GINI and wealth.

Over in the Twittersphere, I occasionally argue with lefties, who occasionally make points which cannot be refuted in 140 characters.

socialism wins: if left wing ideas don’t work. How come the richest nations tend to have low gini (high equity)?

The answer is simple. The poorest nations tend to be the ones with either a) socialist command economies or b) robber barons looting the economy (or more likely in practice, robber barons using socialist rhetoric). As you move up the economic chain, you have freer markets, and better wealth distribution. Capitalism is good at making goods cheap enough for everyone, and paying everyone enough to afford their needs with some surplus for luxuries. The steady increase in wealth enjoyed by capitalist economies is because of the incentives to increase productivity per worker. Because a western worker is more productive than his Chinese counterpart you need fewer of them, and the low value added jobs tend to concentrate in the developing economies. The idea expressed that socialism leads to wealth is so easily dismissed by the near-perfect experiment of Post-war Germany in which the capitalist Federal Republic got much, much richer (and much more equal) than the savagely repressive misery-box that was the Democratic republic. In the words of the famous political theorist, JCR Clarkson

“Socialism is such a crap system, it took a nation populated by Germans… and made it poor”

The best means to get rich in a developed economy is to serve the broad mass of the population well by giving them what they want at a price they can afford, things, especially manufactures but also services get steadily cheaper. Thus most people get “free” bank accounts. Mobile phones and computers are in the range of more or less everyone. Everyone can have access to a car. Providing these things to a lot of people makes a lot of people very wealthy, and makes everyone a bit wealthier. Rich countries “capitalist” economies are very much more egalitarian than most so-called socialist ones. Separate lanes for the nomenkutura’s cars, comrade?

Contrast with a typical poor country, where nepotism is rife, and civil servants’ remuneration is only worthwhile when bribes are taken into account. The second best correlation with wealth is a lack of corruption. An un-corrupt country will tend to avoid robber barons in positions of political power and tend to lower GINI inequality. There is no incentive to supply goods and services to the population because any wealth generated will be confiscated, or be eaten up by the bribes for “permits” to do business.

Thus low GINI is correlated with high wealth. However to suggest that it follows that a government should follow redistributive policies to lower GINI by aggressively taxing the rich to promote growth, is a cum hoc ergo propter hoc logical fallacy. Put another way, it’s stupid.

The best correlations are between wealth and economic freedom. This is independent of the size of the state sector, redistributive nature of the tax system or total tax take as a percentage of GDP. Thus the Nordic countries, though they have a very high tax rate (though not, thanks to Gordon Brown, that much higher than the UK) they are rich because they score highly in terms of economic freedom. There is low corruption, and relatively little red tape. The UK falls down the GINI list because of 1) a big regional divide: socialist shit-holes to the north and a rich south east, and 2) the presence, not shared by most of Europe, of a relatively large number of ultra-rich and 3) a big, for a rich country welfare-dependent underclass.

So. If you think (as I do) that it is to the UKs benefit that London is able to attract the international super rich, then focusing on GINI is going to be counter productive. Ever higher tax rates are not conducive to economic growth, nor do they lead to happiness – they are correlated to these things – only a relatively happy, stable, rich country will tolerate high taxes for example. Causing your richest, most productive citizens to flee to more amenable economic climates (added to the allure of better weather) is not going to help anyone.

The causes of high wealth are economic freedom – something the Nordics could teach Labour’s northern fiefs a thing or two about. The state funds services in Scandinavia, but PROVIDES less than the UK state does. Belief and trust in Markets as a means to efficient allocation of resources leads to wealth, because government intervention usually causes more problems than it solves. A market, even a state financed one, but with consumers making decisions rather than bureaucrats makes for better, and more efficient allocation of resources. A more efficient allocation of resources is another way of putting ‘more wealth’.

A simple, fair tax system (ie not one designed by Gordon Brown) leads to fairer distribution of the tax burden, rather than enormous burdens put on the working poor, whilst the rich enjoy loopholes in the overly complex code. A welfare state with perverse incentive against work and in favour of single motherhood, as the UK’s keeps the numerous underclass down. None of the UK’s excess inequality (to the extent you believe that’s a problem in and of itself) is caused by “capitalism”. The UK’s high inequaltiy is because poor incentives in the welfare state mitigate against the poor getting work, and living in stable families. At the top inequality is increased because London attracts a lot of super wealthy, about whose presence, no-one should care.

So where does this leave New Red Dawn’s assertion that low inequality causes high wealth? The are correlated, for sure, but amongst rich world nations, even that correlation breaks down. Above a certain level – middle income countries around Portugal’s GDP per capita (funnily enough, this is where the Easterlin paradox starts), GINI’s correlation with wealth becomes more tenuous. The richest large country, the USA is also relatively unequal. The unequal UK and France are about as rich as the egalitarian Germany.

It is ironic that the people most obsessed by GINI are the people most likely to oppose the one policy of the UK governing Coalition most likely to do something about it: free schools.

Rally Against Debt

So far the only game in town, rhetorically speaking opposing the coalition programme has been the various groups of “students” chucking rocks at police because someone took their weed money away, “students” chucking rocks at police becauce someone suggested they might actually PAY for services used (unless they can’t….), “anarchists” (in practice the same people as the “students”) who just love to chuck rocks at the police, and the TUC who are screaming that their public sector workers might have to work for thier obscene salaries at the public expense instead of going sick for 20 years before retiring on a full tax-payer funded pension. Allied to these is the anti-business UK Uncut, who think that companies pay tax (rather than people) and these routinely aviod tax, and should be extorted into paying more than they owe.

These people are ignorant, stupid, selfish, nihilistic cunts.

A majority of people in the UK disagree with the mouthbreathers described above and are persuaded that whilst the UK COULD continue to fund diversity outreach coordinators’ ethnic lesbian dance & spirituality workshops for Somalian single mothers, by continuing to borrow money, we’d be fucking stupid to do so. Instead it is proposed by the coalition to bring spending down to the (still extravagent) 2007/8 levels and take 5 years to do so.

There are people, of whom I am one, who think the coalition’s programme goes nowhere near far or fast enough. Unlike the the assorted window-lickers in the NUS, UKUncut and the TUC, most of us are polite, reasonable and non-violent. (shut up, I said MOST). So, the aim of the Rally against debt is to point out that the Left-wing extremists do not represent “the people”, who think (broadly) saddling our grandchildren not yet born with thousands of pounds of debt is immoral and unjust, and that taxes and state spending are already far too high.
A well mannered, polite rally for civilised people who don’t wish to see their hard earned money being spent on pointless government initiatives and instead would like government spending to actually fall and our national debt to be cut. It’s a facebook event, and the likely date is 14th May, 11am, in central London.

We don’t think that it’s fair for us to continue borrowing money to live a lifestyle that we simply can’t afford – burdening our children with unnecessary debt that they will have to pay back.

Any visits to Fortnum and Mason’s by protestors will only be to marvel at their selection of quality goods and perhaps make the occasional purchase.

Bonfires will be strictly forbidden: it’s out of season anyway

Trips to see Vodafone and other high street chains will result in congratulations to the company for providing jobs and growth in the UK.

This is only a planning group at the moment and all subject to change.

Offical hashtag #RallyAgainstDebt or #RAD

So there you have it. The productive, tax-paying section of society’s response to UK Uncut. Let’s be polite, leave no litter and charm the socks off everyone. I however am a realistic bastard. Mr Osborne! Instead of forcing Vodafone, Topshop or Boots to fire productive, tax-contributing people in order to pay taxes they don’t owe, we’d like a tax-cut, please. Fire some of the 200,000 civil servant tax-sponges hired unnecessarily by Labour for whom I’ve been paying for 10 years.

Osborne’s Budget

Of all the announcements, the merging of NI and Income tax is potentially the most significant. Other than that, the budget contained mostly steady-as-she-goes measures, with the political necessity of meeting a stupid election promise – the fuel price stabiliser.

Let’s deal with the Brownian crap first. Rating benefits and tax allowances to CPI instead of RPI is a stealth tax of some import. In time that will significantly erode their real-terms value. As far as the UK is concerned, CPI has NO basis in most people’s cost of living. You might as well index such things to Rick Astley’s download statistics.

The Fuel price stabiliser: no duty escalator if the Oil price is over $75 (subject to consultation) paid for by a really good, hard dry fisting of the North Sea Oil companies is politically sensible, though economically less so. For those holding stocks in North sea oil co’s, though, it just seemed vindictive. For a practical, micro-level demonstration of how the Laffer curve works, read this post from Capitalists at Work. Politically, Osborne needed to do something to meet the truly daft idea from the election (which when they thought about it for 5 minutes I’m sure they hoped would just go away…) and did so with as little damage as possible. Though why they couldn’t have just cut a meaningful amount from duty to AT LEAST cover the recent VAT rise is beyond me, but the manifesto commitment was met and the papers appeased. Or most of them at least.

Osborne boasted of removing 100 pages from the tax code, which is a start, it’s a sticking plaster on the gunshot wound which is Gordon Brown’s near quadrupling of its length. Why no action on tax credits for example?

But that’s carping, the cut in corporation taxes are welcome – signalling that the Government doesn’t HATE businesses like Gordon Brown did, but I don’t understand the point of corporate taxes: People end up paying it; either the Owners of capital get lower returns, employees lower wages or customers higher prices, some cuts in corporation taxes will be regained by taxes on these: most evidence suggests that with returns on capital being pretty level across countries, corporation taxes fall mainly on customers and workers.

The best news, though is the imminent end to NI, which has long been a fiction to enable what became under Gordon Brown the most complicated and confiscatory tax regime in the world. Thanks to misalignments between the rates of NI and Income Tax, there are two narrow bands where the marginal rate of tax is an eye-watering 62%, and even those on low incomes are taxed at a disgusting 32%. The only remaining function of NI is to hide from the British People the tax they pay. This should have been done decades ago, along with ending the capricious contributory requirement for pensions: it’s tough on women especially, forces people onto means-tested benefits and ends up saving the country very little, if anything. And what is the point of the Employers’ contribution? Why split payroll taxes except to hide from the people how hard they’re being raped by the government?

If Britain’s eye-watering taxes are to be cut, the British People, especially those who are net contributors but believe they aren’t, must have their noses rubbed in how much they actually pay so they start focusing on that rather than the rather spurious “benefits” of most of that money. Put it like this. If you had a 30% pay-rise, you could go on holiday somewhere better than Skegness, save a bit AND save up for Junior to be educated properly. If it weren’t for the complete bureaucratic capture of the Labour party and the public sector, a 30% cost cut could be achieved without affecting “front-line” services, by firing 00’s of ‘000’s of the unnecessary extra whitehall pen-pushers hired since 1997 (a forlorn hope).

A small mention in the budget, though is bigger news. It’s the beginning of the end for Labour’s ’47 settlement. The doctors are getting the health service back, in effect destroying the disastrous and soon to be unlamented NHS (though the name will live on, as it’s the British religion). On welfare, NI, long a fiction is on the way out, and benefits will be simplified. Taxes will become flatter, and lower. Capital and profit will be taxed less and as a result the country will be richer as a result. The budget goes nowhere near far enough in cutting the thicket of allowances and gimmicks, nor does it reduce the enormous burden in any meaningful way, but it sets out a plan which MIGHT lead to these things. As such it’s probably as good as we’re going to get, given the disastrous state in which Labour left the country.

A Handy 3-minute guide to the Budget can be found here.

Japanese Tsunami & Broken Windows

No first world country has ever experienced a natural disaster of the destructiveness of the Japanese earthquake, and only the Boxing day Tsunami in 2005 exceeds it for sheer human tragedy. The following is not to belittle the suffering of the Japanese people, but they are the citizens of an effective state, which will be able to help better than perhaps any on the planet. The US pacific fleet is also on the way and tens of thousands of US troops are already there as are search and rescue teams from a many nations (including, I am pleased to say 200 or so from the UK), so anything that can be done to mitigate the humanitarian disaster, is being done. Unfortunately, this disaster has so far been short of the uplifting tales of the triumph of the Human spirit when people are pulled alive from the rubble after days trapped. Perhaps the reporting is concentrating on the Fukushima reactor, perhaps because there just aren’t many survivors.

In light of this dearth of good news, is it in bad taste to search for a silver lining? Perhaps this is the event that will finally get the Japanese economy moving following a 20-year deflationary spiral?

Most of you will be aware of Bastiat’s Broken Window parable, money spent repairing damage doesn’t stimulate the economy because the money spent would have been spent, not at the Glazier, but at the Bookshop or Cobbler or whatever who are deprived of business by the Glazier’s fees. But if the money would have instead been squirreled away by a parsimonious population, into JGBs, at ever lower yields then this broken window on an awful scale forces the Japanese to spend on new houses, cars, furniture to rebuild their lives and communities.

If there is anything in the idea of Government stimulus (the Japanese experience is that monetary & fiscal stimulus in the form of Quantitative easing, deficit spending and zero interest rates has emphatically NOT worked so far), then this is what it takes. Just as the stimulus of WWII was of the scale needed to kick-start the US economy after the depression.

Oh and one more thing. Japan’s public debt is 200% of GDP (ours is around 80% depending on how you calculate it, up from 34% when Labour abandoned fiscal sanity reality-based spending Tory spending plans in 2000). Do you think this helps, or hinders the ability of the Japanese Government to raise the necessary money to rebuild? What happens when interest rates rise in response to more enthusiastic economic activity? Ed Balls…. Ed…. Mr Balls…?

The Dude talks to UK Uncut on Twitter.

are @ disonest or stupid? Barclays this time. which didn’t need a bail-out and which pays a lot of tax.

the entire banking system would have collapsed if it wan’t for the bail. And no they don’t pay a lot of tax.

Question: does the laffer curve mean anything to you. Is there a point at which you stop regarding “business” as a piggy bank?

2007/2008 Financial sector collapse knocked 6% out of GDP, caused a 1 trillion black hole which we are paying the price

Barclays didn’t take the Bail-out. It went to shareholders. Are you dishonest or ignorant?

I didn’t say they did, I said the entire banking industry exists because of the tax payer.

all business exist “because of the tax-payer” because he’s also a consumer. Barclays didn’t take bail-out, so why picket them?

just shows how concentrated wealth is in this country. not right that we should be so dependent on a tiny groups of people

Question: Do you pay more tax than you legally owe? if not you’re a rancid hypocrite.
waaaa! someone has more than me! waaaaaa! You’re a child.

No i pay the tax that is taken out of my pay. I don’t employ a small army of accountants to try and get me out of it.
So you think that Barclays, a major international retail & investment bank should just PAYE without using accountants?
I think Barclays should not have an entire division in their HQ coming up with elaborate means to pay less and less tax

You do agree businesses which make a loss should be able to set that loss against future year’s tax on profits don’t you?

I think the law can be changed to stop the Banks avoiding tax, especially as they have a debt to the public sector
they’re not “avoiding tax”. Barclays is carrying forward losses, something ALL grown-up tax regimes allow.

no this should be changed for the banks. They have a debt to society, they do avoid tax, they have an entire division to do it, with hundreds of subsidiaries in tax havens.

You really are ignorant, aren’t you. How is retrospective taxation different from theft?

because the entire banking industry is being support with 1 trillion of our money and I want it back

with plans to start selling off the RBS stake, you will, soon.

you fail to remember in 2009 that secret papers we leaked to the press showing Barclays secret division.

You mean a big international bank seeks to minimise taxes, and you’re expecting me to be 1) surprised & 2) outraged? Meh…
well we are, you arn’t. We have differing concerns. Which is why this conversation is utterly pointless.
You didn’t answer the question: Do you think business should be allowed to bring forward losses. If not, why not?

I did, you didn’t read it. No the banks should not be able to because they have a 1 trillion debt to society

The Government BOUGHT a stake + loans, which will be paid back on (ha!) Privatisation of Lloyds & RBS (which you support? No?)

but other banks like Barclays benefited through that bail-out so need to pay up too. We will never agree!

Yes. There is a bankers’ put. Which needs to be adressed by regulation, but confiscatory, retrospective taxation is not the answer. Do you even know what ‘Bankers’ put’ means?

there is just no point arguing with those who misunderstand the basics. Sorry.

Inflation & What to do about it.

There is no doubt that the cost of living is rising fast. Oil, Food and Money (interest rates) are all getting, or about to get a lot more expensive. However as I said on Friday moring to those unfortunate enough to be both up at 5:30am and listening to Radio 5-live, the Libyan crisis and the wider revolutions in the Middle East are not the underlying reason for Oil to be at $100, nor are Chinese crop failures or poor harvests in the USA the underlying reason for agricultural commodities to be going through the roof.

When there is inflation in the system – prices going up – the orthodox response is to raise the cost of money, reduce the amount of money in the system by making it harder for people to borrow, spend and invest. This has the effect of slowing economic activity, and so, conversely, when the economy slows, you reduce rates to get the economy moving. However, the effectiveness of raising rates in reducing inflation is limited when almost all the inflation comes from things like import prices for oil and foodstuffs, and one-off increases in tax, and almost all effectiveness it has there is due to higher interest rates strengthening a currency.

So if we raise rates to strenghthen the currency, what happens to the export-led growth we’re told is necessary to get the economy moving in the face of a weak consumer in the UK?

The real reason for the rise in commodites is the flip side of interest rates. In the UK it should surprise no-one that reducing interest rates increases the price of property. This is because the supply of property cannot be raised quickly, and if you increase the volume of money chasing a resourse with short-term inflexible supply, it should be no surprise when the price goes up.

The same is true of wheat and oil in a way it is not true of manufactured goods whose supply can be rapidly raised. So why do media commentators persist in putting geopolitical reasons behind the oil price, and pointing to droughts and local harvest failures for agricultural commodites (when there are such events somewhere every year) when the real culprit is simple. Quantitative easing across the developed world – the USA, Japan and the UK have all indulged – increased the supply of money, and because no-one wanted, or could get a mortgage on property, it inflated the prices of other assets: first financial assets such as bonds, then shares. This went as far as the market thought prudent, meanwhile it also started to feed into commodities. More money chasing a fixed (in the short-term) supply of oil and wheat. Very little of the debased new currency went into “stimulating” business, and instead, it lined the pockets of petro-dictators.

Interest rates in the UK have to rise, but apart from currency effects, this will have little effect on inflation, and may yet stimulate increased wage demands. Raising interest rates too soon risks stagflation. Too late risks runaway inflation and asset price bubbles (if we’re not already there). I suspect therefore that Interest rates will start to rise a bit later than May and caution will be the watch-word.

In the mean time, short-term substitution effects of Libya’s unusually light, sweet (low-sulphur) crude aside, there is an idea that widely expressed idea that oil is marching ever upwards (eg raedwald who has summed up the opinions of an average well-read non-expert). I am not so sure. There is no physical shortage of Oil. The same arguments got their airing in 2008, and the price subsequently dropped back. I am convinced the monetary effects, once they are through the system will lead to drops in the price, and I am equally sure that everyone will be putting this down to “new democratic stability in the middle-east”.

If interest rates rise too much, then under such a scenario, the UK then looks like flirting with deflation as falling commodity prices and a strong Pound mean everything starts to look cheap.

On such things are economic cycles made. People ascribing the wrong cause and effect, and getting the controls wrong. When they’re right, it’s probably for the wrong reason. Most of the time, they’re not too bad and the market interest rate is not set by the bank, but by Libor. Perhaps it’s time to get rid of the anacronism of a Bank of England base rate altogether, and just set everything off Libor, which has decoupled from Base in recent years? Let the market decide how much money they need. The MPC, independent though it is meant to be, is still too statist. Setting interest rates has been described as attempting to drive a truck down a road at night with a blacked-out windscreed, only using the rear-view mirror. Oh and the back window’s cracked. No-one can have enough information to set an interest rate, so why try?

So the correct answer to what to do about inflation is ‘Nothing’. Governments shouldn’t even be doing what they’re doing now by attempting to control the money supply (this argues for “free banking”, a subject for another post). Leave well alone. This lesson is applicable to anything governments do. Even where governments MIGHT be able to help, the chances are they’d make a mess, so the precautionary principle and all available evidence everywhere points to Austrian School economics and Political Libertarianism. However governments don’t like to be told “nothing, in fact stop what you were doing before” when asking “what should we do?” So politically it’s a non-starter.

Small-state libertarians therefore suffer the fate of Cassandra: we’re right, but no-one believes us.

Real Wages, After Tax.

Politicians need to be measured on their performance. Typically Labour ones like to be measured by how much they spend (they use the word “investment”) on public services, because they think the NHS is a proxy for morality. (The established church concurs). Both Tory and Labour ones like to be measured by GDP growth. Tories like tax rates. Liberal Democrats are motivated mainly by facial hair and sandals.

All like to be measured by unemployment, which is reasonable. But the cause/effect loop is much, much slower than media and politicians seem to believe. A government’s action has it’s effect 12-18 months into the future – unemployment is steady and high, and it’s still labour’s fault and will be for a while, in so far as the effects of Government action can be separated from the vastly larger effects of the business cycle. Most of the fall in unemployment expected in 2011 will not be down to George Osborne’s budget, but to the brute effects of the business cycle.

Most of these measures of politicians’ performance are deeply flawed because they measure things that don’t, in themselves matter, or are only marginally affected by politicians. GDP is only part of what makes people feel richer. In addition to employment, what actually matters to people is disposable income after tax and housing costs (so long as the housing costs aren’t reduced by house prices going down). On this measure, Labour is one of the worst governments in history. Real wages (adjusted for inflation) are lower than they were in 2005, and the tax-burden is higher. Housing costs may have dropped for the 20% of households on floating rate mortgages, but remain stubbornly high for everyone else. Only in the great depression did real income stagnate for so long. When you take the effects of Labour’s lunatic rise in the tax burden, people’s disposable incomes have fallen steadily since 2005 and were stagnant even before the crash. That is the Labour legacy.

How does this compare with our competitors?

Well if you look at 2000-2008, the UK under Labour was towards the bottom of the OECD’s table. Of the major economies only Germany (whom Labour now exhort us to emulate – despite their lamentable record on youth unemployment and economic growth) and Italy fared worse. Britain’s Post-tax disposable household income rose only 14% in those 8 years, and 2008-2010 were much, much worse. Labour’s economic record, as felt by the population as opposed to that reported by the press, was dire. I can’t find the data, but if the Bank of England Governor reckons the situation’s got worse since 2008, then who am I to argue. Gordon Brown’s lunatic tax-binge, no private sector growth, all helped cause it. A devaluation of the pound may help keep exports flowing out, but the people pay for it in much higher fuel and food costs – over and above the rise in their dollar price on world markets. Once again, the people pay for the politician’s focus on GDP. If Mervyn King is right, the result of 13 years of Labour is almost NO improvement in real wages after tax. None, in 13 years.

This is why the people are sullen and angry – they were told that a boom was happening prior to 2008, but because the flawed measure GDP was being used, they couldn’t work out why the boom wasn’t happening to THEM as they had to struggle harder and harder to make ends meet. The blame has been successfully laid at the door of the banks because of the credit crunch, but a lot of the leg work in screwing the economy was done by Labour prior to the crash in stagnating private sector employment and increasing the tax-burden. There was no Net Growth in private sector employment under labour’s watch, and despite the “booming” economy youth unemployment rose. I blame the minimum wage for pricing the young out of the labour market for starter jobs, which have been taken by immigrants instead. But that opinion marks me out as a savage right-wing nut-job who would bring back slavery, because the left tell me all the time that the minimum wage has had NO effect on unemployment.

On top of a rising tax-burden and the pricing of young unskilled people out of jobs, the burdens of council snoopers, intrusive government and ever poorer services meant the people who paid for the whole shooting-match couldn’t see the benefits of their sacrifice either. Labour forgot that tax is money taken from the people who earned it, in final analysis, by the threat of violence. Pay or the police will eventually kick down your door and take you to gaol. Politicians have to deliver something to the people who pay it, instead of feather-bedding a client state of ever more generously funded welfare claimants and public sector prod-noses. These prod-noses take resources FROM the public services – money which could be spent mending roads or supplying a heart-transplant is instead deployed on a Labour-voting fuck wit with a clip-board saying “no” to people. Would you rather have your pot-holed road re-surfaced occasionally, or a Diversity outreach co-ordinator for one year? Me too.

Now, with the deficit running at 10% of GDP as a result of over-generous benefits and a vast client state, the Government is borrowing £1 in every £4 it spends. Spending cuts (making services EVEN WORSE, as bureaucrats don’t cut their own preferring to slash the “front-line”) and tax-rises are set to remove even more of people’s money. Furthermore rampant inflation, not captured by Gordon Brown’s fudged CPI measure, serves to further reduce people’s standards of living. The sins of a decade of Labour’s criminal mismanagement of the economy are going to be felt in materially lower standards of living for the next couple of years. All of the rises in living standards under the early years of Labour (themselves nothing to crow about) are going to be proved to be illusory in the next few years.

Labour’s solution in office: Pay people in the public sector to do unnecessary jobs. Their “growth policy” opposition: Continue to pay people to do unnecessary jobs. Whilst it MAY support GDP numbers in the short term, because of the debt burden it creates merely delayed the day of reckoning with reality. However much Labour bleat, the cuts are Labour cuts, they are the result of a decade of criminally wasteful overspend across the whole public sector. We might as well have been paying men to dig holes and fill them in again. In fact, that might have been better, because those men would not be getting in the way of the productive elements of society by standing there with a clip-board saying “you don’t want to do it like that…. “

In truth, Labour admit that the deficit needs to be cut. In private, they will agree that 2011 was the year that LABOUR CUTS would have started. The Tories may be going a little further and a little faster, but CUTS! are the only show in town. However Labour choose to present it, they know it’s their fault. And deep down, so to the British people.

What is necessary to prevent this insanity recurring is a measure of Government performance which takes into account the tax-burden as well as growth. That takes into account the benefits of state spending but reflects the actual prosperity of the broad mass of the British population: Disposable income after tax which should be compared to disposable income after tax and healthcare costs in other countries. If people get richer, the Government should be praised, if they get poorer, the Government should be punished. Steadily rising income makes people happy. Having to struggle makes them sad. This simple economic measure, if more widely reported than the illusory GDP would render moot Cameron’s Gross National Happiness. It would reveal the lie at the heart of the Brownite plan of the Noughties to shovel ever more state spending at unreformed public services, and instead reward Governments for tax-cuts.

My guess is that cutting taxes (starting with corporation tax) and slashing spending whilst simplifying the welfare state and marketising both health and education in the pursuit of economies in the public services, is exactly the medicine the economy needs to improve household disposable income after tax. I don’t say this because I am a Tory. I support the Tories because I think they have the right plan.

Hiring and Firing people

Lefties believe, passionately, that the state should regulate employment: who works for whom, and under what conditions they work, what contracts they can write, and whether or not and under what circumstances they can be fired. The state is crucial for protection of workers, for in their moral universe, the “worker” reigns supreme. His labour is honest, the bosses, or Capitalist always holds the power, with employees on sufferance. Bosses stand ready to, and indeed really want to fire workers at will, driving working conditions down in a race to the bottom. The workhouse beckons, unless the state stands ready to step in and prevent abusive bosses oppressing the masses, like the robber barons of yore. Tories, in this world view as the party of the bosses, are going to take an axe to important employment legislation which is all that stands between social democratic heaven and Victorian working conditions. They argue the Tories will always legislate to the benefit of bosses aiding them in their ever more extreme search for profits, which come, in the left-wing zero-sum-game, from exploited workers. Furthermore, there is no trade off: job protection – making it harder and more costly to fire an employee – has no effect at all on whether or not jobs are created. It’s a cost-free benefit to the worker. An exemplar of this view is Claude, who can be found over at Hagley road to Ladywood. Let’s have a look at the arguments in detail.

David Cameron’s recent plans to make it easier to sack staff in the first two years of their employment have sparked an intense debate over the nature of Britain’s labour market. After the “fluffy years”, it was only a matter of time before the crook-eyed default Tory approach to the world of paid employment would resurface.

There is a trust issue. The belief, clearly laid out that such reductions to job protection or workers’ rights are only to the benefit of “the bosses”. Of course Conservatives along with liberals believe that the main cost of these workers’ rights is borne by the low skilled and long-term unemployed who find it vastly harder to get work as a result. That the left make it a moral issue suggests they haven’t looked at the evidence too closely. They might not like what they see. The motivation of reducing job protection is not some form of class-based loyalty toward the bosses, but in the fact that Governments are judged on two metrics above all others: House prices and Unemployment. Governments are incentivised to keep house prices up and unemployment down. So any argument that the Conservatives are motivated by “profit” is going to get short shrift.

The problem for Cameron and the bosses’ organisations, however, is that – unlike the Thatcher years – there’s very little left in terms of workers’ protection for the government to wade in with the axe. Extreme job insecurity in the UK is already a growing reality.

According to the OECD, Britain is in the top three along with the US and Canada (and well under the OECD average) in the strictness of employment protection index (1985-2008), which measures “the procedures and costs involved in dismissing individuals or groups of workers and the procedures involved in hiring workers on fixed-term or temporary work agency contracts”.

Statutory employment rights, whatever the OECD’s metrics, are a poor indicator of employment conditions. I enjoy no employment rights as I am self-employed, but I rather like what I do. At the other extreme, the workers of the soviet Union were guaranteed a job, and were very unlikely to be fired, yet didn’t think the trade-off in terms of freedom worth while. Of course, Temporary staff give companies the freedom to cover workers’ rights like maternity leave without the costs of doing so causing them to go bust. It also gives individuals the flexibility to ‘try before they buy’ an industry – my work experience after leaving the army was mostly temp work from post-rooms to secretarial positions in any city institution I could find. I built up knowledge from people I met, whilst taking exams. Such positions can also be viewed as an extended job interview – temp-to-perm roles are increasingly common and gave me my first break in ‘the city’. The assumption that temporary staff are always abused is ludicrous.

Given the companies’ free access to casual staff on “zero hours contract”, or the free use of “temps” (which, by law, can be hired repeatedly on fixed-term contracts for up to four years before any tie comes into place), the lax regulation on probationary period for regular staff, as well as some of the lowest levels of statutory redundancy pay in the Western world, the notion that Britain’s employment regulations may be at the core of the current dole rates is simply comedy material.

Were anyone suggesting that employment protection was behind the current unemployment figures, Claude would be right to laugh. But no-one’s making any such assertion. The truth is that any changes to employment legislation are only going to have effects at the margin. Any jobs created that would not have been so had the employment legislation remained at the status quo ante would be swamped by the much larger effect of economic growth on rates of job creation. The Government’s belief is that signals like cutting corporation tax, cutting job protection and easing the burden of regulation will all add up to a significant effect on the unemployment numbers over time as employers are encouraged to take a risk and hire a few people they might not have risked under more onerous legislation. It is not about doing down the workers…

If we carry on this way, soon the only crusade left for the British Chamber of Commerce and the Tories to embark upon under the guise of “cutting red tape” will be against the right for workers to empty their bladder or take a crap at work.

Let’s ignore the hyperbole. The idea that it is the state which prevents people from abusing workers more than the fact that in a wealthy economy, any worker is without options, is absurd. Employers seek to avoid the staff turnover that such conditions create: training people to do jobs in Britain’s increasingly sophisticated economy is a major cost of employment.

The state is not the ONLY guarantor of job security. Indeed I suggest it’s not even the major one. Claude’s argument that job insecurity is the result of legislative changes misses the point.

However, what the last few days also highlighted is the almost total abdication on the part of the left and Labour in the fight against the galloping job insecurity and its noxious effects.

This line from the normally commendable Stumbling and Mumbling blog bothered me to the extreme. While sceptical of David Cameron’s proposals, author Chris Dillow also wrote:

“There’s good evidence that [employment protection] reduces workers’ effort and increases absenteeism. This suggests that – at the margin – Cameron’s proposals might increase labour productivity”.

Now, the reason why the above quote bothered me so much is that it shows how toxic and widespread certain myths are that even well-informed and well-read people can buy into them without questioning. In brief, the Daily Mailesque-fable that a permanent job or certain guarantees at work will automatically turn you into a slacker.

Just because the Daily Mail thinks something, that doesn’t mean it is automatically wrong. Of course the evidence is clear that where job protection is strongest, in the public sector where there is no profit motive for bosses to keep costs down, and where bureaucratic headcount farming rules, shows much higher levels of absenteeism, sickness and lower productivity. Though Claude will no doubt blame this on increasing outsourcing and casualisation, it’s not the temps who are involved in stories of people off “sick” for years on full pay, which are legion. No-one’s counting the cost, so why risk the aggro of firing someone who will never work? Despite the vastly better job security, longer holidays and shorter hours, stress is the most common cause of sickness in the public sector. Where does that leave the rest of the argument?

They ain’t gonna sack me, so why bother, basically. And how can you dispute that if even the usually meticulous and pro-left Chris Dillow can cite “good evidence” on the matter? Except that said “good evidence” points to three pieces of research from Portugal and Italy which are solely and exclusively focused on specific (and already obsolete) legislation passed in those two countries in the 1980s and 1990s. Those laws were extremely protective – overly protective in fact – in a way not remotely comparable to anything Britain ever experienced, not even at its unionised peak. It’s like saying “there’s good evidence that January is not a cold month and in fact look at this link to prove it”. Except that it points to average January temperatures from the Canary Islands and Dubai.

The fact is, instead, that there’s literally a mammoth body of research out there warning of the toxic long-term effects of job insecurity (click here for a summary).

How dare Chris Dillow challenge a leftist Shibboleth! Splitter! I’m not going to argue the toss about whether job insecurity is a bad thing. Of course it is! I just don’t think it is going to be amenable to the kind of legislation Claude thinks is necessary. If you’re vital for the smooth and efficient running of your organisation, bring in business, or have vital skills developed over many years, are just good at your job, or simply try hard then you have job security. If you don’t have skills like these, then no amount of legislation is going to help you keep your job. Secondly, job insecurity may be bad for your health and happiness, but unemployment’s much worse.

In reality, One way to mitigate job insecurity is a dynamic job market in which a newly redundant worker can quickly find another job. And conservatives believe that reducing the risk of employing someone increases the likelihood, at the margin, of jobs being created. A dynamic job market also increases workers’ real bargaining power as it removes some of the fear of the Bosses’ ultimate sanction. Conservatives choose the lesser of two evils believing that state efforts to relieve job security are wrong-headed and indeed counter-productive, whilst leftists deny there’s a trade off at all: they simply don’t believe that reducing job protection results in any net increase in employment. What does the evidence say?

Over the years detailed studies took place around the world, from the US and Canada to Australia, Sweden, Korea, Germany and more. The findings leave room to no doubt: there is a clear correlation between excessive levels of job insecurity and a variety of negative outcomes.

Not in dispute: How much of self-reported job insecurity is due to weak statutory job protection though? If, however there is a positive effect on employment of weakening job protection, then that increase in job insecurity both mitigates the damage by giving the insecure worker options AND reduces the greater harm, of unemployment.

The initial advantages of “increased flexibility and lower costs” for the employers are undisputed. But little is ever said about the long-term effects that “casualisation may have on important aspects of national economic performance such as skill formation” and, most importantly, the ticking time-bomb that is widespread casualisation as weighed against “long-term financial planning”.

Having criticised Chris Dillow’s links on the grounds that they’re obsolete and foreign, he points to a paper dealing with the Australian labour market, much more involved with primary industry, and far more different to that of the UK than Italy’s. The conclusions are tenuous at best. It is trivially true that a casualised workforce will be lower skilled, but misses the bigger point that in skilled industries casualisation is unlikely to benefit the employer. It is the absence of unskilled work of any kind that is responsible, in part, for long-term unemployment. The unskilled are priced out of the UK employment market.

The leftist angst against casualisation misses many other point and belies the importance of temporary work as bridging employment between permanent jobs. Indeed the level of one form of contract over another has little correlation with the degree of labour market turnover. Cultural or institutional factors are more important. My father, a Midlands metal-basher, did not employ unskilled people off the dole. He would only employ the unskilled as apprentices if they could demonstrate the ability to turn up, on time and work hard. This skill is the first to be lost by the long-term unemployed and completely lacking in the multi-generational welfare classes – such people are a huge risk to employ. I will be accused of “demonsising the unemployed”. However a stint at McDonald’s is sufficient to demonstrate the most basic criterion for successful employment: willingness to work. From Claude’s chosen link “direct transition from unemployment to a ‘permanent’ job is less likely than an indirect one which goes from unemployment via a casual job to a permanent one”. Casualisation can be seen as a potential “lubrication” into full-time permanent employment, and is vital to the effective functioning of the Labour market for both employer and employee.

But the strongest and most consistent evidence is the one seen across firms, industries, and countries linking job insecurity with “negative employee attitudes, behavio[u]rs, and health” and with the fact – as noted by several researchers – that “job insecurity is more stressful than job loss itself”.

That may or may not be the case. But it is not clear that “job insecurity” is much amenable to statutory protection. The best defence against insecurity – being valuable to your organisation – is in the individual’s hands. Furthermore, being fired rarely comes out of the blue – there will be a period of disciplinary meetings, performance appraisals and a dawning realisation that you’re going to be fired. Under these circumstances of course, the eventual redundancy comes as a relief! I know: I’ve been fired from a couple of jobs I’ve been unqualified or unsuited for, and the laborious (state-mandated) process of getting rid of someone by creating a paper-trail of HR department meetings, and warnings is a large part of that stress. Simply working without state-mandated rights to sue your employer, or without statutory redundancy pay does not feature in day-to-day stress for someone working competently for a profitable enterprise.

Amongst the negative effects, a “powerful negative influence on motivation”, “reduced effort” and “poor safety compliance by employees”. Low levels of job satisfaction are also associated with negative employee attitudes, lower customer performance and effectiveness with customers as well as with -in turn- a detrimental effect on group morale. And that’s without taking into account what “the longer term negative effects on workers’ depression levels“, or “the systemic [relation] between job insecurity and marital and family dysfunction” or, even, the proven effects that “parents’ job insecurity has on children’s school performance as measured by grades”. The fact that “job insecurity reduces job satisfaction is attributable to the uncertainty of not knowing how to predict or control job threats”.

And more evidence is provided that job insecurity is a bad thing. No-one disagrees. But those statistics pointing to job insecurity suggest that bad management, not lax legislation is to blame. Whilst stronger protection might help at the margin, what is the cost in extra unemployment? Does Claude really believe that job protection has NO effect on the marginal propensity of a business to hire? In any case, the negative effects of job insecurity are not the issue. The effects of legislation on job security might be, but more importantly, Claude has to demonstrate the primary case that statutory job protection increases net employment, and that is far from proven.

The government is suggesting reducing workers’ rights, especially by extending probationary periods, makes it more likely that employers will take the risk of employing someone. Likewise reducing the likelihood of being sued by a disgruntled former worker will reduce the risk of hiring people, and therefore have a small effect on the likelihood of a job being created, as does reducing statutory sick and redundancy pay. No-one is suggesting that these effects are massive. Such policies are not going to end unemployment overnight, but every little change has a small effect at the margin, which may take a long time to filter through companies’ institutional inertia and will be very difficult to tease out of the data in the imperfect laboratory that is an international developed economy.

And that’s because, while insecurity in the short-term may spur a worker to perform better if the goal is a latter stage of more protection and various perks, an ongoing perception of “precariousness” will start having an adverse effect, as the worker will feel increasingly uncertain that their persistence can be sufficient enough for them to retain their job.

This demonstrates how little Claude knows about business. Using fear of unemployment is poor management. The largest employer in the country is the Small & Medium Enterprise sector: family businesses, like the one I grew up with. The risk of hiring an incompetent or idle worker is vast, as margins are thin and competition is hot. One person not putting their shoulder to the wheel at crucial times in a factory employing a couple of dozen people could cost the company a customer or its reputation. Under these circumstances, it makes sense to pay good people well and choose them carefully.

For a worker with little to lose, the lack of ties will offer no incentives to stop them from slacking off or “looking elsewhere” altogether.

Claude makes my point for me. If you need your staff, you need to motivate them – just as getting drunk on company time and crashing the company van will get you fired pretty damn quick, stakhanovite effort will get you a couple of hundred quid extra in your pocket at the end of the month, with tickets to a football match and hand-written note from the boss that a couple of days extra paid holiday should be taken to take the significant other somewhere nice, by way of a “thank you”. Otherwise they will go and find an employer who will appreciate their efforts. Good management is about a happy workforce.

I understand the point Claude’s making. But he can’t have it both ways: either cutting these rights is a big issue which will benefit company profits (which does lead to increased hiring and help reduce unemployment) or it is a drop in the ocean and have little effect, in which case, why is he so upset? My view is that state statutory redundancy and sick-pay and tribunal rights for workers have little effect on job security, and less on the workers’ feeling of job security. Their effect on employers behaviour in terms of jobs created will likewise be small. On balance, I think the trade-off is worth it. If you want to be secure at work, work hard and make yourself invaluable to your employer.

Unemployment is not constant: it is a statistical result of two fast flowing streams: people entering the job-market from education for example, or redundancy; and those getting jobs. Even during a recession 10% of people leave the unemployment pool every month, and it is this stream: getting jobs, which is the more variable. Jobs are lost at a more constant rate over the cycle than are created. Thus it makes sense if, and if you’re a sensible government you do, want to reduce unemployment, it makes sense to concentrate on job creation rather than job destruction which is much less amenable to government action.

The effect, as I mentioned above of job protection on unemployment is extremely difficult to tease out of much larger cyclical effects of the business cycle. But the effect is clearer in the more volatile seasonable data. Job protection significantly reduces job flows. It can also be teased out of intra-regional data: flexibility reduces (some) unemployment. The coalition’s policy is a step towards creating a more dynamic job market that has a better chance of creating full employment than ever stronger job protection for the decreasing band of workers lucky(?) enough to secure a job for life, ever will.

Your job is in your hands. If you’re relying on the law to prevent yourself getting fired, you’re either on the way there, or you work in the public sector.

Unemployment. Not caused by what you think it is.

In another post inspired by the chaps at Hagley Road to Ladywood, I take issue with Claude’s characterisation of the Tories as heartlessly stoking unemployment for political gain. This annoys me for several reasons, not least the idea that Tories enjoy causing misery, but also because it demonstrates so many levels of misunderstanding about the economy in such a short post that I could barely contain myself.

What the keynsian head-banging left is trying to achieve is to “stimulate” the economy by deficit spending. This can take the form of tax cuts or spending. They both have the effect of increasing the deficit. The aim is to borrow demand from the future to boost the economy now. I don’t believe it works: look at Japan 30 years of “stimulus” and all they have to show for it is 40% of Tax receipts going in debt service and debt at 200% of GDP. This punk keynsian approach hasn’t worked anywhere. Ever.

So. The first premise against the cuts is wrong. It won’t tip the economy into recession any more than spending will stimulate it.

The next premise is that the Tories are going to increase unemployment by firing hundreds of thousands of local government workers. Unemployment is the last economic indicator to turn. It usually turns about 18 months after the economy starts to recover from it’s bottom, and polices to influence it are noticed, if at all after a similar delay. It is therefore to blame the Tories for the direction Unemployment is travelling about Summer-Autumn 2011. Unemployment is rising: That’s still the Labour party’s fault.

It may seem foolish to increase the rate of job losses. This looks stronger than the rather stupid idea that cuts will tip the country into recession, but it too is wrong, because as I’ve argued many times, cutting the deficit is vital to prevent a catastrophic collapse in the economy, and that can’t be done without a smaller public sector payroll. And it’s wrong mainly because this level of job-losses can be absorbed by a recpovering private sector even without boom-level growth. Don’t believe me? The UK workforce of 30,000,000 from 1988-2008 lost around 2.2m jobs a year, so an extra 300,000 is neither here nor there. Except that it isn’t 300,000 as there are nearly a million jobs CREATED in the public sector each year. This 300,000 is just those jobs lost which will not be refilled. In fact, the rate of job destruction is remarkably constant during the economic cycle. The most important thing influencing unemployment is the rate of job creation. In the context of an economy which creates around 150-200,000 jobs a month, even now during what is regarded as a pretty horrible economic time, the idea that the private sector will take up the slack, although derided by leftists, is easily believable, if you’re prepared to look at the facts.

Some people on the left don’t think anyone should be fired, ever. That’s just naive. If you want to have a grown-up debate, it is important to accept that jobs have to go from time to time. If you accept that, you need to ensure that there are jobs to go to, and of course for all the reasons mentioned, it is important to look at what increases the rate of job creation.

The government, insofar as it is able must make it less risky for employers to hire. If you cannot fire a worker once hired, this increases the risk of hiring him in the first place. This means that if you make it easier to fire, there will be MORE jobs created, and unemployment will fall. This single piece of counter-intuitive logic effectively negates everything the left believes about employment.

So attempts to stimulate the economy by spending fail, because they destroy the economy. Attempts to mitigate by preventing people getting fired fail because they cause MORE companies in trouble to go bust, and they make it riskier to hire, reducing job creation and resulting in HIGHER unemployment.

In attempting to reduce a small evil – being fired in a dynamic economy, the left condemns millions to a life on benefits without the hope of work. Leftist policy is to the benefit of insiders – those with full-time public sector jobs (especially unionised insiders) but that is the detriment of everyone else, tax-payers, the crowded out private-sector. But most catastrophically the unemployed.

The Tories want the same as Labour. Low unemployment. The fact is the Tories have a MUCH better track record in delivering it. Every labour government since the war has left more people languishing on the dole than when they took office. They also usually left a weaker pound, currency and fiscal crises.

The state is the wrong tool for the job of reducing unemployment, and state spending or fiscal stimulus vies with job protection polices for the most catastrophically counterproductive policy to reduce unemployment. In fact the best thing the state can do to create jobs is build infrastructure (that basically means roads) and bugger off, leaving the people to use it as they see fit without interference by Government. People’s natural desire to solve problems and get rich will see to it that anyone who wants a job can have one. Once you sort out the over-generous welfare state to see to it that everyone actually wants one, then you have full employment.

The less the state does, the better. Every solution the Labour party regards as axiomatic PREVENTS full employment. You might even think that they WANT an enormous client state of servile benefits recipients to reliably vote for the (Labour) hand that feeds. But even I’m not that cynical. Never attribute to malice what could be attributed to mere incompetence.

Manufacturing and China.

John Redwood, normally so interesting, is reduced to bleating “why don’t we make things anymore?”.

Of course making a “thing” you can drop on your foot is no different economically to providing a service except that the latter cannot be outsourced to secretive slave-labour camps like China which because of “communism” gets a bye from the leftist-inclined world media despite its savage political repression. Unlike the slave-labour camp Myanmar which has the misfortune to be a military Junta with a personable opposition leader, there is no significant world profile for opposition leaders in China. A billion people live in bondage in part because people want cheap “things” and in part because almost all journalists think communism is somehow better than fascism or military rule, when all involve the same repression. In fact, my guess is communism’s worse. I doubt Aung San Suu Kyi would have survived had she had the misfortune to be Chinese. Can anyone think of anyone outside the identikit Grey men of the Politbureau who will be next leader. Clue: it’s not Liu Xiaobo. Though the communist economic choke-hold has been released a bit and the Chinese economy grows at a decent clip. China’s success in using her almost limitless labour supply to supply christmas lights to the west at £6 a time, is not a mark of success. It is the wages of half a century of failure of idiotic economic ideas and political savagery.

So poor countries like China with a highly centralised state CAN persue export-led growth by applying western developed technology and nailing them together using extremely cheap labour and currency manipulation. However, John Redwood would, presumably like her Majesty’s subjects in the UK to remain free? To remain rich? And he’s against currency manipulation. So how, exactly does he propose that we compete against the chinese? And who is going to buy our manufactured goods if we did persue this strategy? It’s not the average Chinese worker – he couldn’t becaue the Renminbi is kept artificially low and black market currency trading is punishable, as so much in China, by death.

If China’s exports aren’t a demonstration of the superiortity of Manufacturing, then what is? Manufacturing does not lead to stability – manufacturing goods is one of the most cyclical sectors. Nor does it generate many high-paid jobs, especially if you want high productivity too. Nor are manufactured goods any more “real” than services. How is cooking a steak in a resteraunt less “real” than making rubber dog shit? The real root of the wish for things to be made in the UK is ignorance of what a service economy actually is, xenophobia and nostalgia for an industrial working class, which has gone.

The idea that exporting manufactured goods is the most important economic measure is no less idiotic than the idea that Agricultural land is still the root of all wealth. Agriculture was indeed the root of wealth, until 1750 or so, then manufacturing took over until about 1965. Services – the businesses of ideas and information is the root of wealth now. It’s about who controls the information and has the ideas. And that is still the lucky people breathing free air – Britain, her old Commonwealth, Western Europe and North America who are designing things to be put together by slaves in China who get the most economic benefit from the process.

So John Redwood is wrong. The only way British people could supply those Chrismas lights for £6 would be if we were extremely poor – too poor, in fact to buy them. Like the Chinese who make them.