The Pin Factory Blog

Earlier this year, the “horrific” idea that professorships should not be granted for a lifetime raised more than a few eyebrows in Denmark. The proposal, raised a few months ago by a Danish politician, suggests that after an initial ten-year contract, individual professors should successfully complete an evaluation process every five years in order to maintain their position as a professor. The proposition was designed to ensure that only the most qualified professors would assume the leadership of an academic institute. Unfortunately, I have not heard much of the proposal since it was first introduced, but the idea is nevertheless appealing in many ways.

Making a professor subject to such an evaluation would empower students as well as taxpayers, who are the primary source of funding of a professor’s salary, and would ensure that professors who once excelled at their work when first hired but no longer contribute to their subject do not prevent brighter and more energetic candidates from rising through the ranks of the academy. Such evaluations would allow professors who neglect their duties to be kindly removed from public budget.

I find the idea of an evaluation to be an excellent one, though I would argue that there exists an even more transparent and efficient way of handling the issue than an administrative appraisal. Though the proposal did not specify how such an evaluation process would proceed, I believe that taking both the professor’s research and student evaluations into account would be the fairest way of appraising a professor’s performance. Instead of proceeding with a conventional regulatory structure to supervise professors, which inevitably leads to more people in the public sector, student evaluations could be published on university websites. As most academics are quite keen on advertising their academic performance, the publication of student evaluations would not only fill a missing gap in this information, but would also provide prospective students with better information on where they can obtain an education best suited for their needs and goals. Instead of further regulation, the dissemination of information about “customer satisfaction” would aid prospective students and educational institutions, and would decrease professors’ insulation from market forces. 

According to a new proposed directive from the European Commission (Late Payment Directive), governments are soon to decide the content of contracts between businesses when it comes to agreements concerning payments. The intention of this directive was originally to ensure that government institutions made payments to private companies on time, a principle of which one can only approve. However, government regulation tends to grow in the making and this directive is not an exception.

The latest discussions from the European Parliament reveal that some groups intend to make the directive include business-to-business contracts as well. This will mean that businesses can't decide the conditions of payments in future contracts, making it completely impossible to compete on these parameters. If loss of competitive advantages wasn't enough this system also looks to expand the bureaucratic burdens on the economy in order to monitor it. All in all a loss – loss situation!

It sounds from the discussions in Brussels that they have lost track of what they intended to do in the first place. Instead of intervening in the content of contracts between businesses, the EP should instead increase the possibilities for actors to sanction late payments if they wish to do so. Politicians ought to accept private contracts as legally binding documents made by enlightened adults!

If the Commission intends to hold back European enterprise, and make the Saharan desert look like a better place to do business, the approach this directive indicates is surely the way to go. However, if the Commission wants to fulfil its own vision of making Europe the most competitive knowledge-based economy in the world, I would suggest that the Commission view this directive as a sunk cost and moves on!

Tax, it is often argued, is one of the most influential issues when it comes to determining a country's competitiveness. Included amongst the many reasons for this, is that low taxes help attract a better skilled workforce, thus generating higher productivity.

The suggestion that lower tax has a positive effect on a country's attractiveness for highly educated people is about to be proven in Denmark. From the first of January this year Denmark has implemented tax reform securing lower income taxes and cutting the highest marginal tax rate by about 10 percent. The Danish government has done this to make Denmark more attractive to highly skilled people in a climate of sharpened international competition.

In Denmark highly skilled people can sign a three year contract giving them a tax discount for those three years. The most common scenario in the past has been that people come to Denmark, have their three years of tax discount and then move on to another country . However, The Confederation of Danish Industries (DI) can already now report that since the reforms it has become easier for Danish companies to convince foreign staff to sign contracts for longer periods than those three years.

This is a good thing for Denmark, but there is a cloud on the horizon. There is much uncertainty about the opposition’s plans regarding these tax reforms if they eventually come to power. The leader of one of the opposition parties (Social Democrats) has stated that she intends to roll back these tax cuts. This position induces uncertainty about the future and may have the effect of minimizing the effect of the tax cuts.

Tax is important in determining competitiveness. However certainty about the future is also important. The Danish Social Democrats should therefore take a close look at what their sister party in Britain have done to the business climate by introducing tax rises and set their policies accordingly.

Whether you believe in man made climate change or not, you probably think that energy efficiency is a good thing. And luckily in this respect, the goals of most climate change fanatics (a couple of Guardian columnists excepting) are compatible withd the interests of businesses. However, most tend to ignore this fact and go on advocating for sanctions on businesses, despite the fact that the primary goal of both interest groups is best met in another way.

So how can this goal be achieved? One solution which has been tried  is to hold a meeting between the world's political leaders and let them 'almost' come to an agreement committing them to strangle their domestic industries in order to achieve some arbitrary goal in the reduction of CO2.

The other solution is for governments to let businesses use their profits to invent and invest in technological improvements through a more business friendly tax system. Would all of the profit then go to technological progress? A great deal would, because it is a core interest of companies to develop more efficient ways of using energy to stay ahead.

The current tax levels force companies to stay inefficient because they either can’t afford to innovate. Giving companies an incentive to survive by letting them compete in the global market would lead to more efficient ways of producing goods and would drive less efficient producers out of the market. This would lead to lower energy usage, which is essentially the common goal. Thus competition, not cooperation is the key to decreasing energy use.

So what are these government leaders waiting for? The answer is that many leaders (particularly in the West) have bought into the idea that businesses are essentially evil. We have a saying in Denmark that is fitting: 'It’s hard to escape if you have painted yourself into a corner while painting the floor'. It looses something in the translation, but I hope you get the point.

In The Australian today Alan Oxley, chairman of the US based NGO World Growth, outlines why he thinks the Copenhagen climate summit failed. For him the core reason is due to the presence of severe poverty in developing countries.

In the article, the leading American climate change economist William Nordhaus from Yale is cited as saying: “if developing countries cut emissions too sharply and too soon as advocated by Greenpeace, WWF and the European Union, they would further impoverish their people". This makes commitments to emission cuts contradictory to the political interests of politicians in developing countries, since immediate poverty clearly should overrule any real or perceived climate change. Perhaps a rather rosy view of democratic accountability in action, but it might just be true.

Mr. Oxley’s point is to “fight poverty first then tackle emissions". However, do we really need to tackle emissions at all? Emissions comes from the use of fossil and organic fuels, therefore the most efficient way of decreasing the use of those would be to find a more cost efficient way of producing energy. Making innovation affordable instead of taxing it would certainly help the governments to reach their political goals of decreasing the use of oil and coal.

Regarding the fight against poverty, the solution advocated for by environmental activists of increasing developing aid is simply unsustainable. Instead, breaking down trade barriers and government subsidies to agriculture and industry would be by far the most effective and sustainable way of fighting poverty.It is not the whole solution, but it is the best place to start.

An article published in 2008 by Ruud Muffels and Ruud Luijkx argues that the Anglo Saxon and the Nordic labour markets are the most flexible when it comes to labour mobility in the world. However, looking at the rules and regulations in the UK concerning when you would like to hire or fire a person, it is clear that this process is in fact far easier in the Nordic countries.

If you began looking for government regulation in Denmark on how to fire and hire people in the private sector you would end up using a lot of time, simply because there is not much. In the Danish system there is no legislation regulating reasons or notice periods of dismissals. According to most mutual conventions however, employers are required to give notice in advance excepting dismissals due to criminal offences or unsuitable behaviour in the workplace. Additionally employers are not required to justify the reasons for dismissal. In the UK, it is relatively difficult for en employer to fire employees because of the several notices and the necessity for a reason for the dismissal. By slowing down the firing process, the UK of course creates hesitation among employers to hire when the economy is changing. Just what you don’t need as the country tries to drag itself out of recession.

This sort of government interference in labour market issues is counterproductive and is ill suited to deal with a quickly changing international economy. Letting those people who are in touch with the economy on a daily basis deal with labour market contracts would by far increase the adaptability of the system and help increase job creation.

The investment in future growth By and large scholars in the social sciences accepts the assumption that an increase in the educational level of a population leads to higher productivity, and thus increased wealth. It is therefore thought to be of great importance that a government does everything in its power to increase the educational level of its population. However, first we should ask what is actually within their power.

A popular assumption made by many is that there exists a linear relationship between the amount of money used on education and the quality of the output. To a certain degree this might be true. However, as with many other investments in productive capital, in this case human capital, the marginal product of an additional pound used on education (production) will diminish and after a certain point you will experience a fall in output. Also, the quality of output i.e. the quality of education and the achievements of students is dependent on many other factors apart from funding.

Perhaps psychology plays a part. ‘Pygmalion in The Class Room’ is a study undertaken by Robert Rosenthal and Lenore Jacbosen in 1965. It shows that higher expectations from teachers towards pupils’ achievements increases the knowledge and IQ of those the pupils. In short the achievements of pupils are closely related to the teachers belief in the abilities of the pupils. In fact, an increase in money spent on education might not be as effective as teachers believing in their students. As such, instead of putting more money into education, governments might be better off decreasing the administrative burden placed on teachers. This might allow more teachers the space and time to inspire.

I take issue with an aspect of the New Economics Foundation report discussed here by Charlotte yesterday. It apparently finds that the reason that the minimum wage can’t tackle inequality is because it has not been indexed. As the report states in the introduction, the NEF calculates that the UK could gain 7.35 trillion of social value between now and 2050, if only the UK achieved Danish standards of equality. Being a Dane I am flattered that my country is being used as a benchmark of good policy. However, there might be some misunderstandings of how the Danish system actually works.

First of all, yes Danes pay more income based taxes than in the UK, but with the tax reform in Denmark and increasing taxes in the UK this is about to level out. We also pay a higher rate of VAT, however we have a somewhat simpler system of calculating VAT since everything being sold is subject to a 25 % tax. This is a bit simpler than the extraordinary list of rules for VAT in the UK, leaving the Danish companies administrative burden at a minimum. Regarding corporate taxes, these are actually lower than in the UK, as are capital income taxes up to certain revenue.

So what about that minimum wage? You might be surprised about this but there is no minimum wage in Denmark. The minimum wage totally depends on what job you are carrying out and what convention has been negotiated between the union and the employer’s organization, i.e. more or less the market value of labour. This is also to say that most regulation in the Danish labour market is not enforced by law but by mutual conventions. Both unions and employer’s organisations agree that the government should stay out of matters concerning the labour market. So we don’t have a minimum wage, then what about the maximum wage proposed by the NEF? We don’t have that either, but we are still one of the most equal countries in the world. If equality is what NEF want and Denmark is thier model, they need to formulate some new policies.

In a previous blog I implied that those who are to be hit by the 50 percent super tax next year, would be likely to pay the tax for a year or so without taking any further measures. However, I am happy to admit that I was wrong and the reactions are already showing it. For example, the inter-dealer broker company Tullett Prebon has reacted rapidly on the government’s PBR and announced that they are willing to help employees relocate if they wish to get out of the hands of Her Majesty's revenues and customs. As reported in The Daily Telegraph, the core issue for people who wants to be relocated is the uncertainty that the British government is forcing on the private economy.

In 2000 the OECD made a list of Tax Havens, trying to shame them to comply with international jurisdictions. One of the main arguments of campaigning against tax havens was/ is that it is a part of the fight against the shadow economy. However as Daniel Mitchell explains in this video, the data used to calculate the possible revenues retainable from tax havens is at best: faulty. Further what should be noticed is that most, if not almost all, tax avoidance takes place inside the economy itself, making the campaign against tax havens even more dubious.

Considering the constructive effects of tax havens contribution in the global system of tax competition and vital investment capital for entrepreneurs, the OECD campaign is mistaken. See this video of Richard Teather speaking about tax competition.

Luckily there are no countries left on the OECD list of tax havens, whether this is due to countries complying with the international rules or the OECD realizing their mistake. I think it is of special interest that the two most important tax havens on earth have not yet appeared on the list. As far as I know neither the UK nor the US have changed their legislation concerning international investments. It should of course be for the UK and US governments to decide what domestic legislation they want, and in addition they should stay out of other government’s domestic legislations.