Don’t forget the Wars Mr Davis – both of them

Published on December 4, 2017

I’ve referred previously to Brendan Simms’ History of Europe when trying to understand Brexit: the UK has always been on the edge of Europe and hasn’t been In or Out since sea travel enabled the creation of Empires from 1492 onwards. But our position isn’t the crux of his thesis, which looks at the evolution of Germany from a collection of states in the Holy Roman Empire to a unified force by 1871, and the reaction of other Powers to its coalescence. The clearest reaction was in the Treaty of Versailles, signed in 1919, which removed part of Germany’s productive capacity (the Saarland) while at the same time demanding it pay reparations for the cost of the war amounting to £284bn in to-day’s money.

The treaty started out with good intent, directed by Woodrow Wilson and informed by experts who aimed for free trade, national self-determination and a Parliament in the form of the League of Nations. But national self-interest altered it substantially, and chief among those was France. As John Maynard Keynes, in The Economic Consequences of the Peace put it:

“So far as possible, therefore, it was the policy of France to set the clock back and undo what, since 1870, the progress of Germany had accomplished. By loss of territory and other measures her population was to be curtailed; but chiefly the economic system, upon which she depended for her new strength, the vast fabric built upon iron, coal, and transport must be destroyed.”

We all know how the sense of injustice engendered by this agreement was used by Hitler, even after it had been suspended. I wonder if history is, at least in part, about to repeat itself?

We don’t know the details, nor have the principles been set out yet,of the amount that we will pay the EU when we leave. But what must be achieved is fairness. Or else we may be reading something like this (in “A History of the World Trade Wars?):

“So far as possible, therefore, it was the policy of France to set the clock back and undo what, since 1973, the progress of Britain had accomplished. By loss of membership and other measures her reputation as a global power was to be curtailed; but chiefly the economic system, upon which she depended for her renewed strength, the vast fabric built upon financial services, media, technology and innovation must be destroyed.”

Seems clear from Blighty, but the problem is that Georges Clemenceau lost power for failing to be strong enough in these negotiations. As we enter Advent I wonder if Germany, or a coalition of smaller powers, will follow the guiding light to the stable of fairness and witness the nativity of a hopeful new world order?

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Dear Chancellor

Published on November 21, 2017

Dear Chancellor,

I know that you’re in a difficult position, one in which many FDs would empathise: borrowing is high; problems, especially social care/health and housing, need solving; and tax rises (cost cutting to an FD) aren’t popular.

If you think that you can “kick the can down the road” by borrowing more, then good luck. Markets will correct in the next year or two and conventional economics dictate that interest rates should fall. Unless they have risen by then this won’t be a cure, as Japan’s experience demonstrates. And if they rise the cost to the Exchequer will start to pinch other budgets.

If you think that the Government’s fortunes will be decided by Brexit and nothing can be done until it’s clear, then I suggest you hand over the reins to someone with more vision.

If, as I hope, you espouse the virtues of every politician – to want to make a positive difference – then would you consider the following changes to Council tax and Residential housing gains?

At present there is a 25% reduction in Council Tax for people who either live on their own or live in a house where they are the only adult. On the face of it, it seems fair that people who live alone are helped. But with an acute housing shortage is it still a good idea to incentivise people to occupy houses that are too big for them. I’m told that 30% of houses are in this category so if the subsidy was removed completely then Councils would benefit by 10% (30% of a 33% increase), which may not be enough to fund an increase in social care but it would be a significant contribution. People could choose to continue to enjoy single occupancy but would be paying for the privilege. Some would choose to downsize, thereby not expanding the housing stock but expanding its occupancy rate. The exemption for those with children would remain and the exemption could be retained for lower bands.

Or how about this? Residential housing gains have been considered sacrosanct but I have mentioned it in my blogs; G.O.D. ( Gus O’Donnell) mentioned it as a market distortion last year, and now the newspapers refer to it – “economists say that this exemption isn’t good for the economy” since it incentivises investment in the least productive assets. So how about this as a tentative first step? Gains are calculated from a base day (say 1st January 2018) and divided by at least two. This gain is allocated to each owner of the house. So if there are the expected two owners or more the tax is zero. But if there’s only one, then half the gain is taxable. Such gains would only accrue from the time that the house became solely occupied and there are no other adults: so children could stay in their home and share the gain when they turn 18. Those that choose to stay in large houses whose increase in value will help with their care costs will pay some tax to assist those that don’t or can’t.

I’m sure that there will be some howls of protest at the prospect of paying more tax. But it seems to me that these changes would only tax the luxury of living in a house larger than you need, which is essentially investing. My second suggestion would also remove the anomaly that two unmarried people “living apart together” can make capital gains on two houses whereas two married people living together have to pay an excess on a second home.

What say you Philip? Are you following your leader’s policy of helping the J.A.M.s or will you stick to the jammy ones?

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N.O.A.H. 2.0?

Published on November 10, 2017

Theresa May seems to me to be a modern day Noah. Examine the parallels: after 10 generations (43 years), before the citizens had had a chance to work out how to make the world (EU) work properly God (the electorate) decided to press Control Alt Delete and inundated the world with a storm. The biblical version is somewhat larger than Brexit’s teacup sized version but you get my drift?

And NOAH seems an apposite name because where righteous leaders called to rescue flocks from disaster are concerned there is No Obvious Alternative Here. Brexit is the biggest logistical exercise outside war – as complex now as building an ark was then – and a bit of a thankless task. “You only saved us. I wanted to go to live on the slopes of Mt Ararat (sunny parts across The Channel) not sit here watching the storm”.

But there the parallel ends. Noah navigated through the storm and came safely to rest on the aforementioned Mount. I fear that the eventual resting place of HMS Brexit will be less hospitable, albeit perfectly habitable. Examining the debris of our voyage to the brave new world many, most of us, probably all, will find that there is something to complain about in the eventual deal. I would be amazed if there wasn’t, because tough negotiations (and while we still know little of the substance of Brexit it’s certainly that) end up with the most amount of pain being borne by both parties that it is possible for them to bear.

So while Noah lived for another 350 years, I think that Theresa May’s fate will be tied to a deal which has something for everyone and something for everyone to hate. It’s said that our negative emotions are 9 times more powerful than positive so it’s 9-1 on that she will depart soon after. And it’s at least 9-1 against anyone stepping up to the plate before then because

  1. I believe that all the candidates have made this assessment and
  2. There is no obvious alternative. In 1940 both Churchill and Lord Halifax were realistic contenders for the challenges of PM. Right now I think we are faced with fantasists (Boris, JC) and pragmatists: there’s plenty of talk about practicalities and budgeting but I haven’t heard a cogent vision of a way forward since, er Blair?!

Perhaps we need a higher power to anoint a charismatic leader (Miliband snr? Clegg?), who can build his or her own ark (political party) which we could hop over to and sail away? But right now there is





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Funny Money?

Published on October 26, 2017

While the Tory party conference was, ahem, in full flow, I heard a debate among political commentators observing the current political landscape. Their conclusion was that fewer and fewer people don’t feel that they have a stake in the capitalist system. This disillusionment is driving support to the socialist dream of Jeremy Corbyn in which wealth is distributed fairly (from the few to the many). Those appearing most attracted to this vision are young people who haven’t experienced the turmoil of the 1970s. We were youths once; we knew it all back then and didn’t need history as a guide. I always saw Robin Hood’s antics as necessitated more by the absence of Good King Richard than Bad King John. Only latterly did I form the view that there have always been bad people in some positions of power for a long time. But it also doesn’t follow that everyone in power is a bad person –as we all learned at school, the converse is not true.

Can we acknowledge that the people at the top don’t pass a goodness test to get there? Rather they are the ones others look toward. It’s not unusual for difficult meetings in corporations to end with no conclusion other than “Let’s see what Steve/Bill/Larry says” and the arrival of the CEO produces a resolution.

Some leaders are there because they had the idea. Without the determination of Edison, Dyson and Ellison we wouldn’t have the items we can’t live without. And what do they do it for?

The love of doing it; and funny money.

I think that entrepreneurs are motivated to a greater or lesser extent by

  • The need to prove themselves (to someone who said they’d never make it);
  • A desire to make a difference; and
  • To give something to the world that will benefit it.

They have to spend money to prove that it works, and get pieces of paper (shares) which won’t even buy a loaf of bread when they’re issued. When they succeed, they get plaudits, shares worth a lot of real money, and a list of obligations – to employees, investors, tax men, the environment…

I think we would all be better off if these shares were what people instinctively, intuitively understood as “a stake in capitalism”. But, as you can see, they are derided, until they become objects of envy. The vast majority, I believe, prefer the so called certainty of owning a house, (complete with its vast mortgage) to having shares in the company in which they work, which are earned for good service and will be worth something provided that market and product are well managed. Bricks and mortar are seen as a safe store of value, and even preferable to a savings scheme which owns shares in quoted companies even though their value is the result of a market starved of supply.

What I think we’re missing is the risk inherent in the price of all assets. While an individual share is riskier than an individual house, a parcel of shares – say a bit of the largest 350 companies – actually isn’t. Although shares sometimes go down in value, over time they increase inexorably as wealth is created, whereas houses, the least productive assets would grow in line with inflation were the market freer.

The 50% of young people who are students resent the borrowings they incur to get a degree, which could itself be seen as a stake in society, and the Tory conference included a pledge to reform the system. I wonder if the reforms could incorporate an award of some shares, maybe dependent on length of course and class of degree? Maybe a special class of share in the University with some rights to income from its research and development would give these hard-working people (it was different in my day) a tangible financial stake in the system? Sound like funny money? Maybe as funny as shares in a bag less vacuum cleaner? Leadership can be a thankless task in the beginning.

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Unconscious slavery

Published on October 12, 2017

Albeit I may appear somewhat behind the times, I applaud Theresa May’s stand against slavery. It shouldn’t exist anywhere, least of all in the developed world where there is more than enough wealth to pay minimum wages and living wages.

So it is with only a bit of tongue in cheek that I draw your attention to my attempted enslavement by Facebook. Living on the Welsh borders as I do I have been visiting slightly less fashionable places – a stately home where I purchased some rare flowers – and Baskerville Hall a hotel just outside Hay on Wye. Baskerville Hall clams to be the inspiration for Sir Arthur Conan Doyle’s novel and remains frozen in time more or less since then. But the staff are friendly and helpful and the food is tasty and plentiful.

All of which I could tell Facebook, which contacted me more or less on arrival and told me that they didn’t have any information about it and wondered if I could give them some.

For free.

Now this isn’t slavery because I have a choice. But it’s work below the minimum wage. Even if I charged minimum wage for five minutes work I would be due 60p.

But maybe that’s not fair, considering that I get to use Facebook for free? But is the deal a fair one? As of the time of writing, the value of Facebook’s shares, the difference between its costs and revenues over time, is $475bn based on profits of nearly $4bn from 2bn active monthly users. So if it paid each of us $2 a year for our undercover investigative work, it would be loss making. And if it charged us $2 a year to be members it would double its profits.

Tricky issues these charges for services given and received aren’t they? I wonder what it was like in the Stone Age before money was invented and goods and services were bartered? Odd isn’t it that our technology has brought us full circle in this respect? It was the idea that the marginal cost of providing some software over the internet is so small, and the cost of collecting these sums would eat up some if not all of it, which started the trend of businesses giving things away. But now consumers are giving services away for free too. It is our choice but is it a conscious choice and should it continue? Perhaps you’d like to consider the following?

  • The marginal cost, the cost of making one more of something, is not the only thing that makes up its cost.
  • The cost of making and receiving micro payments has also reduced, and will surely fall further.
  • Is Facebook actually free? Is it worth my investment of time, screens, broadband?

How about we get ourselves back out of the Stone Ages and actually price these things up?

PS You haven’t been charged for this blog. Or any of them.

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Errors and infringements

Published on September 28, 2017

The new rugby season is underway, and once again there are rule changes to get used to. Personally I’m delighted that the rules change a lot every season nowadays. Most business people subscribe to the mantra “change or die” and rugby union is a well-run business now. But it’s still a lot smaller than football due, I think, to the fact that

  • It’s harder to organise informally;
  • It’s more complex; and
  • It’s quite a lot more violent.

Without the physicality it would lose its essence but the tackle law has been changed and it is continuing to address the other two issues.

  • 7-a-side made its first appearance at the Olympics in 2016 and this more informal version of the game increased its popularity.
  • The latest rule changes go some way to reducing its complexity. The scrum laws are now drawn and interpreted so that the ball actually emerges from the scrum for use by the backs as opposed to frequently resulting in penalties. There are still some re-sets and the scrum penalty hasn’t disappeared completely but the ball more frequently emerges from the scrum, even if the forwards quite often take it back into a ruck before letting “the girls” play with it. The overall impression now, it seems to me, is of a game where skill and errors rather than infringements decide the outcome. In other words we can more simply enjoy the thrills and spills rather than consult the rule book, the referee’s mike, the commentators or our mates, to understand what happened.

The more accessible a product or service is, the greater the demand. And that is why I encourage our FDs to explain the finances of a business in terms that are understood by people without our training. Not everyone knows how to calculate debtor days nor what working capital is. So when we start to work with a business, one of the first things we do is re-organise the balance sheet so as to clearly identify working capital, and separate out the cash (which is usually mixed in with it). Not only is cash fundamental it also behaves in the opposite way to working capital – more working capital = less cash and vice-versa.

Once we have removed the technical issues from the financial report we lay the way open to a discussion with, or by, the business managers to manage the finances by, say, chasing up late customer payments, which is one of the actions that produces lower debtor days. In other words we have reduced the number of technicalities that the business may have infringed (increased working capital) so that it can concentrate on its errors (slow customer payments) and how to deal with them.

So there you have it – if the IRFU keeps up its good work, a rugby match will become as exciting as the finance item at the board meeting.

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Decisions, decisions

Published on September 15, 2017

As the summer holiday season ends and things return to normal so the stage is set for party conferences and Saturday night’s entertainment competitions ( X factor and Strictly Come Dancing are under way). Which got me to think about these ritualised tests of politicians, celebrities and wannabes that are now part of everyday life.

Every format – choosing a party leader or competition winner – is slightly different but all seem to acknowledge that there are two aspects required to make good decisions; the experts and the people. There is good precedent for this. SPQR is the acronym of Republican Rome: the senate and the people constitute the state. Simon Cowell and, now, Shirley Ballas, will lead the expert judges. And while there are differences of opinion along the way, and popular favourites such as Ed Balls get more votes than their expertise implies, the eventual winner is generally regarded as worthy.

In politics the decision process, especially for leaders, was rooted in this way but has hit extremes with less highly regarded results: where it’s just the people the winner is Jeremy Corbyn and where it’s just the experts (MPs) it’s Theresa May.

And its low point came with the Brexit referendum where expertise was absent. I realise that there was a campaign and debates were held. But what is strikingly obvious now, if it wasn’t clear then, is that no-one had any idea what they were voting for. There was no expert discussion of the implications for Brexit and there is still very little clarity on what it means. The experts are being consulted now – select committees are being assembled, trade negotiators recruited (albeit the best have yet to be wooed, having turned down what they perceive to be paltry offers). But there is still a significant risk that the decisions, which will not be put to a popular vote, turn out to be what experts perceive to be popular. This is like a company launching a product with no customer research. Whether it’s the Sinclair C5 or the DeLorean gull-wing it is very risky making decisions based on what you think they think.

We work with public sector organisations as well as private, and there are additional considerations in the public sector beyond those of the customer. In seeking popular decisions this is often overlooked. Voters have two economic identities, as consumers and producers. BUT, and it’s a big but, there are more consumers because everyone consumes and not everyone produces. So a popular decision process will always be biased towards the consumers’ benefit.

And there are more citizens who are ruled than there are decision makers who have to allocate resources and make things happen. Again there is a strong urge to satisfy the majority without fully considering the effects of, say, tight immigration and border controls on the decision makers who aim to provide goods and services to the citizens.

The Brexit referendum was like asking you what your favourite colour is. I couldn’t give one answer other than “what is the colour for?” Then I can decide. In other words we use our logical side to clarify the issue and set out the choices. Only then do our intuitions guide us to the choice that feels right.

Good advisors help people to make good choices. Can badly chosen politicians rescue the flawed referendum process and do the same?

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Taylor report: more frustration for business

Published on July 27, 2017

It seems that, after the efforts of Murray and Konta, tennis fever has taken hold in Government now . Issues are not resolved, rather knocked back and forth over the public’s heads. Take this example from the Taylor report:

“..given that this Review is only the latest in a series of studies to make the point about the differential taxing of employed and self-employed, we would encourage the Government to raise public awareness of this issue and engage in debate with stakeholders about potential long term solutions.”

So after years of consultations, and even with knowledge of the Mirrlees review in 2010 saying that employment taxes should not distort the way of contracting with people, the recommendation is to engage in debate. How does he suggest the Government do that? Maybe commission a report to look at the possible methods of reforming tax, consult with interested parties and submit the findings to Government. Ping…pong.

If there is one lesson to be taken from the last election campaigns surely it is that leadership needs to be decisive? The world has always been changing but it seems to me that the pace of innovation is increasing. Billions are entering the work place, largely in free economies; and artificial intelligence and genetic engineering are just around the corner. But those pressing issues are way down the agenda. Our leaders still haven’t addressed the mobility of capital (which reduces national tax bases), workers’ taxation (see above) or even how we trade with neighbours whom we traded with openly for 40 years (it’s already getting boring isn’t it).

Investment in infrastructure is now seen as a good thing. And I think that it is. How about investment in the infrastructure of Government? So that we can get these things done?

It’s said that business likes certainty so that it can invest. Well certainty for workers will improve productivity too. Let’s stop discussing and act.

  • Ensure that those on zero hours contracts would like a clear written statement of their contract terms on day 1 (which is required but currently honoured in the breach) and the right to request fixed hours after a year, at the average level they worked in that time.
  • Provide clarity to those in the gig economy who need to know whether they are employees, dependent contractors or self-employed; and that their competitors are the same, that they don’t have an unfair advantage because they are deemed self-employed and so can charge less because they pay less tax.

Uber was devised in 2009 and launched in 2010. It went international in 2011, since when we’ve had TWO Olympic games, and THREE plebiscites. Business leaders get sacked for failing to innovate (Woolworths, Kodak, Blockbuster) and sometimes castigated for innovating too quickly (Segways, Google Glasses and, erm, railway manning). But at least we try to move the world forward and make it a better place.

Is that not the primary role of Government too? Or is it still a talking shop beside a Victorian paper factory that doesn’t have enough gigabytes for the gigs it has to play?

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The wrong question

Published on July 14, 2017

It seems to me that the BBC, or maybe just the Today programme has decided that we need more police. At least that’s how I interpret the interview on Friday 23rd June with a senior police officer.

The interview focussed on the amount being paid to fund the service and whether or not it was going to declining further, after recent cuts. It was established that, for once, the politician’s claim that funds were not going down was at least partially correct: they’re not going down in nominal terms. But inflation will reduce the amount that can be spent in real terms. This isn’t the easiest task to accomplish but not unheard of either. At Gordon Durhams we used to keep overheads at the same level every year. We always managed to find an item of expense to cut that was as big as the bill for inflation. We even quit the trade association of which my Dad had been President elect because it didn’t provide any benefits.

My question is – why is this the place to focus valuable air time? Why is it so frequently assumed that the answer to every problem is more money? As I wrote in WealthBeing, some businesses react to failure by looking to try something else with more money: a new drinks brand reacted to another setback, its third, with a plan to launch a fourth. This business failed shortly thereafter because it hadn’t looked honestly at the causes of its last failure. It assumed that it was getting everything right except the drink’s formula, whereas its problems actually lay in marketing (no clear message and insufficient coverage) and production (too expensive).

If media were as unbiased as some (such as the BBC) claim to be then they would balance the view that money will solve everything with more insightful questions: e.g. “how are the police harnessing new technologies to combat terrorism ?”. Progress is not always achieved by spending more money doing the same things more frequently. Even World War Two, as I’m re-discovering in the excellent World at War documentaries, was won largely by technology – not just breaking the Enigma code but also things such as radar which enabled our aircraft to meet the Luftwaffe at the right time and in the right numbers in the Battle of Britain. The technologies that are being used now may be as secret as radar and the encryption machines were then. But at least we should acknowledge that new ways of doing things are at least as important as more people doing more of the same things.

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What’s wrong with agreement?

Published on June 29, 2017

Business is tough. Sometimes it seems like an endless series of battles. Marx saw the battles between Capital and Labour leading inexorably to the end of capitalism via glorious revolution. But some 150 years later we’re still bumbling along. Despite the upheavals of 1917, 1926 and the ‘70s, the fact of the matter is that free enterprise continues to function in its own mysterious way. Day by day, organisations and workers strike agreements which fail to perfectly satisfy either party. I think this is the sign of a good negotiation – one in which each party suffers the most hurt that it can withstand.

But when it comes to politics, it seems that the war has different rules, that agreement is utterly unacceptable and the only way to be is in opposition to the other view. So nothing is ever resolved -each side tries to dominate the other, which it does for a time. Then the balance tips too far and the reasonable minded electorate, few of whom have extreme views, vote for the other side to re-balance the costs and benefits.

It’s said that politicians are too busy dealing with current issues and crises to take time out to think about what they should do. But if they did, maybe they could see how business works and try it? I mean it’s not as if the current system is a rip-roaring success is it? It’s not as if everyone in the Conservative party agrees with each other in every aspect, nor the Labour party, or even the EU. If we accepted this as something to be worked with rather than against then maybe we would come up with a better, more long lasting result?

  • Instead of low tax or high tax we could have tax that had a rational approach to income, expenditure and capital; • Instead of low pay and high pay we could have remuneration that rewarded talent and social utility;
  • Instead of protecting people from owning equity, because it’s risky, we could encourage a balanced approach to saving for a deposit on a house (short-term) and retirement (long-term);
  • Instead of soaring house prices we could create a Royal Commission to reconcile young and old, investors savers and occupiers, while maintaining a green and pleasant land;.
  • Instead of tweaking our education syllabus in line with the latest trends, we could ensure that students (and adults?) are schooled in the intangibles that are now intrinsic: finance and software.

Staying wedded to economic theories needs to be jettisoned too. When I hear Paul Mason saying that he would compromise so long as his economic theory isn’t, then my response is: why? Which economic theory HAS worked? Marxism? Keynesianism? Monetarism? Neo-classicism?

This radical approach to governing may need a new system. Maybe we will vote more frequently, (we’re getting enough practise)? Maybe we’ll vote on-line? It may need entirely different politicians, as is happening in France. Agreement is less exciting than conflict: whoever cheered a drawn match? But excitement is not the aim of governing, and those who claim that it is are the epitome of populists. Holding two apparently contrary ideas at once is said to be the sign of wisdom, often the product of maturity that comes with experience. As a long established democracy, are we mature enough to reconcile our differences and to accept as much pain as we can, on both sides, as the price for stability?

Or is centrism simply too radical?

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