200 city traders took home a million or more in 2006. It was good news for sales of luxury yachts and cars, but among the more negative effects were a spike in the price of rural land. The rush of easy cash priced farmers out of the market and handed some of Britain’s best farmland to ‘lifestyle’ owners.

Bonuses have become more controversial since the financial crisis. As performance bonuses, it was understandable that they were paid in the good years. When the banks still paid out after making a loss, it was clearly no longer performance related. Some banks protested that they were contractual and began calling them ‘retention bonuses’ instead, but since the banks had been bailed out by the state, the taxpayers were funding the bonuses either way, and weren’t happy about it.

In response, politicians threatened discipline. “I am angry at irresponsible behaviour,” said Gordon Brown in 2008. “The days of big bonuses are over.” But then he did nothing, which meant that in 2009 all he could do was say that he was “very angry” again.

Needless to say, the opposition made political hay out of the situation, and both the Conservatives and Liberal Democrats promised action on bonuses during their campaigns. So did Gordon Brown in fact, come the election, although there was no reason to believe him. Cameron suggested no bonuses should be paid at all by banks bailed out by the taxpayer, and told the government to “wake up and smell the coffee.” The coalition agreement agrees “robust action to tackle unacceptable bonuses.”

I suppose it was inevitable that the tune would change once the Conservatives were in power and the force of the City’s lobbyists turned on them. Bonuses are necessary to motivate staff, they argue. If UK banks don’t pay out, the City’s best will go to New York or Frankfurt. Bank profits would fall, and where would your tax revenues from the banking sector be then, they insinuate in a tone just short of blackmail. So the government relents, expresses hopes that restraint will be shown, and does nothing.

The fact is, bonuses do matter. For one thing, the banks need to recapitalize, so it’s not a great idea to drain billions out of them every year. Fund manager Michael Lewitt admits as much:”The payment of huge amounts of cash compensation severely weakens the balance sheets of financial institutions,” he warns. That’s money that could be either capitalising the bank or paying investors.

More importantly, big bonuses incentivise risk. Obviously the idea of a bonus is to reward bankers that turn impressive profits for their employer. Nothing wrong with that, except that the bankers still drew bonuses when the banks made a loss. Detached from actual performance, the bankers have nothing to lose. If they generate a big profit, they get rewarded generously. If they make a loss, they still take home the bonus. Since the banks are too big to fail, the taxpayer can always pick up the bill. Bank staff take home all the rewards, and the government underwrites the ultimate risk. With nothing to lose, banking bonuses encourage reckless, debt-based risk-taking in the City, and we all know where that leads.

“Public company executives have a one-way ticket to earn cash compensation with no return ticket to put any of that cash at risk” says Lewitt. “This is the real objection to the sky-high bonuses that were paid on Wall Street.”

David Cameron understands this. “For the past decade, the incentives have been distorted. The bonus culture encouraged short-term risk-taking instead of rewarding the long-term interests of shareholders and the public.”

Lewitt argues that bonuses should be paid in stock, which is something the Lib Dems have argued for. Joseph Stiglitz disagrees. Paying in shares, he argues, creates an incentive for executives to do “everything they could to get their firms’ stock price up – including creative accounting.” As we’ve repeatedly seen on Wall Street, reported value can be very different from actual value. Giving bonuses in shares discourages transparency.

So is it possible to have a fair bonus system? Sure. There are still reasons to object on the grounds of equality and the gap between rich and poor, but setting those aside for a second, it is legitimate to reward those who make the most money for the bank, if that’s the game. A safer way to pay out bonuses would be to tie them performance. Forget the idea of contractual or retention bonuses, you get paid a percentage of the profits made, no more. Further, it should be calculated on a longer time frame. Instead of getting a bonus on the year’s profits, you would be paid over three years’ performance. You should get more in bonuses for consistently bringing in $5 million a year, for example, than making double that one year and a loss the next. It would incentivise longer-term, more stable investments, rather than winner-takes-all risks.

In summary:

• The bonus culture matters because it encourages risk taking and debt.

• Bonuses should be performance related by law, so that none are paid if the bank makes a loss.

• Performance should be assessed on longer time frames to encourage stability.

• To protect bank bottom lines and shareholder interests, the bonus pool should be capped at a certain percentage of bank profits.

• In the interests of an equal society, bonuses should be taxed, and could be subject to an absolute cap to prevent runaway earnings for executives.

• To redress the balance of power between finance and government, bonus culture should be addressed internationally.