What will the power shift from labour to capital make things look like?

As we wander around the many lovely historical relics that Britain has, usually in the care of the National Trust these days, we think we are looking at the past. Wander around the many rooms, and marvel at the effort it would have taken to keep these clean in a world without fossil fuels or vacuum cleaners.

Stately pile in Leicestershire
Stately pile in Leicestershire

Now everybody in the personal finance world is trying to build capital, to make income. It’s the Holy Grail of pension planning, the vanishing point at the distant horizon, the Ermine sitting in his back garden drinking iced coffee while other people toil to fix the sewers and bring water and power and ideas to him. We don’t do this in the up-close and personal way that the Downton Abbey set do[ref]I’m inferring this from press reports about the programme, I’ve never watched it personally[/ref]. We use machines and energy to do it, and if you see people power substituting for capital you know that someone’s thrown the big red switch and the projection reels are rolling – in reverse, and that the aristocracy will be in the ascendant again.

Financial Independence is the non plus ultra  – the destination for which we PF types forego all the gratuitous consumerism of our fellow men, living like celibate monks in a brothel. It’s quite a new concept in human societies. Those grand buildings in the care of the NT were serviced by an army of grunts, basically working for The Man. Over a working lifetime, they didn’t get to save enough money to retire, because they didn’t earn enough money over and above their living requirements. Although we often associate this retirement with the welfare state, trades unions and friendly societies were in this space in the early years of the 20th century.

One of the mantras of the PF world is you can earn a 4-5% real return on capital in a suitably diversified portfolio of assets. This isn’t bad – be grateful you’re living now rather than earlier in the 20th century 😉 In even earlier times, however, the return on capital was better, presumably because the servants never earned enough spare over their needs to retire! On the downside if you were the Man you had to be the first-born son of The Previous Man – capital was inherited, passed down the line by the doctrine of primogeniture. It was a drag if you were the second son, and you were SOL if you were female.

shamelessly pinched from Krugman who pinched it from piketty
shamelessly pinched from Krugman who pinched it from Piketty

I got this from Krugman’s Why We’re in a New Gilded Age but I think he got it from Thomas Piketty. There are a few interesting things here. One is that this is the return on capital after taxes – it can of course be varied using taxes. You’ll note there was a low in the period that had the two World Wars – I guess taxation was high and the destruction of capital too. Another thing that is interesting is that the high-water mark of world GDP growth encompasses my working lifetime – I finished work at the end of it. I guess there’s some kind of limits To Growth forecasting in there, or maybe Piketty’s been reading Life After Growth. Either way we’re seriously into unknown unknowns there.

It is, therefore, possible, that my story is a blip on the thread of financial planning – the thought that an average grunt who left school owning a kettle and the shirt on his back could command enough resources to retire 34 years later. For that piece of luck I am duly grateful.

What do we learn from this? One is that the rate of return on capital assumed by a lot of PF thinking isn’t that unusual, from a historical perspective. It is, however, a bit unusual compared to recent historical perspective. We really could do without any more bloody wars in Europe, and the associated high taxation. OTOH there did seem a big stimulus to growth, although on such a coarse scale it’s hard to say that this wasn’t due to progress in agricultural yields or due to electrification. One of the valid questions would be does growth inherently reduce the return on capital, or is this correlation with something else?

An ermine looking back 30 years, about to enter university. Or not.

One thing does seem clear, however. We are headed towards a world where capital is getting a larger slice of the pie. We see that in wage stagnation, and also in a fall in growth. One fo the hypotheses for the fall in growth is the increasing cost of energy. So what does the future look like?

Much more stratified and class-bound, I would hazard. If I were collecting my A levels today, and if there were and older Ermine-head on the shoulders[ref]because in reality I was much more susceptible to peer-pressure and going along with established norms in my 20s[/ref], I would question some of the shibboleths and assumptions of the consumer lifestyle and image.

I would note that the modern world offers three doors for the A level student. One is the route of university and £30,000 worth of debt. Now in the world I have worked through, £30,000 of debt would probably have been worth the candle, but in the world I see before me, I don’t feel that way at all – I have much sympathy for this viewpoint that university is an unaffordable luxury. There are two reasons why this is different today from 30 years ago:

  • 30 years ago, the exams were much harder [ref] the exams were norm-referenced (ie a fixed percentage of entrants got As)  [/ref] I think it was 7% when I entered and 11% when I left in 1982 of school leavers went to university at all. The exams screened strongly for academic ability, in ways you aren’t even allowed to think about today because it hurts the feelings of those that don’t make it. As a result of this, there were far fewer graduates in the workforce, the graduate premium was stronger.
  • Poorer students got grants and I believe everyone had their course fees paid for by the LEA, whereas now we have the loans situation, which means a student is indebted by £30,000 as well as the opportunity cost of losing the money they might have earned in the first 8-10% of their working life. Although it’s not exactly the same as going to Mastercard and taking out a loan for £30,000 as Martin Lewis is at pains to explain, the trouble is that with a 50% entry target, university is by definition targets at those of average academic ability and up. As a result the graduate premium is much lower, for the simple reason that the product is a lot more common. It’s true that in there are the same 11% of old, but the problem now is employers have to find them, assuming academic ability correlates with better ability at what they want. One of the biggest problems has been that heft in student numbers – it meant that the taxpayer couldn’t afford to support five times[ref]one of the things that pisses me off is the mantra oh my generation pulled up the drawbridge. We didn’t do it deliberately, but did it by being so weak-willed that we couldn’t face telling the less able of our blessed children they weren’t smart enough to benefit from university. This was lily-livered incompetence, not malice as far as I can tell. It is bad, but without knowing how we got ourselves into the shit we can’t formulate a way out of it. Paying fees and maintenance to five times as many people wouldn’t help. We either need to make more jobs that are matched to the lower levels of ability, or eliminate enough undergraduate places to get the proportion to match the jobs we do have. It was right 30 years ago, maybe the proportions want to be higher now because we have a different employment scene and people might be a bit smarter but an increase of FIVE times in 30 years? You don’t need a degree to work a call centre. And society should be honest enough about your ability not to encourage you to spend £30k chasing an empty dream. Which would you rather have – not getting your grades or a place in clearing or picking up a £30,000 debt and lose three years of potential working life to end up in the same position but with a fancy piece of paper? I do accept that the adult world is not serving its offspring at all well here but the answer isn’t pay five times as many people through university as we did three decades ago. Two times, maybe, and there I am all for student grants and fees being paid from general taxation – HMRC will get it back in higher tax receipts later[/ref] as many so the cost of the opportunity has gone up for the students at the same time as the value of the product has been dropped because the market has been flooded.

All round this seems to be a policy failure. We haven’t asked the fundamental questions, which are

what is university for?

  • if it is to provide better work cannon-fodder, is this what companies and the available work want?
  • is it better if companies train their staff themselves – vocational training used to be a lot better – the Ermine was trained in how to use a lathe and other gear by companies, not schools, even though it was a peripheral part of what I would be doing, I have never used a lathe directly in my line of work but needed to know what could be done with one.
  • Is is right to normalise debt to our young adults so early in life – a student debt is more money than I have ever borrowed in my life other than as a mortgage

At the same time I note that there are other routes

  • England is an expensive place to go to university, particularly if you are English – European universities where under EU rules you have equivalent access to courses and support may be a cheaper option (and often taught in English!)
  • The modern world offers the entrepreneurial and talented more opportunities to get to market and a much more efficient business operation than was possible in the past. You don’t need a university degree if you don’t have to convince an employer to employ you – code an app needs knowledge, not a degree and you can learn an awful lot of things online nowadays. Against that the odds against the successful entrepreneur are bad. Many are called but few are chosen to succeed.

The good thing is you have far more options. The bad thing is that the value of the default option has been mullered – price up and value down. I personally wouldn’t go to university in England if I were 18 now, though I would consider Europe[ref]studying abroad also makes you look more enterprising and go-getting, which everybody likes, and at ease with other cultures which some employers seem to like. But I’m no expert, so DYOR[/ref].

Minimize debt in a slow-growth world

One of the macro reasons is that in a low-growth world, debt is a very-dangerous thing indeed, because it’s hard to outrun with wage inflation. Debt also means mortgages. Part of the romance Britain has with house price inflation is because one generation did well out of that (it was my Dad’s generation, not mine – I got slaughtered by housing in the UK). The oil shocks of the 1970s caused high inflation and labour had the whip hand – enough power to drive up wages. They didn’t get any richer, because productivity didn’t go up, but inflation did and their wages kept pace with inflation, reducing the value of the debt in real terms.

Labour will be much, much weaker in the coming thirty years[ref]I mean labour in aggregate. At the moment a lot of capital is being appropriated by the 1% and particularly the 0.1% as income, and technically this is also labour[/ref]. Globalisation and increasing automation will see to that. We may get inflation, but wages need to keep up with it for house price inflation to be A Good Thing. Otherwise we get what we have now – the real value of houses rising and fewer people being able to afford them, and that is not a Good Thing – for anybody[ref]I guess it is a good thing for buy to letters but that’s it. It isn’t a good thing for owners unless they downsize, as they still need somewhere to live, and it tempts twits like Shona Sibary to live above their means.[/ref]

In a low-growth world, even those student loans are going to be more onerous. So beware the debt, or at least investigate getting it down, first by asking whether university is necessary and a good match to your skills and aspirations[ref]this in itself is a beastly tough thing to ask when you’ve just started out – how the bloody hell are you supposed to know?[/ref], and if so considering the foreign option while it’s still open to you. Hopefully Cameron’s plans for an EU referendum won’t bugger that up.

Logan's Run
Logan’s Run, I suppose there are some compensations for the YOLO set

Student debt is an obvious one to minimise, but lifestyle costs are one way that the young do get through money[ref]I am staggered at what the kids of my ex-colleagues buy, though I am pleased to see one old trick is still active – if you want Dad to help you buy a car say to Mum you’re thinking of getting a moped or a motorbike :)[/ref]. You do need some conspicuous consumption to wine and dine and play the mating game, but a little bit of excess goes a long way, as long as it’s the right sort of excess. There’s a limit to how long it’s wise to take the YOLO mantra, unless you plan on taking a Logan’s Run approach to extreme early retirement. I avoided debt in my twenties by being exceedingly tight with housing[ref] only to throw the win away when I did buy a house – you can survive some big mistakes, just not too many[/ref]- I shared houses and targeted the lower, more tatty end of the market. I regularly pass one rental in town aimed at students that has a rate of £56pw – that’s probably the end I was running at. And debt due to consumerism is bad, again particularly so where labour is weak. The normalisation of consumer debt and student debt are the most toxic features arising since 1980 for personal finances. If you can’t pay for your consumer goods in  cash, you’re not worth it. End of.

If we zoom out even further, that power shift from labour to capital is harming productivity in the UK – it means it’s cheaper to hire people to do some jobs that capital. Take the humble car wash. In Britain garages used to get great big furry roller things that you’d drive into and put a coin in and it would wash your car for you while you were inside, not a human in sight.

The Ermine knows the meaning of the plastic bottle on the Downton promo shot
The Ermine knows the meaning of the plastic bottle on the Downton promo shot

Nowadays you see a lot of these car washes broken, but you see loads of signs for hand car wash in supermarket parking lots and btis of waste ground – people with a few buckets, chamois leathers and a pressure washer are cheap, It’s cheaper to pay people to do this now than invest in the machines. That is not a good sign – not a good sign at all. The Ermine knows the symbolic meaning of the plastic water bottle on the Downton Abbey promotion picture. The plot of Downton’s Abbey is running backwards, and the power of inherited wealth and aristocracy is rising again 😉

Look at the retired colonels of The Telegraph fulminating about death taxes. These parents know in their hearts that the best way for their children to get ahead is for them to inherit wealth, because they will probably not be able to earn it. It’s the most natural thing in the world for parents to want to featherbed their kids, over and above others. And parents realise in other ways that they try and buy privilege for their offspring – the whole independent school fees is also to try and build in advantage. Pass on capital – be it financial or social web capital, because the chance to earn your way ahead is thinning out. The aristocracy will be back. Not necessarily land, this time, financial capital will do, perhaps. Some of George Osborne’s DC pension changes play into this too – now the 55% tax rate on pensions going into an estate is removed.

So take care about the things you assume about the world ahead. What worked in the past won’t necessarily work that well in future – and loadsadebt and easy money are a particular hazard to getting ahead. Labour is going to be poorer than capital relative to the last 50 years. On the upside, the talented, the crafty and the well-connected will make bank like gangbusters, it’s the average to the modestly bright that will take the shaft – many of those that will be considering that £30,000 debt.

Wealth warning – this is the scribblings of a jaded fiftysomething that grew tired of the the way the modern world of work is. If you are a twentysomething you have the energy of youth, you have fire in your belly and I wish you all the best of British luck. I don’t think I have said anything that’s explicitly wrong, but the glass is half empty, and one of the specific advantages of youth is that your glass should always be viewed as half full.

From a personal finance point of view I do believe you should think about taking on a £30k claim on your future earnings very carefully and know why you’re doing it rather than just drift into it because it’s the done thing, and have a clear vision of how doing this will help you earn more than 30k in real terms across your lifetime  and compensate you for three years of not earning. Or if you are rich enough, whether a damn good time and one of the few rites of passage we have in the West is worth it as a consumer experience regardless…

Zooming even further out, what will that society look like? Staid and sclerotic – who you are will matter much more than what you know or even what you can do. Maybe Downton Abbey with more mod cons and better contraception. Don’t think we’ll be going to the moon. Or Mars. It’s where we are going if Life After Growth is true. But it isn’t predestined, maybe the other side of Wilkins Micawber will show, the one that isn’t normally cited in PF circles

Something will turn up

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33 thoughts on “What will the power shift from labour to capital make things look like?”

  1. Thought provoking stuff. I agree with much more of this one then the Morgan recap last week, personally. So far I am winning the peak oil / energy debates we had a few years ago (and yes I am keeping tabs! 😉 ). But equally, a few years is very early days. 🙂

    I fully agree that capital is really important versus labour, but disagree it’s the only way to survive. I think most people who make an effort in this country to work in this country will do fine in our lifetimes, and probably ‘our’ childrens (and maybe beyond that — I just don’t claim to look so far ahead!)

    However I think on a relative basis, labour will become poorer versus capital.

    Ironically this isn’t because I share the doomster view of a world of Fred Flinstone cars and growing your own turnips in raised beds made of abandoned BMWs, but because I think there’s so much growth to come (my usual caveat: absent environment collapse caused by all the growth).

    Capitalists are going to make out like bandits because more and more of the world is adopting our way of life and we got here first. That means owning Diageo and flogging fancy whiskey to the Indians, say, has far more operational leverage compared to working at Diageo, on a pound for pound basis.

    Also, I know you timed your housing extraordinary badly (not a dig, a fact you’ve brought up many times, and heck I — a notorious renter — can’t brag as I’ve done even worse! 🙂 ) but many subsequent generations have done perfectly well, especially down here in the south.

    A friend bought her flat in 1999 for £150,000 in South London and told me the other day she’s just had an offer for £525,000.

    That’s doing very well from the (ludicrous) property market, by any measure.

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  2. A good Friday for Food for Thought. Thanks again for yet another great article. Having just bought myself a robot vacuum cleaner which actually works incredibly well and allows my wife and I to more fruitfully spend our lives I’ll also be mulling over this video which I think you’ll enjoy http://youtu.be/7Pq-S557XQU

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  3. @Monevator and @Rob – I did think about writing the abundance version of this, even if it runs against the grain. We have the philosophical basis for this – it’s well sketched out in the basic income guarantee, fleshed out more in The Lights in the tunnel and of course by the original Grand Old Man John Maynard Keynes in the depths of the recession with Economic Possibilities for our Grandchildren. I kind of picture him in his rocking chair knocking on his pipe and greeting us with “what the hell took you guys so long, I’ve been waiting on this for decades” should that ever come to pass. I think it’s one for Monevator to run with though 😉 Interesting take that labour will fall behind because capital will run so much faster – either way labour is goign to be a smaller part of the picture. We really need to do something about the Calvinist mindset written into the culture otherwise there is going to be a lot of needless misery in such an event.

    The youtube vid was thought provoking – to be honest it makes any student loan look like a serious misallocation of capital it even half of it comes to pass, and barring energy problems there’s no technical reason for it to be wrong.

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  4. I have to disagree I’m afraid with Monevator here, I don’t think “most people who make an effort in this country to work in this country will do fine in our lifetimes, and probably ‘our’ childrens …” The only people I think who will do fine are those that have parents able to spot them the uni costs and leave them an inheritance or even better, a house. That’s the new aristocracy right there, nevermind what the 1% are up to. If someone who bought a flat in 99 for 150k, now with an offer of 525k has done very well, it can only mean future (present) generations will be doing very badly. In terms of having somewhere to live that is, or start a family, although I’m sure Far East tat will be in everyones reach. When I left school there was a level playing field where it was much easier to succeed on merit, ability and hard graft, whatever your background. I’d love to be wrong on all of this, but exponential wealth trends are very real.

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  5. Ermine, You have yet again put the fear of god into my heart at a level not seen since my year 8 history teacher start ranting about the end of fossil fuels and the downfall of civilization during my lifetime 😉

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  6. Capital vs labor is a very misleading analysis. You also need to consider rents, including rents from natural resources plus various artificial sources of rent created by the government. In a corrupt society, merely owning a lot of capital (stocks, bonds, real-estate) does not guarantee a secure future for those who lack political power, while conversely, those with political power don’t need to own anything, since they can simply arrange for the government to give them money somehow (big salaries, living expenses paid by the government, sweetheart contracts, etc), with these transfers financed ultimately by stealing from the rest of society.

    I would include things like excessive CEOs compensation (rampant in the United States) in this category and rent doesn’t really suggest that, but that’s the traditional economics terms for the third factor of production. It’s telling that rent disappeared from the economics lexicon sometime in the 20th century. Earlier economists, Mercantilists, Classical Liberals and Marxists, all talked of rent in the same breath as capital and labor. It’s as though discussion of rent has been suppressed because awareness threatens the existing power structure, which is mostly about rents rather than capital.

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  7. @ERG Sorry about that! These trends are secular, and play out over a long period of time. Jacob ERE made this point in his myths and the future post. The Archdruid also makes this point in his post

    …because the foreshortening of history cuts both ways; it makes small but sudden events look more important than they are, and it also helps hide slow but massive shifts that will play a much greater role in shaping the future.

    The damage done to the BSc/B.A. degree is a change that happened slowly and imperceptibly. But I do think that if people don’t investigate the alternatives to the UK they are setting themselves up for a fall. Other European countries can offer better value possibly because they haven’t devalued the entrance criteria so much – you need four As to get into an Irish university, but you’ll pay lower fees.

    And of course something may turn up 🙂

    @Revelo perhaps the fact I never studied economics formally is showing, but I was under the impression that rents are the way that capital expresses an income? I am explicitly becoming a rentier from the definition of financial independence – not having to sell my time for money? I took the proceeds of a bunch of that time and turned this income into diverse capital assets to derive an income.

    In some ways the things you cite are a fourth factor – directing the control of production and the income it throws off. Power, specifically political power, the ability to make other people do what you say. That’s power to usurp the rights over mineral resources and some of people’s income (soem aspects of government) and seizing control of the decision-making process and diverting some of the income from capital to your own pocket – the CEOs, and any pork-barrel lobbying which is buying power to direct.

    I don’t particularly dwell on that aspect because it’s not one I can fight 😉 It’s good to be aware of the 600lb gorilla, but more in the avoidance than as something to clout on the snout…

    Rents are most explicit in the area of property – a Buy To Let owner is explicitly seeking to control a capital asset in order to get a rent from the user of that asset

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  8. Yes, if it were me, now, I think I would consider going straight to working and studying towards a professional qualification e.g., in accounting, marketing, even HR, and then go to university later e.g., for an MBA.

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  9. “Although we often associate this retirement with the welfare state, trades unions and friendly societies were in this space in the early years of the 20th century.” Hang on, the “welfare state” was there in the early years of the 20th century, if by the wf you mean old age pension and unemployment insurance.

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  10. “if you were the Man you had to be the first-born son of The Previous Man – capital was inherited, passed down the line by the doctrine of primogeniture. It was a drag if you were the second son, and you were SOL if you were female.”

    No; noble titles passed by male primogeniture (with a few exceptions) but you could leave your wealth to whom you chose. Primogeniture was only a habit: second sons should blame Pa, not The Law.

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  11. @dearime it’s a fair cop – I was impressed by the welfare-state like nature of the friendly societies that I read about i nthe Somerset Rural life museum but these where Late Victorian rather than early C20, where it appears 1908 was the start of the welfare state in the UK in the pensions space

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  12. @dearieme hehe – now I know what was wrong with giving up History after O level – I’m working on the white flag right now. And I am very happy to learn – thank you!!!

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  13. “One thing does seem clear, however. We are headed towards a world where capital is getting a larger slice of the pie.” Could be, but it’s not at all clear, except to those with crystal balls.

    British student loans don’t have the economic incidence of an ordinary loan; they have the economic incidence of a graduate tax on people with above-average earnings (or more accurately a tax on attenders-at-university).

    As I understand it, American student loans can have an economic incidence rather like that of signing up to be indentured labour. That does encourage a sense of foreboding about the future, I must admit. At least about the future of the US.

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  14. Capital is stored labor, and so there is no limit to how much capital in a society, whereas rents are always limited. The building on a buy-to-let property is capital, but the land is rent. The reason London real-estate is so expensive not because of a shortage of workers to build new buildings (or workers to mine iron ore and work in brick factories and otherwise produce the raw materials for new buildings) but rather because of a shortage of land plus artificial scarcity caused by building restrictions. Both the land shortage and the building restrictions create rents.

    In the 19th century economic controversies, rent essentially meant land rent, and the reason that term was used was because most land in Britain then was owned by a small number of aristocrats and then rented long-term to people who wanted to build on it, rather than sold. Owners of factories and housing units simply didn’t have the option of buying land outright. The result was that a huge amount of Britain’s economics surplus was being skimmed off by hereditary aristocrats, who were essentially useless parasites on society.

    The great conflict in 19th century Britain was between these aristocratic land-owners (the party of land rents and other aristocratic privileges) versus the rising industrialist bourgeoisie (the party of capital). The economists (at least the ones history hasn’t forgotten) all took the side of capital, because it represented the future of British power. Needless to say, no one cared about labor, other than in the aftermath of revolutions, when it occurred to both the aristocrats and capitalists that throwing labor a bone or two now and then might be a good idea.

    Your confusion about rent is intentional. The powers-that-be want such confusion, because we are reverting to the situation of 19th century Britain, and once again a huge proportion of the economic surplus is being skimmed off by useless parasites (rent-seekers). People like you and me, who save from productive labor and then lend out those savings (via of ownership of stocks and bonds) to entrepreneurs who want to build physical capital (factories, railroads) or finance intellectual capital (R&D at technology companies), are NOT true rentiers. Our return on capital is merely deferred compensation for productive labor. A true rentier is someone who receives a stream of income but never did anything productive (they either inherited wealth or used their political power to arrange that stream of income).

    Rents are so appealing that everyone wants them and the very essence of a non-corrupt society is one where rents are ruthlessly eliminated. The following two reforms are most important: high taxes on land values (like 10% per year) but low taxes on value of improvements to the land (like 1%), high inheritance taxes (like 99% for inheritances over say $10 million per recipient). W S Churchill, back when he was Liberal, was arguing for precisely these reforms a little over 100 years ago, though not at the extreme rates I’m proposing. Plus ca change, plus c’est la meme chose…

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  15. One more thing. It may seem like what I’ve written is just a bunch of fancy theory that has no relevance to our personal situations. In fact, it is relevant.

    If the conflict is capital versus labor, and capital will have greater power in the future, and you and I are capitalists, then our future is bright.

    But if we distinguish rent from capital, and see capital income is merely deferred labor income, so that the real conflict is between rent versus capital/labor, and if we expect rent to have greater power in the future, then our future as capitalists not so bright.

    In particular, it might well serve the interests of the true rentiers, those who control the government, to wipe out the petty capitalists like you and me via a combination of inflation, high taxes on dividends/interest, elimination of that alphabet soup of SIPPs and other schemes for avoiding income taxes in the UK (in the US, it would be IRAs, Roth IRAs, etc), and perhaps legalizing theft of corporate assets by insiders, so that the small investors are wiped out in favor of big-shots with connections to the government. Much of the world already operates like this and nothing the future won’t also look that way in the UK or US.

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  16. Thanks for the piece about norm – referencing – I did my A levels in 1985 so it makes me feel better about my B and 2 Ds when “everyone” nowadays seems to get 3 As.
    As to Downton Abbey, the next series might reach the Great Crash so they might well end up on the street 😉 It’s far more likely though that the family will survive nicely (another rich US marriage perhaps) while the poor butler and housekeeper will have to return to work cos their pensions have been wiped out.

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  17. @ Ermine

    Your analysis seems to ignore that we live in a democracy

    Your default position that society will return to some pre 20 th century norm seems to ignore the possibility of an increasingly highly educated and globally aware population decide to stop being screwed over

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  18. @Revelo – that’s a fair amount to think about, and so far appears internally consistent, at least insofar as what I’ve considered as capital has more than one form and some are more like a controlling interest. I shall consider this more, as it’s worthy of more study.

    @Neverland, I guess Revelo’s thesis is a start – I’m not so sure that the collective will of the people is shown in the workings of the economy 😉 Hell, even as a shareholder where I’ve bought some of my votes and ‘the little people’ like me hold stakes by proxy via pension funds etc I won’t go as far as to say some of the CEO pay issues follow the will of the stakeholders.

    Also I consider myself reasonably well educated and globally aware. But I still try not to fight trends I have no hope of winning against.

    But hey – @neverland and @dearieme – well ,a blog is a bit about putting one’s crystal ball on show 😉 As far as DA goes I’m handicapped in that I haven’t seen DA itself but what with trends towards the elimination of a lot of labour because it has no use I do see a power shift away from labour. OTOH some of the basic income ideas and suchlike may be part of society’s response in the long term – after all JMK thought we ought to be well into that territory by now. I hate some of what is done to the unemployed in the hypocritical name of ‘their own good’ – if we really have a number of people who can’t be employed, then making them jump through endless hoops and tickboxes is just nasty.

    Honestly hanging them out to dry, or creating a basic income are all more honest responses to the problem than pretending that work is the solution when I don’t think it is fr more and more people as time goes by.

    @Sara the validity of norm and criterion referencing depend on what you are trying to indicate. The driving test is criterion referenced – it needs to be good enough. It’s terribly hard to say what the design of A levels should be, but in a world of limited resources and in particular it seems ever more limited job opportunities I’d favour norm referencing both to enable us to support those who do go to university properly, or if we do demand that people speculatively sport £30k then to limit the collateral damage. Our student loan system is less pernicious than the US version, it is true, but believing they have a 30k loan means even a student who will never pay the student loan off will be morel ikely to think a £500 credit card bill is trivial on comparison.

    In Germany and other continental countries they use an explicit numerus clausus to manage university entry and control numbers. It sounds a very un-German thing to do but they could probably get away with our lily-livered everyone’s a winner approach to exams because they have this second step. I don’t know what the answer is, but it seems we are a long way off it since we lifted the university target to 50% of school-leavers. This crabby old git gives a view from someone who seems to have worked in education – to wit

    The fundamental problem is that norm-referencing embraces the possibility of failure, and in a mistaken effort not to hurt anyone’s feelings we have rejected that. But, in the absence of mechanisms to prolong periods of study until students can meet realistic criteria, we are stuck with a trade-off between failure and lowering standards. The nature of the system is that criterion-referencing inevitably leads to the latter.

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  19. I’ve got many a year until the circumstances arrive, but I think i’d get my offspring to take the student loans, then use my savings to pay them off for them down the road once they are earning sufficiently to trigger the down-payments. That way, in theory, my savings rate interest (equities/bonds) continue to out-pace the moderate interest on the student debt.

    I am very aware that this is coming a position of privilege for my kids.

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  20. @living cheap in london – MSE’s Martin Lewis makes a cogent case that parents who wish to help their children financially should avoid wrangling with student loans especially paying them off in favour of directing the cash to other big financial hurdles early in life, of which a house deposit is the biggest.

    Along the lines of dearieme’s argument that student loans are more like an extra graduate tax, whereas for finding a house deposit they are short of financial capital, which is a particularly tough ask early in life. Paying down the student loan is a little bit like boosting their income for the succeeding years. Nice, for sure, but if they are using the small boost to save the deposit over the years then having the deposit as a lump gets them going sooner.

    Something worth thinking about…

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  21. “while the poor butler and housekeeper will have to return to work cos their pensions have been wiped out”: you’ve not been paying attention. In an early episode the Earl harrumphed that it was the duty of people like him to provide pensions for their employees, and this new National Insurance thingy would just encourage bad employers to neglect that duty. So the staff will at least get State Pensions at 70 (or whatever the qualifying age was by then): but will they get the hoped-for largesse from the Granthams, if the Gs are bust?

    By the way, one of the many oddities of the series is that there’s no sign of elderly retired employees living out their dotage in Grantham property, a common sight in that age.

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  22. We are having to have our kids take the loans for tuition. We pay their accommodation and they then take out as much of the maintenance loan as they want. The net result of this for my Vet student daughter is that she will owe £70K plus when she finishes. She will never pay this off (Vets dont earn that much – despite the large vet bills everyone complains about.). So its a graduate tax of 9% on earnings above £21K . The debt will be written off at 55 years old. The problem is that the interest rate of RPI + 3% in most cases means that the debt will just increase exponentially. Earning £30K starting salary means you will pay £810 pounds per year back to HMG – which will not even cover interest. Most students will never pay it back and have it written off at 55.

    It’s a graduate tax by another name.

    Matt

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  23. @Mattman I didn’t realise it’s 55, I had been under the impression it was 50 (closer investigation indicates it is 30 years, presumably from 21 when you graduate and the last year the loan is taken)

    One of the horrible, horrible things about student finance is that we call it a loan, here because the politicians are too lily-livered to call it a tax. Therefore for most of their working lives people carry massive levels of what is called ‘debt’ normalising tens of thousands of pounds worth of debt in their minds.

    You, and dearieme, and Martin Lewis, and I might be able to understand this from a distance. But if I had been carrying something called debt of tens of thousands early in my working life, I wouldn’t have had such sophistication – heck I was talked into taking out an endowment mortgage as a single man despite having the benefit of a reasonable PF instruction.

    I don’t know why parents aren’t up in arms and boiling the politicians heads about the terminology used. In a consumerist society full of marketing people trying to normalise massive amounts of debt on people it seems a terrible thing to do, regardless of the wider issue about how many people should go to university anyway.

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  24. Forgive my ignorance of British student loans…

    Are these all guaranteed by the government? Or are there private loans as well?

    Here in the USA, the government student loans are forgiveable debt under the right conditions, but if you’re so unfortunate as to have taken private student loans, then the debt isn’t even dischargeable under bankruptcy!

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  25. @George – I don’t think British student loans are discharged by bankruptcy, but you have to be earning a certain amount which is broadly in line with the average household income before you have to start paying anything towards them. And after thirty years the remaining amount is considered spent.

    Thirty years is a hell of a long time – under such a system I would only just be old enough to have the remainder cleared had that happened to me!

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  26. There is quite a lot of misunderstanding going on here. Dearieme obviously understands the true nature of student loans. They really shouldn’t be called student loans, as they are really a tax on earnings.

    However, you do not earn the average before you start paying them off:

    1. If you went to uni pre-1998, you don’t start paying them until you earn £25k, but loans were a lot smaller back then.
    2. If you are unlucky enough to have gone during 1998-2011, you pay 9% on anything you earn above £15k (this no. rises a bit every so often, current tax yr it’s £16,910). There were some tiny fee reductions available as well as partial maintenance grants.
    3. Current system is 9% above £21k – BUT if you’re from lower income families, you generally get at least 1.5yrs of tuition fees wiped off, as well as having partial grants towards maintenance and a loan towards the rest if you want it.

    I went in 2007 as a mature student. I got £80 from my Dad and the rest in the maximum loans and grants. I now have around £30k owed to the SLC, but I earn under the limit, so have never paid a penny back… I worked out that under the new system, I would have owed around £19-24k at the end, depending on what waivers are available at the uni where I went. I still wouldn’t be paying anything back and could earn more before I had to…

    Clegg’s idea of a 1% graduate tax is perhaps not enough to fund the system, plus nobody WANTS to pay more taxes…

    But I went to university to meet people and start businesses, I don’t care whether I pay a portion of earnings or a graduate tax, because I valued the power of new connections, new knowledge, and anew experiences, so I figured it would be worth it in the long-run. It is already paying dividends, so to speak, so I am glad I went, even though I went under what I consider to be a more unfair system.

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  27. @M I’m not disputing that the current system acts like a graduate tax. But if I’d worked for 30 years and every year a letter dropped through my letterbox that I had a debt or loan of £30k, that makes your average bank loan/credit card debt look small in comparison.

    They don’t dare call it a tax because for the last God knows how long there’s been the mantra Tax is bad.

    You went as a mature student, you’d had time to get experience of how money works and to work through the abstraction of the system and good for you.

    Most students enter university soon after leaving school – so this tax masquerading as a loan/debt gets them used to mahoosive levels of this thing called debt. I happen to think the terminology matters, because consumer debt causes a lot of people a lot of hurt.

    But I guess most people don’t seem to think this is a big deal.

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  28. Under the British system, if I were an evil employer, I’d certainly consider never paying employees enough to trigger the university “tax”. Employees can be conned into believing that they don’t actually want to make more because then they have to start paying back those loans!

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  29. The really important thing about the new student loan system is the interest. Under the former system it was rpi – and currently thanks to a low cost loans clause it is kept at 1.5 per cent by base rate.

    The new system puts it at rpi plus 3 per cent. If inflation goes back to 5 per cent and sticks there, what happens then? Debt will be rolling up quicker than people can pay it off at 8.5 per cent interest.

    The other thing to remember is that affordability based landing means a mortgage lender will be taking student loans into account, as monthly payments eat up earnings.

    As you point out Ermine, I agree that this shouldn’t necessarily make people say no to university, but it should make them think very carefully about it and how they do it.

    I know under the previous system my brother had his £3k a year fees made as he went at 22 and was thus judged on his financial circumstances not our parents’.

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  30. The graduate premium on average may have reduced but it’s a misleading figure. A graduate from an ex-poly who studied a ‘soft’ subject with poor grades is in no way comparable to a graduate from a red brick who studied a STEM with excellent grades. The figure may have been useful when there were fewer people going to university where there was less variation, but not so today.

    The key decision for a student is to ask whether they’ll be in the latter of the two examples. For these students, a degree is their near-only passport onto schemes with impressive companies paying high salaries with good career prospects. Plus their degree experience/skills learnt are likely to be more valuable.

    But even if they’re the former student, I don’t think the money argument is the strongest one. A nebulous 30 year claim on earnings above ‘£x’ won’t be reason to say no to university. Asking them to consider whether their career prospects would be better served using the 3 years in a different way should be more effective. But this ‘different way’ isn’t readily understood, schools certainly don’t talk about it and there’s a stigma about not going to university.

    We all know who to thank for it. It’s classic government policy which may have had good intentions but actually likely made the lot of the ‘disadvantaged’ worse.

    I write as a 23 year old recent graduate on a scheme earning c£40k so biased I admit.

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  31. @recentgrad – a tip of the hat to you sir – good points there. The wider ability range of now compared to then is likely to drop the graduate premium because of ability (assuming academic ability correlates with what companies are paying for in the case of graduates)

    And you are doing a fair bit better than the 23 year old ermine when scaled for inflation, while you are coming out of a harsher recession than Thatcher’s first. Congratulations for success in the face of adversity!

    In that respect, perhaps my fears that companies couldn’t find the able may not be accurate. OTOH it’s still tough on the less able who will end up with both the opportunity cost and possibly the debt.

    @Simon ouch – that 3% real is nasty. Over a 15 year period that increases the real value of the principal by about 50%!

    @George I suspect some employers already do that 😉

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  32. Thanks! I’m not naive enough to think it’s all down to my own ability. There are people just as, or more, able than me who won’t have got through the application process. Whether the difference was luck or some other factor I can pat myself on the back for is the key question I guess…

    Academic ability is just what gets you through the first screen. Companies will genuinely prefer someone with a 2.1 who started their own society vs someone with a 1st who was just a member of a society for example.

    It may well be tough on the less able who make the choice to go to university when it’s likely not appropriate for them. But ‘choice’ is the operative word – the sympathy can only extend so far (or I’m heartless).

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