Tag: Economics

Build more or cut immigration – @MattwRidley

Matt Ridley’s Times column on the UK’s infrastructure challenges.

As ever, it’s an objective and data-driven argument:

Of the 1,447 people that Britain added every day in the 12 months to the end of June last year, roughly 529 were births minus deaths, 518 were net arrivals from the European Union, and 537 net arrivals from elsewhere, minus 137 departing British citizens. Given such a flow, our unemployment rate of 4.3 per cent and employment rate of 75.1 per cent are remarkable, if not miraculous. We are one of the world’s great workplaces, which, of course, is why people come.

and …

Though a densely populated country, Britain is not in any sense running out of land. Only about 7 per cent of the land area is classified as urban, rising to almost 11 per cent in England. But of that 11 per cent a great deal is still not concrete: gardens, parks, water and so forth. So the actual paved-over percentage, even just in England, is about 2.27 per cent according to the National Ecosystem Assessment in 2012, and more like 1 per cent for Britain as a whole. This is why a flight over southern England, let alone the Pennines, gives a very different impression from a car journey through the ribbon development along the roads: there is vastly more farmland and woodland (13 per cent of Britain and rising) than concrete.

As so often these days, we suffer from a long-standing failure to have made the case.

Here is the column in the Times.

Here is the same column from Ridley’s own blog, which includes links back to the data sources.

Over decades, we have failed to make the case for development.

We had the Brexit vote (at least partly) because we failed to make the case for immigration.

People deify that nice Uncle Jeremy Corbyn because we failed to make the case for free markets.

Is the shrill intolerance of no-platforming, safe-spacing, snowflake students the result of past failure to make the case for free speech?

 

Photo by Stephen Crowley on Unsplash

Philip Hammond eyes £1bn budget raid on freelancers – @TheSundayTimes

The Sunday Times reports that the Chancellor is considering another attack on sovereign professionals. The concern seems to be, as before, “disguised employment” and the Sunday Times’ coverage is couched in terms of “levelling the playing field” and “significant tax advantages”.

The reality of course is different.

When running properly, individuals operating through personal services companies are each individual businesses carrying all the risks of business and not enjoying the corporate comfort blanket benefits of traditional employment. If the cost to the client company is higher than employing a traditional employee (and often the fully loaded costs are not as far apart as crude comparisons of “day rates” suggest), then the client business benefits from flexibility and agility that no commitment, on-demand services provide.

A tax raid risks damaging the supply of this important flexibility while also increasing the cost to client firms. This has already been seen in the public sector where restrictions similar to those imagined here have already been implemented. It’s a short-sighted and ill-considered move.

Does “disguised employment” actually exist? I’m sure it does. A number of recent court cases suggest that there has been a trend for some employers to seek the cost benefits of using freelance contractors whilst retaining all of the control traditionally associated with  “permanent” employment. Those cases should rightly be pursued, but not by painting the self-employed as either downtrodden, abused workers or system-abusing fat cats.

Being a sovereign professional is a choice. It has real benefits – not least in flexibility – but it comes with risks, costs and responsibilities. A suitable test of employment would investigate the extent to which those risks are real, rather than simply punishing providers of needed skills through a flexible model.

 

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Markets, fairness and wolves – @mattwridley, @worstall

Over on CapX, Tim Worstall elaborates on Matt Ridley’s recent Times column regarding free markets and fairness.

Ridley observes that free trade, contrary to common socialist rhetoric,  actually makes people behave more fairly and generously:

The more integrated into the commercial world people are, the more generous they are. As one of the authors, the economist Herb Gintis, summarises the results: “Societies that use markets extensively develop a culture of co-operation, fairness and respect for the individual.”

Worstall elaborates that, as a result, a free market of repeated interactions is self-regulating:

Buying bread is, for example, a fairly common activity. Anyone trying to cheat us will quickly find their market disappearing. We might tell on them. We might just reject their offering. But bad bread does quickly disappear.

Buying pensions on the other hand is different – we only really do it once in a lifetime. And it takes perhaps 50 years to find out we made the wrong decision. We can rely a great deal less upon that trained-to-operate-in-markets set of reflexes that multiple iterations allow.

Which is rather a long-winded way of explaining what must be regulated and why.

Worstall’s assertion that fairness is a learned response reminds me of this recently reported experiment which found that wolves and domestic dogs have a similar sense of fairness (i.e. that it pre-dates the domestication of dogs). As reported on the BBC:

Two animals of each species were placed in adjacent cages, equipped with a buzzer apparatus. When the dog or wolf pressed it with their paw, both animals got a reward on some occasions. Other times, the dog or wolf doing the task got nothing while the partner did.

The key finding was that when the partner got a high value treat, the animal doing the task refused to continue with it.

“When the inequity was greatest they stopped working,” said Jennifer Essler, from the University of Veterinary Medicine in Vienna.

“For some of them it was a really really quick and strong response. One of the wolves stopped working after the third trial of not receiving anything while his partner received something. I think he was so frustrated he even broke the apparatus.”

 

Photo by Courtney Clayton on Unsplash

 

Matt Ridley on free trade – @mattwridley

Matt Ridley’s column from the Times, now on his own site, offers a powerful, evidence-driven, argument for free trade:

The “ultimatum game” is a fiendish invention of economists to test people’s selfishness. One player is asked to share a windfall of cash with another player, but the entire windfall is cancelled if the second player rejects the offer. How much should you share? When people from the Machiguenga tribe in Peru were asked to play this game, they behaved selfishly, wanting to share little of the windfall. Not far away, the Achuar in Ecuador were much more generous, offering almost half the money to the other player — which is roughly how people in the developed world react.

What explains the difference?

The answer is, here.

 

The Magic Money Tree explained by @Worstall

All you wanted to know about QE, the circulation of money and why magic – at least as it relates to money trees – isn’t real, from Tim Worstall.

The magic money tree is permanent spending of the same invented money, it is not temporary – the effects are permanent – and it is not reversible without stinging tax rates. It is also known as the monetisation of fiscal policy, or the monetisation of spending. And it has everywhere and everywhen been a disaster from the point of view of subsequent inflation. Not inflation of a couple of percent here and there either, but of two and three digits a year sort of inflation.

There is also mention of the Hungarian pengő, which I understand to be a small and adorable penguin.

 

Photo by Adarsh Kummur on Unsplash

 

Lending and the gig economy

On EconomicVoice.com, the University of Edinburgh Business School’s Jonathan Crook highlights the risk to sovereign professionals caused by the misalignment between traditional lending and the gig economy.

As Crook observes:

while this in-the-moment working arrangement can be sustained in the short-term, only thinking about the now may lead to long-term financial issues.

because:

For years, traditional lending has focused on assessing stable consumer income to determine financial risk. Those with full time and stable jobs will fare better. But ‘gig economy’ workers clock up individual hours which – from a credit risk modelling perspective – may not be seen as joined up, consistent or predictable.

It’s an age-old problem. While the freelance / gig / sovereign professional economy has boomed in recent years, overly conservative bank, stuck to their risk-averse playbooks, have failed to move with the times.

Daniel Pink highlighted the problem in his book Free Agent Nation way back in 2001.

However, in many ways, the security of “”full time and stable jobs” is an illusion. An employee who loses their job has no network or process to fall back on. If a freelancer with a portfolio of clients loses a client, he or she has a basket of other clients to fall back on; the risk is spread. And, if the sovereign professional is an interim manager or “super-temp” they have an established network of agency relationships to help them towards the next project.

There is a clear market need for a solution. Crook suggests that:

it is possible some agile lenders will see this as an opportunity. Instead of examining the consistent hours an employee works, it’s not inconceivable to think they may begin tracking how many years someone has worked in this way and the overall hours they’ve been paid for.

Pink’s solution, at least at the higher earning / larger lending end of the scale was the issuing of shares or bonds, citing examples like Bowie Bonds and the fact that boxers (amongst other athletes) fund their own training by selling shares in “themselves”.

Whichever way it goes, the lending market needs to adapt and, in all likelihood, the solution won’t come from traditional banks at all. A player like PayPal – who have already disrupted small-business funding with their  PayPal Working Capital product – will take a sensible, reality-based view that recognises that a sovereign professional’s established free cash flows are at least as secure as the historic wages of an employee.

(Disclosure: PayPal is a client of my business, Burning Pine)

 

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Aging population and immigration curbs – Bloomberg @Business

Lessons we won’t learn?

A piece on Bloomberg about Singapore’s imminent labour crisis:

In Singapore, immigration restrictions can partly explain an expected drop in working age population growth from 2027, even as Kuijs [Louis Kuijs, Head of Asia Economics at Oxford Economics] credits foreign labor inflows for helping boost that pool over the last decade.

and…

The grim rule of thumb for the [Asia] region: A 1-percentage-point decline in labor supply growth in any of these areas would shave off a half-point to two-thirds of a percentage point in GDP growth.

Read the article, here.

 

Photo credit: Foter.com

Looking from left to right, and right to left

A couple of articles this week on perspective, and especially why those on the political left often state a marked distaste for those on the right.

The Adam Smith Institute’s President Madsen Pirie makes the case that the real difference between the two is not attitude but method:

The left typically favour the use of state power through high taxation, nationalization and the fixing of prices.  The centre-right typically favour relatively free markets, private enterprise, and prices that respond to changes in supply and demand.  Their case is that these usually achieve more sure and more rapid economic growth than can be attained by collectivist planning and state controls.  The left pursue greater equality, whereas the centre-right seek to promote greater opportunity.

In Wednesday’s Times, Daniel Finkelstein takes issue with the left’s disdain (“True socialism always ends with the Stasi”):

Hatred of Conservatives is common currency on social media, and at Labour conferences you can buy mugs with the words “Never kissed a Tory” on them.

… Not unreasonably, many Conservatives are quite hurt. It’s never nice to be thought evil by someone. And the misunderstanding, that Tories are like Mr Burns out of The Simpsons, is quite frustrating. There is also something quite amusing about people who check someone’s position on free schools before they kiss them.

Both worth a read.

 

 

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Ronald Coase – hero of the Sovereign Professional

Eighty years ago, in The Nature of the Firm, Ronald Coase (1910 – 2013) explained why firms exist. His answer (transaction costs) both explains the recent rise in the number of sovereign professionals and highlights the challenge faced in building a high-value sovereign professional business.

Essentially, Coase argued that firms exist where the cost of contracting individual tasks becomes too burdensome. It is relatively cheap and easy to contract simple tasks in the open market, such as taking a taxi or paying a window cleaner. However, the myriad subtle responsibilities of, say, a personal admin assistant are more effectively met by hiring someone on a contract of employment.

The rise of technology, especially smartphones, the web and cloud computing, has dramatically reduced transaction costs on both sides. Size matters less and it is easy for an individual to market themselves, to be found, engaged and for all the requisite admin to take place. Those relatively concrete transaction costs are clearly lower as a result. One could imagine such relationships reaching a new equilibrium where it is now economical effective to contract out a larger set of “tasks” to sovereign professionals.

However, building on Coase’s work, Sanford Grossman and Oliver Hart described two types of rights over a firm’s assets: specific rights, which can be contracted out and residual rights which cannot. The more a sovereign professional works on a client’s strategic projects, the closer he or she comes to those residual rights. At that point, as The Economist describes in Coase’s Theory of the Firm “a merger would make more sense” – i.e., that work may be better done by an employee.

The challenge for the sovereign professional is to build the sort of “trusted adviser” relationship that gives access to strategically important (and therefore valuable) projects while maintaining independence.

Both papers are worth reading and digesting;

The Sanford and Hart paper, The Costs and Benefits of Ownership:
A Theory of Vertical and Lateral Integration, (which is on my “to read” pile) is here
.

 

Image: GNU

Atlas and Albion – @TheEconomist

The Bagehot column in this week’s Economist contemplates an Atlas Shrugged-like future for Britain.

The combined result of Brexit and Corbyn could be the dystopia that Rand warned about: a stagnant society driven by resentment of the successful. The flight of talent will not only have a knock-on effect on the wider economy, as high earners who would have spent money in London or Leeds start moving to Paris or Frankfurt. It will also reduce the state’s revenues, since the top 1% of earners pay almost 30% of income tax and the top 10% pay nearly 60%.

 

Image source: https://commons.wikimedia.org/wiki/File:King_Alfred_Statue,_Winchester.jpg