Newt troubles

Why has the UK suffered weak economic growth for years? Is it because falling profits have choked off investment? Is it because there’s a dearth of good innovations? Or because of fiscal austerity? Or because the Bank of England has failed to target money GDP growth? Or because bosses are lazy mediocrities? Or because pessimistic (pdf) expectations have proven self-fulfilling? Or is it because the financial crisis had a long-lasting adverse effect upon the economy?

No, no, no, no, no, no and no. It’s all because of the great crested newt. In its demand to cut EU-imposed red tape, the Telegraph wails:

Under the EU habitats directive, which covers all 28 member states, [great crested newts] are a protected species. If even a small number are found, newts have to be fenced, trapped and relocated in the spring, which can cost £10,000 even for a small project. In 2011, George Osborne, the former Chancellor, said the directive placed 
“ridiculous costs on British businesses.”

Despite the fact that scholars of long-run growth such as Chad Jones, Philippe Aghion and Dietz Vollrath have been silent about them (AFAIK – I’d be happy to be corrected) it’s obvious that newts are to blame for sluggish growth.

Economists know nothing: well, what do you expect from so-called experts?

Well, maybe. Or maybe not. I know it’s a longshot, but perhaps – just perhaps – there’s another possibility here. Maybe red tape isn’t much to blame for weak growth.

One reason for this is that there really isn’t much of it in the UK. Rick says “the UK is already one of the least regulated countries in the world.” If you don’t believe him, try the Heritage Foundation, a group not famed for its sympathy for state intervention. It says our “regulatory environment is efficient and transparent.”

Another reason is that red tape isn’t what holds back economies. There’s pretty much no correlation between labour market regulation and productivity or unemployment.

Why, then, is the Telegraph banging on about red tape and ignoring the many stronger reasons for our economic malaise?

It might be that I’m missing the point. Protecting newts, like laws against bendy bananas, might not have grave effects, but they are examples of the silliness we’ll be rid of when we cast off the yoke of Brussels and bring sovereignty back to Westminster, where it will of course be exercised by wise and all-knowing legislators.

But perhaps there’s something else. For the last 30 years, the right has gotten most of what it wanted – lower taxes, weaker unions and less regulation. And yet macroeconomic performance – as measured by GDP growth per head – hasn’t improved. Their response to this has been a classic example of the backfire effect. As David McRaney says: “When your deepest convictions are challenged by contradictory evidence, your beliefs get stronger.”

Rather than question their support for “neoliberalism” or – God forbid – doubt the underlying health of capitalism, Tories exaggerate the harm done by remaining regulations. They learn nothing, and they forget nothing.

Worse still, as Brexit negotiations will steal cognitive bandwidth for at least the next two years, we face many more months of this. The great crested newt might be protected, but my patience is not.

Comments

[TickyW]

Heh!

Same with education. The CBI et al have long complained about the failure of UK state schools.

Solution: introduce the National Curriculum and let Whitehall micro-manage state schools.

Years later, the CBI is still whingeing about the failure of schools and blaming the UK's poor economic performance on this. This, in spite of the time that vocational curricula, eg NVQs, were handed to business groups to set.

What a great job they made of that! An uttely complete and totally and utterly complete disaster, as Neil Kinnock mght say.

[Dipper]

as an amateur naturalist I'd point out that Great Crested Newts can travel quite long distances between ponds, often in a water-filled bag in someones car. It always helps to have a handy stock of Great-Crested Newts in a pond so that when the time comes one of the great migrations of the natural world can take place.

[Dafydd]

"the right has gotten most of what it wanted [...] less regulation"

Not true. It may be that the Right has managed to slow the growth in regulation and it may be that as a result it is below the optimum level, but in absolute terms there is much more regulation than than thirty years ago.

Consider the financial services sector. Within institutions the spend on compliance departments, their head count and their power is vastly increased compared with 1987. Likewise on the regulators' side.

Of course for all this resource and influence compliance departments and regulators are still useless. Which rather suggests that the question (addressed by neither Right nor Left) is not the quantity of regulation, but the quality. But that's difficult. Easier to throw money and bodies at a problem.

[Steven Clarke]

I don't think all regulations are created equally.

Consider British land use regulations.

Restricting housing supply in London and the South East makes housing very expensive in those areas, making it hard for people to move from less to more productive regions.

Preventing big box stores prevents retailers taking advantage of economies of scale, which will have negative effects on productivity.

I'm not saying the Tories are thinking of reducing these regulations, their asset rich base benefit from them in other ways, but I think a good argument could be made that they are harming productivity.

[David]

In the UK it is an act of treason to place a postage stamp bearing the British monarch upside-down (where, and relative to what exactly).

I was going to open a tropical fish shop
Topless sales clerks... whoooah!
I needed to move to Liverpool though.

But now that Brexit is under way....?
They are surely EU laws.
Newt... sorry... nowt so idiotic in UK law.. no.... no way!

Reaching for my postage stamps....
Happy times!

[Dave Timoney]

Given that 27 other economies were subject to the same EU regulations, and that our domestic red tape is lightly worn, the UK's poor productivity growth relative to our continental competitors is clearly homegrown.

The bulk of business "overhead" is endogenous, rather than exogenous. In other words, if bureaucracy is a drag on productivity, that is more likely to be the fault of poor business organisation and systems design rather than the heavy hand of the state, let alone the EU, hence the Torygraph's underwhelming list.

Since the 1970s, the right has sought a variety of excuses to deflect attention from the calibre of British industrial management, from unions to the EU. It has successively shot every fox. What new culprit will they come up with to explain under-performance post-Brexit?

[Caradog]

Chris,

In your previous post you made a big issue of the benefits of worker democracy - something that you have done before, so it is clearly important to you.

Then, in this post, you stress that the UK is one of the least regulated countries in the world.

So, my question is, why don't you just create a business that implements workers' democracy?

This is not a rhetorical question. If an enterprise, organised on workers democracy lines, is as good as you say, then you will have the pick of the best staff, who will also be more productive in the new environment - and it turns out that there won't even be much of a regulatory burden. Add in your background in economics and investment - giving ready access to start-up funding - and success seems guaranteed. The resulting benefits would then be huge. The people working in the new organisation will presumably be more fulfilled, less stressed, better paid ... or whatever they choose to be. However, beyond the organisation itself, you personally will no longer have to rely on academic studies when arguing for your idea - you will have a concrete, real-world success to demonstrate your claims. Furthermore, that one successful example will be a template for others to copy, indeed, it might even sponsor the creation of new copies of itself. You might end up being the founder of a movement that gradually replaces hierarchical companies with superior democratic alternatives. In which case you don't even need to persuade anyone of anything - you just watch the more effective workers' democracies drive older structures out of business.

So, why write blog articles about it, when you can just do it?

[Phil]

It turns out that the GCN was already protected by first-term Thatcher legislation before the EU got round to it or even existed, and the restrictions to which the DTel objects are already being relaxed. Also, attempts to replicate the 'backfire effect' study have failed. Apart from that, good post.

[rogerh]

Plainly newts are not the problem and red tape is mostly a necessary counterbalance to rabid greed and foolishness. But what stands out is that no European (including the UK) economy stands out vastly ahead of any other. Which begs the question - is it even possible for a mature European economy to be much different from any other?

I reckon the answer is no, not much. Therein lies the pseudo frustration that drives so much whining about productivity and the blaming of failure on red tape. If you are a developed mature economy you won't be much different from any other. Small incremental improvements should be possible but paradigm shifts - strictly for the consultants.

But those small incremental improvements are key and what is also key are small decremental barriers. There the UK does suffer, we have a great number of decremental barriers to improvement. These are nothing to do with the EU but to do with the structure of UK society and government. Brexit is a smokescreen to hide the real difficulty.

[chris]

@ Caradog - good points, except that you miss a massive one: what is that business I set up supposed to do? I honestly can't imagine: I don't have the entrepreneur's talents. Also, I'm nearly retired so don't need or what the trouble or risk! And it's surely barmy of anyone to set up a business to prive some political point.
Not that the point would be proved. Even if such a business were to succeed, it would not be convincing evidence, but merely one of countless data points.

[Sam]

I suspect the great crested newt is a 100% conscious distraction tactic, which because it's a "ha ha, silly bureaucrats" story is trotted out to hide what's actually going on.

Friendly media (and lazy media wanting a story which sounds funny and therefore gets read) summarise the regulations to be repealed as "great crested newt" when in fact the purpose of repealing regulations is far less popular: for example enabling building for profit in areas of outstanding natural beauty.

It was much the same tactic with announcing the NHS would stop funding sun cream - they were actually announcing it'd stop funding lots of really quite important things for chronically ill people. But ha ha, look, ha ha, funny, silly bureaucrats are handing out sun cream. Ha ha.

[Maurits Pino]

Chris doesn’t defend himself particularly well against Caradog’s charge.
Why doesn’t Chris start a worker run / worker owned company?

To start with, there are some worker owned companies of a substantial scale: John Lewis in the UK, Coop Norden in Scandinavia and Mondragon in Spain are 10bn turnover companies owned by their employees. And there are many legal and medical partnerships are as well (although typically only some of the employees are owners, others aren’t). So it is possible.
But there are lots of difficulties:
The legal setting is just not very favourable although it’s different from one country to another (you see the same with cooperatives that are far more prevalent in some countries than others (also between different traditionally capitalist countries)).
Capital providers are reluctant both because they’re not used to this and because of the legal problems.

Cjcjc mentioned here that no worker run place would fire its employees. Well, law firms do get rid of partners. But the problem is more, as you can show in a simple model, that worker run firms have a big incentive to hire too few workers for a given capital stock (compared to a profit max firm; which is in itself perhaps an argument against worker run companies – in any case, this was a big problem in Yugoslavia where this was supposed to be the institutional set up).

[Caradog]

Chris,

Thanks for the response.

I didn't miss anything. I didn't mention a business because it doesn't matter. The point is to a) prove the general approach works b) create a template for others to copy and c) create a free standing business that could spawn others like itself (ie like Israeli kibutzim do). The choice of area scarcely matters.

However, there is no need to create one if examples already exist and Maurits has a reply just after yours that mentions Mondragon - that I had to look up. They seem quite interesting.

[Caradog]

Maurits,

As you point out, legal and medical partnerships aren't very good examples - the partners are more like directors and the non-partners are regular employees - just as they would be anywhere else. For the most part these are conventional, hierarchical structures.

I'm not familiar with Coop Norden and Mondragon, so I looked them up on Wikipedia. Coop Norden is described as "Defunct" in 2008, however, Mondragon is fascinating - a large, long-lived collection of worker cooperatives. It's a lengthy article so it will take me a while to digest but I think that is the kind of thing I was looking for - actually it's much larger than I was expecting. I also looked up John Lewis (for background) and that article contains its own fascinating piece of insight "In 1999, ... there were calls from some Partners for the business to be demutualised and floated on the stockmarket. If this had gone through, each Partner would have received a windfall averaging £100,000.". I think that might be a better explanation for why worker's collectives tend to be rare - the ones that don't fail, sell out. That said, there's a link at the bottom of the Mondragon page that leads to a list of UK worker cooperatives. More reading, sigh.

Thanks for the pointers.

[gastro george]

IIUC, the main problem with worker ownership, at least in the UK, is finance. Loaning money from banks, etc., is ridiculously expensive. So unless you have investment capital already in place (unlikely unless you're very rich) or some kind of development organisation willing to supply soft loans, there is no way for the business to grow.

[Ander]

I've been told that British regulations protecting GC Newts predate those imposed by the EU. I'd love to know if that's true, just to smash another Leaver myth. Anyone able to confirm?

[Maurits Pino]

Dear Caradog,
I hope to reply with a series of short posts.
First on lawyers and doctors (and university faculties and some engineering,a ccountancy etc firms). Yes, they are hierchical but they are organisations where decisions are made by people who spend a substantial part of their time doing the company's work and who have done so for easily a decade. That's Chris' Hayekian argument for worker control.
The people making decisions aren't the types who've never operated the machine and have their noses up in the air for the work. Of course, this doesn't make them nice & great egalitarian employers.
BTW, a quick look at the numbers: Allan & Overy, Clifford Chance and Freshfields have around to 500, 400 and 400 partners respectively (concluded from https://www.thelawyer.com/issues/online-july-2014/201314-financials-a-decade-in-figures-at-the-magic-circle/); from their websites or wikipedia, 2800 lawyers, 3300 lawyers, 1660 associates/4900 employees respectively. Compare that to Walmart or Shell or VW ...

[Maurits Pino]

(2) Access to capital
Partnerships seem to work most often in businesses that require little capital – the law firms etc. that require little more than office space.

Perhaps all sorts of capital market developments will benefit worker owned organisations – the availability for lease (in all sorts of variations) many types of capital equipment seems to increase which provides a solution of sorts.

But the question remains why it's difficult for partnerships/worker owned businesses to have access to capital markets. Is the legal environment inadequate (for them)? Are banks reluctant because of the unusual legal set up?

For a genuine worker owned organisation, it's of course very bad if new capital can be raised only from its workers as they shouldn't expose their life savings as well as their salaries to the same shocks.
(maybe this is a key reason that workers aren't that keen on being co-owners despite all the alleged advantages; of course, there's something to be said for not being too implicated in your work in the first place).

"the ones that don't fail, sell out": think of Goldman Sachs - now that was a great idea for the last generation of partners. Not so sure if it was for the company.