A Reasonable Excuse?

This week's blog has been postponed, with the (hopefully) reasonable excuse that I became a father for the first time yesterday. Hopefully I will get my emotions in order and get typing amidst the nappy changing over the next week.

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Twenty years ago, almost to the day, the world witnessed the protests of nearly a million Chinese in Tiananmen Square. On June 5th, 1989 the military moved in to clear the square and as many as 2,500 protesters were killed, with ten thousand or more injured. Back then, the dissenters reportedly rounded themselves up by sending faxes around the country, calling for the union that was eventually broken in such dramatic circumstances in the centre of Beijing. I'm not sure of the last time I sent a fax, but it's been a while, and what I recall about the process is that they often tended to get lost at the receiving end (or so the receiver tended to say to me).

In June 2009, nowhere is it more clear that the networked world has moved on than the unfolding scenes from the so-called "Twitter" Revolution in Iran. Images of street protests and beatings by government empowered agents are making their way out, and then back in, fuelling a combustible political scene that Iranian authorities want to cover up.

This isn't the first uprising to tap the Internet, but it's the latest to test the limits on controls and to use new ideas to evade government censorship. Iran is almost the perfect place to perform such an experiment - there is a lively blogger culture in a country where two-thirds of the 70 million population are under the age of 30. Some 45 million of the population have cell phones and 23 million have Internet access. Pretty good demographics for such a test. This youthful population are what the IT savvy call "digital natives". Around the world this group, who have grown up online, will force businesses and governments to operate differently and more openly, whether they like it or not.

In the UK, the cringe-worthy image of Gordon Brown "connecting" with his electorate on You Tube and performing the most comic of false smiles, is at the opposite end of the spectrum from the Iranian situation. Gordon Brown gets it - the importance of social IT that is - he just doesn't "get it". While understanding the power of these tools, he is the wrong sort of politician to engage in this way - awkward and dour.

In the US, on the flipside, Barack Obama is currently the undisputed champion of both understanding and implementing the power of social IT - his election campaign pulled together the "network" in a way that showed the true power of tools such as Facebook and YouTube. Exit polls revealed that Obama had won nearly 70% of the vote among Americans under 25 - the highest percentage since US exit polling began. It's no coincidence that one of Obama's key strategists was 24 year-old Chris Hughes, one of Facebook's co-founders. It was he who crafted the Obama campaign's highly effective use of social networking sites as well as podcasting and mobile messaging.

And his government continue to embrace these tools while in power. This week, with the chaos spreading in Iran, the US State Department wanted a way to influence events on the ground without overtly getting involved. Hearing the news that engineers at Twitter were planning to take the website offline to perform some maintenance, officials in Washington made a call to ask them not to. For almost a week, the Iranian election has been the most discussed topic on the microblogging site, and it's not just the usual guff, like Paris Hilton's take on the Supreme Leader (poor dress sense/ headgear): there are plenty of intelligent reports from eyewitnesses in Tehran as well as links to photos and videos of events, reported almost in real time. Twitter, Facebook, Flickr and YouTube are the new soapboxes and organizing centres. As Thomas Friedman asked in the NY Times: "Is Facebook to Iran's Moderate Revolution what the mosque was to Iran's Islamic Revolution? Is Twitter to Iranian moderates what muezzins were to Iranian mullahs?"

As soon as Iran's leaders had launched a crackdown on public protests, there was an almost immediate switch to digital protesting - Twitter became a "virtual" town square. Its avatars - the small, identifying pictures used on its pages - turned green to match the campaign colour used by the disputing challenger Mir Hossein Mousavi. Twitter had become a way for those outside Iran to learn about the turmoil inside the country and then beam back the information to protesters cut off from the news. Similarly, YouTube, Facebook and Flickr are stocked with photos and videos that the mullahs would be keen that the world doesn't see. These new uses showed that censorship and Internet controls had the main effect of producing ingenious ways of evading the crackdown. It's very hard, if not impossible, for a government to control all of the swaths of information that flow internationally through the internet.

China continues to try to do it, but with less and less success. This week authorities in Beijing ordered Google to stop users of its Chinese language service accessing overseas websites. According to state media reports on Friday, Google was being "punished" for linking to pornographic content. The sense is that the crackdown was likely to be a mixture of the government's recent hardline approach on censorship and increasingly bitter rivalry with Baidu, a domestic search engine, which holds 59% market share. Although the authorities accused only Google of allowing links to lurid content, similar material could be found on Baidu.

What's clear is that it is harder for a dictatorial regime to operate its censorship policies in the light of these new social networking technologies. The situation in Iran and China may well tell an interesting tale for a host of other governments and businesses around the world. Either embrace and understand the power of this new world order, or you are going to run into some serious problems. In a business context the positive and negative power of social IT are increasingly evident. Using these tools is now a critical part of brand management, and also a very effective way of connecting with clients and consumers. On the negative side, if a disgruntled employee or customer has an axe to grind he or she can do some real damage to a business using these networking tools. As an example, a US jet manufacturer that I know quite well, has been publicly damaged by a disgruntled former employee taking his grievances to the airwaves via a well read blog that discusses the uglier internal side of that business. If you do a Google search for this company, this blog appears 2nd in the list of options, and is undoubtedly read by stakeholders and other employees of the company, which can't be good for business. This example is certainly not unique.

It's clear that a successful organisation, whether it be a military dictatorship like Iran's, a pharmaceutical company in the US, or a sidestreet hairdresser, needs to operate in a much more refined and subtle way, which for some could mean fundamental changes to "business" models. This will probably entail more listening, watching and being in tune and in touch, engaging with interested or agitated parties, being responsive to communities - which for an aggro, insecure dictator may be akin to "an old dog being taught new tricks".

This gathering storm is changing the environment in which businesses and all types of government will operate. Some leaderships - like in China, or Iran for example can attempt to delay the process, but it will become increasingly difficult. It will affect these leaderships in different ways. The US car industry, for example, might have suffered less if it had tapped into online social networks discussing motoring trends; perhaps the banking world could regain some public trust by engaging with interested digital communities. They could read my blog for example...

Never put off until tomorrow what you can do the day after tomorrow

The FT has it's own version of the Sun's agony aunt columns, compellingly called Dear Economist. They tend to steer clear of the Jerry Springer show type situations and focus on the more mundane, and perhaps, more cerebral issues of the day. A recent letter from "T.N., of Limerick, Ireland" (the Irish always ask the best questions) posed the following: "I tend to procrastinate and leave tasks until the very last moment. As a consequence, I always feel as though I could have done more and that my potential has been somewhat unfulfilled. However, I find I concentrate much better and am more prolific with a deadline dangerously close. Can economics help me resolve this tension?"

"T.N." of Limerick doesn't compel us perhaps in the same way as the girl writing to Dear Deirdre in the Sun, who is caught in a love-triangle with her sister's husband and a local priest, but it's a valid and very relevant issue that we all as individuals and collectively confront on a regular basis. We delay because we can, even if it really hurts us to do so over the long run.

The agony aunt's, or in this case agony uncle's, response was fairly straightforward. "The answer is obvious: make sure you always have a deadline to hand, and you will always be prolific." Nothing short of profound.

The Bard himself wrote, slightly more eloquently, in Twelfth Night, "In delay there lies no plenty." We have all been given such sound advice in different ways, typically by a teacher or parent, over the years. And we all understand the value of immediate action, deadlines and the like.

The behavioural economists Dan Ariely and Klaus Wertenbroch recently conducted an instructive study of procrastination with three groups of students at MIT. Each group had to complete three assignments over the 12-week course. The first group had a separate deadline for each paper, after four, eight and twelve weeks. The second group had no intermediate deadlines: all three papers were due at the end of the course. Students in the third group were asked to impose their own deadlines. Students with well-spaced deadlines – those in the first group and a subset in the third who had spaced out their deadlines – tended to achieve the highest grades. Students who had assigned themselves no intermediate deadlines, or had been assigned none, fared poorly.

None of this is particularly surprising. The really practical issue is how to establish deadlines that are clear, and then stick to them, especially when there is no pressing need not to delay.

Similarly to "T.N." of Limerick, most governments around the world are faced with the many consequences of the financial crisis, one of the biggest of which is substantial budget deficits. They can either confront this issue head on, by raising taxes and cutting spending or postpone this issue by borrowing more and saving the problem until someone else's watch. In the liberal democracies of "the West" with regular elections, procrastination is often the safest short term political route. Raising taxes and cutting spending don't tend to sit well with the electorate. Without well established incentive structures then it's unlikely to be any different.

On a personal note, for example, when I started writing this blog, I knew that given that a) I wasn't getting paid to do it, and b) it's a taxing but rewarding undertaking then there were likely to be times where I would think "I'm not sure I can be bothered this week". Consequently, I thought, I'll establish some painful consequences for myself if I don't follow through on my commitments. If I miss my 9am Monday morning deadline I have to pay my wife £100, which she is allowed to spend "guilt free". In the second week of my entrance into the blogosphere I handed in my homework at 9.06 on the Monday morning, and thinking that my relationship with my wife is on a sound footing, I thought I might get 6 minutes worth of leeway.

Not a chance.

38 weeks later I have not missed the deadline again, as the pain of handing over that first £100 fine still cuts to the core. The process (while often left to the last minute) has become habitual. There are those who might say the habit is anti-social, like smoking, and therefore should be banned in public places, but there is a bigger issue now at stake for me. I don't want to pay, so I am going to keep writing.

To force our public servants to confront issues as they arise is more difficult. It can be political suicide to take on the really big problems early in their development, because your name will may be permanently associated with these problems. There is a serious issue with the fact that there is little incentive to act on the really big issues before things become untenably bad.

Nearly 70 years ago, when a horrible and unprecedented storm was gathering in Europe, British prime minister Neville Chamberlain found it inconvenient to see the truth about the nature of the evil threat posed by the Nazis. In criticizing his government's blinding lack of awareness, Winston Churchill said, "So they go on in strange paradox, decided only to be undecided, resolved to be irresolute, adamant for drift, solid for fluidity, all-powerful to be impotent." After the temporary appeasement at Munich, Churchill said, "This is only the first sip, the first foretaste, of a bitter cup which will be proffered to us year by year - unless by supreme recovery of moral health and martial vigor we rise again and take our stand for freedom."

Then he warned prophetically that "the era of procrastination, of half measures, of soothing and baffling expedients, of delays, is coming to a close. In its place, we are entering a period of consequences."

Churchill's words ring true for the current time, where globally governments have embraced a period of financial procrastination which will ultimately lead to "a period of consequences". The worst global economic storm since the 1930s may be beginning to clear, but as The Economist points out "another cloud already looms on the financial horizon: massive public debt."

Across the rich world governments have borrowed vast amounts as the recession has reduced tax revenue and spending grows to pay for bail outs, unemployment benefits and stimulus plans. We have rebooted the system but in doing so have transferred the cost onto a future generation of taxpayers and political leaders - we have procrastinated. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens.

Not since the end of the second world war have so many governments borrowed so much so quickly, and today's increases in public debt, unlike the wartime one, may not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. To compound this fact, the current ballooning of government debts is taking place just before we feel the real impact of the demographic shift that will see huge healthcare and pension costs of a "greying" population. By 2050 a third of the rich world's population will be over 60. The Economist reckons that the "demographic bill" is likely to be ten times bigger than the fiscal cost of the financial crisis. In the US alone, current "unfunded" social security and healthcare liabilities of the federal government tally to a figure around the $40 trillion mark, or around 300% of current GDP.

That doesn't really bear thinking about, so while the day of reckoning can be postponed it will be. In areas ranging from the environment and green energy production to healthcare provision and social security, government voices are making promises that their pockets can't keep.

In the UK this week, similarly, one of the key upcoming General Election battle lines was drawn. The shadow health secretary, Andrew Lansley, accidently indicated the bleeding obvious, that cuts in spending in real terms are a likely implication of the state of the public finances. Not exactly rocket science, but the very fact that he has acknowledged that purse strings need to be tightened has led to him and, by association, his party being painted as tight-wads.

In Prime Ministers Questions this week Gordon Brown proposed: "Let us have a debate about the choice that really does exist in the country between a Conservative Party that now wants to cut, even at a time of recession, into our basic public services and a Labour Party that wants to invest in them." David Cameron in response said: "The next election, when you have the guts to call it, won't be about Labour investment versus Tory cuts, it is going to be an election about the mismanagement of the public finances, the appalling deficit you have left and your plan for cuts."

On the one side, the voter power of the extensive public sector in the UK is substantial and if the Conservative party is seen as the party that will cut back and diminish the size of the public sector then there is a risk that they will lose this group.

On the flipside, as the publication by the Office of National Statistics of new productivity estimates for the public sector shows, "investment in basic public services" as Gordon Brown calls it is less an "investment" than charity. This data showed that despite a small improvement lately, productivity has fallen most years in the past decade. The ONS thinks that average public-sector worker's output in 2007 was 3.2% lower than in 1998. Contrasting this with the private sector doesn't make for good reading. Over the same period, again according to the ONS, "market" sector productivity rose 22.8%.

As David Smith points out in The Sunday Times this implication is huge - "By my rough calculations, if public sector productivity had matched the private sector, we could have had the same level of public service for almost £100 billion less than the £670 billion the government intend on spending this year. We would still have a public borrowing problem but it would pale into insignificance in comparison with the one we have."

To cut to the chase, the UK is planning to run massive budget deficits over the coming years and the place where this money is mostly going doesn't work very well. The choice that exists is either to confront this problem, or to postpone it. The responsible thing to do would be to confront it, as all the advice we have ever received about procrastination would attest to, but the easier thing would be to cover our ears and hope.

The battle lines for the UK election are a subset of the problems, ranging from financial to environmental, that we face around the world. As "T.N." from Limerick now knows, the importance of dealing with issues as they arise is very clear if he is to "fulfill his potential". The really practical issue is trying to establish incentives such that we are forced to deal with these problems as they arise. Unfortunately, in the political-economic sphere, the bigger the problems the less the incentive to start sorting.

There's nothing to match curling up with a good book when there's a repair job to be done around the house.

Designed by Apple in California, assembled in China...

A couple of years ago, Niall Ferguson - the Harvard economic historian, coined the word "Chimerica" to describe what he saw as the key relationship in the then booming global economy: China and America. Cheap Chinese labour was making US companies highly profitable, while spendthrift American consumers in turn, were keeping Chinese corporations busy with export orders. This relationship was driving not just domestic GDP growth rates in these countries, but was also the engine room of world GDP growth. The words on the back of your iPod - "Designed by Apple in California, assembled in China" start to tell the story. To round out this arrangement the Chinese government was converting export surpluses into dollar denominated reserves (US Treasuries in the main) with the aim of preventing their own currency from appreciating - further helping the competitiveness of it's own exports. The United States had the world's cheapest credit card, with an Annual Percentage Rate unlike (in a good way for them) the rates I get sent from Barclays every month. That was then.

This is now. The relationship has moved through various chilly phases over the past 18 months. It's clear that the relationship has not hit it's tipping point just yet, but there is a heightening anxiety amongst more credible commentators about how things will play out. This week I read three articles from for me (and I'm not alone) credible commentators addressing this issue. The Great Reckoning between the wannabee and the has been is going to come, that is for certain. What is uncertain between these commentators is who holds the upper hand at this point in time. In the blue corner, the US has a mountain of debt which is increasing with each domestic stimulus effort. In the red corner, the Chinese have been the historical funders of this debt mountain and are growing increasingly weary about keeping this line of credit ticking over.

A cat and mouse game is being played - the US are pumping out Treasuries by the bucketload and are effectively printing money to finance them (the Federal Reserve is buying much of the issuance) and over time this policy action will create inflation and erode the value of the dollar. On the Chinese side, there is a kind of catch 22 situation - continue to finance the US deficit in order to protect the value of past investments, or allow the US to print money to finance it's own deficit and in doing so erode the value of the liabilities it has to China. To be sure, China is still piling up those dollar-denominated bonds. In March alone, China's holdings of US Treasuries rose $23.7 billion, but Deutsche Bank recently predicted that Chinese reserves will rise by only $100 billion this year, compared with $418 billion last year. With the US annual deficit looking like it will be in excess of $1.5 trillion this year alone, you don't need to be a Nobel prize winner in economics to know that China's $100 billion loan won't cover much of that lot. Where is the rest of the money going to come from?

Irwin Stelzer in his weekly Times "American Account" discussed this great conundrum that "even Barack Obama can't solve for the US". Republicans in Congress have not yet produced a coherent alternative to the President's deficit spending programmes, or his plan to move the boundary between the public and private sectors to the left. And no, the economic data do not suggest that the President's stimulus package has failed. Stock markets, house prices, consumer confidence, you name it, seem to indicate "green shoots". As Stelzer points out however, "the long term challenge to the president comes from two related places: the bond markets and China." It's all got to be paid for, most probably via the bond markets, and if not via the credit card with China, then who?

Bill Gross, in his monthly PIMCO Investment Commentary, raised the same issue. The build up of US IOUs to the rest of the world is maybe not a problem for the short-term, but it is undeniably a major problem for the future. "To zero in on the US of A, its annual deficit of nearly $1.5 trillion is close to 10% of GDP alone, a number never approached since the 1930s Depression. While policymakers, including the President and the Treasury Secretary assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery's corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington's hat."

The current annual deficit of $1.5 trillion, as Gross points out, does not even address the proverbial "pig in the python". Private think tanks such as The Blackstone Group promise that spending for Social Security and the various healthcare programmes sponsored by Federal government will collectively increase by 6% of GDP over the next 20 years, leading to even larger deficits unless taxes are increased proportionately. Collectively these programmes represent an approximate $40 trillion liability. That figure added to the current $10 trillion US deficit adds up to a public debt of closer to 300%. As Gross points out - a ratio that is similar to that of Latin American economies like Argentina and Brazil when they defaulted at various points over the past century.

Prior to 2009, it was enough to count on the recycling of the US current account deficit to fund Treasury borrowing requirements. Now, however, it is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not. The concern is, therefore, that this funding gap can be bridged in only two ways – both of which have serious consequences for US and global financial markets. The first and most recent development is the steepening of the US Treasury yield curve and the rise of intermediate and long-term bond yields. While the Treasury can easily afford the higher interest expense in the short term, the pressure this puts on mortgage and corporate rates, whose prices are based off government bond prices, represents a serious threat to the fragile “greenshoots” recovery now underway. Secondly, the buyer of last resort in recent months has become the Federal Reserve, with its near daily purchases of Treasuries and Agencies currently running at a $400 billion annual rate. Basically, the only policy action for the US is to inflate it's way out of it's liabilities - yet another hit to the prudent savers of the world - the Chinese government being the biggest.

In this regard the US hold the upper hand in the short term - inflationary fiscal and monetary policy is in their control and to their benefit. Over the longer term, however, the upper hand is undoubtedly held by China - a point which Niall Ferguson asserted in the Daily Telegraph. The breakdown of "Chimerica" could be one of those great turning points in history "when the balance of power tilts decisively away from an established power and towards a rising challenger...It is possible. Financial crises often accelerate the gradual shifting of the geopolitical tectonic plates; they are to history what earthquakes are to geology."

Ferguson, refreshingly, uses historical context for what it's worth and is hugely credible as a consequence. His recent book The Ascent of Money shows how the cycles of history repeat themselves, and create a great context for understanding the current financial crisis. "Something similar may be happening as a consequence of the American financial crisis that began nearly two years ago. The flapping of a butterfly's wings may trigger a hurricane in the Home Counties; in much the same way, a crisis in the market for subprime mortgages could signal the waning of the US hegemony and the advent of a Chinese century." In short, he says, it may be time to start believing the projections made by the Goldman Sachs economist, Jim O'Neill, who predicted a few years ago that China's GDP could equal that of the US by 2027. Three years ago, China did not have a single bank among the world's top 20, measured by market capitalisation. Today the top three are all Chinese. In 2006, the US had seven of the top 20 banks, including the top two; today it has three, and it's highest, JP Morgan, is only fifth.

In an earlier blog post, back in February (Communist Capitalism or Capitalist Communism) I looked at the situation whereby deflated stock prices around the world were allowing China to pick up strategic national assets on the cheap. I happened to be in Australia at the time, and there was a growing insecurity there at national government level about the potential sales of stakes in big Australian mining companies to Chinese interests. A kind of capitalist imperialism was being embarked upon by communist China - a complicated mess of ideologies, where China was using capitalism against the arch capitalists. This empire building will continue for the foreseeable future, as over the longer term, the Chinese economic and political position in the new world order will continue to rise and rise.

In the short term, to China's detriment, the US holds the upper hand in relation to the financing of it's own current account deficit. The US will pursue highly inflationary policy to limit the damage of it's truly gigantic public spending commitments, and China's holdings of US Treasuries will suffer as a consequence. Twenty years from now, if Jim O'Neill's China prediction holds true and the Chinese are sitting on top of the economic world order, the Chinese government will not have forgotten who broke the "Chimerica" relationship.

However, justifiable as retaliation might be, as one of their own ancient proverbs warns: "The one who pursues revenge, should dig two graves."

Piggy in the middle...

As regular readers of this blog will probably have picked up by now I'm not exactly a card carrying Trade Unionist at heart - a considerable understatement perhaps. This isn't to suggest that I don't have a socialist outlook on the world, but more that if over the long term we don't embrace economic competitiveness we will all be broke and hungry. The consequences of competing and winning the economic battle should be that we are even more inclined to help the less fortunate, but never in a way that actually erodes their ability to help themselves.

This view is probably best summarized by the Chinese proverb "Give a man a fish and you will feed him for a day. Teach a man to fish and you will feed him for a lifetime". My approach to judging economic policy is based, therefore, in a form of consequent "sustainable capitalism". So it may surprise some that I did find myself this week reading with interest a recent report ("Life in the Middle" - tuc.org.uk/touchstone/lifeinthemiddle.pdf) from the Trades Union Congress (TUC) in the UK that was looking into the erosion of the status and wealth of "Middle England", or as the Financial Times so patronisingly called the "white van men".

The report shows that income inequality has grown markedly since Thatcher took power in May 1979, to the point where the mean British income now exceeds the median income by some 23%; in 1979 this figure stood at just 7%. This means in effect that a small proportion of earners at the top of the food chain have done relatively well, while the middle masses have seen their incomes and living standards stagnate. As the TUC puts it, Britain has gone from being one of Europe’s most equal societies to one of its most unequal. We’re not referring to the truly dispossessed here, either; rather we’re talking about the millions in the middle, those with a decent job and a mortgage and a pension.

Needless to say, on reading this public report, I thought this would form the backbone of some stereotypical Daily Mail borderline fascist rant. They did not disappoint. "The brave people of middle Britain are now struggling just to survive. Fecklessness is rewarded. Standing on your own two feet is punished" the Mail headlines raged.

As is often the case, the Daily Mail's almost comic levels of ranting often reduces the strength of their point - which every so often they do actual have - a good point that is. While middle Englanders have seen their status erode, they cannot be completely excused of blame. It is this group that created it's own mirage of affluence by taking out levels of personal debt that would have had their grandparents turning in their graves. Moreover, as this group has embraced the benefits of international trade that have brought cheap flat screen TVs, iPods and IKEA furniture they have also seen the things that they make and export erode in competitiveness to the outside world. The manufacturing base that was the driver of British tax revenues in the 60s and 70s has become uncompetitive and uncompelling to the outside world. Middle England doesn't have anything to sell at a price that can sustain their level of spending - in economic language, they are running a considerable current account deficit.

Nonetheless, this should not have meant that Middle England's status should have diminished in relation to the very poor, and the very rich in the country. The important issue that is raised by the TUC report, is that over the past 10-15 years the "engine room" of the (albeit less competitive) British economy has actually had it's status eroded to the benefit of a) government tax revenues, b) very low income earners, or unemployed through New Labour's very expensive tax credits system, c) public services that remain inefficient and overcrowded and d) the very wealthy, who tend to pay the lowest % rates of tax as they choose to receive their "income" in shares which are subject to lower capital gains tax.

While the world was flush with cheap credit, the Middle Englanders that the TUC report refers to felt a false sense of security - a mirage of affluence. As the main home-owning, mortgaged class, house price appreciation more than compensated for the fact that they were effectively paying more tax and getting less back via their public services than they did 30 years ago.

It has been a similar tale in the US. In Autumn of last year the US Census Bureau published figures for median real incomes for US families between 2000-2007. CNN at the time commented that "...this is the first business cycle ever in which the middle class had less income at the end than at the beginning." Median real incomes had actually fallen from $58,500 in 2000 to $56,000 in 2007.

When Karl Marx told the "workers of the world to unite", he was talking about a revolt against the Capitalists. Now the workers should be revolting against their governments, who see them as the ideal group of people to tax - they can pay (or used to be able to), unlike the very poor, and they can't afford good lawyers fees or accountants to help "alleviate" their tax, unlike the very rich. There is something wrong here. The incentives to be that small businessman, or middle manager in this country aren't there any more, so it's questionable where the economic growth is going to come from to pay off the growing debt pile that the UK government is sitting on.

To return to the base concept upon which I write these blogs - this incentive scheme is out of whack. I personally have no issue with inequality of wealth, as long as it is based on principles of wealth creation and not stealth, sleight of hand or fecklessness.

At one end of the scale, New Labour has pandered to the very rich - they run scared when a super high net worth individual claims that they will leave these shores if their tax situation is altered, claiming that their participation in the private equity deals that have led to their ownership of some of Britain's biggest companies is absolutely critical to job creation and the fabled "trickle down" effect of their wealth creation. By and large this is pure manure.

Sadly many of the leveraged buyouts that saw the acquisition of companies suchs as Boots, were debt fueled tax arbitrages that will over the long run destroy wealth and reduce employment. The efficiency gains that were touted as the basis of many leveraged buyouts were smoke and mirrors stuff that covered over the real play. Debt is tax deductible. Profits are taxable. Buy a company, reduce its tax bill by replacing debt with equity, upstream a dividend to yourself and hey presto. Debenhams before being bought by a syndicate of private equity groups paid £40mm in tax, after the leveraged buyout it was paid £8mm by the Inland Revenue on similar earnings. This is not restructuring to create a more efficient business, it's just sleight of hand. The Debenhams situation is in no way unique.

There will always be ways for the well advised to avoid paying taxes, but an incentive structure should be in place to remind the fortunate that the circumstances in society that existed that allowed them to profit - things like a sound legal environment, free markets and solid infrastructure - were paid for by someone, and it is only reasonable that they should contribute proportionately. In the US the super high net worth earners are also the biggest charity givers, not just on a nominal basis, but also in percentage of wealth terms. In the UK, the super high net worths, with a couple of notable exceptions, don't "give back" in any meaningful sense when compared to people of similar status in the US. There is not the same sense of community or societal responsibility.

At the other end of the scale the is the position of the very poor. Gordon Brown's hugely expensive tax credit system, allied with the minimum wage, sharply improved the incomes of the poorest sections of society. Some of those who have been helped by these hand-outs have been thoroughly deserving, but the feckless have benefited as well. There are regular newspaper examples of cases of individuals caught in the "poverty trap", whereby working more is actually less financially beneficial than extracting social security, which is truly the worst form of disincentive structure.

Make no mistake, the UK is in quite a financial pickle. The government plans to borrow £175bn through gilt auctions in the current fiscal year and the same the year after. In last year's budget, public net debt was expected to be 39% of GDP this year, now it is at 59% and is going to be close to 80% by 2013-14. In theory such borrowing should be sustainable if the assets side of the national balance sheet are likely to produce the tax revenues to pay these debts, or if the other part of the liabilities side - public sector spending promises - are reduced, or both. Currently, however, there aren't too many signs as to where the increased economic growth that could afford this debt burden are going to come from.

What is almost certain is that taxes are going to have to rise. The government remains reluctant to really address ways in which they can extract more from the super high net worth population, who continue to threaten to leave these shores if the government moves towards a less lenient approach to their tax position. Crispin Odey, a London hedge fund manager, for example, has regularly suggested that he's "seriously considering leaving". When asked where he would move to, he was quoted as saying "...anywhere else as long as the rivers were stocked with salmon and the valleys with pheasants." Hong Kong Crispin?

At the other end of the wealth spectrum, it won't be the unemployed and feckless picking up the tab either - they'll still be relatively well looked after by the state, because no political party courting the popular vote will risk being seen as a 'benefits slasher'.

The likelihood therefore is that the middle Englanders that the TUC report addresses will be the ones further burdened with increased taxes to foot the bill. While they are not bereft of blame for the position they find themselves in - highly burdened with debt and working in increasingly uncompetitive workplaces - they should not be unduly burdened in the recovery process. But they will be. They are the easiest ones to go after - they can pay, unlike the very poor, and they can't dodge, unlike the very rich.

Now that's not the basis for a sound incentive scheme, is it?