Adam Smith’s invisible hand and visible hands in Birmingham

Birmingham has long been a city with some of the highest levels of deprivation in western Europe, living with fears for the future as the loss of big manufacturing becomes apparently permanent.

However, within living memory the city became the UK’s second city, and achieved an economic peak during the 1920s and 1930s – times that for Manchester and most American cities were very tough.

Neville Chamberlain and Stanley Baldwin were major reasons for Birmingham’s success. Theirs is a story that contradicts that of Michael Heseltine, who conjures up illusions about a ‘buccaneering’   entrepreneurial past. A story that underpinned his now clearly failed attempt to forge a common agenda between provincial English business (centered on Local Enterprise Partnerships) and the Downing St of today.

appeasementThe Appeasement of Adolf Hitler has cast a shadow over proper understanding of the era of Birmingham’s expansion. This appeasement occurred before the suburbs where most Birmingham people now live, had come to need their original paintwork renewing.

Local historians have been less effected by such political and  obsuring shadows. And one can find glimpses  in local history of  how Baldwin and Chamberlain and their people worked.

For much of the interwar period one or both of them were tenants in Downing Street. Either as Prime Minister or as Chancellor.

Business alliance

Both were elected from the West Midlands, but there was more to it than that. Kenrick coverTheir families had since 1887 both been in alliance with the Midland’s premier business family – the Kenricks.

As the First World War ended, Kenricks were at the heart of the trade ( the cartels) that supplied baths, cisterns and the metal components that would profit from any house building boom. The Baldwins were major shareholders in Kenricks since selling out their factories in Stourport-upon-Severn.

Neville Chamberlain’s mother was a Kenrick. And her early death meant that he spent most of his childhood at the Kenrick’s main family home – Berrow Court, at Edgbaston in Birmingham.

Berrow CourtAlthough Neville ran a firm of his own, that boasted of being an ‘Admiralty Supplier’ on its letterhead, around  1913 he brought in about a quarter of his income from a second job -chairing a Kenrick owned company.  This company,  called Elliots, made the copper for the plumbing and wiring that building now required, and was the base material for the bulk of Birmingham firms who were then geared towards home-making goods, rather than the automotive bits of  later decades. Indeed as the base for Ford in the UK,   Manchester could until 1929 better claim to be the UK Automotive city.

Homes for Heroes

That Neville Chamberlain would  be the most important figure behind the building of the interwar suburbs, should be seen against this industrial  background. For much of the interwar years he was acting for a cabinet led by Stanley Baldwin.Baldwin

Birmingham was first out of the stocks with building ‘homes fit for heros’ in 1919.  Manchester and Glasgow, Birmingham’s main rivals trailed. Shipbuilding and textiles did not sniff such profit in housing. Nor had either been prepared for a house building campaign.  Manchester did not have much room to expand, being hemmed in by industrial townships like Oldham and Salford in every direction except southwards into Cheshire. Manchester would not get round to buying up land until the end of the 1920s. Neville would be the minister who would assist the setting up of a Manchester Regional Plan in 1927, for the neighbouring councils to co-operate in Manchester’s overspill.

Building the suburbs

Birmingham had not needed any such help, when as a Ladywood councillor Neville had lead the lobbying for Birmingham to expand into the rural districts surrounding  it  in every direction except to the west – where the Black Country lay. This 1911 Birmingham boundary extension assumed future housing estates, the case for which he led the elaboration of – on the very eve of the 1914 war.

This experience in Birmingham gave him a status as a housing expert when he got to Parliament to represent Ladywood in 1918. Conservatives had tended to favour property tax incentives to encourage building, but Neville leaned towards government subsidy. It was no coincidence that subsidy for both private and council house building were introduced by Neville’s brother, when he was chancellor in 1919 (and his deputy was Stanley Baldwin). And this subsidy was rapidly taken up by Birmingham builders.

Manchester, however, was not yet going to be contributing to the profits of firms the likes of Kenricks.  Areas reliant upon textiles and other depressed industries could not afford building without even further subsidy. Led by Manchester, these councils sought an improved subsidy for building council houses in 1923. Baldwin was then chancellor, which ensured Neville ( as Health Minister) had a free enough hand to cut them a better deal. And on this basis, Manchester built out to the south into Wythenshaw.  Orders came Birmingham’s way – as a simple matter of trade association quota.

SmithWhile some might have been wittering on about the wonders worked by the ‘invisible hand’ of the free market, hands were visible reaching down to co-ordinate production, strategic subsidy and government policy – if one knew where to look. This would not be lost on the big banks – who were generous with overdrafts to the businesses so close to Downing St. There was also a Kenrick on the board of Lloyds Bank during those years. So credit got co-ordinated too.

Such strategic planning has more in common with the political economy of China in recent decades, then with the visions of Adam Smith and his invisible hand.  And it is worth bearing this in mind when one examines a further twist in this story.

Confronting the Brick interests

The interwar expansion of the English suburbs was based on bricks rather thanbrickwork any other building material.  And brick is so energy inefficient that it is now a major challenge for today’s suburban life. However, the brick economy was in the 1920s a major drag on the housing boom. Labour tended to blame profiteering on the part of brick manufacturers, while the conservatives tended to blame the bricklayer’s monopoly in the face of the laboriousness of  bricklaying.  But – whichever – this was hampering the flow of Birmingham’s supplies to a housing boom and the rewards.

However, in the late 1920s the brick industry came to have to accept less favourable terms.  It had been during a Labour interlude in office, that their housing minister, John Wheatley began a review of whether new building methods could speed up the delivery of cheap popular housing.  But when Neville got back into the ministerial driving seat he pushed this debate even further.

Houses built from bigger concrete ‘breeze blocks’ were encouraged. But even more radical options were ‘promoted’ by Neville.  He even fostered a scheme to use elements of the Glasgow shipbuilding industry to mass produce the panels for steel bungalows. Pushing such discussion so far, worked its effect on the brick interests, and delivered more profit thereafter for Birmingham than for Glasgow.

Drawing the right/wrong lessons

Since Chamberlain was displaced from power in 1940, the only city that Heseltine   has been able to tug so regularly upon the levers of power has been the ‘City of London’.  The lessons that can be drawn from the rise and fall of Birmingham are legion. However, our purpose here is to weigh up the agenda that Lord Heseltine has been pressing.

Heseltine began life as a ‘buy to let’  landlord who used his profits to become an advertiser/publisher. After going into politics he was a sort of Viceroy for Liverpool for Mrs Thatcher, whom he later sought to replace with himself. Liverpool did build its position on slavery and what went with it. Maybe that is where he gets his notion of a bucaneer capitalism.  But that label also fits himself. And fits him better than it does any inland city, and certainly better than Birmingham.

Birmingham’s experience would really highlight notions of planning, local committment, addressing social need ….

Andrew Lydon

An analysis of one of our rival cities can be found here

 

 

 

Housing reflation and housing inflation – Alternative inflation …

As this is being written, in 2012,  squeezed living standards have been the norm in the UK now for a good many years. The lastest news indicates apparently that the global downturn is taking the pressure off food and energy prices.

Rental prices for housing are still edging upwards although purchase prices are subsiding, and it is only the inflow of Greek and Chinese money into the upper end of the London housing market that is hiding this in national figures.

With our ‘double-dip’ recession the coalition government is now talking about using house purchase and house building to look to return us to some sort of ‘growth’. Whether in the coming years this will ease or increase the inflationary pressures on the population, would be clearer to all if we had an inflation index in this country that properly took housing, and especially owner-occupied housing, properly into account.

New Inflation Indices

House price inflation in this country has always tended to become apparent in one part of the country before going on to become a general phenomenon. And it affects some social strata before going on to affect everyone. That is why we have been calling for regional inflation indices in the UK and indices that follow the fortunes of different types of households. However, none of these indices would be any good unless housing was properly factored into these figures.

The Office for National Statistics (ONS) is currently doing a consultation on these issues. They are consulting on the formula for owner-occupied housing and the regional issue at the same time. You might have heard of the consultation on owner-occupied housing, but you will not have heard about the consultation on regional indices because it takes the form of a few sentences on the last but one page of  the document on the housing issue. And it says – let’s just forget about them.

This is something worthy of Sir Humphrey Appleby, the satirical character from the 1980s BBC comedy, who was endlessly inventive at stopping anything happening that he did not want to happen. Indeed earlier in his career, Appleby might well have helped kill off the idea of regional inflation indices, when in the early 1970s Whitehall decided not to follow the rest of the developed world, and much of the less developed world, in establishing them.

…so that things remain the same.

Sir Humphrey has also been involved in framing what we are being offered as a new national inflation index that will include housing inflation, and owner-occupation inflation especially. Over a year ago they were offering us a choice of 2 indices. But when you looked at them closely there was no significant difference between them. Below you will see a chart which shows these two choices. It is a very busy chart. The green and the purple lines represent the two ways of including owner-occupied housing  that were being considered until early this year.

The green line is the index that the ONS wants to use and is currently asking approval for. It is the line that is closest to the black line that is the current Consumer Prices Index. Indeed for most of the time shown here you will barely be able to tell them apart.  However neither the  green nor the purple index are significantly different to the current black index.

When inflation exceeds 3%,  the Bank of England can no longer deny a problem and must write to the Chancellor to explain it and what they are going to do. None of the indices in the chart above compel any such attention before food and energy prices create pressure during the final years of the noughties. None of these indices would have triggered an alert at 3 % during the UK house price boom which is shown at its most accelerated in 2003 –  indicated by the additional blue line on this chart. Indeed you can see house prices are actually falling (notice the scale on the right) when the indices cross the 3%  letter-writing  point.

However, the Sir Humphrey consultation document does not ask readers whether they think these problems might make these indices unfit for purpose. Instead the consultation asks a whole series of very technical questions that could be guaranteed to provoke the rival camps among statisticians that have variously been championing the green and the purple.

               

 Can you see the bubble ?

Indeed,when you say that the house price bubble should make some significant  presence in these figures for the early 2000s, the ONS says – well it is not a house price index. However, when you look at the US Consumer Price Index over the last decade, their house price boom is visible in that.

Very specifically the impact of the infamous US house price bubble is visible in the weights of the housing components of the US CPI.

This can be seen in the chart shown immediately below. The weight given to what they term ‘Owners equivalent rent of primary residence’  can be seen here  (in the red columns). It rises from 20%  as the US house price boom took off from 2001.  Had the price rise only been in line with either general inflation or popular incomes, this item would not have needed to be enlarged as a factor in US consumer price inflation.

But over the period 2001-2005, US average house prices rose by about a third in relation to median/average US incomes.  So this item came to play a bigger role than before in driving the US inflation indices up to levels that would provoke the US Federal Reserve to take action to address this by increasing interest rates. (It is now down to where it was in 2002 – as can be seen by scrolling down the current weights.)

Not in no UK index

The black columns are the weights that our UK Office for National Statistics wants to use in their new UK Consumer Price Index as they would be felt during the same period of our even bigger house price boom. They only go up from just over 10% to just under 11% of the index during this period.

This failure to properly pick up the housing inflation in the weights is why the ONS chart we have already displayed fails to pick up our even bigger UK house price boom in any significant way. We have previously quantified this boom from the particular standpoint of the West Midlands. Over the period 1997 to 2007, UK house prices doubled in relation to income. But any increase in the weights in the ONS’ proposal is barely visible, even if we charted the figures back to 1996.  That the weights are less than half the weights in the US index is a further flaw, because during all the period shown in our chart, house prices have been far higher in relation to income in the UK then in the US.

What should the ONS do now ?

The best thing is for the ONS to go back to the drawing board and sort out some proper weights for the new index.  To go ahead with this deeply flawed index, even as an interim measure, would be pointless given that it is basically the same as the existing CPI in most important respects. Worse, to go ahead with this index would give the public the impression that housing in the inflation index is a problem that has been solved, when it has not.

It is clear that the index the ONS is proposing, had it been available 10 years ago, would have done nothing to make the UK’s entrapment in house price inflation and huge private debt any less likely to have happened.  The doubling of UK house prices in relation to incomes was only brought to an end because interest rates around the world began to head upwards, when the US Federal Reserve began to push them up as their house price bubble began to be a problem in their index that could not be ignored. UK house price inflation was brought to a halt by the action of the US system –  not our own.

It was as if they put their brakes on, and because we had no proper controls over our system, we went straight into the back of them. How much better it would have been if we had had an index that had prompted us to damp down our house inflation before the Americans. Then we would not have ended up in this transatlantic pile up when they acted on theirs.

Andrew Lydon

LWM Regional Prosperity & Inflation Project

Alternative inflation report – coping with an inflationary global economy

For the last couple of years we have been posting our alternative inflation reports just after the inflation figures for the main G7 economies have come out.  However, for over six months a pattern has emerged: the UK now has significantly higher inflation than any of them. So this month we will use this report to flag up some issues for readers to have in mind next Tuesday when the figures on the latest installment in our national inflation fiasco are announced.

The rise in food and energy prices has been seen by all sides as having  ignited the political explosion that has rocked north Africa over the past month or so. However, it is worth recalling that the official recent inflation figure for Tunisia was only 4% and in Egypt it was only about 10 %, which is about half the rate it was a year earlier.

Price Explosions

These inflation rates seem minor by comparison to the 1970s when no such explosions occured. One must conclude that it is the background of slow income growth, and the fact that the prices rises have been continuous –  that is making this crisis so intense.

The Bank of England always talks of keeping on top of people’s expectations, and preventing an inflationary spiral from taking off.  However, this current spiral in food and resource prices is international, and it is this international spiral that has taken off.  So has not now the time come to re-think our policies ?  So as to gear-up the UK for riding out this storm and the others that will come along.

While it is international resource prices that are driving this spiral, prices originating domestically must fall back otherwise inflation will be higher than it need be. Things like housing costs will have to fall if we are to pay higher prices for food and energy. This can already be seen in the United States but is not yet happening here. In December inflation for US urban consumers was 1.5 %.  If you look in the set  of figures released with that December US figure you will see that with what the Americans call ‘shelter’ taken out of the index, the US inflation figure would have been 2.0% For Chicago, without shelter inflation would have been 1.7 % instead of just 1.2 %.

Housing costs falling ?

So the falling price of houses and their rental prices is holding US inflation down. For most of the post-war period,  US house prices have been on average 3 times Gross Household Income.  When they reached 4 times average incomes  in 2006,  the US inflation index brought that little housing boom to a sudden end. And prices are currently under 3 times income.

Germany is the other major country that has a history of  being tough on inflation.   A big part of their success also lies in holding domestic accommodation prices down. Germany has held house prices stable for decades. Against a background of steady income growth this has made home ownership increasingly affordable for more people over the last couple of decades. While in relationship to incomes house prices in Germany are not dissimilar to UK prices, that is a steady improvement in a country that had to build so much of its housing stock after 1945. Home ownership affordability is improving most in the small towns and rural areas unlike over here. Homes in big cities are still too expensive for many to buy.

The main reason why the Germans and US have been more effective than us in holding housing costs down is that their inflation indices are very sensitive to housing. They are a big part of the notional baskets on which inflation is calculated. Almost a quarter of the US basket represents the value of owner-occupied housing alone.  20% of the German Consumer Prices Index is based on housing. By contrast, in the UK no more than 10 % of the Retail Prices Index (RPI) represents the basic accomodation costs. And the RPI claims to include housing in a way that the Consumer Prices Index does not !  For the last year rents were just under 7 % of the index. But another 3 % covers Mortgage Interest Payments. (Despite these payments being more the result of bank base rate decisions than the housing market).

Flawed UK indices

Alcohol however, is 6 %  of the RPI index. See table 4.12  in the document here. There is something seriously wrong with how we have weighted the UK inflation indices.   In 2009 Alcohol was 6.3 % and Rent was only  6.2 % !  And alcohol always had been bigger in the RPI. When it was originally set up in the 1940s, a professor at the London School of Economics wrote to the Times and asked rhetorically – what sort of family spends more money on alcohol than on clothes. ?

This problem with the weights is a major reason why many have considered that the UK indices have underestimated inflation here for decades. If there is too much alcohol in the index there must be too little of other things. We have got the weightings wrong.

Putting the indices right.

The Statistics Authority has now told the Office for National Statistics (ONS) that owner-occupied housing costs must now be factored into the Consumer Prices Index. The ONS are looking at 2 different ways of calculating it, called ‘ Net Acquisitions’ and ‘Rental Equivalence’ . In the chart below they show how each of these supposedly different calculations would have registered inflation during a period now universally seen as when we suffered the biggest house price bubble in our history (The blue line).  And the indices under consideration are shown in green and purple in this complicated chart below.

This chart comes from a bigger paper that can be found here. It is evident that neither of these measures would have alerted us to the inflationary problem except for right at the end of the boom when the  original CPI index was indicating a problem anyway. These calculations are therefore not fit for purpose, if that purpose is detecting and heading off inflationary problems. From what we have shown above, it will also be evident that the problem is that housing clearly does not have sufficient weight in the current indices and that the weights need to be revised. We think it is reasonable to expect that housing should have a weight in the index not very different from that seen in the German and American indices.

We will be making this point to the ONS. We will also suggest that the development of indices based on specific regions and localities of the UK, and specific household types, could help a process of revision of the weighting systems that would make the national figures more representative. We have earlier emphasized the importance of having regional figures if housing inflation is to be proportionately recognised – and promptly so. The ONS has been told to look into the issue of regional indices by the Statistics Authority.

When the BBC anounce the monthly inflation figures they usually say that the RPI includes housing costs to explain the difference from the CPI. From what we have shown above it can be seen that that is an over-simplification. In giving the figures a coherence they do not otherwise have, it borders on misrepresentation. Sky tends to just say the RPI is a wider index. However, last month the BBC did at last refrain from their usual practice of bringing on a banker to tell us that inflation is not as important as it might appear. (To justify low interest rates to savers). Last month the BBC even had the TUC on to comment on the figures.

The poor media coverage of inflation in recent years is also due to the sort of consultancies the media rely on. One of the most high profile is Capital Economics, founded and led by Roger Bootle who came from the old Midland Bank.  Bootle, always tends to minimise the prospects of inflation, which in the UK has been above the government target of 2 % for most of the last four years. What is almost never mentioned is that Bootle published a book called The Death of Inflation. Nowhere in the book does Bootle address the questions of how we detect inflation. Indeed, he published this book in 1996 just before UK house prices took off again under New Labour and became a serious form of British inflation that squeezed the middle of the British income spectrum, to borrow Ed Miliband’s term, and created the Two Income Trap to borrow an American term. Whether Bootle is responsible for the poor media attention to inflation or just reflects it must be left to history to judge.

Andrew Lydon

LWM Regional Prosperity & Inflation Project

Alternative Inflation Report – Bank of England failure ?

The highest rate of inflation among the original G7 members, is currently our UK inflation rate. Although there is much doubt about how representative the official UK figure is, no one really believes the official figure over estimates inflation. The October figures can be found at the foot of this report.

Over a decade after inflation and interest rate management was taken out of the hands of politicians this is an unexpected predicament. The whole logic of the hope of the 1990s was that the UK would have a sounder monetary system if politicians and their short-term agendas were taken out of this level of economic management. That was supposedly the lesson of experience overseas.

In 2010, one now has to ask whether price stability would have been better served, had it been something for which Gordon Brown, Alistair Darling, George Osborne or David Cameron had still been answerable every week at Question Time. This would have been a question that would have been asked for some years now, had not the entire political class rallied behind the Monetary Policy Committee system that New Labour used to claim was its most important reform.

UK inflation has now been above its target for most of the last 4 years. By contrast none of the other G7 has above target inflation. The standard G7 target is 2 % or less. An inflation rate of zero would be seen as the ideal. But here the UK is the odd man out. Our central bank would have to explain itself if the inflation rate was less than 1 %. Such a rate would be treated as as form of deflation, something to be averted here in the UK, unlike in other countries. Other countries trust their inflation indices and if inflation is reported as being about zero, that would not be regarded as a potential economic crisis but as an achievement.

The UK inflation indices are being reviewed by the UK Statistics Authority and we have been making representations to them about how our inflation indices can be more securely based. Details of the lessons from other countries can be found in our September report.

 

Should global inflation not fall back as the Bank of England hopes, the UK would be further blighted by already having the highest inflation. In our previous reports we have emphasized how global food, energy and resource prices are being driven up by ecological and population pressures. Being geared to respond to this sort of inflation will become the main challenge of economic policy across the planet.

However, the recent concern over ‘Currency Wars’ needs to alert us to another aspect of the global price shift that none of the mainstream economic commentators have picked up on. The US wants the Chinese to allow the Yuan to rise against the Dollar and other major currencies, so that Chinese made goods are not under-priced in comparison to other producers (and especially the US). However, this must necessarily mean that the price of the goods China manufactures will then rise alongside food and resource prices. Against this background, the Bank of England’s confidence that inflation is temporary, even if an increasingly long ‘temporary’, seems very complacent.

One of the major reasons why the Bank has got away with such complacency, is the very poor scrutiny they come under from the mainstream media. Most months the announcement of the official inflation figure is accompanied in many media by an economist from the banking sector telling us that inflation is not the real worry, and that interest rates need to be kept down. At the moment the profits and bonuses in the banks are largely the result of them being able to borrow off the public at the historic low interest rates and lend out at much higher rates.

This usually goes unquestioned  by the media, adding to the confusion over inflation in this country and the negligence with which it is addressed. It is at its most objectionable when the BBC allows the bankers to spread this confusion through a media service paid for by taxpayers. For November’s announcement  BBC 24 had on the economist from the investment bank Investec, last month it was his counterpart from HSBC.

The BBC tends to say that the difference between the Consumer Price Index (CPI) rate of inflation and the Retail Price Index (RPI) rate of inflation is that housing costs are included in the RPI. But this is an over-simplification bordering on misrepresentation.  There are housing costs in both indices. When we look back on the biggest house price bubble in British economic history over the last decade, no one can argue that even the RPI  registered the cost of housing in such a way as to prompt the adjustment of interest rates to curb it.

By contrast in the USA,  once house prices reached 4 times average houshold income in 2005, this cost had such weight in  the US Consumer Price indices that it raised the inflation figure. This raised the alarm with the central bank that prompted the interest rate increase that brought their relatively minor house price boom to an end. House prices fell back to below their long term trend of  3 times household income.

That American Consumer Price Index is an index that can be properly said to take housing costs into account. The current high level of our RPI inflation has nothing to do with the fact that our UK houses are still over 4 times average household income. While the RPI might talk the talk about taking housing costs into account, it does not walk the walk  in the way that  the US  consumer price indices do.

Stephanie Flanders, the BBC’s economics editor is listed as a member of the ONS’ s advisory committe on the inflation indices. ( Their current report can be found here. )  This advisory committee has resisted change to these poorly constructed indices since before the 1990s.  They are now proposing the most minimal of changes to the current indexing system while supposedly accepting that housing costs must be better represented in the index. This graph is from Annex A of their report.

It shows how neither of their preferred options for change regarding housing ( Net Aquistions and Rental Equivalence) would have changed the inflation figures during the ‘boom’ by very much and so would not serve as any alarm in future. Their new figures would not be significantly different, whatever the advisory committee say.

In any event, properly involving housing costs in the indices is only part of what we want to see. Regionalising the indices is even more crucial as we explained in last month’s report.

October’s comparable inflation figures are currently

United Kingdom               3.2 %

Canada                          2.4  %

Italy                              1.7  %

France                           1.6 %

Germany                         1.3 %

USA                                1.2  %

Japan                              0.2 %

Andrew Lydon

Regional Prosperity & Inflation Project


Alternative inflation report – Living standards in the West Midlands

None of our current inflation indices register the unique house price inflation the UK has had. Had they done so in any manner comparable to Germany and the US,  there would have been far higher inflation registered across the UK under New Labour. Looking at housing  affordability indices gives us some idea of the seriousness of the real inflation being missed and an index that shows this up region by region would show a revealing story for the West Midlands.

Our house prices have changed so rapidly over the last generation in the UK  that we have adopted the practice of measuring affordability in terms of the number of years annual income one would need to buy a house. One of the most comprehensive set of figures for house prices across the regions has been compiled by the old Halifax Building Society (and its successors) since 1983.

The following chart shows their figures for 1983 for some of the ‘southern’ English regions including London.

The West Country, East Anglia and the East and West Midlands are included. I have left out the others so that the images are not too crowded. In the early years of  the Thatcher government, it is still the people of the West Midlands that find it easiest to buy their houses. The average house can be bought on the 3 times average male earnings that were the traditional lending standard. (But with a deposite also necessary).  It was London and especially the West Country where this was becoming a stretch. The full Halifax figures can be found here.

 

However look what had happened by September 1992 when the UK got kicked out of the Exchange Rate Mechanism.

It is now the West Midlands whose buying power has been erroded. The region is already on the way to being one where  a household, which not long before could be run on one income, could no longer. We were falling into what is in the USA refered to as the ‘Two Income Trap’. In the General Election of a few months before, the WM conurbation had for the first time  become the southern most sub-region to mainly vote  Labour.  The Conservative government lost here a whole Parliament before they lost the UK as  a  whole.  And even in 2010 the conurbation did not respond to David Cameron.

Under the John Major government house prices fell back and incomes slowly grew so that Labour did not actually inherit the Two Income Trap in 1997. But when the housing market peaked in 2007 we were all trapped. On the basis of traditional 3 times income lending, the whole of the UK was in the trap.  The average house required 5.86 times the average full time male wage . 2 incomes.  Most of the regions we have been particuarly looking at were slightly above that. The West Midlands had tasted this earlier than the others, but we were actually all in the same boat/trap now.How this situation will now evolve is difficult to say, but some regions will show a trend before others. Maybe it could even be that the West Midlands will show it up first. But for government to head off another wrong turn we will need to reform the way we measure inflation so that we have region by region figures that pick up housing inflation as part of the basket with other sensitive items such as food and energy.

Andrew Lydon

Lessons from the Thatcher/Reagan years – an Alternative inflation report

The new coalition government have inherited the highest inflation rate in the G7. Higher even than China. And as they consider any sort of increase in VAT to pay off national debt they need to think about how they keep their finger on the national pulse as the country faces these challenges to their living standards.

Immediately on coming to power, Margaret Thatcher’s chancellor raised VAT, much against her initial reluctance. And this was the start of a process that lead to the popular perception that living standards had been badly hit under Margaret Thatcher. And for no lasting gain.

This chart shows the official story of living standards in the UK. We are supposed to be about twice as prosperous as we were in the 1970s.

The hard times under Thatcher and Major are merely slight setbacks that we quickly recovered from. But if people really bought that story, why did the Tories, even with the mess that Gordon Brown made of our economy, face such reluctance to allow them an overall majority in 2010? Birmingham and the West Midlands are a striking example of this reluctance.

Contrast this blight on the Tories to what happened in the US under Ronald Reagan whose heirs have never been blighted by Reaganism. Two George Bushes stand as evidence of this.

This chart shows that Reagan’s legacy was because living standards in the US were hit more under Nixon and Carter, and actually stabilised under Reagan. This chart and this outcome were in large part because they had good quality inflation and prosperity indicators.

When Reagan came to power, the US had long had monthly inflation figures for most big cities and even had regional indices. However, in the first years of Reagan they improved their inflation indices by revising the way housing was measured. This allowed them to apply counter-inflationary policies while having their finger on the pulse of the people’s economic life.

On behalf of LWM I am currently pressing the UK Statistics Authority to look at what can be learned from the system of US inflation indices.

History often seems to repeat itself, first time as tragedy, second time as farce. A government presiding over austerity that looses track of prices as they are felt across the country, would be a farce none of us would want to see. The coalition needs to allow the best inflation indices to be put in place and allow it the priority it deserves.

Andrew Lydon

Regional Prosperity & Inflation Project