IEA Blog

I very much agree with Mark Littlewood’s blog yesterday on the proposed ending of default retirement. While as an employee I may welcome the opportunity to work longer, as someone involved in employing people I can also see the downside. 

Evidence I have looked at from Canada and the United States suggests that abandoning mandatory retirement at 65 will have a smallish but still significant impact across the economy, with an increase of maybe a couple of percentage points in those continuing work beyond 65 (which 10% of men and around 5% of women do already).

However, in some fields the increase could be rather larger and it may be interesting to see why. One area with which I am very familiar is employment of university academics. Academic work still has high levels of autonomy, a lot of flexibility and few physical demands. Academic staff have greater than average life expectancy and enjoy their work. Already many staff ask to stay on, even though they know that such permission is given sparingly and only for a limited period. I suspect that we could now see quite an upsurge in those working later.

In the USA, when the mandatory retirement age was raised from 65 to 70 in 1982, 40% of academics chose to work beyond 65. When mandatory retirement was dropped in 1994, one study suggested that around 15% of academics would work beyond 70. Professors in their 70s and even 80s are now common in American universities.

If something similar happens in the UK, I can see a number of problems. Older academics are paid a lot more than junior academics – even though they are doing essentially the same job – because of the various grades through which they are promoted, and increments within those grades. So the wage bill will rise. In particular narrow fields of the sort which proliferate in universities, bed-blocking academics will prevent newer recruits: if there are only five or ten posts in Persian in the country you will be able to forget about entering that field any time soon. University restructuring will become more difficult as natural wastage declines: universities will have to spend a lot of money – as in the USA – in buying out elderly professors in areas of declining demand.

Communication with young students may become more difficult. And it is no use pretending that older staff who are no longer performing competently can be eased out. Any competence tests would have to be applied to all staff, or else this would clearly be age discrimination. Tests for all (presumably on an annual basis) would be costly – and likely inconclusive, as strong unions already make it extraordinarily difficult to remove anyone unless for theft, fraud or sexual misbehaviour.

To abandon mandatory retirement without also freeing up labour contracts – needed in universities as elsewhere – may create more problems for employers than the breezy Ed Davey imagines.

The coalition government is considering scrapping the fixed retirement age and Minister for Employment Relations, Ed Davey, is promoting the policy on the grounds of choice – You don’t have to work beyond your 65th birthday, but you can if you choose to. The stark reality of an ageing population and the clever spin of the new policy being about improving flexibility and ending arbitrary laws makes the announcement a public relations success.

Sadly though, the policy in isolation will be bad for employment and particularly for the elderly. I’m all in favour of the state extinguishing a vast number of employment statutes and regulations, but it’s a leap in the wrong direction to effectively extend employees’ rights whilst continuing to undermine the discretion exercised by the employer.

As far as practicable – and certainly a lot further than permitted in 2010 Britain – we should allow workers and businesses to negotiate their own contracts. So remove statutory provisions about retirement ages by all means, but replace them with the discretion to write into an employment contract that any retirement date can be agreed. This might be 65. Or it might be 35. It could be a ten or twenty year deal from the employee’s start date. Or, rather like some football managers, some employees might have a rolling contract renewed on a year-to-year basis. If the coalition’s proposals are going to remove the dead hand of Whitehall regulation and replace it with this sort of discretion, then that would be a welcome move.

Unfortunately, this doesn’t seem to be the case. From an employer’s perspective, offering a contract of employment could be seen as close to offering a deal for life. Assertions that people can be “performance managed” out of jobs towards the end of their careers are of little comfort. Workforce planning becomes very difficult and costs to the employer are certain to rise. Neither of these is conducive to boosting employment.

Indeed, recruitment decisions may start to go against the interests of those in their 50s and 60s. A young person at the start of their professional career, taking a role as a stepping stone on their long career journey, might stay in post for a few years before moving on elsewhere to a more senior position. But someone in their late 50s, possibly taking on their last employed role, is far less likely to depart willingly. And the employer’s commitment is open ended – how do they know whether the employee is planning on retiring at 60, 65, 70 or 75? Or maybe later still. If the employer has concerns that due to the onset of age or declining health, they might find themselves with a long-term staff appointment with diminishing productivity, they are likely to lean towards younger recruits.

 A flexible and dynamic labour market will tend to thrive as statutes and regulations are repealed, but only if combined with much greater discretion in terms of freedom of contract. Getting only half this equation right could prove to be a retrograde step.

If you tire quickly of the tediously lengthy build up to Christmas, which starts about now, then heaven help you in dealing with two years of hyperbole about the 2012 Olympics. Even the most enthusiastic synchronised swimming fan will find it hard to imagine that the actual event will live up to the billing. And as a keen follower of sport (well, proper sport like football or motor racing), I hope that the London Olympics absolutely bomb.

 I want half empty stadia, feeble athletic performances (particularly from British competitors) and embarrassingly low television viewing figures. Because – after this fiasco has finally ended – I don’t want there to be anyone who can seriously claim that it was a success; that it was worth it; or – most cringe-making of all – that I should feel proud to be a Londoner on the back of it…

Read the rest of the article on the Spectator’s Coffee House blog.

Vince Cable suggested on Sunday that the payment of bank bonuses and dividends should be linked to whether or not they lent more to businesses. It is not clear exactly what he meant and there was no substantive mention of this idea in the Green Paper that has now been published. He seems to be all at sea and one wonders whether his ambition is to promote another financial crisis.

A few years ago, the IEA published a very good book, Fifty Economic Fallacies Exposed. I am beginning to wonder if Vince Cable should be the subject of the next edition. At the current rate, his fallacies could fill a whole book within the year…

Read the rest of the article on Conservative Home.

The way in which government funding of universities has corrupted our thinking is illustrated very well by David Willetts’ comments about the awarding of the title “University College” to BPP. David Willetts suggested (Telegraph 26th July) that BPP will only be the second private university – the first being Buckingham University. If the minister for universities is confused about this matter, we have a problem.

What David Willetts really means is that BPP will be the second university to be independent of government. All our universities are private. Indeed, they are more private than the company which owns BPP, in which the public can buy shares. Most of our universities have governance and ownership structures that are impenetrable to the outside world – unlike BPP. The problem with universities is not their ownership but the way in which their priorities and procedures are distorted by government funding. They are private but largely dependent on government.

Some universities are a good deal more independent than others, but an urgent priority in the review of undergraduate funding must be to ensure that all universities become independent as far as teaching is concerned. There should then be a review of research funding. The end results should be that, if the state does provide funding, it is directed through students and the support of research endowment funds. This might make institutional independence a reality in higher education once again.

Banker-bashing, hedge-fund bashing, speculator-bashing: one of the legacies of the financial crisis will surely be a hugely negative perception of financial markets. These are now widely perceived as strongholds of short-termism, irrationality and self-indulgence, inherently unstable and volatility-prone. A casualty might well be political reforms that look to a greater role for markets, whether this is in terms of the pension system, the NHS or the social care system. This is a great pity. As the case of Chile’s pension scheme shows, the mechanism by which something is funded is important and competition has an important part to play. One of the world’s purest examples of a savings-based pension system, Chile’s scheme shows that these systems can weather a major crisis remarkably well.

In the Chilean system, people can choose between five types of savings funds, denoted A to E, defined by their ratio of fixed-interest to variable-interest assets. Fondo A is the most risky one, with up to 80% of its assets invested in equities. Fondo E is the most conservative one, consisting of fixed interest bearing bonds only. The other ones are intermediate solutions. In 2008, the value of Chilean pension assets crashed spectacularly. Average annual returns after inflation looked grim:

Fondo A:           -40%

Fondo B:           -30%

Fondo C:           -19%

Fondo D:           -10%

Fondo E:           -1%

Critics rejoiced. However, in 2009, real values rebounded:

Fondo A:           +43%

Fondo B:           +33%

Fondo C:           +23%

Fondo D:           +15%

Fondo E:           +8%

These are averages, which lump all pension fund providers together. But thanks to competition, even the worst-performing company had recovered a large proportion of the initial losses by the end of 2009. Is volatility of pension funds a problem at all then?

It depends. From the perspective of someone who had long envisaged retiring in 2008, and selling their entire assets at once to purchase a lifetime annuity, it is. It would force them to delay their plan. But what critics of private pension provision frequently forget is that state pensions are by no means insulated from ups and downs. They are usually pegged to some fluctuating macro-aggregate such as median wages, and suffer, in addition, from arbitrary political interference. In fact, about 30% of Chilean pension assets are invested abroad, making Chilean pensioners less dependent on the domestic economic situation. This provides a degree of security which state PAYGO systems could never achieve. Lacking any reserves, they are backed by nothing but the power to tax, which, by definition, ends at the national border.

Ultimately, what matters are longer-term average returns, and in those terms, Chile has much to boast about. Between 2002 and 2009, savers benefited from annualised real returns between 4% (Fondo E) and 9% (Fondo A). The dreaded casino-capitalism turns out to be a real blessing for ordinary workers.

A single claimant of Jobseeker’s Allowance or Income Support aged 18-24 receives £51.85 a week. This goes up to £65.45 for those aged 25 and over.

Tax credit and child benefit payments for a first child are significantly higher at £75 per week, while subsequent children will earn claimant households an additional £58 per week.

It would seem to be unfair that child-related benefits are paid at a higher rate than those for young adults. In particular, young adults may have to spend around a third of their income on utility bills, whereas families will enjoy the economies of scale resulting from shared living space, meals and transport etc. Moreover, it is inconsistent that the benefits system recognises economies of scale within families (hence the first child premiums) but not in its treatment of families vis-a-vis single households.

A fairer system would standardise first child payments at the young adults’ rate of £51.85 per week, with lower payments for additional children. This could be achieved in practice by halving the child element of child tax credits. The measure would have the additional advantages of improving work incentives and cutting billions from the annual £24 billion tax credits bill.

I don’t apologise for returning once more to my hobby-horse, the seemingly unstoppable growth of employment tribunal claims and the pernicious effect of fear of tribunals on the workplace.

They’re in the news again this week with the hearing of the case of Emma Amelia Pearl Czikai (referred to in an earlier blog post) who is seeking the right to pursue £2.5 million compensation for disability discrimination against Simon Cowell, who was rude about her singing abilities on Britain’s Got Talent.

But, as usual, the tabloid coverage of this ridiculous case has not gone behind the headlines to look at the bigger picture of what is happening with tribunals. Figures published a couple of weeks ago show that a staggering 236,000 claims were accepted by the Employment Tribunals Service in 2009-10. This is a 56% increase on the previous year’s total of 151,000.

Much of this increase came from the rise in multiple claims, by which unions use their financial muscle to pursue what are in effect “class actions” by groups of workers, for instance over equal pay or Working Time Directive issues or Transfer of Undertakings (Protection of Employment) regulations. But single claims also rose sharply, by around 14%.

There were big proportional increases in the newer types of discrimination claim. Claims around Religion or Belief were up from 830 to 1000, Sexual Orientation claims from 600 to 710, and Age Discrimination applications rose from 3800 to 5200. And, as might be expected in a recession, claims associated with unfair dismissal, breach of contract and redundancy rose by 17% to 126,300.

The growing workload has led to the appointment of 35 new full-time employment judges and 340 new part-time panel members in the last year. This hasn’t prevented a significant case backlog building up.

Of course only a fraction – less than a fifth last year – of claims accepted by the ETS ever make it to a full tribunal hearing. Most are withdrawn, conciliated by ACAS or struck out without a hearing. Of those cases actually reaching a hearing, over a third fail. But this does not prevent employers spending substantial amounts of time and heavy legal fees defending against cases which have little substance. It was revealed this week, for example, that the University of St Andrews spent £200,000 to defend itself against an unsubstantiated accusation of bullying.

This week I was sharing a platform at the All-Party Parliamentary Group on Well-being Economics with Professor Cary Cooper of the University of Lancaster. Cary asserted that the HR problems of the workplace were simply the result of bad management. Well, this isn’t the view of people I talk to who are actually attempting to manage staff. One lady present pointed to the procedural nightmare involved in dismissing a nursery worker who had put a child at risk through negligence. Getting rid of incompetent teachers is a similar problem, both in schools and in HE. If you put a foot wrong in the long-drawn-out sequence of stages you have to go through, a claim of unfair dismissal will likely be upheld.

New employment law continues to pour out of our legislature. The “family-friendly” legislation embodied in the Equality Act, and coming into force in October, is worrying HR managers at the moment, according to the Annual HR Survey from HReSource. The extended right to request flexible working is particularly problematic, for turning down such a request is fraught with danger for organisations: compensation for discrimination is uncapped.

These things make managers reluctant to attack poor performance at the workplace, and deter them from taking on staff at all where consumer demand is uncertain and staff are expensive to dismiss.

Sooner or later steps are going to have to be taken to turn back the tide of employment regulation, and to make the use of tribunals – where claimants face no real penalties for unfounded claims – the last, rather than the first, resort of people disappointed at work.

Next May there is to be a referendum, at the behest of Nick Clegg, on whether or not the UK should change the first-past-the-post system to the Alternative Vote (AV) system. Under AV, voters must rank the candidates according to preference and if no candidate has an overall majority the bottom candidate’s votes are re-distributed amongst the others, and so on until there is a clear winner. This keeps minority parties in the race, as one would expect under a proposal from the leader of a minority party, but there is no clear reason why that is an improvement, any more than there is for literally scores of other possible voting systems, each of which has its own following.

In terms of benefits to mankind, all voting systems are varieties of the question “how many angels can dance on the head of a pin?” They are poor substitutes for exchanges that can be made amongst individuals under which all gain and nobody loses; if some don’t like the game they don’t have to play and by definition are no worse off than before.

The chattering classes and the elites of politics love elections. A good example of this is the BBC; you can almost feel their paroxysms of delight throughout the whole election process. Yet the process is essentially a very serious game which, by virtue of an advance auction of goods about to be stolen and redistributed elsewhere (with huge commissions to the auctioneers), creates enormous aggregate net losses, just as does any other form of theft.

When government was small this hardly mattered. But now, government doesn’t do small, and as it expands its scope, it attracts people of a very different mind-set. The motivations for a Parliamentary career have changed radically, from a strong wish to do good to exercising power for its own sake and the corruption of the system for personal gain. This fits precisely Hayek’s explanation of “why the worst get on top”.

Thus in 1930 a Labour MP gave his wife and daughter two rail travel vouchers from a pack issued to him (only) for travelling between his constituency and Westminster. The ticket inspector pressed charges and that was the end of the MP’s career.

Over a less than century, serious corruption in Westminster has moved from virtually unheard of to routine. The same goes for abuse of power – examples I recall include Jack Straw’s refusal to release records of how the Iraq war came about (it would “damage democracy”) and Harriet Harman’s reaction to Fred Goodwin’s pension (“it might be enforceable in a court of law but it’s not enforceable in the court of public opinion and that is where the Government steps in”). It’s not that many years since Harriet was a National Council of Civil Liberties activist. 

This decline coincides (but not coincidentally) with the rise of total taxation over the last century or so from about 5% of GDP to about 50%. But we ain’t seen nothing yet. My knowledge of history isn’t exhaustive, but I suggest we’d be hard put to find a democracy that lasted as much as 500 years. Of course there is room for doubt about what a democracy actually is, which is one reason why Churchill’s famous remark “Democracy is the worst form of government except for all those others that have been tried” is little more than a sound-bite.

An unlimited democracy in which all decisions can be settled by a majority vote is essentially the same as two wolves and a lamb voting on what to have for lunch. A “representative” democracy is potentially even worse, with government itself taking all decisions in an elective dictatorship, such as those of Hitler and Mussolini. Modern Britain is getting ever closer to this position.

What is needed above all else is a constitution, listing all the areas which are off limits for either government or majorities to settle (such limits, both personal and economic, being based in particular on the bulwark of private property in its widest sense).

Not one of the original constitutional documents of the USA (Declaration of Independence, Constitution, Bill of Rights) mentioned the word democracy. These documents are themselves bulwarks, but over a period of time “representative” government dismantles them or disobeys them without fear of retribution.

If history is anything to go by, the picture is bleak indeed. We are fiddling while Rome burns, which it duly did. As Ludwig von Mises wrote in Human Action, “The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Fuhrer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.”

The dismal economic returns on the Channel Tunnel Rail Link are a stark warning to supporters of a high-speed line to Scotland and the North of England.

The total cost of the link, now renamed “High Speed One” (HS1), is close to £10 billion in today’s money, when all the hidden subsidies and extras are included. And this figure does not include the substantial “deadweight” losses from the additional taxation required to fund the line. A commercial business would expect to make an annual return well above £500 million on such an investment, particularly since railways typically need to be substantially rebuilt after 30 or 40 years.

In this context, the return on HS1 is pitiful. Last year, the “investment recovery charge” levied on Eurostar was reduced by more than half to about £2,200 for each train service using the route. By my calculation, this adds up at most to about £40 million a year – a return of less than half of one per cent on the government’s original investment.

But even this return is questionable. Eurostar has made large losses during its sixteen year history and it remains to be seen whether the hidden subsidy of cut-price access charges will enable it to make sustained profits in the medium term. In other words, not just the infrastructure but the service itself has been heavily subsidised by taxpayers, meaning the overall economic return on HS1 has almost certainly been negative – even before inflation is taken into account. The local “Javelin” services to North Kent now using the line are also subsidised.

Of course, advocates of high speed lines may point to “wider benefits” such as regeneration. Indeed, the expensive re-routing of the Channel Tunnel link through East London was supposed to boost the area’s economy (as well as to facilitate currently non-existent through trains to the North of England). However, state-funded regeneration tends to be a negative sum game. Resources are inefficiently transferred from some areas to others, while social problems are displaced rather than reduced. Moreover, if nebulous “wider benefits” arguments were used consistently as a rationale for taxpayer support, just about every business activity would be entitled to subsidies and almost the entire economy would become socialised.

After sixteen years of support, the government should stop subsidising train services to the continent. Taxpayers could receive at least some compensation if the high-speed line were sold off to the highest bidder with the proceeds used for tax cuts and (unlike in current proposals for its “privatisation”) no restrictions imposed on how the route is used. Perhaps an unsubsidised international service could just about cover maintenance costs, with the sunk capital effectively written off. But far better returns could almost certainly be achieved by shutting down the line and disposing of the assets – which include substantial plots of land, tunnels under London and the Thames, and large amounts of scrap metal.