Infrastructure companies are made to measure for ‘widows and orphans’; they offer investors relatively stable income streams over many years and are very unlikely to be wiped out by technological change as Kodak was earlier this week.   All of which makes them ideal investments for pension funds which must fund their long-term liabilities to pensioners with suitable investments.   With interest rates at record lows the relatively stable income from infrastructure companies is more than ever needed to pay pensions.  Something is very wrong if we have to go half way round the world to find investors; I thought the City was supposed to be the world capital of, err, capital!

In a well run world people in their peak earning years would build up a pot of savings, either as individuals or through a company pension scheme.  Then, after their retirement, they would draw down their savings leaving the next generation in turn as the capital providers for industry giving them in turn a pension to look forward to.

But this deal breaks the circle.  The next generation will now have to work twice as hard – first to earn their way in the world and second to pay the dividends that are going offshore.   This doesn’t work unless we see a step change in the size and competitiveness of British industry that was last world-beating (with honourable exceptions) in about 1850.  Unfortunately, there is no sign of that changing anytime soon.

For this and other reasons most countries would not sell their basic infrastructure off.  We do because, in the infinite wisdom of the market fundamentalists, there should be no borders to the free flow of capital.  That’s an argument for another day; suffice to say for now that, even if the fundamentalists are 100% correct, most others are not playing by the same rules nor is there any incentive for them to do so.   Can you imagine, say, Centrica (the company behind British Gas) being allowed to become the dominant gas supplier in France in the way EdF has been allowed to move into electricity in Britain?   At the very least we should insist on reciprocity; companies from another country operating in sector X should be free to invest here only if UK firms operating in sector X could do the opposite deal and acquire comparable assets in that country.  That simple rule would go a long way to levelling the playing field and no-one could argue that it wasn’t entirely fair.

As she says it was guns that caused the whole problem in the first place.  She asks, “What happens when they start shooting the wrong people?“

Quite so.   Effective policing can only be done with the consent of the community; live rounds are not the way to win hearts and minds.

The traditional justification is that remuneration has to be “internationally competitive” to attract the best talent but this is a theory constructed out of wishful thinking; the notion that there is a liquid market for chief executives is pure self-serving fantasy.  As the High Pay Commission itself notes the importance of global mobility is largely a myth and that, “only one successful FTSE chief executive has been poached in the last five years – and even this person was poached by a British company“.

My own experience leads me to believe that most people can only have one major goal – money or results but not both – after I had the doubtful privilege of working for a chief executive who was transparently only interested in himself.  Under his ‘stewardship’ the company could have gone to hell and would have done repeatedly so were it not for the work of a handful of good people who averted the worst outcomes his negligence might have caused.  At another time I worked in a company with a chief executive who was quite simply out of his depth; every time things got sticky (as they periodically did) he would find it necessary to take an extended tour of our international operations leaving others to sort things out.  Yet he still drew an immense salary and decorated his office with imported handmade wallpaper.  His talent was not executive genius but knowing the right people to get himself appointed.  Plus ça change!

Anecdotes do not aggregate to data, but it is surely significant that, co-incident with the HPC’s report, we get a damming leak on England’s poor performance in the Rugby World Cup.   According to the BBC, “A number of England’s World Cup players were “more focused on money than getting the rugby right“.   Exactly my point!

The bottom line is that many executives are getting paid too much and delivering too little which is perhaps inevitable when they sit in judgement on their own rewards.   I have no objection to high pay per se when it is earned (Steve Jobs for instance) but the quid pro quo for sitting on a high branch should be that it’s a breezy one and easy to get blown off.  It’s time the ground rules were changed to bring order to this non-market and the HPC has some good suggestions to build on.

Well, it turns out that they have a point.  As a new report shows, despite an epidemic of financial crime federal prosecutions in the US have fallen to under half their level of a decade ago.   The downward trend became firmly established in the presidency of G W Bush and has continued under Obama. The chart shows federal prosecutions each year for the last two decades and four presidents.

The FBI warned as long ago as 2002 that an epidemic of financial fraud was building yet nothing was done in the face of willful blindness on the part of bank executives, regulators and politicians.    Policing and regulation (which in this context are much the same thing) completely failed leading to the wave of subprime fraud which eventually broke in 2007 precipitating the world into Depression.

But the subprime meltdown would not have been nearly as serious as it was unless the system was already in a fragile state because so many banks and other institutions had long been exploiting the near absence of any regulation to make hay in ways that history shows inevitably lead to a meltdown.  So subprime was only the trigger.  Dozy regulators are one thing; remaining fast asleep after 2007 is quite another yet, as the chart shows, that’s exactly what has happened; prosecutions have fallen because, whatever the law say (and it says plenty) there had been a de facto decision to decriminalise … well, crime.

Obama came to power amid much hope that he would take control and sort things out.  But nothing; he reappointed Bush’s economic team and did nothing to prosecute offenders despite abundant evidence.  Which is to say that he, and his appointees like Attorney General Eric Holder have made being blind a matter of deliberate policy.   Obama might have chosen to clean out the frauds saying of the inevitable reaction, “I welcome their hatred” as FDR, who understood the score, said when faced with epidemic levels of fraud in the Great Depression.  Instead he chose to try to reconstruct the economy with the criminals in place – a policy that has failed.

Not surprisingly the country is seething and Occupy is the response.

Fortunately the situation is nowhere near as bad in the UK  but there is no room for complacency either.  Almost all the bailout has gone to the bankers and very little to the real economy – a point which last night’s Question Time audience clearly understood.  With the bankers likely to need another bailout very soon, the politics of this are going to get interesting; any party on the wrong side of events is going to be history.

Basically, the proposal is to reduce the number of health and safety inspections by about a third – 11,000 per annum – as “part of a package of measures to change the culture…” and it will also start recovering its costs where it intervenes.  The justification for all this seems perfectly reasonable at first sight.  In the words of the consultation document,

… it is reasonable that duty holders that are found to be in serious material breach in standards – rather than the taxpayer – should bear the related costs incurred by the regulator in helping them put things right. A cost recovery principle will provide a deterrent to those who would otherwise fail to meet their obligations and provide a level playing field for those who do.

In reality it is riddled with problems.  For a start it’s not at all clear how these proposals will “change the culture”.  They say they are going to target higher risk industries and through the better use of “intelligence”.   These are admirable aims but are about better management, not changing culture.  What it’s really about is part funding the HSE through a swingeing increase in fines described in true Orwellian terms as “fees”.

Then there’s the question of the moratorium on new domestic regulations for small businesses announced only this last spring?   This is easily dealt with,

“Ministers have confirmed that the moratorium will not apply to these proposals …”

So, they were just kidding about the moratorium then; I’m glad they told us.

And there is the trigger for and level of fines fees involved.  Where any ”material” (as opposed to merely “technical”) breach of health and safety law is found and followed up with a letter (or email)  the fees will apply, the amount depending on the complexity of the investigation.  The current hourly rate is £133 and it is estimated that a letter will typically result in a charge of £750 and an enforcement notice £1,500.  More complex cases will cost much more.

A “material” breach, the consultation document helpfully explains is, “When, in the opinion of the inspector, there has been a breach … which requires them to make a formal intervention [i.e. a letter].”  A ”technical” breach is one where again, in the opinion of the inspector, a formal intervention is not required.

This really is a jobsworth’s charter.  Inspectors will be able to hit any arbitrary targets then might be set for the number of interventions or the amount of revenue raised simply by adjusting their opinion.  Or maybe it will depend which side of bed they got out of in the morning.  Either way the strong temptation will be to pick off low hanging fruit, meaning in practice smaller businesses that are unlikely to have the management or financial resources to challenge an inspector’s opinion.

Or to put it another way, this is just setting up a system that creates potential for conflicts of interest in the HSE.  We need to know that action is taken when, and only when, there is genuine risk and not just because the HSE budget is under pressure.

(For the avoidance of doubt let me say clearly that I’m sure that 95% of inspectors are thoroughly professional in their approach but no-one should be put in a position where they face contradictory directives from their management.)

From the point of view of small business this represents yet another regulatory minefield – exactly the sort of thing that is so unpopular and with just cause.  The HSE only has to be expert in one field, the business in every field.

If the government were serious about changing the culture, especially among harder-to-reach small companies, it would use inspectors more as consultants, going into firms to help and advise and resorting to formal interventions only when the management is clearly dodging its responsibilities.  For the majority of companies that want to improve their health and safety this would be a practical and cost-effective way to to so.  However, under the “fee for intervention” system a company would have to be mad to ask the HSE for advice.

Government should be helping British firms cut their costs and improve their efficiency while doing the same for its own direct responsibilities (which have the same relationship to the economy as a whole as do head office costs to an individual firm).  Unfortunately, this proposal doesn’t do so; it merely shuffles costs off the government’s books and onto the private sector’s books; it is an HSE stealth tax that rearranges the financial deck chairs but achieves no net benefit for the economy.  In fact it will almost certainly increase costs for the economy as a whole.

And it won’t do anything for the standing of the HSE which is a pity because it has an important role to play.

]]> http://liberaleye.wordpress.com/2011/10/06/hse-stealth-tax-and-bad-regulation-coming-and-forget-the-promised-moratorium/feed/ 0 liberaleye http://liberaleye.wordpress.com/2011/10/04/whats-your-narrative/ http://liberaleye.wordpress.com/2011/10/04/whats-your-narrative/#comments Tue, 04 Oct 2011 16:50:07 +0000 liberaleye http://liberaleye.wordpress.com/?p=964 ]]> George Osborne got quite an ear bashing from Sarah Montague on Radio 4′s Today programme yesterday (starts at 2:10:00).   He had to stick to his guns to insist that getting the deficit under control must take priority while she repeatedly asked why the government did not have a more activist growth strategy – saying, “You have got to stimulate the economy somehow, you have got to get the economy growing“.   She seemed fixated on the importance of tax cuts to do this coming back to the point again and again, at one point asking, “As a Conservative, who must believe that tax cuts boost growth – and I presume you do …?”   The question tailed off into silence and, tellingly Osborne did not say ”yes, of course” although he later went on to affirm, although in a rather theological way, his belief in low taxes as a long run goal.

So, amazingly, it was the presenter pushing a particular policy while the Chancellor was more guarded and nuanced.

Sarah Montague’s simple faith that tax cuts will get the economy growing is shared by many Conservatives so maybe the Today programme has simply forgotten it’s duty to be impartial but I suspect that something a little more complicated is going on.   Perhaps, along with much of the rest of the population, some BBC presenters have unwittingly swallowed the neoliberal narrative that says that we should unshackle the market.  We should, they say, go easy on regulation and give firms and their bosses everything they want – including lower taxes.  And with it goes a threat; that if we don’t cut regulations and taxes, firms will flee the country for more benign locations taking their jobs with them.

As a narrative this works quite well; it offers a sufficiently joined up account of how things work to be credible at first sight and neatly sidesteps some problems.  Like, for example, that governments have worked hard to make it a self-fulfilling prophecy by making capital as elusive and globalised as possible by promoting London and various island outposts of Empire as tax havens while steadily shifting the tax burden from capital onto labour.

As a way of running the country it has been a disaster; given the huge pools of capital accumulated in recent years, the neoliberal narrative implies that there should by now be a tidal wave of money pouring into productive investments in the real economy but there isn’t.  Money stays in the financial casino or is cashed out into high living and country estates.  Neoliberals might argue that this is because we haven’t gone far enough down their road, but just how bad does it have to get for the majority before they’re satisfied?  What they are actually promoting is a race to the bottom.

We need an alternative narrative, a different story of how things work.  I suggest it might go as follows.

Companies are just like people; they have great potential but must live within a framework of rules to realise their potential and these rules must reward good behaviour and punish bad behaviour.  With good rules they will become responsible (corporate) citizens.  With bad or poor rules they are at great individual risk of going off the rails.  Some will certainly do just that; the bad will then drive out the good.  In particular, and again just like real people, companies tend to bunk off and take the easiest course – the path of least resistance – so the rules must work to keep them on the straight and narrow, focussed on activities that support public and community goals.

Note that this is very different from the regime we have had in recent years.  Then “light touch” regulation (meaning usually none) meant that firms could and did take the easiest route and in practice that meant financial speculation, casino capitalism, asset stripping and, increasingly, outright criminality.   In short, the neoliberal narrative is largely responsible for the mess the real economy is in and it’s time we changed it for a better one.

Well, shock, horror!  But, before rushing to abolish the higher rate, ask yourself how much – if at all - mainstream economists understand the workings of the economy.  After all those who, like these, belong to the mainstream neoclassical school and who comprise the great majority of economists in government, in banking and in academia failed to see the credit crunch coming and, now that it’s here, quite obviously have no idea what to do about it.  They would like the public to see them as social scientists with the emphasis on the science bit, whereas in reality they are not scientists at all but the high priests of a cargo cult pushing a self-interested party line.   This letter is part of a campaign being run by PR firm Westbourne and some at least of those involved are very high earners.

(For the avoidance of doubt let me say I have a great deal of time for the minority of economists who genuinely try to follow the evidence and don’t insist in reducing complicated humans to “homo economicus“, a coldly rational calculating machine).

Also, ask yourself if you think there is any evidence that people behave in an entirely mercenary way.  Yes, people are influenced by material considerations but most of us have a life as well.  The officially sanctioned fantasy that people are entirely rational calculating machines is part of the failed paradigm that led to the crash.

The evidence that a 50p rate drives talented people away and/or damages industry is remarkable slight although these claims are often made.  Richard Murphy of Tax Research UK says there is no evidence of people relocating in significant numbers.  We had vastly higher marginal tax rates in the 50s, 60s and 70s yet by many measures the economy performed better than it has subsequently.  Of course, this doesn’t mean that marginal rates don’t matter but it does suggest that they are not crucial, at least not within broad limits and that the economy can do perfectly fine as long as other factors are not pulling it down.

In reality few high earners would succeed in isolation, unsupported by the wider community.  Many, perhaps most, of them are bankers, lawyers, accountants and perform service functions for the wider economy; they could not survive without it.  Some of that comes via being physically present in a country that provides a good legal and administrative framework but the City also depends to a high degree on huge implicit and explicit taxpayer subsidies without which much of it would not be viable.

And, if these 20 economists’ view is right, we should expect to find a superabundance of angel investors looking for promising startups, a ready flow of capital to SMEs wanting to expand and so on.  After all, we have more wealthy people with surplus funds to invest than ever before yet this just isn’t happening.  Capital for smaller businesses, whether new or established, is notoriously hard to find and expensive when found.  How can this be?

Perhaps the right wing’s favourite economist, Adam Smith, can help.  In Wealth of Nations he writes:

When a landlord, anuitant [i.e. someone with investment income] or monied man, has a greater revenue than what he judges sufficient to maintain his own family, he employs either the whole or a part of the surplus in maintaining one or more menial servants.  Increase this surplus and he will naturally increase the number of those servants.

Or, as we might say today, wealth tends to be spent on conspicuous consumption – which is why prestige houses and top jewellers are doing rather well.  Smith goes on to note that when an “independent workman” has a surplus:

… he naturally employs one or more journeymen with the surplus, in order to make a profit by their work.

In other words, then as now small business was the engine of employment and growth.  Look after the wealthy and luxury goods markets will boom as civil disruption and riots increase, look after Main Street and the economy will recover.

The conclusion has to be that we need to change the ruling economic paradigm if we are ever to get out of this depression.  If we carry on with the old paradigm things will only get worse.

Perhaps so, but perhaps we should be generous and allow him the odd lapse of judgement.

But what then are we to make of Steve Hilton, his Strategy Director’s latest outburst?  According to the FT, Hilton wants to abolish maternity leave and all consumer rights legislation.  Apparently he thinks it will inject life into Britain’s sluggish economy.  He also thinks Britain should simply ignore European labour regulations.

Reading between the lines there is considerable exasperation in Whitehall.  One insider is quoted at saying, “… a lot of time is spent at an official level trying to deconstruct his maddest thoughts.”

Mad indeed!  This is utterly bonkers.   In the absence of consumer protection, how long does he imagine before unscrupulous firms start selling goods that are dangerous to life and limb and, by undercutting legitimate companies, start a race to the bottom?  “Made in Britain” would become a toxic brand in no time flat.  For the morally challenged financial sector with their intrinsically hard-to-understand products it’s a recipe for a rip off on an epic scale – and don’t imagine it wouldn’t be grabbed with both hands.

As for abolishing maternity leave, is this really from the party that trumpets family values?  Surely not!

The implication is that Hilton imagines that markets are self adjusting, self limiting affairs and that any sort of regulation can only get in the way.   Well, there are indeed many bad regulations but there are at least as many good ones.  What he proposes is a charter for the mafia.

The FT piece concludes with a comment from sources described as Hiltons’ “friends” that “… nothing compared with Mr Hilton’s ultimate blue-sky plan, formulated when the Tories were in opposition, to buy cloudbusting technology to provide Britain with more sunshine.” 

If Hilton is the best that Cameron can come up with, then we’re in a whole heap of trouble.  His poor judgement can no longer be passed off as an isolated error and his advisers clearly have a dangerously low level of understanding; a truly toxic combination.

As far as I am concerned News Corp richly deserves the opprobrium heaped on it.  Companies invariably reflect the values of their leadership – as the saying goes “a fish rots from the head”.  Those values have clearly been sadly lacking and the crisis in which they find themselves is simply karma.   Rupert Murdoch may be a media visionary with talent far beyond his contemporaries or he may be merely a slick operator who discovered early in his career that the way to get ahead in media was to go relentlessly down-market and to have as many politicians in his pay as possible and to terrorise the rest.

But I do have some sympathy for the position the police find themselves in.   Some of the things they investigate are clearly priorities even in a world of limited resources.  Murder is the obvious example.  But what about the grey areas?   What happens when it’s not clear that what has happened is actually a crime or where the evidence is lacking or where it is undoubtedly a crime but is too trivial to prosecute?

The answer is, of course, that someone has to make a judgement call but this doesn’t happen in a vacuum.   It must depend on what the boss thinks is/is not important – and for a senior policeman than means key politicians, people like the Mayor of London (given that this is the Met), the Prime Minister and the House of Commons generally.

Well, we know what the mayor thought about hacking; his view was unequivocally that it was “politically motivated codswallop”.  And the PM?  Well, he was having Murdoch senior round for tea, visiting with Rebekah Brooks and employing Andy Coulson despite his having left News of the World under a cloud and multiple warnings.   Rebekah Brooks told the House of Commons Media Committee in 2003 that payments had been made to the police which is illegal and they chose not to follow it up.  Only when the whole affair blew up did they sanctimoniously ask Murdoch why he hadn’t pursued it.  Presumably only the fact that he was in “humble” mode prevented them getting the same question flung back at them.

So, with the whole political establishment lined up to support News Corp even when it strayed a bit (and perhaps a lot) over the line into illegality, what can a policeman to do?   Probably not a lot is the honest answer but don’t expect the Media Committee to agree with that view.  They look pretty foolish themselves and a fall-guy is needed.

My defence of the police is, however, limited by the fact that senior officers who should have known better were far too ready to take the Murdoch shilling as columnists, to dine with editors supposedly under investigation and to be willfully blind when reviewing evidence.

The politicians should redeem themselves by breaking up the News Corp empire in Britain.

For as long as I can remember (somewhat over 20 years) the Party has actually been pursuing the Overton Window which is really just a newish and convenient label for a very old idea.  As Wikipedia explains,

“At any given moment, the “window” includes a range of policies considered to be politically acceptable in the current climate of public opinion, which a politician can recommend without being considered too “extreme” or outside the mainstream to gain or keep public office.”

Arguably this oversimplifies but it does so in a useful way in that it highlights the different levels at which politics can happen.  Inside the window is the world of the Westminster Village, a realm of insiders and arcane rules.  It is the world where playing the game is more important than being right (as Vince Cable’s run in with the Telegraph illustrated) and of politicians consumed with manoeuvering but too often adding remarkably little value.  Outside the window is a very different world where the struggle is to drag the window as a whole, by fair means or foul, to a new place on the political spectrum.  It is the arena of a less visible fight but one whose winner gets to choose the terrain on which to fight – an advantage that is likely to be decisive in the long run.

The right understands only too well the whole business of dragging the window to a new part of the spectrum plus the related skills of framing and storytelling – skills they use like lipstick to make their policy pigs presentable.  Nor is it all about rationality; liberals might dismiss the likes of Glenn Beck (who has written, or at least put his name to, a book called The Overton Window) as buffoons but this is to miss the point; he and his kind are useful tools for the real power brokers on the right.  The bottom line is that their media presence, magnified by attempts at rebuttal, results in the window of acceptable discourse being dragged to the right – which is a win for the right.  (And in the case of Murdoch, the shock jocks also provide entertainment which he has always understood to be central to a successful media operation.)

In contrast, liberals (and socialists) have been just dreadful at moving the window towards their corner of the arena.  Indeed, the ‘official’ liberals – the Lib Dems - really haven’t engaged at all as an organised force although individuals have.  Like the anti-Ghaddafi forces in Libya, they remain passionate and committed volunteers – and almost totally ineffective.   The result is that since Reagan/Thatcher we have lived in a neoliberal window – and we’ve seen how that’s turned out!   Unfortunately, it remains the only game in town in the absence of an alternative.

Just how dedicated the official Party is to staying firmly in the window was made clear to me four or five years ago when I went to a meeting in Warrington to hear Chris Rennard, then Chief Executive, address north-west activists.    On the subject of policy he was very clear about the approach adopted.  There were, he explained, just five or six issues which routinely topped any opinion poll of public concerns – jobs/economy, education, NHS, housing etc.  The shortlist was remarkably stable over time so the object was to find liberal things to say about each which resonated as strongly as possible with focus groups then go big on those in writing the manifesto.  Issues not in the shortlist - I remember he specifically mentioned the EU – were accordingly downgraded and given as little mention as possible.

In effect, the proposition was that success lay in staying firmly, ruthlessly even, centred in the Overton Window as it then existed, as constrained by the understanding of a focus group, as ‘educated’ by the existing political establishment.

Can you have leadership by opinion poll?  Would any general choose to fight on ground chosen by the enemy?  I don’t think so!  For a party that likes to see itself as radical this is a contradiction in terms and a recipe for groupthink and incoherent policy (for instance regarding the EU as self-evidently a ‘Good Thing’ and supporting its initiatives on autopilot never mind how undemocratic they might be).  In opposition it’s bound to remain a ‘none-of-the-above’ protest party and in government a car crash.

So, what can we do?

The answer, I suggest, is that we need to work out a better approach to running the country which is easy to say but hard to do.  Labour’s big idea – roughly achieving ‘fairness’ by taxing and spending – has failed.  So has the Tory’s big idea – roughly that markets will solve everything.  Unfortunately, it continues zombie-like in the absence of an alternative.  This leaves the stage open for someone to come forward with a new big idea, a new political narrative.  For what it’s worth I am convinced that such a narrative is beginning to emerge but that will have to wait for further posts.

If this view is right, then our proximate objective is obvious; we should forget opinion polls and detailed policy and concentrate on discovering and elaborating a new narrative.  What we already have is an immense number of leaves but a distinct shortage of trees and no view of the forest at all.   (Mark Valladares has just made much the same point in different words at LDV.)   I believe that, given a coherent narrative, it would be relatively easy to drag the Overton Window to the liberal corner of the political arena.   After all there is no viable alternative and, unlike Glenn Beck’s efforts, people would soon start to understand that it would work for them.

When we articulate a sensible narrative we will win national elections; until that day we won’t - and we won’t deserve to.