Confused Politics

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Posts Tagged ‘economics

No Pain, No Gain

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Times are hard, our politicians have (with the collusion of the electorate) made a right mess of things and huge numbers of people across the UK and Europe have seen their real income falling. Our leaders are exhorting the people to make sacrifices for the good of the nation, so I think it might be time to take a look at their remuneration. Fair is fair after all.

A voter pays an MP yesterday.

Performance related pay has become widely prevalent in the private sector. If you’re good at your job then you get more money, be it in bonuses or other benefits. The important point is that your incentives are more closely aligned with those of your employer. Everyone wins. Well, except the people who are bad at their job… MPs on the other hand have a fixed salary, the only risk they face is losing their seat and hence their job. Unfortunately the link is not all that strong. The Electoral Reform Society estimated that approximately 60% of the House of Commons’ seats were safe. Many of the others would only change hands in exceptional elections. For the majority of MPs, there is little to fear from voters.

I think the current level of pay for UK MPs (just over £65,000 p.a.) is about right. However, up until recently it was MPs that set their own salary, and there is still no link with their performance. The US Congress has an interesting system for trying to deal with the issue. Basically, any pay rise that its members give themselves only comes into effect after the next election. In my opinion, that’s a nice idea, but in the end representatives’ pay will (and probably should) be subordinated to other issues when voters make their choices.

So, I propose linking MPs pay to a weighted average of changes in the nation’s incomes. Each year their pay would be revised up or down based on the percentage change in the average income of each tenth of the population. If the top tenth had their income increase by 20%, MPs’ pay would also increase. However, it would not increase by 20% unless everyone’s income went up by that much. Instead, assuming no one else’s income increased it would only go up by 2% (10% of the population, 20% increase, 10% of 20% is 2%). If everyone’s income increased by 20% then it would go up by 20%, if only half the population had an income increase then it would go up by half of whatever their average increase was.

This encourages the government to support growth, but it also encourages it to support growth that benefits the population as a whole. This is because, assuming the same amount of economic growth, the more it is concentrated in the hands of the wealthy, the smaller it will be as a percentage of income for the people it benefits. If the economy is £100b richer, and all the gains go to the rich, it might only give the richest 10% a 1% increase in their incomes. If all of that money went to the poorest 10% it might be 100% of their incomes. So, for the same increase in absolute terms the politicians’ pay would go up considerably more if the money went to the poor.

The last 10-20 years have seen significant economic growth, but much of that growth has gone to the richest part of society. My proposition aims to incentivise economic growth but also a more equitable distribution of it. The rich have plenty of tools for influencing public policy to their advantage, equally attempts at massive wealth redistribution would be likely to hurt growth. For MPs to get their pay increases they need economic growth, my way just aims to ensure that that growth is shared round a bit more.

Of course there are some weaknesses to this proposal. Firstly, it might over-emphasise economic growth as a tool of government policy. I accept this is a possibility and there are plenty of other goals which should be pursued, however, I do think that economic growth remains the best method of improving people’s living standards as long as it can be fairly distributed. It also provides a far more transparent method of assessment than most other policy goals could.

There is also has the problem that it might not actually be a significant incentive. If MPs get most of their income from other sources, then they are unlikely to care much whether they get a 1% or a 3% pay rise. Unfortunately I don’t have any statistics on MPs’ extra earnings, but from my own political experience and knowledge my impression is that most backbenchers do in fact rely on their pay. Ministers may be a different matter – even if they have few extra earnings during their tenure, they often have significant opportunities to earn after they resign. For an extreme example look no further than Tony Blair. In the end, I think some incentive is better than no incentive, and people like Tony Blair are certainly not the norm.

Finally, there is a risk of short termism. The current debt crisis is a good example of the problems with politicians ignoring sustainability in favour of immediate growth. If you can boost incomes significantly with government borrowing then you can effectively mortgage the country’s future in order to get a pay rise now. Of course these arguments could also be applied to having elections on a regular basis. What I would say is that there is a very high incumbency rate in the UK which gives MPs an incentive to think in the long term. In this case my pay scheme could actually work better than elections for long term thinking. If most MPs know that they will probably be in their position for a long time, it doesn’t matter whether they’re part of the government or not; if they leave the other party a heap of shit to deal with, their pay is still going to drop.

So, all in all, I think the idea could work. Bringing a bit of private sector style incentivisation to our legislature would do it good and it would be nice if the proceeds of growth could be shared a little more evenly. If you see any holes in what I’m proposing, please do feel free to criticise.

*It’s worth noting that MPs do also get very good pension rights, amongst other things, which makes the remuneration more attractive than the base figure would suggest.

Picture made by ‘Ambro

Written by Confused Politics

November 20, 2011 at 12:11 am

Reasons To Be Cheerful?

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The eurozone crisis should be depressing anyone who even half-heartedly follows business news. The contagion is spreading rapidly, even core countries such as France and the Netherlands are seeing their debt yields rising. If Italy does go over the edge we can prepare ourselves for a full on depression.

Credit for the Image to 'africa'

So, here are three pieces of good news. They don’t outweigh the general doom and gloom surrounding the European (and by extension the world) economy, but they do provide glimmers of light at the end of the tunnel. Without further ado:

1) If the eurozone can survive the next year or two it will be in an excellent competitive position. According to a study from the Lisbon Council, a Brussels based think tank, reforms of the major European economies is much further along than the popular perception, and the economic and competitive convergence needed to successfully run a single currency are also taking place. They have harsh words for France, which appears to be reforming as little as the Germans but without their strong economy, but the PIIGS are said to be rapidly improving their situation.

2) Portugal is meeting its targets and Ireland’s GDP has started to grow again. Today the ‘troika’* announced that they were very satisfied with Portugals progress and that it was successfully meeting its targets under the bailout deal. Similarly Ireland’s GDP has grown in the last two quarters.

3) Italy has never defaulted on a debt in peace time. As this Telegraph article explains, Italy’s only debt default in its whole history was on debts owed to the Allies in 1940. I don’t much approve of people defaulting on debts they owe to us, but when we’re actually at war it’s probably excusable. This contrasts with France and the UK which defaulted in 1932 and 1933 respectively. Italian default is the greatest danger to the European economy, and so if you have reason to think they don’t do default it’s a reason to be more optimistic.

Realistically there are plenty of reasons to feel down about the European economy, and my own view is that it has a pretty negative outlook. But hey, writing this post at least made me feel better for a bit.

*The EU, ECB and IMF.

Written by Confused Politics

November 16, 2011 at 8:50 pm