A dose of austerity for a pampered generation

By Michael Skapinker
Published: November 3 2008 19:40 | Last updated: November 3 2008 19:40

A British chief executive told me that she recently watched a client company talking to its
staff. The employees, mostly young, listened to the cutbacks that were coming. They were
incredulous and petulant. The watching chief executive thought to herself: “You guys don’t know
what’s going to hit you.”

This recession has already hurt people such as over-mortgaged home owners and bank staff.
But employers and headhunters predict a real shock for one group: those in their 20s and early
30s who have never experienced an economic downturn before.

Employers call them different names – Generation Y or the Millennials – but agree about one
thing: they are the most pampered employees ever, with an overwhelming sense of entitlement.

Those were labels once pinned to their parents, the baby boomers who grew up in the 1960s
and 1970s. But the baby boomers have lived through several downturns: the aftermath of the
1970s oil price rises, recession in the early 1990s and the dotcom bust a decade later.

For the baby boomers’ children, mass unemployment will be something new. The shock will be
all the greater because the best educated of them have had it their own way ever since they
entered the workplace.

In the past few years, employers have competed furiously for staff, and those applying for jobs
could name both their price and their work conditions.

“We were begging graduates to work for us. We were bribing them,” said the British chief
executive, who asked not to be named.

I spent last week talking to employers, headhunters, university academics and young workers
on both sides of the Atlantic.

There was surprising unanimity. The young workers I spoke to agreed that the past few years
had been a cushy time for them.

Those most in demand could demand time off for other interests, whether that was travelling,
skiing or training for a triathlon. BlackBerries and mobile phones meant that working from home
was common – and there was often no one paying attention to how much work was done.

To the baby boomers, work-life balance usually meant having enough time to spend with the
family. To their children, it often meant time off to practise the piano.

But generalisations are dangerous. Some workers in their early 30s remember the end of the
dotcom boom. Some even lost jobs then.

And hardships do not come only from work. A university faculty member I spoke to pointed out
that one of her students was a single mother. Others had parents they had to care for. Having
an easy time at work is no protection against parents’ divorce or family illness.

Many young workers hoping to enter the workforce in the past few months have already been
knocked back by the new reality. Some companies that had offered jobs to graduates have
postponed the starting dates. Others are asking recruits to come in to be reinterviewed. This is
particularly tough for those with student loans and large mortgages.
One London-based headhunter told me job-seekers would have to moderate their wage
demands, which had been pushed up during the years of plenty, particularly by the investment
banks.

Many will fail to find jobs or lose the ones they have. Will they cope? They will have to. Their
parents had an easy time during the 1960s and early 1970s – provided that, in the US, they
were able to avoid the military draft. When economic downturn came, they had to adjust.

In the UK in the early 1980s, unemployment among would-be professionals was common. Many
were grateful for whatever work there was.

Some of the younger generation of workers have already begun to make the adjustment.

I heard last week of a 26-year-old banker who had recently lost her job. She was lucky: as well
as being a banker, she was an enthusiastic baker. She is being paid by the bank until the end of
March and has already started setting up a cake-making business.

In one sense, today’s younger generation are better prepared for economic hard times than
their parents or grandparents: they were not expecting jobs for life.

Nor did they ever think they would have defined benefit pensions, calculated as a proportion of
salary at retirement. (One young worker was astonished when I explained the idea to her.)

However pampered Generation Y may have been, switching jobs and reconsidering careers are
second nature to them.

Time off to train for a triathlon will probably be harder to come by. As to who was responsible for
these unsustainable perks, the British chief executive has no doubts: blame the parents, or at
least the employers of the parents’ generation. “It’s our fault. We agreed to it.”

Send your comments to michael.skapinker@ft.com

Pubs fall victim to the perils of lone drinking

By Jonathan Guthrie
Published: November 3 2008 20:08 | Last updated: November 3 2008 20:08

There was just one lunchtime drinker nursing a pint at the Farcroft Hotel, a struggling pub,
when I visited. Hunched in an outsize anorak, his singularity emphasised the emptiness of the
saloon bar. He had a nonplussed look, like the last dodo on Mauritius wondering where all the
other dodos had gone. Communal beer drinking, an activity once as British as cricket and class
snobbery, is going out of style.

“Once it was a privilege to be a landlord,” said Jit Singh Josen, licensee of the Birmingham pub.
“Not any more. Now the stress is continual.” The beer consumption
of Farcroft regulars has fallen from 16 to seven barrels a week. The glamour girls on the Big D
dispensers stay decorously clad past the sell-by date of the peanut packets that clothe them.

EDITOR’S CHOICE

Comment on this column - Jun-28

More from this columnist - Jul-13

Mournfully, Mr Josen pulled me a pint on the house. Which I could not possibly accept. Oh,
alright. Cheers.

Running a pub used to be the dream occupation of many men, from the harassed police
sergeant to the bond trader jaded with the City. Nice little boozer. Roses round the door. Mine
host at the bar, dispensing the foaming ale. Lovely.

Only the most ignorant proppers-up of bars now entertain this fantasy. Pub closures have
accelerated to five a day as a result of the economic slowdown, according to the British Beer &
Pub Association. Beer sales through pubs, bars and restaurants fell 8 per cent last quarter. In
the year to September 30, sales were off 4.4 per cent, compared with a 2.2 per cent increase in
purchases through supermarkets and off-licences. Pessimists expect one-fifth of the UK’s
57,000 pubs to close during the next few years.

“We have dropped into a hole with this recession,” Mr Josen said. “If I ask regulars why they
don’t come in so much, they all do this.” The landlord rubbed his thumb and forefinger together
in the universal gesture for money being too tight to mention. In a cruel paradox, the downturn
makes drinkers want to cry into pints they can no longer afford.

Maintaining the jocularity that is a landlord’s professional mien is increasingly difficult for small
businessmen such as Mr Josen, who is making a loss. The majority of publicans are self-
employed. About 53 per cent are tenants, occupying premises owned by pub companies such
as Enterprise Inns, Marston’s and Punch Taverns.

Phil Dixon of the British Institute of Innkeeping says a typical pub turning over £250,000 a year
used to return about £30,000 a year in income to the tenants. But the proportion enjoying those
modest earnings is falling sharply.

Partly this reflects woes pre-dating the recession. Competition from supermarkets has been stiff,
with store chains sometimes retailing beer more cheaply than bottled water. The smoking ban
has hit small, local boozers badly. Utility bills have soared.

The response of canny publicans has been to morph into restaurateurs in pursuit of fatter
margins, with beer as a loss leader. “We are a food-led destination retail outlet, in other words a
country pub,” Richard Macey told me, brandishing a spatula in the kitchen of the Fountain Inn in
Worcestershire. Cooking up a sauce for moules marinieres, he said: “A lot of landlords are
blaming supermarkets and the smoking ban for financial difficulties because they do not want to
blame their own dirty toilets, unswept car parks and poor products.”

But even positive thinkers such as Mr Macey, whose pub restaurant is booked solid for
Saturdays a month ahead, find the going tough. His profits have fallen and he has reduced his
staff by seven to 25. He believes pub companies, which are out of favour with the City, have
created a national licensed estate that is poorly equipped to deal with recession. “All the pub
companies do is firefight,” Mr Macey said. “They have not developed their tenants. Now they are
reaping what they have sown.”

The trust-busting Beer Orders of 1989 forced breweries to reduce their tenanted estates. The
old “Mash Tun Philosophy” of pub ownership – keep the brewery mash tuns busy and everyone
would benefit – died not long after. A new breed of pub company emerged, focused as much on
financial engineering as beer sales. These charged steeper rents, reducing their reliance on
selling beer to tenants at a premium. Publicans now find themselves badly exposed, as profits
fall to meet fixed costs that include those higher rents.
The BBPA said its members, the big pub companies, are trimming rents piecemeal to help
struggling landlords. They should instead set rents as a percentage of pub turnovers, a move
that would better support hard-pressed publicans. It would be a sensible recognition that the job
of pub companies is to manage decline. Men, the main customers of pubs, increasingly hang
out at home. They split a bottle of Chardonnay with the lady over dinner. They drink squash and
play video games with the kids. Or they neck cans while chortling at the television comedian, Al
Murray, who does far better financially by pretending to be a pub landlord than he ever did
running a real pub.

jonathan.guthrie@ft.com

The big myth of taxpayer cost

By Samuel Brittan
Published: October 23 2008 19:51 | Last updated: October 23 2008 19:51

One of the most irritating aspects of the current debate on the credit crunch is the headline
estimates of “taxpayer cost” of official rescue operations so avidly taken up by opposition
parties, populist media and financial market pessimists. According to Dresdner Kleinwort “state
intervention in the developed economies is rapidly approaching €3,000bn”, so far mostly due to
guarantees for new lending between banks. The cost of the UK package was originally put at
£400bn, although this will depend on take-up and may already have grown.

The UK’s National Institute of Economic and Social Research has projected government
borrowing peaking at over 6 per cent of gross domestic product in 2010-11 and public sector net
debt then rising above 60 per cent even without counting all the banking liabilities acquired by
the state. But as far as the citizen is concerned the “cost” is what he or she might have to suffer
in terms of future increases in the tax burden or lower public expenditure on tangibles such as
schools and hospitals, to pay for rescue measures. The answer is; very little if anything over the
next couple of years and perhaps not very much looking even further ahead. The limit to any
stimulus is given not by accountancy, but the point at which rising inflation is again a danger.

Conventional thinking assumes that there is a fixed pot of money and what is used to take over
a bank, let alone finance a road programme or a cut in consumer taxes, is not available for other
purposes. This was not even true under the gold standard and is absolute nonsense with paper
currencies, where the amount of money – or “liquidity” if you must – is a joint outcome of official
policy and private agents’ behaviour.

The obvious temptation is to allow too much money to be created and to end up with rapid
inflation and no lasting gain to output or jobs. But faced with the risk of a severe slump, when
men and women who could be working satisfying human needs are left needlessly idle,
conventional wisdom needs to be stood on its head as the danger is of too little spending.

Some readers have been puzzled by my drawing on both Keynes and Milton Friedman, who are
popularly regarded as polar opposites. In fact, they have a remarkable amount in common. Both
believed that there had to be official policies to remedy any deep-seated demand deficiency;
and neither lost any sleep over government borrowing. Friedman believed that sufficiently
vigorous action to prevent a 30 per cent drop in the US money supply in the early 1930s could
have prevented the Great Depression. At least one of his disciples, a certain Ben Bernanke,
considered that monetary policy might have to be supported by fiscal expansion, as he has
reminded us.

As for Keynesianism, it is a pity that the media regard it as a leftwing argument for public works.
As a matter of historical fact, Keynes – unlike his more logically consistent follower, James
Meade – hesitated to advocate a deficit to finance current spending and put his hopes on
devices similar to the present British public-private partnerships in which the red ink did not
show. But there is nothing in the logic of his arguments to make one prefer extra public
spending to tax cuts. Public works take a long time to be fully effective and are difficult to
reverse. The conventional argument against tax cuts is that in an uncertain atmosphere they
might be saved rather than spent. Nobody has rebutted my suggestion of temporary cuts in
sales taxes such as VAT.

It is of course true that fiscal stimulation will be more effective if undertaken by the main world
economies together. But there is no need to wait for formal co-ordination, let alone “another
Bretton Woods”. Common understandings between national actors, as has occurred on the
banking front, may suffice. And a floating exchange rate gives some limited room to go out on a
limb.

A more interesting question is: what will be the taxpayer legacy in the longer run when one
hopes that growth resumes. There are several scenarios. One is the familiar picture of a straight
line growth trend with a wavy line snaking on either side representing recessions and booms.
This is the model lying behind the eurozone’s growth and stability pact, the UK fiscal guidelines
and other central projections. It also lies behind the insistence of Alistair Darling, the UK
chancellor of the exchequer, that public spending will eventually be reined back to the original
guidelines.

Keynes, writing in the 1930s, had a very different picture. It was of an economy where there was
a permanent surplus of potential saving over profitable investment opportunities and which
could only be saved from an “underemployment equilibrium” by continuing stimuli.

There are many other possibilities. A plausible one suggested by Christopher Dow in Major
Recessions is that there is no permanent demand deficiency, but no return to the old trend line
either, as the output lost in a big downturn is lost forever. It will take some time to assess where
we are among these and many other possibilities – for instance, the trend might bend – and it
would be best to postpone any rewriting of fiscal guidelines nationally or internationally.

More columns at www.ft.com/samuelbrittan.com

Japan needs more than gestures

Published: November 2 2008 19:14 | Last updated: November 2 2008 19:14

The rate cut by the Bank of Japan is a stopgap that will change nothing. If Japan’s monetary
policy-makers fear a return of deflation – and their own forecasts suggest that they do – rates
must be cut to zero and Japan must consider some unconventional alternatives sooner rather
than later.

On Friday, the Bank cut short-term rates from 0.5 per cent to 0.3 per cent, on the casting vote of
the governor, but a 20 basis point cut in borrowing costs will make no difference to the yen: after
the Federal Reserve’s 50bp cut, the gap between yen and dollar interest rates will still be
smaller this week than last. It will make no difference to consumers on fixed rate mortgages, nor
will it bring back the foreign investment banks that fuelled a mini-property bubble. Most of all,
20bp will not convince banks to throw cash at risky borrowers.

EDITOR’S CHOICE

Bank of Japan prunes rates to 0.3% - Oct-31

Lex: Asian rate cuts - Oct-31

Japan edges closer to zero rates - Oct-31

Double blow handicaps Japan manufacturers - Oct-30

Full coverage: Global financial crisis - Oct-22

Slowing output raises hopes of BoJ rate cut - Oct-30

There is only one rationale for a 20bp cut: the markets demanded it, and it does not hurt to give
them a cuddle and murmur that everything will be OK. Unfortunately things are not OK – Japan
is racing back into deflation. The Bank cut its own forecast for core consumer price inflation in
2009 to zero, and now expects only the most minimal growth in output either this year or the
next.

Japan’s government also announced large funds to recapitalise banks, before any got into
trouble, which should help to avoid systemic financial difficulties from exacerbating the
downturn.

And the yen’s rapid rise helps to erase the previous commodity shock – in yen terms the oil
price is down 60 per cent from its peak in July – and so lowers headline inflation. That is no bad
thing, but the stronger yen will also depress exports, creating slack in the economy, and cut
import prices. It is hard to believe that Japanese consumers will create enough growth in
demand to avoid deflation.

If consumption and exports are weak, investment will not come to the rescue. That only leaves
the government. Taro Aso, Japan’s prime minister, has proposed a Y5,000bn fiscal stimulus.
But that is too small to make much difference, while general income tax rebates and small
business loan guarantees look more like populist electioneering than an attempt at serious
economic policy.

Japan’s huge public debt makes it deeply undesirable, but it is time to think about a much larger
stimulus. Policymakers missed opportunities to move Japan away from being so heavily export-
dominated during its half a decade of growth; the only way to shift the economy toward
domestic consumption is to put money into the pockets of low and middle income earners
whose wages have now been stagnant for almost two decades.

As for the Bank of Japan, its eagerness to raise rates before inflation was properly established
looks more mistaken than ever. Last time the country was in deflation, the Bank had to go
beyond zero interest rates to “quantitative easing”, and there was no monetary disaster. More
than any other central bank, the Bank of Japan knows what works. If need be, it should not
hesitate.

Finding a way out of the global crisis

Published: November 2 2008 19:05 | Last updated: November 2 2008 19:05

On November 15, barely 10 days after the election of a new US president, the world’s
leading economies will gather in Washington to discuss the global financial crisis. Although the
Group of 20 gathering has been thrown together at short notice, amid inflated talk about
constructing a new Bretton Woods agreement to reform global economic governance, it can still
play a valuable role.
With goodwill and imagination, the G20 leaders can commit themselves to a co-ordinated, co-
operative solution to the financial crisis that, day by day, is sweeping across the developing
world. That would be a powerful political response to an immediate problem. The alternative,
that countries look out for their own interest while the system falls apart, is too horrible to
contemplate.

EDITOR’S CHOICE

Brown, Sarkozy seek ‘new Bretton Woods’ - Nov-02

Inflation punctures deflation fears - Nov-02

George Soros: America must lead a rescue of emerging economies - Oct-

28

Editorial Comment: Learning to live with excess debt - Oct-28

Comment: Fund must protect emerging markets - Oct-23

Europeans blame bankers for turmoil - Oct-19

The financial crisis is now – through a global liquidity crunch and extreme risk aversion among
investors – affecting even stable and well-run emerging markets. Recent moves to combat it are
substantive steps in the right direction.

The Federal Reserve’s decision to extend its currency swap lines to Singapore, South Korea,
Mexico and Brazil was a courageous and timely way to support well-run emerging market
countries. With its new short-term facility, the International Monetary Fund also seems finally to
have found a way to support fundamentally stable economies with temporary liquidity problems.

Authorities need to be careful that helping those inside a charmed circle does not harm those
just outside. Intelligent use of traditional IMF lending with appropriate conditions attached – not
soft-touch, but not micromanaging – should be able to cope with that. But it will require money,
and with the IMF rapidly emptying its arsenal, other donors will have to co-ordinate with the
overall effort.

The European Union support for the Hungarian rescue is an example to follow. Yet the really big
sources of foreign exchange reserves are not in Europe but Asia, particularly Japan and China,
and in the Middle East.

Gordon Brown, the UK prime minister who has been visiting the Gulf for this purpose, has called
for such governments to put their foreign exchange reserves to work complementing IMF rescue
lending. (Implicitly, of course, Beijing and the oil exporters are already financing a crisis-racked
deficit country with a shaky banking system – the US.)

This suggestion might be better coming from someone other than Mr Brown. The UK, backed by
France, has spent the past two years dragging its feet in accepting more contributions from
emerging Asian nations to the IMF, balking at the increased votes on the fund’s executive board
that come with them.

To ask Beijing to stump up more cash now without gaining any more say over how it is spent is
asking a lot – but Mr Brown may feel, with some justification, that his leadership role in the crisis
entitles him to a dose of chutzpah.
The underlying principle is, after all, a good one.

China, despite being left out of some of the key discussions on the global economy – such as
the co-ordinated interest rate cut on October 8 – seems to be biting its tongue and playing a
remarkably constructive role. It could, for example, easily have single-handedly bailed out
Pakistan in return for foreign policy concessions. Instead Beijing seems likely to join an IMF-
orchestrated rescue mission.

The G20 meeting will not resolve the intricacies of regulating credit default swaps or introducing
new counter-cyclical capital ratios for banks. But it does offer a chance for some of the rich
economies to undo some of the damage they have done to global economic co-ordination over
the past decade. Determined US leadership for the future will have to wait until a new president
moves into the White House in January. The rest of the world cannot allow a vacuum to exist
until then.

Back in 1944, it took many months of detailed planning before the articles of association of the
IMF were signed in the white-wood, red-roofed Mount Washington hotel at Bretton Woods in
New Hampshire. Political leaders at the G20 meeting cannot hope to produce such a blueprint
for a new global financial regulatory regime.

The G20 leaders can, however, give marching orders to their civil servants to get going on
imagining what the new world might look like. This may take months, even years. Leaders may
not have all the answers on November 15, but they do need to show they are ready to act.

Now they see the benefits of the eurozone

By Wolfgang Münchau
Published: November 2 2008 17:50 | Last updated: November 2 2008 17:50

It was a Friday but for Denmark it might as well have been Black Wednesday – that day in
1992 when sterling was forced out of the European exchange rate mechanism. After a
speculative attack on the Danish krone on October 24, the country is now considering whether
to adopt the euro.

Last week, Hungary received a €20bn ($25bn, £16bn) rescue package led by the International
Monetary Fund and the European Union. The austerity conditions ensure that Hungary will all of
a sudden fulfil the criteria for membership of economic and monetary union. I also hear that
diplomats from Iceland made discreet inquires in Brussels about accession.

While I am still hesitant to make predictions about the long-term economic and geopolitical
effects of the financial crisis, it looks like it will accelerate the enlargement of both the EU and
the eurozone.

The latter is particularly important, since several EU countries had planned to stay outside the
eurozone indefinitely. The UK and Denmark negotiated their opt-outs in the early 1990s. Others
piggy-backed, claiming these opt-outs for themselves as well. This group came to include
Sweden, Hungary, the Czech Republic and, until last year, Poland.

For Hungary, it turned out to be a near catastrophe. The socialist administration under Ferenc
Gyurcsány, prime minister, ran amok with a reckless fiscal expansion after EU accession. No
less unsustainable were his government’s financial policies that encouraged the adoption of
foreign currency mortgages.
This was usually defended by enthusiastic economists in terms of birth rates and fanciful long-
term projections of economic growth – the same silly arguments used to defend the doubling or
trebling of house prices elsewhere. Towards the end, almost all Hungarian mortgages were
denominated in Swiss francs or euros. National insolvency would follow from simple currency
devaluation.

The country will now pay the price for this madness in the form of an IMF-imposed austerity
programme at a time when the economy is shrinking. Looked at from boomtown Budapest in
2006, membership of the eurozone seemed absurd. The perspective from depression-bound
Budapest in 2009 will be different.

Denmark is wealthier and better run. It experienced one of the biggest property booms in
Europe. It also boasts a banking sector several times the size of national annual output. Unlike
the British, the Danes never cared about economic independence. Their reasons for staying out
of the eurozone were largely political and symbolic. Denmark has participated voluntarily in the
ERM and dutifully shadowed the European Central Bank’s monetary policies at every turn.

Ten days ago when the krone was attacked, the Danes discovered there was a price to be paid
to maintain this schizophrenic arrangement. The Danish central bank intervened heavily in the
foreign exchange market and was forced to raise interest rates from 5 per cent to 5.5 per cent –
a full 1.75 points higher than the ECB’s rate. Anders Fogh Rasmussen, the Danish prime
minister, who supports euro membership, had already talked about holding a referendum as the
mood in the country was shifting.

In Iceland, support for EU membership has soared since the crisis erupted. The Reykjavik
newspaper Frettabladid carried a poll last week showing approval for EU membership up from
48.9 per cent a year ago to 68.8 per cent now. The number in favour of adopting the euro is
even higher. Along with Norway and Liechtenstein, Iceland is a member of European Economic
Area, which extends the EU’s single market to those countries. This means membership
negotiations, normally long and complex, could be wound up in a short period of time. Talking
points will be the euro and fish.

In an illuminating policy paper, the economists Willem Buiter and Anne Sibert* say Iceland is
only an extreme case of a more general phenomenon – of a small country with its own currency,
and banking sectors too large to be bailed out by national authorities. Others are Denmark,
Sweden and Switzerland. The UK is larger and also enjoys – say professors Buiter and Sibert –
“minor-league legacy reserve currency” status. But some of the arguments apply to the UK as
well. I would expect a renewed debate about eurozone membership to surface in the UK as
well, as the country’s 15-year long credit-crazed economic binge unwinds. I will address the
issue of future UK euro membership in a separate column.

One of the lessons from Iceland’s and Hungary’s fiasco is that non-eurozone Europe may not
be economically viable during times of crisis. Several countries are financially overextended but
even those that are not, such as Poland, may be caught in the maelstrom.

Of course, membership of the eurozone offers no panacea. As an EU member, Iceland would

still have a crisis, because each country ultimately has to meet the costs of its own financial
adjustment. But Iceland’s interest rates would be 3.75 per cent, not 18 per cent. Apart from
lower interest rates, eurozone membership offers a joint policy framework and protection from
speculative attacks. In good times, few people care, but these are not good times. As I argued
last week, the crisis will ultimately produce stronger economic governance. It will also make the
eurozone larger, sooner.

*The Icelandic banking crisis and what to do about it , www.cepr.org