In praise of Britain's flexible labour market

We would not say that the overall picture here is desirable - no one does actually want to have a close rerun of the Great Depression. But the specific response of the British economy here is excellent. And this specific response is something that we've been working toward for some decades now. It's a result of Britain's hugely flexible labour market and it's one of the reasons why we made all those reforms in order to gain a hugely flexible labour market.

But of course, some don't understand this or, perhaps, would just like to find something to complain about:

Britain has suffered a bigger fall in real wages since the financial crisis than any other advanced country apart from Greece, research shows.

A report by the TUC, published on Wednesday, shows that real earnings have declined more than 10% since the credit crunch began in 2007, leaving the UK equal bottom in a league table of wages growth.

Using data from the OECD’s recent employment outlook, the TUC found that over the same 2007-2015 period, real wages grew in Poland by 23%, in Germany by 14%, and in France by 11%. Across the OECD, real wages increased by an average of 6.7%.

The TUC found that between 2007 and 2015 in the UK, real wages – income from work adjusted for inflation – fell by 10.4%. That drop was equalled only by Greece in a list of 29 countries in the Organisation for Economic Cooperation and Development (OECD).

If you look only at that then of course that is terrible. Signed sealed and delivered - an appalling outcome. But of course we should not look only at that, we also want to look at unemployment.

And there the British economy has done quite startlingly well. Unempl;oyment here is 2.5 percentage points lower than in Poland for example, well under half that for the eurozone as a whole and in Greece it's well over 25% compared to our shade under 6% (according to those OECD numbers which are not entirely up to date).

The point being that when the economy crashes, when GDP falls, there will be one of two reactions. Either wages are flexible and fall, or wages are inflexible and unemployment soars. Under models of previous versions of the UK economy the GDP fall that happened would lead us to expect unemployment to balloon out to 4 million, 5 million. And many people did so predict.

Instead, what happened? Wages took the hit, not jobs.

Of course, the GDP fall is not desirable in the least. But it having happened which would we prefer? Wage falls or mass unemployment? And the reason we worked so hard, starting under Thatcher of course, to have a flexible labour market was so that we could gain this result. Perhaps a crude calculation but better that 100% of us lose 10% than that 15% of us lose 100% of our incomes.

Thus this result can be seen as a surprise, yes, but a welcome one. We have managed to alter the economy so that if, as and when, there is that undesirable economic pain we now spread it, share it, rather than dumping it upon those who lose their jobs.

Isn't it lovely when a plan works?

The EU: It’s not too late

David Cameron rightly claims successes, Free Schools and Gay Marriage for example, but posterity will regard the main outcome, the EU, as a failure. Cameron began with a switch to an EU political party with no clout; potential allies were not cultivated; the UK was isolated in the wrong fights and lost in European courts.  The EU’s lack of accountability, both financial and democratic, was not exploited. The pre-referendum “re-negotiation” was John Cleese in the Specsavers advertisement.


The UK civil service, notably the FCO, and EU ministers exacerbated his difficulties, acting as a Brussels Fifth Column.  Even the House of Commons EU Scrutiny Committee under that notable EU sceptic, Sir William Cash, failed to have a single EU Regulation or Directive rejected by Parliament.


The new EU minister, David Davis, will, on past form, show more vision, backbone and imagination. Or let us hope so.  The key weapon is “subsidiarity”.  Sir John Major deserves more credit than ever received for the Maastricht Treaty which, confirmed by Lisbon, stated that all legislation should be left to member states unless there was a really compelling reason , such removing trade barriers, why the legislation must be pan-EU.  The Commission did not like that one little bit and has ignored it ever since but it remains EU law.


Subsidiarity is equally ignored in Whitehall which prompts legislation at the EU level - less work for them and Brussels gets the blame.  But Cameron should have been better briefed:  much of the sovereignty he was demanding is already on the EU statute book, even though Tony Blair, perhaps in a bid to be EU President gave away the social part of the Maastricht Treaty and increased the UK’s share of the budget without any improvement in Brussels’ financial control.


To secure a favourable Brexit, Davis needs a stronger bargaining position.  Saying the UK buys more from the EU than it sells to the EU is negated by the argument that we are only a small share of EU trade, i.e. they can afford to do without us more easily than vice versa.  The EU strategy for dealing with Brexit (they had one; Cameron did not) is to insist of Article 50 being triggered and a list of UK “demands” before negotiations begin.  Then those demands can be treated as Cameron’s were and we depart with the worst possible deal.


If the UK insists, however, that subsidiarity is put into effect, as we are entitled to do, before Article 50 is triggered, we play to Germany’s worst fear: indefinite delay.  Thousands of directives and regulations would have to be amended or Brussels would have to show the EU courts, for each one, why their pan-EU status is justified.  The alternative would be a quick and dirty deal satisfactory to the UK.


A common market, as has been shown in other parts of the world, no more requires free movement of people than equalising wages or taxes. Only gross distortion of competition should require EU intervention. Subsidiarity and a truly common market, still not achieved forty years on, are the keys to prosperity for for the EU and the UK.

If your enemies define you, Pokémon Go is doing something right

The Pokémon franchise is a testament to the brilliance of consumer capitalism. An innovative and seemingly absurd concept delivered by a multi-national corporation to fulfil desires that consumers did not know they had, spawning a hugely entertaining, and profitable, franchise. 

As someone who grew up in the 1990s, the games, cards, toys, and anime of Pokémon made up much of the wallpaper of my childhood. Amazingly, it continues to fulfil a similar role for subsequent generations as new Generations of games, and the nineteen year-old anime, continue to consistently attract children of any sex and age and, increasingly, adults.

This widespread success probably has something to do with the variety of Pokémon (some powerful, some cute); the distinct goals (you can ‘catch ‘em all’ or create the strongest team); the harmony of continuity and development; and the multiple mediums. 

The release of Pokémon Go, an augmented reality app that allows you to catch and fight Pokémon ‘in the real world’, has been a huge success even by Pokémon’s standards. Downloads in the UK exceeded 5 million in its first week and Nintendo’s stock price has exploded (until new guidance suggested Nintendo won't make quite the revenues they expected from Go). In particular, the game has been popular among adults, such as myself, who played Generation I twenty years ago. 

Although fundamentally based on a simplistic gimmick of throwing balls at small Japanese monsters, Pokémon Go is great fun. This is partly due to accessibility and the ease of play, contrasting with many contemporary games, which develop hardcore cult followings but lock out normal people. Nostalgia value and Pokémon’s inherent mass appeal are also factors. And the fact that the app is free doesn’t hurt. Mostly, though, it is the familiar (Pokémon) being used in conjunction with the novel (augmented reality gaming) that has made the game an explosive success. 

Not unexpectedly, with great success has come great resentment. A legion of rag-tag undesirables has lined up to express their fear and loathing of Pokémon Go. Every species of misanthropic misery-merchant, including religious fanatics, anti-capitalist clowns, creepy paternalist regulators, busybodies, and envious nobodies, has come out of the woodwork to attack people for having fun.

This is nothing new. All of the worst people hated Pokémon from its inception. It has long been accused of being Satanic/Masonic/Jewish (as, I believe, is the ASI in some circles). Saudi Arabia issued a fatwa in 2001, which has been renewed for Pokémon Go to emphasise that they’re still ridiculous in 2016. Fundamentalist Christians hated its promotion of evolution and Satanism. Moral guardians panicked over violent content. And left-wing pseudo-intellectuals frowned upon its competitive and consumerist ‘gotta catch ‘em all’ ethos. 

Pokémon Go has proven an even greater ire-magnet. Gaming purists are sneeringly disdainful about AR technology taking off with something as trivial, mainstream, simplistic, and lowbrow as Pokémon. Conspiracy theorists are convinced that the Illuminati/government/corporations have sinister intentions for the data it accesses. Nanny-statists have jumped on exaggerated safety concerns to strangle the game with red tape. The far-left are making vague, vapid noises about AR vindicating nonsensical concerns about alienation and capitalism. And Internet identitarians are desperate to prove that Pokémon Go, like everything else, is racist and classist.

I suspect that most of the swivel-eyed hatred towards Pokémon Go stems from bitterness over the benefits it provides and the enormous potential it merely hints at. For puritans, the idea of people actually being happy is offensive. For luddites, the idea of technology making people happy is horrifying. For nanny-statists, the notion that the market can solve ‘social issues’, such as obesity, is terrifying as it makes their existence redundant. And for the hard left, any evidence that capitalism provides any kind of benefits to anyone needs to be explained away and smeared. 

AR can only be increasingly important, innovative, and profitable. Any trial run deserves interest and respect. Pokémon is an ideal fit because it is simple, user-friendly and a tried-and-tested formula. A previous attempt at an AR game, Ingress, was less successful, despite near-identical technology, due to being more complex and lacking brand recognition.

The fact that it is played outdoors and requires players to move around promotes exercise and exploration. The technology could be one of the best ways to keep people fit. It also gets people talking: strangers on the street and the bus have engaged me in conversation about catching Pokémon. Asides from the boost to Nintendo’s stock, other businesses are benefitting, with many attracting customers by becoming Pokémon hotspots. 

And, most importantly, people enjoy it, directly undermining the agendas of most of its critics.

We think that BHS report is rather biased against Sir Philip Green

Or at least that it is possible to think that Sir Philip might have a point here:

Sir Philip Green has broken cover to complain that a highly damning report by MPs was a “biased and unfair process”  and is considering a legal complaint against the co-chairman of the Commons select committee responsible for the inquiry into BHS.

Aspects of this have been mentioned elsewhere but we think it important enough to repeat.

The essential set up of the report is that BHS paid substantial dividends to its owners then some years later there is a substantial pensions deficit. That is quite obviously true.

However, there're three points which really should have been investigated further.

1) As the report itself notes low interest rates play merry havoc with investment returns on pension funds. Assumptions of low interest rates out into the future blow out that deficit in a major fashion.

2) The pensions funds were slightly in deficit in 2006 and vastly so now in 2016.

Both of those points are to be found on page 3 of the report.

3) What is not found in the report is that interest rates have, under the monetary policy of the Bank of England (something we fully support), fallen from 4.75% to 0.5% over that period of time.

We are not pensions actuaries but would and do assume that some, perhaps a rather large, portion of that pensions deficit is due to that move in interest rates rather than anything which was happening internally to the company.

Further, we think that we would all be rather better informed if the report had pointed this out and attempted to quantify it. It didn't - therefore we think that it would be fair to say that there could be thought to be some bias in this report.

How much bias would depend upon someone doing that calculation. If anyone would care to inform us we'd be most grateful. As, obviously, so would Frank Field and friends as they become better informed.

 

Corporations are the backbone of capitalism

Legal distinctions between things are important. The ability to sign different sorts of contracts for different areas of life opens up a wide range of extra choices. For example, an employer can feel more secure about an employee if they are under contract and can plan on this basis, and it is very similar from the employees perspective. If we were unable to sign employment contracts this would significantly reduce the range of things we could achieve with our lives individually, and that society could achieve collectively.

This is as true for complex multilateral interactions as it is for one-on-one bonds. Allowing people to incorporate into a company has many benefits and has independently evolved around the world. This doesn't just apply to limited liability business firms, or even to profit making firms generally; traditionally towns were run as a corporation with specific legal rights and duties. Today their role and structure are mostly homogenised from above. The most recognisable now is the City of London corporation, which retains a lot of its old traditions but without many of the traditional functions that once gave it meaning.

Constant decision-making by multipolar bilateral agreement has very high transactions costs. We do not subcontract employees for every individual task we need done; we do not usually sell our labour by piece but agree in advance to a very large range of outcomes that might occur, so long as they're arrived at by known rules, consented to in advance. The same is true for city corporations: making decisions for spatial areas is prohibitively costly if always done on a case-by-case basis: everyone can raise their welfare by agreeing on decision-making systems in advance.

The same is true with modern incorporation. Is it possible to trade as a non-corporate in the UK, as a sole trader or a partnership. Most firms (by count, though not by value or employment) are of this sort. In one sense, you have more flexibility this way: you are bound by fewer rules and regulations. But in another more important sense, you are bound: it is very hard to convince lenders that you will use their money well, or that you will still be around to pay it back, precisely because you are flexible. By contrast, corporates, forced to reveal more information, have more options precisely because they are bound by the strictures of their legal form.

This is borne out by a large empirical literature. Firms that incorporate grow faster, increase their productivity and employment quicker, and contribute more to the economy. One of the main costs of corporation tax is levying a higher tariff on the corporate sector than on the non-corporate sector. This distorts firm structure to be less corporate than it would otherwise be, and thus drives capital away from where it can be used more efficiently, or even reduces the total amount of saving and investment.

A new paper (pdf) from Li Liu and Michael Devereux, of the Oxford University Centre for Business Taxation quantifies this cost. They find that a 2006 UK reform that reduced the number of unincorporated firms choosing to incorporate by 4.5% thereby cut investment. Unincorporated firms, without the ability to credibly show investors info, were credit constrained, and could only use funds they'd built up themselves—a £1 reduction in internal funds meant a full 90p reduction in investment.

There's two ways of interpreting this result, both of them valid. One of them is that taxes, particularly capital taxes, have large economic costs. This is true. But I think the most important conclusion to draw is the importance of legal structures for economic success. It might seem trivial to require, for example, shareholder votes to pass important firm decisions, but in fact most firms in the most economically successful countries arose with the freedom to choose from a much wider range of corporate forms. Banning the freedom of people to engage in free association which involves binding themselves often reduces their ability to achieve as much as they might.

The horrible mistake made by Jeremy Corbyn and Momentum

We can't help but think that this is a horrible mistake:

T-shirts sold to raise money for Jeremy Corbyn’s Labour leadership campaign are being made by poverty-stricken workers earning just 30p an hour, The Mail on Sunday can reveal.

The machinists in Bangladesh toil for up to ten hours a day to make the garments, which are believed to have raised thousands of pounds for the Labour leader’s fighting fund.

...
Yet a Mail on Sunday investigation has discovered that Momentum – the Left-wing organisation central to Corbyn’s leadership campaign – has bought hundreds of the T-shirts, some emblazoned with the politician’s name in superhero-style lettering, to sell here for £10 each.
 

No, not that, that's eminently sensible. If you're trying to raise money for something then you want to be cutting your input costs to the bone. No, this is the mistake:

Last night Momentum cancelled its contract with the British supplier of the T-shirts and promised to ‘rigorously’ check the sourcing of its merchandise in the future.

Why cancel? Providing work for the labouring man to do is a good thing, surely? And as Madsen Pirie of this parish has been saying for at least a decade so far - buying things made by poor people in poor countries makes those poor people richer.

Thus what better manner to advance the cause of international brotherhood? Something which we believe is the sort of thing Momentum peeps mouth off about.

The poor worker gets 30p a t-shirt. around 25 p more than they would make in the same time staring at the south end of a north moving water buffalo. £9.70 is raised for Jezza's campaign.

International trade and voluntary exchange make all better off. So why not do more of it?

Yes, we think it must just be a horrible mistake. For surely they're not so ignorant as to believe that voluntary exchange and international trade don't make everyone better off, are they?

 

Perhaps we're bad people but we do find this amusing

The Observer tells us that Academy heads, or rather the heads of chains of Academies, are charging expenses to the taxpayer:

The leaders of academy schools are spending taxpayers’ money on luxury hotels, top-end restaurants, first-class travel, private health care and executive cars, a joint investigation by Channel 4’s Dispatches and the Observer can reveal.

Expense claims released under the Freedom of Information Act lay bare for the first time what critics claim is an extraordinary extravagance by some academy chain chief executives and principals, at a time when schools are struggling financially.

Reading through the list of claims we wouldn't say that all of them sound entirely appropriate. But "credit card bill for expensive meal" and "entertainment bill for big meeting with staff" do sound rather different, don't they? But they also seem modest compared to our memories of certain civil service awaydays and the like. Perhaps someone would like to do a proper comparison? 

The amusement starts here: 

Sir Daniel Moynihan, the chief executive of the high-performing Harris Federation, earns £395,000 a year.

Bloke who runs high performing organisation gets paid a lot. We thought that was rather the point to be honest. Incentives do, after all, matter. 

But of course there must be someone to provide a rent-a-quote to tell us all how terrible this claiming of expenses is:

However, asked to respond to the revelations, Margaret Hodge, the former chair of the Commons public accounts committee, said that the checks and balances in the academy system were not robust enough

Ah, yes, Dame Margaret, Lady Hodge:

New figures have revealed the two MPs representing Barking and Dagenham were among the biggest spenders in London over the last Parliament – costing the taxpayer £1.4million in expenses.
...
Our investigation, looking at thousands of claims over the last five years, has shown Labour MP for Barking, Margaret Hodge, had the 10th highest expenses bill in the capital at £708,492.

As Dame Margaret, Lady Hodge, points out that was all spent in the pursuit of her duties as an MP. Including, no doubt, travel and entertainment expenses and so on as well as staff wages.

Just a little amuse gueule before a Sunday breakfast.

It's amazing what people will consider a benefit of the EU

Now that the Brexit vote has happened it's probably a little late or these stories about how the European Union has made our lives better. But even so they're trying - and even so they're getting it wrong:

Britain’s exit from the EU will mean the end of Brussels’ attempts to make UK households install energy-efficient light bulbs. But one couple’s experiences show why such bulbs are still worth bothering with – even if older types are still available.

Pete and Linda Powell said they had saved £400 a year after they switched almost all the bulbs in their house to LEDs. The retired couple, from Skipton in Yorkshire, switched their bulbs from low-energy halogen bulbs three years ago.

That we didn't need a law to make us do this is shown by the fact that the switch saves £400 a year. We do generally assume that consumers are not drooling morons and thus do things which benefit them voluntarily.

However, this demonstration of the EU's concern for our wallets is still wrong. Because of course there has been no legal move whatsoever to shift us all over to LEDs. What did happen was that there was a legal move (to the point of a ban on the sale for domestic use of them) away from incandescents.

Unfortunately that legal ban came into effect before LEDs were ready for prime time, leaving people to have to switch to the markedly more expensive and less efficient compact fluorescent bulbs. And yes, while they fit the same holes as the earlier bulbs that's not enough, some investment in changing the set up was also necessary.

So, what we actually have here is that the free market, entirely unadorned, would be shifting us around about now all quite naturally from incandescents to LEDs. The EU's intervention forced us all, at some cost, to shift to the intermediate and not very good technology of CFLs before the move to LEDs.

This is not, to put it mildly, a victory for the powers of intervention in that free market unadorned.

But then there's that horrible and pernicious tale out there that the ban on incandescents was actually lobbied for by the light bulb manufacturers who had these lovely factories capable of making CFLs but which no one wanted to buy....and yes, one of us has been a cog in the global supply chain for the lighting business for some decades. Our opinion is that that horrible and pernicious tale is not mere cynicism about regulatory capture.... 

We think this is rather important actually

A standard result in economics, albeit one that far too few people realise is a standard result, is that there's no such thing as a solution, there are only trade offs. We can have a little bit more of this at the cost of a little bit less of that and there are even things which approach a free lunch but very very few of them.

We can, for example, promote primary innovation by giving strong intellectual property rights to it but at the cost of, the stronger such rights, the derivative innovation that we've just banned. We can indeed make today's poor better off through redistribution but at the cost of those higher tax rates reducing future economic growth and thus making tomorrow, including tomorrow's poor, poorer than they need be.

This would seem to be a concept that public health peeps need to grasp:

There is strong evidence that alcohol causes seven types of cancer and probably others, according to a review that dismissed the claimed health benefits as "irrelevant".

A study of existing research found strong evidence of a direct, harmful effect of drinking, even though scientists are unsure of the exact biological reasons why alcohol causes cancer.

Writing in the journal Addiction, Jennie Connor, from the University of Otago in New Zealand, said alcohol was estimated to have caused about half a million deaths from cancer in 2012 alone - 5.8 percent of cancer deaths worldwide.

That alcohol causes cancer is interesting to know. But it is absolutely not true that any health benefits are irrelevant. They're actually the point. We know that there is a trade off here.

That trade off starting with the fact that none of us (as far as we know at least) The Virgin Mary, Elijah or others who ascended without dying. Death is thus going to come to us all. Not drinking and not getting those cancers (to the extent that not boozing only reduces those risks anyway, not eliminates them) only means that something else will kill us.

We thus want to know the balance of drinking and raising our changes of those cancers and drinking and lowering our chances of some other disease. Far from the health benefits being irrelevant they are the vital information we need to be able to make the trade off. For as we know, a solution, perfect health forever, is not granted to us in this vale of tears.

And, of course, we would also need to include in our trade off the knowledge that beer is proof that God loves us and wants us to be happy (yes, we know, Ben Franklin never actually said that) and more importantly that there is utility, in the alleviation of the troubles of this vale of tears, in the consumption of booze.

For that is what we''re all trying to do in this life, maximise our utility. Entirely true we can be on different sides of Pascal's Wager and thus the time span over which we are trying to maximise and thus take more or less note of religious prohibitions against the Demon Rum. 

But even then it is the trade off in front of us which is the important thing, not the negative (nor, obviously, only the positive) effects that matter.

That skeleton with the scythe is coming for us all. Now, how do you want to fill in the time until then and which risks of what do you wish to run?

Other effects are not irrelevant to this point they are the essential beginning of the decision making process.

 

The right way to give workers more control

Theresa May says that she wants to put workers’ representatives on company boards, in the German style. 

That would be a bad idea: it perverts the board’s incentives to make the company as profitable and efficient as possible, and creates unnecessary divisions at the top of the firm, where unity of vision and purpose are very valuable. 

Giving unions more power – for it is they who will be representing the workers – is also not necessarily a good idea. One study suggests that this rule has cost German firms 26% of shareholder value 26%, which is very large.

How then to give workers more say in how their firms are run? One way might be to give workers shares in their firms. That way they benefit when the firm is well-run and valuable, and they will have a voice at shareholder meetings. The board will serve them (as well as other shareholders), but will still function normally as a board.

Workers who have been at the firm for more than six months, on a permanent contract, could be given equivalent to 5% of their salary in shares in the firm. If they want to sell those shares, so be it, but if they value having a long-term stake in their firm and say over how it is run, they will not.

Who pays? It depends on how rapidly such a system was introduced. If it was done immediately through the creation of new shares it would, effectively, be a tax on existing shareholders. This would be a bad idea – it would effectively be a tax on investment, which depresses growth. 

Better would be to phase such a system in over a number of years so that as new contracts and wages were negotiated this would gradually take effect. This would mean that it would probably be the employees themselves paying, though if it’s true that wages are sticky upwards as well as downwards (so workers don’t get wage rises when they should) it could lead to some being better off.

The one problem with this would be minimum wage workers – requiring that they also be given 5% of their salary in shares could make the cost of employing some of them prohibitively high, causing unemployment. To avoid this, only workers earning 60% of the median wage or more should be included in this scheme.

I’m not entirely convinced that workers having more say in how their firms are run is worthwhile. Really this feels like a solution in search of a problem. But if Theresa May thinks it’s important, so be it. If she is going to give workers more say in how their firms are run, she can at least try to do it properly.