The Pin Factory Blog

Employers are just so beastly, aren't they? Attempting to get around their responsibilities to the workers. Why, some of them even decide to hire temporary workers instead of loading up on full time long term peeps that they have to pay extra costs to employ!

This example comes from the US:

Labor Ready's business customers are billed for the temp workers' wages, plus fees that cover things like workers compensation insurance, payroll taxes, and, of course, a significant markup. The clients save cash on HR and training, and they save even more by eliminating the need for health insurance, paid sick leave, vacation time, and other standard employee benefits.

We could call this beastly: indeed I will call it beastly. But no, it's not the employers who are being so by trying to dodge those costs like health insurance, paid sick leave, vacation time and other standard employee benefits. Rather the beasts are those who load all of those things onto wages while insisting that they're not really costs at all.

The truth is, as ever in this dismal science of economics, that there is no such thing as a solution. There are only trade offs. It may well be that a decent and civilised society will provide these desirable things to the people who do the scut work of that society. I certainly think it desirable as I'm sure do most of you. But we must also recognise that there are costs associated with this. Here, the obvious costs being those people who cannot get any job at all because of the costs of providing those desirable things.

We can see that there are some such as well: for some do get jobs when those costs are not imposed while they do not get jobs while they are imposed.

The solution here, for all that there are no solutions so let us say a better trade off, would be to abolish all the laws that insist upon those extra costs. That way the maximum number of people who want a job will be able to find one: a desirable outcome. But, I can already hear the cries, what about paid vacation, what about paid maternity leave? Interesting examples: for the US has no national legislation insisting upon either of these. And yet just about everyone in full time employment in the US gets both of them. Proving that both employers and employees think them desirable and entirely worth having if as and when the value added of the labour is sufficient to provide them. And also not worth having when their provision bites too deeply into the value added and thus reduces cash wages too much: and most certainly showing that there is no need at all to have a law insisting upon them.

The twitterati are out in force again this week, this time angry at G4S and their failure to secure enough staff for the Olympics. You’ll no doubt be familiar with the scandal. You don’t have to look far to find someone putting forward the argument that this is a textbook example of why we shouldn’t outsource state services.

Certainly G4S has made mistakes, yet I’m not convinced by the public outcry against outsourcing. Think of Bastiat’s That Which Is Seen and That Which Is Unseen. We see the G4S failure, but we don’t see what would have happened had the state been tasked with Olympic security.

Clearly, neither the state nor the private sector are perfect. Tasking either with Olympic security had risks that something would go wrong. The state seems to have a nasty habit of making mistakes – data is constantly leaked or goes missing, the Home Office seems incapable of running an immigration desk, not to mention the quality of state healthcare and education provision lagging far behind their private counterparts. The list goes on. To me it seems that the rational thing to do when deciding who should provide services is to go with the least risky option. To say that I’m not convinced that this option is the state would be an understatement.

Yet the popular narrative emerging from the G4S scandal is that we should trust more service provision to the state. I can’t help but think had we done that with Olympic security, the state would have had as just a difficult time securing staff, if not more.

And what would have happened had the state been in charge, and yet the troops still had to be called in? A public outcry against state provision? A wave of commentary saying how this is a textbook example of why we should outsource?

No. Of course not. It would have been a minor scandal at best. Probably not even serious enough to warrant the loss of a ministerial job, yet there are calls for Nick Buckles, head of G4S, to stand down. We would shrug off state failure as though it were the norm.

We hold the private sector to a far higher standard than we do the state. Holding those who provide public services to account is hardly a bad thing, but if we don’t demand the same high quality from the state as we do from the private sector, our public services will be doomed to mediocrity.

For some weeks transport within London has been dislocated and delayed by road closures as Olympic venues are prepared.  Soon now whole lanes will be closed off to ordinary drivers so that these 'Games Lanes' can whisk Olympic officials around in their limousines without hindrance from other motorists.  Any cyclist entering one of these lanes faces a fixed £130 penalty, and motorists have been advised to avoid London altogether during the Olympics.

My use of the word 'Olympic' risks an enforcement lawsuit from the committee 'protecting' the trademark.  Also banned are words and phrases made up of terms that might refer to the Games, including London, 2012, games, medals, gold, silver and many more.  Bullion dealers should be careful when they talk about their work.

The Spectator tells of a butcher in Weymouth banned for arranging a display of sausages like the 5 Olympic rings, and of a florist in Stoke-on-Trent ordered to remove similarly arranged paper tissues in her window.  Only Macdonald's chips will allowed at the Olympic stadium; others are banned.

There is a no fly zone around London, and some homeowners have to put up with anti-aircraft missile batteries installed at the top of their apartment blocks.  Residential areas will have to put up with the noise of commercial garbage being collected nearby between 1.0 and 4.0 am during the games.

There are queues of several hours sometimes for air passengers arriving at Heathrow, even before the games have begun.  The cost of all this long exceeded its planned budget, and is now reckoned to top £12bn, though if the cost of public transport upgrades is included, even that figure doubles.

And for what?  So that the "international sporting community" can have a good time at the expense of the locals?  So that Olympic officials can congratulate themselves on the way the locals were whipped into line to minimize any inconvenience they faced?

Welcome to the true spirit of the Olympics.  Its rings stand for corporatism, cronyism, extravagance, bullying and arrogance.  The sensible course is to be as far from it as I can be until it's all over.

In August 2006 the Adam Smith Institute produced its own (and only) wristbands.  People were being urged at the time to "Make Poverty History."  While it would be nice if it happened, the slogan was largely empty in that it did not involve actually doing anything. 

Our case was that no country has ever emerged from poverty through development aid, and no country has ever done it without trade.  To us that seemed to suggest that opening our markets to their goods might help them more than sloganeering would.

Trade creates wealth.  Full stop.  The rich countries did not become so by stealing wealth from others; they did it by creating wealth through trade.  When people exchange, each gains something they value more in return for something they value less, and both become richer.

Our wristbands said "I buy goods from poorer countries," expressing something people actually do about relieving poverty, as opposed to sloganeering.  The wristbands were made, of course, in poorer countries, and we produced thousands of them.  We sent one free to anyone who gave us a mailing address, and they went all over the world.  We had a second batch made, then a third, then we stopped.  We still have requests come in, years later, but the stock is long gone.

The arguments against free trade have not gone, however.  We said then:

"The trade which can lift peoples out of poverty is assailed from many directions. A motley assortment of protectionists and anti-capitalists use every argument they can lay their hands on to protect their interests. From the CAP to ‘food miles,’ the effect is to deny poorer people the chance to gain wealth by selling us what they produce."

Alas this is still true.  In straitened times we are urged to buy local, and protectionism is urged to protect domestic industries.  This is just a concealed tax, in which we become poorer by paying more for goods and services that free trade would have given us more cheaply.  We become poorer through protectionism, while poorer countries are denied the chance to become richer.  This is as bad a deal now as it was then, and as it always will be.

A series of news items on cash in recent days underscore the perversity of the world’s  economic situation. What they all have in common is the growing piles of cash around the world that no one knows what to do with. Consider these items:

• Some fund managers like JPMorgan Chase, BlackRock and Goldman Sachs have closed some money market funds, notably those denominated in euros, to new customers. More money at current low rates would just hurt current holders.
• A survey by the Association of Finance Professionals which represents US corporate treasurers found that 41% of them have more cash than ever before and expect that to grow. More interestingly, they’ve more of that pile - over 50% - sitting in simple bank accounts than six years ago when it was just 23%. These treasurers are eschewing capital markets because returns are too low to justify the risk. In short, they’re more comfortable holding a depreciating asset (cash) than risky longer-dated securities.
• The European Central Bank reported that funds kept at its overnight deposit facility fell in the week after its rate cuts to €325 billion from €809 billion but it all merely moved to the ECB’s current account facilities. Jens Larsen, chief European economist at RBC Capital Markets said. “The real concern for the ECB is not whether banks keep money in one account or the other, but whether the cut in rates has any effect on credit creation and real economic activity.” Clearly no.

Switzerland’s central bank is estimated to have spent some 62 billion Swiss francs (about $63.7 billion) buying up euros in June, up from CHF52 billion in May to prevent appreciation of the franc. One analyst said clients are wondering whether other policies will be needed “to slow capital inflows either through capital controls or negative rates." Those diligent, hard-working and prudent Swiss are wasting their resources buying piles of foreign cash they don’t need.

These are vast sums sloshing around wastefully but in a completely rational response to utter fear of the future. Like medieval peasants hiding copper pennies from rampaging barbarians, some of the smartest people on earth are happier sleeping on a lumpy mattress than investing in the future.

Monetary policy has run its course. Zero interest rates and quantitative easing may have saved the world’s banks from collapsing but now there’s not much point in pushing those strings anymore. As for fiscal policy, that’s also been exhausted – not even the mighty Keynes could have imagined the budget deficits and national debts from Japan to Europe to America.

Confidence in the productive sector remains low. How about some real-world policies that investors can believe in? Like completing Europe’s single market in services and unifying the disparate patent systems? Or simplifying tax codes that do away with special breaks, tax shelters and market distortions in favour of uniform but much lower tax rates – Reagan’s wistful tax return on a postcard ? Or making it easier to fire redundant or poor workers to encourage hiring anyone the first place?

Any of these would do more for confidence and growth than yet more container loads of cash. 

There's an interesting little number that comes out of the TUC's number crunching on the tax and income redistribution system. One that leads to a very interesting question: how much income redistribution is enough? What is an acceptable level of equality in other words?

The effect of taxes and benefits is to reduce an original income disparity of 29.6 to 1 to a final income ratio of 6.3.

This is using deciles and it is the median income of each decile so it's not capturing the effects at the very top, the 1%, very well. Leaving that aside though, what do we think is an acceptable level of inequality that the society should have?

I start from some fairly basic points: I doubt very much that any of us here think there shouldn't be a safety net of some sort. Maybe not the one we have (and I'd agree with that) but the idea that somehow society collectively provides for those who cannot for themselves would gain 100% support, no? Once that principle is conceded then there is going to be some redistribution of incomes. The question I'm interested in is, well, when have we redistributed enough?

The TUC's figures show, to personalise the income deciles, that someone who studied medicine for 7 years (yes, fully qualified doctors will all be in that top decile) plus a first degree are enjoying 7 times the income of someone who has never worked and is reliant upon benefits (could be anywhere in the first three deciles dependent upon family size and circumstances).

Is that enough redistribution? Not enough? And why either way?

My personal answer would be that's too much. Certainly I'd say that an airtight case can be made against further redistribution: we're done here, problem's over. But I'd be interested to hear your views. How much equality is enough?

Sam and I have been patting ourselves on the back for working out that the best and simplest way of increasing the incomes of the poor is to stop taxing them so bloody much. Raise the income tax and NI limits so as to pull all of those we define as poor out of such tax nets. We were thinking around the level of the minimum wage, around the £12,000 a year sort of level. And now I find out that we're being outflanked by people even more liberal than we are:

Both authors agreed a longer term vision to fundamentally restructure the tax and benefit system. This includes a personal allowance of £20,000 which would take half of the population out of paying income tax altogether, but would leave those earning above £36,000 contributing more because of changes in tax rates.

Well, not quite, for we're suggesting lifting the burdens of national insurance as well in a manner that they are not quite.

But even with that I'd be entirely happy to go to £20,000. But I don't think it will happen. For the quite simple reason that those people left don't have enough money to pay for the amount of government our governors wish us to have.

You see, there are two constraints to how much taxation can be squeezed out of the population. The first is this one that we're arguing about now: the morality of insisting that the poor hand over widow's mites in order to pay for bureaucrats. We're all tending towards the view that this should not be happening. On the very simple and basic moral grounds that they're poor dammit and should be keeping what money they do have. To take half the working population out of the direct taxation net is just fine by me on this very basis. I've no problem at all with it being the rich that pay for everything.

The thing is, the reason it won't happen, is that there will be a lot fewer everythings provided by government if this does happen: for there really is a Laffer Curve. A rate above which you get less revenue for higher rates. A general consensus seems to be forming that this is at around the 50-55% level for all taxes on income or, with our current NI and income tax system, a top rate income of 45% or so. On capital gains taxes, around 25-30% (compare with our current 28%). Now if that's true then there isn't any room to take more tax from the top end. We reduce tax from the poor, yes, this is excellent on moral grounds. We cannot get more tax from the rich (we can increase tax rates but we won't get more money). Thus the only way to make all of this balance is to have less government.

Which I, I have to admit, am entirely happy with.

The Financial Services Authority grew significantly in the 2000s, to 4,000 staff. But its tick-box approach to regulation took its focus off fundamental issues and it was unprepared for the unfolding financial crisis. Hence George Osborne’s decision to replace it with new agencies, the Financial Conduct Authority (FCA) for consumer protection and the Prudential Regulatory Authority (PRA) to supervise financial firms.

It is a mistake to have two regulators, second-guessing each other. They intend to be continuously monitoring financial firms, rather than just setting broad rules and punishing transgressions, which will increase the volume and cost of regulation on the sector. They also seem to have no understanding of the value of competition in regulating firms’ activities; and their high regulatory cost will not encourage new firms to set up.

The FCA seems to believe that it can train new staff in a matter of months, and specify in detail how firms in a complex sector should compete. It has provided no performance measures by which its success or failure could be judged.

A better model for consumer protection is the Financial Ombudsman Service (FOS), which sets broad rules and deals with hundreds of thousands of complaints on a staff of just 1,000. The FOS could protect consumers well, without the need for a further regulator in the form of the FCA.

The Bank of England has recovered its supervisory role. In this, it must not be diverted into the bureaucratic tick-box culture of the FSA.

The Prudential Regulatory Authority is conflicted between saving troubled firms and ensuring the health of the financial system as a whole, which will require some firms to fail from time to time. Early signs are that it does not appreciate the regulatory role of auditors, shareholders and boards and will load more unnecessary bureaucracy and cost onto companies.

Where malpractice is found, there is confusion over whether individuals or firms should be penalised. Targeting individuals would be more effective. Auditors should also face personal penalties for failure.

Libor malpractice does not require endless committees and investigation.  The solution is quite simple.  What should happen is that the firm contracted by the British Bankers Association to consolidate the figures should also be contracted to collect the data from their sources and ensure their probity, .e.g. by checking claimed interest rates by payers with payees.  In other words, the role of the submitters should be taken out of the bankers’ network.

The heavy price of French participation in the 2010 G20 meeting in London was to hand financial services rule-making to Brussels. We should ensure that EU-wide rules are enforced uniformly across the EU, and not gold-plated here.

George Osborne’s plan to replace the FSA actually makes things worse, with more overlapping and conflicting regulators and greater costs arising from the bureaucratic tick-box culture. Regulation would be stronger if it were simpler. With this in mind, we recommend:

• The FCA is unnecessary and should be wound up

• The PRA should be slimmed and become an early-warning team to inform other regulators.

• The Money Advice Service, set up from the FSA, should be commercialised or dismantled.

• Regulators must understand and accept the role of brands and competition in bidding up service and value levels. The importance of boards, shareholders and auditors must be strengthened too.

• EU financial regulation must be enforced equally across the EU.

• The Bank of England must resist regulatory creep in EU regulation.

• Auditors and executives must be personally accountable.

Download this report

I was on Radio Five Live this morning in discussion with the Living Wage Foundation’s Director, Rhys Moore. The news hook was the story today about Whitehall cleaners demanding a pay rise, which I’m actually pretty sympathetic to – I’d rather public money went on a slightly higher wage bill for cleaners than the considerably higher wages of the many, many unnecessary quango staff that the government pays for, the bloated public service, and so on.

I quite like the Living Wage Foundation – they work to get businesses to voluntarily pay their low-paid staff more, and I understand that they don’t target small businesses. I’m glad that PR campaigns can be used to pressurise firms into raising low-paid staff’s wages and improving working conditions. That’s a feature of the free market that we should cherish.

Where I probably disagree with many Living Wage fans is that I think it would be a bad idea to make this mandatory. The price floor on wages that a minimum wage creates prices some people out of the market. if a saleswoman who could only sell £10,000 worth of cars a year wasn’t allowed to be hired for less than £11,000 a year, why would a car dealership hire her and make a £1,000 a year loss?

The people who tend to lose out are young people – the term “NEETs” (Not in Education, Employment or Training”) has entered policy wonk lexicon in recent years as youth unemployment has grown and grown. It is arguable about how much of this is down to minimum wage laws – the empirical evidence is conflicted, and macroeconomic factors are obviously a significant component of the current problem.

Raising the minimum wage to a Living Wage level would do nothing for these people, and would push people at the margin into making a loss for their employers.

Nevertheless, low wages are a serious problem. As Tim Worstall has pointed out, the real travesty is that we take so much money in tax from low-wage workers. In fact, the difference between the after-tax Living Wage and the before-tax minimum wage is virtually equal to the tax burden imposed on minimum wage workers — £12,154/year with the Living Wage, £12,160/year with an untaxed minimum wage. In other words, if minimum wage workers didn’t have to pay tax, they would be earning a Living Wage.

Taking these workers out of tax would square the circle of the Living Wage debate – they would be earning a basic salary without more people being pushed out of employment. Indeed, by making work pay more, some people at the margin of earning benefits would be enticed into work – a much-needed carrot to the government’s stick of reducing benefits.

It would only mean a small cut to government revenues – the bottom 50% of taxpayers pay just 11% of taxes. But, as I said this morning, if we can’t find additional savings in health, education, defence, corporate welfare and civil service spending to reduce the burden on people at the bottom of the wage ladder, we need to have a serious think about our priorities.

It is indefensible that we tax the poorest workers while simultaneously tolerating politicians talking about the need to, somehow, improve their lot. There is a simple solution that should appeal to Living Wage supporters and free marketeers alike: stop taxing the poor, and stop it now.

Tim Worstall and I rarely disagree about anything.  Indeed, if the genie of the lamp gave me three wishes, the first would be to have Tim Worstall installed as Economic Advisor to the Treasury.

Tim, however, claims he is a left-winger, whereas I know I am not.  He says:

But as I have argued before, we also share the basic lefty goals: we want a world that is getting better, a greener one, one in which all can achieve their potential and so on. As long as we stick to political vacuity we sign up to pretty much all of the desired goals. All we argue about is what is the best way to get from here to that desired goal.

I do not agree that these are left-wing goals.  They may be goals that are shared by some left-wingers, and certainly are ones that I espouse.  I also go along, of course, with Tim's commitment to breaking monopolies and creating conditions for competition and choice.  But it is worth looking at what 'left wing' and 'right wing' actually entail, apart from their BBC usage as synonyms for 'good' and 'bad.'

Tim's case (with maybe just a touch of the mischief that is a hallmark of the ASI) is that sharing those goals makes him a lefty, albeit one who thinks free markets and judicious tweaking are the best way to achieve those goals.  I, in contrast, do not think that it is your goals that define your position on the left or the right. 

There are those who think that individuals and their families can generally do better for themselves, and that the order produced by the interaction between them is more humane and more efficient than an imposed one.

On the other side are grouped those who think that society can do these things better collectively, acting in concert to plan and produce an order different from the one that spontaneity would achieve, and one that they think will achieve more worthwhile things.

Those leaning to the right tend to be more concerned with opportunities for self-betterment, whereas those who lean left seem more preoccupied with equality.  And since I have a deep distrust of central planning and a deep dislike of forcing people to live out someone else's ideal of what they ought to be like, I do not describe myself as left wing.  Tim and I will just have to differ on this one.