Is this written by Don or Chris?

There’s a case for limiting top pay. The point here is not merely about fairness. One lesson of the collapse of the banks is that high pay doesn’t work. It doesn’t call forth “talent”, but rather destructive rent-seeking and risk-taking.

Well, we do have some historical precedence for this. How successful was the salary cap at professional football clubs, and what can we learn from it?

I agree with the rest of the post, but…

“There’s a case for limiting top pay. The point here is not merely about fairness… ”

The “fairness” case for limiting top pay is a rather twisted and pointlessly destructive one. As far as I can tell, it basically reads “I’m not rich, so why should anyone else be?” If you try to improve social equality merely by dragging people at the top downwards, the only impact you’re having is negative. It’s just spiteful.

“…One lesson of the collapse of the banks is that high pay doesn’t work.”

The collapse of the banks didn’t show us that high pay doesn’t work. It showed us that high pay is not a guarantee against failure, which I hope we already knew. What it certainly didn’t prove is that high pay is the problem. Unless we can demonstrate that high rates of pay have a major negative impact on economic stability, I really don’t think we can justify telling private firms how much they can pay their staff. Publically owned groups are of course another matter.

“Is this written by Don or Chris?”

It’s written by Chris – we’ve done an upgrade of wordpress which means that I can post articles but can’t select the author name

The editor will hopefully fix this once he returns from gallivanting around at Labour Party conference.

What the Hell is going on around here ?

All these Political Party Conferences appear to be a monkies tea party where they are all get to regurgitate the biggest load of bullshit for the year.

It is all a diabolical waste of time and money and we get to pay for it, the security and other expenses including paying for these idiots wages to perform.

Cannot wait to roll around laughing at the Tories annaul pathological liars party next because we are sure to hear some whoopers there.

These politicians talk about moral collapse and decline but it’s these people that are guilty of creating a broken Britian because they are sleezey, deceitful, lying hypocrites that milk the system and slaughter the poor along with their financial institutions buddies and dodgy bankers that have created worldwide misery.

Bloody hypocrites that live in another dimension the lot of them. Sad that Guy Fawlks did not succeed because he had the right idea years ago, blow the House Of Horrors Up.

I don’t quite understand this post … is it arguing:

1. we face a low growth future and need to learn to live with it (hence focus on redistribution etc.)
or
2. we need to do something to generate growth, because as things stand we face a low growth future.

If there are underlying reasons to expect low growth, then spending taxpayer’s money in a misguided attempt to generate growth could backfire (we’d end up without growth and with a public finance crisis to boot). The warning not to expect too much from a state investment bank is consistent with this thought.

But what of “tough fiscal rules …. would merely exacerbate this”? If we face a low growth future, then borrowing as if we are expecting a high-growth future is a recipe for disaster. If future growth is low, the debt arithmetic looks v different. Of course you can say that excessive cutting, short-run, can make matters worse not better, but if you expect low growth, cutting the deficit becomes more important, not less important.

Lastly, I’ve made this point repeatedly before, but I’m not sure what to make of recent low levels of investment. What if the varieties of economic activity that require investment, of the sort that shows up as investment in the national accounts, has been exported to China? Low levels of investment could merely reflect the UK moving more towards services, and setting up a new services business does not, I think, show up as investment in the national accounts. If correct, this means that a “lack of investment opportunities” is not a permanent state of affairs. As exchange rates moves and Chinese wages rise, providing no new low-cost giant emerges, these varieties of economic activity may start to return to the UK [1]. And as I’ve also said before, this process might not be much fun – it will felt as a reduction in real incomes, because we will no longer be borrowing money to buy cheap imports.

[1] Hopefully Africa will become a new destination for economic activity.

CG @ 3:

“The “fairness” case for limiting top pay is a rather twisted and pointlessly destructive one. As far as I can tell, it basically reads “I’m not rich, so why should anyone else be?” If you try to improve social equality merely by dragging people at the top downwards, the only impact you’re having is negative. It’s just spiteful…
The collapse of the banks didn’t show us that high pay doesn’t work. It showed us that high pay is not a guarantee against failure, which I hope we already knew. What it certainly didn’t prove is that high pay is the problem. Unless we can demonstrate that high rates of pay have a major negative impact on economic stability, I really don’t think we can justify telling private firms how much they can pay their staff. Publically [sic] owned groups are of course another matter.

A very cogent, insightful and civilised comment from CG, whose views I respect even when we disagree. The left needs to get away from ‘levelling down’ and focus on ‘levelling up’. In my view, though I cannot (obviously) speak for CG, this means ‘maximising the minimum’, not ‘minimising the maximum’, within a functioning (ie not killing the goose that lays the golden egg!) but appropriately regulated market economy; and also this means abandoning the notion of ‘equality’, which is an utterly inhuman conceptual import from mathematics into political theory, and focussing on ‘fairness’.

In practical terms, this means removing the lower paid from tax altogether, not taxing them and then recycling the money back to them (at considerable expense!) in tax credits and benefits – and with all the behavioural disincentives this entails – which is a shrinkage of state provision….What people earn at the top of the income bands is irrelevant morally and economically – what matters is how we can improve the lives of those at the bottom of the heap!!!

‘Equality’ is not the issue, as is shown by (say) the Guardian/BBC agonising over “less equality” when ‘equality’ is an absolute. A functioning market economy will, even when appropriately regulated, produce vast disparities in income. Given that there is simply no other show in town (and never will be) other than capitalism, let us manage capitalism to maximise the minimum for those at the bottom of the heap…

The theoretical basis for all this is the writings of the social democratic/social liberal political theorist, John Rawls. I recommend his magisterial ‘A Theory of Justice’ and his seminal article ‘Justice as Fairness’. But many on here may prefer the Germanic vapourings of Marx…

@7 – Of course, it’s *entirely* appropriate that executive pay should continue to balloon and have no relevance to the success of the company! Oh, wait.

I don’t believe we should *dictate* to firms how much they can pay their executives. However, I also feel it’s entirely appropriate for the pay multiples to be reflected in an element of corporation tax.

“In practical terms, this means removing the lower paid from tax altogether”

I completely disagree. You’re using special mechanisms and allowances, which are often themselves regressive for middle-earners as opposed to the rich. The answer is to pay poorer people such that you do not, for the vast majority, *need* to subsidise them from the state!

Moreover, means testing for “universal” benefits should be abolished and those benefits given to all. With tax rates set such that they are recouped from richer people. THAT saves money, and avoids intrusive state data gathering…

“I completely disagree. You’re using special mechanisms and allowances, which are often themselves regressive for middle-earners as opposed to the rich.”

I think you’ve got the wrong end of the stick there Leon. Theophrastus is advocating getting rid of the “special mechanisms and allowances” so that we no longer have this weird and wasteful merry-go-round where people on the minimum wage are taxed and then reimbursed.

Re: “I don’t believe we should *dictate* to firms how much they can pay their executives.” It does sound very much like you do believe that you should dictate this. That you don’t directly have a gun to their head but instead game the system against them doesn’t absolve you of being dictatorial.

I disagree. There’s a massive difference between “you may not”, and “you may but your tax will go up”. Heck, I support different levels of corporate tax based on the structure of the corporation… (lower for cooperatives/worker-owned trusts, for instance)

And you take the poor out of tax using those very same special mechanisms. You create exceptions and bubbles in the system which usually end up hammering the middle class. Better to pay a living wage in the first place!

So you support progressive taxation and yet you think that the poorest earners should be taxed. They should then have a chunk of their money wasted and some of the remainder handed back to them. You don’t consider this to be a “special mechanism” but you would view a raised threshold that took the poorest out of tax as one.

Is that right? I have to ask because I think that’s what you’re saying, and if so, it is utterly barking.

As to the other, it rather depends on the rates etc., you sounded keen to take pounds of flesh from any firm that is, in your view, too unequal. Without knowing your proposed details I cannot say for certain but it appears likely that your plan would be highly coercive and therefore dictatorial. Also you might want to justify taxing one corporate structure differently to another, just because you happen to like Co-ops isn’t sufficient.

1) Ending free migration: Through membership of the EU, you get a plethora of low skilled migrants driving wages and opportunities down for the working class.

2) Grammar Schools: Have selective secondary schools with multiple opportunities to gain entry so the intelligent from the poorer groups have access to decent schools with an atmosphere of scholarship.

Remember the Labour Party was set up for the employees of the (for wont of a better term) working class, not the loose liberals (many from non-Labour backgrounds/private or Grammar School education which have polluted the political establishment in all 3 parties).

1945 was a tough time to institute social democracy – but if the political will is there . . .

1) Ending free/easy migration: Through membership of the EU, you get a plethora of low skilled migrants driving wages and opportunities down for the working class.

2) Grammar Schools: Have selective secondary schools with multiple opportunities to gain entry so the most intelligent from the poorer groups have access to decent schools with an atmosphere of scholarship.

Remember the Labour Party was set up for the employees of the (for wont of a better term) working class, not the loose liberals (many from non-Labour backgrounds/private or Grammar School education which have polluted the political establishment in all 3 parties).

[13] Quite. And one thing the British working class has no desire for whatsoever is co-operatives. Both in the 1970s and more recently Labour governments have been willing to give them a fair wind but the British Working Man and Woman have conclusively demonstrated that they don’t want the responsibility co-operating entails. Which being so, there is almost a case for saying that the BWM&W deserve whatever Tories and capitalist crises throw at them…

theophrastus:

The idea of “equality” is no more an “inhuman conceptual import from mathematics” than “economic growth” is.

I agree about removing the lowest paid from tax – however, your idea of “levelling up” seems highly unlikely in an environment where the bulk of the proceeds of any economic growth accrue to the already wealthy. Economic growth will not cause “levelling up” in the absence of some sort of intervention to prevent high incomes spiralling out of control.

Plus, a high level of inequality *does* have downsides no matter whether the average (or minimum) wealth level is rising. To take just one example, in the housing market the presence of very wealthy people actively causes difficulties for everyone else, because in a country with a finite amount of available building land they tend to (A) use their wealth to occupy hugely more housing per head, reducing the space available for everyone else and (B) invest in housing they don’t live in, pushing up prices and forcing a greater proportion of people to rent. I don’t blame them for doing either – it’s a rational way to invest excess wealth – but they illustrate that inequality in itself can have negative effects.

Perhaps more perniciously, extreme inequality – again regardless of the average or minimum – causes the rich to be able to buy the political system wholesale by monopolising campaign funding (unless political parties were state-funded, which would be very unpopular to say the least).

Leon Wolfson @10: Agree entirely, we should have progressive taxation in the business sector; right now thanks to tax avoidance we have the reverse, where the bigger the company the less it pays.

Thats a mess Chris

16. jungle

Economic growth will not cause “levelling up” in the absence of some sort of intervention to prevent high incomes spiralling out of control.

Of course it will. It not only will, it does. Regulation will not help. If anything is certain in economics it is that trickle down works.

Plus, a high level of inequality *does* have downsides no matter whether the average (or minimum) wealth level is rising. To take just one example, in the housing market the presence of very wealthy people actively causes difficulties for everyone else, because in a country with a finite amount of available building land they tend to (A) use their wealth to occupy hugely more housing per head, reducing the space available for everyone else and (B) invest in housing they don’t live in, pushing up prices and forcing a greater proportion of people to rent. I don’t blame them for doing either – it’s a rational way to invest excess wealth – but they illustrate that inequality in itself can have negative effects.

Does Britain have a finite amount of building land? Yes in the narrow sense of Britain being limited by the laws of physics, but no in the sense we are not even remotely near that point now. What you mean is that land and housing styles are restricted by laws and regulations. They push up prices? So what? This is a good thing as it means more houses will be built. Except they won’t, will they? Because of the Green Belt – yes, land within the Green Belt in finite. Because of planning regulations which are slow when they do not prohibit and thus make construction uneconomic. The problem is not rich people. The problem is regulation. This is not indicative of rich people being a problem but of government intervention making a situation worse. Loosen those laws and there will be a burst of construction, housing prices will drop and everyone will be happy.

Perhaps more perniciously, extreme inequality – again regardless of the average or minimum – causes the rich to be able to buy the political system wholesale by monopolising campaign funding (unless political parties were state-funded, which would be very unpopular to say the least).

Although there is no example of this in the history of the human race. There are plenty of examples of governments using this or similar threats to vote themselves the power to do something about it – which means in practice moving most of the country’s wealth to their Swiss bank accounts.

Agree entirely, we should have progressive taxation in the business sector; right now thanks to tax avoidance we have the reverse, where the bigger the company the less it pays.

This is nonsense too. British companies pay what they owe. No more and no less. There is no such rule. The bigger the company, the more they pay.

@18 – “If anything is certain in economics it is that trickle down works.”

Troll. Plain Troll.

Mods, please deal with this, it’s getting out of hand.

19. Leon Wolfson

Troll. Plain Troll.

I am sorry you don’t like it Leon but that does not make it untrue. It is observable – Hong Kong is hardly full of poor people these days. It is theoretically hard to argue with – people with money have to spend it or invest it, both of which cause a rise in income over the long and medium terms. It is just a fact.

Mods, please deal with this, it’s getting out of hand.

Leon, given the recent panning you have got from people on the sane Left here at LC, you really think that calling for bans is sensible?

@18: “The problem is regulation”

Nonsense. The prospect of completely unregulated development in a country with Britain’s high population density is a nightmare. There are issues about new developments in flood planes and about the downstream infrastructure costs which new developments impose – the extra utility and transport services required, and the extra school places and healthcare facilities.

NIMBY – Not in my back yard – is often a huge constraint on infill developments on “brownfield” sites even though the additional infrastructure costs in those cases are often relatively low – depending on how much spare capacity there is in existing infrastructure provision.

The Conservatives in the London borough where I live campaigned at the general election last year against infill developments. The really believed they had won their cause when the coalition government announced last December that henceforth “localism” would prevail:

“The Bill will devolve greater powers to councils and neighbourhoods and give local communities more control over housing and planning decisions.”
http://services.parliament.uk/bills/2010-11/localism.html

They were deceived. The new land use planning principle of: “a presumption in favour of sustainable development” won’t abolish the real issues about the risks of building in flood planes and the additional infrastructure costs that new developments impose.

21. Bob B

Nonsense. The prospect of completely unregulated development in a country with Britain’s high population density is a nightmare.

That is both a strawman and irrelevant. You are changing the subject. First of all, I did not say we needed a completely unregulated system – although it would rapidly bring down housing prices. It is just that the main cause of high house prices and low house numbers is regulation. This is actually provable. Is it not really something we need to discuss. But if it was a nightmare, well, perhaps so. But that is not the issue is it?

There are issues about new developments in flood planes and about the downstream infrastructure costs which new developments impose – the extra utility and transport services required, and the extra school places and healthcare facilities.

You mean the fact that the government has mismanaged everything else as well is a good reason for them to go on mismanaging housing regulation? There is an issue with flood plains. The other costs are trivial and any sensible and competent local government ought to be able to cope with no problems at all.

NIMBY – Not in my back yard – is often a huge constraint on infill developments on “brownfield” sites even though the additional infrastructure costs in those cases are often relatively low – depending on how much spare capacity there is in existing infrastructure provision.

NIMBYs would be irrelevant if they did not have the massive array of baroque and Byzantine regulations to back up their prejudices. As I said. You seem to be making my case for me.

[18 etc] I think SMFS is wonderful and Sunny should give him a column every now and then – say at the beginning of April each year.

Hong Kong is hardly full of poor people these days No, but other parts of China are. HK is not an economic system entire unto itself. Trickle-down makes the rich a lot richer and the poor ever so slightly less poor – it increases relative poverty. This may or may not be a cause for concern. Not, if you’re SMFS who worships money and thinks anyone who doesn’t is stupid, vicious or both.

British companies pay what they owe. No more and no less Either tax avoidance generally is a figment of nasty lefties’ diseased imaginations, or else British companies practice a higher morality than foreign companies and British individuals. Or both.

I did not say we needed a completely unregulated system – although it would rapidly bring down housing prices So why didn’t you say it? Because property fetishism trumps market fetishism? Why was Ricardo wrong to regard land as a factor of production on its own – why are you right to follow the neoclassicals in subsuming it within capital? “Because it makes the maths easier” is not a good answer, incidentally.

The main cause of high house prices and low house numbers is regulation. This is actually provable Only – in principle – after you have answered the previous question and maybe not even then.

But don’t bother, SMFS. The truth is you think the world would be a better place if everyone who is even the tiniest bit sceptical of market forces (other than when they get across the great Baal of property fetishism) took a rope into the nearest convenient forest and hanged themselves from a suitable branch, n’est-ce pas?

@22: “NIMBYs would be irrelevant if they did not have the massive array of baroque and Byzantine regulations to back up their prejudices. As I said. You seem to be making my case for me.”

Local Conservatives in the London borough where I live have persisted in campaigning against infill development – and especially against those house owners who have been selling off parts of long back gardens for infill housing developments. Try this news report from June last year, shortly following the formation of the coalition government:

“The government is announcing new measures to stop the practice of ‘garden grabbing’ which has seen swathes of urban green space swallowed up by new housing developments.”
http://www.guardian.co.uk/environment/cif-green/2010/jun/09/garden-grabbing-housing-stopped

Our local Conservatives and LibDems really believed that the coalition government had answered their prayers with the new localism bill, announced by Chum Pickles last December, but they were sorely deceived. The coalition government speaks with forked tongue.

The important issue is that unregulated development – whatever that does to the countryside – imposes downstream social costs as the result of building in flood planes and from the need to provide utility and transport services, and extra school and healthcare facilities. Who is to pay for all that and how? Those pushing for deregulation of development are only telling part of the story.

Either tax avoidance generally is a figment of nasty lefties’ diseased imaginations, or else British companies practice a higher morality than foreign companies and British individuals.

Tax avoidance is, definitionally, strict compliance with tax law. We’ve gone through this an awful lot of times. Companies that practice tax avoidance are paying what they legally owe – they’re just not paying more than that.

23. Mike Killingworth

Hong Kong is hardly full of poor people these days No, but other parts of China are.

That would be …. the part with socialism, right? You know, thirty years of Marxist-Leninist government that left them as poor in 1980 as they were in 1950, followed by thirty years of getting out of their way which has lead to a massive increase in wealth? That part of China you know?

HK is not an economic system entire unto itself. Trickle-down makes the rich a lot richer and the poor ever so slightly less poor – it increases relative poverty. This may or may not be a cause for concern. Not, if you’re SMFS who worships money and thinks anyone who doesn’t is stupid, vicious or both.

It is sad you need to resort to childish lies to buttress what is, I admit, a p!ss poor case, but you ought to be able to do better. Trickle-down can do a lot of things. But as a general rule, the rich will only get richer if the economy is changing, and more usually innovating, faster than it is growing. The poor of Hong Kong or Singapore are not slightly less poor. They are not poor. Relative poverty is a useless concept – and worse. It is not worth considering.

Either tax avoidance generally is a figment of nasty lefties’ diseased imaginations

Pretty much. Look at what Richard Murphy actually bases his claims on.

But don’t bother, SMFS.

I won’t. You can waste your own time.

24. Bob B

The important issue is that unregulated development – whatever that does to the countryside – imposes downstream social costs as the result of building in flood planes and from the need to provide utility and transport services, and extra school and healthcare facilities. Who is to pay for all that and how? Those pushing for deregulation of development are only telling part of the story.

Well building in flood plains mainly affects those living on the flood plain. You keep talking about some other issue. Yes, you are right. But the value of the housing grossly out weighs the costs of providing utilities and transport. It is just not an issue.

Chris – are you advocating a public sector wide Lean production review and extenstive business process re-engineering – Japanese style?

If so, are you content with the implication that large numbers public sector workers will be made redundant as a result?

I’m a fan of HK but, like Singapore, it’s a city state with a high population density and a long, long trading history with a moderately laissez-faire market regime. But note that the location and scale of land development in HK was and is tightly controlled – and was controlled long before it reverted back to Chinese sovereignty in 1997. HK cannot be upheld as an inspiring example of deregulated land use.

You know whats interesting? Times of depression tend to be the ones where the most innovation occurs, in the Great Depression the number of R & D groups grew by 300%, as for the funding, well there is plenty of money, its just not moving, the problem is liquidity as people are putting their money in safe bets like Gold or long yield treasury bonds (that’s why government bond interest rates are at such a low right now).

For me its not about removing red tape or the need to find funding at all, its about making it move (and its not by coaxing the bankers into doing it for us).

A very good way it was done in the 1950′s was in the Netherlands where the government basically controlled their financial institutions, they used that power to funnel private and government investment into their countries various business’s based on an industrial plan that yielded the second highest growth figures in Europe (Germany was the highest but it had a lot of extenuating factors)

Being that we more or less own our financial institutions why don’t we just go for an industrial plan backed by private finances that we can more or less order to do what we want?

As for Pay and workplace democracy i am all for it, a lot of recent studies carried out by the Federal reserve have found out people in positions that demand active thinking incur a disincentive from too much work pay, only mechanical skills at the bottom of the work ladder experience a positive correlation between pay and work eff. What really makes people work is a sense of autonomy and purpose.

@29 “a lot of recent studies carried out by the Federal reserve have found out people in positions that demand active thinking incur a disincentive from too much work pay”

Please cite the papers, this seems very unlikely indeed.

“A very good way it was done in the 1950?s was in the Netherlands where the government basically controlled their financial institutions, they used that power to funnel private and government investment into their countries various business’s based on an industrial plan that yielded the second highest growth figures in Europe (Germany was the highest but it had a lot of extenuating factors)”

Are you certain that there were no extenuating factors in the Netherlands? The vast majority of the time, government picking winners is an absolute disaster. We can live without another British Leyland.

It’s a city state with a high population density and a long, long trading history.

Not really. Hong Kong was only founded as a trading station in the mid 19th century, it was little more than a fishing village before the Brits moved in.

“Hong Kong was only founded as a trading station in the mid 19th century, it was little more than a fishing village before the Brits moved in.”

That is before the Brits moved into HK with right of lucrative access to the China’s internal market to sell opium, which had been gained through winning the two Opium Wars.

But I was speaking of how HK had developed after, say, 1960 when it did become an increasingly prosperous and vibrant city state on the basis of a moderate laissez-faire regime – which didn’t extent to land use. Predictably, laissez-faire enthusiasts hardly ever mention the challenging downside problems of pollution in HK as the result of laissez-faire:

Air pollution levels in Hong Kong have reached a record high, prompting government warnings to people to avoid going out. [March 2010]
http://news.bbc.co.uk/1/hi/8579495.stm

Many years back, The Economist had a fascinating article on applying the widely recommended “polluter pays principle” regarding that block of tenanted factory units near what was Kai Tak – airport, which has long since been demolished.

Understandably, the tenants of said factory units felt free to dispose of a wide variety of liquid waste from their respective industrial processes down the drains, leading to unpredictable results in the sewers serving the block as various chemicals interacted.

The challenging policy issue is: How is the polluter pays principle to be applied in such a context? In that context, strict regulation seemed to be the only way of safeguarding against potentially disastrous outcomes. The polluter pays principle doesn’t work.