Jeremy Warner's Outlook: As the world economy falters, Greenspan, the grand illusionist, faces his Waterloo

Everyone's ducking the pensions issue - BT must beware the regulatory backlash
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The Independent Online

Fast forward 20 years and how will historians come to judge Alan Greenspan, chairman of the Federal Reserve? As things stand, Mr Greenspan's report card reads "outstanding performance so far, but jury still out on the final verdict". Last night, the Federal Open Markets Committee raised short-term interest rates in the US for the eighth time in a row, continuing the gradual, or "measured" approach to tightening it began in June last year.

Fast forward 20 years and how will historians come to judge Alan Greenspan, chairman of the Federal Reserve? As things stand, Mr Greenspan's report card reads "outstanding performance so far, but jury still out on the final verdict". Last night, the Federal Open Markets Committee raised short-term interest rates in the US for the eighth time in a row, continuing the gradual, or "measured" approach to tightening it began in June last year.

Just to put this in perspective, even with the Fed funds rate now at 3 per cent it is still "only" 2 per centage points higher than a year ago. By historic standards, rates remain incredibly low. Yet even at this level of interest rates, with inflationary pressures apparently building, US growth continues to look fragile. It's going to be hard to raise rates much further without sending the economy into a tailspin.

Back in Britain, we are seeing something of the same phenomenon. Interest rates remain low by historic standards, but the economy seems extraordinarily sensitive to anything higher. Just six months ago, everyone was talking about the return of inflation. Now the City wonders whether we have not already reached the peak of the interest rate cycle. Retail is suffering some of its worst trading conditions in years and manufacturing seems to be slipping back into recession.

With Mr Greenspan, the question is whether he can ever now hope to wean the US off its addiction to low interest rates. With the benefit of hindsight, it is now obvious that he ran far too lax a monetary regime throughout most of the 1990s. The policy of easy money helped stoke the extremes of the dot.com bubble.

Too late, he began to tighten, only to find that the economy - eventually completely unhinged by September 11 - was slipping into recession. Rates were again put sharply into reverse, but continued growth has been achieved only at the cost of mountainous current account and budget deficits and an ever growing housing market bubble.

As he tightens once more, Mr Greenspan again finds the economy beginning to suffer. The magic is beginning to wear thin, and, like an illusionist whose sleight of hand is uncovered, scepticism is now palpable: Mr Greenspan may have succeeded only in delaying the pain, not in removing it.

This is, of course, the $64,000 question of economic debate right now, or should that be $64 trillion? Can Mr Greenspan succeed in engineering a soft landing for the US economy, where there is gradual correction of the present imbalances, or has he lost control of the aircraft as it careers towards the runway? The judgement of history awaits.

Everyone's ducking the pensions issue

Pensions have barely figured as an issue in the election campaign, which given their importance to an ever growing proportion of the population is perhaps odd. Is this because they are too depressing to think about, or because the differences between the parties are too esoteric and marginal to be of interest?

A bit of both seems to be the answer, so we should perhaps be grateful to the OECD for reminding us in a new tome published over the weekend just how big an economic threat the pensions "time bomb" really is, not just to Britain, but across the world.

The bar chart on page 62 showing state pension provision as a per centage of average, pre-retirement net salary among 30 OECD nations neatly illustrates the nature of the problem. As things stand, Britain has an affordable state pensions system, but also one of the meanest. Given that we are now towards the top of the leader board in terms of per capita income, that looks something of an indictment.

With many other countries, the problem is the other way around. Many of those with much more generous levels of state pensions provision almost certainly can't afford it. As the population ages, the burden will become economically crippling.

In Britain the challenge is how to extend the level of pensions provision in an affordable way. In other countries, the challenge is how to reduce it without provoking a revolution. Little doubt, then, about who is in the greatest political difficulty. Britain's pensions challenge is a comparatively easy one.

In the past, the meanness of basic state provision in Britain has been compensated for by relatively well funded private sector pension arrangements. Much has been written and said about the way Labour has pole-axed the final salary pension scheme, and most of it is fair comment. Yet the truth is that even with the most benign regulatory backdrop in the world, there is virtually nothing that could have been done to halt the decline of widely available, defined-benefit pension arrangements.

This is not just because low rates of investment return and greater longevity have made them unaffordable. The changing nature of employment, with greater labour mobility and enhanced competition between businesses, has also undermined the old paradigm where employees were happy to accept part of their benefit as deferred pay. Even in quite high income groups, not enough is being saved to pay for a decent retirement. Among the lower paid in the private sector, the situation is beyond repair.

So if Britain has an affordable but a financially inadequate pensions system, what's the answer? In his interim report, Adair Turner, chairman of the Pensions Commission, presented the options starkly. Either pensioners will become poorer relative to the rest of society, or taxes devoted to pensions must rise to pay for a more generous state system, or private pension saving must rise, or average retirement ages must rise.

Politically, this is a pretty unappetising choice. Among the main political parties, the Lib Dems come closest to choosing one of these options, which is to increase the size of the state pension to a basic living wage, but they don't properly explain how they will pay for it. The Tories don't address the issue of the inadequacy of present arrangements at all as far as I can see, while the Labour approach, in so far as they have one, is means tested income support, which everyone agrees acts as a huge disincentive to saving and still leaves British pensioners trailing their overseas counterparts.

The Labour government promises to declare its hand once it has seen Mr Turner's final report, due in the summer. Yeah, right. What is not an option, according to Mr Turner, is to do nothing at all. The demographics are catching up with us. Unfortunately, it is this non-option which the Government is all too likely to pursue, assuming it is re-elected. Politicians and long-term thinking don't readily mix.

BT must beware the regulatory backlash

As a footnote to British Telecom's decision to freeze Marconi out of the bidding for £10bn of spending on network renewal, it's worth remembering that BT is still a highly regulated company and it may not have been entirely wise to alienate the political establishment in this way.

Ofcom is an independent regulator whose present review of telecoms regulation shouldn't in theory be influenced by BT's spending decisions. The two things have little, if anything, to do with each other. Yet there may be some impact at the margin. If BT won't even buy British anymore, what's the point of it? Why should BT continue to enjoy what remains of its old monopoly if it is not prepared to put anything back? Break the company up and be done with it, might be one reaction.

There is little to indicate Ofcom might follow this course. To the contrary, part of BT's case against an enforced break-up is that it wouldn't be investing in the network at all if wholesale were denied the guaranteed business it presently gets from retail. Yet for a company that still relies so heavily on regulatory favour, it may not pay to fan the flames of controversy quite so vigorously.

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