Saturday, 2 April 2016

The steely view on steel

Steel has hit the headlines again this week with the news that Tata Steel is withdrawing from the UK market. The media has been full of 'facts' all week - almost none of which stack up to any sort of scrutiny. It's been like watching a Trump rally - high on rhetoric and emotion, low on cold hard steely analysis.

I've been disappointed with the response of the Labour party, which has been exceptionally emotional. Steel is clearly totemic to the current people in power in a way that Woolworths, the textile industry and numerous other obsolete operations that have closed over recent years are not. That I find particularly puzzling - there seems to be more going into steel than into supporting junior doctors. But then I find their obsession with 'manufacturing' pretty quaint as well - by which they clearly mean metal bashing jobs producers rather than near fully automated robotic operations like, for example, the Amazon distribution system. (which is in the distasteful service sector - like advanced high tech software, computer chip design, graphic design, advertising. All areas the highly creative Brits excel at).

The feeling that the current Labour leadership are living in the late 1960s just continues to grow and I find that worrying. It clearly appeals to a small number of people, but that economic and political attitude just doesn't seem to take into account 21st century problems.  It needs to evolve and quickly.

The biggest issue with the steel crisis is of course the loss of jobs and income to the people living and working near the Port Talbot factory. This is a terrible human tragedy that has to be dealt with and quickly. But this just throws into relief the problems with the current way we operate our market system and how that fails to help people impacted by obsolescence. The questions it raises are numerous and challenging.

Why do we have a homeownership system that relies upon people getting recourse mortgages for houses? Why haven't we got an advanced rental sector? What will happen in Port Talbot is the same as has happened elsewhere in the country hit by industrial decline.  The central employer in the area closes and people lose their jobs. They can't meet the mortgage, and they can't get rid of the house because nobody is buying any more. Our mortgage system doesn't allow people to hand the keys back like the US system, nor does it allow them to convert to renting. They have to go through bankruptcy and lose everything before they can move on. So they end up trapped due to a monolithic employment model, and a housing system that relies upon prices only ever going up.  There is no purchaser of last resort in the housing market, and no mechanism by which houses can be recycled. Instead you end up with a housing system that ends up increasingly looking Cuban Car ownership - propping up ancient structures because there is nothing new of quality being constructed and nowhere to construct them.

Why do we have company pensions in an era when companies come and go, merge and emerge, restructure and change ownership? They are an anachronism from a time when companies survived for decades. A modern company can't shoulder a pension scheme any more than they can shoulder a university to train their staff. It has to be moved elsewhere in the system to an entity that is likely to last a lifetime.

Why do we have pensions operated by insurance companies when they come and go in the same fashion? They simply cannot pay out on their pension promises unless they are provided millions and millions of pounds of indexed-linked savings certificates with the government - an inherent subsidy of the private system. Even then they need to receive 'compulsory contributions' enacted by parliament to keep them going. When you look at the accounts of a pension fund, there can be no doubt that it is simply a privatised tax collection system. It's there in the income and expenditure statement.  The funds of the current savers pay the pensions of those drawing, plus a top up (index linked mostly) directly from the state. Why do we have this complicated system, rather than just paying people directly like we do the state pension and taxing as necessary? That would free up tons of resources in the financial sector for other uses.

Rather than putting forward ideas about how Port Talbot can become the beacon for a modern market system that can recover from the inevitable failure of businesses, Labour are back to their 'nationalise' position. It's perhaps a credible angle to take - if we had an independent UK - but in our current situation the rhetoric just highlights the conflicted position Labour has on the EU.

You can't blame Chinese steel for the problem because the EU commission spent eighteen months investigating the situation and decided that a ~16% 'anti-dumping' tariff on Chinese steel was sufficient to make it cost equivalent to EU steel. So the problems with Port Talbot are either endemic due to its lack of competitiveness, or the problems are with the EU commission making a mistake on their calculations.

You can't really blame the Tories for 'blocking' higher tariffs, because they didn't. What they did is refuse  the transfer of more ex officio powers  to the EU commission - because they don't need them. For the 'lesser duty' rule to have any impact there has to be a 'lesser duty' calculated in the first place. Which the EU commission did - at 16%. The question should be, again, why is that tariff at 16% and why has no EU commission tariff ever been applied retrospectively.

The Tories are taking the 'blocking' line on the chin, because being Europhiles themselves they can't really draw attention to the huge tariff cock up at the unelected EU commission that is decimating the steel industry across the EU. Nor the clear grab for power from the EU commission - which wanted ex officio powers to apply tariffs even if no complaint had been received from a resident on a member state. What's really funny is that the change is opposed by 14 out of the 28 EU member states, as this document shows. Austria, Belgium, Cyprus, Czech Republic, Denmarks, Estonia, Finland, Ireland, Latvia, Malta, Netherlands, Slovenia, Sweden and the UK. Yes that's half the states in the union. You'll struggle to find that in the media reports.

If you're an EU fan, then you can't really call the UK steel industry strategic. The EU is the second largest manufacturer of steel on the planet. There is plenty of 'strategic' supply within the union even if Port Talbot goes. Saying UK manufactures need a UK steel works is like saying English manufacturers need an English steel works because they can't rely on the Welsh.

Outside the EU all this would be moot. The UK government could respond to the latest Chinese tariffs directly and rapidly without 18 month investigations and on a basis that covers UK businesses from unfair competition and reinforces our green tariffs on energy use. All while sticking to the letter of the WTO rules, if not the spirit - just as everybody else does.

Outside the EU nationalisation would likely be a foregone conclusion - to allow restructuring at the very least. Inside the EU it is virtually impossible because it is severely discouraged by the treaty and the commission. Many Europhile labour supporters are desperately trying to show that the treaty allows nationalisation, but the decisions of the ECJ and the view of the EU commission are against that interpretation. As the FT reported:

In January, Margrethe Vestager, competition commissioner, announced an investigation into €2bn of state support that the Italian government gave to the struggling steelmaker Ilva. 
On the same day, she ordered the Walloon regional government in Belgium to recoup €211m provided to steel companies in the country’s depressed industrial southern regions that are part of the Duferco group.
In its statement at the time, the commission declared flatly that “EU state-aid rules do not allow public support for the rescue and restructuring of companies in difficulty in the steel sector”. This was “to ensure a level playing field for those steelmakers that have already been carrying out painful and costly restructuring plans funded through private resources”.
You can't really get clearer than that. Professor Danny Nicol has put forward numerous articles showing how embedded neoliberalism is within the EU treaty and that those on the left believing otherwise are largely deluding themselves. There are less emotional counter-arguments, which end up being about trying to put a square peg in a round hole just to try and placate the EU commission. That is going to be very difficult when the EU commission is flat against what you are trying to do. So again the Labour party is tying its hands by backing the EU and ends up getting into contradictory positions that simply cannot be resolved.

Moreover saving jobs in steel in Wales means that the worldwide over-production of steel continues, and that the jobs must be lost elsewhere. How does that sit with internationalism and 'solidarity'? There is no plan to increase the demand for steel by building steel using things (except Trident, but that can't use the steel made in the UK because it apparently isn't the right quality.).

Port Talbot is a warning on many levels that we have no mechanism in place to handle obsolescence,  failure or de-growth either on a regional or national level. And it is a warning that centralised EU level responses just don't address the problem at all. In steel the EU has utterly failed its people, and then used the crisis as an excuse for a power grab.  Quite outrageous.

The problems at Port Talbot are probably terminal for the 100 year old plant. The usual British issue of lack of investment in skills and automation to produce higher quality products bites again. Automation costs jobs, and UK manufacturing is often reluctant to take the risk if it means a redundancy round. So they muddle on until the whole thing finally collapses as other countries build new plants with the automation built in. Port Talbot is a combined plant and hopefully parts of it can be saved to work with imported steel, but it may be the case the whole thing is doomed. Certainly anybody looking at the books has walked away and that suggests there are serious issues.

It's very difficult to maintain a low technology steel making plant if you are not next to the source of ore and coal. The virgin steel plants in the UK can't even use the ore that remains in the ground in the UK, and have relied upon imported ore for many years (hence why most of the remaining virgin plants are near, or at a port). There is no arguing with the economics - a boat load of steel is less costly than a boat load of iron ore plus a boat load of coal.

In the UK our steel industry needs to be scrap recyclers and formers for the hot products, which likely need to be somewhere on the main transport intersections, and cold formers at the ports. That is likely sustainable. You would need detailed input from industry and market specialists to work out the best structure than can actually compete in a global market.

Saving jobs in totemic obsolete loss making industries always plays well to the crowd - right up to the point where you show how much extra tax they have to pay to keep the place going. Maintaining wages above the living wage is always a transfer from somebody, somewhere. You can't continue with the pretence that 'somebody else' is going to pay. The buck stops with the household sector, and they always pay the cost of transfers one way or another.

We would likely be better reshaping the plants and the people into what we need in the future. It does work. Some of the best IT engineers I've ever worked with were ex-steel workers from Sheffield. They were never afraid of a hard days work and certainly never missed the steel plant they had left behind. But that would require admitting that higher value 'service' jobs exist that ex-steel workers are very suitable for.

And it would require finally admitting that there simply are insufficient jobs to go around, that the private sector is structurally incapable of providing them and that we need a state sponsored Job Guarantee scheme to fill in the gap. A guarantee that gives people the opportunity to retrain, all while maintain demand automatically in areas currently with high unemployment. We need a system where people can move around jobs and expect to move around jobs, but where the risk of doing so is reduced to an acceptable level by a more equal income structure, better pension and housing provision and a superior auto-stabilising social security system.

If we are to persist with a market system, then we have to have a market containment vessel that expects failure to happen and controls for it. How many more industrial collapses are required before the lessons are learned?