Mark Carney: time lord?

Is the bank of England Governor messing with the very fabric of time?

Time isn’t a very interesting idea to a physicist. There is the unchangeable past and the unpredictable future. “Now” isn’t a definable concept. It’s not even fixed – you can bend it. Time is a sort of illusionary bi-product spit out as the universe goes from a state of order to one of chaos. Why politicians and central bankers would want to start messing with it is a mystery.

Mark Carney, the Governor of the Bank of England, and the Monetary Policy Committee have been lured into the time game. They expect one of their trigger points, unemployment, to drop below 7 percent in 2016 at which point they’ll have a look at what they might - or might not do. In the world of the Bank of England this constitutes "delivering a measure of certainty". The previous governor, Sir Mervyn King, just used to say "I don’t know" when faced with demands for definiteness.

With unemployment currently at 7.8 per cent three years seems a long and unambitious timescale to set yourself such a meager target. Carney says that to achieve the 7 per cent unemployment rate a million jobs will have to be created – 750,000 new ones and 250,000 to compensate for planned reductions in public jobs and that is what will take the time.  Markets disagree and have pumped up their rate increase expectation to as early as next summer. Somebody is wrong.

Perversely, if you were Chancellor of the Exchequer, George Osborne, or a Conservative Party election campaign organizer, you might be pretty happy with the idea that unemployment wasn’t going to fall any time soon. The reason is simple – over the years the multiple of house prices to earnings has risen for about 3.5 to 6.5 for England as a whole (your main electoral battle ground) and the electorate has become twice as sensitive to interest rate movements today as they were twenty years ago (see graph). Get interest rate policy wrong and it could have electoral consequences.

By mapping where house prices are highest relative to earnings it’s easy to show that above average interest rate sensitivity lies almost exclusively in Conservative-held boundaries; the East, South East and South West (see second graph).  London is the exception but suffers the double whammy of being both the most leveraged part of the country AND dominated by Labour. You’ll get no votes from Londoners for increasing interest rates too soon.

Also the higher house price-to-earnings regions are associated with areas with higher salaries which already carry the highest level of taxation. Those earning up to £50,000 a year now have total deductions (National Insurance and Income Tax) of about 20 per cent whilst if you earn between £50,000 – 100,000 this rises to 32 per cent. In the £100,000 to 200,000 bracket your annual deductions bill averages 40 per cent of gross salary. By linking housing costs (i.e. an interest only mortgage) to where you are on the income scales it can be shown that for every 0.5 per cent interest rate increase could lead an equivalent of between 2 per cent and 4 per cent increase income tax. Increasing interest rates in that sense hits traditional Conservative voters harder than potential converts from the Liberal Democrats of even Labour.

None of this should come as a surprise to people but the extent of the apparent hyper-sensitivity of the electorate to interest movements is going to be more economically and politically important at the next general election than it has ever been before. The MPC will have to be doubly sure they have a self-sustaining economic cycle, embedded in a stable global background, before increasing interest rates. It may even be why they have set their earliest revue date to beyond the next general election. In that sense Mark Carney has been right to dampen the enthusiasm the markets have shown for marginally stronger UK data recently whilst if you were Conservative Party Chairman you would be praying that not too many jobs are created too quickly especially before the General Election in 2015.  

 

        

Source: HM Land Registry

                                 

Mark Carney. Photograph: Getty Images

Head of Fixed Income and Macro, Old Mutual Global Investors

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How the Democratic National Committee Chair contest became a proxy war

The two leading candidates represent the Hillary Clinton and Bernie Sanders factions.

While in the UK this week attention has been fixed on the by-elections in Stoke-upon-Trent and Copeland, in the US political anoraks have turned their eyes to Atlanta, the capital city of the state of Georgia, and the culmination of the Democratic National Committee chairmanship election.

Democrats lost more than a President when Barack Obama left the White House - they lost a party leader. In the US system, the party out of power does not choose a solitary champion to shadow the Presidency in the way a leader of the opposition shadows the Prime Minister in the UK. Instead, leadership concentrates around multiple points at the federal, state and local level - the Senate Minority and House Minority Leaders’ offices, popular members of Congress, and high-profile governors and mayors.

Another focus is the chair of the national party committee. The Democratic National Committee (DNC) is the formal governing body of the party and wields immense power over its organization, management, and messaging. Membership is exclusive to state party chairs, vice-chairs and over 200 state-elected representatives. The chair sits at the apex of the body and is charged with carrying out the programs and policies of the DNC. Put simply, they function as the party’s chief-of-staff, closer to the role of General Secretary of the Labour Party than leader of the opposition.

However, the office was supercharged with political salience last year when the then-chair, Debbie Wasserman Schultz, was exposed following a Russian-sponsored leak of DNC emails that showed her leadership favoured Hillary Clinton as the party’s presidential nominee to Bernie Sanders. Schultz resigned and Donna Brazile, former campaign manager for Al Gore in 2000, took over as interim chair. The DNC huddled in December to thrash out procedure for the election of a permanent replacement – fixing the date of the ballot for the weekend of February 24.

The rancour of the Democratic primaries last year, and the circumstances of Schultz’s resignation, has transformed the race into a proxy war between the Clinton and Sanders factions within the party. Frontrunners Tom Perez and Keith Ellison respectively act as standard bearers for the respective camps.

Both are proven progressives with impeccable records in grassroots-based organizing. However Perez’s tenure as President Obama’s Labor Secretary and role as a Hillary booster has cast him as the establishment candidate in the race, whereas Ellison’s endorsement of the Sanders campaign in 2016 makes him the pick of the radical left.

The ideological differences between the two may be overblown, but cannot be overlooked in the current climate. The Democrats are a party seemingly at war with its base, and out of power nationwide.

Not only are they in the minority in Congress, but more than a third of the Democrats in the House of Representatives come from just three states: California, Massachusetts, and New York. As if that weren’t enough, Democrats control less than a third of state legislatures and hold the keys to just sixteen governors’ mansions.

Jacob Schwartz, president of the Manhattan Young Democrats, the official youth arm of the Democratic Party in New York County, says that the incoming chair should focus on returning the party to dominance at every tier of government:

“The priority of the Democratic leadership should be rebuilding the party first, and reaching out to new voters second," he told me. "Attacking Donald Trump is not something the leadership needs to be doing. He's sinking his own ship anyway and new voters are not going to be impressed by more negative campaigning. A focus on negative campaigning was a big part of why Hillary lost.”

The party is certainly in need of a shake-up, though not one that causes the internecine strife currently bedevilling the Labour Party. Hence why some commentators favour Ellison, whose election could be seen as a peace offering to aggrieved Sanderistas still fuming at the party for undermining their candidate.

“There's something to be said for the fact that Ellison is seen as from the Bernie wing of the party, even though I think policy shouldn't be part of the equation really, and the fact that Bernie voices are the voices we most need to be making efforts to remain connected to. Hillary people aren't going anywhere, so Ellison gives us a good jumping off point overall,” says Schwartz.

Ellison boasts over 120 endorsements from federal and state-level Democratic heavyweights, including Senator Sanders, and the support of 13 labor unions. Perez, meanwhile, can count only 30 politicians – though one is former Vice-President Joe Biden – and eight unions in his camp.

However the only constituency that matters this weekend is the DNC itself – the 447 committee members who can vote. A simple majority is needed to win, and if no candidate reaches this threshold at the first time of asking additional rounds of balloting take place until a winner emerges.

Here again, Ellison appears to hold the edge, leading Perez 105 to 57 according to a survey conducted by The Hill, with the remainder split among the other candidates.

Don’t write Perez off yet, though. Anything can happen if the ballot goes to multiple rounds and the former Secretary’s roots in the party run deep. He claimed 180 DNC supporters in an in-house survey, far more than suggested by The Hill.

We’ll find out this weekend which one was closer to the mark.

Louie Woodall is a member of Labour International, and a journalist based in New York.