The Pin Factory Blog

Today we release our latest policy paper, "Mind Your Own Business!". Elaine Sternberg, the paper's author, argues that high executive pay is not a "market failure" as some politicians have claimed, but a natural and perfectly reasonable function of a well-run firm. Shareholder power is critically important, but where problems have arisen it is because of government meddling in corporate governance. She outlines some of her arguments in today's City AM:

The High Pay Commission, an inquiry set up to look at executive remuneration, concluded that high pay is corrosive and unfair. But the purpose of corporations is not to promote an egalitarian society. Corporations aren’t creatures of the state, there to serve official social ends. They are the private property of their shareholders, and serve the ends designated by their owners.

Corporate governance refers to ways of ensuring that corporate actions, agents and assets are directed at the constitutional objectives of the corporation, set by the shareholders. It should be up to the shareholders to determine the rights, responsibilities and remuneration of all their corporate agents, and to specify the kinds of accountability they require. Given the varied history, size, activity, jurisdiction and shareholder composition of corporations, one size will emphatically not fit all.

Regulation is counterproductive. It is inflexible and imposes substantial costs, both in funds and freedoms: even disclosure is not costless. The High Pay Commission programme would increase intervention, impede corporate governance, and damage business. In demanding detailed disclosure, greater diversity, inexperienced directors, claw-back provisions, and binding votes, the High Pay Commission’s suggestions would further constrain shareholders from governing their corporations in their own ways.

The full report is available for free download now.

There are two actions that might put the UK's finances and its economy into better shape.  Unfortunately, neither of these can be done.  The first policy would involve hauling down the long-term unfunded entitlements and largely replacing them with self-supporting schemes aided by a measure of transfer payments to the small number unable to fund their own future needs. 

The second measure would involve setting loose the creative abilities of the private economy by a big round of tax cuts, both personal and corporate, and the repeal of many of the unnecessary and bureaucratic regulations that hold back enterprise and ambition. 

Both would probably work, but neither can be done in this political climate.  The electorate would be likely to throw out any government that tried to cancel their future benefits, and would be hostile to tax cuts for business and enterprise at a time when their own living standards were either static or falling.

Since it is unlikely that future generations will pay for those unfunded entitlements, future governments will probably have to borrow more in order to finance them.  And since economic growth will not surge forward without cuts in taxes and regulations, the national indebtedness will not diminish in proportion to the total economy. 

In an ideal world, think tanks and commentators would work to persuade the public of the advantages of both of these policies, clearing a pathway that politicians could walk upon.  In this real world, however, there is little chance of the electorate ever being persuaded to vote for reduced benefits.  It is just possible that the public could be shown that they, too, would gain from tax cuts on enterprise, and agree to support it, but only to a limited extent, and with measures far more timid that those needed to generate vigorous growth.

It is far more likely that governments will just muddle along, incurring great unpopularity for trivial cuts to entitlements, and making trivial tax cuts with one hand while increasing taxes elsewhere with the other.

This is a pity, because these twin tracks to recovery could utterly transform Britain, and do it very rapidly, too.

This May marked the end of an amnesty by the Information Commission Office (ICO) on enforcement of the EU Cookie Directive. It requires all website owners to update their content to request the viewer’s permission to use cookies. While ‘essential’ cookies are exempt, this doesn’t include cookies that track usage or allow targeted advertising, which are critical to improving the user’s experience (through methods such as A/B Testing). This compromises the ability of firms to provide services that people want, and to do so free of charge.

What this law won’t catch is those who actually mean to do harm. The online community already counters those who would genuinely seek to misuse cookies more quickly than a government agency could shut down a server. The usefulness of cookies to do harm is also limited, and by telling people it is cookies they should be concerned about shifts very real concerns about using the internet safely away from genuine threats.

Meanwhile well-meaning service providers break the law without even realising it. The ICO’s own video to publicise the change has less than 10,000 views, while over 175,000 new .uk sites were registered in May alone. Providers simply aren’t aware that the technology they put in place to improve their products is making them criminals.

In practice, the law means only that users will be faced with constant interruption. Once the user has been asked for permission for a specific cookie for a specific site a hundred times, it seems unlikely that they would continue to read about what each cookie does. Eventually only the illusion of security is provided, breeding complacency.

Cookies have been around almost as long as the internet has been commercially available, and for those that are concerned about them, there are already a plethora of techniques to avoid them such as browsers and scripts. These are one-button fixes as opposed to a heavy-handed law, which requires updates on upwards of half a billion web pages.

While this will have little impact on large businesses, which can move their servers out of the EU and avoid the process entirely, this will be a blight on smaller providers of web content.  It is these small providers that have made the internet so interesting. Traditional publishing has long been dominated by a much smaller group of voices, and the internet has gone a long way to increasing pluralism. The EU Cookie Directive puts that at risk, while only providing a façade of security.

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

— Judge Learned Hand, U. S. Court of Appeals, 1935.

We generally hear the term ‘Consumerism’ used as a term of abuse, usually by religious movements, pro-state economists, environmentalists and so on. I would argue that, properly constituted, a ‘consumerist’ society is exactly the type of society that we should be striving for.

However, part of the pejorative use of the term comes from a particular meaning attached to it. As the brief but surprisingly illuminating Wikipedia article observes, there are at least four possible meanings of the term:

i) The common use of the term giving an "emphasis on or preoccupation with the acquisition of consumer goods" (Oxford English Dictionary) – which is exactly the meaning which attracts much opprobrium

ii) The original coinage (1915) which referred to the "advocacy of the rights and interests of consumers" (Oxford English Dictionary)

iii) The economic use of the term referring to “economic policies placing emphasis on consumption”

iv) And finally “In an abstract sense, it is the belief that the free choice of consumers should dictate the economic structure of a society”.

Clearly, as Classical Liberals or Libertarians, we will see that (iv) is exactly the kind of economic order that we would like to prevail. This is the argument of von Mises in Liberalism that:

The social order created by the philosophy of the Enlightenment assigned supremacy to the common man. In his capacity as a consumer, the “regular fellow” was called upon to determine ultimately what should be produced, in what quantity and of what quality, by whom, how, and where... The much decried “mechanism” of the free market leaves only one way open to the acquisition of wealth, viz., to succeed in serving the consumers in the best possible and cheapest way.

This must be contrasted to an economic order in which producers are able to dictate to consumers what quantity of quality and of goods they should receive and at what prices, rather than having that determined by, in the long-run, the subjective desires of consumers. In a free market*, producers will be unable to dictate to consumers except in a very few cases, as Hayek and von Mises pointed out. However, armed with the power of governmental intervention, producers will be able to create cartels and monopolies and exploit consumers. This is what Deirdre McCloskey recently pointed out as have many others.

Read this article.

The great thinkers at the nef have insisted that we must reform the UK banking system in the following manner:

We need new institutions such as a Post Bank, Social Investment Bank, Green Investment Bank and new mutual, local and regional banks to provide a diverse, competitive and resilient banking system fit for the 21st century.

They and Compass organised the Good Banking Campaign which said:

The creation of a genuinely mixed and plural banking sector with far more choice for people than the present one-size-fits-all model with its few 'too big to fail' banks. Such a sector would for example include flourishing building societies, local and regional banks, green banks, a post bank run through the post office network, co-operatives and mutuals so that all sections and needs of society and business are properly catered for.

Lovely. Co-ops and mutuals, just get rid of that capitalist part, the shareholders, and everything will be well sweet. From the New York Times:

Spain’s three largest banks — Santander, BBVA and La Caixa — are not expected to request rescue financing.

Ah, something of a problem with the basic thesis then. For two of those three are the capitalist shareholding type banks. All the ones going bust and threatening to bankrupt the entire country are the local, regional, mutual or co-op type banks.

I'm all in favour of having a varied ownership structure for I really do believe in markets. Markets in forms of organisation just as much as in products or services. But to think that cuddly local organisations cannot cause problems is an error. Especially when, as in Spain, so many of them were subject to the "democratic control" of the local political classes.

I'm not sure that I've seen this extremely interesting form of argumentation before. Quantas, the Australian airline, is in dire financial straits. Their international routes are losing bucketloads and are being subsidised by their very juicy profits on their domestic routes. Etihad, the parent company of Emirates, is looking to raise its stake in Virgin Australia. Quantas is arguing that this must not be allowed to happen:

“Etihad will cross-subsidise Virgin’s domestic business with the specific aim of weakening Qantas,” claims an internal Qantas briefing paper, reported in the Sydney Morning Herald. “Virgin/Etihad will be able to flood the market with capacity until its competition is forced to significantly reduce its own operations or worse.”

That is, they must not be allowed to cross subsidise because it will damage our own cross subsidies.

I've always had this impression of Australia, of Australians, of being a pretty straightforward sort of place and people. Willing to give everyone a fair go, no side or pompousness to them.

Ah well, I suppose even the Lucky Country has to have its share of brazen hypocrites.

Are the days numbered for Europe’s last big bastion of sound money and public finances? The omens from its real estate market aren’t good.

Germany’s Chancellor Angela Merkel faces unrelenting pressure from virtually all other world leaders to set the printing presses free and to hand over her citizens’ dosh to feckless foreigners. Oh, it’s all dressed up in grand macro-economic excuses about matching surpluses and deficits, harmonizing fiscal regimes and stabilizing markets but the assault strikes at the foundation of Germany’s recent success – hard work, prudent saving and thoughtful investment. Like Britain’s own St Margaret in her final days, Frau Merkel is increasingly cornered by the baying hounds.

It looks like the rot, though, has already crept into the home front – literally. This week’s Sunday Times Home section has an article on the booming property market in Germany. Could it be that even those industrious Germans are succumbing to the siren call of easy money to be made in real estate – the same temptation that skewered the economies of Ireland, Spain and, yes, the UK?

German house prices had been relatively steady for two decades but have started to move up significantly in the past couple of years.

Nationally, house prices were up 5.5% last year while flats in the biggest cities rose by 10%. The Sunday Times article is replete with the kind of anecdotes so familiar to British home and property supplements over the years: Berlin properties now fetching three times their price four years ago, opportunities in buy-to-let, exploitation of tax breaks. One developer is quoted as saying: “We’re seeing Greek millionaires pile in out of fear and because they think it’s trendy…”

All these are worrisome signs of a bubble in the making. Even The Sunday Times article itself poses the question “So where are the best places to invest?” – surely a leading indicator of trouble ahead. If German airwaves become saturated with reality make-over TV shows and dinner parties with arguments about the best source for marble counter tops, then we’ll know that even Germany is lost.

We’ve argued before that speculative investment in real estate is a poor substitute for truly productive investment, something that Germany has clearly avoided in the past, much to its benefit. The more Frau Merkel is forced to give away to foreigners, the more the folks back home will ask “Oy! Wo ist meine?” That would be a far cry from the Germany we’ve come to respect and, secretly, admire.

The debate over tax avoidance never dies because most people tend to act in their own self-interest. We always search for the most common-sense approach to organising our own finances: We tend to buy things with lower VAT because they cost us less, and we tend to put our savings into a tax-free ISA when the opportunity presents itself. Likewise, with the financial resources to do so, you would tend to seize the chance to avoid tax on a much grander scale à la Carr.

The political classes, from David Cameron to Owen Jones, present tax avoidance as immoral. But then taking advantage of ISAs and VAT distinctions is immoral too, just as stealing a pound rather than stealing a million remains stealing nonetheless, the difference in scale is more to do with opportunities and abilities than intent. If moral equivalence amounts to anything at all, then we would have to demonise the entire population for tax avoidance.

But the real root of the complaint about immorality is that it deprives the government of revenue to do worthy things, like fund hospitals and schools. So dodging £1m is given the moral equivalence of taking it from the sick, children, and particularly sick children. Libertarians can even set aside the retort that these functions may be better served by the private sector. But it’s really the system that allows massive tax avoidance that should shoulder the moral blame, something that both libertarians and socialists could actually agree on.

The extraordinary 12,000 pages of the Tolley's Tax Guide represent decades and decades of heavy-handed discrimination and intervention by government. It ranges from petty differences like X VAT on pasties, and Y on their warm variety, to Labour millionaires acting like corporations. This discrimination is, obviously unequal treatment before the law, and will tend to discriminate against those least able to lobby: against the average family, and the smaller businesses. If ‘fair’ means anything it all, coercive discrimination to either manipulate society or give sops to lobbyists probably isn’t it.

But morality is a slippery thing. Even setting morality to one side, and accepting that tax avoidance does harm, what are the proposed solutions? Every government informs us that they are 'cracking down' on avoidance, with ever-greater resources and powers for Her Majesty's Revenue and Customs. But this solution tends do even more harm than good. Unsurprisingly, the bureaucratic sledgehammer falls heaviest on the easiest, and thus poorest targets. These small businesses without armies of accountants are woefully unprepared to deal with the thousands upon thousands of pages of tax legislation.

The solution is ruthlessly simple, and should satisfy socialists and libertarians alike: Taxes ought to be simplified. That means radically fewer exceptions, fewer loopholes, and fewer distortions. If possible, eradicate them completely. Let’s stop blaming individuals for being human, acting in their own self-interest. Instead, maybe we can agree for once, and end large-scale tax avoidance by ripping up our crony-corporatist tax system.

It is encouraging to see that the Coalition is looking into welfare and changes to improve how the state treats the poor. After all, a lower welfare bill means the stress on the poor through taxation can be reduced. Proposed measures to scrap housing benefit for under-25s however, are poorly thought out.

Many claimants of housing benefit do so in order to subsidise low wages. Some 93% of households who made claims in the last year included at least one employed adult. Rather than seeking to subsidise the low wages of the employed, we should be seeking to reduce the taxes they pay.

Lifting those on minimum wages out of tax altogether would be a good way of achieving this, effectively securing a ‘living wage’ for all who are employed. Having a greater post-tax income is preferable to an equivalent in-kind benefit for housing, most clearly because it gives the poor more choices in alleviating their own poverty. Present arrangements give offspring financial incentives to live apart from their parents. In reality the young poor may be better served with money for transport than by an in-kind benefit for housing. These people are better placed to determine what they need than government.

The reasons for needing housing benefit in the first place are largely driven by state failure. Prime among these are examples of urban planning, which so often fail to actually meet the needs of the poor. Instead these projects serve to generate political capital as governments can be seen to care about regeneration. Similarly, the middle classes are often able to use planning law to protect the value of their own property. This in turn limits the ability of property developers to generate new stock, bringing about high prices in this sector. Steps to liberalise planning law and to reduce the size of the green belt would reduce property prices and help to reduce rents.

Many have already pointed to alarmingly high youth unemployment figures for reasons as to why it is wrong to specifically target under-25s. They are right to note this, but it is not through benefits that these problems can be solved. Rather, legislation such as minimum wage and employment law serves to reduce the number of employment opportunities open to young people. Government’s fetishisation of Higher Education has served to further distort employment markets.

This policy would create new problems by further complicating an overly complex system of benefits, while not properly addressing the real issues with welfare and housing that currently harm not just the taxpayer, but most importantly the young poor themselves. A sincere attempt to reform would have the state get out of the way of young people and allow them to help themselves.