Inequality doesn’t matter: a primer

Inequality doesn’t matter: a primer

So Jeremy Corbyn’s talking about inequality. His ideas might be a little silly, but at least he’s talking about inequality, right?

Well, no – inequality probably isn’t something we should worry about at all. The fact that Corbyn's policy is solely designed to make the rich poorer just shows what a pointless measure inequality actually is.

Most people use it as a shorthand for living standards for poor and average-income workers, but inequality measures are just as sensitive to the incomes of the people at the top as the bottom. That means that if everyone becomes worse off, but people at the top become even worse off than the rest, then inequality falls. That’s what happened during the Great Recession, where inequality (as measured by the “Gini coefficient”) actually fell

Labor flexibility beats unemployment: a closer look at the labor market in Denmark

Despite Bernie Sanders’ efforts to identify Denmark with some sort of democratic socialist utopia where a highly-interventionist government regulates all the nooks and crannies of the economy, it is well known nowadays that the success of this Scandinavian country is closely linked to its high degree of economic freedom. We just need to look at the latest Index of Economic Freedom, published every year by the Heritage Foundation, to state the obvious: Denmark ranks in the top 15 worldwide.

When looking more closely, Denmark excels at two specific economic indicators: business freedom and labor freedom. Business freedom measures the impact of government regulation on businesses. This indicator places Denmark at the top of the ranking, only behind Hong Kong. As for labor freedom, which examines the legal framework that regulates the labor market in a country, Denmark finds itself in the top 6. The strong correlation between labor freedom and low unemployment rates seems to explain why Denmark has one of the lowest unemployment rates in the EU. In the following lines, I aim to explore the specific characteristics that make the Danish labor market an example to follow in many ways.  

Wage Formation in the Danish Market

Wage formation in the Danish labor market is undertaken at two levels: sectoral and enterprise levels. At the sectoral level, unions representing both employers and employees negotiate wage increases as well as other benefits. However, it should be noted that, at the sectoral level, only minimum wages are agreed upon. Actual wages are negotiated at the company level and are, in most cases, higher than the sectorial minimum wages agreed on the collective bargaining. As stated by Eurofound,

Wages negotiated on enterprise level are usually higher than the minimum gross wage settled through collective bargaining. Even starting salaries are often higher than the minimum. Half of all newly employed in the private sector receive a starting salary that is considerably higher (18% or more) than the required minimum of the collective agreement […] actual wage increases are determined at company level and it is probably only few employees that are paid the minimum wage.

In fact, negotiations at the enterprise level have gained importance over the last decades as revealed by the percentage of employees covered by the standard-wage system as opposed to the minimum-wage system, which moved from 34% in 1989 to only 16% in 1994, remaining at that level ever since. Under the increasingly less relevant standard-wage system, salaries are negotiated at the sectoral level and individual companies are not allowed to modify the sectorial agreements. In contrast, the minimum-wage system described above, which is predominant nowadays, allows companies to use the sectorial agreement just as a reference to set their wages, the company being the epicenter of this wage-formation process.

What is the role of the Danish government in this process? None. The government does not interfere in the way wages are determined. This becomes obvious by the fact that there is no legislation that establishes a minimum wage on a national level.

Flexibility + Security = Flexicurity

The Danish labor market is based on the concept of “flexicurity”. This concept, firstly coined by the former Prime Minister of Denmark Poul Oluf Nyrup Rasmussen, refers to the two main characteristics of the Danish labor market: flexibility and security.

In terms of flexibility, firing costs are minimal. For instance, a white-collar worker that was unfairly dismissed today would receive a compensation of maximum four months of salary after working for 10 years in the company. This flexibility is reflected in the fact that 25% of private sector workers change jobs every year. Moreover, employers are incentivized to hire through very low social security contributions, which do not exceed 2% of the employee’s gross salary.

The second pillar of the system is security. Employment security is given priority over job security, meaning that the focus is placed on preventing employees from being away from the labor market for long periods of time rather than shielding them in their current positions. This is achieved by combining flexibility with considerable unemployment benefits (usually 90% of the last salary during a maximum of 4 years) and effective policies aimed at relocating the unemployed.  These benefits are, in turn, accompanied by sanctions in case the job seeker refuses to accept a job offer.

Labor Flexibility Beats Unemployment

A well-functioning and efficient labor market is, no doubt, one of the ingredients that account for Denmark’s economic prosperity. It is certainly responsible for the low unemployment rates that the country has enjoyed over the last decades. The Danish experience should open the eyes of those European governments that refuse to undertake reforms that liberalize their labor markets. The evidence is clear: labor flexibility results in lower unemployment. Will the Danish example be followed by those countries badly hit by the plague of unemployment? Spain partially liberalized its labor market four years ago, and the reform seems to be yielding positive results. Who will be the next?

The terrible problem of food waste

This does seem like a problem which we should do something about really, doesn't it?

Household food waste reduction targets under the Courtauld Commitment 3 (CC3) – a voluntary agreement aimed at improving resource efficiency and reducing waste within the UK grocery sector – have been missed, despite £100M of business savings being delivered by reducing food waste elsewhere in the supply chain over three-year period, results released today (January 10) have shown.

Targets have been missed - voluntary targets at that - heavens to Betsy, alert the media!

The Waste Resources & Action Programme (WRAP) is described as a charity. Oh yes?

The majority of WRAP’s income from charitable activities in 2015/16 was in the form of grants. Grant income from central government reduced to £14.8m from £19.6m following the expected reductions in the Defra programme. Following the 2015 Spending Review the Defra programme has been confirmed at £12m for 2016/17 and is expected to continue thereafter with funding in the range of £9m – £10m per annum. Funding from other UK governments was £9.2m compared to £13.2m in 2014/15.

They are civil servants by any reasonable definition therefore.

And why is it that targets have been missed? 

It was attributed to a combination of factors, including UK population growth, falling food prices and increased personal earnings. These have reduced the pressures for people to avoid wasting food, claimed WRAP.

A richer populace spends less time conserving something getting cheaper. A result so shocking that you could slap us down with a wet haddock over that. Who knew that people consume fewer potato peelings as they get better off?

So, clearly, we do have a problem here and one that we should do something about. Our minds turn to the immediate cessation of grants, the redundancy of all of the people and the organisation itself and, just be to be on the safe side, to be sure, the ploughing of the land where WRAP once stood with that salt we're not allowed to eat any more.

After all, we don't want to be extreme about this, only to produce a sensible solution to an obvious problem.

Book Review: Progress by Johan Norberg

Whenever I tell people that I cycle to work each morning I am met with furrowed brows and scrunched mouths. “Isn’t that a bit dangerous?” People ask me, before reminding me of the poor man who was recently crushed beneath an articulated lorry. Well, actually no, it isn’t. Too often we form judgements based on memorable events rather than common ones. So the headlines telling us of tragedies on two wheels give us the impression that when setting out to cycle in London, you are putting your life on the line.

The same can be said of almost any other unfortunate event. It is undeniable that people around the world are for the most part, merchants of misery, always ready to remind us that Brexit will be a disaster, or that global warming will be the death of us all.

Which is why reading Economist Johan Norberg’s latest book Progress was such a joy. He draws attention to the fact that pessimism across the globe is widespread - from the chairman of the joint chiefs of staff testifying before Congress that “the world is a more dangerous place than it has ever been”, to Pope Francis claiming that globalisation has condemned many people to starve. Then he gives us ten good reasons, in ten good chapters why this sentiment is wrong.

Norberg zooms you through food, sanitation, life expectancy, poverty, violence, the environment, literacy, freedom and then equality before rounding things up with a chapter named “the next generation” in which he asserts that “the future is in our hands”. Along the way, you are bombarded with facts, figures and pleasantly surprised by the occasional graph, so that by the end you scratch your head and question just how on earth it could be possible that so many despair so much.

Occasionally the book reads a little staccato like, and on at times the speed at which the facts are hurtled your way can feel somewhat swamping. But overall it is hard to come away from the book feeling anything other than optimistic.

This all gives me the impression that this could have been a very long book, and I am glad that Norberg did not make it so. Not because what he wrote was in any way boring or irrelevant –it was the exact opposite. But because Norberg’s ten chapters are the literary equivalent of the miniskirt – long enough to cover what needs to be covered, but still short enough to keep things interesting. They’re full of things great for throwing into a conversation. His anecdote about his great-great-great-great Grandfather shows just how far we have come in such a short period of time. More people have been lifted out of poverty in the last 25 years than have been in the last 25,000 years.

All the time, Norberg gives credit to globalisation and the rise of free markets, and rightfully points out that as humans have become freer, they have become more prosperous. Defying prevailing thought about how Globalisation has been bad for the environment, he shows how it has been anything but by using many examples, one being how more efficient agricultural technology might mean that we have reached “peak farmland” and how as a result by the year 2100 a plot of land the size of France may be returned to nature.

Progress is a thought provoking book. It is well worth a read.

The Entrepreneurs Network in 2017

The Entrepreneurs Network, which sits within the Adam Smith Institute, works in three ways in support of one aim: to make Britain the best place in the world to start and grow a business.

First, we are the voice of entrepreneurs in the political process. We have a strong and growing network of thousands of entrepreneurs, from which we can find out how the laws and regulations of the land impact their ability to start, run and grow successful businesses.

We fuse this practical knowledge with the latest research to lobby for specific changes to law. We are critical when governments are getting it wrong (e.g. the sclerotic visa system, historically poor planning policy, regulatory creep etc.), but supportive when they get it right (e.g. the introduction SEIS and EIS, smart crowdfunding regulation, the Northern Powerhouse initiative etc.). In 2017, we will explore these and other issues impacting entrepreneurs through the All Party Parliamentary Group for Entrepreneurship.

Second, we help explain what is happening in Westminster and how it will impact entrepreneurs’ businesses. What’s the point of the government launching a new tax break if Britain’s business owners don’t know about it? And when a new regulation is going to burden businesses, we help explain its potential impact. Where appropriate, we even partner with the government – for example, with the Department for International Trade on their Exporting is Great strategy – but we will never take government money because doing so would undermine our independence.

Third, we are very much a do-tank (to steal a phrase from Madsen). Whether it's the Leap 100, a select group of some of the UK’s most exciting, high-growth companies, or projects like the Female Founders Forum, we are increasingly helping entrepreneurs in a practical way. In 2017, we have a new project that will help connect the founders of Britain's leading companies with the next generation of entrepreneurs – particularly the most talented young entrepreneurs who wouldn’t otherwise have access to our remarkable network of business owners and experts. For those familiar with the Adam Smith Institute, it will be like The Next Generation for entrepreneurs.

We will do much else besides – including our annual Parliamentary Snapshot that polls MPs on their knowledge of policies impacting entrepreneurs – and Regional Roundtables, which get us out of London for events up and down the country. It will be a busy year!

The latest terror to befall society - exercise inequality

As we all know social practices and idiocies, but we repeat ourselves, start over there and cross the Pond with a perhaps decade long delay. We should thus gird ourselves for the latest of these, the terrors of exercise inequality. 

Early on weekday mornings, I often find myself panting and sweating beside strangers in a dark room. Riding stationary bicycles with nightclub music blaring in my ears isn’t my idea of fun. But I turned to Flywheel’s spinning classes after the YMCA next to my office shut down, and now I’m hooked.

The draws for me are the ruthless efficiency of 45 minutes of grinding interval work and the fitness returns — running is a lot easier since I started spinning. The studio is also just a short walk from my house.

Lately, though, I’ve been questioning my reliance on this luxury studio, and wondering what exclusive gyms like Flywheel and SoulCycle mean for America’s epidemic of physical inactivity.

We are told that the poor take less exercise than the rich. Without any adjustment being made for the higher probability of manual labour among the poor of course. Those upper middle classes seem not to realise that some do still earn with the sweat of their bodies, not just their brains.

Then we have the laments about how the poor don't have as much access to leafy parks as the rich - entirely true, richer areas do tend to be better provided with such. Rather because richer people move to such areas but still.

And then the insistence that this is an inequality that should not stand. Why, to join one of these gyms might cost $100 a week (yes, we know, Veblen Good or what?) and the poor are just left with no parks and only the dangerous streets to cycle upon.

At which point we might note what it is that the privileged are actually exercising upon. A stationary bike in a room. A stationary bike costing some $130 these days when not on sale. And we're really pretty certain that the boom box for the music is a pocket money sort of cost these days.

No, it isn't true that the poor are left gaining their only exercise possibilities in dodging rent collectors. Thus this idea of exercise inequality is one of those American imports we can probably do without. But sadly, we'll get it anyway, won't we?

In Defence of Uber (again)

This morning’s Tube Strike brought chaos to the Capital, and people are (understandably) unhappy. A colleague at work took over two hours for a commute that usually takes just 20 minutes, and a friend ended up walking all the way from Paddington to Canary Wharf in the rain. Looking out the window as I write, the traffic hasn’t abated much and London has brought a new definition to the word sluggish.

In response, mobile taxi app Uber, renowned for its efficient and cheap service, has hiked its prices for a ride. Over four times the normal rate in fact. People flocked to social media to vent their despair, describing Uber’s behaviour as both “disgusting” and “disgraceful”.

But what such cross commuters fail to recognise is that Uber is actually doing us a favour. By using the surge pricing model that is responsible for the high fares, Uber are able to send an economic message to drivers, to lure them into London so that there is no shortage. Further, the higher prices ensure that the service isn’t completely inundated with requests to drivers, so that some drivers are likely to be available to those who are willing to pay.

This may not sound comforting though. One may well think that in hiking its fares, Uber is simply giving speed and efficiency to the wealthy, with no regard for the poor, who might be condemned to trudge the pavements of London. This may seem so, but what it also means is that the service is available for those who have an emergency on their hands. What’s £45 if it means you can make your job interview? What does £50 matter when you have a crucially important business meeting to get to, or have to rush your dog to the vet? Those who deem their punctuality sufficiently important (and who see Uber as sufficiently speedy) are able to get their ride. This would not be the case if such apparently “disgusting” and “disgraceful” behaviours were banned.

So rather than jab fingers at Uber, as businessman Roger Charteris did, tweeting “@Uber you are cashing in on people’s misery”, we should stand by them and their decision to raise prices, and defend their acting in their self-interest.

iPhone anniversary

Apple CEO Steve Jobs was a visionary who wanted to put a computer – and a cool, easy-to-use one at that – not just into everyone’s home but into everyone’s pocket. Ten years ago, on 9 January 2007, he succeeded, launching his “magical” iPhone at MacWorld in San Francisco.

Everyone knew that Apple was ‘getting into the telecoms business’. But he did not just promise his audience “a revolutionary mobile phone”. He promised them two other new products: “a widescreen iPod with touch controls”, and “a breakthrough internet communications device”. It was only after a few moments that he made his audience realize that these were all the same device. “Today Apple is going to re-invent the phone,” he said. “It will revolutionize the industry.” And it did.

Apple stock soared. But I doubt that even the visionary Steve Jobs anticipated just how much his invention would change our lives. The iPhone did not just revolutionize the telecoms industry. It revolutionized the conduct of all industry. Take banking as an example: we now routinely move money and pay for our coffee with a tap of a finger or a phone. I can’t remember the last time I actually went into a bank or saw a paper statement: the retail banking industry has gone almost entirely digital, and increasingly, almost entirely mobile.

For five years now, smartphones have been outselling PCs. It is reckoned that 5 billion of the world’s 7 billion population have a mobile phone – pretty well everyone except the infants, in other words. And half of those are smartphones.

We each carry in our pockets an entire warehouse-full of useful tools: a phone, a camera, a movie camera, a map that tracks you (like in James Bond’s Aston Martin DB5 in Goldfinger), a calculator, a radio, a stopwatch, a timer, an alarm, an address book, a notepad, a health monitor, a music store, a complete set of train timetables, a torch, an itinerary to anywhere you want to go, and one that avoids traffic too, a credit card, a compass, a thing that wakes you up when you reach your station on the train… well, the list goes on and on.

As Apple’s ingenious marketing team noted, whatever you want to do, “there’s an app for that”. Indeed, it is estimated that there are 2 million iPhone apps, and perhaps 2.2 million apps for its Android competitors.

And remember, that all this is in the hands and pockets of over a third of the world’s population, while another third have something that looks more and more like it every day.

This is, truly, a miracle of capitalism.

I often wonder what might have happened if the telephone industry were still in state ownership, as it was here in the UK until Mrs Thatcher privatized them in 1984, and had decided to produce portable phones. I can’t believe that they would even now be any smaller than the brick that Sean Connery had in Doctor No (and just like the map, even that, at the time, was merely a figment of the director’s imagination).

And if, ten years ago, some government department or quango had been charged with developing applications for a smartphone, how many do you think there would be today? I would guess maybe six, with another fifteen in development. 

But we have millions of apps, precisely because their development is not centralized, but is spontaneous and competitive. Millions of people have good ideas and it is cheap to promote them as apps. If other people find them useful – or even just fun – they will gladly pay a dollar to have them. It’s the very essence of capitalism – except that you don’t necessarily need much capital, just vision and determination, to create a bestselling app.

I doubt that even we, ten years later, can anticipate just how much Steve Jobs’s invention, and its successors, will change our social and business lives over the next decade. But that’s capitalism for you – always surprising us with new wonders.

Doing Business with China

In the post-Brexit world, with Sino-USA relations becoming more fractious, China will become still more important for British business people, be they exporters, importers or investors. Those who see the glass as half full believe the UK does well in China; on the other hand, the UK is not one of China’s top ten trading partners (China Daily. February 19, 2014) and as the value of our exports to China is about the same as the Netherlands.

If there is a single reason for UK under-performance, it is our failure to understand China and its people.  The Americans, Australians and Germans, for example, are much better briefed.  I have met British expatriates there who arrived without having read a single book about China.  Yes, some Chinese business practices now look more like those in other countries but that is superficial.  China is unique.

The highly successful Steven Wang, the founder of a $700M investment fund in Shanghai, when asked in 2016 what he wished he had known before he started, replied “the people dynamics”. And he is Chinese.

Relationships, be they with suppliers, employees, customers, business partners or government officials, are even more important than they are in the West.  Those relationships are also different in nature.  A - maybe the - key concept is guanxi, a relatively modern word meaning something between friendship and mutual dependency.  In America, one does business with people who may become friends.  In China one makes friends with whom one may later do business.  Commercial law is rapidly coming into place but it is a new concept in China.  Contracts may not be worth the paper they are written on.

Homework is essential and yet too rarely undertaken.  Of course becoming a China expert (if there is such a person) can only come from experience in China but, to get to first base, one should have some acquaintance with the basics.  The Chinese are not impressed by visitors with no knowledge of their history, customs and ways of thinking.

To fill some of this gap, Morgen Witzel and I published Doing Business in China in 2000 (Routledge). Chao Xi joined us for the third and fourth editions, the latter published in January 2017 and widely available in the UK, USA and, interestingly, Hong Kong.  An introduction to the subject, it maps out the paths the newcomer may wish to explore further.

Doing business in, or perhaps with, China has changed immensely in the last 20 years.  Deng Xiaoping only allowed the theory and practice of marketing back into China in the 1980s.  Distribution was reserved exclusively for the Chinese and foreign businesses had to be joint ventures until recently. China today is far more international. Chao Xi is a law professor in Hong Kong and is particularly interested in the development of commercial most of which has taken place since 2000.

With all these changes and the huge expansion of China’s GDP we expected the 4th edition to be a substantial revision.  In fact it wasn’t.  We note all the significant changes, people in key posts have come and gone and half of the 14 case studies are new. At the same time, the country and the people are much the same and, as ever, things are rarely as they seem.  The book is a guide to what to look out for.

Of course we should use consumer pressure to beat fake news

An interesting proposal over in the New York Times - itself something of a novelty -  about how that menace of fake news might be beaten. We, as consumers, should complain to the advertisers who place ads on such and thus cut the practice off at the wallet.

Yes, of course, consumer power is almost always the answer to things we don't like

Mr. Phillips had just engaged in a new form of consumer activism, one that is rewriting the rules of online advertising. In the past month and a half, thousands of activists have started to push companies to take a stand on what you might call “hate news” — a toxic mix of lies, white-supremacist content and bullying that can inspire attacks on Muslims, gay people, women, African-Americans and others.

In mid-November, a Twitter group called Sleeping Giants became the hub of the new movement. The Giants and their followers have communicated with more than 1,000 companies and nonprofit groups whose ads appeared on Breitbart, and about 400 of those organizations have promised to remove the site from future ad buys.

Some might think that Breitbart isn't quite the right target there - but it is, it really is. Not because the site is any better or worse than any other but because consumer pressure is indeed the solution to things we don't like.

Note that it doesn't matter what it is that we don't like. If someone is doing something we don't like then it is not just our right but getting close to our duty to remove our money from those people. It is, after all, our money. The spending of our money being one way that we can shape the world in our desired image. The aggregation of how we all spend our money being that intensely democratic process by which we do indeed change the world into something closer to what we collectively desire - the collective being weighted by the accumulation of those individual votes and actions.

If someone is doing something you don't like then don't spend your money there. Ask that those you do spend money with do not too. Similarly, if you like something then spend more, encourage others to do so there. This just is what consumer sovereignty is about.

So, when do we get the British government to stop spending our taxes on job ads in The Guardian? After all, they do still at least occasionally employ a known KGB agent of influence and recipient of Moscow Gold, don't they? Such hateful behaviour really should not profit from our money, should it?

And yes, as the cookbooks do point out, sauce for the goose is indeed sauce for the gander.