UK politicians’ ignorance towards immigration gives Juncker credit he probably doesn’t deserve

It’s a tough day when you have to agree with Jean-Claude Juncker. After all, I tend not to see eye-to-eye with those who think the European Commission needs “to be an even more political body.”

But today, Juncker came out strong against Cameron’s proposed cap on EU migration to the UK; which is good, important even:

From The Telegraph:

Mr Juncker said: “I am not prepared to change [freedom of movement]. If we are destroying the freedom of movement other freedoms will fall. I am not willing to compromise.”

He said that any attempts to address the issue of the amount of benefits being claimed by foreigners would have to be in line with current EU treaties.

“Member states are free to take the initiatives they want as long as these initiatives are line with the treaties,” Mr Juncker said.

Here’s the problem – I don’t think I do agree with Juncker; in fact, I have a sneaking suspicion he and I hold the opinion that free movement in the EU should remain uncapped for fundamentally different reasons. I, for one, don’t think migration is complimented by mandates to ensure a universal ‘minimum social wage’ throughout the EU.

Rather, I see free movement as an integral and necessary component of UK economic prosperity, not to mention a huge benefit for communities that both migrants and natives come in inhabit.

Yet on this particular topic, Mr Juncker and I have the same end goal. And his commitment to protecting free movement—rejecting Cameron’s migration negotiations—has taken us another step towards a full-blown referendum in 2017. Such a referendum, described in the most positive light, would be an opportunity for Britons to discuss and debate the implications EU regulations have on the UK (the specifics of trade agreements and vacuum cleaner bans are two topics that immediately spring to mind…). But there is a deep worry on the part of pro-immigration advocates such as myself that many will use the referendum to lock migrants out of the UK as best they can.

The majority of Juncker’s policies fall short of promoting freedom and prosperity—but on migration, at least his end goals are right. And until UK politicians (all of them really, Conservatives and Labour across the board) stop trying to halt the overwhelming benefits migrants bring to the UK, I find myself in unfamiliar waters, with Mr Juncker as my ally.

The tax system is the biggest barrier to growth

Outside of academic papers that too rarely see the light of day, most “research” is unremarkable in its optimism about the state of entrepreneurship in the UK. That’s why the RSA’s Growing Pains: How the UK became a nation of “micropreneurs” caught my eye. It paints a stark picture.

The UK, according to the report, has become a nation of micro businesses, while the proportion of high-growth businesses has plummeted: “UK businesses are becoming increasingly micro in size – reducing the overall potential for economic output and future growth, and increasing the economy’s reliance on a relatively small number of larger businesses.”

Since 2000, the proportion of businesses classified as micro (0-9 employees), as a share of all UK businesses has grown from 94.3 per cent of all private sector companies to 95.4%. This represents an additional 1.4 million micro firms and an increase over the same period of 43%.

“At the same time, the proportion of high-growth enterprises has declined sharply, falling by more than a fifth in the majority of regions since 2005.”

Although the number of high-growth firms is expected to rise over the coming years, the report cautions optimism: “performance is expected to remain below 2005 levels in all regions except London”.

So how can we solve the problem? According the entrepreneurs, the tax system (44%) is the biggest barrier to growth – ahead of a lack of bank lending (38%) and the cost of running a business (36%).

Another problem highlighted by the report is that entrepreneurs don’t know what the government is up to:

“Around three-quarters (73%) of small business leaders also say the Government must make it easier for SMEs to access the right information and support for growth. While several of the Government’s recent incentives to support SMEs are designed to address the top-cited barriers, perhaps this information is not reaching the people who need it the most.”

Two polices are put forward in the conclusion to help entrepreneurs. First, “continued reform of the apprenticeship scheme could help micro firms to grow out of this business size category”. Second, “more tax relief like the National Insurance holiday could also pay real dividends.” It would be worth exploring the former in detail (something I plan to work on), but I don’t think another NI holiday goes nearly far enough: Employers’ National Insurance should be scrapped entirely. And no just for small businesses.

Being an entrepreneur is tough. As the report points out, “the majority (55%) of new businesses don’t survive beyond five years.” Scrapping Employers’ NI is the logical place to start.

Philip Salter is director of The Entrepreneurs Network.

R&D’s great but why a target for spending on it?

R&D’s just lovely, it is, after all, how we develop the new technologies that are such an important part of economic growth. But we do hesitate a little bit when people start to say that we should have targets for spending upon something, whether it be R&D, poverty alleviation or education:

A “bold strategy” is needed to remedy weaknesses in Britain’s supply chain, according to the CBI, in a push to create 500,000 new jobs and boost the economy by £30bn.

The CBI feels a long-term target of 3pc of gross domestic product for public and private sector spending on research and development would underpin a turnaround over the next decade.

It’s all a bit never mind the quality, feel the width, isn’t it? For it’s not actually true that devoting more resources to something is desirable: what we want is more output of whatever it is from the resources that we do devote to that thing. We could describe this as being almost Stalinist: don’t worry about how good each car is but just weigh how much steel we put into each one! Or, another way of making the same point is that GDP, the thing we use to measure economic growth, is actually measuring value added in the economy. Except when we come to talking about government of course. There we’ve no idea what the value added is so we just assume that the output is worth the value of the resources devoted to producing it.

That’s not an assumption that holds true in the real world of course: and so it is and would be with R&D spending. How much we spend on it isn’t the interesting or important point: how much cool new stuff and shiny shiny we get from spending on R&D is.

The report shows a lack of investment in research and development, along with a growing skills crisis, has weakened “foundation industries” such as plastics, metals and chemicals.

It is also calling for a change in research tax credits to help innovation and incentives to encourage more graduates to take science, technology, engineering and mathematics (STEM) degrees.

Creating a national materials strategy to protect and enhance critical supply chain sub-sectors and doubling the budget of Innovate UK are among other measures in the CBI programme.

It all does smack rather of that old industrial planning, doesn’t it, where success is measured by resources consumed rather than the value of the output.

Finally, as an aside, encouraging more people to take STEM degrees is very simple indeed. The employers of those who graduate with STEM degrees should increase the wage they pay to those with STEM degrees. Rather than demand that the State subsidise the creation of a willing workforce.

Tired of London?

Samuel Johnson famously pronounced: “when a man is tired of London, he is tired of life”. This isn’t the end of his statement though, he added: “for there is in London all that life can afford.” But what if you can’t afford life in London? Surely then it is time to up sticks and move to a cheaper city.

According to a poll from the Supper Club, the network for entrepreneurs turning over £1m or more, 40pc of London-based business owners have considered moving their operations.

More than a third claimed that the cost and inefficiency of London’s public transport system is holding back businesses, while 40pc said that the cost of housing is driving away the best talent. With house prices in London reaching an all-time peak, business owners have warned of a “brain drain”.

The Supper Club, which represents 330 entrepreneurs from a range of sectors, found that 79pc of respondents fear a skills crisis within five years.

Of course, for as long as London remains a leading world city – at the cutting edge of finance, business and culture – it will remain a pricey place to live. After all, there is a flipside of the economies of amalgamation – some stuff, like housing becomes more expensive. And yet, there can be no doubting that house prices are hitting crisis point. For Generation Y, many can’t foresee how they will ever be able to own property in the capital. London’s big divide is between the owners and the renters and successive governments’ failure in allowing more houses to be built is squarely to blame.

To give you a sense of the crisis, Shelter’s model predicts that fewer than 1 in 5 of London families will be able to become owners by the age of 65 if prices inflate as they have done in the past.

As the LSE’s Paul Cheshire points out, politicians haven’t stepped up to the plate. The coalitions’ Help to Buy policies are doing little (except pushing up prices), while Labour’s suggestion for partial controls on rents, increased security of tenure, and elimination of agent’s fees for finding housing for renters, will probably just decrease rental supply as fewer people want to become landlords.

Cheshire believes “nothing short of radical reform will improve housing affordability. But radical reform, like intelligently loosening restrictions on Greenbelt building, is frightening.” Affordable, more stable house prices should be the policy goals of all political parties. This requires a more liberalised system, whereby the demand for housing would impact its supply.

This generation of successful entrepreneurs may be able to live in London but their employees increasingly can’t. And crucially, for the wealth of this nation, the next generation of entrepreneurs may have already moved to a city where the cost of living isn’t prohibitively expensive – and my first pick wouldn’t be the UK.

The risk tolerant benefit more from entrepreneurship training

Policymaking always utilises a broad brush with which to redraw the lives of individuals. However, though broad, with the right evidence this brush can be narrowed by taking account of the heterogeneity of human behaviour.

Just consider the many and varied schemes designed to support entrepreneurs. Putting aside the debate over whether or not this is the best use of tax revenues, nobody could deny that if we are to spend money on promoting entrepreneurs we should do so in most efficient way.

In “Entrepreneurship Training, Risk Aversion and Other Personality Traits: Evidence from a Random Experiment”, Robert W. Fairlie and William Holleran from the University of California draw on data from Growing America through Entrepreneurship (Project GATE), the largest randomised control experiment on providing entrepreneurship training ever conducted in the United States. Fairlie and Holleran find that:

[I]ndividuals who are more risk tolerant benefit more from entrepreneurship training than individuals who are less risk tolerant. The estimated interaction effects are large: averaging our estimates across the three waves implies that individuals who have a one standard deviation higher level of risk tolerance experience a 2.9 percentage point larger increase in business ownership and a 3.7 percentage point larger increase in the likelihood of starting a business from receiving the treatment than individuals with the lower level of risk tolerance.

This is a useful insight and suggests that we should consider identifying specific groups that may benefit more or less from government programmes to help people start a business. There can be no sure-fire way for spotting the next Zuckerberg, but we can increase the odds. Interestingly, Fairlie and Holleran also find “no evidence that individuals who are more innovative benefit more from entrepreneurship training than individuals who are less innovative.”

As the paper states: “some of the most disadvantaged groups such as at-risk youth and individuals with a criminal background have high levels of risk tolerance, and thus might benefit more for entrepreneurship training than more traditional job training programs.” There might be something in this: John Timpson has found ex-offenders fit in well with his unique entrepreneurial, bottom-up model for running his high street retailer.

As things stand in the UK, we have a remarkably limited understanding whether the schemes used to support entrepreneurship are doing any good. According to Gov.uk, business owners have 278 schemes to choose from. With proper analysis it might turn out that this is the correct number and they are being targeted at exactly the right group in the most efficient way. But I doubt it.

Philip Salter is director of The Entrepreneurs Network.