Things not to do: Renationalize the railways

Support for renationalizing the railways comes mostly from people too young to remember what it was like when the state owned and ran the railways. Those old enough remember overcrowded, dirty and outdated trains. They remember the lack of investment that meant the infrastructure was too antiquated to cope with higher speeds. Trains were slow and uncomfortable. The greatest drawback was that they were unreliable. It was difficult to plan meetings because people could not rely on the train being anywhere near on time, and large numbers of them were cancelled every day.

The staff were numerous but unhelpful. British Rail constituted a classic case of producer capture, with the trains running to serve the needs of the unions and their members rather than the general travelling public. The monopoly, combined with union militancy, gave them that power. Large numbers of railway staff at stations did not seem to do anything, and some analysis coined the term “overstaffed but under-manned” to describe the phenomenon.

Although people rightly complain about the present failings and inadequacies of the rail companies, the facts point to a considerable improvement in the years since privatization. Twice as many passenger journeys are made. The trains are faster, and more of them keep punctual times. The equipment is more modern, more comfortable and more reliable. Breakdowns are very much less common. Safety has improved, too.

Government was faced with a major problem at the time of privatization. It was the same problem faced by the other nationalized industries; insufficient public investment over the years had led to lack of maintenance and modernization. The rail network and the trains and their carriages needed massive investment to make them fit for a modern economy. The government continued and continues with a support subsidy to facilitate that.

The decision was made in the UK to have the travelling public pay a larger share of the costs of their journey than is the norm in much of continental Europe, where the taxpayer contributes more towards the cost of a train ticket. It was deemed unfair that people living in pleasant country areas should have a large share of their commute paid for by those who could not afford to enjoy that pleasure. Not surprisingly, this leads to complaints about ticket prices.

Renationlization would be a major step backward to all of the failings that a state-run railway entailed. But there are things that can bring improvement, some of which are already in process. Longer trains, and stations reconfigured to accommodate them would help deal with overcrowding, as would more frequent services.  The abolition of first class on some commuter routes would free up yet more space. Upgraded infrastructure and new technology can bring faster trains with shorter journey times. The diversity of different rail companies means that improvements achieved by some can be copied by others. And the need to win contracts keeps companies anxious to innovate and improve.

Black Friday is nothing to moan about

This morning our national media was filled with news that the American tradition of Black Friday has continued its spread to the UK. Variously people were concerned about crowds (Metro amusingly mocked the polite crowds with a wonderfully British headline), about the effect on our competitive retail sector, or how often deals were the same prices as earlier in the year. 

Yet what makes Black Friday interesting for the UK though, is not the immediate impact of price cuts (good for consumers) or the psychology of shoppers looking for bargains (shock). No, what’s interesting about Black Friday is how it shows the benefits of price discrimination.

No doubt your inbox this morning was, like mine, filled with offers from various retailers you’ve bought from before offering you unique deals designed to entice you to part with your cash in return for Christmas presents and goodies. If you got given a discount code, if you got personalised offers, if you received a loyalty bonus then you have been offered goods at a different price to what other people looking at these products will have been. You’ve been offered a discriminated price, a price different to what others will have been offered last week or will be offered next week. 

Why do shops do this? The British retail sector is famously competitive with a huge range of specialist and generalist stores in our high streets, in retail parks, and increasingly online. There are huge fixed costs in running stores (not least labour costs, global supply chains and logistics across the UK). Purchasing the distribution warehouses and stores, hiring and training staff, getting a brand known and thought positively about, all of these are high upfront costs that companies incur. 

In certain situations you might bemoan price discrimination. Certainly our politicians like to do so when talking about utilities. As Sam Dumitriu argued, the real benefit from price discrimination comes from the overall increase in output, and the lower average price that everyone pays. 

Think about a jumper produced by a firm like Zara.  The Galician retailer will have spent millions in research and development, in building one of the most advanced supply and distribution networks on the planet and have competitors across the UK offering similar products. The sunk cost is enormous getting to the point where you walk in and decide whether you want to buy a jumper from them or not. If you walked away they haven't earned anything and all that money invested into the stores gets them nothing and it doesn't take long for a high set of costs with falling sales to turn into bankruptcy. 

By charging higher amounts to people that are price insensitive throughout the year, and by getting large numbers of people that otherwise walk away during the sales, they can spread the fixed cost that firms are charged. That way they boost the overall level of sales and manage to turn what would be a loss into a small profit.

In other words, they're able to continue getting their clothes out across the country, and you're able to buy a wide range of clothes across the competitive market at a lower price than you otherwise would be. 

So here's to Black Friday and the beginning of a very consumer Christmas!

We have a useful solution to this business, err, horse puckey

Given the delicacy and refinement that we so pride ourselves upon here we might prefer to use horse puckey but there's no doubt that there's a certain directness and vibrancy to The Guardian's phrasing:

From inboxing to thought showers: how business bullshit took over

No one with any experience of modern capitalism would disagree with the underlying idea. We all know that by the time any organisation has a Human Resources department (rather than one bod in a corner just checking the legality of employment contracts) there's going to be floods, great tsunamis, of the latest cod nonsense flowing through the system. What we desire, of course, is some method of divining which is useful such and which isn't - something subject to Sturgeon's Law, 90% of everything is, well, that horse puckey.

Fortunately, we do, those markets in which modern capitalism is embedded. The proof being:

Although Kroning may have been killed off, Kronese has lived on. The indecipherable management-speak of which Charles Krone was an early proponent seems to have infected the entire world. These days, Krone’s gobbledygook seems relatively benign compared to much of the vacuous language circulating in the emails and meeting rooms of corporations, government agencies and NGOs.

Those agencies and NGOs are not subject to market pressures. The corporations are. Get too much up the bovine cloaca here and the business will go bankrupt. As C. Northcote Parkinson pointed out well over half a century ago the others will find that greater attention paid to such things brings an increase in budgets.

It might be true - sadly so - that there is no method of preventing the puckey takeover. That just means that we need to wipe out those organisations so affected - now all we've got to do is apply this rigorously, to those organisations which don't already face those market pressures which do that very job for us. 

Things not to do: Increase the top rate of income tax

Some people claim the rich are not paying their “fair share” of the tax total, and propose that the top rate of income tax should be raised to 50 percent, and some even say 60 percent. They often then proceed to say how the extra billions raised should be spent.

The problem is that there would be no extra billions. Less revenue would be raised at 50 or 60 percent than is currently raised by the top rate of 45 percent. In 1979 when a Conservative government took office, the top rate of income tax was 83 percent on wage income, with an additional 15 percent surcharge on money earned from investments, giving a top rate of 98 percent. Very few people paid 98 percent since it was hardly worth people earning money if they were only allowed to keep 2 pence for every pound earned.

The Conservative government made a series of income tax reductions. It cut the top rate on high earners to 60 percent and abolished the 15 percent investment income surcharge. More money was raised from the lower rates. It later cut the top rate to 40 percent with a standard rate of 25 percent. Again, more money was taken by the Treasury at the lower rates.

The reason is that economic activity became more worthwhile when people were allowed to keep more of what they made. Secondly, it became less worthwhile to make complex use of tax havens and to employ accountants to devise tax-sheltering schemes. At the lower rates it was simpler just to pay the tax. Thus more revenue was raised because the tax base increased and avoidance declined.

There was another significant effect. The proportion of the total paid by top earners increased. Where the top 10 percent had been paying 35 percent of the total, it went up after the tax cuts to 48 percent. The richest went from paying just over a third to just under a half of all income tax. In 1976 the top 1 percent paid 11 percent of the total; now they pay 29 percent of it. The top 10 percent of earners now pay 60 percent of all income tax, whereas the bottom 50 percent pay only 10 percent of the total.

More money would be raised by lowering the top rate to 40 percent, and more still at 35 percent; and the top earners would be paying a larger share of the total. It is politically difficult to be seen to be cutting tax rates for the rich, but the government could declare the target percentage of the total it wants the top 10 percent of earners to pay, and adjust rates accordingly to achieve it.

EU immigrants are indispensable

For many years, big welfare states tended to guard their borders, right to residency and especially access to welfare benefits very carefully out of fear of immigration creating a strain on the finances and many nations do in fact still guard these prerogatives today. There generally is a consensus today that if a nation has a liberal policy towards immigration then it also has to have more restrictive access to welfare benefits. However, EU changed this radically when they introduced free movement within its borders. This now meant that what had earlier been controlled by sovereign states now was controlled supranationally by the EU. Following this, workers moving within the Union had the exceptional right to access welfare benefits of other member states.

Nonetheless, this policy has for a long time been questioned due to political uncertainty regarding the sustainability of the welfare state in an open border community. Additionally, ever since the A8 countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) from the former East Bloc joined the EU, concerns with immigrants taking more out of the welfare state than they put in have been exacerbated ultimately peaking with the referendum on Brexit.

This concern ended up being one of the most pressing issues during the referendum campaign, even though EU immigrants have helped subsidize the welfare state as Sam has pointed out before. While it’s uncertain that this was the main driving force behind the outcome of the referendum, there’s no doubt that EU citizens right to participate (and receive welfare benefits) in the labour market created a polarised debate leading to an assumption that EU immigrants are “welfare tourists” who are here to free ride on the system, in spite of the fact that claiming benefits in the UK doesn’t come easy. In fact, in 2013 the EU Court of Justice supported a German jobcentre who declined two Romanian from getting basic social security on the ground that they travelled to Germany with the one goal of getting welfare benefits.

However, the debate is not exclusively prominent in the UK. In other countries, such as Denmark, similar assumptions are made. Due to the generous and universal benefits, many think of Denmark as a "welfare magnet" and to be incompatible with the free movement and open-border policy. Arguably, Denmark is even more of a welfare magnet than the UK with its high share of non-contributory benefits. In addition, more than 90 percent of immigrants from western countries that migrates to Denmark are members of an EEA country. With the addition of the Eastern European countries, the immigration from these countries have even been increasing since 2004 and since 2007 they’ve accounted for the biggest share of immigrants from the EEA, whereas in the UK they’ve been on par or beneath the level of immigration from the original member states.

Because of these characteristics, Denmark makes a good case for examining the effects of EU immigrants on the welfare state enabling us to generalize beyond Denmark and confirm/deny that countries with a residual/insurance based welfare state are attracting EU workers because of the appealing benefits, otherwise known as “welfare tourists”.

A paper published earlier this year examines some of the claims that is stated in the public debate. They manage to identify three core claims in all that they think should be examined empirically:

  1. The EU free movement and cross-border welfare rules are more likely to pose a burden on more inclusive and generous welfare states.

  2. EU immigrants from the new member states are more likely to be net burdens to the host welfare state than EU immigrants from the old member states, as their wage levels will be low, and they will contribute less to the public purse.

  3. EU immigrants with short-term residence are more likely to be net burdens to the host welfare state than EU immigrants with longer term residence, as they may benefit from the system before they have earned their way into it.

The authors found that in the period examined the EU free movement and cross-border welfare rules did not cause a fiscal burden - quite the contrary actually. They conclude that EU citizens had a positive effect on the Danish welfare budget contributing with 15.54bn euros while expending 8.91bn euros resulting in a positive fiscal contribution of 6.63bn euros. Furthermore, EU immigrants coming from some of the newer member states also net contributed to the Danish welfare state, although they didn’t contribute as much as immigrants coming from the original member states. However, they weren’t as much of a strain on the expenditures as EU15 immigrants.

In the blog post I mentioned earlier that Sam wrote, he also examines, based on a paper written by LSE’s John Van Reenen, what effect immigrants have on natives wages. He finds that they have little to no effect overall on low skilled workers. As he argues:

This isn’t terribly surprising, even if we take a fairly simplistic supply and demand view of things. Immigrants supply labour, yes, but they also demand labour – they spend their incomes on groceries and other things, creating about as many jobs as they’ve taken. That’s a very crude way of putting it, but it might help us to understand why the empirics look so benign.

Finally, EU immigrants with short-term residence proved to be putting more into the system than they would take out albeit the numbers are significantly lower than immigrants staying long-term. A report from the Danish Ministry of Finance has confirmed this as well.

In addition to all this, employers understandably fear that a shortage of short-term workers will occur. The average satisfaction with current short-term workers has dropped as well, suggesting that the qualifications of these workers have diminished. However, the fears go beyond that. With the net immigration of EU citizens falling with 81,000 compared to 2016, something might suggest that if a proper deal with the EU securing the free movement of labour and current EU citizens rights to stay in the UK, similar to the deal that Norway or Switzerland have, doesn’t happen, the lack of workers from EU member states will result in an acute labour shortage, especially within the NHS where non-UK doctors have been an important remedy to meet that shortage. If, as the numbers suggest, UK becomes less attractive for EU workers, UK will suffer from even lower productivity as 5.5 percent or 35,740 smaller and medium-sized business directors are from the EU.

Therefore, a change in discourse among pundits is much needed in order to address some of the concerns that dominated the referendum campaign and still dominates the media today. Instead of using fear mongering rhetoric, we should aim to address these fears with sensible arguments and hopefully the UK will get out of the EU with similar possibilities for EU citizens as they have now. They after all help contribute on key areas which is indispensable, especially with the prospects of low productivity for the years to come.

Finally, people are getting it right about the gender pay gap

As this is something that we've been banging on about for a decade now we do indeed welcome the manner in which others are now getting with the program:

Back in the 90s, it was all going to be so different. Not for our generation the lopsided approach of our parents, with their quaint postwar notions of father-breadwinners and mother-homemakers. We would be equal; interchangeable. Our young women would run companies, embassies, hospitals and schools, while our young men, no slouches themselves, would punctuate their careers with long, halcyon spells dandling babies and teaching toddlers how to make tiny volcanoes out of vinegar and baking soda.

That equality would have formidable knock-on effects. The gender pay gap would narrow. Sexual harassment wouldn’t disappear, but decoupling professional power from gender would do a lot to erase it from the workplace.

If men and women had equal working patterns then it is entirely true that the "gender" pay gap would not exist. If an equal portion of fathers were the primary child carer as mothers are then it would be very much smaller (not disappear though, it is still true that the portion of mothers among women is higher than fathers among men).

So, what's happening?What happened? Latest statistics for England show more than 80% of fathers still work full time, rising to almost 85% for dads of very young children. This rate has barely changed for 20 years. The ratio of part-timers has flatlined just above 6% throughout this decade (having soared through the 90s and early 00s). Just 1.6% of men have given up work altogether to take care of the family home. New rights for fathers to share parental leave with mothers have poor take-up rates.

At which point we face our standard liberal differential. There are those who call themselves liberals who argue for a specific outcome. Say, that equality of market incomes between mothers and fathers, or more generally between men and women. Then there are those who are actually liberals who are entirely willing to agree that opportunities should be equal but that that doesn't equate to equality of outcome. A society in which choices are available but which lead to different outcomes as a result of consenting adults maximising their utility through such choices is an entirely just one, a righteous outcome. Indeed, that's rather the point, that all should be able to access the choices which maximise that utility.

Not just rather the point actually, it's the whole and entire point. The society emergent from maximal liberty might not be equal along certain axes but it is along the only one which really matters - equality and thus maximisation of liberty.

We cheer because the basic point is being made, that gender pay gap is today largely if not entirely reliant upon the different choices that men and women tend to make about the care arrangements for their mutually begotten children. Where we differ is that, well, if the choices are available and adults make them then, well, what is it to anyone else what the outcome is? 

Aren't we all supposed to be liberals on such matters? 

 

Things not to do: Place a cap on maximum earnings

The earnings of Chief Executive Officers have risen spectacularly over the course of the century. This has been especially true of those involved in the finance industries, but has also been true of most of the FTSE 100 companies. Salaries and bonuses running into millions of pounds are common, and even those running into tens of millions are not unknown. The gap between what is earned by the average employees of a company and what is earned by its executives has widened dramatically over the same period.  

There are calls for government to take action by setting an upper limit on what executives can earn, and by legislating to impose a maximum ratio between the earnings of average employees and those of directors and board members. The claim by some is that directors have been abusing their power by voting themselves unjustified salary and bonus increases simply because they can, and that only legislation can curb this misuse of power.

One reason behind these dramatic increases has been globalization, and another has been advances in technology. Globalization has opened up vast new markets for firms and placed a premium on successful expansion. The rewards of this activity have been huge, spawning multinationals with an outreach into many countries.

Technology has seen the rise of hugely profitable companies such as Google, Amazon, Apple and Facebook, all of which make huge sums on a global scale and have seen their shares rocket as they have expanded.

This backdrop has meant that successful chief executives can make a dramatic contribution to corporate earnings. There is a limited pool of outstanding talent, as there is in many sports. It means that those at the peak of their profession or their performance are in great demand. Because they are in relatively short supply, organizations bid against each other to secure them. This happens in business as in football. The presence of Ronaldo on a team can make the difference between success and failure, and the same is true of top executives. Often when a talented director leaves a company, its shares plunge in consequence. The recruitment of a known outstanding talent can similarly see an immediate increase in a company's shares.

Top executives are paid huge sums because, for the most part, they earn it for their companies. In a highly competitive world with great revenues at stake, companies want to hire the best, and to hire the best they must pay the most.

There are undoubtedly some cases of abuse, in which executives are given rewards beyond any value they have added to their company, but the solution here is not to limit maximum earnings and punish the ones who are worth it, but to encourage shareholders to resist unjustified awards. A maximum earnings limit would severely damage the UK economy by depriving its companies of the top talent that can augment their revenues. The UK would be reduced to employing second rate people and would become a second-rate economy.

Productivity is everything, here's how we boost it

The Chancellor decided not to exercise his traditional right to present the budget alongside a stiff drink. That’s a surprise, because today’s OBR GDP Growth projections would have any reasonable person reaching for the bottle. The stubborn refusal of productivity growth to return to its pre-crisis levels has led the OBR to predict that growth will be a sluggish 1.5% for the next five years. By contrast, the US is currently growing at twice that rate.

Forget the gimmicks, the jokes and the tweaks to the tax system, this should be the big the story out of the budget. And if the OBR’s forecasts are correct, we should expect voters to be even more likely to risk it all on a radical socialist agenda.

Hammond understands the problem. It’s welcome to see him commit to boosting R&D spending and recognise the importance of sorting out the housing crisis so people can move to the high-paying jobs of the future. But frankly, the measures announced in the budget won’t do enough to really move the needle.

If the government wants to get a grip on productivity, here’s what they need to do.

Housing

As my colleague Sam Bowman persuasively argues the housing crisis is a key driver of the productivity crisis. Nobel Prize Winner Ed Prescott found that wages in the US would be 12.4% higher if planning regulations were relaxed in the most productive cities. It’s likely that the problem is even worse in the UK.

Hammond is right that housing has become increasingly unaffordable because we’re not building enough. Indeed, if rumours are true he understood the need to build on the Green Belt but was blocked by the PM. Still if the government are truly committed to ending the housing crisis they need to be bolder and focus less on distractions like second homes and land banks, and more on fixing the broken planning system.

Investment

The UK has one of the lowest levels of business investment in the EU. Only Greece and Portugal invest less as a share of GDP. Part of that is down to a tax system that encourages consumption at the expense of long-term investment. Corporations are able to deduct day-to-day expenses (e.g. stationary) from their annual taxable income, but they can only deduct long-term productivity boosting investments in new machinery gradually as the investment depreciates. But a £100 tax benefit is worth much less if I don’t get it in full until ten years down the line. Worse still, even as corporation tax has fallen (a good thing) the cuts were funded in part by lengthening capital allowances and for industrial buildings scrapping them altogether.

Infrastructure

Cheaper off-peak rail travel is a nice perk, but it’s no substitute for ensuring that Britain’s towns are well-connected to growing cities and ensuring everyone has a fast connection to the web.

Since Thatcher, the fundamental debate between Labour and the Conservatives has been about whether it’s better to grow the pie (the Conservative way) or slice the pie more evenly (the Labour way). If the Conservatives can’t deliver the real growth, voters will desert them for a less dynamic but more egalitarian Labour government. Put simply, if the OBR’s forecasts come to pass then this government is toast. But we shouldn’t be fatalists, we know the policies that can kickstart growth across Britain, we just need a government with the guts to implement them.

Things not to do: Substantially increase the Minimum Wage

When the Minimum Wage was first introduced, some analysts predicted that it would increase unemployment, particularly for young people and those from ethnic minorities, as it had repeatedly done in the US where it was set above the level that some people's labour was worth to employers.

However, the UK level it was set at was sufficiently low to avoid this effect. Indeed, it was widely criticized as far too low by many of those who had campaigned for it. It has been raised several times, and when Chancellor George Osborne decided to match the Opposition commitment to the 'Living Wage,' it headed to the level where it could prevent people from getting a first low-paid job that would set them on a course to work their way up the employment ladder by gaining on-the-job experience.

Analysts note that every time it is raised, the supermarkets increase the number of automatic checkout machines that enable them to employ fewer staff. A similar effect is seen in other businesses, where it becomes cheaper to automate than to pay higher wages to employees with relatively low productivity levels. A substantial further increase in the Minimum Wage would increase the number of people that it would be uneconomic to employ.

The problem for the low-paid is not so much that employers pay too little, but that the government takes too much. At a mere £8,164 per annum, the government starts charging National Insurance at 12 percent. At only £11,500 per year it starts charging income tax at 20 percent. Add the amount the government takes in VAT, insurance taxes, stamp duty, airport departure tax, fuel duty, alcohol duty and tobacco tax, and it adds up to a huge slice of a low-paid persons’ earnings.

Take-home pay, the figure that matters most for the low-paid, could be increased if the thresholds for National Insurance and Income Tax were harmonized and raised to a level that look low-paid people out of taxes on their income altogether. Take-home pay could be further raised for young people starting out in low-paid jobs by levying a lower youth rate, certainly for National Insurance, and possibly for income tax, too.

An interesting little puzzle about corporation tax

We regard this as an interesting little logical puzzle, this fuss being made about corporation tax at present. The basic starting point is that corporations don't pay the tax at all, they cannot. All and any taxes mean the wallet of some live human being is lighter. Whose pocket is being picked by which tax is the study of incidence.

About which we have an interesting paper:

Data on the foreign activities of American multinational firms provide wage rates and interest rates for a panel of more than 50 countries between 1989 and 2004. Evidence from applying this framework to these data indicates that between and 45 and 75 percent of the burden of corporate taxes is borne by labor with the balance borne by capital. 

We do not, by any means, insist that this specific number is correct. However, we do insist on the basic underlying logic of the case. Which is that the more mobile factor of production will bear less of the tax burden, the more immobile more. Mobility here is a close proxy for elasticity of course. Which brings us to the common complaint about that corporate taxation

Second, capital - financial and real - and goods and services are now more mobile across national boundaries than ever before. This is because many highly valued modern products - such as the iPhone - are relatively lightweight and can be shipped economically (and in volume and rapidly) by air. Other valuable modern products weigh nothing. Consider the digital nature and economic value of operating systems and the multitude of apps for smartphones and the growing value of "big data." Financial capital and services are also weightless. These products can be shipped globally with a few strokes on a computer and at the cost of a few electrons.

A major and unheralded problem for modern governments is that they are landlocked, while firms and their plants and equipment and job bases can move with growing ease among countries at decreasing cost.

Which brings us to what we think is the interesting little puzzle. When capital was less mobile the incidence of such taxation weighed more heavily upon the capitalists. Perhaps a good idea perhaps not but what was actually desired at the time at least. Now with the greater mobility such corporate taxation necessarily falls more upon the wages of the workers, the least mobile factor of production. Yet this is exactly the point where people are calling for more corporate taxation. Just when we absolutely know that it's not the capitalists or the rich people being taxed.

The very thing which is causing the problem being complained of, that mobility of capital, is exactly the thing which says we shouldn't be trying to tax it in this intermediate manner, through the corporation. Yet the campaigning insistence is the other way around, that because of the mobility we must tax it more, as we actually cannot in this manner.

Isn't that an interesting little puzzle? It's almost as if the campaigners don't understand the subject, isn't it?