Whisper it, but things finally seem to be looking up. Investment is rising, unemployment is falling, and the deficit seems to be coming under control. But it could be a lot better. Real wages will not recover to their pre-crisis peak until 2020. And expected growth of 2.7 per cent this year is well below what we might expect in a real recovery.
The question is, how can we get the strong growth we all want? Tax cuts are nice, but hard to sell as long as the deficit remains large. And calls for business deregulation are often too vague to be useful. But there are clear areas for reform in planning, immigration, and money, and none would threaten the deficit. Reform these areas – the PIMs, we might call them – and real, booming, sustainable growth will come.
What really gripes my goat in the discussion of profits
Deborah Orr discusses why the breat cancer treatment she had was just fine but why a more expensive one that might save the lives of other women wouldn't be. And while my description of her argument might sound cruel and her argument itself might sound cruel she is in fact correct. Resources are limited and a cost benefit analysis has to be applied as to where and upon what they should be expended. However, there's one little point she makes that really gripes my goat:
But Roche seems pretty good at recouping them. It made a profit of 11.4bn Swiss francs (£7.7bn) last year. As its chairman, Franz B Humer, said in his 2013 letter to shareholders: "In a challenging, increasingly cost-sensitive environment, our focus on targeted medicines and diagnostic tests has allowed us to expand our strong market position and to significantly improve net income. In light of our strong performance, the board of directors is proposing – for the 27th consecutive year – an increase in dividend." It's worth bearing in mind, reading this, that a 2012 report called The Research and Development Cost of a New Medicine reckoned that, on average, only about 10% of the overall cost of developing a new drug is taken up by research and development. Much more is spent on attracting and servicing investors. Quite a bit is spent on PR.
It's that "attracting and servicing investors" part that so annoys. For this is exactly the same cost benefit analysis leading to the efficient deployment of resources that Ms. Orr is so praising. Hoffman La Roche employs some 80,000 people around the world and has, if I've read their accounts correctly, some 40 billion Swiss francs in capital to back up their work. And we do need some system to try and decide how much of the accumulated wealth of the species is tied up in trying to create cancer drugs to save the lives of Ms. Orr and other unfortunates who lose that crap shoot with their health.
Please note that while we do have a mixed capitalist/market based system doing that allocation for us here the problem doesn't go away if we try to move to some other system. Perhaps worker based socialism where that 40 billion has to come from the pockets of the workers who work in the company, perhaps some planned system whereby taxes are raised to provide that capital. But however it's done we still need the cost benefit analysis to tell us that we're allocating that capital optimally. And we still need to pay the price too: by devoting 40 billion to the treatment of breast cancer we're not allowing it to be used to create vaccines, or for people to consume now, or on beer, or space rockets.
In fact, simply and purely the fact that capital is scarce means that we both have to calculate how best to use it and also pay the price for with holding it from other uses, whether we have a capitalist/free market economy or not.
Against the hypothecation of taxes
One of the sillier ideas floating around out there at present is that there should be a new hypothecated tax to pay for the NHS. The reason that this is a silly idea is that there's simply no connection whatsoever between what you can tax out of a particular activity and what we wish to spend upon some other particular activity. That is, hypothecation is itself a bad idea. Here's one demand for an NHS tax:
But a credible idea for preserving Labour's most enduring achievement in government is desperately needed. An earmarked health tax may be one whose time has come, and perhaps a model for financing other strained public services and modifying voters' resistance to taxation. Gordon Brown introduced a 1% national insurance health surcharge in his 2002 budget. The trickier question is how far the idea can be extended. Should all health spending come from specific revenue sources – the total proceeds of NI, say, or a general sales tax? Should something similar be done for education? Should older people's care bills be financed from an enhanced inheritance tax? Should corporation tax go to in-work benefits – which, in effect, subsidise inadequate wages?
Leave aside here that line about modifying voters' resistance to taxation. Concentrate just on this one point: that how we raise taxation, from what, is an entirely different question from how we wish to spend the money raised.
For example, we could posit a cigarette tax to cover the costs to the NHS and social security systems of smoking. Indeed people do. That smokers actually save the NHS and social security system money by dying earlier would mean that the correct tax would be a subsidy in this case. But leave that aside: we'll tax cigarettes their direct costs to the NHS and ignore the indirect savings. This would lead to a tax much lower than the one currently levied.
So, why do we tax fags so highly? Because demand for them is inelastic. We can load 200%, 300% taxes on smokers and people will still line up to buy the coffin nails. So, therefore, we tax cigarettes highly. And the same is true of booze, petrol and a host of other things. We tax them highly simply because we can. There are also any number of things that have very low elasticity of demand with respect to price and thus those things must be taxed lightly if we are to avoid too many distortions.
So what we can tax and how we can tax it depends on attributes of the thing that is being taxed.
Over on the spending side there is absolutely no connection whatsoever between what we can raise by taxing one specific thing according to its attributes and how much we want to spend on whatever other activity we're undertaking. What we can efficiently squeeze out of smokers has no connection whatsoever to the costsof the NHS, or the education system, nor even what we might want to spend on smoking cessation programs. For example, if the smoking rate either rises or falls, does this have any influence at all on how much we might want to spend on childhood vaccination?
No, it does not, there is no connection at all between these things, between how much we can raise from one specific tax and how much we want to spend on one particular activity. Therefore we shouldn't link one specific tax with one specific area of spending: that is, hypothecation is a bad idea.
Which leaves us back with Colbert's point. The art of taxation is to have the maximum plucking of the goose with the minimum hissing. The same statement as we should tax things with highly inelastic demand and not things with elastic such.
Another reason we really do want a carbon tax now
Have a look at this nonsense that is going on over Drax at the moment:
Drax is to legally challenge the Government's decision to exclude the power plant operator's plans to convert a coal-fired unit into one burning biomass from its latest round of funding. The decision to challenge the Government could set a precedent for other generators and overshadowed the approval of several new renewable energy projects on Wednesday. Drax had expected to receive the subsidy after the project to convert Unit 3 at its Drax station in North Yorkshire was shortlisted in December under the Government's new contracts-for-difference (CFD) scheme. However, the Government said on Wednesday that the scheme does not meet all its criteria for the enhanced CFD mechanism and urged Drax to continue with the project under the existing direct subsidy, sending shares in the company tumbling 11.7pc to 667p at midday.
The first point we should make is that it's actually fairly stupid to try to ship wood pellets 3,000 miles in order to avoid the burning of coal. There are reports out there insisting that this will lead to an increase in emissions, not a reduction. But leave that aside for a moment.
Assuming that we do sign on to the idea that climate change is a problem, one we need to do something about, it is exactly this sort of bureaucratic jockeying which makes the case for the carbon tax. Who is getting, or not getting, saubsidies, contracts for difference and all the rest is being determined by who is in favour politically. Whcih isn't what we want at all: we want simple and sustained economic pressure on people to reduce emissions. Which is exactly what a carbon tax does. It might put Drax out of business. It might encourage a move to biomass, or to continued coal burning with more efficient methods. But it becomes purely an efficiency argument as to which happens rather than a political one driven by whatever it is that is between Ed Davey's ears.
And what's actually worse is that we do now have a carbon tax. It's disguised as a minimum price for a carbon emissions permit but it has much the same effect as a carbon tax. Meaning that all of this bureaucratic nonsense has already been superceeded. Either burning coal at Drax, including that minimum price for a permit, makes sense or it doesn't: therefore it will happen or not.
All of which is intensely irritating of course. We now actually have that correct (if rather Heath Robinson) system to reduce emissions. Yet the politicians are still playing games as if they don't realise that they've already solved the problem.
How do we solve unemployment?
It appears that the correct method to reduce unemployment is to reduce unemployment benefits, increase in work benefits, abolish the minimum wage and insist that those unemployed take a job, any job, at any price.
After all, that's what Germany has done and the German unemployment rate fell dramatically as a result of doing just that. Scott Sumner has the detail:
So what's the real explanation for the German success? That's pretty obvious; the Hartz reforms of 2003 sharply reduced the incentive to not work, and sharply increased the incentive to take low wage jobs. As a result, today Germany has lots of very low wage jobs of the type that would be illegal in France or California. ....So the one major success story among developed countries has achieved its success by doing essentially the exact opposite of what progressives want. Germany has no minimum wage, reduced its incentives to live off welfare, and has a level of wage inequality that is increasing even faster than in the US. It's no wonder that progressives prefer to focus on things like "vocational training programs," which were just as common during the 30-year period of steadily rising German unemployment.
That's a fairly forthright explanation of what has been going on. And the real annoyance of that Progressive stand (what we over here might call Guardianista), that we must raise the wages of the lowly paid, not reduce them, that no one should be forced to work to gain benefits, is that you can derive the Hartz reforms from the work of Richard Layard. Indeed, even the timid attempts we do have to get people to work, any job at all at any price, even if the pay must be topped up with benefits, can be derived from Layard's work. For what he's actually saying is that long term unemployment puts people on the scrap heap. Thus there have to be sticks and carrots to drag them, screaming wildly if need be, back into the labour force.
Sumner is depressed at the way that the American left insists on counterproductive policies on unemployment. And we are here about the British left. If the market for low skill labour isn't clearing then that must mean that the price of low skilled labour is too high for the market to clear. If you're really worried about getting people into jobs you've therefore got to accept that wages will fall. If you then want to top them up with in work benefits then that's intellectually at least, just fine. But wibbling on about how the minimum wage must rise because inequality is just condemning ever more people to lives wasted on the dole.
Small firms, giant leaps, and the elephant in the room
IPPR has recently released a detailed and thought-provoking report. In Small Firms, Giant Leaps, Spencer Thompson considers the contribution small and medium-sized enterprises (SMEs) have made to Britain’s economic recovery since the financial crisis and the role they could play over the coming years – specifically in getting more people back into work. Small Firms, Giant Leaps suggests some sensible reforms that this Government should take seriously, but it falls short of dealing with the real problem; a problem so much discussed and so obvious that its mere mention is liable to induce a collective yawn: too much complex regulation. As the report makes clear, SMEs have contributed enormously to the labour market recovery since the financial crisis – 84% of jobs growth between the start of 2010 and the start of 2013 came from SMEs: “Overall employment rose by 1.5 million between the start of 2010 and the start of 2013. Of this, 1.2 million was in enterprises with 0–249 employees. Given that they only account for two-thirds of total employment, it is clear that SMEs are disproportionately driving the jobs recovery.”
The report suggests four policies for using SMEs to the end of creating “full employment” (defined as 80% of the workforce). I’ll first consider two through four.
The second recommendation is to retain and reform statutory sick pay recovery. Obviously, businesses are less likely to hire workers who have a higher risk of getting sick and not turning up to work, and this is more weighty burden for smaller businesses. Thompson suggests targeting current support towards individuals that face the greatest sickness-related hiring risks and only making this available to small firms (those with an annual NICs liability of less than £45,000). It is estimated that this reform would cost just over £20 million, which is good deal less than the £50 million currently spent on statutory sick pay recovery.
The third recommendation is to intermediate labour markets in welfare-to-work policy: “Providers under the next iteration of the Work Programme should be allowed and encouraged to act as a temporary employment agency for claimants in particular groups, securing short-term paid work placements with employers.” The fourth recommendation is for an occupational benefit insurance scheme for SMEs. Thompson calls on employer associations – such as the Federation of Small Businesses and the British Chambers of Commerce – to work with insurers to help SMEs club together to offer occupational sick, maternity and paternity pay to their employees.
The first recommendation is less convincing and gets us to the nub of the problem. Thompson calls for more business support for new employers and existing micro and small businesses. The problem is easily identified: “those not large enough to employ a dedicated HR professional and unable to afford the cost of external support have to navigate through an often complex system of employment law and labour market regulation.” The solution, according to Thompson, is to give up to £1,000 in support and services.
Rather than setting up yet another scheme to navigate the complex regulation, the Government should exempt small businesses from as much of the labyrinthine system of employment law and labour market regulations as is feasible. Since 2001, the Government has been committed to exempting microbusiness from upcoming “burdensome” new regulations. The logical conclusion is to exempt them from existing burdens too. For those who suggest that this can’t be done, just consider that in 2012 the Government exempted hundreds of thousands of low-risk workplaces from health and safety inspections.
Information is certainly important for SMEs – the chopping of Business Link and the various changes since then must have done significant harm – but by their own reckoning regulation is the key reason SMEs aren’t hiring more. As is shown in the Figure 2.1 (page 33) of the report (see below), when asked in an FSB poll about the barriers to taking on more staff, only 5% of SMEs said it was “not finding the appropriate information”, while 32% said it was a “fear of litigation/employment tribunals”, 30% “employment law/regulations”, 16% “other regulations”, and 14% “administrative burden”.
Some may suggest that SMEs fears are unfounded, but the 321,800 claims accepted by employment tribunals in 2011/12 suggest that the hesitancy is based on real and present dangers. One of the costs of regulations designed to protect the currently employed is that it restrict access to those on the margins of labour markets. If your goal is 80% employment, then, whether you like it or not, deregulation is the most powerful weapon in your armoury.
Philip Salter is Director of The Entreprenuers Network.
Explaining things to George Monbiot once again
Sadly it's necessary for us to describe the way of the world to George Monbiot once again. Here he is complaining about the fact that the government is putting a value on various parts of the environment:
Do you believe that people prepared to cheat to this extent would stop a scheme because one of the government's committees has attached a voodoo value to a piece of woodland? It's more likely that the accounting exercise would be used as a weapon by the developers. The woods are worth £x, but by pure chance the road turns out to be worth £x +1. Beauty, tranquillity, history, place, particularity? Sorry, they've already been costed and incorporated into x – end of discussion. The strongest arguments that opponents can deploy – arguments based on values – cannot be heard.
That the government might cheat should not surprise anyone at all. But it's in that last sentence that Monbiot exemplifies his ignorance on the point. For the very method that is used to determine that accounting exercise is based upon those very values that he wishes to deploy.
For the way we calculate the amentiy of some piece of nature is by adding up what we can tell about peoples' behaviour toward that piece of nature. It's not, admittedly, an exact science, more of an art. But what amount of something else would people be prepared to give up in order to preserve or have access to that piece of nature? The value of an oil rig free view of Cardigan Bay perhaps. Or an old, coppiced forest? We do use money in this process but that's only because we want to be able to do sums. Is that view of Cardigan Bay worth more than cutting that forest down to keep people warm in the absence of oil and or gas from the Bay?
And it is the views of everyone that count here. Our entire indifference to whatever happens in Wales as against the much greater interest that is going to be shown by Monbiot who actually uses the bay currently to go fishing from his kayak. But that is what we're doing when we try to work out the value of some piece of nature: how much value does it have to the lives of the human beings it affects? And It's very difficult indeed to see how we could make decisions in any other manner.
What Monbiot is really complaining about here is that the rest of us don't have the same values about nature that he does. To which the answer is, well, tough, for it's a democracy and all our views count, not just those of the Guardian writing class.
Three steps forward
It's inheritance tax that stops inheritors losing their fortunes
As we all know there's been some form of inheritance tax in both hte UK and US for over a century now. And as we're all also being told there's been an increase in wealth inequality back to the levels we had before inheritance tax. This will sound a little counter-intuitive but one of the reasons is that we have that very inheritance tax. Consider this from the US:
Their name tags read like a catalog of the country’s wealthiest and most influential clans: Rockefeller, Pritzker, Marriott. They were there for a discreet, invitation-only summit hosted by the Obama administration to find common ground between the public sector and the so-called next-generation philanthropists, many of whom stand to inherit billions in private wealth.
It's not quite that they're going to inherit billions. It's that they're going to inherit control of billions, a rather different thing:
Policy experts and donors recognize that there’s no better time than now to empower young philanthropists. Professionals in the field, citing an Accenture report from 2012, estimate that more than $30 trillion in wealth will pass from baby boomers to younger generations by around 2050. At the same time, the Dorothy A. Johnson Center for Philanthropy (no relation to this reporter) and the nonprofit consulting group 21/64 have concluded in a recent study on philanthropic giving that heirs are becoming involved in family foundations at an earlier age — specifically in their 20s and 30s — and imprinting them with the social values of their generation.
Note "family foundation" there. Because of that inheritance tax rich peoplpe do tend to (and they have to be very rich for it to work) stick all of the money into a foundation. This wealth can then be maintained by professional money managers down the generations. Tax free, of course, as it's inside a foundation. The stipulation is that said foundation must give away 5% of its assets each year. But such "giving away" obviously includes employing family members to run it. At pretty much any salary desired.
This obviously wouldn't happen if the money could just be left directly to children without tax being due. And the effect of it going into such a foundation where the professional money managers can maintain it, rather than the heirs blow it, is that we've lost one of the major forces that disperses wealth through the society. The feckless heir.
So, we end up with the imposition of the tax leading to the continued concentration of old wealth, as the avoidance of the tax reduces the ability of the inheritors to waste it.
As an example, who thinks that any of the Kennedys would still be rich if they'd been able to get their hands on old Joe's money directly?
I rest my case.
After No: The ASI Brexit Prize Entry
David Cameron famously said that he didn’t want any more banging on about Europe. The ASI feels the same way and for similar reasons: the topic threatens the unity of the party most likely to introduce policies we would welcome. Even so, after a couple of near-misses in essay competitions, most recently the IEA’s €100,000 Brexit prize, the topic seems to have become my specialised subject. One thing I’ve learnt is that those interested in the subject risk putting everyone else off with Monty Python “Judean Liberation Front”-style vehemence. So in the ASI’s entry, After No, I went for more of a “calm down, dear” approach to the most inflammatory issues. So too the winner, enabling the following compare and contrast as a reasoned contribution to an amicable debate.
1.Why leave the EU in the first place?
Almost everyone ends up talking about “sovereignty”. This mainly means intrusion into domestic law-making, in particular the “harmonisation” to European norms which is so unpopular. Also immigration, which is tricky all round. To take the last first, I argued that the UK needs to balance public hostility to immigration with labour shortages, the welfare of UK expats and the country’s humanitarian commitments. As a complication, the European Court of Human Rights prevents the UK limiting the rights of immigrants as a class but is not an EU body. So I warmed to leaving the ECHR system, replacing it with a British Bill of Rights; and accompanying this with a “public conversation” led by a Royal Commission, so as to reduce the temperature on immigration. The winning essay proposed a parliamentary “cross-party commission”. I looked at harmonisation by asking...
2.What are the UK’s trade interests?
Every sector has its evangelists so policy-makers need cool heads to develop a positive regime. The winner dwelt on trade in goods. I was struck that duties on goods have reached record lows, while the EU has failed to keep its promise on services. I see the latter as the future of trade and crucial for the UK, making me most concerned about the non-tariff measures (NTMs) which hobble them. The EU’s approach has been a wall of NTMs against the rest of the world, plus internal harmonisation with the intrusive baggage which upsets British opinion. This led me to see trade as very much calling for Plan B: and so to…
3.Which grouping suits the UK best?
This conjures up partisans for the Commonwealth, the US, (or both combined as the “Anglosphere”), and our non-EU neighbours. I took the view that all are somewhat restrictive and argued for an association open to every nation willing to abolish what’s left of duties and sign up to work away at NTMs while respecting national sovereignty. The winner also urged an “embrace of openness”, together with renewed links with non-EU neighbours in the European Free Trade Association.
4.Just how difficult will departure be?
I talked to EU insiders, who like to argue that ties are so profound as to be unbreakable. This infuriates many Euro-sceptics, provoking them into one of two diametrically opposed responses: that the UK can readily engineer a “single bill” departure; or that it can only leave after years of gradual disentanglement. My own view is that two or three parliamentary acts, a programme of interdepartmental consultations and vigorous leadership would suffice. My essay presented a timetable of proposals for organisation and legislation. The winner went for consultation and a “Great Repeal Bill”. I also argued that a decent deal with the EU is more likely than not, as its negotiators will be driven by the interests of member states who will be afraid of losing the UK market; the winner focussed on the effects of the re-imposition of EU tariffs. This takes us to the final question…
5.What about the costs and benefits of leaving the EU?
The honest answer is that no-one can know for sure. I crunched numbers for best, middle and worst cases, using the falls in output, sector-by-sector after the subprime crisis, as a template for the worst. This showed that leaving the EU would be nothing like as bad as 2008-12, with sensible policies making the country 6% better off after five years even in the worst case. In the other cases it would flourish, with greater output, stronger trade and lower inflation. The winner also calculated three cases and made policy proposals.
If the topic tickles you, take a look at the ASI’s Brexit entry here and the winner here.
The glory that is Will Hutton
We're getting close to the point that we'll have to declare Will Hutton a national treasure, something that must be preserved in aspic for the glory of posterity. Read through this little point:
It is beginning to be obvious that performance has hardly anything to do with the sustained rise in executive pay. Why should British CEOs in charge of smaller, generally less complex companies be paid proportionally more than their counterparts in the US? Does it make sense that 60% of pay comes in options to buy shares, so that executive focus is wholly on doing those things – cutting investment, avoiding risky innovation, using cash to buy company shares etc – that keep up the share price.
Certainly it's possible to ponder the high salaries that executives get at large companies these days. We might even agree that there's perhaps a certain soupcon of conspicuous consumption in the numbers that are bandied about. We could equally point out that modern companies are vastly larger than our largest companies were even just one generation ago, meaning that the effect of a good CEO is more magnified. And, perhaps even more importantly, the effect of a terrible one (recall what happened to GEC for example) similarly magnified.
But imagine how confused you must be to insist that 60% of pay comes from your success in increasing the share price and then insisting that said pay has nothing to do with performance? Getting the share price up being the aim and desire of the shareholders of course, the very reason they've hired that CEO to run the company for them.
So, just how do you embalm a journalist?