Financial Times Europe - 09.03.2020

Monday9 March 2020 ★ FINANCIAL TIMES 17

W

e are on the cusp of

another economic pol-

icy error in the euro-

zone. Its roots lie in a

mixture of compla-

cency aboutcoronavirus nd a deep-a

seated beliefthat monetary policy has

no ammunition left when interest rates

are negative and that fiscal policy is, by

nature, constrained.

It is comical, yet consistent with the

observation above, to hear European

policymakers reiterating that they are

waiting and monitoring the situation.

Eurozone finance ministers could not

agree on a co-ordinated policy response

when they held a telephone conference

last week. And theG7 industrialised

nations nly managed to agree — guesso

what — to monitor the situation. Even

income currently subsidises research.

The biggest change is to recognise that

employers, who benefit directly from a

highly educated workforce, should con-

tribute to the higher education costs of

the graduates they employ — govern-

ments already contribute because soci-

ety benefits and individual students

contribute because they benefit person-

ally. This third contribution would

strengthen collaboration between

employers and universities.

The principle of employer contribu-

tions already exists, for example

through theapprenticeship levy, sup-

port for work-based degree courses and

some bursaries. But the existing

arrangements are incoherent, insub-

stantial and often ineffective.Ministers

could decide to set employers’ national

insurance contributions at a higher rate

for university graduates and direct the

revenue to universities. It’s time for uni-

versitiesto contribute their full poten-

tialand for the government to make the

changes necessary to make it happen.

The writer is co-author of ‘The University

Challenge’ with Ed Byrne and a former UK

secretary of state for education

rightly linkingsuccessful institutions

and the welfare of communities rather

than pledging, as some would like, to

reverse university expansion.

A new, sustainable funding structure

must encourage more niversities tou

pursue these missions, and better. Gov-

ernment can take straightforward steps

to achieve that, some of which were rec-

ommended by the Augar review.

The loan system should be extended

to awider range of courses s in coun-a

tries like Australia, New Zealand and

Singapore, including technical educa-

tion and vocational courses other than

law, medicine and the other work-re-

lated degrees taught at university. The

real interest rate for student loans

should be set at zero and the loan repay-

ment income threshold substantially

reduced. Maintenance loans should

fully cover real living costs. Mainte-

nance grants for students from poorer

backgrounds should be reintroduced.

Early loan repayment should be

incentivised and students could be

treated as financially independent

from the age of 18.Research nd teach-a

ing budgets should be separated to

increase transparency — tuition fee

Ministers need to appreciate that the

UK’s strong universities — more so than

governments, corporations or NGOs —

are best placed to offer ways to address

the complex challenges of a fast chang-

ing world including pandemics, terror-

ism, climate change, 5G and the trade

disruptionscaused by Brexit.

World-class research institutions ana-

lyse the problems, identify long and

short-term solutions, and, by educating

about half of all young people, help soci-

ety handle rapid change.

Moreover, there is good evidence

from the US that universities in the UK

are well placed to helpregenerate hoset

localities that have been the biggest los-

ers from globalisation. The Tory mani-

festo promised to “work with local uni-

versities to do more for the education,

health and prosperity of their area” —

in the 2017 election: a few months later

she commissioned theAugar review.

Last May, its recommendations were

published, including reducing the fee

cap to £7,500. But the political toxicity

of the issue meant the latest manifestos

ducked it. Labour kept its vacuous abo-

lition pledge. The Conservatives said

they would look at the interest rates on“

loan repayments with a view to reduc-

ing the burden of debt on students”.

This long period of policy immobility

is now coming to an end.Controversial

reforms are best dealt with early in the

parliament. The new universities minis-

ter hassignalled “crackdown on lowa

quality courses” and Downing Street’s

favourite think-tank has already high-

lighted thepublic trust challengesfac-

ing higher education.

But the system of student finance is so

complex that any reform needs absolute

clarity of purpose. Our original ration-

ale was to raise money for universities

so that resources could be targeted at

schools. The 2012 context was austerity,

so coalition ministers shifted university

costs from the state to individuals. This

government needs to be clear on what it

hopes to achieve with further changes.

I

n 2006 I had lunch with Boris John-

son for the first and only time. As

higher education spokesman for

the opposition, he was looking for

tips in shifting Tory policy away

from outright opposition to university

tuition fees. In that same helpful spirit, I

now offer some suggestions to the prime

minister for urgent reform of the post-

school funding system — which, as he

knows, is working badly. The subject is

moving rapidly up the political agenda.

Since I established the current struc-

ture of university funding in 2004, as

education secretary in a Labour govern-

ment, there has been just one substan-

tial reorganisation. The 2012 reforms

under the Conservative-Liberal Demo-

crat coalition, raising the fee cap from

£3,000 to £9,000, fatally undermined

its sustainability.Theresa May believed

Labour’s pledge to scrap student fees

was a reason for her poor performance

Christine Lagarde, president of the

European Central Bank, felt the need to

issue astatement aying that she, too,s

was “closely monitoring developments”.

There is still a lot we do not know

about Covid-19. But we know what we

need to know for an economic policy

response. The UK government’s medi-

cal advisers, for example, have calcu-

lated that, with existing measures, the

greatest increase in the number of cases

will occur in April, with a peak in May or

June. This implies economic disruption

lasting at least into the summer.

The timeline should be broadly the

same for the eurozone, with the spread

of the virus peaking a little earlier in

Italy, where it started earlier. The direct

impact on the eurozone economy is,

therefore, a hit to supply chains and to

consumption for two or three quarters.

This is a foreseeable and probably sig-

nificanteconomic shock, very different

in effect to Sars and other viruses of the

recent past.

In an ideal world, eurozone govern-

ments would co-ordinate fiscal policy

with each other and also with the ECB.

But there is no sense of urgency. In Ger-

many, for example, a urvey founds hatt

66 per cent of the population think het

situation is under control, while 76 per

cent are not greatly concerned about

becoming infected.

For as long as such delusions persist,

there will be no public pressure for

immediate government action. Ger-

many has announced afiscal stimulusof

a magnitude of 0.008 per cent of gross

domestic product. If there is no political

pressure for a domestic stimulus, then

there will be no support for a co-ordi-

nated response either.

What about monetary policy? During

the eurozone crisis, the ECB was the

only functioning institution of the EU. A

combination of negative interest rates,

quantitative easing and liquidity poli-

cies prevented the eurozone from falling

into a depression. The ECB managed to

ringfence the banking sector and the

money markets. And it managed to

compensate, in part, for the lack of a

mutualised safe asset. But most impor-

tant it was able to neutralise the effects

of austerity, the biggest economic policy

error of our times.

Monetary policy is still the only game

in town. It would be delusional to think

it has no effect. For example, he rise int

the euro’sexchange rate ince the mid-s

dle of February stemmed from the

expectation that the USFederal Reserve

would cut interest rates more aggres-

sively than the ECB. The exchange rate

is one of several channels through which

monetary policy affects the economy.

The big question for the ECB now is

whether it continues to do “whatever it

takes” to support the eurozone econ-

omy when others do not, or whether it

reverts to the mindset of 2011 or earlier.

During that era, policymakers prided

themselves on keeping calm in the face

of adversity.

Ms Lagarde has talked a lot about

green finance and tacklingclimate

change. Important as these issues may

become in the future, I wonder whether

this focus has become too much of a dis-

traction from the more urgent task at

hand. The ECB should not only be dis-

cussing whether it ought to encourage

banks to maintain credit flows to small

and medium-sized companies. It should

also bedealing directly with the eco-

nomic shock from coronavirus that lies

ahead.

The US, China, Japan and the UK are,

at present, more likely to take effective

action than the eurozone. The right pol-

icy will, this time, require a significant

fiscal component. And it will take more

than anItaly-only iscal injection off 0.

per cent of GDP. The whole of the euro-

zone will need a stimulus of at least two

or three times that size. My expectation

is that eurozone policymakers will act

eventually, reluctantly and insuffi-

ciently.

The result of the collective brain fog in

Frankfurt and Brussels would be

entirely negative: another policy-in-

duced recession that will last longer

than it should.

[email protected]

Ideally governments would

co-ordinate fiscal policy

with each other. But there

is no sense of urgency

British universities need a new funding settlement

Charles

Clarke

Employers, who benefit

from a highly-educated

workforce, should

contribute to degree costs

The eurozone is complacent about the coronavirus threat

Opinion

europe

Wolfgang

Münchau

business

Rana

Foroohar

A

merican capitalism feels

divided. Stagnant wages

a n d h i g h c o s t s h av e

squeezed workers, while

companies and investors

have scored record profits and returns.

It has become increasingly clear that the

market benefits some more than others.

So how to repair it? The business lead-

ers who recognise there are faultlines in

the US economy need to start with a few

basic steps. The first is to measure more

precisely in their own companies what

can be improved, and fix it.

Arguably, most important is to gauge

the financial health of their workers.

Chief executives should conduct a

financial stress test of employees to

determine how they are doing and then

establish where changes can be made.

Just Capital Foundation’s polling shows

that Americans holdfair pay and living

wages s two of the top three issues theya

want businesses to prioritise.

PayPal is one company that has taken

note. Under chief executive Dan Schul-

man, PayPal gauged financial stress lev-

els of its hourly and call centre employ-

ees. It found that60 per cent struggled

to make ends meet nd often lived paya

cheque to pay cheque. This compelled

Mr Schulman to raise wages, reduce

healthcare costs, designate employees

as shareholders and promote financial

education — all because PayPal took

time to measure worker wellbeing.

Another step is to report workforce

information. Both private and public

companies should disclose on their web-

sites how many full-time, part-time and

contract workers they have in the US, as

well as the number of staff in each wage

band by increments of $10,000 under

$100,000 (with wider bands above).

Other metrics to include are pay equity

between genders, diversity, paid paren-

tal leave and career development and

tuition reimbursement programmes.

Such disclosure would not only

inform prospective employees. They

would show communities the true eco-

nomic value that a company brings.

There is a big difference between a com-

pany with wages so low that taxpayers

have to subsidise workers, and one that

genuinely provides for its people.

Wages and costs are only part of the

story. Equally valuable is environmen-

tal management and impact. Here, too,

Just Capital has found that the public

cares about a company’s record. Busi-

nesses should detail their carbon foot-

print, and report their biggest liabilities.

This is not just for environmental rea-

sons; a company’s climate behaviour

also brings economic risks and, in some

cases, opportunities.

Sceptics will ask how these disclo-

suresimprove capitalism. The answer is

simple: awareness is the basis for action.

If you don’t measure something, you

will struggle to change it.

If executives can see with granularity

how their workers are doing, they will

know how to help them. If workers see

how their pay stacks up, they will have

more command over their careers. And

if investors get systematic breakdowns

of how companies score by worker, cus-

tomer, environmental and community

(and not just shareholder) metrics, they

can put money into — and benefit from

— just corporate behaviour.

The fallacy of our time is that share-

holders and stakeholders are in a zero-

sum game. But companies that make

Just Capital’s top 100 ranking, b ased on

the priorities of the American public,

have bigger returns on equity, greater

net margins, and enjoy higher valua-

tions than their unranked peers. They

also pay their median workers 31 per

cent more, are 32 per cent more likely to

establish environmental policies, give

8.4 times more to charity and pay living

wages to anestimated 11 per cent more

of their workers.

The picture is clear: successful stake-

holders can also mean successful busi-

ness. Fixing capitalism is a matter of

neither wholesale change nor sticking to

the status quo. It simply requires

rebooting the system to encourage

awareness that can lead to change.

The writer is co-founder and chairman of

Just Capital

A simple

first step for

businesses to

mend capitalism

Paul

Tudor Jones

The fallacy of our time

is that shareholders

and stakeholders are

in a zero-sum game

the fickle fortunes of the market.

All of it was supported by the myth

that share prices are the ultimate indi-

cator of what was happening inside a

company, and ultimately, an economy.

I don’t think that’s really been true for

a long time, something underscored by

last week’sdeath f former Generalo

Electric chief executive Jack Welch. He

came to represent the rise, and ulti-

mately, the fall ofshareholder focused

capitalism. After the 2008 crisis it

became clear that GE’s share price

underWelch had been artificially bol-

stered by debt and leverage.

Welch eventually rejected share-

holder “value” as the “dumbest idea in

the world”. I can only hope that this

market downturn will force more peo-

ple to come to the same conclusion. How

much longer can we run an economy

driven so disproportionately by finan-

cially engineered asset bubbles? The

next few weeks and months may give us

the answer.

[email protected]

receipts. Given the importance of asset

price increases in both tax receipts and

GDP growth, it’s hard to imagine a world

in which the Fed won’t keep cutting

rates indefinitely. Live by the market,

die by the market.

It did not have to be this way, and this

situation did not develop overnight. The

US built an economy that is dangerously

dependent on the whims of Wall Street

little by little, since the 1970s onwards.

It is the result of policy changes driven

by both Democrats and Republicans.

Among them was the 1982 rule that

allowed share buybacks in specific con-

ditions, even though this had once been

considered market manipulation; and

the decision to provide favourable tax

treatment to stock options, which

allowed already fortunate people to

profit from the rising valuations ofcom-

panies they worked for. The most fun-

damental change was the shift from

defined benefit pensions to defined

contribution 401(k) plans, which

has linked the future of so many

Americans, in a Faustian way, to

that the things that make people middle

class — healthcare, education and hous-

ing —have become unaffordable.

Seen in this light, President Donald

Trump’s disingenuous attempts to

equate the fortunes of Wall Street with

those of the country at large make a

kind of grim sense. The value of the S&P

500 is less a gauge of the broad health of

US corporations or consumers than it is

of the wealth of a few tech firms and

value of the 2017 tax cuts. The latter

accounted for wo-thirdst f the aggre-o

gate rise in corporate profits between

2012 and today.

But share price increases represent a

disproportionate amount of the income

tax paid by the top 5 per cent of earners,

who pay 60 per cent of income tax

expectation of wealth held in assets like

stocks and bonds.

What’s stunning is how utterly

dependent American fortunes have

become on the inflation of those asset

prices. Mr Gromen has calculated that

net capital gains plus taxable distribu-

tions from individual retirement

accounts are equal to 200 per cent of

year on year growth in US personal con-

sumption expenditure.

That does not necessarily mean that

people are pulling money out of their

retirement accounts to buy hand-sani-

tiser, bottled water and face masks. But

Mr Gromen argues that it does mean

that US gross domestic product “cannot

mathematically rise if asset prices are

falling”.

No wonder the US Federal Reserve cut

rates by 50 basis points last week. The

move came with a predictable risk of

spooking the market — and it did so. The

S&P 500fell nearly 3 per cent hat day.t

But the fundamental risk of inaction

was deemed greater.

Central bankers are clever people.

They know that they cannot fix pan-

demics or political dysfunction with

monetary stimulus. But in the US more

than anywhere else, they have found

themselves in an unenviable position:

managing an economy that has, over the

last several decades,particularly since

2008, depended on low interest rates to

push up asset prices. That in turn has

made it less obvious to consumers (and

voters) that average real weekly earn-

ings for the bottom 80 per cent are at

about the level they were in 1974 , and

W

atching the markets

these days is like watch-

ing the seven stages of

grief — shock, denial,

anger, bargaining ,

depression, testing and, finally, accept-

ance. We clearly have not reached that

last stage yet. This isn’t really about

coronavirus — that was simply a trigger

for a correction I have long expected.

The US is in the longest economic recov-

ery cycle on record, withmounds of glo-

bal debt, falling credit quality, and dec-

ades of low interest rates driving asset

prices to unsustainable levels.

The reluctance of investors, politi-

cians and central bankers to accept that

is not just an example of the natural

human tendency to put off pain. Rather

it is something scarier and more factual.

The truth is that the US economy is now

dependent on asset bubbles for survival.

This was sharply quantified in a

recent edition of financial analyst Luke

Gromen’s weekly newsletter “The For-

est for the Trees”. About two-thirds of

the US economy isconsumer spending.

But people’s spending patterns are not

based only on their income. Our per-

sonal consumption is also linked to our

A dangerous

dependence

on Wall Street

How much longer can

we run an economy driven

so disproportionately

by asset bubbles?

MARCH 9 2020 Section:Features Time: 3/20208/ - 17:41 User: charlotte.middlehurst Page Name:COMMENT USA, Part,Page,Edition:USA , 17, 1