We have compiled some news, comment pieces and announcements that we hope our readers find interesting. In this instalment, there are stories relating to free markets and patriotism, pharmaceuticals and markets, pay growth, consumer spending, public attitudes towards capitalism and free enterprise, the environment, and artificial intelligence and the stock market:

 

America’s new ‘patriotic’ capitalism (Financial Times)

The American government has bought a 15% share in MP Materials, a company that aims to produce rare earth minerals, and has guaranteed a ten-year price floor for its products. This is an interesting move in a country traditionally considered committed to free markets and is likely based on security concerns and the dearth of rare minerals supplies in the United States. It is perhaps also reflective of a wider shift in thinking within the administration, towards a more mercantilist outlook – at least with regard to security – particularly in view of China’s domination of the global supply of rare earth minerals, such that the government feels that in order to compete with China, something more than free market forces alone will be needed. An implication of this is the possible emergence of a new paradigm of ‘patriotic capitalism’ – a factor that investors may need to take into account when valuing assets in future.

 

Britain can’t win its fight against Big Pharma (The Spectator)

Recent reports surrounding the increased price of weight-loss injections and the Health Secretary’s claims regarding drug pricing reveal some interesting trends and phenomena in the market for pharmaceuticals. One is that negotiations between pharmaceutical companies and governments naturally involve a series of overlapping but not identical interests. Another is that NICE (the government health body) has been slow to adjust the figure that it is willing to spend on drugs for the National Health Service, which naturally leads to disputes with suppliers. In addition, the manufacture and supply of drugs is heavily regulated, which means that developments are slow and market principles are heavily skewed (particularly by certain forms of purchase arrangement). In addition, President Trump’s insistence that the United States should not be paying more for pharmaceuticals than other developed nations is likely to increase prices for other buyers. Where development costs are vast and prices appear likely to change, discounts for a relatively small buyer might be hard to secure, so is reform needed to the way in which prices are agreed and drugs purchased in the UK?

 

Britain’s jobs market has a slow puncture (The Economist)

With wage growth at around 5% per year and inflation above the Bank of England’s target (at 3.8%), the UK could arguably benefit from a softer labour market, but recent government measures increasing the minimum wage and lowering the threshold at which employers pay National Insurance, while also increasing the rate appear to press down on demand by increasing costs for employers, particularly when hiring lower-paid workers. So far there appears to have been no increase in redundancies, but vacancy rates are falling. Some employers are passing on costs to customers but others are simply not taking on new staff, not replacing leavers, or are making greater use of self-employed contractors.

 

UK pay growth close to four-year low (The Times)

According to figures from Incomes Data Research, average pay growth across the economy fell to 3% for July and August, an indication of an increase in available employees and slowing demand for workers:

 

UK should stop investing in carbon capture for power, government adviser says (Financial Times)

The Chief Executive of Octopus Energy (and government adviser as a member of the Industrial Strategy Advisory Council) has claimed that the UK government should stop investing in carbon capture technology for energy production. His argument is that in sectors where carbon abatement is difficult, carbon capture has a place, but for energy systems it makes more sense simply to burn gas unabated in order to reduce costs. As prices fall, green technologies such as heat pumps will become cheaper and will drive emissions reductions.

 

America’s middle-class spending power withers to historic low (The Telegraph)

According to Moody’s Analytics, households in the United States earning between $60,000 and $150,000 annually have seen the largest fall in their share of the national economy of any income group, as measured by consumer spending. The middle class now accounts for 28% of total consumer spending (down from 37% in 2002), while those in the top 10% of earners (earning over $250,000 per year) now account for 48%. Spending by those on the lowest incomes has fallen from 12% to 9%. All of this suggests that while globalisation increased overall wealth, middle class jobs in America suffered.

 

Image of Capitalism Slips to 54% in U.S. (Gallup)

Americans remain more favourably disposed towards capitalism than socialism, though the positive attitude towards captialism has slipped to 54% of those polled from a figure more typically around 60%. Negative attitudes towards socialism remain constant at around 57%, as do positive attitudes at around 39%. The outlook among Republicans is largely fixed, while among Democrats, the proportion viewing capitalism favourably has fallen to below half. Americans remain overwhelmingly positive about free enterprise (81% in favour) and small business (95%), but attitudes towards big business are in decline, with 37% viewing it positively and 62% negatively.

 

What if the AI stockmarket blows up? (The Economist)

Have investors over-reacted to the capacity of AI to increase productivity? Are we witnessing an investment bubble based on hype over the technology’s capacity to transform the economy? Perhaps so, if returns have so far been disappointing relative to the scale of investment. Nevertheless, there have been numerous bubbles in history surrounding technologies that went on to become essential parts of everyday life (such as electric lighting). The question, perhaps, surrounds the nature of any investment bubble surrounding AI and what kind of crash – if any – might follow. Perhaps the significant determining factors are what sparks the exuberant investment (new technology or perhaps government regulations or taxes), the scale and durability of the capital deployed, the use that the invested capital is put to (whether it results in something useful to the economy more widely) and who bears the losses when the bubble bursts. On these criteria, the apparent AI bubble seems relatively modest at present – though the scale of expenditure could be enormous if one considers the need to invest in data centres to make further development possible. It is also true that politicians have fuelled investment begun by technological innovation. Perhaps the most worrying question is where the losses of any crash might fall: on tech companies and institutional investors, certainly, but with the wealth of richer households heavily exposed to the stock market, as is the case in the United States at present, there are serious implications for an economy whose growth has of late been driven to a significant degree by consumer spending on the part of the wealthy.