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, 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.

University fees should rise - but let's have a market, not government, determine them

Tuition fees are to start rising in line with inflation. This obviously has to happen but we think that there should be more than just this going on:

Universities in England have started telling potential students that their tuition fees will go up across the board from next year, the first rise since fees were nearly trebled to £9,000 in 2012.

Manchester and Durham are among universities already listing annual undergraduate fees as rising to £9,250, following an announcement by higher education minister Jo Johnson that universities meeting expectations under the first year of the new teaching excellence framework (TEF) were able to raise them from September 2017.

This is government fiat stating that prices will, or may, rise and that's not the way to set prices at all. Prices are information, something that tells us all how many people want some thing and how many are willing to provide it at that price or in that quantity.

It is this which leads to the standard finding that the best way to ration something is by price.

Here we also have a further reason to desire market pricing. Currently Physics at Cambridge charges the same price as Gender Studies at an ex-Technical College. The two really are not of the same value, neither to those who undertake such courses nor to society as a whole. We would thus rather like to see some price differentiation here.

And finally, the major beneficiaries of tertiary education are those who receive it. Absent some of those Gender Studies courses graduates enjoy higher lifetime earnings. Thus, given that they are the people who benefit they should be the people bearing the cost.

Please, no, University is not a public good. It is both rivalrous and excludable. It is not even true that having a lot of graduates around is a public good - Adam Smith pointed out that primary education probably does provide that public good of a generally literate and numerate population but this does not apply to tertiary education.

We should thus free the market for university fees and then we can really find out who does benefit, who wishes to partake and who wishes to supply. And we can only do that if we really are using market pricing not whatever it is that the government of the day is willing to countenance.

One less thing to worry about after Brexit

Hans Von Der Buchard has written an interesting profile on German anti-free trade campaigner Thilo Bode at Politico.

Since Bode, who is 69, entered the fray in 2014, support for TTIP in Germany has plummeted from 55 down to 17 percent, putting pressure on the most powerful country in the EU to drop its support. Major German trade unions, which once supported an agreement, now oppose it.

Bode’s book “The Free Trade Lie,” (in German, Die Freihandelslüge) is a best-seller, having sold 70,000 copies in the past 16 months. An anti-TTIP rally in Berlin in October 2015, which Bode helped organize, drew more than 150,000 people, making it the country’s largest political demonstration since the 2003 invasion of Iraq.

More worryingly Bode no longer just has TTIP in his sights. He's also looking to block the CETA partnership, which covers trade between the EU and Canada.

Recently, Bode came a step closer to claiming his first scalp. Since the beginning of the year, he has expanded his campaign geographically and substantially, opening a new office in France — where skepticism over TTIP is mounting — and shifting his focus from the negotiations with the U.S. to the smaller but already completed EU-Canada deal, the Comprehensive Economic and Trade Agreement. “If CETA [is successful], then TTIP will follow,” he said. His domino logic works the other way as well: If he can bring down one deal, he can also wreck the other.

Bode’s efforts were instrumental in creating the public pressure that caused the EU to drop plans to ratify the deal without involving national parliaments. The decision, taken by the European Commission, could prove to be a mortal blow to CETA, subjecting the treaty’s every deal to the approval of 38 national and regional legislative bodies. It also sets a precedent for TTIP and other future trade deals, potentially subjecting them to the same legislative bottleneck.

Striking up new trade deals after Brexit will be challenging, especially when you take into account our worrying lack of trade negotiators. But, Brexit Britain is at least safe in the knowledge that 7 years (!) of negotiations won't be scuppered by a German Greenpeace activist opposed to a completely different trade deal.

There's industrial strategy and then there's industrial strategy

With the new Prime Minister, Theresa May, indicating that she is in favour of an industrial policy all sorts of people are having palpitations of excitement at what this means. And we have to agree that we're all in favour of an industrial policy too. The discussion therefore centres on what the policy should be, something where we feel that many aren't really thinking hard enough:

Reform of finance is vital, to boost investment and to rebalance the economy towards manufacturing and exports and disadvantaged regions of the UK.

Quite why we've got to have more manufacturing isn't explained. Manufacturing output peaked in the middle 00s, true, but it's only a whisker off its peak now. Manufacturing employment has fallen through the floor, quite true, but that's because of automation, not a lack of manufacturing being done. What has really happened is that services have grown faster than manufacturing - manufacturing thus declines as a portion of the economy but not, really, in size itself. 

And other than the case of Germany that portion which is manufacturing in the UK economy is entirely in line with other similarly advanced economies in Europe and around the world.

That emphasis on exports also looks a little odd. Back when we had fixed exchange rates "Export or die" was true (even if it should have read "Export or the government will have to devalue which is is most embarrassing") but with floating rates it simply isn't. We're not about to not export ourselves into a sterling crisis simply because with floating rates we can't have one.

Sure, we know what the real logic behind this is. Unions are good, manufacturing has lots of unions, thus there should be more manufacturing around. Which is a rather conservative way to build an industrial strategy if you ask us.

We would agree with this:

But this requires a shift of focus, from the quantity of finance to its quality. Long-term, strategic and “patient” capital is needed.

OK. So how do we do that? Equity of course. The net present value of an equity investment is, by definition, the net present value of the future income stream. Thus that value, at any one time, reflects the view of that value out to perpetuity. It's difficult to think of any form of financing more long term than that.

Policymaking over the past half-century has relied on a narrow school of economic thought, dominated by a simplistic idea of “markets” and “market failures”, of “competition” and “shareholder value”. May’s new agenda will need to draw on a much richer palette.

Ahhh, that's not what they mean, is it?

We're not averse, as we say, to at least the discussion of an industrial strategy or policy. But we would rather insist that if we're going to do that then we've got to sit down and think through the underlying assumptions being made. And that's the part that everyone with their own little list isn't doing.

Equity capital is long term, patient, capital. Manufacturing is nothing special and Britain's share of it is pretty normal for a modern economy. That this isn't what the industrial strategists are saying is what is wrong with an industrial strategy, not the idea of having one in the first place.

Our own such policy, or strategy, would be to free the economy from many of the shackles which bind it and then see what it is that Britain and Britons can do where we have a comparative advantage. All the other things, exports, the balance of payments, employment, wages and so on will be cured once that is divined. And it is only market processes red in tooth and claw that can do that divining for us.

Fewer bureaucrats, lower taxation, that's how we'll actually find out.