The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (59 page)

If there is any point to economics, and the pursuit of growth, it should be the advancement of ordinary people. In the years of easy growth before the credit bust, the rising tide lifted most vessels, from the superyachts to the rowing boats. But the promise of rising living standards for everyone has stalled. The boom in credit masked this for around a decade. In some countries, such as Britain, the United States and the nations of the Eurozone periphery, the argument right now is not so much about who shares the proceeds of growth, but rather who bears the burden of paying the cost for the decade of excess.

In Rhode Island I met some of America’s 48 million recipients of food stamps: working pensioners who cannot earn enough to buy the food they need. Here, on the 1st of every month, the supermarkets are swarming with food stamps users. The same aisles empty from the third week, as the so-called ‘Gold Cards’ (formally state-funded Electronic Benefit Transfer cards) run out of federal government dollars. ‘I hoped to qualify for a platinum,’ jokes an unemployed carpenter, before explaining to me how he runs out of the $200 monthly allocation of food stamps in week three. For one in six Americans – more than the population of Spain – food stamps are an alternative currency, and the number of US citizens reliant on them has nearly trebled since the turn of the century. These are not generous benefits by European standards, about £40 a week, but you don’t expect to see this
sort of dependency in the USA. A pensioner and her son in Bristol, Rhode Island, describe how many working families rely on the Gold Card, but few want to talk about it openly. There is a stigma. The government prevents the card being used for the purchase of hot food, pet food, alcohol and cigarettes. One user says she feels the stigma and the shame if shoppers in line see her buying ice cream with the Gold Card. The cards are presented fleetingly at tills, and quickly hidden in wallets. In wealthy towns and across this nation, struggling, working Middle America seems to want to pretend that it is getting by without government handouts. After food stamps run out, the food banks kick in for the last week or so of the month. If a family runs out of food stamps at the start of a school holiday, it can push them over the edge into hunger, as parents need to find the money for extra daily children’s meals. ‘Poverty in America used to be isolated in urban and rural settings that most people didn’t see. Now it’s more public, much closer to home,’ says Andrew Schiff, who runs the logistical backbone for Rhode Island’s food banks.

In Cyprus the Orthodox Church was also preparing food banks, after the collapse of businesses starved of working capital and bank funding. The Cypriot debacle was an extreme example of a boundary being tested. Ordinary depositors were lined up to pay the price for a nation’s banking excess with a chunk of their savings. We are now entering a bail-in world. The banks were bailed out, and now ordinary people are being bailed in. And not just in Cyprus. Bail-ins are going global.

This leads me to a first big conclusion. Those who breathlessly declared that, in the aftermath of the financial crisis, we were seeing the end of capitalism, were spectacularly incorrect.

Let’s focus on the UK for the moment. If you look through the lens of Marx, then it’s pretty clear that, right now, capital has never been so ascendant over labour. Capital is capturing the returns to growth, and labour is losing them.

The best example of this is the basic refusal of Britain’s workers to ask for pay rises. The inflationary price-wage spiral has completely failed to fire. The bargaining power of British workers has never been so weak. It’s not just about low levels of unionisation, it seems that the British worker now internalises the idea that their job can be done more cheaply in China, or by an eager foreign worker. So that means when inflation has hit above 3, 4 or even 5 per cent, wages fail to keep up, growing by just 1.8 per cent. When inflation fell below 3 per cent in 2013, wage growth fell below 1 per cent. This trend is predicted to continue until 2015. In the public sector there were massive strikes over pensions. But at the end of it all, millions of workers ultimately accepted paying more, even after a real pay cut, for a palpably worse pension provision.

In November 2012, the then governor of the Bank of England, Sir Mervyn King, went as far as to publicly exclaim his pride in such real pay cuts, in the face of a slumping pound: ‘Wage inflation has been remarkably low at around 2 per cent a year. That’s a real test of whether we have allowed domestically generated inflation to pick up. We haven’t. This is the first time since the Second World War that the United Kingdom has been able to absorb a very large depreciation of its currency without domestically generated inflation wage costs picking up. I think that’s an achievement for monetary policy and I think the MPC [Monetary Policy Committee of the Bank of England] can be rightly proud of that.’

I first saw this dynamic at first hand at the Honda factory in Swindon in 2009. Japanese just-in-time delivery stretched to their employment practices. A collapse in demand for cars was transmitted immediately around the world and led to them cutting down on working time as much as on steel. Workers accepted a 3 per cent pay cut for workers and 5 per cent for management in the place of compulsory redundancies, to cope with the slump in world trade after the Lehman collapse. It was the new ‘Honda Effect’. So there is no wage-price spiral. Workers have been tamed; labour is mute.

Something similar is happening with savings. To support their economies, nation-states such as Britain are printing money by the truckload. At least with interest-rate cuts, one can see directly how borrowers or companies could benefit. The transfer of savers’ returns to borrowers has been a form of macroeconomic bail-in. But £375 billion of quantitative easing (QE) is crushing the pensions of current retirees, alongside savings income. Yet at the same time, QE has also inflated the price of accumulated wealth even further – monetary policy for the wealthy (see Chapter 9,
here
). And there can be no doubt that it has benefited large corporations and big banks disproportionately.

The euro crisis has got nothing to do with a crisis in capitalism. It is basically political. The single currency could, and would, work if German voters felt comfortable with spending their buoyant tax revenues on supporting the comparably trivial problems in Greece or Ireland. If Germany and Brussels can persuade Rome and Madrid to increase their economic competitiveness, it could even be something of a success. But this is a diplomatic game, not a fundamental problem with the economic system.

I have seen this on the streets of Athens and even at the Occupy protests I visited in New York, London and Frankfurt. It’s very tempting to see all this as a global insurrection as TV cameras skip from riot to protest. What I find remarkable is that protests like this aren’t much much bigger, given the crunching of living standards. Again, despite the rise of radical parties, protests and riots, the internal devaluation strategies insisted on by Brussels and Frankfurt have, when push comes to shove, been endorsed in elections. Centre-right parties that are broadly more comfortable with market-based reforms are now in office across the periphery. The backlash of the workers and unemployed of the periphery has not happened yet. Even in China, nominally Communist, the largest migration of humans on the planet, that of migrant workers from rural China to its factories, is testament to the bargaining power of managed state capitalism over its people.

Of course, there is a notable exception to this hegemony of capital over labour, and that is the industry where workers capture far more of the returns as wages and bonuses than the shareholders. Even as the UK economy slumped, even as some of their employers were bankrupt, three-quarters of workers in this industry expected higher or the same bonuses. Even when their bonuses were hosed down, fixed pay was simply adjusted up. As one British bank chief executive told me during the crisis: ‘Marx would have been proud of the triumph of labour in the banks.’

Everywhere else capital is most definitely in the ascendant. Right now it’s game, set and match to capitalism.

‘It is true that Manchester people stress this when their attention is drawn to the revolting character of this hell upon earth.’

These were the words used in 1844 by Friedrich Engels to describe his visit to the textile mills near the centre of a Manchester booming during Britain’s Industrial Revolution, and home to waves of migrant workers from Ireland.

In 2012, a plan was hatched to lure them back. The promise was no less than the return of Manchester’s rag trade, but in a form less dark and less satanic than its nineteenth-century predecessor. Reshoring, rebalancing and reindustrialising Manchester’s textile industry was the call – the rag trade returning to its historic home. In theory, this was the reverse of offshoring, imbalances, and deindustrialisation: just what George Osborne said he wanted for the UK economy.

At Headen & Quarmby in Middleton, the retail guru Mary Portas commissioned a range of upscale women’s underwear called ‘Kinky Knickers’. They started hand-making them in north Manchester this year, and the results have been incredible. ‘Lovingly Made in Britain’ is the label stitched into each pair of knickers. The company’s MD David Moore says that they have increased their staff fivefold, and they could increase by another tenfold again, such is the demand for homespun underwear. He wants to turn what was a warehouse for imports into another manufacturing facility: high-street retailers are on the phone; Headen & Quarmby are going to expand their range.

So far so good for this, the niche of the upscale manufacturer. But this is just the start. The local councils, politicians, businessmen and industrialist Lord David Alliance have got together to form an initiative to test the ground for a much more substantial return of mass manufacturing to the area. Lorna Fitzsimons, the affable former Labour MP for Rochdale, runs it and has commissioned a series of consulting reports on what parts of the textile supply chain could return. The answer is: almost all of it – even weaving and spinning.

Brands such as ASOS, Pacific White and
Boohoo.com
explain why this can happen. Boohoo’s offices are housed in a former mill right in the centre of Manchester. As with ASOS and Pacific White, it is internet-based fast fashion that is changing the economics of offshore clothes manufacturing. There are bags of product in the basement, high-end design and sample production on one floor, and a catwalk, studios and models for online catalogues, filming and photography on another. Under the ‘made in China’ model right now, a firm would have to put in their whole order for spring 2015 by October 2014. They’d have to second-guess emerging trends, the sizes, the colours. They’d have to discount 80 per cent of stock from full price because that equation would inevitably be wrong.

Well, nearshoring and reshoring changes all that. The company can get the clothes on the shelves quicker. They can do a test run of, say, 500, and then swiftly reorder. They can shout at somebody in person if the colour is wrong. Reshoring takes huge amounts of risk out of the supply chain. Boohoo’s CEO Chris Bale told me that eighteen months previously 75 per cent of his product came from China. Now over half of it is made in the UK. One million ‘skater’ dresses were made and sold in Britain in this way. He says there isn’t enough textile manufacturing capacity to service the demand. Another Boohoo boss tells me all of his friends are starting factories. Seven years after start-up Boohoo is already profitable and revenues are booming.

In this instance Boohoo’s supplier’s factories are in Leicester, and they employ some of the women laid off when local textile mills closed in the 1980s. Other brands have clothes factories in Manchester. Go down the road past Oldham to Delph and you will see that not all the mills died. At Mallalieu’s of Delph, the trademark 40-foot chimney is still attached to a working mill that weaves high-quality fabrics for Barbour jackets. Some of their cloth featured in the 2012 James Bond movie
Skyfall
. The factory buzzes with whirring needles turning thread into tartan and other fabrics. There always was a niche for luxury. What is amazing, perhaps, is that MD David Mallalieu is now starting to export cloth to the Chinese. Selling cloth to China, from Britain. There
is
a market.

And if that was not enough, then I was told than even basic spinning could be about to return. It seems to break most of the rules of economics. A German industrialist told me that they were ‘in discussions’ and ready to supply new factories designed for mass textile manufacturing in the Greater Manchester area. ‘If we don’t do it, the Chinese will do it for themselves. They’re already doing that in Italy,’ said one new member of Manchester’s prospective rag trade mafia.

The re-industrialists of Britain’s northwest want and need much more infrastructure: ports, roads, high-speed rail. At peak times, the trams of Manchester’s Metrolink light railway are full. In Delph, says David Mallalieu, there is an amazing opportunity, but the skills aren’t there. Fitzsimons tells me that there are just five training places in the entire country for skilled textile machinists. In Middleton, David Moore suggests that less employment red tape would allow him to open more factories. This is a vexed question. But it is clear that in an industry that is becoming ever more just-in-time, and ever more flexible in demand and supply, there is a case to be made for trading jobs for labour-market flexibility.

The tens of thousands of jobs created from this vision of a return of Cottonopolis will not necessarily be highly paid. If they do return, they may well do so on the basis of highly unpredictable patterns of internet-based demand. If Britain wants these jobs back onshore, then there may have to be a trade on pay or conditions, or the prices people pay in clothes shops and online. There is a choice. The vision of Chinese-owned manufacturing and assembly on the docks in the Wirral described in Chapter 4 (see
here
) will, for many, represent a dark dystopia. But with youth unemployment hovering near record levels, it would be a brave local politician who turns down such job opportunities. As David Moore at Headen & Quarmby told me: ‘not everyone can be Ph.Ds or invent medicines.’