The Pin Factory Blog

Proposals to reform business tribunals have been put forward today by Vince Cable. If passed, these changes will certainly be a step in the right direction, but not enough to ensure that the private sector is free to lead the economic recovery, which is vital to shake off the mammoth national debt and overcome the structural deficit.

The proposals include an extension of the qualifying period for unfair dismissals from one to two years, fees for bringing a claim to lessen vexatious litigation, and the creation of a compulsory mediation stage with the Advisory, Conciliation and Arbitration Service (Acas) to screen out unnecessary cases.

Although never pleasant for the person being laid off, easing regulations allowing companies to sack their workers with greater ease, will lead to better outcomes. This is to allow the “churn” of employment vital to modern dynamic economy. Sir Richard Lambert, the former CBI Director-General, defended the “churn” in his final speech earlier this week: “in the past 12 months, there have been over 600,000 lay-offs – and yet aggregate employment has risen by around 250,000.” Quite right. If the government is going to take an interest in employment matters, it shouldn’t be concerned with the number of people losing their jobs, but with the aggregate. And the best way to get the government can get this churn is through low taxes and deregulation.

Yet the Business Secretary is still just tinkering at the edges when what we need is need a bonfire of bureaucracy. Sir Richard Lambert’s in the aforementioned speech he suggests a few places to start. I would add his extensive list the need to scrap the minimum wage or at least get freeze it while the Low Pay Commission (LPC) marching orders.

In the medium to long term though, this government or the next must get a handle on the regulations imposed by the terms of our membership of European Union. If this country is not to be dragged in to Europe’s stagnant condition, a government will need to renegotiate our membership so that it precludes the European Commission’s and the European Court of Justice’s involvement in employment and social policy and law. Without this, there is little that any Business Secretary can do.

The knee-jerk public and celebrity outrage is entirely predictable. We saw it thirty years ago when the government was trying to sell off other 'priceless national assets' like the telephones (where business customers used to wait three months to get a phone line, and for domestic customers it was eighteen), the steel plants (which lost £1m a day) and the gas board (need I say more?). Now we're told the nation's forestry heritage is up for grabs.

From the sound of it, you might think that Britain's forests are going to be sold off to keep Rupert Murdoch in paper, or maybe concreted over for car parking. Hardly. State forestry is a mess, and private ownership will revitalize it, and will actually extend the public amenity that our forests afford us. Private owners are actually more likely to encourage public access than the Commission has been – they can see more commercial potential in doing precisely that.

The Forestry Commission already plans to sell small bits of its forest estate, which will earn taxpayers a useful £100m. The question mooted by the government today is whether it should sell the whole lot. That's actually no really big deal. The Commission owns only a fifth of England's forest land. Most of the rest, about 68%, is already in private hands. (Various government departments, like Defence, own other bits too.) Many of the celebs who are saying how much they love forests could well be thinking about ones that are already private.

And private forestry is already heavily regulated in terms of the owners' obligations to the protection of nature, logging schedules, public access, and development. Thos protections would remain, even if the whole estate were sold. And indeed there would be extra protections for ancient woodlands like the Dean, New, and Sherwood forests. As in New Zealand and other countries, there could be a mixture of commercial, non-profit, community and mixed ownership.

Right now, the Forestry Commission is compromised. It is supposed to be the regulator, but it is also the biggest owner and manager on the block. You can't be poacher and gamekeeper at the same time. The whole of its forestry estate should be sold, and it should become the pure regulator, protecting those amenities that the celebs are screeching about.

Parliament will debate the Scotland Bill today, which among other things proposes to devolve some fiscal autonomy to the Scottish Parliament. I've written a 3-minute guide to the Bill, outlining and assessing its proposals, and arguing that it doesn't go far enough in devolving fiscal autonomy to Scotland. You can get it here.

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This week we've been told inflation is rising, to which the BBC has responded by running stories containing lots of three-letter acronyms (MPC, CPI, OBR...) and hinting that mortgage interest rates are going to rise. We're also told by the Chancellor that the recent VAT increase to 20% is "is not temporary. It can't be... the VAT rise is a structural change to the tax system to deal with a structural deficit". I get the sense that most of the population is highly confused, thinks that this is a raw deal, and is asking one question: is there a way out?

Perhaps there is, but in order to find it we need to go beyond the numbers to understand the nature of our welfare state. For this I direct you to everyone's favourite Marxist, Jürgen Habermas. He argues that in a capitalist system the state performs three functions: first, it secures the legal prerequisites (property, contract, competition law, etc) for business; second, it "improves the chances for the realization of capital" through big-ticket public expenditure; and third, it "compensates for the dysfunctional consequences of the accumulation process that have elicited politically effective reactions on the part of... organized groups," powerful competing demands on the state which are both expensive and irreconcilable.

Practically, this means the state enacts social welfare provision and, relative to the fiscal needs of such provision, inadequate levels of taxation to pay for it. As a consequence of the inability to reach a consensus position on how to mediate these conflicting demands, economic crises are displaced into the political sphere, with attendant "inflation and a permanent crisis in public finances... the government budget is burdened with the common costs of a more and more socialized production." Eventually, the strain becomes too much for the state to bear: "if governmental crisis management fails, it lags behind programmatic demands that it has placed on itself", the consequence of which is a mass withdrawal of loyalty from the state, a crisis of legitimation, the consequences of which might be very serious indeed.

While Habermas' analysis is highly macroscopic, bordering on the metaphorical, it can shed some light on our current predicament. First, most Western governments currently possess a long-term "structural" deficit which represents, at its core, an inability to reconcile expensive social welfare demands with the need not to strangle the private sector. Second, the continued displacement of conflicting demands has, as Habermas hypothesized, resulted in (1) frighteningly high levels of public sector debt created by fiscal imprudence and (2) as we can see now, levels of inflation that are a direct consequence of artificial suppression of interest rates. Third, the beginnings of a legitimation crisis can be seen already as the loss of confidence in governments by international bond markets; whether this worsens in relation to any particular state will depend on that state's ability to contain, and recover from, the current crisis.

Whither capitalism, then? Due to word count and other considerations this question doesn't bear further exploration here, but after considering Habermas' view I am reminded of von Hayek: "when (democracy) becomes dominated by a collectivist creed, democracy will inevitably destroy itself." I don't think we're that far gone. But it's certainly a concern we should keep in mind.

Scores of celebrities – actors, TV chefs, even the odd archbishop – have written to the Sunday Telegraph to complain how our countryside would be ruined and made inaccessible by plans to sell off 15% of the UK's state-owned forests. They're talking utter, ignorant rot.

In the first place, the current plans would raise £100m for the taxpayer. Dame Judy Dench and company may not care about high taxes, but those of us trying to run homes and businesses do. Second, access and environmental conditions can easily be inserted into any sale conditions – just as we made British Telecom maintain free 999 calls when it was privatized in 1984.

Third, Dr Rowan Williams and disciples have an odd faith in the state forest quango, the Forestry Commission, when most of the forest it runs is completely inaccessible anyway – dense, ugly, upland pine plantations. What is to be lost by selling that? And in terms of the deciduous lowland forests of England, local non-state owners would have very much more incentive than a quango to make them more accessible and improve their leisure use and biodiversity dimensions.

Fourth, Ranulph Fiennes and party seem not to have explored the success of forest reforms in places like New Zealand, or the variety of different ownership models, from outright sales to local community trusts, that have produced benefits in other countries.

Fifth, not even Hugh Fearnley-Whittingstall could rustle up such a dog's breakfast as the Forestry Commission. It owns, manages, exploits and regulates forests – poacher and gamekeeper at the same time – and completely dwarfs and dominates the private sector. And, of course, the Department of Environment plus the devolved governments of Scotland, Wales and Northern Ireland all butt in on it too . There are far too many cooks in this broth.

No: the entire forestry estate should be sold as appropriate to private, local, voluntary or community groups, and the Commission should focus on making sure that it is managed with public and environmental interests in mind. That would be good for taxpayers, good for forestry, good for the environment, and indeed good for everything these cocooned celebs actually want to achieve – or say they do.

Update: Simon Cooke has also blogged on this, which you can read here.

Two photos of Shanghai, the first taken in 1990 and the second in 2010. Is it a boom, a bubble, or both?

via Reddit.

Well, I told you so. The UK economy actually contracted in the last quarter of 2010, while inflation is headed, by anyone's calculation, up to around 4% by April (on the official figure, or around 5% on the retail price index).

We have stagflation, in other words. And it's going to continue just as long as we keep on printing money and keeping interest rates low. Business failures are at a 30-year low: after an economic shock of this size, we really should be experiencing a lot more pain. But no, bad businesses are being kept afloat by quantitative easing, cheap credit and government spending and borrowing.

It was expansionary Keynesian policies that got us into the boom-bust cycle. Then the US and UK governments tried more expansionary Keynesian policies to try to get us out again. But we will only come out when the value of money is stable so that the price system starts working properly again, when credit is no longer too cheap so that people start making rational investments and abandoning lost causes again, and when government balance their books instead of trying to print and borrow their way out of debt. It was a long party, and we must expect a long hangover, though it will be quicker if we just suffer it rather than keep taking a hair of the dog. The pain is actually the cure.

Roll up that book of Keynes, Mr Secretary: we'll not be needing it these ten years.

Official growth figures released today show that the economy contracted by 0.5% during the last quarter of 2010. The ONS attributes the contraction to the snow, but says that had the snow not been so bad, the economy would still have stayed static. If the first quarter of this year is also negative, we’ll be back in recession. The cuts can’t be blamed, because they haven’t started yet, but it’s clear that businesses need the government to get off their backs.

Begbies Traynor, the small business consultancy, estimates that small business insolvencies will rise by 10% in 2011, and unemployment is set to rise by 100,000 over the course of the year as well. Today’s figures show that cutting spending and fixing the state’s finances aren’t enough for the economy – the tax and regulatory burden on business has to be eased as well.

Here are four things the Chancellor can introduce in the March budget to promote growth and avoid a double-dip recession:

1. Abolish the 50p tax rate. It doesn't bring in much extra money, and it's making high earners move abroad, which means they'll invest in jobs elsewhere.
2. Abolish the employer's NI contribution. Correctly seen as a tax on jobs, the employer’s NI contribution adds to the cost of hiring labour, increasing costs to business and reducing the number of viable jobs available.
3. Cut corporation tax to 15%. Britain’s corporation tax is set to fall throughout the course of this government, but this should be accelerated and deepened to undercut the rest of Europe and attract multinational investment.
4. Reverse the CGT hike. Inhibiting economic activity at a time like this is countereffective and disincentivizes investment. This would be a shot in the arm for firms and entrepreneurs finding it difficult to raise capital.

George Osborne appears to think that taxes should be cut after the recovery, but cutting taxes is one of the biggest steps he can take to help spark a recovery in the first place. Times like this mean we have to be bold – we can't afford not to.

Tom Clougherty, Executive Director, responds to the latest economic growth figures:

"Some people are bound to blame these disappointing growth figures on the government's deficit reduction plans, but that is plainly wrong. For starters, the spending cuts haven't started to bite yet: spending has actually continued to rise – in real terms – under the coalition government. Slowdowns like this are completely normal after a recession, and historically they have tended to occur quite independently of government fiscal policy.

"Nevertheless, we should take these figures as a stark reminder that we are not out of the woods yet. America's economy looks weak, China has strayed dangerously into bubble territory, and the eurozone's woes look set to continue - so there may be fresh crises around the corner. In light of this, the government needs to press ahead with plans to stabilise our public finances, do more to encourage private sector growth, and urgently come up with a better way of dealing with failed banks."

Dear Nick,

When we were both in the think-tank business, we used to end up agreeing how distant state agencies could be from the needs of the public whom they are supposed to be. Now that you are the police minister, here is a little example that you might be able to do something about.

Listen to the first few minutes of this programme presented by Kate Silverton (pictured) on Radio 5 at the weekend. Basically, she was driving along and was pulled over by the police and questioned. Being stopped by police is a worrying thing and she was shaken by it. She was even more alarmed when they demanded her identification. (She only had her BBC business card – the officers laughed when they realized who it was.)

All that was wrong was that one of her tail lights was out, and as they looked around the car, they pointed out at one of the headlights was a bit iffy too. The sort of thing that could have been sorted with a cheery "Well, Miss Silverton, will you promise me you'll take it in and get those bulbs fixed before you drive anywhere tomorrow night? Yes, well that's just fine, take care, and have a nice evening."

But no, Kate says she sat there trembling as they ominously checked in to see if she or her car had any 'previous'. Treating her as if she was, or could be, a criminal – over a dud light. She couldn't sleep after the incident and was still shaking, she said, as she thought about it.

It's no wonder that people are getting hostile to the police. It's really time you told them to lay off the bully-boy tactics and sent them all to charm school. Then we might all start to think of the police as on the same side as we are, and help them do their job, rather than start shaking when we recall our encounters with them.

Best wishes

Eamonn