The Pin Factory Blog

I stumbled upon an excellent blog post the other day from a Hungarian business owner on the prospects of starting a business in Hungary. He titled it pretty clearly — “This is why I don’t give you a job”. He points out to the devastating effects of the Hungarian system where business start ups are almost impossible, if you don't have political support that is. He describes the anti-capitalist mentality and systemic problems with corruption as the highest obstacles to creating and maintaining a stable business. From the variety of comments the text got I understand that many businessmen in Hungary share his concerns as some of them were forced to simply close down.

I recommend you read the full text to get the clear picture. The text itself contains some rough language, but while reading it I understand why the author decided to use it. There are simply no better words to describe the awful situation in the Hungarian private sector. The administrative, regulatory and tax burdens with which the text starts seem light compared to the system of political corruption, anti-capitalist propaganda and downright cronyism. Hungary is becoming the poster child of crony capitalism.

To avoid bias, I looked into the situation in Hungary in order to find out whether all these facts are true. They certainly appear to be. Hungary is in some views crossed the Greek scenario and could suffer even worse consequences. Here’s a text from the New York Times on the current situation and here and here are some blog summaries of the Hungarian economic woes.

Furthermore, the IMF and the EU have pulled out of negotiations over a new line of credit due to the rise of what is believed to be authoritarianism. The talks have been restored however, but there are still issues to be covered. The constitutional reforms have outraged many Hungarians while the international organizations are mostly angry because of Hungary's PM Mr Orban's undermining of central bank independence. Talks have even been on suspending Hungary’s voting rights in the EU Council. Besides that, all three rating agencies downgraded its credit rating to 'junk status'. No wonder the country isn't attracting any foreign investments and is sliding into radicalism. Something is terribly wrong in Hungary.

The situation is turning to bad to worse and in some cases even paradoxical. The Economist reports in the latest issue (Jan 7th – 13th) on the country’s war against the IMF in times when they desperately seek international help and even secret services ordered to investigate currency attacks. The country is driving towards dictatorship. All the preconditions are here (shattered private sector, high corruption, authoritative prime minister, banning the media, nationalization, anti-capitalist and anti-business mentality), but the people still won’t let go. They’ve beaten communism once before, but this is another tough fight they will have to endure.

Even though I'm not an expert on the situation in Hungary I do know a thing or two about the issues in other South Eastern European countries, where a similar situation is arising. They suffer from the same misbalances, and the same hostile environment towards capitalism and businesses. The only difference between Hungary and some of the Balkan countries is that at least Hungary didn't undergo a devastating war 15 year ago. The relative underdevelopment of the banking and financial system in the Balkans prevented them from experiencing the same financial blow during the 2009 credit squeeze as Greece and Hungary did. Crony capitalism has been a dominant system in the Balkans for over two decades. It’s only a matter of time before it starts producing the same malign consequences as it did in Hungary and Greece. The only problem is, Balkan radicalism is far more dangerous.

From the Eastern point of view, the situation in Western Europe isn’t half that bad. Just a reminder that it can always get worse if we’re not careful. 

Same old problems got you down in this new year? Budget deficits, euro crisis, immigration? Ed Milliband’s promise of fairness in tough times doesn’t stir the soul? Thirty minutes quicker by train to Birmingham on HS2 a big yawn? Well, here’s something brand new to start worrying about.

Life Technologies of San Francisco unveiled on Tuesday its new benchtop Ion Proton Sequencer that is designed to sequence the human genome in a day for $1,000. That’s quicker (and maybe cheaper) than your average NHS cholesterol test. The gadget costs only $149,000 compared with current sequencers costing $500,000 to $750,000 but which take several weeks to complete the sequencing at a cost of up to $10,000.

As is the way of these things, costs will come down quickly and soon the whole process will be cheap enough to install at your local Tesco pharmacy. Before then, of course, the trendy will be getting these genome sequences on their way to a breast or hair implant clinic. No doubt, the Americans will be way ahead on this as UK and European politicians wrangle about its morality, regulation and accessibility.

This is going to be big, very big - far bigger than the current kerfuffle about removing faulty breast implants - and for good reason. Insurance companies and employers would love to get their hands on such information. Governments, too, will be keen to either suppress genomic information so as not to interfere with equality agendas or to demand such information in the pursuit of any number of other objectives.

In effect, the genome sequence is a scientific crystal ball, significantly enhancing the ability to predict the likely course of an individual’s life: predisposition to disease, physical characteristics and mental aptitude. That’s what will make the issue so big - and scary or hopeful, depending on your point of view.

But the inevitable is hurtling towards us. Once the genie is out of the bottle, there’s no putting it back. As with the first mainframe computers, then the PC, then the internet, then social media and smartphones, the more that information is rapidly and transparently disseminated, the better. It’ll be noisy, perplexing and disturbing so get ready – widespread genome sequencing is upon us.

Whilst most of the coverage of the PIP breast implants story has been rather puerile – if they had been in men or a rather less exciting body part I doubt the story would have gained much traction – there are some serious issues at stake.

There has been much criticism of the private cosmetic clinics for refusing to replace implants. Their refusal is quite correct, however. As the clinics point out, the costs of removing all the PIP implants and replacing them would be enormous and unnecessary. The quango responsible, the Medicines and Healthcare Products Regulatory Agency (MHRA), had declared the implants safe to use and had given them a CE mark. Subsequently, the MHRA has stated that it is not recommending removal. This makes Andrew Lansley’s accusation that clinics have a ‘moral duty’ to remove implants even more of a nonsense; what about the clinics’ moral duty to their other customers and employees not to bankrupt themselves for no reason? Further, the government statement that the NHS would remove any implants which clinics refuse to remove means that clinics are incentivised to do just that, as clinics are well aware that the state will do it for them.

Most idiotic, however, has been commentary regarding regulation of the cosmetic surgery industry. Unsurprisingly, the Observer led the charge to call for regulation. This particular article is a litany of contradiction and misunderstanding. It is quite obvious, however, that the cosmetic surgery industry is already heavily regulated, as the existence of the MHRA shows, and this regulation helped to cause the problem. The cosmetic surgery industry is already covered by general laws and regulations relating to any business, but also to specific medical regulations and institutions as this DoH report shows. By approving the implants the regulator encouraged clinics to use them and customers to buy them whether they were safe or not (which is unclear). In a free market, it is in the interests of producers to protect their reputations and supply good quality products. Under a regulated market, suppliers can hide behind the protection of regulatory approval. In short, the regulator created moral hazard.

The calls of the industry’s own professional bodies to be regulated should be treated with the contempt they deserve. The Observer’s ignorance of the function of professional bodies is laughable, although commonplace. It is in the interest of professional associations to create mechanisms by which they can reduce competition and erect barriers to entry so that they can increase market share and raise prices, hence the BMA supports the NHS and so forth. Under a free market, there may be a number of competing agencies and outsiders who may be able to offer a cheaper or more innovative service. In a regulated market, a state agency will set an arbitrary standard and create compliance costs to achieve it, thus reducing competition and innovation and driving up prices. It is no wonder that established market players are calling for regulation but it will not serve to protect consumers who will be exploited by monopolists and will suffer regulator-induced health problems such as this one.

Existing regulations notwithstanding, the success of the cosmetic surgery industry in the UK has occurred because it has been freer of regulation than many other areas of health. Costs have been kept down by competition and innovative products have been brought to market offering new and better treatments. Levels of complaint and dissatisfaction are low – it would be interesting to compare these to general medical standards in private and in nationalised medicine. Whilst some feminists and those who think they know better scoff at cosmetic surgery, for patients there are enormous benefits. Further regulation of the industry would only serve bureaucrats and producer interests, it would not serve the interests of consumers or potential consumers.

(One commentator pointed out that many breast implants were funded by women on relatively low incomes using cheap credit as a means to fund surgery and that the cosmetic surgery industry was hit hard by the credit crunch. Clearly, this may be a classic case for Austrian Business Cycle theory to show how credit manipulation by Central Banks led to inflation of assets!)

Harold Macmillan was Chancellor of the Exchequer for one year in 1956. Although the budget speech he delivered was a fairly tepid bit of Keynesian tinkering (famous, almost, for introducing Premium Bonds) it did contain some wisdom about the usefulness of economic data:

…some of our statistics are too late to be as useful as they ought to be. We are always, as it were, looking up a train in last year's Bradshaw [train timetable].

When it comes to the unemployment figures, this is always worth remembering. There is a lag between the event and the data; when you see a politician on the news the day that new figures are released trying to blame the latest crises in the Eurozone, it’s a lie. Causes in an economy persist; some are latent for a long time, other become apparent more quickly.

Likewise, people who quote data from a certain period in order to show correlations or connections are not to be trusted. When assessing Thatcher’s economic performance, people often look at the GDP growth figures from 1982/3 – 1988/89, and it is an impressive array; but when you factor in the recession that occurred in 1908/1981 the average takes a downward turn. This is also true when you factor in the recession at the end of Thatcher’s time in office.

A great example of the misuse of statistics in current debate is executive pay. As Allister Heath points out, it is often forgotten that current pay rises relate to the performance of the company in the previous financial year, not the current one. This is a trap that MigrationWatch has fallen into. Yesterday they claimed that there was a correlation between rising youth unemployment and rising EU A8-country immigration. They further said that if there wasn’t a causative link between rising immigration and rising youth unemployment it would be a “remarkable coincidence”.

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Following the announcement on High Speed Rail, Sam Bowman, Head of Research, has given the following reaction:

"There are big questions remaining about the viability of HS2, and in all likelihood it will become a major burden on public finances in the years to come. Past experience in Britain and elsewhere suggests that governments tend to wildly overestimate the demand for high-speed rail, and it is telling that there are only two high-speed lines in the world that do not rely on a taxpayer subsidy. Britain's past experience with high-speed rail, the line connecting London St Pancras to the Channel Tunnel, was a disaster – it sold for less than half of its construction cost and passenger numbers were less than a third of the projected number. 

"The potential for overspending, too, is worrying. A tunnel in transport minister Cheryl Gillan MP's constituency will add £500m to the £32bn bill – at £190,000 per yard, or £5,300 inch, it raises the possibility of massive extra spending to keep key MPs happy. At £32bn, the project is enormously expensive and its first stage will reduce the journey time from London to Birmingham by twenty minutes. It is staggering that the government is prepared to use so much taxpayers' money for such a risky, costly project which will almost certainly require a significant long-term subsidy to remain operational."

Our report released last year 'High Speed Fail' pointed out the many flaws in the HS2 plans. Its key arguments are detailed below, but you can read the full report here. 

The facts on HS2:

• HS2 will be an expensive taxpayer-funded project – the first phase to Birmingham will cost £17bn, with completion of HS2 to Leeds and Manchester bringing this to £30bn and the planned eventual extension to Scotland bringing the total to £50bn. The HS2 project will therefore cost taxpayers approximately £1,500 per household.

• HS2 is extremely expensive even for high-speed rail: its cost is equivalent to £130m per mile and is a staggering four times the cost of the average European high speed rail line.

• Around the world, all but two high-speed rail lines depend on government subsidies for their ongoing operation. The TGV in France has caused SNCF’s debt to rise to c£25billion. The World Bank warned in 2010 of the debt created by high speed rail systems talking of the ‘near certainty of copious and continuing budget support for the (high speed rail) debt’.

• The potential for going far above the £4bn “optimism premium” set aside for overspending is high, especially in light of current inflation. Public pressure for more tunnels (which cost much more per km to build) through environmentally sensitive areas such as the Chilterns will push up construction costs, as has been demonstrated by the £5,300/yard tunnel expected to be approved to win the support of Cheryl Gillan MP for the project.

• Predictions of passenger numbers and demand for High Speed 2 may also be overambitious. This would have huge repercussions for HS2’s profitability. Britain's previous experience with high speed rail – the HS1 line between London St Pancras and the Channel Tunnel – proved far less popular than its promoters had predicted, with actual passenger take-up coming to one-third of the predicted amount. 

• HS1 cost £5.7bn but raised only £2.1bn when sold off, raising the possibility that HS2 may also incur a significant loss upon completion. If HS2's sale made the same magnitude of loss as HS1, it would mean a loss to the taxpayer of nearly £20bn.

• The outstanding questions about HS2's profitability make it appear extremely likely that the project will require a significant ongoing taxpayer subsidy upon completion and may well make a loss upon its sale. The promise of slightly faster journeys to Birmingham, Manchester and Leeds do not warrant this risk-taking with taxpayers' money.

The Iron Lady interweaves two compelling themes.  One is of a love story, romantic and endearing, played out against a backdrop of great events.  The other tells of a struggle against the odds, of a woman facing the supercilious and dismissive ranks of a male establishment.

The movie is utterly dominated by the mesmeric performance of Meryl Streep.  A few minutes deep into the story it becomes apparent that we are witnessing a role that will become legend.  We have to remind ourselves that we are watching an actress portray a role, rather than a documentary featuring the former Prime Minister herself.

The movie, fiction though it is, will probably prompt a reappraisal of Margaret Thatcher and the part she played in changing the nation she led.  Meryl Streep's strong performance wins the audience into a sympathetic evaluation of Lady Thatcher's achievements.

The movie has been criticized for its portrayal of her dementia while she is still with us.  That portrayal, however, is not remotely mocking; on the contrary, it powerfully elicits our sympathy and support, and the sad fact is that the lady we knew is already no longer with us.

There is nothing in this film for the Left.  Where they demonized Margaret Thatcher, the movie humanizes her.  It is not about the great events of her political life; these are its backdrop.  Her entry into Parliament, her leadership bid, the miners' strike, the IRA and the Falklands War all feature, but the movie is not about them.  Rather is it about the strength of character with which she confronted successive challenges and crises.

Her achievements are featured, together with the confrontation it took to bring them about.  She took on a prevailing political ideology and overturned it, as well as the political elite that espoused it.  The nation prospered again, spreading new opportunities for advancement and home ownership.  The ailing state-owned giants became successful enterprises, and the brutal ideology that had enslaved half the world was overthrown.

Her faults are depicted, too.  Towards the end she became progressively more imperious and insensitive to advice or criticism.  She remained committed to the view that government was there to help people to improve their lot, and was equally firm in her conviction that she knew how to do that.  A little more readiness to listen and debate might have bought her a little more loyalty from her colleagues.

Overwhelmingly, though, the impression is favourable.  Meryl Streep wins its audience over to identify with her struggles and to leave it more sympathetic towards the former Prime Minister than it was before.  The movie will win accolades without doubt.  And there will be new accolades and recognition of achievement for Lady Thatcher herself.

The ASI has today published as a paper a proposal first made on this site.  The paper ("The Growth Agenda – the Self-Employment Option") suggests that the wider use of self-employed status can overcome much of the regulatory burden that stands in the way of enterprises, especially the small enterprises that create so many of the new jobs.

Although the Treasury has spent nearly three decades trying to shoehorn people our of self-employed and into employed status, the ASI claim this acts as a barrier to enterprise and growth.  For its convenience HMRC prefers to have employers calculate and collect PAYE and National Insurance for them, but in doing so, says the ASI, it imposes burdens that thwart the creation of hundreds of thousands of new jobs.

The Treasury cites costs as well as convenience if it had to collect from directly from people newly classified as self-employed, but it fails to count the supply side effect of taking people from unemployed dependency on state funds into new jobs in which they earn money and pay taxes.

The ASI proposes that small firms should be encouraged and helped to be able to classify their workforce as people self-employed under contract.  This sidesteps the burdens not only of PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay.  All of these might be affordable to large firms, but to small and medium enterprises they act to prevent people being taken on in the first place.

The new report says that "allowing self-employed status for SME staff is the single most powerful tool that could unleash the private sector and boost growth."

In a BBC interview, UK Prime Minister David Cameron indicated that shareholders will be given more power to decide the pay of top executives. It is a welcome acceptance of the fact that government regulation of executive pay has not actually worked, and that it is better to leave pay up to the markets and to the shareholders who actually own businesses, and for whom the executives – supposedly – work. And it is good that Cameron has taken up the arguments on this that were voiced by the Adam Smith Institute back in November.

Executive pay has long been a contentious issue in UK politics for decades. In the early 1980s, Margaret Thatcher's 'big bang' deregulation of the financial sector led to sleepy UK banks and broking houses becoming major international players. It made the UK capital markets much more efficient, and much more international, and gave UK businesses access to fresh capital for expansion. With the technological improvements in communications and transport, it made the UK a truly globalised economy. Firms became much more productive, and many of the top stock market companies became much bigger. And executive pay increased to reflect that new scale and efficiency.

But high pay attracts envy, and soon there were calls to rein in 'fatcat' salaries. The Cadbury and Myners commissions were set up, and the upshot was that, to make pay more 'transparent', firms had to set up remuneration committees with non-executive directors, just to make sure that executives were worth their money. But that new regulation proved catastrophically counterproductive. Boards just chose directors of other companies to sit on their remuneration committees. So it became an endless round of 'you sit on my pay board and I'll sit on yours' and, not surprisingly, boardroom pay soared – arguably well ahead of growth and efficiency.

This is the absurdity that Cameron now proposes to cut through, by giving shareholders much more power to decide executive pay. It is a power they should never have been stripped of in the first place, but that is politics for you – politicians think they can run businesses better than markets and competition and real ownership can. Indeed, the Adam Smith Institute argued years ago, in a report Competition in Corporate Control by Elaine Sternberg, and most business policy 'problems' would solve themselves simply by boosting competition, reducing regulation, and letting owners run the enterprises they supposedly own. 

David Cameron said today that he will not scrap the 50p tax rate, because “it would be unpopular”; because “the broadest shoulders should do more”; and because it would not be appropriate now that the economic situation has deteriorated.  Let us dissect the arguments one by one.

Cameron approaches the argument from the wrong end.  He wants to balance the books.  But these are the books of a socialist state.  This government is spending the most money any government has ever spent in the UK.   Arguably, a government which merely seeks to finance such an excessive state is not Conservative.  The question is not whether 50p raises money; or whether it is popular.  The question is: will this 50p rate produce growth and therefore prosperity for all?

Of course 50p is popular with a majority in the land: they are not paying it.  Something is not right because it is supported by the majority.  It is possible that expelling hundreds of thousands of immigrants would be popular with a majority.  It is possible that banning travellers would be popular with a majority.  It is possible that expropriating anyone who owns more than, say, £500,000, would be popular. Democratic majority rule must always be subject to rules which limit what the state is allowed to do.  In effect: limiting coercion by the state to an absolute minimum.  Key in the limits to government stands the protection of private property rights –  the ownership of one’s body and the fruits of one’s labour.  Property must not be made subject to majority rule because it is of enormous benefit to all – including those who don’t own anything.

Private property (including the fruits of one’s labour) does not need protecting because of a “belief”, but because it advances society and therefore civilisation as a whole.  Pay, profit, and resulting wealth shows which behaviour should be imitated and which shouldn’t: go out to work, or stay in bed?  It shows which methods are the most effective, thereby leading to innovation and progress.  It sends signals to everybody else as to which goods and services are required where and when: when the Soviet Union abolished private property it resulted in long queues and shortages.  Accumulation of property and capital allows investment. Exclusive products become mass produced because wealthy people pay too much for them initially.  Countries with no respect for private property stagnate or decline.  Is it a coincidence that this government coerces us through taxes to part with the biggest share of our private property ever; while at the same time its country produces no growth whatsoever?

Should the biggest shoulders do more?  They already do, of course.  When I last checked, shoulders were situated on top of a body that can walk away.  This is precisely what is happening in the City right now.  Those biggest shoulders are moving to Switzerland and Dubai and Singapore and Hong Kong – and the rest of us will eventually have to pay for the shortfall in tax take.  HMRC enthusiastically reports that the 50p brought in hundreds of millions in the first year.  Presumably, it takes a while before people start fleeing.  Perhaps the 50p payers even hang around for a bit longer while Osborne dangles the prospect of the future abolition of the 50p in front of them?  What the increased revenue does not show is how much tax take is not achieved because those high-end employees never arrive on our shores; or because entrepreneurs decide to invest outside of the UK. What that increased revenue does not show is what harm it does to the economy.  This government of the 50p is also the government of no growth.  Countries which slashed their taxes always experienced a high growth as a result. 50p tax seems to be part of an Agenda for No Growth.

It is said that we could not cut the 50p, because the economic situation has deteriorated.  Has anyone in Osborne’s department ever wondered whether the one does not (in part) cause the other?

In this whole debate one very strange argument popped up.  According to The Telegraph. “Ministers are also thought to believe that the decision effectively to extend the public sector pay freeze until 2015 has postponed the removal of the 50p rate”.   Perhaps they mean to say that everybody should tighten the belt.  To me and mine a public sector pay freeze comes not even close to approaching effective measures to reduce the size and therefore the cost of our bloated state.  How about firing half of all the public sector employees so we can cut taxes to jump start the economy?  Firing half of our public sector employees would have the added advantage that there would be fewer around to harm our economic endeavors with their rules and regulations.

Demanding that people part with 50p in tax is excessive.  Add to this social security contributions, VAT, stamp duty, fuel tax, flight tax, and a myriad of other taxes, and you reach levels of 70 or 80% of taxation.  Such taxes are not characteristic of a free people.

An actuary isn’t where dead actors are buried; it’s someone who tells you about a problem you never thought you had and in a way you can’t understand. Actuaries are the butt of  jokes that they’re dull folk – accountants without the charisma. Their function is to assess the financial impact of risk and uncertainty, thinking through everybody’s worst nightmares – accidents, catastrophes, injury and death. In short, they talk about things we’d rather not.

Last Tuesday, the Association of Consulting Actuaries (ACA) released its 2011 Pensions Trends Survey, detailed numbers on the demise of the defined benefit pension scheme. Ninety percent of such schemes in the UK are closed to new entrants while 40% are closed to future accrual. Right on cue, Shell UK announced a couple of days later that it’s closing its defined benefit scheme to new hires and this by one of the best-run schemes around.

Both underscore the reality of the modern world – we have collectively failed to adequately save for retirement and to recognize huge changes in employment practices. Defined benefit schemes are a nostalgic relic of a bygone era when employment was for life and that life was relatively short. This led to the assumption that pension provision is the responsibility of employers, reflected in the joke that General Motors was a huge pension fund with attached car-making facilities.

As the ACA survey shows, market forces are tearing this notion apart with employers switching to defined contribution schemes – bunging a chunk of cash into a pension pot from which the employee arranges a pension when the time comes. This is a brutal but inevitable response to the real world.

The regulatory regime is now scrambling to keep up but little forward-thinking has gone into the issue beyond affordability: the employer as pension provider is still the working assumption. These days, life-time employment with one company is rare. Indeed, more and more people don’t even work all their lives in one country. Many now have a plethora of small pension schemes, perhaps even in different countries. This is costly to the worker from an economies-of-scale perspective or from scheme consolidation costs. Meanwhile, employers are still burdened with the costs of running a pension scheme.

In a small way, the government is moving in this direction with the introduction of NEST, a mandatory pension scheme for small employers who now don’t offer one. But this is a piecemeal approach with all the pitfalls of any other government scheme.

Why not go the whole hog and privatise National Insurance into a dozen or so independent pension schemes? Initially, at least through the transition, mandatory minimum employee contributions would be required, say 10% of income for younger folk and rising by some formula with age. Companies could redirect their current pension contributions to wages, allowing employees to top up the mandatory minimum to maintain their overall pension savings rate of NI plus company scheme.

In the meantime, the government could start negotiating with other countries for mutual recognition of similar official pension schemes so mobile workers can a maintain a consistent savings regime for their retirement wherever they happen to be employed.

And actuaries will continue to be with us, expecting everyone to be dead on time.