Students should not be treated as immigrants

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Some interesting figures emerge today in a City AM piece by Baroness Jo Valentine of London First, who commissioned a poll by ComRes to discover if Londoners think foreign students should be treated as immigrants. In the case of non-EU students studying in Britain, only 17 percent of people think of them as immigrants.  For EU students the figure drops to 15 percent.

Furthermore, their view of foreign students here is highly positive.  Some 66 percent of people think that foreign students provide useful global networks to promote trade with the UK.  The proportion thinking they pay tuition fees and make a valuable contribution to the UK economy rises to 72 percent.  And the number who think they bring valuable skills to the UK after graduation is 68 percent.  These are all very positive numbers.

The negative outlook is shared by only a minority.  Only 32 percent think they take places from UK students.  Only 25 percent think they should study in their own countries, and only 19 percent regard them as having a negative impact on public services.

This confirms something the ASI has said all along.  The UK has a multi-talented and diverse workforce, and should act to sustain its high skills talent pool.  Some who campaign against immigration add students to their numbers to augment them, even though the public agrees that international students constitute a great asset.  We should re-classify them as temporary visitors and look favourably on those who want work visas after graduation.

Of course we don't want bogus "English Schools" bringing in unqualified immigrants illegally, but we do most certainly want the talented, the skilled - those who qualify for admission and study at our academic institutions.  It is a small step to stop treating foreign students as immigrants, but it is one that would be beneficial to Britain and help keep our businesses competitive.

The Amy and Vicky Act: as naked a financial theft as you shall ever see

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One of the things we must constantly guard against is one or other of the special interest groups managing to carve out for themselves some juicy little rent opportunity. It might be landlords arguing that we shouldn't have business rates because that's a tax landlords pay. It might be that we must have very special pensions for MPs, the people who determine MPs pensions, because MPs are very special people. But all such attempts to slice a juicy little piece off the body politic, from our hides, are to be resisted. And the latest attempt to do so is riding on the horrors of child abuse.

The Amy and Vicky Act, which has been passed by the Senate and is now before the House of Representatives, seeks to secure damages for victims of online paedophiles who possess indecent images of them.

We find ourselves in the societally odd position of being in favour of child pornography because we are against child abuse. All the evidence there is points to the fact that the porn is, on balance, a substitute for the act. Thus the way to reduce the number of acts is to increase the number of images in circulation. Obviously, that should be created digitally, not in any form of reality.

However, leaving that aside, this proposal is in fact one of the most naked attempts at carving out a rent, at securing a steady and consistent flow of other peoples' money, we have seen:

The Children’s Charities’ Coalition on Internet Safety – which includes the likes of the NSPCC, Barnardo’s, Action for Children and the Children’s Society – will on Monday publish an open letter to Michael Gove, the justice secretary, urging him to study legislation being drafted in America that would force internet paedophiles to make financial reparations for their actions.

You get caught with child porn then you should have to pay damages for the pain caused to the abused child caused by the knowledge of your possession. Looks pretty tenuous to us and the courts have thrown the idea out. However, look a little deeper:

John Carr, the coalition’s secretary, said a new law was urgently needed. Estimates suggest that paedophiles in the UK alone could be holding between 150 million and 360 million images of child abuse. “Conventional law enforcement methods are not working in this area, so we have to look for new deterrents,” Carr said. “I think this could be a very effective one. If guys know they could lose their house or their pension, they’ll think twice.”

They can certainly see a golden pot of money there. Further:

They explain that it would also help to take some of the financial burden off the state. “The sort of financial orders we envisage might cover an element of compensation to the victim, but also make a contribution to the cost of any necessary therapy or ongoing support the abused victim might need. Typically, this would relieve the state of some or all of the cost of providing such therapy or support.”

Oh, therapy and support eh? Our word, wonder who might be the providers of that? Possibly:

The Children’s Charities’ Coalition on Internet Safety – which includes the likes of the NSPCC, Barnardo’s, Action for Children and the Children’s Society....

Well, yes, obviously.

So to tell the story in a simpler fashion: if you change the law as we suggest then there's a vast pot of money that can be confiscated by us urging the change in the law, which will keep us, those urging the change in the law, providing therapy and support services at fat hourly rates from now until kingdom come. With lovely pensions to boot and all without any oversight from anyone at all. Which is why we propose this change in the law.

The correct response to this proposal is a sustained outburst of that Anglo Saxon invective which so enriches the English language followed by a "No". Even a "No!"

For some reason we also want to say something about sex and travel.

This is a rum one from Corbyn

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  Well, perhaps not all that strange, given what little we think Jeremy Corbyn knows about business and economics. He's decided that companies should not be allowed to pay dividends to shareholders unless all staff are making the living wage. This fails on two counts: on the detailed knowledge of how the business world works and upon the underlying economics of wages works.

Here's the ramblings:

Companies should be banned from paying their shareholders dividends unless their staff earn the living wage, Jeremy Corbyn has said.

The Labour leader wants to ban chief executives from handing financial returns back to investors if they rely on “cheap labour” for their profits.

Well, partnerships don't pay dividends: thus partnerships, and there's a lot more of them out there than most people think, won't be covered while that small portion of limited companies that do are. It's simply not sensible to divide the economy in this manner.

But it's the misunderstanding of the economics that's so painful. For of course this will lower the amount of capital that is put into British business. But more capital going into British business is what raises wages. Good grief, even Marx got this right, it's the capitalists competing for the services of the workers that raises the price of labour. Thus we want more capital coming in, not less.

Corbyn's proposal will, over time, lower UK wages. And the tragedy is that he simply doesn't understand this, nor does his coterie.

A simple guide to us all being fatty lardbuckets

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Allister Heath has picked up on the excellent work that Chris Snowden has been doing over at the IEA on the obesity issue. Weights are indeed rising but it is not because we are all eating more. The reason that's not the reason is that we're not all eating more: calorie consumption is falling as it has been for a century. The current median diet is today well below the level at which people would lose weight under WWII rationing. Something else has changed and it's actually the amount of energy we expend, not what we consume, which has. As regular readers will know we think that it's central heating which is the big issue here, not in fact exercise. Which, given that the main energy expenditure of mammals is temperature regulation makes a lot of sense to us.

However, Heath makes clear something that can be used as a very useful little tell tale:

We aren’t addicted to high fructose corn syrup either. For reasons relating to tariffs and agricultural policy, Americans consume 25 kilograms a year, against less than half a kilogram for us.

If anyone starts going on about how it's fructose which is the problem, or HFCS, then we can immediately dismiss them as a crank. Or at best, woefully misinformed. Because people are turning into fatty lardbuckets at similar rates in the US and UK. And across Europe too, where HFCS consumption rates vary. So, given the huge variance in fructose consumption, but the same problem everywhere, then it cannot be the fructose causing the problem.

This is not, obviously, a startling revelation, but it is a handy little mnemonic. Warbling on about fructose just doesn't cut it we're afraid.

Scrapping deposit insurance is a perfectly respectable idea

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Our friends the Centre for Policy Studies have a report (pdf) out today, by banker/adviser Andreas Wesemann, which argues for the abolition of deposit insurance. This shocked and appalled some, including All Souls professor Kevin O'Rourke, who asked Twitter if Wesemann and the CPS could possibly be serious. Yes, they could be serious. Scrapping deposit insurance is an idea with a fairly impressive pedigree. O'Rourke is presumably aware of the hugely-cited 2002 paper "Does deposit insurance increase banking system stability? An empirical investigation", in the prominent Journal of Monetary Economics (the 22nd highest impact econ journal by ideas.repec.org's most sophisticated ranking system). If he wasn't, Garett Jones pointed it out to him on Twitter. It looks at 61 countries between 1980 and 1997 and finds that explicit deposit insurance tends to lead to more banking crises.

This is, of course, precisely what the CPS paper argues. And one of the JME paper authors, with different collaborators, updated the analysis in 2015, looking at data from up to 2013 from across the world, with largely unchanged results (pdf). They point out that insuring deposits may restrain bank runs, but it encourages worse sorts of instability, and drives bank risk-taking. We might add that if debt is a worry, then subsidising deposits but not equity is yet another intervention encouraging debt over other, potentially less worrisome, ways of funding investment.

It's true that not every paper supports the CPS conclusion. Some find that deposit insurance cushions the market in bad times, even if it makes these bad times worse. Others find that the runs that a no-insurance regime allows are a key element of discipline in the system, working toward higher long run stability even as they destabilise in the short run. In the absence of systematic reviews and meta-analyses I can only give my own impression of the literature, which it seems to me sides mostly with the 2002 finding from Demirgüç-Kunt & Detragiache.

But whatever the overall tenor of the research, it's clearly an academically popular position that deposit insurance brings with it clear dangers. So I'd ask O'Rourke and others to tone down the shock and horror—abolishing deposit insurance is a perfectly respectable position. Now how about reconsidering all that Basel III business...

If only Owen Jones actually understood economic numbers

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We do find it difficult to understand Owen Jones. He has, in recent years, told us that Syriza in Greece, Podemos in Spain, Chavez and Maduro in Venezuela have all been economic examples we might want to copy. Quite why such a collection of basket cases have been held up for admiration we're really not sure. But today we are at least beginning to have an inkling. Jones simply doesn't know: he doesn't know the numbers, doesn't understand what the various economic numbers are telling us and him. This might seem like a minor example we're to show you but it's part and parcel of that, well, that ignorance in fact.

But consider the plight of the majority of Americans. We know that, six years into his presidency, poverty was still higher than before the financial system near-imploded. While child poverty has been alleviated for many Americans in the past five years, for African-Americans it has remained stubbornly constant.

The link for the child poverty is to this report. And that's not a measure of child poverty at all. It's a measure of how many children would be in poverty before the things the US government does to take people out of poverty.

To understand: there are now two measures of poverty in use in the US. The Official Poverty Measure, which is three times a basic but nutritious diet in the early 1960s upgraded for inflation since then, adjusted for family size. It is an absolute measure of poverty: it does not consider how lifestyles in general have been improving over that time. The other is the Supplemental Poverty Measure: this is very much more like our own measure, one of relative poverty, relative to the median income. The SPM also includes the various things that the US does to try and reduce poverty and under that measure child poverty rates are quite similar to what they are here in the UK.

However, the thing about the OPM, which is what Jones is considering, is that it does not include those poverty alleviation measures:

The income and poverty estimates shown in this report are based solely on money income before taxes and do not include the value of noncash benefits, such as those provided by the Supplemental Nutrition Assistance Program (SNAP), Medicare, Medicaid, public housing, or employer-provided fringe benefits.

That it doesn't include taxes also means that it does not include the EITC, the US equivalent of our tax credits. And pretty much all of America's poverty alleviation efforts come through either that EITC or the direct provision of goods and vouchers: all the things not considered in this estimation of poverty. They spend about $800 billion a year or so on them, they do alleviate a lot of poverty. In fact, the one thing that the US poverty alleviation system is very good at is the alleviation of child poverty. When we measure against that OPM, but add in those benefits in tax and in kind, child poverty in the US pretty much disappears in fact.

The error that Jones is making, as so many others do, is akin to looking at the British figures before all taxes and benefits. Something that is done here. Figure 1 tells us that (using our relative poverty measure of less than 60% of median household income) fully 40% of Britain is in poverty. Which is of course a nonsense. Because we cannot measure, usefully, poverty before the things we do to alleviate poverty.

We can also test this in another related manner. The Gini is not quite the same thing but it is indeed related. And if we look at the pre-tax and benefits inequality of various countries the US does not stand out in any remarkable manner. It is, before that redistribution, less unequal than France or Germany, only a little above Sweden or the UK.

Is the final outcome in the US more unequal? Yes, indeed it is. They do less redistribution than most European countries. However, to go around measuring poverty by the gross numbers for the US, before tax and redistribution, and then try to compare it to the net numbers, after tax and redistribution, for other countries is simply absurd. Or, of course, ignorant.

As Mark Twain pointed out, it's not what you don't know that's dangerous, it's what you do know but ain't that is. And thus we think we've found our solution to the conundrum of Owen Jones. He simply doesn't know the subject he's pontificating upon, just doesn't grasp the economic numbers. And thus his being led into the error of being a socialist.

An Introduction to the Bank of England’s Stress Tests

This posting provides an introduction to the Bank of England’s recent stress tests on the UK banking system. It suggests that a stress test can be compared to a school exam: there is the exam paper or stress scenario and there is the performance of the candidate against a pass standard to determine whether the candidate passes or fails. More precisely, with a mild stress scenario, a highly gameable capital-adequacy metric to assess performance and a very low pass standard, the Bank’s stress tests can be compared to an exam that is extremely easy to pass. This bias towards a ‘pass’ result undermines the credibility of the entire exercise. (For the previous blog in this series, see here.)

The purpose of central bank stress testing is to assess the banking system’s capital adequacy, i.e., the ability of banks to withstand financial stress. A stress test has three key components:

  • An assumed adverse stress scenario – essentially a guess scenario generated by modellers at the central bank.
  • A metric to gauge the strength of each bank. This metric is the bank’s capital ratio – the ratio of ‘core’ capital to some measure of the total amount ‘at risk’ - the intuition being that core capital provides a buffer to absorb potential losses and keep the bank solvent in a crisis.
  • A pass standard by which we determine whether the post-stress value of the capital ratio is (or is not) high enough to merit a pass mark in the test.

There is a natural analogy here with a school exam, the purpose of which is to assess a student’s academic strength. It too has three key components:

  • There is an exam paper based on a set of questions, and underlying this, the issue of how easy or tough the exam paper might be. The easiness/toughness of an exam paper is comparable to the severity (or otherwise) of a central bank’s stress scenario.
  • There is the performance of the candidate in the exam, i.e., the mark they receive.
  • There is the pass standard, i.e., the minimum mark that a student must achieve in order to pass the exam.

We then draw our conclusions. For example, if we had an easy set of questions and a low pass standard and the student achieved a low mark, then we shouldn’t conclude that the student is academically strong.

Similarly, if we had a stress test with a mild stress scenario, a low pass standard and generally low post-stress capital ratios – all of which are in fact the case with the Bank’s stress tests – then we shouldn’t conclude that the banks are financially strong.

Yet this is exactly the conclusion that the Bank draws from its stress tests.

We should also say a little more on the capital-adequacy metrics and the pass standard.

To evaluate a bank’s capital adequacy, we need estimates of both the numerator (core capital) and the denominator (the total amount ‘at risk’).

By core capital, we mean the capital available to support the bank in the heat of a crisis. However, there are a number of different core capital measures available and some are more reliable than others. Their reliability is in inverse proportion to their broadness: the broader the capital measure, the more ‘soft’ capital it includes and the less reliable it is. The narrowest and best is Common Equity Tier 1 (CET1), which approximates to tangible common equity (TCE) capital plus retained earnings. In this context, the ‘tangible’ in TCE means that it excludes ‘soft’ items such as goodwill and other intangibles that cannot be deployed to help it weather a crisis, and ‘common’ means that it excludes more senior capital items like preferred shares and hybrid capital. However, in its stress tests, the Bank also uses a broader definition of capital known as Tier 1 capital; this is equal to CET1 plus some additional and therefore softer hybrid items.

As with any exam, a major concern is cheating – or ‘gaming’ to use the more polite language used in this area. In the case of the capital measure, the concern is with banks’ ability to exploit loopholes (e.g., by stuffing softer and less expensive-to-issue capital items into the core capital measures approved by regulators) and, of course, with their lobbying to create such loopholes in the first place.

Then there is the denominator, the total amount ‘at risk’. Traditionally, this was taken to be the total assets of the bank. However, for many years now the on-balance-sheet amounts at risk have been dwarfed by the amounts at risk off the balance sheet in securitizations, contingent liabilities, derivatives etc. These off-balance-sheet risks have long since made the total assets measure highly inadequate.

To make matters worse, the exposure measure long favoured by the Basel system is not total assets, which would be bad enough, but so-called ‘Risk Weighted Assets’. We can think of RWAs as a game to lower the ‘at risk’ numbers in order to get lower capital requirements. In this particular game, every asset is given a fixed arbitrary ‘risk weight’ of between 0% and 100%. So, example, the debt of OECD governments would be given a zero risk weight on the presumption that it is riskless – that’s right, Greek debt is considered riskless! - whereas commercial debt would be given the full risk weight of 100%.

The result is to create artificially low ‘Risk Weighted Asset’ measures that are much lower than total assets. To give an idea, latest available data for the UK banks that participated in the stress test show that their average ratio of RWA to total assets was a mere 33%, which means that on average across the system, two thirds of bank assets are deemed by this measure to have no risk at all! And one institution – the Nationwide - had a RWA to total assets ratio of just under 18%, meaning that no less than 82% of its assets were deemed to be entirely risk-free. So either these banks have indeed taken very low risks or they are just very good at playing the risk-weighting game. The evidence suggests the latter.

Going further, this RWA system is tailor-made for gaming: you load up on zero-weighted assets and you are rewarded with a lower capital requirement because you are deemed to have low risk. In limit, you could load up entirely on zero-weighted assets: you would then be deemed to have zero risk and incur a zero capital requirement. If we look at the data, we see that average risk weights across the big banks have trended down from about 70% in 1993 to a little below 40% by 2011. If this trend continues, then the average risk weight should hit zero by 2034 and every single risk in the banking system would be invisible to the risk-weighted measurement system.

There is also abundant evidence – most notably that provided in a widely cited paper published by the Bank of England itself [1] – to suggest that the RWA measure is so poor that it actually gives a contrarian indicator of risk, i.e., that a fall in RWAs indicates rising risk!

Part of the explanation is that banks were loading up on assets with low RWAs to reduce their capital requirements.

Even more worrying is that banks were also engaging in vast derivative and securitization transactions to move assets from high to low weight classifications to reduce their capital requirements even further. Indeed, this game even had a name – Risk-Weight ‘Optimisation’ (RWO) – and RWO really means risk-weight minimisation.

And this RWO that almost no-one has ever heard of was the main driving force behind the enormous growth in derivatives trading and securitization in the years running up to the Global Financial Crisis (GFC) – and in so far as it led to (much) greater risk taking and (enormous) capital depletion it was also a major contributing factor to the GFC as well. [2]

Thus, a low RWA does not indicate low risk; instead, it indicates RWO: it suggests that the banks concerned are taking more risks, but are better at hiding them from the risk measurement system.

To help deal with these problems, the Basel III international bank capital adequacy regime introduces a new measure of the amount at risk known as the ‘leverage exposure’. This measure makes a half-hearted attempt to incorporate some of the off-balance-sheet risks that do not appear in the total assets measure. However, the adoption of this new measure was subject to the usual bank lobbying and one must have serious doubts about it. Nonetheless, if we rule out the RWA measure, then we are stuck with a choice between total assets and the Basel III-based Bank of England version of leverage exposure as the only exposure measures available to work with.

With both the capital and exposure measures, we should also be concerned with the mischief that arises from highly gameable accounting rules. Examples include the abuse of hedge accounting rules to hide risks, and the abuse of International Financial Reporting Standards (IFRS) accounting rules to create illusory capital, which makes banks appear more capitalised than they really are, and to create fake profits, which can then be siphoned off as bonuses to the bankers who created them and in the process decapitalise the banking system. [3]

Returning to our main theme, the Bank uses two different capital-adequacy ratios in its stress tests:

  • The first is the ratio of CET1 capital to RWA – the so-called ‘CET1 ratio’ – and it is the tests based on this ratio that the Bank always highlights in its headline commentary on the stress tests.
  • The second is a supplementary capital ratio (the so-called ‘leverage ratio’), the ratio of Tier 1 capital to leverage exposure.

Neither of these ratios is entirely satisfactory: the first because it uses the worse than useless Really Weird Assets measure, and the second because it uses a softer capital measure (i.e., Tier 1 instead of CET1). However, notwithstanding this latter weakness and one’s doubts about the leverage exposure measure in its denominator, the leverage ratio provides a much better metric of capital adequacy than the ratio of CET1 capital to RWAs, precisely because it is not dependent on the fatal flaws in the latter.

It was therefore unfortunate that the Bank of England chose to focus on stress test results using the CET1/RWA ratio rather than the leverage ratio.

Then there is the question of choosing a suitable pass standard.

One approach is to choose a pass standard that reflects the minimum regulatory capital standards imposed on banks – most obviously, the standards imposed under Basel III. Indeed, the Bank itself suggested pass standards of at least Basel III quality. As it explained in the October 2013 Discussion Paper setting out the stress testing framework:

A key consideration [in setting the pass standard] will be the minimum level of capital required by internationally agreed standards. Banks need to maintain sufficient capital resources to be able to absorb losses in the stress scenario and remain above these minimum requirements.

The document then notes that under the Prudential Regulation Authority’s proposed implementation of CRD IV, the EU Directive on capital regulation, there is a minimum CET1 [to RWA] requirement of 4.5%, and it observes a little later that “CRD IV [also] requires banks to have at least a 2.5 percentage point buffer of capital above the 4.5% minimum.” [4] Note the word “required” here.

In short, the Bank suggests that the hurdle rate/pass standard should be at least as high as internationally agreed minimum required capital standards [read: Basel III] and it acknowledges that this minimum required standard is at least as high as 7%.

But for reasons best known to itself, the Bank then chose a pass standard that fell below these minimum standards: it set the pass standard at 4.5%.

A cynic might suggest that the Bank chose a mild ‘stress’ scenario, focused on a very ‘soft’ and highly gameable capital adequacy metric (the CET1/RWA ratio) and chose a very low pass standard to engineer an undeserved ‘pass’ result for the UK banking system.

I am not suggesting that the Bank actually did this, but the Bank’s stress tests could be construed that way.

And this is a big shame, because it undermines the credibility of the whole exercise – the Bank of England failed its own stress test.

In the next posting, I will start to examine the stress tests in more detail.

References

[1] See A. G. Haldane, “Constraining discretion in bank regulation,” April 9, 2013, p. 15, chart 2.

[2] See G. Kerr, “How to destroy the British banking system – regulatory arbitrage via ‘pig on pork’ derivatives,” The Cobden Centre, January 21, 2010.

[3] For more on these problems with IFRS accounting standards see T. Bush “UK and Irish Banks Capital Losses – Post Mortem,” Local Authority Pension Fund Forum, 2011, and G. Kerr, “The Law of Opposites: Illusory Profits in the Financial Sector”, Adam Smith Institute, 2011.

[4] Bank of England, “A framework for stress testing the UK banking system,” (October 2013), p. 28.

We're afraid that it's true, maternity leave does contribute to the gender pay gap

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This might not be quite what people want to hear but it is in fact true:

Women's careers can nosedive if they take more than a year off after having a baby, experts warned yesterday. New mothers may struggle to get back into the workforce, earn less and be passed over for promotion in what has been described as a ‘motherhood penalty’. A panel of women representing the teaching, legal, medical and recruitment professions told MPs that mums who spent more than 12 months on maternity leave were ‘penalised’. Dr Sally Davies, of the Women’s Medical Federation, said: ‘Anything more than 12 months is a detriment – you will not be looked at quite in the same way, sadly, when you return.’ Amanda Fone, chief executive of F1 Recruitment, said she would discourage women and men from taking more than a year off to care for children because it was ‘so difficult’ to return to a role equivalent to the one they left. She claimed legislation had ‘got in the way’ of women being able to have honest discussions with their employers about their plans to have a family.

As we've pointed out many a time before we don't in fact have a "gender" pay gap any more. What we do have though is a motherhood pay gap. And this is made up of two rather different things. The first is simply the general societal background to the process of child rearing. Whether it should be this way or not (not that it is a surprise in a mammal species) it is true that in general women take on more of the child rearing work than men do. Thus things like careers, on average, take a bit more of a back seat for women than they do for men. Perhaps that should change: but a goodly part of the distinction between male and female average wages comes from that deep rooted fact of our society, not from any discrimination by employers.

The other cause is the actual process of having the children themselves and that associated maternity leave. Some part of the pay gap is not because of that lesser desire for the cut and thrust of business, but because of that time taken out of the workforce. Imagine, say, two years paid maternity leave: and the possible average of two children per woman who has any children at all (about right) that would be four years out of the labour force, or well over 10% of the average working life. Climbing that greasy pole is simply going to be more difficult with that disadvantage.

There isn't in fact a solution, at least not a legal or governmental one, to either of these points. whatever ones' views on this, or indeed innumerable other possible problems, it simply is just true that some conundrums just don't have solutions.

Shareholder 'say on pay' is completely irrelevant

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I was on Radio Five Live the other day debating CEO pay. On my side, arguing that high CEO pay is not necessarily bad, was Chris Philp, the Tory MP for Croydon South who sits on the Treasury Select Committee. His arguments echoed those I regularly hear: shareholder capitalism is good generally, but it's bad that non-executive directors on remuneration committees set pay for executives; that these pay awards are rarely voted down; and that few shareholders actually vote. What we need to make sure shareholder capitalism is working, this popular argument runs, is to make sure that shareholders are vocal and closely scrutinising boards.

This is completely false. For the obvious, intuitive reason as to why this is false, ask yourself why all public firms, owned by shareholders, would choose to set pay by remuneration committee if that meant they'd waste millions overpaying their executives.

But wait—isn't this because shareholders don't vote enough on firm decisions and boards get away with murder? No, this explanation is also false. It's false because shareholders have two tools to make sure their money is in good firms: making the firms they have money in better or moving their money to good firms. In practice, doing the former through shareholder action is pointlessly costly, and shareholder capitalism has much better mechanisms, so shareholders overwhelmingly, and effectively, do the latter.

When firms do bad things, shareholders simply move their money out. Since board members and executives tend to be large shareholders in a firm themselves, the departure of other shareholders, driving down the share price, is a huge personal incentive to run it well.

But ignoring this, it's clear how the exit mechanism alone, combined with profit-maximising market institutions like hedge funds, will shift capital towards well-run firms and away from badly-run ones; towards firms whose remuneration committees use shareholder money well and away from those who don't without any need for a single shareholder voting once.

Centuries of capitalism tell us that the market values 'say on pay' very little, and aloof, powerful boards quite a lot. So does the academic literature.

Similarly, to those unfamiliar with the power of 'exit', the fact that shareholders allow remuneration committees to write lucrative 'golden parachutes' into executives' contracts—seemingly rewarding them for failure—is bemusing. But golden parachutes are actually good for firms that award them, as they make bosses less worried about revealing bad info about a firm to non-execs in a timely manner. Regulatory fair disclosure rules, by contrast, don't work.

If say on pay was so necessary to shareholder capitalism's success, why have firms practising it not taken over the market, and the world? That's the question Philp et al. need to answer before they pressure—or worse, force—firms into broader adoption of stockholder votes on pay.

ASI publications are now available in Farsi!

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ASI publications have now been made available to readers in Iran, thanks to the Network for a Free Society and CAPTO. The publications have been translated into Farsi and published on CAPTO's website. Books available include "Public Choice- A Primer", "Foundations of a Free Society", and "The Condensed Wealth of Nations", all by our Director Dr. Eamonn Butler. The link to the books in Farsi can be found here.

Also featured on the website is a humanities based magazine "The Excellent Organisation", which this month features selected pieces from "Freedom 101" by ASI President Dr. Madsen Pirie, and "Foundations of a Free Society" by Dr. Eamonn Butler.

The magazine, "The Excellent Organisation" can be found here.