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Feb 132013
 

One of the humorous coincidences arising from the ever increasing horse meat saga, is that this would happen during the Tories reign of mis-rule. You see we often get treated to the Tories bang on about excessive government regulation and red tape, and how business could be far more effective without it.

And of course with a special venomous attack on the European bureaucrats.

Which is all very well, but the biggest lesson that can be learnt from the whole sorry saga of how horse meat got passed off as meat of another kind, is that we need government regulation to protect us from crooks pretending to be businesscritters. And honest businesscritters need that protection even more than the rest of us.

We have learnt how crooks have infiltrated horse meat into the market for cheap processed meat because it is so much cheaper than beef. This has two effects :-

  1. The crooks make money … lots of money.
  2. Honest businesscritters lose out. If it goes on long enough there won’t be any honest ones left!

There are those who say “well horse isn’t too bad … it seems to taste pretty good”, which is missing the problem(s). Not only should we be able to see what is in a product by looking at the ingredients list, but if crooks get away with putting safe horse meat into burgers, will cheaper crooks get the idea to put unsafe horse meat in ? Or rat? Or worse?

It is worth remembering this current saga when the Tories start banging on about government regulation – regulation is usually there for a reason, and the reason far too often is due to an event like this where unscrupulous crooks abused the public in order to make a bit more cash.

 

Jun 252010
 

Well we have had the emergency budget and one of the announcements was a two year public sector pay “freeze”. Of course in reality it is a pay cut because of inflation. Of course if politicians were a little more honest they would actually announce it as a pay cut by freezing cost of living increases; one minor sign of improvement was when the prime minister admitted afterwards on a debate with the public that it was actually a pay cut. After all in the past, politicians have blindly and foolishly proclaimed that a pay freeze was not a pay cut at all.

For those that doubt that it is a pay cut, take a hypothetical public sector worker who earns £20,000 a year and who spends every pound on buying a £1 loaf of bread. This is of course ridiculous, but makes the arithmetic easier. Now let us assume that the current UK inflation rate is 3% (it’s actually a smidgen higher) and stays that way.

In the first year our hypothetical worker can buy 20,000 loaves of bread.

In the second year, the price of a loaf increases by 3% to £1 * 1.03 or £1.03. Because our worker has not had a pay increase, he can now afford just 20,000 / 1.03 loaves of break … 19,417 loaves of bread. In the third year, the bread goes up yet again to £1.06 and the number of loaves our worker can buy drops again to 18,867.

In a very real sense the value of the work that our worker does for the public is being nibbled away year by year. And don’t forget that it lasts until the cost of living increases above inflation eventually restore the value. Sure our worker still gets £20,000 a year, but the value in money is not the in the symbol printed on the bank note, but in what it can be exchanged for.

Whilst the government has plenty of reasons to reduce government expenditure and reducing the total public sector pay bill is perfectly reasonable, the way it was done is a little old-fashioned. One of the noticeable things about the similar efforts in the private sector in this recession as compared with previous recessions has been the amount of negotiation involved. More enlightened managers have negotiated with the workers to find a mutually least disagreeable way of reducing the cost of salaries.

Sometimes this has meant a number of voluntary redundancies; sometimes a cut in the hours worked with an associated pay cut, and sometimes it has been a simple pay cut. Or a combination of all three.

Why hasn’t the government tried a similar path with the public sector workers ? After all, these things can be negotiated. One obvious compromise is to not only freeze the pay, but also to reduce the standard working week every year by the amount of inflation. This is still a pay cut, but at least values the work of the public sector worker the same – it gives the public sector worker something in exchange for less pay – a shorter working week.

By imposing this pay cut without negotiation, the government is behaving like an old-fashioned tyrannical employer who treats their workers like wage slaves.

And where does this idea that all public sector workers get gold-plated pensions from ? Sure many get final salary pensions which in the majority of the cases is not a spectacular amount. Despite the demonising propaganda floating around in the press, most public sector workers do not earn immensely large salaries; on a personal note, I earn roughly half what my brother earns for roughly the same job – and that excludes his yearly profit bonus.

Fact is that the private sector has slowly been dropping final salary pension schemes for years without any great reflection on whether this is necessary to ensure pensions are affordable, or whether this is a means to ensure fatter profits for the fat cats. And yet still there are a significant number of private sector firms that offer final salary pensions.

The targeting of public sector pension schemes by the right-wing fascists is little more than playing up to the insecurities of private sector workers who have been deprived of their final salary pension schemes.

As someone mentioned on a TV debate on the increase of the pension age to 66 in 2016, we not only need a review of government provision of pensions (to both the workers in general and the public sector workers), but we also need a review of how pensions are paid for in the private sector. We are a richer society now than we were 20 years ago, but pensions are less generous.

Is this simply because people are living longer than they used to, so pensions cost more ? Or is there something else at work ?

In dealing with pensions, I have more questions than answers but it needs some serious thought about how pensions can be paid for. Can we as a society really not afford to pay pensioners a decent pension ? We have a belief that the wealth created by private sector workers belongs to the entrepreneurs who risked everything on setting up a company. But all too often these entrepreneurs are merely managers of very large companies that are risking very little. That is not to say that genuine entrepreneurs do not exist, but the assumption that every head of a company is an entrepreneur is wrong; indeed the ones who earn the most are rarely the ones who risk much.

This is beginning to sound like I am in favour of some kind of old-fashioned hard left socialist state. Not at all, but the belief that the free market can solve everything is just as foolish a belief.

Jan 292009
 

When the economy is well, we constantly hear from businesses about how government should not interfere with business; that anything the private sector does is sacred, and the public sector is at best pathetic. They complain the most about regulation but government support for problematic businesses frequently comes up to. And of course whinge constantly about taxation on business.

Of course any business that needs support from the government to survive is pathetic and probably should fail.

But wait! Come this recession, we are seeing speaking heads from businesses in droves demanding that the government bail their business out. Somehow because there is a recession on, all the traditional rules can be ignored and businesses need support from government.

Sure perhaps we do need to use public money to help out businesses that would otherwise fail. After all reverting to 19th century economics like the Conservatives seems to have done is likely to be far worse. But that does not mean they should get a free ride – we should remind them that businesses usually ask to be left alone, and that goes two ways.

And of course put up taxes on businesses a tad, to pay back the money over the long term. And every time a business complains about high taxes, remind them of these times when government was spending money to help businesses out.

Sep 202008
 

Lehman Brothers collapse, Northern Rock run, HBOS takeover. All were in theory good stable banks suffering slightly because of bad debt (US subprime) which may be why the financial markets are so twitchy about them. Even though the markets were in large part responsible for the takeover of HBOS (nothing apparently wrong with them – they just suffered an inexplicable share price collapse).

Now the US government is promising to throw hundreds of billions at the problem by buying up bad debt on top of the trillion dollars already used to protect the banking system. Probably a very sensible move.

But it is slightly peculiar that a freemarket government (and a particularly keen one at that) is bailing out private companies. Perhaps banking is a special case; after all we have seen a housing crisis in the US cause financial panic world-wide, even in industry sectors that have very little to do with banking. But if banking is a special case, it needs special treatment.

The traditional view is that intervention to save banks is wrong, because to rescue banks would encourage banks to take risks they would otherwise avoid. There would be some truth in that if in fact only banks with poor practices failed and the people responsible for bad practices did in fact suffer. Well, HBOS only “failed” (actually got taken over at a rock bottom price) because their share price collapsed for no good reason and because other banks may have been reluctant to lend to a bank in that situation. Lehman Brothers? Well their CEO isn’t suffering too much … he was paid a $22 million bonus last year, which is more than enough to last any reasonable person a lifetime.

Going back to the root causes of the current problems, we can see that it was initially caused by a great deal of irresponsible lending done in the expectation that with rising prices, there were huge profits to be made. Indeed the US is investigating numerous cases of fraud committed by the lenders.

Over the last thirty or so years, the trend has been to remove regulation from the banking sector to give it more freedom on the grounds that regulation was stifling the free market in its quest to make ever greater profits. As it has turned out the greed and irresponsibility of some lenders has shown that bankers cannot be trusted to behave responsibly without strong regulation or close supervision.

First of all, because banking is world-wide, any action by governments has to be done on a world-wide basis to avoid distortions in the banking market where a bank in a country with less stringent regulation would have an unfair advantage.

Secondly because bailing out bad banks has been and will always be so costly, banks should pay a higher rate of tax than other companies.

Finally each bank must have a supervising member on its board of directors who would attempt to identify bad practices and stop them.

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