Tag Archives: politics

John Kay on Bankers’ High Salaries.

John Kay, economist and chair of the Government review of equity markets and long term decision making [PDF; and it's long!], was speaking to the Edinburgh University Business School, ostensibly on “Why are financial services so profitable?”, but essentially discussing remuneration in financial services. (This may because the answer to the original topic is a quick “they’re not!” – profits from the boom years were wiped out in the crash of 2007 and the ongoing global financial crisis: the profits were illusory).

Remuneration is of course a hot topic. The EU is developing proposals to cap bonuses; bankers’ salaries and bonuses regularly feature in the news.

The standard economic model of wages is that workers receive the same as their marginal unit productivity (I think!). The article in Wikipedia explains it better than I could… A big problem with this model is that it is very hard for organisations to know what the marginal productivity actually is. In large corporations through to the smallest business employing people, whilst the theory might say this is how wages are calculated, my guess is that actually no one knows. What is the marginal productivity of a waiter, a bar tender, a bank teller – or the CEO of a major company?

Kay discussed three different economic theories to explain real remuneration patterns and income distribution, each of which comes from different economic and political assumptions.

The first is that what may be perceived as excessive wages reflect political power and rent seeking. Economic rent the amount paid for a resource in excess of the amount to get that resource into productivity. In the example Kay used, the amount that Wayne Rooney is paid by Manchester United is probably far more than the minimum that Wooney would need to be paid to get him to play football: the difference is because ManU have to pay this excess to stop him moving to another club, who might pay more: in an open market, those other clubs bid up the price. (Kay may have been a little premature on this specific point, though the principal stands…)

The economic power in this case is with Rooney; similarly, successful bankers can threaten to move to another employer – or even another country. They could work anywhere – they have highly transferable skills – and their employers might worry that if they don’t pay their high salaries, they would lose access to the bankers’ skills. (I am not so sure that this threat is a problem now that much of their success has been proved to be illusory.)

The second model Kay covered is what he called “the estate agent problem”. The economics of estate agency is, according to Kay, curious: the rate of fees is generally static, with competition not acting to drive down prices. Estate agents generally charge the roughly the same fees as their competitors. This is because users want to pay for the best service; no one want to pay for an ok, but cheap, estate agent (let alone a bad but dirt cheap agent!), since the benefit accruing from paying a bit more for an excellent agent would far outweigh the cost.

Banks therefore pay for the quality they perceive they receive. They don’t want to pay for a mediocre performance when they believe they can pay a bit more and get excellent performance. Similarly, no board of directors is going to hire a CEO or MD they believe to be average: they will all want the best, and their recruitment firms will help – and bid up the price. But it is doubtful how much difference CEOs can actually make. Luck has an awful lot to do with their success or failure, as do the people they hire.

(Recruitment agencies and remuneration consultants have a lot to answer for, too. All firms want to be seen to be good payers – management roles, at least: job ads often describe roles – firms – as “top quartile pay”; I don’t think I have ever seen a role described as “bottom quartile pay”, though of course 25% of jobs, and firms, must be! Remuneration consultancies produce regular reports showing the market rate for specific jobs, which firms expect to have to pay to get the people they want – and the market rate inflates each year as firms adjust their rates to stay with the market.)

The third issue Kay identified is that of “bezzle“, a word coined by J. K. Galbraith to describe the undetected amount of corporate fraud. Before the fraud is discovered, the victims believe themselves better off than they are. Prior to the global financial crisis, we all thought we were better off than we actually were, because of those non-existent banking profits. As someone said (attributed to Nassim Nicholas Taleb), “we borrowed from the future, and now the future wants it back!”

Until a fraud is discovered, we are all better off! (Kay has writen about the global financial crisis in terms of the bezzle.)

The asymmetric information between financial institutions and their customers – that is, just about everyone – and between fraudsters (call them bankers, fund managers… people who are claiming their bonus for no special performance) and institutions are able to make excess profits. Until of course they get found out. Clearly, even though they have been found out, a great many still think they are worth it.

There was a discussion about how better to align reward and performance – locked-in long term share options, maybe – and perhaps a more apposite debate on the kind of people we want running our companies. This last is important. The traders who do the jobs in banks may do so precisely because they are attracted to the high risk, high return environment. Whilst we might benefit from people with less risky approaches, they are unlikely to be attracted to those jobs. Similarly, the CEOs we appoint might actually be wrong for the job – but less aggressive, flamboyant people aren’t going to apply. And what board would appoint a wall-flower against an alpha male bull? Maybe we get the management we deserve.

I’m not sure if any of this really explains extravagant remuneration and the bonus culture that has been laid bare by the crisis. Maybe it is simply greed, and people gaming the system: trying to get as much as they can.

Internships

On Wednesday I had a debate on Twitter about internships. Liz Cable tweeted

I tweeted my immediate reaction (well, thought about it, and edited it down to 140 characters, thought better of sending it and then changed my mind – as one does…):

And hence I got into a friendly discussion with Liz, and also with Doug Shaw, who joined in. (As an aside, this kind of discussion emphasises some of the values of Twitter: we clearly hold different viewpoints, but are able to engage with each other and debate a topic back and forth. In 140 characters…)

I was surprised by strength of my reaction, and thought I’d set out my reasons hear.

Fundamentally, it stems from a belief that if one is engaged in productive work, one should be paid for it. We have laws protecting workers from exploitation – including setting a minimum wage. (Which isn’t much.) Using interns to do “real” work – tasks which an organisation would otherwise have to pay someone to do – is exploiting them. And, because of those laws, illegal.

If firms couldn’t use interns, they may need to hire more employees, paying them real wages at the minimum wage or above.

Only those who can afford to work for (more or less) nothing can be interns. They are therefore the realm of the privileged, increasing inequality and reducing social mobility.

I also think internships teach some of the wrong lessons. If someone’s first experience of a working environment is exploitative, exploiting others appears to be ok. Indeed, by allowing this exploitation, society is implicitly making it ok. And yet we bemoan a lack of business ethics as a cause of some of our economic ills.

I can understand why young people want to do internships: in a tough job market, anything that can demonstrate skills, determination and ambition – anything that might make a CV stand out from the crowd – will be pursued.

I can definitely see why companies want interns: a cheap supply of labour; and potentially seeing able candidates perform in a working environment must be better than more formal interview processes. The major benefit will accrue to shareholders: those firms using interns will make more profits (none of which go to the interns).

It is of course not this black and white. Interns are, I’m sure, willing: they want the experience. But the power in such a relationship is so skewed towards the firms that willing or not, it is still exploitative.

I can’t reconcile where voluntary work fits in to this, either. I have done voluntary work at different times in my career, and it can be rewarding for both the worker and organisation they volunteer for. But I think the power in this relationship is much more toward the volunteer.

I’m not the only person who thinks like this. The Guardian website describes internships as “institutional exploitation” and “a scandal” – as does the Daily Telegraph’s website (the latter referring specifically to internships with MPs in Parliament). The website JobMarketSuccess outlines many of the objections I’ve expressed.

None of my criticism of internships is directed towards Liz: I’m sure she is trying to do the best those for whom she needs to source internships, and I have no doubt she, the organisations she works with, and any interns placed would work in an ethically fashion.

“DemoMax”: looking at Scottish democracy.

The Electoral Reform Society Scotland has been running “an inquiry” (I’d call it a series of meetings!) into looking for a better model for politics, or what politics should look like – what it calls “Democracy Max” – or DemoMax. (A nod to the third, unexplored (and unanswerable) question in 2014′s Scottish referendum on independence, “DevoMax“.)

I came late to the DemoMax party, attending a public meeting last week. It felt like I was coming in half way through a conversation.

There were three speakers, who varied in their passion and direction, discussing three themes (already set by “the people’s gathering” and some roundtable discussions): participation in politics; sovereignty of the people; and the mechanism of engagement. After each speaker, there was a bit of open discussion and then a show of hands vote on a specific question set. These were different, but related, to the three questions set out on the ERSS website, namely

  1. Sovereignty of the people – How do we return more power to the people?
  2. Defending our democracy – How do we stop vested interests having too much influence?
  3. How do we write the rules – How do we get the checks and balances our democracy needs?

(I didn’t write down the questions we were asked to vote on, and I can’t find them on the website.)

A bit about the process. Despite the efforts of facilitators, I didn’t feel it worked very well. The setting – a university lecture theatre – didn’t really engender debate. We were constrained to speaking to our neighbours, followed by a “feedback” session after each speaker. The votes seemed a particular waste of time, since we didn’t know the detail of what might be proposed: I abstained in them all, being assured that would be taken as a need for more information. (Though the lead facilitator’s omission to count abstentions to the first question didn’t bode well – he had to be prompted by a member of the audience to do so.)

The evening was held under the Chatham House rule. I’m not sure if that extends to the three main speakers or not, but in case it does, I’ll respect it and not say who said what.

The evening opened by postulating that there was something wrong with the state of political parties in the UK. The Hansard Society Audit of Political Engagement [pdf] shows decreasing levels of engagement with the political process (p18), which the speaker blamed on parties: he reckoned people were disillusioned and detached, that parties were suffering a crisis of their elites, and that they were hierarchical, bureaucratic, tribal and adversarial. I agree. But he also though parties were essential – indeed, he believed that if political parties didn’t exist, we’d have to invent them.

On that, I really don’t agree. The subtitle to “Democracy Max” is “Politics is too important to be left to politicians.” Politicians are what you get with political parties. They want power. (I hope they want to change things for the better too, but power is their tool.) The speaker didn’t believe non-hierarchical systems could work, but there was no (public) discussion of the role social media might play, nor on the distributed power demonstrated by the Occupy movement (despite ERSS listing OccupyEdinburgh as one of the bodies involved in the process). The National Council for Voluntary Organisations reckons

…[p]eople are now increasingly drawn towards single issue campaigns and organisations providing opportunities for involvement that cut across traditional lines of division between political parties. This allows people to engage in a less structured and less formal way [pdf] (p2)

I don’t think we need hierarchical, bureaucratic, adversarial political parties. But then I’m a strange beast who believes that coalition is a viable way to run a country…

The second section of the evening looked at the democratic deficit. Interestingly, despite the previous discussion, the proposed solution was to have more politicians: or at least, more elected officials. Whilst France has 125 local councillors (or equivalent) to every member of the population, Spain about 700 and Norway 800 (figures quoted during the evening – I haven’t tried to verify them), in Scotland that ratio is 1:4,270. European countries generally have many more councillors than the UK, and it was suggested that by devolving power as low as possible locally people would have more direct interest in political decision making. I was sitting next to a Spanish (Catalonian) national who disputed this – he reckoned that whilst political issues are gripping Spain and more than a million march in favour of Catalan independence (against the meagre 5,000 who turned out in favour of Scottish independence two weeks later), people were no more engaged in Spain than Scotland. This is only anecdotal, but salutary.

The UK has long had centralisation, both in Westminster and Holyrood. It makes sense to me that decisions are made as close to the issue as possible – as the speaker pointed out, the frequency of rubbish collection shouldn’t really be the concern of Westminster politicians. But how local is local? My street, my neighbourhood, my town? Who knows. And I am not certain that increased localisation will increase respect for politicians and the political process.

I did however like the idea that rather than central Government(s) pushing power down to local institutions, it should work the other way: a kind of zero-based political process, the default should be local decision making, and power only then passed to larger, more central organisations. Someone also talked about the myth of economies of scale – whilst economically big may be better, that isn’t the only answer: there are other issues to be taken into account.

The last speaker looked at how we might hold politicians to account. It was a fiery, heart-felt speech, proposing a “people’s chamber” for Holyrood to balance the power of MSPs – a “citizen’s assembly”. (Albeit that without a formal constitution, Britons are subjects, not citizens…!) This assembly would need to be representative of the population (neither Westminster nor Holyrood is, in terms of gender or race; or probably, age and wealth…), perhaps chosen by lot rather than elected (to remove the need for parties?).

Part of me thinks this is a great idea; part of me thinks it would be a disaster and unworkable. In a country as sparsely populated as Scotland, representatives would need to be based where the assembly was – even if it moved between cities and towns, that would mean the central belt most of the time (where 70% of the population is based) and those far away islands would feel as isolated as ever.

Would business people want to spend their time on the assembly rather than running their businesses (or making money, or paying taxes…)? Would there be opt outs?

Lots of questions, as the proponent of this idea pointed out, but no answers.

The idea of representativeness was interesting. Because the meeting to discuss DemoMax was anything but representative. It was pretty well balanced in terms of gender, but it was 100% white and, I would guess, uniformly middle class. I would also guess that there were few there who represented the political right. And everyone there was engaged politically. It felt ironic that the politically engaged should be spending their time discussing how to involve the politically unengaged – because of course, they weren’t there to talk for themselves. (I do expect and hope that ERSS will have other ways to reach out to those not happy spending an evening in a university lecture theatre.)

But I guess that is politics.

Entrepreneurs and Scottish Independence: a debate.

The Entrepreneurs Club at the business school held a debate (jointly with MBM Commercial, a legal practice) about independence and businesses.

There were five speakers (plus Bill Jamieson in the chair, who recommended this report by ICAS on taxation and independence): J.P. Anderson; Gavin Gammell; Jim Mather; Ian Ritchie; and Ian Stevens. Of these, one was vehemently pro-independence, one vehemently pro-Union and three uncommitted but, I felt, leaning pretty much towards the Union’s camp. This surprised me somewhat – it made the panel feel pretty much unbalanced (albeit in a way that I strongly agree with). Could they really only find one business person who favours a “Yes” vote? (Also, why no women and no minorities?)

The two who felt very strongly both appealed to largely emotional arguments, in ways that, judging by the questions following the speeches, didn’t go down particularly well with the audience. The pro-Union speaker talked about the shared history of the Union, our strength as part of a large nation, and the fear of economic collapse under independence. The pro-independence speaker talked of England (and, specifically, London) creaming off capital and talent, how it was time for Scotland to stand on its own two feet, and how Scotland had to find its own destiny. His speech was painfully low on detail, and frankly jumped all over the place – though I will admit that I was never likely to be convinced by his emotional appeals.

The key issues for the three uncommitted-but-leaning-Union seemed to be

  • the damage caused by long periods of uncertainty (for a minimum of two years until the referendum, and in the case of a “Yes” result, perhaps another five whilst all the details are decided and the Union is unravelled), particularly regarding
    • relationships with EU and NATO
    • the currency
    • taxation
  • access to capital and markets
  • risks to funding research and education (specifically, Scottish institutions receive more from funding bodies on the basis of their research projects than a per capita share; and Scottish universities currently charge fees of English students which they would be unlikely to be able to do under independence, since they can’t charge students of other EU nations)
  • regulation, particularly of financial institutions (an independent Scotland could not afford to be the lender of last resort for either RBS or the HBoS arm of Lloyds, both of which might therefore need to be headquartered in England)
  • the role and size of the public sector in Scotland

Neither those for nor against independence were able to come up with a “business plan” for their outcome – indeed, one of the weaknesses of the Unionist argument seems to be the inability to produce a positive message for the Union: I agree we’re “Better Together“, but where are the positives of the Union (as opposed to scare stories)?

The crux of the debate came down to the inability of the “Yes” campaign to provide answers to many questions, so that people don’t know (and won’t know by the time of the referendum in two years’ time) what they’ll actually be voting for. Not their fault, necessarily (though the SNP government has been woeful in its obfuscation), but clearly critical for the key “don’t knows”.

The results of the poll at the end of the debate were:

77% vote No

Pretty categorical: 77% of attendees voted “No”, out of 115 votes cast (which means about 35 people, or 23%, couldn’t be bother to vote Or, more positively, a 77% turnout!).

Where I Stand on Scottish Independence

Much of my last post on “A Just Scotland” concerned the constitutional settlement for Scotland, and in particular the outcome of the proposed referendum in 2014 on Scottish independence.

I rarely post here about overtly party political matters, though much that I write about is “political”; but the arguments for and against independence go beyond (or, at least, ought to go beyond) party politics, and I thought it only right that I should explain where I stand on Scottish independence.

I have already made up my mind how I’ll vote (though of course I have plenty of time to change it – and if I do, I’ll post about it!).

I am against independence.

My decision stems from three arguments, any one of which I think would stop me voting “yes” to independence.

The first is the outright uncertainty in what we are voting for. Fortunately, the recent “Edinburgh agreement” restricts the referendum to a single question on independence. (The precise wording is being overseen by the Electoral Commission – the wording of the question may make a big difference to the outcome.) But quite what a “yes” vote may mean is unknown: in the EU or not, in NATO or not, contributing to UK armed forces or not, in sterling or the euro (or neither) or not, the amount of debt UK national debt that will be allocated to Scotland… The list of unknowables is long. Some of these might be decided – or at least a policy decided – before the referendum, but much which be decided as part of negotiations should there be a “yes” vote. Which of course means that we won’t know what we’re actually voting for in 2014.

The second factor is the complexity. Scotland and the rest of the UK have been so closely linked since unification in 1707 that common institutions are intricately tangled, and untangling them will be difficult. Rebuilding these from scratch would be costly. One of the advantages of union is the economies of scale resulting from being part of a larger whole. At its most basic, having the infrastructure for tax collection in place is a huge boon. (Imagine the economic hiccup in switching from one tax collection system to another: just as when one changes jobs, the Scottish government would need to build up a reserve to tide the country over the gap.) It might be possible to outsource much of the bureaucratic infrastructure – I’ll bet the UK government would happily do the job (for a cost). Or maybe not: HMRC might just laugh at us, and not hand over their share. Scotland would have minimal leverage. And no representation. Even if the Scottish government were able outsource the bureaucracy for so much of our day to day lives back to London, what then would be the benefit of independence? Nothing would have changed.

The difficulty for business would be immense: the large number of cross-boarder businesses which would, one way or another, need to account for their Scottish and other UK operations separately would make this a vast, and expensive, task. (I recently had a conversation with a friend who had been working on the transfer of over 300 RBS branches to Santander – a deal that has subsequently fallen through. Both organisations had large teams working on this, and the complexity of the process was mind-boggling.) Separating two countries that have been so tightly linked would be several times more complicated – an enormous and costly task.

It is also possible that there could be a large number of talented people who migrate from Scotland to greener grass south of the boarder if Scotland gains independence, leaving the country financially and culturally poorer.

The last, and frankly killer, argument is economic. Scotland’s economy is inextricably tied up with England’s. Excluding oil and gas, Scotland exports goods and services (excluding oil) worth £45bn (2010) to the rest of the UK (ie England), more than twice the £22bn it exported overseas [pdf]. (Of the £22bn of international exports, £10bn went to the EU, £4bn to the USA and £2bn to Asia.) For business reasons, it would make sense to keep sterling: the costs of transacting in another currency could be very large.

There are at least two other options: Scotland could join the euro (though it is doubtful that could take immediate effect – the Maastricht criteria for joining the euro have a minimum of a two-year lag period, during which the nation’s currency must be in ERM II (which sterling would not be, of course); or Scotland could issue its own currency (like Irish punts before Ireland joined the euro). Given the current state of the euro and the stringent economic conditions being set by the European Central Bank, it is unlikely the Scottish government would chose that path. And the costs associated with establishing its own currency (which would have no value in the money markets and which would impose large transaction costs on business) would, I believe, make this a non-starter.

(The SNP states that “…on independence day … the pound will be our currency“, but there are many views which dispute the workability of this.)

Without an independent currency, in what way could an economy be independent? Any economic decisions made by an independent Scottish government would be subject to decisions on monetary policy decided in London or in Frankfurt – that is, fundamental decisions on interest rates and monetary supply. Fiscal policy – tax raising and spending powers – would be determined in Scotland, but it is fair to assume that the yield on Scottish government bonds (the rate of interest charged by the money markets) would be higher than that on UK government bonds, if only because the market would be so much smaller (and hence less liquid). It would therefore cost more for the Scottish government to borrow money to fund its activities.

Either way, the Scottish government would have its hands tied – by the Bank of England, the European Central Bank – or even by the financial markets. It would be independent in name only, and at great cost.

And that is why I am against independence.

Other sources I looked at when trying to set out my views include

“A Just Scotland”?

Last month, just after discussing “caring capitalism“, I spent the day at an event organised by the STUC to consult on A Just Scotland.

The campaign describes this as a “more equal and socially just Scotland”. This is undeniably a worthy aim but it doesn’t actually say what it means by “just”: equal income, wealth, oropportunity? How would we know if we had got there – and can we ever get there?

I’ll admit to being right outside my comfort zone: whilst I had known that it was organised by the STUC, I hadn’t expected it to be quite so old-world (party) political. As an open meeting, covering such a broad, important topic, I had expected a wide range of views and stances. As it is, I was way to the right of just about everyone else there, and there was a somewhat lazy, unquestionning attitude from other attendees (not necessarily the organisers or those speaking from the platform) that everyone there was a socialist of one form or another.

For me, the objective of “a just Scotland” is way beyond politics. Though prompted by the desire to explore what Scotland could be like following a constitutional settlement on independence (or “devo max” or “devo plus” or – whatever!), and the STUC wanting to help shape political thinking, seeking a just Scotland is also way beyond independence: it ought to be a valid political goal whatever the outcome.

As well as old-school politics, the meeting also felt old-school: there were pre-prepared papers from the STUC, and then points from the floor – but little real discussion: the way the meeting and workshops were managed meant the audience could make their points but not really engage in dialogue with each other. I think a freer discussion might have prompted more debate – personally I’d have gone for an “unconference” format to fully explore the issues and come up with actions for engagement (though you would have expected me to say that). I’m a bit worried that by raising the topic and setting a political agenda: it is too easy to then leave it to politicians to deliver; if that had been a good idea, the STUC wouldn’t have needed to have a series of discussions to set the agenda, because politicians would have had social justice as an objective long ago. (I don’t think this is something one can just lay at the door of the coalition – nor even the 1980s, Thatcherite Conservative party: measured by the Gini coefficient, income inequality increased during the last Labour governments.)

Peter Kelly of Poverty Alliance ran through some frankly disturbing statistics on the impact of poverty, particularly on children. He said 20% of children live in low income households. (The Scottish Government’s figures show 15% of the population in “relative poverty”. Interesting, they also show the Gini coefficient for Scotland to be lower than Great Britain as a whole – meaning Scotland has a little less income inequality. I couldn’t find figures for child poverty on the Scottish Government’s site, despite a link saying they’d be there, but the End Child Poverty campaign shows 35% of families with children in Glasgow are on benefits, and whilst the average elsewhere in Scotland comes out at about 18%, the large population of Glasgow might give 20% across the nation. Of course, defining poverty is one of the ongoing difficulties.)

His main point was that these statistics are not fixed: they are the result of choices politicians – and their voters – make. Low pay has persisted for many years; the gap in education between those in poverty and those not lingers for years, with a youth unemployment rate of 12% pre-dating the recession. He saw these as issues of power and democracy – and addressing them would cut across reserved and devolved constitutional powers.

There were several comments from the floor. Most powerfully, I thought, was Andy Myles from Scottish Environment Link, an umbrella body for environmental NGOs, who said that climate change was more important than constitutional change: that is, in making decisions about Scotland, we should ask what it is we want: Scottish Environment Link have set out what they think [pdf], and they are hard to argue with.

Angus Reid read out his “Call For A Constitution” – and again, it is hard to argue with his goals. (This could be an issue: I agree we should have less poverty, more equality, better care for the environment, and everything… I want it all – but there are bound to be some conflicts: do we just leave it to the politicians to decide the priorities?)

These things are of course the nuts and bolts of politics. Someone else pointed out that the political choice people make in Scotland, whilst similar to north England, Wales and Northern Ireland, differ from those of south England, where much of the nation’s wealth is now concentrated.

There were two workshop sessions and several that sounded interesting, so I picked the two that were most closely attuned to my interests. First up was a discussion on the economy and fair taxation. There wasn’t actually much discussion about taxation – somewhat surprising given how much tax has been in the news recently – and a lot about the economy.

Economic arguments seem to be key in the debate about independence – and of course there are rarely clear answers in economics. STUC is calling for changes to the economic model to make it more just – moving to fair, progressive taxation and a distribution of wealth from the rich to the needy; but I couldn’t help thinking that much of the STUC’s thinking is rooted deeply in the old economic model of 20th century industrial orthodoxy – such as seeking to maximise employment. (The STUC’s job is of course to act for the benefit of its members – those employed, largely in the public sector.) As those present discussed way to reintroduce growth to the Scottish economy, I was once again struck by the thought that if radical change is needed, it won’t be obtained by working within the same old economic models which have clearly failed to deliver over the past fifty years.

In a world dominated by global markets, the options for Scotland – independent or otherwise – are limited. Someone pointed out that there is sufficient wealth in the world, but it is unequally distributed. Of course, in global terms, even the poor of Scotland are probably comparatively well off.

The Scottish government does have some limited tax raising powers: it could impose an additional 3% of income tax (the Scottish government held a consultation on local tax raising powers a few years ago – but using such powers might be political suicide), and it controls council tax (held static for several years – a potentially undemocratic, regressive move) and business rates. The Scotland Act 2012 will give the Scottish government more tax raising powers from 2015, although according to Jon Swinney of the SNP, this will only account for 15% of all taxes raised in Scotland. (The rest will be covered by VAT, corporation tax, national insurance and so on.)

There was much discussion of the the nature of currency post independence. There seem to be three options:

  • maintain sterling
  • join the euro
  • establish Scottish “punt”

The last of these seems unfeasible since it would have no value in global markets: transactions with other economies would probably be denominated in pounds, euros or dollars. But if an independent Scotland had sterling or the euro, it would have no control over money supply and interest rates (we have seen how well this has worked for the smaller economies of the euro over the last five years or so). Scotland would thus not control its economy – and not really be independent at all. (For me, this is the killer argument against independence. Economically, it just won’t work.)

The second workshop I attended was on education, participation and democracy. (The briefing paper is apparently missing from the website.) Education is already wholly devolved, and the Scottish education system has always been separate (and many would claim better) than its English counterpart. The Scottish Curriculum for Excellence (on which I worked several years ago) is designed to deliver learning outcomes appropriate for each learner, for ages from 3 to 18 years (ie pre-school to leaving secondary education) and across all abilities. The curriculum is built around “four capacities” – creating

  • successful learners
  • confident individuals
  • responsible citizens
  • effective contributors

All very laudable, and clearly forming the foundations for a just society, I’d say.

In the discussion, education was suggested as the bedrock of democratic participation, and this is certainly encompassed in the curriculum capacity of “responsible citizens”. But about of quarter of Scots have problems with literacy or numeracy (compared with 16% for England – I’m not sure if the same things are being measured, but it is a guide; for the UK as a whole, about 20% are functionally illiterate). That is quite a big difference, and the Scottish Government has long had a strategy to improve adult literacy. (It also questions Scotland’s apparently superior education system.)

Comparatively low levels of literacy may also hamper economic development – and certainly reduce the options for employment.

It was said that poverty reduces participation in democracy, with a lower turnout in elections in poorer regions than rich. The Electoral Reform Society found a link between social exclusion and political engagement [pdf] – with “near universal association between political participation [electoral and political] and socio-economic status” (p20).

The election for the Scottish Parliament of 2011 had a 50% turnout whilst the turnout in Scottish seats in the UK Parliamentary election of 2010 was 64% – quite a significant difference. The difference is consistent, too: the 2007 Scottish Parliamentary election had a turnout of 52% [pdf], the Scottish turnout in the 2005 general election was 61%. I believed devolution was meant to increase engagement, but apparently this hasn’t happened.

After the workshops, there was a debate between Ewan Hunter, representing the “Yes” campagin, and Kezia Dugdale MSP representing “Better Together” (as the “No” campaign has styled itself). Frankly, Dugdale knocked Hunter’s contribution into a cocked hat – but then she is a professional politician. Hunter failed to address the topic of day – that of a just Scotland – focussing instead on the arguments in favour of independence. He highlighted one of the major problems with the Yes campaign – that voters don’t actually know what they will be voting for: the details can’t be worked out until the vote has decided. Sterling or Euro? Inside the EU or not? In NATO or not? Let alone what the financial settlement with Westminster would be – I’m sure HM Treasury would be more than pleased to offload RBS and HBoS and their billions of pounds of debt.

Dugdale did address the issue of a just Scotland, highlighting the SNP had rejected proposals for a “living wage” (which, lets face it, even Tory London mayor Boris Johnson has signed up to – albeit on a voluntary basis). She proposed to devolve power down to give communities more say (the Scottish government consulted on the Community Empowerment and Renewal Bill during the summer). My only caveat to Dugdale’s contribution was that her party, Labour, were dominant in the Scottish parliament for two terms, and failed to address the issues of poverty and inequality raised by A Just Scotland.

It was an interesting, challenging day; at a fundamental level, I agree with the objectives of the campaign for A Just Scotland, and believe that they are bigger than political parties and the old arguments between right and left; and indeed bigger than the constitutional settlement. Whatever the outcome of the referendum, these issues should be addressed: how to do that is a much bigger question.

Trying to Understand the Financial Crisis…

Some time back, someone shared a new acronym with me: GFC. For those, like me, not in the know, this is apparently the hip shorthand for the global financial crisis – the economic mire that engulfs us all. It has been going on, more or less, for five years now, with every indication that it will get worse. It is its evolution from a banking crisis to a sovereign debt crisis – at least within the Eurozone – that gives me my optimistic outlook. I’ve been trying to write this post for ages, but every time I do, the story gets bigger and and seem to be constantly changing. It still is.

I have written this in an attempt to understand how we got here. I must stress that, whilst I have taken a couple of classes in economics, I am not an economist. I am sure I am missing large chunks, and I look forward to being corrected by people who have a greater understanding of these matters than I have.
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Tax: a comedy of errors…?

I have written a bit about taxation before, so it probably won’t surprise you that I have found the ongoing “controversy” about Jimmy Carr’s tax affairs and the political pronouncements by both Labour and Tories (not least David Cameron) pretty irritating.

Let me put my cards on the table. I avoid paying tax! Most people do, I would expect. I am quite happy to whatever tax is due, but frankly I would not want to pay more than I need to, and I take steps to reduce the amount I pay.

All, I hasten to add, perfectly legally. And, whilst the methods I use are a little more mainstream than Mr Carr’s (for instance, using my annual ISA allowance, paying into a personal pension plan, and, in the past, using a limited company to manage my freelance work), they are frankly no different. The government has decided to allow me to save tax in a variety of ways, and I chose to do so; similarly, Mr Carr took advantage of sophisticated but government-sanctioned ways to reduce his tax bill. Indeed, since it is fair to assume that every UK taxpayer at the very least makes the most of their personal allowance (currently £8105 pa) – if only because it is taken into account automatically by HMRC), so to a small extent we all avoid tax.

I might not think it is “fair” that Carr pays so little tax, but it seems odd to berate him for doing what others do, just because he is a public figure. (There may be a bit of hypocrisy if his stage act focuses on others wrongdoing – I am not a fan, and I don’t know his act – but that certainly isn’t “a moral issue”.)

In fact, the most hypocritical person here seems to be David Cameron. He is in the perfect position to change the tax legislation – to simplify the UK tax code, for instance, and remove loopholes that result lawyers and accountants thinking up whizzy (if legal) schemes to reduce their clients’ tax bills.

Instead, he and his chancellor reduced the top rate of tax payable by the highly paid in the last budget. Now, I’d say that IS a moral issue.

A Taxing Debate

Tax is much in the news. The recent budget gave us pastygate, the granny grab and tax reductions – for the highest paid. (It also reduced the tax paid by the lower paid, but that isn’t such a great headline and didn’t seem to feature much in the media coverage.) The London mayoral elections contained allegations against Ken Livingstone (apparently unfounded regarding illegality but possibly guilty of hypocrisy), leading to a “confrontation” in a lift and all mayoral candidates publishing their personal tax details. Tax has been one of the main issues in the Republican nomination race.

Either matching the mood of the zeitgeist – or jumping on the bandwagon – the RSA organised a panel discussion to talk about tax – “Should Tax Be More Taxing?“. There were three speakers from different parts of the spectrum, and the focus was very much on corporate – rather than personal – taxes, and multinational corporations at that, a somewhat more specialised area (although also much in the news).

Mike Lewis from ActionAid‘s main point was that large corporations avoiding tax can be significant and material sums for developing nations. Large, multinational organisations can organise their work to minimise the tax they have to pay: if directors believe that it is their duty to maximise shareholder value, it would be their duty to do so. Avoiding (rather than evading) tax is legal – but multinational corporations can afford legions of tax lawyers to help them stretch the law. Lewis proposed international regulations to reduce corporate tax tourism, but clearly different countries should be able to tax businesses what they want (or need)?

Philip Booth of the Institute of Economic Affairs took the opposite extreme, suggesting that the only way to stop corporate tax avoidance is to stop corporate tax: not as mad as it sounds, since the shareholders and other owners of large organisations have to declare income and pay taxes as individuals. However, Mike Lewis highlighted two problems with this

  1. the owners may live in different jurisdiction from where the work is done or the profits made

  2. the owners can hide their ownership (and taxes!) in tax havens and behind nominee accounts – so this transfers the problem

Richard Murphy of the Tax Justice Network spoke most convincingly, pointing out that despite tax being central to politics in western democracies, there was little informed debate about tax itself – candidates may bicker about the details of tax rates or exemptions, but not about tax per se. Murphy calculates that tax evasion costs the UK £70bn per year. (HMRC estimates that evasion and avoidance together account for £35bn lost to the government [PDF] – see Table 1.1.) If Murphy is right, that’s about 10% of the total tax take of approximately £600bn (the figures are for different years and may not be wholly comparable, hence the approximation…!): that’s a significant amount and could reduce the government’s austerity programme by a lot. Corporate tax avoidance is put at estimated to be £12bn a year – still an awful lot of money (but also legal, if not morally right).

Murphy believes that one solution is to make corporate tax more transparent – by getting corporations to disclose the tax they pay and where in their annual accounts – the hope being that customers and investors will exercise pressure to bring corporations into line. What won’t help is the government cutting the resources available to investigate tax avoidance and evasion – HMRC is losing 13,000 staff as a result of government cuts.

The UK tax system is clearly a mess. And it gets messier every year: chancellors can’t help tinkering (Gordon Brown was one of the worst) and the tax legislation apparently runs to 11,000 pages – too much for anyone to remember! The complexity leads to lots exceptions: politicians like to push their pet projects, the aim being to promote particular ends – way back in the early 1990s when I had to learn about tax for some exams, I remember their being an exemption relating to companies who launched satellites, applicable I think to only a handful of companies and presumably designed to promote high tech industries. The tax system is full of anomalies.

The Institute of Fiscal Studies published the Mirrlees Review, recommending wholesale reform of the UK tax system. Amongst their recommendations (taken from the press release [PDF] – I am not sufficiently masochistic to read the whole thing!) are

  • remove the distinction between national insurance and income tax, and the complexities it creates (unlikely to happen because pensioners are subject to IT but not NI – though tweeking age-related allowances [and hence adding more complication] may be a way around this)

  • drastic reform of the benefits system (and the perverse incentives it can produce – thoughthe government is hoping to tackle those anyway)
  • extend VAT (not a vote winner, especially after pastygate!)
  • reform property taxes
  • align tax on employment, self-employment and corporate taxes (this would remove the incentive for individuals to use companies to account for their income, as Ken Livingstone and many others do)
  • equalise the tax treatment of corporate debt and equity (this might stop companies over-leveraging, possibly one of the many causes of the financial crisis)

Others call for more radical changes – a flat tax rate, for instance, or moving to a consumption tax (neither would work politically, being highly regressive, despite possibly making economic sense).

Clearly something radical should be done, to simplify the tax system, reduce opportunities for avoidance and promote an equitable society. But agreeing what – maybe even agreeing what the objectives if taxation are – seems very unlikely.

“The Road to Wigan Pier Revisited”. And a bit of a rant by me…

I went to the RSA to hear Stephen Armstrong talk about his journey last year, following in the footsteps of George Orwell, which he describes in The Road To Wigan Pier Revisited. It was a disturbing and challenging talk, because it suggested to me that there had ben a systematic failure of politicians of all hues over the last fifty years.

Armstrong described how, despite the growth in wealth and incomes in this country, the poor were in much the same situation as Orwell described in 1936.

Armstrong told lots of stories – he is a journalist, so that is what he does. Most were depressing – housing estates designed to isolate those living there; employment contracts which won’t guarantee to pay you, but will stop you claiming benefits; short term employment contracts which disincentivise working since leaving and rejoining the benefits system means the worker may go weeks without money; workers too scared to talk openly about their working conditions because they fear reprisals from their employers; the police enforcing civil contacts by arresting debtors so debt collectors could take back property.

Some stories were heart-warning too: the community centre putting on art classes which seem to change the way local people view themselves and the works around them; communities coming together in the face of adversity; a former steel worker with a tattoo of George Orwell on his arm, telling Armstrong “not to fuck up” the book.

Most of the stories told how those in power had let down the people below them – those at the bottom of the pile. Inequality in Britain is at the same level as 1936. (I can’t find the figures, but this data and infographic show a dramatic increase in inequality between mid-1970s and 2000s.) The transfer of population and jobs from the north to the south has taken the heart from communities – just as the relocation of people from slums to new estates broke long-held ties. The de-industrialisation from the 1980s onwards has created a non-working class, whom the demonisation of “chav culture” has left unrepresented. It is easier for politicians to point the blame at “benefits fraudsters” (despite getting his figures very wrong – as pointed out by that well know left-wing paper, the Daily Telegraph) than it is to collect taxes from global corporations.

Armstrong didn’t mention it, but that much of this happened under 13 years of Labour government is a shocking indictment.

(This makes me sound like a rabid socialist; I am not. But the gross wrongs undertaken by politicians seem – well, so wrong!)

Armstrong didn’t have any solutions; nor did the audience. There are no simple answers to complex problems. But the failure of party politics to meet the needs of much of the population suggests to me that party politics won’t be able to supply the answers.

Armstrong believed that much of the problem lay with the disruption of established communities: so perhaps the answers lie within the communities themselves. He mentioned on community leader who, on being asked if the “big society” might be one answer, responded that the big society would fail because it was imposed from above: it had to be communities which solve their own problems.

This may be too much of a get-out clause for central government: they need to take steps to enable communities to tackle local issues. Party politics at a local level has not provided any answers. Is there another model that could enable local communities to coalesce and take locally-oriented action? What would central and local government need to do to facilitate true localisation? To put power in the hands of local people? And can they do it before the underclass we have created decide to do it inspite of, not because of, their representative politicians?

(You can listen to Armstrong’s talk here. Anyone with any solutions can tweet them to Armstrong on @RoadToWigan – he’d love to hear them. Or maybe it would be better just to put them into action…)