Thursday, 11 March 2010

The truth from the shop floor

Yesterday I watched an interesting television programme about the John Lewis business. For anyone who doesn't know, John Lewis has department stores and a grocery business called Waitrose. It is not a limited company but operates as a partnership in which all its employees have a stake. Perhaps because of its unusual ownership structure it was chosen by the BBC to be the subject of a fly-on-the-wall type of show in which the state of the business is being examined as well as day-to-day operations in some of its shops.

One theme dominated the first edition, namely the effect of the recession on retail trade. A compelling difference was apparent between the attitude of the head honcho of John Lewis and the position adopted by politicians of all parties. He expressed the view that recovery from recession will be slow and that he did not expect the spend-spend-spend years to return. Politicians seem unable to recognise this obvious truth, or if they do recognise it they don't seem to want to say so for fear that it might not be what the electorate wants to hear. It is, however, of fundamental importance if the path out of recession is to be realistic and sustainable.

I can illustrate the point simply by reference to my favourite emporium, Mr Patel's Merrymart. Mr Patel was ticking along just fine. He worked in the shop together with three other full-time staff and four part-timers. The business neither expanded nor contracted because it was what it was, it paid for Mr Patel and his loyal staff for a decade with no real variation year-to-year. All of a sudden customers had a lot more money to spend because they had borrowed against the perceived value of their homes. Sales were rocketing which required Mr Patel to take on extra staff, one more full-time and two more part-time. And here's the important bit - he took them on only because he had to and he only had to because the shop became much busier. Then customers stopped borrowing and started repaying what they already borrowed. Turnover at the Merrymart fell to below the level before the boom. The new staff lost the jobs they had been in for three years of boom and one of the old part-timers had to go.

How do you measure the decline in Mr Patel's business? Is it realistic to treat the boom times as a true level of business and to compare the new situation to those times? Or is it more realistic to treat the previous decade as the true "par value" and the boom as a blip? To my mind the answer is obvious. For three years the shop benefited from additional business that could not be sustained over the long term. It was nice while it lasted, but the shop is what it is; it is a small shop with a small catchment area. Run well it could always expect to provide a living for a certain number of people. For three years there was an upward blip. Now, as potential customers pay £50 a month to Visa rather than putting in his till, Mr Patel will find his takings fall below par value. Over time it is realistic for him to expect sales to go up as credit is repaid and the extra £50s come his way.

When an economy has been boosted in an unsustainable manner by an orgy of borrowing and spending it is inevitable that GDP will rise. When the tide turns and GDP falls people wring their hands and wail "recession, recession", as though it is necessarily a bad thing. In one way it is bad because all the additional staff taken on by businesses like the Merrymart find themselves drawing benefits when previously they had work. What cannot be ignored, however, is that they had work only because of an entirely bogus and unsustainable increase in business activity. Similarly, increased tax revenues during the boom years were illusory. They appeared as numbers on a computer screen but they were only ever temporary. A reduction in business activity was always inevitable because it was always inevitable that the added sales made with borrowed money could not continue indefinitely.

The true level of GDP, like the true level of sustainable business for the Merrymart, is not defined by a temporary upward blip any more than the true level of someone's annual income is defined by a once in a lifetime win of £5,000 on the lottery. You earn £30,000, you win £5,000, in the year of the win your income is £35,000, yippee; but next year you are back to £30,000 again. It is not realistic to look on this as a reduction in income, the substantive position is that your income has remained static but you received a one-off lucky bonus.

The boss of John Lewis understands this. He knows his business got lucky when people borrowed money and stuffed it into his tills and that he should not expect to get lucky again. He measures performance now not against the lottery years but against the real, stable, sustainable years. Front bench politicians of both parties (with one exception) have not recognised this truth openly. They measure current GDP against GDP in the lottery years and claim to have policies to bring back those heady days. It isn't going to happen. The wise exception is Ken Clarke who recently called for a shift in the whole structure away from credit splurging and towards saving and paying your way. Such a change will mean setting sights much lower and accepting that any given measure of GDP is not a minimum standard for future levels of business activity.

Once you acknowledge that poor Gordon's boom of doom was a blip giving rise to misleading headline figures for GDP and misleadingly high levels of tax revenue, it becomes obvious what must be done now. Expectations must be changed and budgets must be set according to what is sustainable in the future not according to some fairy-dusted period of fictitious wealth. Of course the recession is affected by factors other than the end of the credit boom, but that is no reason to pretend that the business created by the credit boom will reappear. It won't. Mr Patel knows it. The boss of John Lewis knows it. Ken Clarke knows it. I would suggest that every fair minded observer of matters economic also knows it.

We have witnessed a fall in GDP of somewhere between 5% and 6%. But that is a fall from a false high level because part of the starting measure was unsustainable and would have disappeared anyway once people stopped borrowing and started repaying. Whether that is 0.5% or 3% or somewhere in between is anybody's guess. For so long as politicians pretend that the credit boom represented real and sustainable business activity we cannot expect them to put forward a credible path to recovery.

1 comment:

Stan said...

Nice to see you back FB.

I quite agree with your post, but I'd just like to throw this extra bit in. the obsession these days is with "growth" - growth in GDP, growth in revenue, growth in profits - all fuelled by an obsession with the stock market. The stock market is seen these days as THE key indicator of economic performance - why? It is meaningless - just a glorified gambling cartel. But this obsession causes sensible listed companies to borrow huge amounts of money to "grow" their business just so that the stock market likes them - and the stock market is one hell of a fickle mistress.