The economics of Bob Crow

Bob Crow, 1961 – 2014

The reactions to the sudden death of RMT leader Bob Crow from friends and foes alike were unanimous about one thing; he was good for his members. Indeed, most of those who ride London’s underground can only dream of the tube drivers’ basic salary of £44,000 and 52 days holiday a year. But how much of this was due to Bob Crow?

A private enterprise will not pay a worker more than it thinks that worker will add to turnover, if it did it would be losing money on the employment. The private sector enterprise has only three sources of funding; debt (bank loans, corporate bond issues), equity (selling shares), and income. If it loses money and exhausts these sources by paying workers above a level commensurate with their productivity it will go bust. No matter how determined or skilful the union representative, the workers’ marginal productivity sets a cap on their wages.

But the situation is different for public or government backed enterprises, such as those Bob Crow faced across the negotiating table. They have a fourth source of funding; the taxpayer. In these circumstances unions can push pay claims ever higher. If a union seeks to push wages above a level commensurate with worker productivity and the public enterprise exhausts the funds it can raise from debt, equity, or income, it doesn’t go out of business; it receives taxpayer support. For the public enterprise, unlike its private counterpart, on the other side of the bottom line isn’t bankruptcy, it’s a bailout funded by taxpayers. This is why trade unions continue to thrive in the public sector but are largely absent in the private.

Indeed, despite their extravagant remuneration the productivity of tube drivers, what they add to output, is actually rather small. The big value adding inputs into the production of tube travel are mostly capital inputs; boring machines, trains, track, IT systems, ticket machines etc. It is quite possible, in fact, for tube trains to run without drivers at all. Indeed, as far back as the 1960s the Victoria line could have been built to run without drivers. It was only the insistence of trade unions that saw a role created for drivers to sit in the cab and press a couple of buttons – drivers who could become their paid up members. To avoid union headaches Margaret Thatcher built the Docklands Light Railway to run without drivers in the 1980s, which it has ever since with a safety record comparable to manned tube lines. If a factor of production, in this case labour, is being applied to production needlessly it is wasteful and unproductive. It should not be receiving high wages.

If Bob Crow was aware of the economic possibilities for his members offered by recourse to taxpayer’s money he was also acutely aware of the politics of the situation. He knew, as a former RMT employee put it to me, that “Boris wants to get re-elected as mayor and/or become PM. If he screws up the tube his chances of either are lessened. He has to balance the damage caused by, on the one hand ‘giving in to the unions’ and, on the other, chaos on the underground. The fact that he has to balance those factors makes the union’s position a strong one.”

Such was Bob Crow’s terrain and, like a Wellington, he understood it well. But it did not make him a labour relations genius any more than the Mediterranean coast and Qattara Depression made Montgomery a military genius. His membership prospered not so much because of his skills as a leader, but because of their status as public or semi-public employees whose pay claims were underwritten by the taxpayer. Bob Crow played his hand well but he had a strong hand to play. Those hoping for a more emollient approach from his successor ought to remember that they will inherit that hand.

French lessons for Miliband and Balls

“Take it from me mate, don’t…”

“Bliss was it in that dawn to be alive” wrote Wordsworth in middle age, reflecting on the euphoria his younger self felt at the French Revolution. Ed Miliband felt a similar sense of elation when François Hollande was elected President of France in May 2012 albeit expressed in slightly more prosaic terms.

Mr Miliband said that President Hollande’s campaign “has shown that the centre-left can offer hope and win elections with a vision of a better, more equal and just world”. Mr Miliband declared “This new leadership is sorely needed as Europe seeks to escape from austerity” and assured us that “I know from our conversations in London earlier this year and from [Mr Hollande’s] victory speech tonight of his determination to help create a Europe of growth and jobs”

Alas, since he spoke of President Hollande’s “determination to help create a Europe of growth and jobs” French unemployment has risen from 10.2% to 10.9% and Britain’s has fallen from 8% to 7.1%. The French economy has averaged growth of 0.13% per year while Britain’s has averaged 0.16% a year.

Mr Hollande’s strategy was to tax and spend France back to prosperity. A raft of new taxes, most notoriously a 75% top rate of income tax, would pay for the hiring of 60,000 new teachers, the creation of 150,000 subsidised jobs, and a reduction in the retirement age. This strategy has failed. Like Louis XIV’s revocation of the Edict of Nantes in 1685 which flooded east London with entrepreneurial Huguenots, Mr Hollande has simply driven the French men and women who can afford to leave out of the country. Those who can’t are left stuck with unemployment and stagnation, Mr Miliband’s “better, more equal and just world”.

Yet, just as Mr Hollande abandons this strategy in favour of a €30 billion payroll tax cut and €50 billion worth of spending cuts in the next two years, ‘austerity’ if you like, Ed Miliband’s Labour Party are committing themselves to it afresh. Last Friday Shadow Chancellor Ed Balls made one of his increasingly rare appearances and committed a post-2015 Labour government to eliminating the deficit by 2020. The tool with which he intends to achieve this is a reintroduced 50 per cent top rate of income tax.

Mr Balls apparently needs to learn the lesson so painfully learned by France; that as per the Laffer Curve, beyond a certain level increasing tax rates ≠ increasing tax revenues. Indeed, in the last two years of the 50 per cent rate, 2011/2012 and 2012/2013, top rate taxpayers paid £41.3bn and £41.6bn in tax respectively. Under the 45 per cent rate that amount has risen to £49.36bn. Ed Balls was immediately in the unusual position of having to explain how he would fund a tax rise.

This presents the Conservatives with an opportunity. David Cameron and George Osborne should be pointing across the Channel and saying that Hollande’s abandoned France of high taxes, high government spending, rising unemployment, and falling growth, is Miliband’s Britain.

Ultimately the high ideals of the French Revolution were drowned in the blood of the Terror, replaced by the dictatorship of Napoleon, and a disillusioned Wordsworth retired to the Lake District and Romantic poetry. What will it take to educate Mr Miliband?

David ‘Whoops!’ Blanchflower strikes again

Back to the wall again

You…hang on, what’s that noise?

Never mind.

You may have seen that your humble narrator has had one or two exchanges in the past with arch-Keynesian, wannabe Krugman, and Columbo dress-a-like David Blanchflower. They centered on his now infamous 2009 prediction that

“If spending cuts are made too early and the monetary and fiscal stimuli are withdrawn, unemployment could easily reach four million… If large numbers of public sector workers, perhaps as many as a million, are made redundant and there are substantial cuts in public spending in 2010, as proposed by some in the Conservative Party, five million unemployed or more is not inconceivable.”

Blanchflower, being rather a fragile sort, blocked me after our latest discussion of this (I’m in good company there) but others have continued to hold him to account and Blanchflower has continued to defend it.

In the course of defence just 11 days ago Blanchflower tweeted the following

But hold on, what’s this? It’s the Office of National Statistics saying that, you guessed it, that double dip never was. Blanchflower’s thumb will be working overtime trying to explain away this one.

Oh, that sound, I’ve figured out what it is; it’s Blanchflower’s credibility disappearing down the toilet.

EDIT

Also embarrassing for such a Labour partisan as Blanchflower is the fact that it now appears that the economy did much worse under Labour, slumping much further in 2009 and recovering less strongly before the election in May 2010.

Source: Daily Mail

Ed Miliband on banking

Speaks for itself

It’s a funny thing is politics. Someone demonstrates that they have the skill set required to win an election and, in doing so, they assume responsibilities for which they have demonstrated no discernibly appropriate skill set at all. It might be fascinating to hear Alex Ferguson give a lecture on football tactics, but I’d skip his thoughts on string theory and quantum mechanics.

Take Ed Miliband. The son of a politician, the brother of another politician, he has spent his entire life in politics. What is there is this background which gives him any basis upon which to comment on banking, let alone very much else?

Yet that is what he did last July when he gave a speech at the Co-op bank saying 

“It is a pleasure to be here at the Co-op. You have always understood that ethics of responsibility, co-operation and stewardship must be at the heart of what you do.

That’s one of the reasons why the Co-Op bank has in the last week seen a 25 percent rise in applications for accounts.

It was your values that I was talking about last September when I said to the Labour Party conference that Britain needed a different kind of economy.

An economy based not on the short-term, fast buck, take what you can. But on long-termism, patient investment, and responsibility shared by all.

Not an economy based on predatory behaviour. But productive behaviour.

Not an economy that works just for a powerful, privileged few But an economy that works for all working people”

And now, a little less than a year later, the Co-op bank is bust.

We, perhaps, shouldn’t be too harsh on young Miliband. After all, like much of our political class, he has very little idea of how things work beyond politics so it shouldn’t come as much of a surprise when he talks such obvious rubbish about non-political topics.

But we ought to ask ourselves a question; why do we give politicians so much power over things they don’t understand in the slightest?

Hayek on the euro

Tru dat

I’ve just finished a book titled Hayek, Currency Competition and European Monetary Union, the text of the 1999 Hayek Memorial Lecture given at the Institute of Economic Affairs by European Central Bank bod Otmar Issing.

Issing quotes Hayek’s Denationalisation of Money from 1978 saying

“though I strongly sympathise with the desire to complete the economic unification of Western Europe by completely freeing the flow of money between them, I have grave doubts about doing so by creating a new European currency managed by any sort of supranational authority. Quite apart from the extreme unlikelihood that the member countries would agree on the policy to be pursued in practice by a common monetary authority (and the practical inevitability of some countries getting a worse currency than they have now), it seems highly unlikely that it would be better administered than the present national currencies.”

Issing spends his lecture arguing that Hayek was wrong.

Otmar 0 – 1 Hayek

I hate to say it but…

This last week has seen articles from Roger Bootle and Allister Heath warning of the consequences of a bursting in the “bond bubble”. Now we have the Bank of England’s Andrew Haldane saying

“If I were to single out what for me would be the biggest risk to global financial stability right now, it would be a disorderly reversion in government bond yields globally.

We’ve seen shades of that over the last two to three weeks.

We have intentionally blown the biggest government bond bubble in history. We’ve been vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted. That’s a risk we as FPC need to be very vigilant to.”

As I asked on The Commentator last August, Is the bond bubble the biggest yet?

An exchange with Glenn Close, sorry, some bloke

“You never replied to my post, or my tweets…”

One of the things they always say about economics is that it’s about allocating scarce resources. One of those resources is time. I’m currently in the middle of exams for my Masters and three months off my wedding so when it comes to time I’ve got a fair bit of economising to do.

Not everyone is in that situation. Some, quite the opposite to me, have an abundance of time with a relative lack of things to fill it with. One of those people is Joe Sucksmith.

On May 28th The Commentator published an article of mine titled Deficit and debt: Does anyone know the difference? Two days later I had a reply to the posting of the article on this blog (which you can find below the article) from Mr Sucksmith. He wrote “Monetary sovereigns retain control over interest rates, so there is no risk of suffering penal rates due to an increase in the debt. Japan is instructive in this regard” I pointed out that, at that time, Japan was experiencing rather a nasty (an unexpected by the Bank of Japan) spike in bond yields. Mr Sucksmith’s example, in other words, was proving him wrong as he typed.

The exchange continued, as you’ll see, with Mr Sucksmith saying sillier and sillier things, a favourite being that, despite Japan having increased it’s debt to GDP ratio from 50% to 230% its stimulus spending hadn’t been big enough. In the end Mr Sucksmith left a post so full of errors and confusion (the main one being that he assumes money demand to be infinite) that the time it would take to refute it was too much time for me to be prepared to divert from either my revision or wedding preparations. So I left the comment to sit before approval.

Since then, while I have been busy with other things, Mr Sucksmith meanwhile has tweeted me demanding a reply and now devoted a whole blog post (and a further tweet about that blog post) to the exchange. A quick look at Mr Sucksmith’s blog reveals it to be be full of such exchanges (Lord Carlile, Student Rights, and Dominic Casciani of the BBC also being on the receiving end), indeed, we have here nothing less than Disgusted of Gloucestershire.

Me? I have one more exam next week and then a wedding in a different continent to get on sorting so I’m afraid I will continue to economise my time with Mr Sucksmith. Maybe I’ll return to it when I have more time. In the meantime I hope Joe gets out more.

Is it because I isn’t black? Yes, actually

To the utter ambivalence of most University of London students there are some election going on for their usless union at the moment. But hold on, what’s this?

Apparently only black students (or those who ‘self define’ as black) are allowed to vote for one of the positions. Isn’t that a bit, well, racist?

Oh well, as you’ll see, I voted. Not that anyone will care, ULU is about to be put out of our apathy.

Good riddance.

Phelan’s First Law of Public Finance

Each and every copper coin of government spending is absolutely and utterly indispensable to the continued existence of the nation – according to the people or persons it gets spent on

Norman Tebbit’s cricket test

Not cricket

You may or may not remember Norman Tebbit’s old cricket test. Back in 1990 Tebbit told the Los Angeles Times “A large proportion of Britain’s Asian population fail to pass the cricket test. Which side do they cheer for? It’s an interesting test. Are you still harking back to where you came from or where you are?”

Predictably this caused outrage. Then Lib Dem leader Paddy Pantsdown condemned the “outrageous and damaging remarks” and Labour MP Jeff Rooker called for Tebbit to be prosecuted for inciting racial hatred, “(Tebbit) is a clever politician using soft language about cricket” Rooker claimed.

Yesterday a British soldier was literally butchered in the streets of London in broad daylight. The man who probably did it, who reports suggest was brought up in Britain, was filmed, still covered in the victims blood, saying

“The only reason we have killed this man today is because Muslims are dying daily by British soldiers.

“And this British soldier is one. It is an eye for an eye and a tooth for a tooth.

“By Allah, we swear by the almighty Allah we will never stop fighting you until you leave us alone.

“So what if we want to live by the Sharia in Muslim lands? Why does that mean you must follow us and chase us and call us extremists and kill us?

“Rather you lot are extreme. You are the ones that when you drop a bomb you think it hits one person?

“Or rather your bomb wipes out a whole family?

“This is the reality. By Allah if I saw your mother today with a buggy I would help her up the stairs. This is my nature…

“Through many passages in the (Arabic) Koran we must fight them as they fight us.

“An eye for an eye, a tooth for a tooth.

“I apologise that women had to witness this today but in our lands women have to see the same.

“You people will never be safe. Remove your governments, they don’t care about you.

“You think David Cameron is going to get caught in the street when we start busting our guns?

“You think politicians are going to die?

“No, it’s going to be the average guy, like you and your children.

“So get rid of them. Tell them to bring our troops back so can all live in peace.

“So leave our lands and we can all live in peace.

“That’s all I have to say.

“Allah’s peace and blessings be upon you.”

The chap wasn’t Asian but it certainly seems as though he considered himself ‘other’ than British. Seems old Norm might not have been quite so crackers after all.