Are EU scared?

One of the greatest fallacies of the Scottish independence referendum was that Scotland was being offered “independence”. Yes, we would have been independent in many respects. But the undisputed plan was to immediately begin re-acceding to the European Union. 

Whatever this meant – from fulfilling requirements to become a member again to no longer being one of the big players (usually meaning France, Germany and the UK) with a greater say than the other nations – we certainly weren’t going to be independent. 

It was not only concerning to witness it seldom questioned by Scottish people that we would be rejoining the EU – despite expecting an in/out EU referendum as part of the UK – but it is concerning, too, that the majority of pro-EU politicians don’t want to reform it or even to achieve a better deal for Britain.

What is more, there is a lot of scaremongering going on as fans of the European project say we couldn’t survive without many of our decisions being taken in Strasbourg. 

A new report authored by Ewen Stewart, Stuart Coster and Brian Monteith seeks to dispel the myths about the UK’s survival without the EU and explains why a Brexit would not bring economic isolation to the UK as scaremongering claims by politicians suggest.

The paper has five arguments to show why often-repeated political claims are intimidating the British electorate into shutting their minds to the possibility of change and preventing a rational debate taking place:

1. In reality, the EU is more dependent on being able to export to our significant market than we are on selling to the European Single Market.

2. There is a real threat to UK employment, influence and broader prosperity if we do decide to remain an EU member.

3. Our future economic well-being depends instead on gaining access and selling to the faster-expanding markets that lie beyond the EU.

4. Employment growth would be even stronger if Britain was free to adopt bilateral arrangements of its own, outside membership of the EU.

5. A growing percentage of cross-border issues and regulatory requirements are determined now by bodies at the global level.

A lot of research is looked into about the UK’s performance in comparison to that of the European Union. And the conclusion reached is that British jobs are not dependent on the EU and so this is no reason to leave. Jobs would in fact be gained by leaving the EU.

The UK has performed much more strongly over the last 6 and 12 year time horizons that EU averages while 14 out of our 20 fastest growing markets are with non-EU nations.

We have global links with the Americas, Asia and Africa, as well as the Commonwealth, meaning it is perfectly possible that the UK could have good trading relationships with not just our European neighbours but the rest of the world by enabling trade policy to be determined at home.

The political stability of the UK, the English language and the rule of law coupled with secure property rights and a population that is by far and away the most diverse in Europe mean we will always continue to benefit from global growth.

If the Scottish independence referendum is anything to go by – scaremongering a population about change can make the positive arguments shine and usually backfires. Hopefully it does.

Miliband’s zero hours contracts catastrophe

Ed Miliband’s latest attempt to screw up a part of the economy is his proposal to legislate on zero hour contracts:

“If you work regular hours for three months, Labour will give you a legal right to a regular contract, not a zero-hours contract.”

I have no doubt Ed Miliband isn’t ignorant of the fact that such a policy will harm lots of people and help only a tiny few, yet he doesn’t seem to care two hoots – he supports the policy because he knows most people will endorse it based on the help for the tiny few while at the same time being wholly oblivious to the wider harm it will do. If you happen to be one of those few to whom that applies, you’ll be happy. But for the vast majority, the labour market of supply and demand involves an allocation of resources (work and wages) far beyond the scope of any top-down management, and with far more efficiency than state meddling can achieve. Telling employers they must offer a regular contact after three months (a figure seemingly plucked out of the air) can only harm the efficiency of mutually allocated resources. This isn’t anything more than standard first year economics – something politicians seem to be happy to ignore to buy votes.

What Ed Miliband is missing is the most important point. Yes, some people struggle on zero hours – the part of the labour market that contains much of this kind of work is often insecure, unstable and volatile anyway – but the notion that this law will make things better is moonshine. Here’s the key point. The labour market of supply and demand is dictated by numerous price signals that generate all kinds of information about the value of labour, the supply of services, length of contracts, and so forth. A dentist can work in the same place for 15 years doing a similar number of hours each day. A sub-contracted painter and decorator can work at dozens of places in that time, with varying lengths of contract. Selling labour is heterogeneous – and you’re just not going to be able enforce better pay or more stability without damaging a whole sub-section of people in that labour market.

So it’s not that I’m repudiating Ed Miliband’s proposal because I’ve suddenly developed amnesia about the struggles of people’s ability to live or the volatility of the market – I’m repudiating it because its implementation will simply alter the behaviour of employees and employers in the market because the vital price signals of information on which the economy runs will be distorted.

It’s easy to think of zero hour contracts only in terms of employees, and to imagine most employers to be cold, uncaring exploiters. But it distorts the true reality. Economic policies affect employers as well as employees – and employers are the essential providers in this equation. Make a law that helps low earners and you hinder another group (usually low-skilled employers but also other low earners). Make a law that helps tenants and you hurt another group (usually landlords). Make a law that helps Brits and you hurt another group (usually anyone who isn’t a Brit). Nothing comes without a cost.

Employers have lots to consider when they take on people. They have to make forecasts about the future; they have to consider market fluctuations; they have to consider what they should invest; and they have to consider which future state-interference will hamstring them. Zero hour contracts are sometimes opportunities to exploit, but they are mostly opportunities to reduce risk in a frequently unstable market, and create lots of short-term employment.

Think who the beneficiaries might be – students, single parents, those looking for additional employment to top up their main job, and those with multiple part time jobs. The ability to work flexibly as and when they want is a very beneficial thing for them. Ed Miliband’s proposal to ruin theirs and their employers’ flexibility is narrow and short-sighted.

What Ed Miliband also doesn’t understand is that the economic growth is the main vehicle to reduce zero hour contracts for those not happy with them. The reason being job growth increases the necessity for employee stability, which will only diminish the allure of zero hour contracts for both employers and employees, because employers are going to want stability in their personnel. Moreover, as unemployment rates fall and job creation continues to take place, greater power is transferred to jobseekers, which places selection pressure on firmsoffering less desirable contracts. Ironically, Ed Miliband’s proposal will uproot some of the stability in the market, which will more than likely go on to have a cobra effect type scenario whereby he contributes to an increase in zero hour contracts – the very opposite of what he’s trying to do.

The state’s role is to reduce the tax burden for people on low incomes or in volatile parts of the market, and give them the financial help they require, leaving those vital price signals untouched.

Erm, this one is interesting

So Prof. Tim Besley of the London School of Economics, former All Souls Prize Fellow, ex-member of the Bank of England’s Monetary Policy Committee, the UK’s third most respected economist, and all-round impressive smart guy, has a new paper with Marta Reynal-Querol at the Universtat Pompeu Fabra in Barcelona.

I mention these credentials to emphasise how respected and mainstream these guys are before I mention the finding of their paper, entitled “The Logic of Hereditary Rule: Theory and Evidence” (pdf, seems to be quite an early working paper), which is that hereditary rule/monarchy outperforms democracy but only when the hereditary ruler is subject to few constraints on their power.

Hereditary leadership has been an important feature of the political landscape throughout history. This paper argues that it can play a role in improving economic performance when it improves intertemporal incentives. We use a sample of leaders between 1848 and 2004 to show that economic growth is higher in polities with hereditary leaders but only when executive constraints are weak.

This finding is mirrored in policy outcomes which affect growth. There is also evidence that dynasties end when the economic performance of leaders is poor suggesting that hereditary rule is tolerated only where there are policy benefits. Finally, we focus on the case of monarchy where we find, using the gender of first-born children as instrument for monarchic succession, that monarchs increase growth.

That is: hereditary monarchs with lots of legal power choose better policy than other systems do, including democracies, non-hereditary dictators, and weak hereditary monarchs, and this is reflected in higher growth.

The size of the coefficient suggests that, in a country with weak executive constraints, going from a non-hereditary leader to an hereditary leader, increases the annual average economic growth of the country by 1.03 percentage points per year.

That’s a really really big difference.

Of course, they’re not saying they actually favour hereditary monarchy!

Although we have tried to understand the logic of hereditary rule, we do not regard the findings of the paper as supporting the institutions of hereditary rule. There are many arguments against, going back at least to Paine (1776), about the inherent injustice in such systems. Moreover, the fact that many polities around the world have put an end to hereditary rule and establish strong executive constraints is no accident since this is arguably a much more robust way to control leaders than relying on the chance that succession incentives will safe-guard the public interest.

It depends what you want government to do. If it’s just there to guarantee a basic framework for society then as long as it worked, some sort of non-democratic system might be OK. Our having a stake in the electoral process hardly guarantees good governance (perhaps the opposite).

But lots of people value democracy not just because they think it gives us good policy: being part of a community; as an expression of human equality; an important type of positive freedom. These pragmatic arguments for and against different governance systems are not going to fully convince those types (and that’s fair enough).

Of course the bigger issue is that the paper could easily be proved wrong in the review process, that’s the point of interesting conjectures in working papers. And there’s a whole lot of other literature out there, some of which goes against Besley and Reyna-Querol’s work. But I tend to think that monarchy vs democracy is an empirical question. Whatever makes us freer, happier, richer is best.

The democratic cycle

Just as the business cycle seems to punctuate times of economic growth with periods of stagnation or recession, so there appears to be a political cycle in democratic countries, a cycle that features times of economic consolidation and progress with those of profligacy, deficit and debt.

In some countries a centre right government coming into office institutes policies that rein in spending and encourage the growth of the private economy. Supply side policies aid business development and expansion, and tax cuts increase rewards and act as incentives to economic expansion.

The growth that often follows the policies can lead to the re-election of the government that implemented them. The feel-good factor of improving standards, higher wages and inflation under control can enable such a government to secure re-election.

Memories are short, however, in the democratic cycle, just as they are in the business cycle. People come to take wealth and growth for granted, and to be less prepared to continue with the policies that led to them. People grow careless and are more ready to take political risks.

Quite often a party that proposes to concentrate on distributing the new-found wealth rather than on continuing to grow it, appeals to the electorate more than the one whose policies helped bring it about.

The centre-right government is replaced by one that leans more to the left. It sets about expanding benefits and growing the public sector. It tries to exact more from private business by increasing taxes. It needs to fund new programmes and borrows money in order to do so. For a time its largesse is appreciated, but increasingly investment and business find it harder to flourish in the new environment it has created.

Growth slows down, the economy grows sluggish. People begin to feel less secure and less wealthy. They begin to question the competence of ministers who seem unable to manage the economy. The left-leaning government sometimes wins its first re-election after a term in office, but often with less enthusiasm than that which first put it there.

The economy stagnates under the impact of inappropriate policies, and a centre-right government is sometimes then elected to clear up the mess. It implements the policies that encourage investment, applies fiscal responsibility, and makes it easier and less costly for firms to take on new employees. Gradually the economy recovers, and the democratic cycle begins once again.

It might be a feature of democratic societies that whenever wealth and growth are created, a popular party will eventually secure election on the basis of promises to redistribute that wealth. The less well-off can always outvote the more well-off. It means that instead of a steady continuation of policies that allow the economy to grow, there is more likely to be a staccato, with periods that help the economy alternating with those that stunt it. This is more about politics than it is about economics.

The Spending Plan, courage, and politicians

A ring-fenced National Health Service, a bill poised to commit future governments to spend 0.7% of GNI on international aid, a triple lock on pensions, senior military figures pushing for commitments to higher defence spending: these are inauspicious times in which to contemplate cutting the UK’s £77 billion structural budget deficit, but contemplate we must.

Aside from the velleities and equivocations of the political parties when it comes to their respective deficit reduction plans (and most other things besides), the Taxpayers’ Alliance has today released their Spending Plan, which comes as a substantial contribution to the debate. The Spending Plan’s first goal is modest: to lay out a menu of cuts which would take public spending to 35.2% of GDP by 2019-20 – the level forecast by the Office for Budget Responsibility – its second more radical, to outline further measures which would cut spending to 31.7% of GDP, a level at which a single income tax of 30% could be implemented.

Despite the reasonableness of its first end point, or perhaps because of it, the Plan makes for sobering reading. An implementation of the first, less stringent, programme would, among other things, see the abolition of no less than three government departments (the Department for Business, Innovation and Skills; for Culture, Media and Sport; and of Energy and Climate Change), an end to national pay bargaining in the public sector, and a sizeable cut to Scotland’s grant from the UK government.

While the numbers add up, the issue is likely to arise in finding a politician willing to implement the proposals. As the TPA’s Chief Executive, Jonathan Isaby, puts it:

Our Spending Plan honestly sets out the savings that need to be made by whichever party or parties take power after the election. Today we challenge our political leaders to accept our plan or to produce a similarly rigorous set of proposals of their own which explain where it is that they would reduce spending instead.

The report recognises that reduced spending and deregulation are of no importance if they don’t lead to people being better off in the long run, and makes the welcome case that making the state leaner is desirable for reasons other than deficit reduction. David B. Smith sets out the case that market economies grow faster, while the ASI’s Director, Dr. Eamonn Butler, makes the ethical argument for lower taxes.

Despite the size of the challenge that future governments face, that markets have confidence in the UK’s ability to get its debt under control might serve as good evidence that all is, in fact, not lost. However, politicians would do well to come to the realisation that, whether those set out in The Spending Plan or not, radical decisions about the role of the state must be made; we can only hope this research helps them do that.