Manchesterism and Public Service Devolution

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 Berhaman, the turnover of prrime Misters over the last decade is a symptom of the problem. and the problem is The supportu 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 around innovative and to serve their customers better. That piece of software is cracking. 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 realized that they were licensing from a competitor I said we've had to spin it off so it can reach its full potential. Yeah, makes sense, Craig, thank you. Right, we're gonna go to the episode. I sold my car in Carvana last night. Well, that's cool. No, you don't understand. It went perfectly. realal offer down to the penny. They're picking it up tomorrow. Nothing went wrong. So what's the problem? That is the problem. Nothing in my life goes as smoothly. I'm waiting for the catch. Maybe there's no catch. That's exactly what a catch would want me to think. Wow, you need to relax. I need to knock on wood. Do we have wood? Is this table wood? I think it's laminate. Okay, yeah, that's good. That's close enough. Car selling without a catch. Sell your car today on cararvana. Pick up these Mly it up. I am selling the building. The final season of FX is the Bear. The restaurant is flooded.. Everything's either gonna be okay? Noop O not We are out guned and we are out mananned, but we have each other FX is The Bear, the final season, all episodes now streaming on Disney plus Hello and welcome to the Rest is Money with me Robert Pston. And M Steph McGon. Now it's obviously everyone's talking about this looking likely that Andy Burnham's going to become the fifty ninth 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 former director of the Institute for Fiscal Studies. lotots we 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 twenty 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, Lads 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 turnover of prrime M ministers over the last decade is a symptom of the problem. and the problem is that we've not got better off for about twenty years. So average earnings today are very similar to what they were twenty years ago. They're ten, maybe fifteen thousand pounds a year less than they would have been had growth, had incomes continue to rise as they did in the fifty years before the financial crisis, before two oh eight. 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 nine percent 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 Beost of living crisis, what they're talking about is a living standards crisis, which they're feeling because as soon as something at all difficult happens the Iran warar or what have you increases in energy prices. becausecause they've not seen an 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 ten to fifteen grand a year more if we'd have carried on the trajectory we had. Yeah. I mean it's huge it's like twenty five average average salaries which is getting on for forty thousand now, they'd be fifty thousand or more if salaries continued to rise as they had prettyre much every year in the fifty 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 twenty years ago This 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 the housing and the pension and the other wealth. that the older generation got used to doing. Yeah. Now there are, you know, 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 have 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 fifteen years, you probably don't feel as though 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 get growth back onto a high trajectory. We can talk later about the ways in which you might do that. but I do think the fundamental question is about making sure that we have economic growth without 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 electorate gets that 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 wonks would say, well the triple L really doesn't make very much. And at some point it has to stop because you know if you carry on ad infinitum, it would literally take up the entire economy. So you have to stop at some point we need to decide where to stop. But actually, I think we almost kind of overfus 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 have we really increase 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 I mean, efficiency, productivity in the health service has collapsed over the last seven or eight years We're also clearly paying for social care, all those kinds of things.t one level, because the population is 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 state how much the state pension goes up by each year and it's based on either it's a minimum of either two point five percent average earnings growth or CPI inflation And so the point is it's a minimum of two point five percent 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 a triple off It's clearly not sustainable forever. Now what we need for the state pension is a view of what level do we want it to be? Yeah It's currently about thirty percent Average earnings. Now maybe we think the right number is thirty three percent or maybe we think it's thirty percent. Whatever we think it is, we should say, that's where we want to get to mayaybe we'll keep the triple lock until we get there and then we stick At that point, it's turned out that the Tripleock hass been quite expensive over the last fifteen years, partly because we've had such a bizarre economy. If we'd had the Triple lock for the fifteen years before it was introduced, it would cost almost nothing. Right Because earnings were generally above inflation And we're generally above two and a half percent so you just increase it year and year in line with earnings. But as it's happened over the last fifteen years, quite often two and a hal percent 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 withith the result that it's just kind of ratcheted up So it was 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 young people and the fact that their earnings and wealth is so massively underperformed over the last fifteen to twenty 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 Milban or I mean, I 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 tackling you know low wages for young people through just putting up the minimum wages at this particular juncture where you know, 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 as it were, how do you get young people's earnings up if you're not in a sense going to have that kind of market intervention? of course, mean the minimum wage, 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. thirty 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 the difference between the bottom and the middle. And that's created its own problems for employers because now it's remarkable. haaving had years of worrying about inequality, we almost have too much equality in the bottom half of the labor market. So the gap between someone in the middle and someone at the bottom is much smaller today than it was twenty years ago. And that means of course that often employers are complaining, Well I can't get someone to accept a promotion to a more difficult and responsible job because they only give them twenty p an hour or whatever it is more for doing it. So that compression is itself an issue. And why have you got the compression? 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 favor 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 we're certainly at the limits to what you can achieve with that. But I think a lot of us were concerned when the government increased it very significantly for the youngest work That's what I'm talking about Exactly. because when you're an employer Aually when you' got you twenty year old, you need to train them. you need to put quite a lot of effort into them. and part of the deal has always been, 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 for twenty year old with no experience and a twenty five year old with a bit of experience, and you have to pay them the same you're probably going to go for the twenty five year old. And also just that point on that because even like the sixteen to eighteen year olds and we've seen this in our business, it's been double digit increases in their wage whichich on top of national insurance contributions and business rilates and energy bills and everything else when there's a choice between what you 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 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 thirty 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 to the welfare system were done to try and bring people into work, particularly lone parents, for example, many more lone parents in work the case. Historically we haven't had as big a problem with neats as many European countries. And now we've swung into another place where actually partly because of policy, partly for other reasons We've ended up with a 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 pay And now we've kind of gone back to a world where we've kind of solved the 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 slow to respond to these trends. Yeah. mean I mean Qion 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 government intervention or less 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 tax rises over the last few years and continuing on through this decade. That has a direct effect, was it' just taking money out of people's pay packets. It has an indirect effect. We're taxing employers, more we're creating problems in the economy. There are other things which really matter. 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 cost of housing and that affects both theirility liivving standands 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 Do all of the things that I would argue you need to do on these. A they're not short term going to have a big effect. B, they may be short term, particularly difficult. and C you get the benefit five or ten years down the road and we've seen political cycles just You know they barely manage five days now five years. I mean, there's a ton of stuff But you know, in terms of individual policies, to talk about. I mean, housing obviously is terribly important. know 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 Makerfield B election was The Count Binface intervention where he said that he would promise to build at least one affordable home which felt that it sort of slightly captured what's been going on in the housing market. We need to get Binface on you know I mean, I'll give you a very clear answer to that. The answer is housing. It's not affordable housing. it's housing. houss of the things that interesting about Burnham You know I was 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 fifty weeks to get permission for house buildilding and in Manchester it takes I think fifteen weeks. So he has had an impact in Manchester when it comes to speeding up permiss. One's impression is in London it takes fifteen years, Burnham you know does for the country what 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' 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 or requirements and so on and regulations on high rise buildings all of which has made it very expensive to build. and actually 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 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 just ask you on that. 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, living standards of young people may not have been going up quite as fast as previous generations in America, but actually there 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 part of that, and of course that varies in different parts of America. If you go to San Francisco and Silicon Valley they certainly don't 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 that earnings have been rising, productivity has been rising and the economy has been growing. Now America is a much more unequalled 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 They have the Jenny Z problem that we have Indeed 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. Hi, this is Garalinka from Goldhangers. The restest is Football. This episode is brought to you by Wise. 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Join the Nordy Club to unlock exclusive discounts, shop new arrivals first, and more Plus, buy online and pick up at your favorite rack store for free. Great brands, great prices. That's why you rack And obviously housing is part of this whole idea of Manchesterism, which Berham refers to as this business friendly socialism. And essentially what he's saying 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 what's happening in Manchester? I think there are three things that seem to have worked pretty well. One is just the whole devolution of powers to a mayor or authority on a substantial And I think Andy Berham wants to do more of that. I think that's a good thing. I think there's plenty of international evidence that modud 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. say more freedom. there's still quite a lot of constraints on how they can spend their moneyib devolution and 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 center of the city particularly. And this way predates Burnham. But the population of Central Manchester has grown from very little to you I can't remember the number is very little to a little big number Over the last thirty years. I mean like from five thousand to one hundred thousand or something. I don't quote those numbers, but very, very big. And you go to Manchester, which you do quite a lot. and there's lots of big new high rise buildings there with lots of people in them. And the third thing, which I think is kind of where a lot of this idea of state intervention comes in is from the regulation of the bus network. Yeah the network. be this is something these economists have known and argued for for 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 to allow it to happen is something of a mystery. But to be clear, all this is not public ownership. This is essentially a publicly organizing thing so that they're providing a public service. Can I just add to that as well? Because obviously I lived in Salford for quite a while and was part of the cohort that moved with the BBC to Sulford. And this obviously predates Burnham as well. And this was this investment which really completely changed Sulford, you know and before long talking to you 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 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 mean they know they still even thepite the transport still feel very distant from central Manchester and some of the poorest areas are still there. So ye you know they's still clearly more do. I mean, look, it's great that the Beven network has been a success. And as you say, there is absolutely no question that better organized, 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 B network lesson translate Well I don't think you to I don't know, you know the price of gas I was I was going to contact because you ask serious a question about public ownership and the utilities. 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 twenty ten s really kept P prices down a lot With a 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 keeping bills down, actually regulated this to ensure that the focus was on keeping bills down rather than on providing the best serv. Now there's always whenever I come on this podcast, I talk about trade offffs. 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 fact from the choice about how much you put into spending on the water sector and the water sector or theergy sector heavily regulated. Now, I think you can perfectly reasonably argue that they're badly regulated indeed this government got a huge report from John Cunliff, formerly of the Bank of England about fundamental change to the regulation of the water sector. I mean it has its own own issues, you've got a lot of control already. Now the question is 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 we start from where we are I mean I certainly would not be spending a large amount of time and a huge amount of treasure on trying to reationalize these things. 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 privatizing water was a terrible mistake for the simple reason that you know nobody's going to dig the roads up second set of pipes I would never have beenrivat. I disagree with you in some sense. I mean I don't think there's 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 renationalize the whole thing. Yes, you're right. In the short term, you look at the kind of bill that would fall on the government for nationalizing, 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? you could 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 gs, you then have to say, let's assume we take this on. and we know that there's a very big investment in programm 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 would 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 funding long term investment programs with its water. one of the reasons fact actually privatised was because there had been such chronic underinvestment 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 Andddy Burnham really stands for what he's going to deliver, if he believes that when it comes to the living standards of millions of people, actually public ownership will drive down essentially what these 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 firstirst, 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 ambit 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?s The same question, I think for Andy Berham, if he brings more into lic ownership because he thinks he's got the right policies, as he think the governments for the next ten or twenty 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 bills down. really it's focusing on the symptoms and not the of this of link. So we started the conversation by the way. The real problem is that we haven't had growth in the economy on a per capita basis for twenty years Will nationalizing anything really help that? I don't think it will. We'll sorting out the supply side, we'll sorting out the tax system, we'll sorting out investment incentives, we'll sorting out education system, all of those things will tackle the fundamentals. And it really worries me if we end up focusing huge amounts of