The year of the insurrectionists

The year of the insurrectionists

This is very much the year of the outsider, and the year in which the establishment machine politicians are rejected by angry voters.  Donald Trump is a complete outsider, yet in a series of bruising battles that make up US primaries, he has seen off every single establishment party-machine politician ranged against him.  Now there is only one more left against him, and that is Hillary Clinton whom he now faces in November. 

She is almost the embodiment of machine politics, and has the misfortune to face a populist outsider in a year when conventional politicians are mistrusted.  Furthermore, she is tainted as well as mistrusted, with enough doubts about her probity to dampen her support.  The chances must be very high that come November, Donald Trump will be elected the 45th President of the United States.

Why Britain’s company law is not fit for purpose

The closure of British Home Stores shows not only how badly managed the company has been. It shows how Britain’s company law is not fit for purpose.

Founded in 1928, the company was one of Britain’s longest-established high-street department-store brands. But it has ended up with a £571m pension deficit, all its 163 stores will close and 11,000 jobs will go. Sure, the high street is unforgiving? But how can such a giant be brought so low?

Step forward Sir Philip Green and Dominic Chappell, particularly Green, the high-profile businessman so regularly pictured with supermodel Kate Moss on his chubby arm aboard his superyacht. Green and other investors took more than £580m in dividends, rent and interest payments during his tenure at BHS; Chappell’s Retail Acquisitions consortium was paid millions in fees and salaries. Meanwhile, Green did not close BHS’s defined-benefit pension system (as most other large and small companies have done, following Gordon Brown’s disastrous change in the regulations while he was Chancellor). What on earth was he thinking? Was he thinking about the future at all?

It’s a bad advertisement for capitalism, right enough, when the reality is that most businesspeople scrimp, save, mortgage their homes and watch every penny to help their companies grow. 

But it’s an even worse advertisement for all the UK (and, dare I say it – EU) regulation around business governance. Designed to keep businesses transparent and well run, our company law now has the opposite effect. It has tried to substitute official rules for shareholders. And shareholders are the best regulators – after all, it is their business, and their money at risk. 

Sadly, UK and EU politicians did not appreciate this regulatory role of shareholders (though the rising volume of shares held by corporatist-minded pension funds did not help either). Shareholders were seen as merely money-takers; their power was curbed and the powers of boards and executives grew – with everyone being told that’s fine, because there were so many rules to control them.

It is not a new problem. Philosopher and corporate law expert Dr Elaine Sternberg pointed it out in the ASI report Competition in Corporate Control as long ago as 2003. Let shareholders run their businesses as they want, she argued. If some mess up – paying too high salaries, say, or giving executives too much control – nobody is likely to do that again. Competition in corporate control is self-regulating: good systems crowd out the bad. But our regulatory system, substituting top-down rules for market-driven competition, kills that self-regulating process.

It really is time for a bonfire of controls. At least then when we see CEOs sipping G&Ts on their £100m superyachts, we could be confident that deeply interested and farsighted share owners figured they are worth it.

If corporations have all this power then where the heck is it?

Peter Walker points out that there's a certain problem for those who would claim that corporations have some vast amount of market power which they use to lord it over the rest of us. If this were true then we wouldn't see corporate disasters:

Part of the idea here is that large corporations have power over markets and their consumers. When "corporate power" get mentioned I sure people think of companies like Microsoft, Google, Coca-Cola, Pepsi, and McDonald’s etc and the control these firms are said to have over their sectors of the economy. One aspect of this power is the control these corporations are claimed to have over their consumers, but if these "powerful" firms produce spectacular failures, then perhaps consumers are not as docile as some would suggest and we overestimate the extent of said corporate "power".

The latest example might be Microsoft's entirely dismal failure with Nokia. And it really has been an absurd failure as this rather hopeful email details:

Microsoft and Nokia created opportunity for companies in need of ICT professionals
1,000 ICT professionals available in Tampere, Finland, for any industry

Recent news about the Nokia and Microsoft layoffs are good news for those in need of experienced and international ICT professionals. The City of Tampere, Tampere Region Economic Development Agency Tredea and Invest in Finland (Finpro) address this unique opportunity with #Tampere4ICT campaign to attract foreign investments.

Microsoft Mobile and Nokia (Alcatel-Lucent) will release highly experienced technology professionals in the Tampere Region, Finland. There will soon be around 1,000 ICT professionals available, with experience of 10-20 years and with ability to build new, innovative solutions for any industry. Especially companies looking to set up product development, and willing to move fast, there is now a unique opportunity to acquire fully functioning product creation teams to develop advanced connected products.

They bought the company, played around with it for a couple of years and are now effectively closing the whole thing down. That simply wouldn't have happened to a corporation that was wielding great market power. And the explanation for why it did happen is simply that no more than some trivial fraction of us consumers were willing to use Windows for Phone. We beat one of the largest corporations on the planet and all their tens of billions of expenditure just by saying "Nah, think I'll have that one over there instead, ta very much." 

The notion of great corporate power over us consumers doesn't really stand up to close examination.

Why Keynesians are wrong

The most prominent theory in macroeconomics is New Keynesianism. One of the most striking and unique predictions that New Keynesianism makes is that when the economy is in a recession, everything gets flipped upside down. Specifically, when interest rates are at the zero lower bound and the economy is stuck in a liquidity trap, most of the things that would usually improve economic outcomes actually worsen them.

The NK model predicts that supply-side loosenings, like lifting employment regulations, cutting taxes or liberalising immigration laws, will actually make things worse in a recession, as will interventions that increase price flexibility. However, this prediction—familiar from Paul Krugman's NYT columns since 2007—seems to have been strongly challenged in a batch of recent papers.

The first is "Supply-Side Policies in the Depression: Evidence from France", by Jérémie Cohen-Setton, Joshua K. Hausman, and Johannes F. Wieland. It, as the title suggests, looks at data in from the great depression in France, one of the areas that suffered it from the longest, due to the obsessive desire of the Bank of France never to sever the currency's link with gold. The Keynesian model would predict that devaluation and leaving gold were the only game in town, but in fact the negative supply-side shocks that happened at the same time depressed activity, even in a deep slump.

The effects of supply-side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time-series and cross-sectional evidence that these supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one-sector new Keynesian model and with a medium scale, multi-sector model calibrated to match our cross-sectional estimates. We conclude that the new Keynesian model is a poor guide to the effects of supply-side shocks in depressed economies.

The second is "Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data", by Julio Garín, Robert Lester, and Eric Sims. It looks at more extensive data on productivity. The Keynesian model predicts worse productivity improvements from supply shocks that occur in slumps but the data finds quite the opposite result.

The basic New Keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound (ZLB) compared to periods of active monetary policy. We test this prediction empirically using Fernald's (2014) utilization-adjusted total factor productivity series, which we take as a measure of exogenous productivity. In contrast to the predictions of the model, positive productivity shocks are estimated to be more expansionary at the ZLB compared to normal times. However, in line with the predictions of the basic model, positive productivity shocks have a stronger negative effect on inflation at the ZLB.

The third, "What Was Bad for General Motors Was Bad for America: The Automobile Industry and the 1937/38 Recession" by Joshua K. Hausman, tackles the question less directly, finding that shocks that impacted the car industry, even if they weren't aggregate, demand-side shocks, nevertheless had large impacts on overall output and income.

I think the New Keynesian model is wrong about a lot of things. It seems that the impact of supply-side moves in a recession is yet another prediction it gets wrong.


This is a referendum on the EU, not the single market

Today three opinion polls - from YouGov, ICM and TNS - are all putting Leave in the lead. Those are on top of other very recent surveys suggesting a shift in Leave’s direction.

That has obvious significance and it is causing reverberations in the Remain camp.

Taking a step back for a moment to last week, on Tuesday we saw the Telegraph’s Ambrose Evans-Pritchard coming out in favour of the Flexcit plan by Dr Richard North, and my own ASI paper called “The Case for the EEA Option” that borrows from the North plan.

That article prompted leading Remain thinker Charles Grant of the Centre for European Reform to agree that using the EEA as a transition point was indeed a viable exit option - to my knowledge, the first Remainer to do so. Grant also agreed that parliamentary arithmetic very much favoured this option and, further, that top Vote Leave MPs would be able to support such a manoeuvre after a Leave vote.

Now this morning, the BBC’s James Landale has reported that Remain MPs are indeed saying that while they would have to deliver a Leave proposition after a Leave vote, they would not support leaving the single market (the European Economic Area), which is separate to the EU.

There are two ways to view this. Firstly that they are genuinely concerned about leaving the single market more than leaving the EU. That would make perfect sense as so many of their objections to leaving the EU are actually objections to leaving the single market. But secondly that they are making mischief for the Vote Leave campaign that has nailed its colours so firmly to the border control mast.

I suspect it is the first but with a helpful side-effect (to the Remain camp) of the second.

And of course the other paradoxical side-effect is that it derisks the economics of Leave and makes Leave more attractive to wavering voters.

Sure enough, Dominic Cummings for Vote Leave responded by suggesting that MPs were saying they would ignore a Leave result. Yet that is exactly what they are not saying. Rather that “Leave only means leaving EU membership”. The BBC report made it very clear:

One minister said: ‘This is not fantasy. This is a huge probability. The longer we move away from the referendum, the more the economic pressures will grow to keep some links with the single market.’
Another said: ‘We would accept the mandate of the people to leave the EU.’

Indeed they would. Because in the event of a Leave vote, the precise question on the referendum ballot will matter. A lot.