Will HS2 be kicked into the long grass?
The much criticised flagship HS2 rail project, which seeks eventually to build a new £50+ billion high-speed rail route between London and Scotland, has had a difficult few months.
Phase 1 from London Euston to Birmingham is due for completion by 2026, whilst the construction of Phase 2 – a Y-configured route from Birmingham to take in both Manchester and Leeds - is scheduled to operate from 2033.
Recent confirmation of heavy investment in several much smaller rail projects in the North and the Midlands, a series of legal challenges to HS2 and even bureaucratic foul-ups at the Department for Transport (DfT) have all been negative for the project’s future. And, at the macro-economic level, the UK economy is basically flat-lining thereby substantially deferring the year when the UK’s public sector net debt (PSND) will eventually start to fall – it recently passed through the previously unimaginable £1 trillion threshold.
As such, further deep public expenditure cuts seem certain as the UK seeks to protect its treasured AAA sovereign debt rating. Whilst the HS2 project has many flaws, such as its environmental impact, its weakest case remains financial. Quite simply, the numbers don’t stack up. And, even assuming that the optimistic passenger growth projections until 2033 are accurate, it is difficult to discern how a decent commercial return can be generated. A Tory minister was quoted in the Spectator recently as saying that the project was 'effectively dead'.
Compared with other EU countries, HS2’s projected Phase 1 capital costs per mile are way higher, whilst its claimed financial benefits are seriously inadequate. A Benefit-Cost Ratio (BCR) analysis by the DfT for Phase 1 barely shows a positive return, even before many risk factors. Not surprisingly, the DfT prefers to focus on the various contentious non-commercial benefits. In times of economic crisis, previous Governments have axed major projects. Within the next three years, the highly uneconomic HS2 project is a strong candidate to be shunted into the sidings.
Why we shouldn't tax companies: because companies don't pay taxes
It's not unusual to hear the economically illiterate insisting that companies must pay more in taxes. This is illiterate because companies do not pay taxes. They cannot, for only people can bear the burden of a tax: someone's wallet has to get lighter and that wallet must belong to a person.
The really big question therefore is who does pay a tax if we try to levy one on a company? The only three groups possible are the shareholders of that company, the customers of it or the workers. At which point we have an interesting new paper on what that incidence is in the European example:
A stylised model is provided to show how the direct effect of corporate income tax on wages can be identified in a bargaining framework using cross-company variation in tax liabilities, conditional on value added per employee. Using data on 55,082 companies located in nine European countries over the period 1996–2003, we estimate the long run elasticity of the wage bill with respect to taxation to be −0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents.
As we can see, the workers are paying 50% of that corporation tax bill. Meaning that anyone (and everyone) shouting that companies must pay more in taxes is in fact saying that they want to reduce the wages of the workers.
Something useful to keep in mind when considering the Robin Hood Tax proposal for example. You're not taxing the banks because banks, being companies, do not pay taxes. Which rather blows apart even the spurious justifications for said tax.
Yes! Let's close the libraries!
I'm not going to do my reputation as a b'stard neoliberal here any good (hmm, well, it might increase it perhaps) but CityUnslicker makes an interesting point: why shouldn't we be closing the libraries?
We can happily wander back to Adam Smith and point out that general literacy is a public good, that such a public good can be usefully bolstered by some tax funding, sure. But we also need to consider technology: most specifically whether the tax funded provision of dead tree printed books is the best way of advancing that public good.
And there's a strong argument, one gaining strength every passing month let alone year, that it isn't. For the written word is going digital.
The whole concept of a library (and before that, of public lectures at a university) is based upon the concept that books are an expensive thing. That they are too expensive for the average person to purchase and own and thus that there should be some method of borrowing them for a short time. It is rapidly becoming true that this is no longer so. Certainly the canon of western literature is now available for free online: and there's any number of very cheap newer books available as well.
At which point the concept of a library as a physical space in any one town rather loses its function. It's possible to think of all sorts of alternatives: from simply saying the entire idea is past it to some form of online library where government does the (much lower of course) funding of maintaining a stock of titles for lending to the impecunious.
And this highlights one of the problems with government provision of things. We've seen over recent years how public libraries have added all sorts of things to become more "relevant", CDs, videos, internet access and so on. All as the book part of it falls away. Out in that red in tooth and claw market part of the economy suppliers who become technologically irrelevant go bust and disappear. As computer games are increasingly downloaded then expensive retail stores supplying the physical box go bust. Indeed, some 10% of retail space in the country is empty as some 10% of retail sales take place over the internet: something of a clue there really.
So I present the idea, perhaps we actually should be closing the libraries? Not just as some austerity measure but as part of that culling which we have to do as technology changes. In a digital world why would we want to subsidise the distribution of physical books? And given that the public sector does not have that market driven bankruptcy to do the winnowing of old technologies, perhaps this is something that we have to do more aggressively through direct action in that public sector?
The blunder that is France's Tobin Tax
I'm in City AM this morning writing about the new French Tobin Tax, something we're particularly interested in here at the ASI:
WHEN Napoleon Bonaparte’s regime executed an aristocrat on trumped-up charges of treason, stirring up bloody memories of the Revolution, his chief of police is said to have remarked that it was “worse than a crime; it was a blunder”.
The same could be said of this week’s introduction of a Tobin Tax in France. The measure imposes a 0.2 per cent tax on purchases of shares in any publicly traded company with a market cap above €1bn (£789m), on “naked” short sales of sovereign credit default swaps, and on some high-frequency trading.
This is a form of the EU-wide Tobin Tax on all securities exchanges proposed by Nicholas Sarkozy last year. Though less disastrous than that would have been, the unintended consequences of this tax may leave President Francois Hollande wishing he had let these proposals die along with the Sarkozy government.
Behold the Dartford Olympics
Hopefully, David Cameron’s summer vacation takes him over the Dartford Crossing over the Thames River downstream from London. With luck, the toll queue on the Queen Elizabeth II Bridge will let the Prime Minister take in the stunning views in all directions - the panorama will instil more pride in the nation and inspiration for new policies than the opening ceremony of the Olympic Games.
That ceremony might have encouraged Mr Cameron to return us to a rural idyll that never was, to imprison all wealth-generating industrialists, to beatify the NHS as the country’s official religion and to ban all culture except pop. The Dartford Crossing, though, is the real-world antidote to that view of Britain and suggests some good ideas to restore the economic growth needed to pay for the flights of fancy on show at the Olympic Stadium.
Start with the sheer volume of traffic that is utterly breath-taking – thousands upon thousands of cars, vans and trucks streaming across in both directions heading to all points of the compass. Mr Cameron should take pride in the fact that the majority of the world’s major carmakers – Ford, General Motors, Toyota, Honda, Nissan, BMW, Tata - continue to make their cars in this land and that those cars are good enough to export anywhere. And he should be proud that so many of the lorries are registered in lands as far away as Turkey, hauling goods to and from every nook and cranny of the nation.
However, Mr Cameron should also recognize that Britain’s roads are far more critical to the economy’s health than any prestige rail projects like the high speed link from London to Birmingham and Manchester. A crowded Britain will live or die by an efficient road network where the vast majority of economic traffic isn’t between the centres of big cities. Road infrastructure offers many opportunities for creative thinking - privatisation of major trunk routes, tolls and road pricing where the money stays within the industry for consistent upkeep, modernisation, expansion and even dismantling as required by a dynamically changing economy. Handle this right and little taxpayer funding will be required.
Mr Cameron should also recognize that Britain’s historic economic success is so clearly underscored by those foreign-registered lorries – foreign trade. At every summit, at every meeting with every foreign dignitary, at every trade show on every continent, Mr Cameron must shout out the virtues of trade, starting with the EU’s own reluctance to implement the directive on free trade in services. Conveniently, such evangelism doesn’t need any additional taxpayer funding.
Just upstream from the Dartford Crossing is the sprawling Littlebrook Power Station and another testament to Britain’s strengths and weaknesses. The nation has a proud history of energy innovation and development with its skills in the field exported around the world. Littlebrook is oil-fired, though, and incessant dithering about long-term energy supply is bordering on the criminal. So let’s cut through the crap and dash for gas to exploit the nation’s skills, significantly reduce if not eliminate carbon emissions and secure energy supplies for the foreseeable future. It’s another opportunity to enhance growth prospects without hitting up taxpayers.
Downstream from the Dartford Crossing is the Thames Estuary, the proposed dream site of a new futuristic airport for London and there’s no escaping the need for more airport capacity in the southeast if Britain has any intention of sustaining economic growth in the decades ahead. An airport in the Estuary would be a huge challenge but Britain’s engineering industry is second to none in the world. The country’s problem isn’t building things – it’s being unable to decide to build anything. So, Mr Cameron, push the button for this airport if you want a real legacy, especially if you can finally get Whitehall to negotiate proper public-private financing initiatives.
Let’s hope the Olympics opening ceremony was the last hurrah of New Labour’s delusions and that Mr Cameron can recognise it as such. For a sense of the real world, he should spend £1.50 for the adrenalin rush of the Dartford Crossing.
New at AdamSmith.org: These Olympic Games are nothing to be proud of
The London 2012 Olympic Games have been a triumph of wastefulness, nannying government, corporatism, deceit and incompetence. Our writer Lawsmith asks, how could our political class have gotten it so wrong?
The first and only time I've met Boris Johnson was when we were on our bicycles at the traffic light at the bottom of King William Street in the City. I stammered: "Uh, good morning, Mr. Mayor." Play it cool. After a brief (and awkward) exchange, he pushed off, away from my sight and into eternity.
Months later, as the tangible effects of the Olympic Movement's month-long occupation of central London started to make themselves felt, my thoughts once again turned to my cycling buddy. After reminding yourself for a moment that Boris once gave some constructive criticism to the city of Portsmouth by saying it was "too full of drugs, obesity, underachievement and Labour MPs," and that barely two months ago he referred to the BBC – which, like that brainchild of the Blairite Labour Party, the 2012 Olympics, is state-run – as “corporatist, defeatist, anti-business, Europhile and… overwhelmingly biased to the Left”, I take the view that BoJo -- currently the Games' biggest cheerleader -- would be doing one thing, and one thing only if he were in opposition (if he were so inclined).
He would tear the government, the media, and anyone even remotely associated with bringing the Olympics here to shreds.
In his absence, others have tried. Most have failed to make a dent. Dominic Lawson, writing for the Independent, fired the opening salvo of reason against Olympics fever last month — writing a fairly broad-brush piece which covered most of the general criticisms of this circus (cost, inconvenience, armed police), he scored his best points at the ‘leftist’ BBC's expense: "[news coverage of the Games] really does make one feel as if this is North Korea,” he wrote, “rather than a country supposedly characterised by individualism and nonconformity."
Going 4 silliness
The twitterati are out in force again this week, this time angry at G4S and their failure to secure enough staff for the Olympics. You’ll no doubt be familiar with the scandal. You don’t have to look far to find someone putting forward the argument that this is a textbook example of why we shouldn’t outsource state services.
Certainly G4S has made mistakes, yet I’m not convinced by the public outcry against outsourcing. Think of Bastiat’s That Which Is Seen and That Which Is Unseen. We see the G4S failure, but we don’t see what would have happened had the state been tasked with Olympic security.
Clearly, neither the state nor the private sector are perfect. Tasking either with Olympic security had risks that something would go wrong. The state seems to have a nasty habit of making mistakes – data is constantly leaked or goes missing, the Home Office seems incapable of running an immigration desk, not to mention the quality of state healthcare and education provision lagging far behind their private counterparts. The list goes on. To me it seems that the rational thing to do when deciding who should provide services is to go with the least risky option. To say that I’m not convinced that this option is the state would be an understatement.
Yet the popular narrative emerging from the G4S scandal is that we should trust more service provision to the state. I can’t help but think had we done that with Olympic security, the state would have had as just a difficult time securing staff, if not more.
And what would have happened had the state been in charge, and yet the troops still had to be called in? A public outcry against state provision? A wave of commentary saying how this is a textbook example of why we should outsource?
No. Of course not. It would have been a minor scandal at best. Probably not even serious enough to warrant the loss of a ministerial job, yet there are calls for Nick Buckles, head of G4S, to stand down. We would shrug off state failure as though it were the norm.
We hold the private sector to a far higher standard than we do the state. Holding those who provide public services to account is hardly a bad thing, but if we don’t demand the same high quality from the state as we do from the private sector, our public services will be doomed to mediocrity.
How much equality is enough equality?
There's an interesting little number that comes out of the TUC's number crunching on the tax and income redistribution system. One that leads to a very interesting question: how much income redistribution is enough? What is an acceptable level of equality in other words?
The effect of taxes and benefits is to reduce an original income disparity of 29.6 to 1 to a final income ratio of 6.3.
This is using deciles and it is the median income of each decile so it's not capturing the effects at the very top, the 1%, very well. Leaving that aside though, what do we think is an acceptable level of inequality that the society should have?
I start from some fairly basic points: I doubt very much that any of us here think there shouldn't be a safety net of some sort. Maybe not the one we have (and I'd agree with that) but the idea that somehow society collectively provides for those who cannot for themselves would gain 100% support, no? Once that principle is conceded then there is going to be some redistribution of incomes. The question I'm interested in is, well, when have we redistributed enough?
The TUC's figures show, to personalise the income deciles, that someone who studied medicine for 7 years (yes, fully qualified doctors will all be in that top decile) plus a first degree are enjoying 7 times the income of someone who has never worked and is reliant upon benefits (could be anywhere in the first three deciles dependent upon family size and circumstances).
Is that enough redistribution? Not enough? And why either way?
My personal answer would be that's too much. Certainly I'd say that an airtight case can be made against further redistribution: we're done here, problem's over. But I'd be interested to hear your views. How much equality is enough?
Oh Noes! We're being outflanked by liberals!
Sam and I have been patting ourselves on the back for working out that the best and simplest way of increasing the incomes of the poor is to stop taxing them so bloody much. Raise the income tax and NI limits so as to pull all of those we define as poor out of such tax nets. We were thinking around the level of the minimum wage, around the £12,000 a year sort of level. And now I find out that we're being outflanked by people even more liberal than we are:
Both authors agreed a longer term vision to fundamentally restructure the tax and benefit system. This includes a personal allowance of £20,000 which would take half of the population out of paying income tax altogether, but would leave those earning above £36,000 contributing more because of changes in tax rates.
Well, not quite, for we're suggesting lifting the burdens of national insurance as well in a manner that they are not quite.
But even with that I'd be entirely happy to go to £20,000. But I don't think it will happen. For the quite simple reason that those people left don't have enough money to pay for the amount of government our governors wish us to have.
You see, there are two constraints to how much taxation can be squeezed out of the population. The first is this one that we're arguing about now: the morality of insisting that the poor hand over widow's mites in order to pay for bureaucrats. We're all tending towards the view that this should not be happening. On the very simple and basic moral grounds that they're poor dammit and should be keeping what money they do have. To take half the working population out of the direct taxation net is just fine by me on this very basis. I've no problem at all with it being the rich that pay for everything.
The thing is, the reason it won't happen, is that there will be a lot fewer everythings provided by government if this does happen: for there really is a Laffer Curve. A rate above which you get less revenue for higher rates. A general consensus seems to be forming that this is at around the 50-55% level for all taxes on income or, with our current NI and income tax system, a top rate income of 45% or so. On capital gains taxes, around 25-30% (compare with our current 28%). Now if that's true then there isn't any room to take more tax from the top end. We reduce tax from the poor, yes, this is excellent on moral grounds. We cannot get more tax from the rich (we can increase tax rates but we won't get more money). Thus the only way to make all of this balance is to have less government.
Which I, I have to admit, am entirely happy with.
One easy step to a cost-free Living Wage
I was on Radio Five Live this morning in discussion with the Living Wage Foundation’s Director, Rhys Moore. The news hook was the story today about Whitehall cleaners demanding a pay rise, which I’m actually pretty sympathetic to – I’d rather public money went on a slightly higher wage bill for cleaners than the considerably higher wages of the many, many unnecessary quango staff that the government pays for, the bloated public service, and so on.
I quite like the Living Wage Foundation – they work to get businesses to voluntarily pay their low-paid staff more, and I understand that they don’t target small businesses. I’m glad that PR campaigns can be used to pressurise firms into raising low-paid staff’s wages and improving working conditions. That’s a feature of the free market that we should cherish.
Where I probably disagree with many Living Wage fans is that I think it would be a bad idea to make this mandatory. The price floor on wages that a minimum wage creates prices some people out of the market. if a saleswoman who could only sell £10,000 worth of cars a year wasn’t allowed to be hired for less than £11,000 a year, why would a car dealership hire her and make a £1,000 a year loss?
The people who tend to lose out are young people – the term “NEETs” (Not in Education, Employment or Training”) has entered policy wonk lexicon in recent years as youth unemployment has grown and grown. It is arguable about how much of this is down to minimum wage laws – the empirical evidence is conflicted, and macroeconomic factors are obviously a significant component of the current problem.
Raising the minimum wage to a Living Wage level would do nothing for these people, and would push people at the margin into making a loss for their employers.
Nevertheless, low wages are a serious problem. As Tim Worstall has pointed out, the real travesty is that we take so much money in tax from low-wage workers. In fact, the difference between the after-tax Living Wage and the before-tax minimum wage is virtually equal to the tax burden imposed on minimum wage workers — £12,154/year with the Living Wage, £12,160/year with an untaxed minimum wage. In other words, if minimum wage workers didn’t have to pay tax, they would be earning a Living Wage.
Taking these workers out of tax would square the circle of the Living Wage debate – they would be earning a basic salary without more people being pushed out of employment. Indeed, by making work pay more, some people at the margin of earning benefits would be enticed into work – a much-needed carrot to the government’s stick of reducing benefits.
It would only mean a small cut to government revenues – the bottom 50% of taxpayers pay just 11% of taxes. But, as I said this morning, if we can’t find additional savings in health, education, defence, corporate welfare and civil service spending to reduce the burden on people at the bottom of the wage ladder, we need to have a serious think about our priorities.
It is indefensible that we tax the poorest workers while simultaneously tolerating politicians talking about the need to, somehow, improve their lot. There is a simple solution that should appeal to Living Wage supporters and free marketeers alike: stop taxing the poor, and stop it now.
