Tuesday, 7 February 2012

I'm not hostile to all business... just most of them...

I know I’ve gone quiet for a bit: turns out this writing Economics PhD Thesis business is much tougher than it looks. But I found myself so outraged by the sentiments expressed by ‘the business community’ that I had to have a rant.

So yesterday our glorious Prime Minister sat down with some ‘business leaders’ to reassure them Britain is still a good place to do business. Apparently they have some issues with the Hester Bonus debacle, some high tax rates and the unknighting of MR fred goodwin.

Apparently the market for talent in these high up places so very mobile and they will all spit out their dummies and fly off to Hong Kong or some such hotter place with lower tax rates. Apparently this is especially bad  in the financial services sector upon which we are oh so reliant.

I say: It’s all a load of codswallop.

First off the biggest financial centres of the day are the same was the have been for most of the last two centuries. Clearly when new economies become global players they set up markets, first Hong Kong (mid 1800’s), then New York (1900’s) and more recently various cities in mainland China, SE Asia and South America. If business was going to be scared off by high tax rates they would have upped and left in the mid 70’s.

If the city really didn’t care where it was then it wouldn’t pay some of the highest rents in the world to be located in the square mile. The truth is it’s still easier to business in person and like all sectors of business there are huge advantages in cluster effects. Yes I could more my hedgefund to some far off land with no taxes but do they have the infrastructure? the pool of potential employees?  The IT services companies? The pool of graduates I can train up? The list goes on.

And you might come back and say: But lots of places do have this set up. Hong Kong being the most obvious. But  they already have a much lower tax rate than the UK, so why haven’t businesses already moved?

The truth the UK is a nice place to live and a great place to do business. And if, in order to preserve that which we value, we scare off a few petulant CEO’s? I say good riddance.

Lots more to say about large corporations feeling unloved (mainly look at Germany) and how there’s no evidence that even if we scare off the top 1% of earners we’d be any worse off but I’ll save that for another day.

Wednesday, 7 December 2011

Who is to blame for the Euro Crisis? (1)

The Eurozone is a very worrying place. And it doesn't look like it's improving.

On the one hand there is now political will to make improvements to treat the problems of governments who have borrowed more than the market currently thinks they should have. The narrative we're being fed is that certain governments were profligate, they bought the votes of the people and ran up huge debts that are now unsustainable. The market is simply doing it's job by raising interest rates to point this out and we (including the Greeks) should be grateful for this service.

But looking at the situation rigorously none of this seems to be fact. To start with, lets look at debt over the last few decades: (taken from the IMF's historical Debt Database)

So the question is: in this time frame were governments over spending and being profligate? First off it's obvious that all countries saw huge rises in debt after the 2007 crisis, not surprising it was the biggest recession since the great Depression. But the charge levelled at Governments isn't that they did to much after the crisis it's that they were fundamentally lax in their budgets for a longer period.

How can that possibly be the case? From the peak of debts in the early 90's Only Greece, Portugal, FRANCE and GERMANY saw rises in Debt to GDP!

For Greece it is clear that something was very wrong, I'd still disagree on how they're trying to fix it but something had to give. The same is true to some extent of Portugal but Spain and Italy were both running down structural deficits (the difference between income and spending that left over when you take away the business cycle). The idea of Mercozy lecturing these guys on fiscal discipline seems some what laughable.

Moreover, once again we see that the current fiscal crisis is almost wholly caused by the financial crisis. Even better it exposes Camerons lies. Look at the Uk line. From 1997 to 2007 it is downward sloping. The state of the public finances in Britain is nothing to do with Labours over spending and everything to do with the greed of bankers. Yet Cameron has promised to do everything in his power to protect their interests at the summit today. Go figure.

Monday, 14 November 2011

‘Good’ Business Matters

On the Today Programme this morning I was struck by a story that noted 65%1 of all businesses in the UK are family businesses, with one butcher being handed down since the 16th Century! Obviously the weight of this history must bring certain problems but it also places the focus very much on long term planning, the workforce have a significant stake in such businesses and even non family members tend to have much longer tenures of employment. Generally staff at this type of business report much greater satisfaction and they tend to have much lower borrowing than the publically limited counterparts. Better yet they are anchored in communities, they are held to account by the people around them. I know this is naïve and could be seen as the business equivalent of Downton Abbeys paternalist gentry but it is certainly true to say that medium size family businesses are generally more focussed on sustaibaility than your average ftse 350 company.

So the question arises: Why does this 65% of companies in the UK only account for around 5% of GDP2? Where as in Germany nearly 95%3 of businesses have a family at their core accounting for between 40-50%4 of all output? The answer is in two parts, the first I blame management consultants and latterly the tax system.

Most family run businesses revolve around people. They contain a class of owner managers, many of whom grew up in the business, they are not necessarily brilliant managers and rarely do they go on to become CEO's of FTSE 100 companies. Management consultants would say they have too much vested interest to make objective decisions and would doubtless ramble on about emotional connections. We have a culture in the business world of specialism, each role in a business is very tightly focussed on very small areas, in big companies the management are specialist generalists; expert managers who can change the fortunes on enormous organisations simply by arriving each morning. How else would they be worth the millions of pounds they get paid every year? The answer is of course that no one earns that much money, they might be paid it but in reality the idea that they contribute 20-200 times more than a 'shop floor' worker is patently false. And I'm not the first to wax satirical about 'cult of the leader' as often it's called and nor will I be the last, but I digress, this is about family firms (worry not I will come back to this topic).

Many of the problems of a developed world I would put down to over optimisation, the idea that waste is always bad and that we must squeeze every last gram of productivity out of people. This is especially obvious further down the pecking order, there have always been menial jobs and there always will be and often they are the most important to society, I'd sooner live without Doctors than Bin Men or shelf stackers (and last longer too!). But what we have lost in the UK is the mid range job, the job that involved many skills: you may be a shopkeeper but there would be elements of book keeping, stock management and buying decisions. Now each of these roles is separated out in to a tortuous monotony. It is almost impossible to work your way up to the top, there are graduate programmes to ensure that talented individuals waste no time actually learning how the business works, the gap between senior managers and workers has never been bigger.

And the tax system doesn't help either. Lets talk about entrepreneurs, everyone like them right? We need more if anything. And I'd agree. But there is an interesting quirk of a very sensible idea that makes long term considerations almost untenable. Say you are an entrepreneur with a business worth £10million. If you sell it you will need to pay £1million in Capital Gains tax and the rest is yours. If you wanted to keep the business the marginal tax rate is between 42.5%-50% (Dividends vs Income), meaning if you wanted to get the same return over say 20 year the business would need to earn over £20million. For many entrepreneurs it's a no brainer, you sell the business and move on. The incentive to encourage entrepreneurs to start business encourages them to start several with a purely cash motive when what the country really needs is long term investment. Worse yet these small/medium companies get eaten up by big ones, concentrating our productive capacity with organisations focussed on optimising output rather than managing risks and investing in people/communities.

I'm not saying we should discourage serial entrepreneurs; people who have ideas can have lots of them. But it strikes me as no coincidence that the German economy was far more robust to the crisis than the British one and that their midsized family companies have consistently grown even with very weak demand. Where I think the real difference lies is in terms of planning, family business plan to survive the worst, they have low borrowing and big cash reserves so that when recession hits they can weather it with minimal disruption. But big companies (PLC's) need to maximise return on investment investors bond mangers with big debts, reward managers with bonuses on short term gains, focus on the stock price ticker rather than the great grandkids opportunities.

I guess I could equally argue for co-ops, but I'll build up to the outright leftist rantings!


  1. Institute of Family Businesses http://www.ifb.org.uk/media-centre/press-releases/the-uk's-oldest-family-businesses---stability-in-troubled-economic-times.aspx
  2. Bit of extrapolation hear based on tax receipts quoted by IFB, but it's certainly no more than 10% based on NS stats.
  3. Dw World.DE http://www.dw-world.de/dw/article/0,,15048390,00.html
  4. FFI http://www.ffi.org/default.asp?id=398#Anchor-Europe

Wednesday, 9 November 2011

My First Post: YOUR NHS needs YOU!

So welcome to my blog, I was hoping to have something profound to say and I’ve been working on posts about proper economics in the context of the ‘Euro Crisis’. However, as always perhaps, events just move too fast and, as usual, I got so annoyed by this idea that I simply had to rant.

If you hadn’t guessed by now I can’t write very well so bear with me!

Today the government looks likely to announce that an NHS hospital will be taken over by a private company. If ever there was a clearer sign of what actual Tory policy is then I haven’t heard it- yes I’m political get over it. Circle 50.1% is owned privately, and 49.9% owned by a ‘partnership of employees’. In other words 100% not owned by the tax payer and therefore patients it will be treating.

The claim is that it will be paid exactly the same for procedures as NHS hospitals and that Circle will take all of the financial risk. Without making cheap puns about John Lewis, their preferred business model, I have some very grave concerns.

It all comes down to economics. Why is it that the ‘free market’ is considered such a silver bullet for all the worlds ills? Why is it that even a Labour government saw competition in every field as a good thing? And why is it that every fibre of being frowned a little at the idea of this announcement? These are the questions that I hope, in time, this blog will answer.

So, Free Markets, I’ll be writing about this more in weeks to come but it basically comes down to something called the Fundamental Theorems of Welfare economics. This is the mathematical proof that Perfectly Competitive Markets make exactly the same allocation of resources that would be made by a Benevolent Central Planner who knew everything about everything. Clearly neither of these abstract situations arise, markets have transactions costs and planners lack information (and often benevolence).

But the proliferation of Neo-Liberalism seems to suggest that consensus is that markets get closer to this ‘optimal’ situation than planners. A hospital run private company with all of that competitive behaviour will automatically be better than one run by civil servants. I believe this is to fundamentally misunderstand why markets deliver efficiency. The simple fact is that most private companies fail. More than 90% if you’re interested. Obviously we only know about the ones that make it, the others no longer exist.

And this is the problem with allowing private interference in health care. If you want to gain the benefit of competitive markets then you have to allow for this weeding out, you have to allow companies to fail. Are we really prepared for a hospital to fail?

These patients can’t vote with their feet, perhaps even literally, like they would when choosing between supermarkets. I don’t want to choose my hospital, I want to go to the closest one and it be of the same standard as all the rest.

Lets make this the first and last NHS hospital to be run by the private sector: http://www.dropthebill.com/