Wednesday, 29 August 2007

tale of two ecomonies

So, to parahprase Dickens, is 2007 "the best of times, and the worst of times?"

We learned this week that bonuses payed to those lucky folks in the financial services 'industry' hit a record high of over £14 bn. Follow this with news that boardroom pay has gone up astronomically (again), and that this latest rise in directors' pay
is more than 11 times the increase in average earnings and nearly 20 times the
rate of inflation

so that's the best of times covered, seemingly. how about the worst?

well, there's the staggering consumer debt the UK is now saddled with, which for the first time is more than the entire economic output of the country.

how does Britain manage to keep a straight face through all this? can we seriously be committed to a fairer society when we value CEOs 100 times more than people who work for them?!


Chris said...

I came here from badscience, and read your impressive article on the mobile phone scare - it was well argued and clearly knowledgeable.

But then I read this post - where you seem to have fallen for the economics equivalent of the mobile nonsense. Two points:
1. buried in the article on incomes is the fact that most of the headline increase in exec salaries was driven by rising share prices. If they did the analysis now, after shares have fallen on average 10% since the start of the year, what do you think the result would be? Nowhere near as dramatic as the article claimed. Furthermore why do they highlight the pay of company directors - who at least generally have some real responsibility to go with the money - rather than the pay of footballers, celebs and singers? There is no amount of pay that can be handed to a business person that manages the obscenity of Jonathan Ross' £18m, all paid for by the licence fee payers.
2. why is comparing consumer debt to GDP of interest? The whole point of debt is that enables borrowers to effectively spend future income now. Many people, including me, take on vastly more debt than their personal GDPs - its called a mortgage. The sensible comparison is to compare the amount of debt service with income: assuming the average interest rate across all consumer borrowing is about 10% the debt service:income rate in the economy as a whole is also about 10% (on an interest only basis). This does not strike me as unreasonable. This is not to deny that some have over-borrowed – but looking at economy wide numbers tells you nothing about this.

teekblog said...

chris, fair points i must admit.

focussing on directors' pay is simply to narrow the focus of the blog entry - of course lots of other sectors "overpay," but it seems sensible to start at those at the top of the corporate tree.

secondly, i kinda see where you're coming from in terms of personal GDP and mortgages. however, the difference is that mortgage debt is offset against the valus of the asset you're borrowing for, whereas consumer debt is generally unsecured. to me (a layman in economics terms) this means there's less value in stretching your debt service ratio in the direction of "personal loans" which does account for a large proportion of debt as a whole.

the discusion continues...