The dignity of work

There is dignity in work. Even the most menial job can give a sense of identity. Work gives that transient but satisfying moment of delight that can only come with a regular wage payment. A working household is an independent one, where the workless one is marginalised and economically irrelevant.

The number of households in the UK without a working adult has been trending upwards for decades. Since 1996, it has doubled. Certainly, there have been years when the number ticked downwards, but the trend has never been reversed.

So why have so many households effectively exited from the labour market? Certainly, the benefit system does nothing to encourage work. Family breakdown, and the marginalisation of men in family life has also played its part. No doubt, laziness has a role.

Nevertheless, a number cannot reflect the sense of humiliation that comes with being without work. It cannot capture that appalling sense of being left behind, as the rest of the working world busies itself with a sense of purpose.

Inequality and welfare dependence

There are three striking things about the distribution of income in the UK.

Inequality - The top fifth earn on average 6 times as much a year as the lowest five percent.

Welfare dependence - Over half of household income of the bottom five percent takes the form of state support.

Redistribution - Without that state support, households in the top five percent would earn almost 14 times the income received by the lowest five percent.

It is doubtful that the UK can continue to support redistribution of this magnitude. Nevertheless, we should understand the implications of further cuts in welfare - more inequality.

(Data for 2007/8. Source: Households Below Average Income, Department for Work and Pensions. Equivalised household disposable income before deduction of housing costs, using OECD equivalisation scale.)

No rate rise

If not now, then when?

The MPC again ducked out of the difficult but necessary task of raising the bank rate. It is not obvious what they are waiting for. Inflationary pressures have grown considerably stronger over the last six months. The MC have just sat there in their oak panelled meeting room, watching passively as the rest of us have inflation hit five percent.

Wishful thinking won't deliver price stability. Talking tough doesn't do it either. The only known cure for rapidly rising prices is higher interest rates.

Great shot

Libya's main oil terminal was in flames on Wednesday night after Muammer Gaddafi's airforce bombed the complex, in an escalation that pushed the cost of the benchmark Brent above $115 a barrel

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Libyan oil wasn't the only thing destroyed by Ghaddafi's planes. The Bank of England's inflation forecasts also took a direct hit.

The Treasury proposes a new framework for financial regulation

The Treasury has just produced a paper outlining a new framework for financial sector regulation. The paper proposes three new innovations:

• A new Financial Policy Committee (FPC) will be established in the Bank of England, with responsibility for ‘macro-prudential’ regulation, or regulation of stability and resilience of the financial system as a whole;

• Micro-prudential (that is, firm-specific) regulation of financial institutions that manage significant risks will be carried out by an independent subsidiary of the Bank of England, the Prudential Regulation Authority (PRA);

• Responsibility for business regulation will be transferred to a new regulator - the Financial Conduct Authority (FCA). The FCA will have responsibility for conduct issues across the entire spectrum of financial services.

The strategy has at least two commendable features; the Financial Services Agency will be, for all practical purposes, abolished. As such, we are witnessing a rare example of insitutional accountability. The FSA's failure is being justly punished.

Second, the Bank of England is now back in the driving seat. It has primary responsibility for overseeing the financial system. In practical terms, it is a return to the pre-1997 position, thus unwinding the nightmarish Brownite experimentation in financial sector supervision.

However, on more substantive regulatory reform, the strategy is disappointing. Instead of promptly pushing for higher capital and liquidity requirements, the strategy has placed its trust in Basel III - a multi-lateral approach to enhancing financial sector regulation.

We are likely to wait a long time for an international consensus for tighter capital and liquidity requirements. It would be far better to circumvent these tedious discussions, act unilaterally and decisively strengthen our national regulatory framework. The government should propose higher mandatory capital and liquidity requirements.

Bankers will inevitably complain that tighter regulation will reduce UK financial sector competitiveness. There are two ripostes to this argument. First, the UK is excessively dependent on financial services. We need to diversify, and some downsizing of the city of London would be no bad thing. Second, tighter regulation might have powerful reputational effects, strengthening UK bank balance sheets, which might limit some of this loss in competitiveness.

In any event, tighter regulation is needed in order to avoid a repetition of the 2008 financial crisis. The sooner the government acts to constrain reckless banking practices, the better.

Say goodbye to traditional marriage

In the Guardian today, Jill Filipovic was celebrating the demise of traditional marriage in western societies.

It's finally time to ring the death knell for traditional marriage. ..... Conservatives are right: traditional marriage is under attack. But the assault isn't just from gay men and lesbians who want the right to enter into marriages of their own. Heterosexual Janes and Johns are also reshaping holy matrimony: they're marrying later, they're marrying less, and for reasons other than having children. And it's making them (and their kids) happier and healthier.

Jill makes a long list of largely unsubstantiated claims about the state of personal relationship. The thrust of her argument is clear; we are all better off without marriage. However, she does make one very telling point.

More women are also forgoing childbearing – nearly twice as many women have never given birth today than in 1976. And when we do have children, we're doing it later: the average age of childbirth is now 25, compared with 21 in 1970.

Traditional marriage, which presumably means monogamous heterosexual life-time relationships were very good at achieving one thing - producing children. Jill seems to have neglected the profound significance of that fact.

Virtually all advanced economies have fertility rates below 2.1 children per woman. In some countries, such as Germany, Italy and Japan, the fertility rate is closer to 1.4.

The consequences of these kinds of fertility rates are mathematical. The population will, within a generation, begin to age, and then the population will decline. The only solution to ageing and population collapse is either boost the fertility rate or import large numbers of migrants.

Europe has opted for the latter strategy. The problem for Jill and her liberal experiment in personal relationships is that many of these new arrivals do not share her vision for marriage. Migrant fertility rates are higher largely because tradition marriage is stronger in these communities.

Ultimately, the future belongs to breeders. This is not a value judgement, it a fact of life. A society that does not produce babies has no future.

Young men exit the labour market in record numbers.

The last decade might have been boomtime for bankers, but for many young men, it was a very lean period. Labour force participation rates for 16-24 year old males fell by around 7 percent. Before you ask, that number excludes those in full time education.

The decline in participation seems to coincide with the election of Blair, Brown and the New Labour crew in 1997. During the latter years of the Major goverment, participation was actually increasing.

The recent recession appears to have accelerated the process of male youth economic inactivity. Last year, the participation rate fell dramatically

Here is a question - how are those inactive young men surviving? Perhaps, they are all safely at home with mum. Or perhaps not.

Unprovable counterfactuals

Economic policy over the last two years was one huge Keynesian experiment. The fiscal deficit was pumped up, allegedly to prevent an apocalyptic depression. Can we see any evidence that this massive fiscal expansion had any practical impact on economic growth? In a word, no.

Despite this historically unprecedented policy intervention, real GDP collapsed in 2008. For six straight quarters, the economy contracted. There was a modest and decidedly anaemic recovery last year. Nevertheless, the economy remains about 4.5 percent smaller compared to its previous peak.

Nevertheless, there is the unobservable counterfactual. Deficit junkies argue that while it is true that the economy contracted as the fiscal deficit exploded, the contraction would have been even greater if the government had not tried to support demand.

It is an unprovable claim. Nevertheless, it remains a durable one. There are few economists who are prepared to come forward and admit that the Keynesian experiment was a disaster. It did nothing for growth and bequeathed a massive debt stock that will impoverish future generations for decades.

Oil - the growth killer

Perhaps things are really showing down

The Q4 GDP number looked like a weather-generated aberration. My view, for what it is worth, was that the UK economy would recover quickly this quarter. While I thought growth would continue to be anemic, I also believed that the UK GDP numbers would crawl into positive territory.

However, a couple of recent stories have recently made me reconsider this optimism.

First up; Primark....

Primark, the discount fashion retailer, warned of a "noticeable slowing down in UK consumer demand" in a further indication that Britons are tightening their belts.

Then, there is UK property lending....

State-backed lenders Royal Bank of Scotland and Lloyds Banking Group, the two largest European commercial property lenders, cut loans by a combined £14.5bn, stated Bloomberg. HSBC and Barclays reported a drop of £2.7bn pounds. The four banks lent £199bn between them, according to financial statements published this month.

Then there is the q4 growth downgrade. The UK economy actually shrank by 0.6 percent rather than 0.5 percent, as was previously announced.

Gross domestic product (GDP) fell 0.6pc quarter-on-quarter, the Office for National Statistics (ONS) said, a bigger drop than its initial 0.5pc estimate that had shocked markets.

After an unprecendeted fiscal expansion, near-zero interest rates and a £200 million helicopter drop of cash, the UK economy is again slowing. Only this time, it is slowing with a rapidly rising inflation rate. The post-crisis expansionary policy stance was always folly. It was unnecessary. It was never going to provide any support of economic growth.

Why? Loose monetary conditions always leads to higher inflation. Loose fiscal policy destabilizes expectations. The private sector, when it sees large deficits and rising government debt, expect higher future taxation. Therefore, they cut back on current consumption depressing growth.

Sadly, recent economic data seems to be bearing out sorry but entirely predictable scenario.

The terrible tyranny of public debt dynamics

Debt charts can often scare the crap out of you. If the line heads upwards, dark images of financial ruin and bankruptcy come to mind.

David Miles, external MPC member, produced this alarming picture in a recent speech. It highlights the UK debt-to-GDP ratio since the middle of the 19th century. If one includes the debts of recently nationalized bank, the current debt to GDP ratio stands at 150 percent. It must have had the audience nervously searching their handbags for the Valium.

Actually, that number is a little too alarmist. There are assets that one should place against those bank liabilities. The real level of public sector indebtedness is closer to 70 percent. Still, there is something shocking about that number. In the space of three years, the public sector debt has doubled as a percent of GDP.

Apart from the recent reckless rise in government borrowing, this chart points to a deeper truth about public debt. It warns us about debt dynamics and how a comparatively short period of fiscal irresponsibility can create decades of trouble.

To see why, consider the situation in 1914. The UK government had a comparatively low level of indebtedness. Along comes the First World War, and borrowing shoots up. Public sector debt continues to rise during the great depression. Who would have expected that? The interwar governments were actually Keynesians, borrowing to pump up the economy, with dismal results in terms of higher economic growth. Yes, the economic history of the interwar period is highly politicized and often grossly misrepresented.

As the second world war approaches, governments re-establish a degree of fiscal prudence, Debt levels start to fall, and economic growth picks up. However, borrowing again increases sharply during the second world war. By 1945, the debt to GDP ratio is at 250 percent.

After the war, it starts to decline, more or less continuously for 60 years. By the middle of the last decade, the debt-to-GDP ratio returns to pre-1914 levels. The punchline? It took almost one hundred years to work off the debt accumulation incurred during the first world war.

This chart illustrates the appalling tyranny of debt dynamics. Once a country accumulates a lot of debt, it has to use a large proportion of its future taxes to service that debt. With a huge chunk of taxes eaten up by interest payments, governments have strong bias towards higher fiscal deficits, and a continued accumulation of debt.

Higher inflation doesn't help in the long run. Nominal interest rates increase in line with higher inflation. The only way to pay down the debt is to run fiscal surpluses. That means cutting back expenditure and hiking taxes.

This is why the UK economy is in such a dangerous position right now. The debt ratio is rising rapidly. As we accumulate more debt, more of our future tax payments will have to be set aside for higher debt servicing costs. This means less money will be available for future social expenditures.

This is why arguing against an upfront fiscal consolidation is so dishonest. Those people who argue for an aggressive expenditure cuts today understand debt dynamics. We realize that the best way to preserve public expenditures over the long run is to maintain balanced public sector budgets. Every pound of debt avoided today, means more money available in the future for education, health and pensions.

At last, some good news about fiscal policy.

At last, we have some good fiscal news.

In January the government actually collected more tax than it spent. Tax receipts came in at £58 billion, some £6.4 billion higher than January last year. At the same time, government expenditures were £50.5 billion, just over £2 billion higher than last January. Collections on wealth and income related taxes were particularly strong.

Of course, January is always a good month for tax collections, and a single month doesn't make a trend. Let's keep the pessimism under control. The numbers were better than expected, and we should be thankful for that.

Finally, we can dare to hope that the public sector accounts might begin the long road to recovery.

Personal debt in the UK

Infographic by Money Debt & Credit

Stop worrying about single mums, it is time to tackle corporate welfare

Welfare dependency isn't just confined to the inhabitants of our inner-city sink estates. Corporations also do nicely out of government largess. Unfortunately, corporate welfare was more difficult to detect than the stroller-pushing single mum in the high Street.

Nevertheless, things changed radically last year. Shortly after the election, the new coalition instructed ministries to publish data on expenditure over £500. We now hae extraordinary database that reveals in startling clarity that many firms now depend on handouts from the government.

Take, for example, the Ministry of Energy and Climate Change. Between September and November last year, the Ministry handed out almost £60 million in grants to private sector firms.

The language used in government accounting lacks a certain clarity. Nevertheless, the meaning of the word "grant" is clear enough. It is not a loan to be repaid later. It is a handout.

The Ministry of energy's database also provides a tantalising hint about how this money is used. The bulk of these handouts go on "asset creation". Perhaps I'm wildly wrong, but I doubt that these "created assets" will eventually belong to the public sector.

Judging by the names of the firms and a casual search on the Internet, many are working in the newly-minted climate change industry. Suddenly, one sees the environmental issue in an entirely different light. There is money to be made and government grants to receive if the climate change fear factor is ratcheted up. I always knew that the environmental lobby was vocal, but I didn't realise how expensive it had become.

Of course, there will be those who will justify this expenditure in terms of the global threat posed by CO2 emissions. I have no strong view on climate change; I am ready to be persuaded. However, I know two things. First, CO2 emissions are up 20 percent in the last decade. Second, two thirds of an increase is due to China. Those generous grants from Ministry of Energy will have absolutely no impact on either of these two trends.

But never let a few awkward facts get in the way of a government handout.

Bishop Theophilus is innocent

In a recent speech, author Philip Pullman compared the eagerness of some local authorities to close down public libraries to the Bishop Theophilis who Pullman claims destroyed the Great Library of Alexandria.

“The government, in the Dickensian person of Mr Eric Pickles, has cut the money it gives to local government, and passed on the responsibility for making the savings to local authorities. Some of them have responded enthusiastically, some less so; some have decided to protect their library service, others have hacked into theirs like the fanatical Bishop Theophilus in the year 391 laying waste to the Library of Alexandria and its hundreds of thousands of books of learning and scholarship.”

Philip Pullman's reference to Theophilus is obscure. Did the fanatical Bishop really burn down the library at Alexandria? These days, it is possible to verify faux intellectualism with a quick search on Wikipedia. It would appear that Pullman unjustly maligned the poor Bishop.

Like Dave Brent discovering a few random facts about the life of Dostoyevsky, I learned that there are four competing theories about the destruction of the library. Several reliable sources point an accusing finger towards Julius Caesar, who accidentally burned large sections of the city in 48 BC, although there is some dispute about whether he destroyed the library itself or a storage depot.

Nothwithstanding Caesar's pyrotechnics, Wikipedia reports that some form of Library was maintained in Alexandria until the third century. Unfortunately, this library was destroyed in 270–275AD when Emperor Aurelian was suppressing a revolt by Queen Zenobia of Palmyria.

Then we come to Theophilus. In 391, he closed down the Serapeum - a pagan temple located on the site of the library. Unfortunately for Pullman, none of the contemporary witnesses make any reference to the destruction of books. Indeed, no one is sure whether the original library was in existence in the time of Theophilus.

Finally, there are Arabic accounts suggesting that in the seventh century the invading Muslim armies of Amr idn al 'Ass destroyed the library. Since these accounts were written some 500 years after the events they describe, their veracity has long been doubted.

Paraphrasing that great Jurist - Johnny Cochrane "if the flame wasn't lit, then you must acquit". The evidence against Theophilus seems, to say the least, quite unconvincing. Instead, the Romans seem the most likely culprits.

That's the great thing about the Internet. In the past, a poser like Pullman would go unchallenged. Now, obscurantism can be easily exposed.

Why do some people find it so hard to understand how a budget works?

That old fool Philip Pullman is upset at the prospect of library downsizing. In a recent speech, he lashed out against the difficult choices facing many local authorities:

"Here in Oxfordshire we are threatened with the closure of 20 out of our 43 public libraries. Mr Keith Mitchell, the leader of the county council, said in the Oxford Times last week that the cuts are inevitable, and invites us to suggest what we would do instead. What would we cut? Would we sacrifice care for the elderly? Or would youth services feel the axe? I don’t think we should accept his invitation. It’s not our job to cut services. It’s his job to protect them.”

Where does one start with this kind of incoherent rhetoric? Anyone who has ever held responsibility for a budget knows that there are three numbers that matter; how much is coming in, how much is going out, and the difference between the two. If there is less money coming in than going out, then difficult decisions are inevitable.

The county council in Oxfordshire, like local authorities across the country, has lower revenues. There are multiple reasons for the shortfall; lower economic growth, the after-shock of the financial crisis, and large banks successfully avoiding corporate income tax obligations.

Whatever the reason, people like Keith Mitchell have to confront the consequences of lower funding. This means answering incredibly painful questions like is it better to close 20 public libraries rather than reduce care for the elderly?

I don't know anything about Keith Mitchell or what party he represents. However, in these difficult days, he will be called upon to provide leadership, which means making agonizing and unpopular decisions that serve the best long term interests of his community.

He will find no help from scribblers like Pullman who put forward impossible demands such as maintaining public services without sufficient revenues to fund them.

But we are only complying with the law

Shamed by their excessive use of tax avoidance schemes, Barclays have fallen back on the excuse of last resort; "we are only complying with the law".

As an aside, Barclays has a less than perfect record of following the requirements of UK legislation, as various judgements from the Financial Services Agency will attest. Moreover, UK corporate tax law is notoriously complex. It is an unequal struggle between the slick accountants from Barclays and the disaffected and underpaid tax inspectors of her Majesty's Customs and Excises.

Still, it is hard to understand why tax inspectors can't squeeze more corporate tax payments from Barclays. The company just reported their results online and 2010 was a very good year. Profits amounted to about £6 billion. Roughly speaking, around a third of these profits came from retail banking operations, the bulk of which were generated in the UK. The remainder came from Barclays capital, the investment banking operation primarily based in London.

For tax liabiilities, location matters. Corporate income tax, in theory, should be levied on the profits made by firms in a given geographical region. Judging by the financial statements, the majority of Barclays operations as well as their employees are based in the UK. Yet curiously these UK operations never seem to generate significant amounts of corporate income tax payments.

Barclays have tried to hide the paltry amounts of corporate tax payments by publishing the total tax amounts that the company paid over to the Exchequer. For example, they have included the amounts of PAYE paid by their employees. In 2009, the bank paid around £2 billion over to HM Revenue & Customers, although £113 million was corporation tax.

This only adds to the mystery as to why corporate income tax payments are so low. High levels of PAYE payments point to high underlying salary payments. Normally, companies don't pay out massive wads of cash unless their workers are generating large profits. Aren't bank bonuses supposed to be tied to profits?

Companies have an incentive to hide those profits from the taxman. Otherwise, how could one explain the massive financial flows into the Cayman Islands; a barren rock in the middle of the Caribbean. Banks have taken advantage of the complexity of corporate income tax regulations. They have arranged their financial operations so that they are now effectively liberated of any responsibility to pay taxes.

However, our Parliament is sovereign. We can determine our own tax laws. If the political will was there, Barclays would not be able to avoid taxes in such a scandalous way.

One simple way forward would be for corporate income tax on banks to become a presumptive tax. At the end of every quarter, the bank would have to pay a fixed proportion of its PAYE contributions as an advance payment on future corporate income tax liabilities. A rate between five and 10 percent would be reasonable.

These funds could be held in escrow accounts. At the end of the year banks would have to justify why those profits should be allocated to offshore centres. If they can genuinely prove that the profits were generated through operations conducted abroad then they can receive a rebate on corporate tax payments. However, the level of proof required would have to be extremely high.

The idea isn't that radical. Presumptive taxation is quite common worldwide as well as advance payments on corporate income tax. It would offer a way of genuinely cracking down on these outrageous tax avoidance schemes that banks have abused for years. If Barclays don't like it, then they put all their ATMs on the Cayman Islands.

Bank profits, correlations and tax

"Any link between Barclays Group profits and the amount of tax paid to the UK government is inappropriate - there is no direct correlation between the two."

Barclays Bank Press release

I defy anyone to find a more arrogant statement than the one produced by Barclays bank and reported in yesterday's Guardian. Whatever Barclays might claim, the vast majority of its operations are based here in the UK. Nevertheless, it somehow they contrived to pay only one percent of its annual profits to the UK Exchequer.

Some simple arithmetic highlights the absurdity of the Barclay's statement. The current rate of corporate income tax is 28 percent. Therefore, in order to pay just one percent of global profits as taxes to the UK, it follows that only 3.6 percent of those profits are attributable to UK banking sector operations. Does that seem likely? Call me a failed accountant, but I think not.

In terms of financing its operations, Barclays is proudly British. It has profited handsomely from the low rates engineered by the Bank of England. While savers are being punished by zero returns on their deposits, Barclays bank generously awarded their staff with a huge pay increase last year. However, the patriotism disappears when it comes to paying tax.

The bank also has the reassurance of knowing that should they fall into any difficulties, the taxpayer is there ready to bail it out. Yet despite this extraordinary generous financial back-stopping by the state, Barclays claims that there is no correlation between its profitability and the amount of tax it pays to the government.

Imagine if we all thought that way. Suppose that millions of PAYE taxpayers suddenly claimed that their salaries have no correlation whatsoever with the amount of tax owed to the government. It is of course an absurd claim.

Bankers are out of control. This sense of entitlement knows no bounds. They think it's perfectly acceptable to demand massive bailouts when their reckless decisions threaten bankruptcy. They also feel no obligation to pay a reasonable contribution to the public purse. Instead, they claim their corporate affairs are too complex to require paying any tax.

Earlier this week, David Cameron promised welfare reform. He pointed to a sense of entitlement that is endemic among the poorer sections of society. I'm still waiting for a similar statement about corporate welfare. When will we see a banking sector corporate welfare reform bill before parliament?

The wild and wonderful FTSE

UK equities have done spectacularly well since the beginning of 2009. Although, the Footsie hasn't quite regained all the losses incurred at the time of the financial crisis, it is almost there. If current trends continue for a few more months, the Footsie should surpass its precrisis highs.

At this point, I suppose I should warn you that the previous paragraph t is not a recommendation to buy anything. As the familiar investment mantra warnds, share prices can go down as easily as they rise.

Even though the Footsie has enjoyed a reasonably steady recovery prices have still swung around quite violently. The extraordinary volatility emphasises the great strength of equity markets. It is quite possible to lose large amounts of money on equities. As the chart amply illustrates, when prices crashed in 2008, investors suffered appalling paper losses.

Moreover, when investors make losses there is no recourse to a taxpayer bailout. If an investor places their money on a share that turned out to be a dog, they have to suck up the losses. Therefore, no one can complain or feel aggrieved if those same investors are now making healthy gains.

So if you've made any money recently on the Footsie, I congratulate you. If you start making losses tomorrow, it is your business and I don't want to hear about it.

Back on the welfare reform trendmill

Haven't we been here before? Didn't the previous Labour government promise benefit reform?

Yesterday, David Cameron was before the cameras promising yet another welfare reform Bill. The grand idea behind this latest initiative seemed strangely familiar. The complex network of welfare benefits will be replaced by a single universal credit. There will also be hard-hitting new sanctions to punish those who want to remain idle.

Cameron's main sound bite was that he was ''finally going to make work pay - especially for the poorest people in society." Sadly, that quote provoked a deluge of pedantry from me. "There is only two kinds of work" I said ” paid and unpaid work, the latter being better known as either slavery or housework".

Anyway, I have left the pedantry in the kitchen. I am now before a computer and back on the theme of benefits. There isn't the slightest possibility that Cameron's welfare bill will reduce the numbers receiving financial assistance from the state.

The benefits debate has always been framed around the conflict between providing incentives to work and poverty alleviation. If the state provides a minimum level of income to the poor, the incentive to work is reduced. If the state introduces sanctions against the work shy, poverty increases.

At the margin, changing the rules behind welfare payments will affect a small number of the unemployed. Tighten the rules and some will return to gainful employment. Weaken the rules and more people will stay at home and watch the atrocious yet strangely compelling Jeremy Kyle show.

Incentives isn't really the problem; the key problem is the appallingly low productivity levels of the urban poor. The vast majority of people on benefits do not possess the necessary aptitude or skills to acquire a job in the mainsteam economy.

This wasn't always true. Fifty years ago, the country was full of factories which could offer people with limited capacities a place where they could perform menial tasks for a modest yet reasonable income stream.

Unfortunately, all those jobs have relocated to the developing world, where people are willing to do those repetitive and menial tasks for a fraction of what low skilled British workers are prepared to accept.

The obvious riposte to this argument is that benefits keep UK wage rates high and therefore act as a disincentive to the unemployed in accepting lower wage rates. This is absolutely true but isn’t the point.

How far would UK wages have to fall in order to attract back to Britain all those factories that left over the last 40 years? The answer, obviously, is that wage rates would have to fall to close to those currently paid in the developing world.

If the UK benefit system were abolished tomorrow, there is a fair chance that unskilled wages could fall sufficiently far so that unskilled British workers are competitive with their developing world counterparts. The obvious implication would be that the living standards of these newly employed Britons would also be comparable with those in the developing world. In other words, many UK cities would be transformed into the kinds of slums that one sees in the developing world.

When this obvious point is made, it usually generates a lot of sanctimonious nonsense about education. If only more money was spent on tooling up the unskilled, then welfare reform might work.

Policy makers in the developing also know about the importance of education. Those same unskilled workers that took those factory jobs are also acquiring new skills. The bar is being raised. It would take an unacceptably high amount of public investment in education in order that British low skilled workers acquired sufficient levels of productivity to effectively compete against their counterparts in the developing world.

Therefore, welfare benefits are the cheaper option. In effect, we are paying for the pretence of living in a competitive modern and thriving economy. Some parts of the UK economy are doing brilliantly. At the same time, there are large sections of the potential workforce are woefully uncompetitive.

Deep down, most of us know this sad reality, which is why we are prepared to tolerate the outrageous amounts of money that is devoted to keeping the unskilled from starvation. We complain and moan about the work-shy, we angrily demand welfare reform. Politicians like Cameron respond to this clamour, and deliver us a feast of anti-benefit rhetoric. At time same time, we wink at the politicians, “Don’t take us too seriously” we hint. After all, “we don’t want to turn London into Shanghai”.