Taxing Times: Tax Avoidance, Boon or Bane?
Rather ironically, in the same week he welcomed the news of the introduction of a 75% tax for high earners in France;
“If the French go ahead with a 75% top rate of tax we will roll out the red carpet and welcome more French businesses to Britain and they will pay taxes in Britain and that will pay for our health service, and our schools and everything else.”
A more sure-footed Ed Milliband made the following observations when responding to Cameron’s comments.
"I'm not in favour of tax avoidance obviously, but I don't think it is for politicians to lecture people about morality.
"I think what the politicians need to do is - if the wrong thing is happening - change the law to prevent that tax avoidance happening and I think that is the right course the Government should take.”
However, the mood music of popular opinion can sometimes be irresistible for politicians. The same Ed Milliband last year pronounced that:
“The bankers who took millions while destroying people's savings: greedy, selfish, and immoral; the MPs who fiddled their expenses: greedy, selfish, and immoral; the people who hacked phones at the expense of victims: greedy, selfish and immoral.”
The next Prime Minister's Questions with the two UK leaders could be quite interesting! Whilst few will have much sympathy with Jimmy Carr, given his TV antics lampooning tax avoidance, Mr Milliband is right. Individual judgement of personal tax affairs is a matter for tax administrations and not the court of public opinion. The tax code in the UK is extremely complicated with Tolley’s Tax handbooks now reputedly running to some 11,500 (!) pages of explanation. Given this degree of complexity it is not that surprising some advisers seek to leverage this to reduce their clients tax bills. The situation is further complicated by successive UK government’s introducing tax incentivised schemes to encourage investments into key industries, such as films and creative media; the subject of the recent controversy, which earn billions for the UK economy, but are often seen as high risk investments. Of course the difficulty with introducing morality into tax is one man’s tax planning is another man’s “aggressive” tax avoidance. When we buy duty free we are avoiding tax, invest in a pension or an ISA we are avoiding tax, accept a benefit in kind rather than cash, we are avoiding tax, run our affairs through a company utilising dividends as opposed to paying income tax and national insurance we are avoiding tax, and so it goes on. Neither is tax avoidance the privileged domain of big business or high net worth individuals. Danny Alexander, Chief Secretary to the Treasury recently made an announcement in Parliament, having identified that large scale public service tax avoidance had been uncovered through an HM Treasury Review:
“The review has identified over 2,400 off payroll engagements in central Government departments and their arm’s length bodies that were live on the 31 January this year.
"That is an unacceptable number of off payroll engagements given the lack of transparency on the tax arrangements of the contracts.
"Mr Speaker that lack of transparency cannot continue.
"Today each department involved is publishing on their website a list of off payroll appointees who, as of 31 January, were engaged at an annual cost to the department of more than £58,200.
"The majority of cases relate to technical specialists – in fact over 40 per cent relate specifically to IT specialists.”
It seems that many of these arrangements have been used purely to avoid tax. The unfortunate outcome is that new legislation may be passed which would also hurt the private sector, potentially impacting on employment flexibility and costs, due to public sector transgressions. The recent HMRC Tax gap analysis coupled with the revelations contained in the HM Treasury review indicate quite clearly that the UK’s issues around tax avoidance are very much homegrown. Where do we draw the line then between what is acceptable and what is not? Despite acres of comment on the subject the current system for deciding this is quite sensible and is stacked in favour of the tax collector as opposed to the tax avoider. Pretty much all of the tax planning schemes that have made the headlines recently are subject to Disclosure of Tax Avoidance schemes (DOTA’s) regulation. The DOTAS regime allows HMRC to keep up to date with what types of tax avoidance schemes are in circulation. This provides the opportunity to review and if necessary, amend legislation to block any scheme that the government considers aggressive and unfair. HMRC can rule schemes offside and the only way a promoter could challenge this would be to go to court, which is risky and expensive. This check and balance is to be further strengthened as a result of the work on a General Anti Abuse Rule or GAAR undertaken by Graham Aaronson QC on behalf of the UK government. The idea would be to make even clearer what would be offside and to give greater powers to address transgressors. Tools are available to tackle abusive tax avoidance and they are going to be strengthened. So why is this issue arousing so much public interest? In a climate of recession and cutbacks everyone wants to feel that all sections of society are making a fair contribution. But this is where we get into some difficulty; fairness and moral judgement are subjective, they are a matter of personal opinion and are coloured by our personal view of the world. Graham Aaronson QC in his study on tax avoidance made the following observation:
“My approach to taxation, tax avoidance and the question of whether a GAAR would be beneficial for the UK is based on the premise that the levying of tax is the principal means by which the state pays for the services and facilities which it provides for its citizens. “
But should there be any limits on what the State demands and does the citizen have any right to order their affairs to pay the tax legally due and no more? When framing an answer to that question how many people appreciate for example that the top 1% by income already pay more than a quarter of all income tax in the UK, and the top 10% pay over 50% of all income tax collected. In contrast the bottom 10% by income pay just 0.5%. The answer to those questions will probably be quite different according your world view and on which end of the political spectrum you sit. I would suggest that it may be affected too by whether you, or someone else, is paying the tax. One view is as described by Simon Jenkins in the Guardian :
“Modern tax theory is rooted in more than revenue raising. It adheres to fairness, redistribution and incentive. For most people, paying taxes defines their citizenship. Whether or not avoiders are in the same class as "benefit cheats" is moot: most cheats have legal "sickies" as most film companies have brass plates in the Caymans. What is surely beyond dispute is that refusing to pay taxes in a shared community is anti-social, unfair and infuriating.”
But Ryan Bourne, writing for the Centre for Policy Studies, expresses a different point of view:
“Those who argue the tax avoiders are immoral are talking about a particular form of tax avoidance: stuff that other people do which they, personally, disapprove of. We thus risk every case being discussed to death by the social conscience of the middle-class commentariat, who impose their interpretation of morality on everyone else. Rather than impersonal rules, they desire personal public vilification depending on how they feel about a particular issue. Ultimately, this is the politics of envy being endorsed by the PM."
"Finally, the most disappointing aspect of this debate is the underlying assumption that the state is moral and keeping your own money legally is immoral. Is it moral, as we found out recently, that the state uses our money to lobby itself for causes actively designed to restrict our personal freedoms? Was it moral to plunder the pension-funds of hardworking individuals? Where was the ‘fairness’ in piling huge debts onto future generations? What was the ‘fairness’ dimension of the massive extension of state surveillance? More generally, the principle of any taxation by coercion (let alone avoiding legally) is morally wobbly- it amounts to confiscation to meet the priorities of those who feel their values and principles are morally superior to your own.”
Clearly some trenchant and polarising views in play. A still relevant article I wrote some time ago commenting on this area entitled ‘A Taxing Fundamentalism’ can be found here. I have previously written on the place of morality in business although this also works for tax: “Moral judgment without a transcending benchmark is simply a matter of opinion, and opinion fuelled by anger is rarely rational.” Recently we have seen an increase in tax disputes generated by HMRC, probably in response to greater demands from a cash strapped HM Treasury. Figures obtained by Pinsent Masons showed that the number of cases heard by the First-tier tax tribunals reached a record high of 3,400 in the last three months of 2011. Overall, the number of new cases heard in 2011 was 20% higher than in 2010, at 11,000. In addition, the number of unheard cases rose from 16,700 at the end of 2010 to 22,100 at the end of 2011. The downside of this approach being that international investment is likely to be deterred if the tax system is not seen as certain, simple and fair, or the tax authorities too aggressive. But what of Jersey’s role in all of this? Our position is clear and straightforward. We have a reputation for being a high quality and well run finance centre. We want to attract only business which supports this proposition. The tax avoidance schemes that have recently hit the news are designed, marketed, promoted and approved in the UK, their only connection with Jersey being one of an administrative function. Think of the analogy of a warehouse, lots of packages come into the warehouse, which the shipper certifies are compliant with health and safety regulation with respect to the contents. The warehouse checks the paperwork and accepts the shipment on the basis of this certification. It cannot open and examine every package or crate it receives, and wouldn’t have the knowledge to form an accurate judgment in any event. Jersey is in this position. We will only accommodate legally planned schemes which are HMRC approved, if they are challenged by HMRC and deemed to be offside; that is illegal, we will not house them. We are not in a position to make this judgment on our own nor should we. Our obligation is to make sure the ‘certification’ is sound and that we offer a safe, secure and legal hosting facility. Remember too through our tax information exchange agreement with the UK, HMRC can request and obtain any information relevant to tax matters on any UK taxpayer with business in Jersey. Tax planning schemes are a relatively minor part of what we do in Jersey. £200bn of the funds we manage relate to mostly pension funds where we are supporting the drive to provide a better retirement for ordinary working people. A further £155bn relates to the safekeeping of cash in a place that is trusted and secure on behalf expatriates working all over the world. Most of this value is placed wholesale into the City of London and supports the UK banking system and Stock Exchanges to the tune of several hundred billions of pounds at any point in time. The Times series on tax avoidance is to be welcomed, it has certainly stirred up considerable debate on an important subject. The editorial leader describes the complex system of British tax reliefs as ‘byzantine’ and calls for ‘lower’ and ‘simpler’ taxes. Chancellor Osborne, the IOD, the Taxpayers Alliance and the Adam Smith Institute have all argued that what Britain really needs is a simpler tax system — a system where fair, flat tax rates broaden the base of tax collection, a system that provides generous allowances to the low income groups who need them, and a system that removes incentives for complex tax avoidance schemes. It is this sort of informed debate and intelligent legislative development that can provide greater clarity and certainty for all parties and which we welcome as a positive way to develop the business of international finance.
Geoff Cook is CEO of Jersey Finance.
In praise of consumerism
However, part of the pejorative use of the term comes from a particular meaning attached to it. As the brief but surprisingly illuminating Wikipedia article observes, there are at least four possible meanings of the term:
i) The common use of the term giving an "emphasis on or preoccupation with the acquisition of consumer goods" (Oxford English Dictionary) – which is exactly the meaning which attracts much opprobrium
ii) The original coinage (1915) which referred to the "advocacy of the rights and interests of consumers" (Oxford English Dictionary)
iii) The economic use of the term referring to “economic policies placing emphasis on consumption”
iv) And finally “In an abstract sense, it is the belief that the free choice of consumers should dictate the economic structure of a society”.
Clearly, as Classical Liberals or Libertarians, we will see that (iv) is exactly the kind of economic order that we would like to prevail. This is the argument of von Mises in Liberalism that:
The social order created by the philosophy of the Enlightenment assigned supremacy to the common man. In his capacity as a consumer, the “regular fellow” was called upon to determine ultimately what should be produced, in what quantity and of what quality, by whom, how, and where... The much decried “mechanism” of the free market leaves only one way open to the acquisition of wealth, viz., to succeed in serving the consumers in the best possible and cheapest way.
This must be contrasted to an economic order in which producers are able to dictate to consumers what quantity of quality and of goods they should receive and at what prices, rather than having that determined by, in the long-run, the subjective desires of consumers. In a free market*, producers will be unable to dictate to consumers except in a very few cases, as Hayek and von Mises pointed out. However, armed with the power of governmental intervention, producers will be able to create cartels and monopolies and exploit consumers. This is what Deirdre McCloskey recently pointed out as have many others.
I would argue, however, that it such an economy is nothing like the type of economic order we currently possess, which is best characterised as one of ‘producerism’ enabled by extensive governmental intervention in all aspects of economic life both directly and indirectly. I would probably term our economic situation as ‘Corporatist’ although ‘Crony capitalist’ has also been posited by John Tomasi.
When critics of our current economic circumstances complain about rampant ‘capitalism’ and ‘free markets’ they actually are observing something quite different. We must remember that we are de facto all consumers, unless we totally eliminate the division of labour and return to caves and even then there must be some division of labour such as child-rearing and hunting. On the other hand, producers constitute particular and special interest groups, the maximisation of whose interests may be contrary to the general good of all in society (producer interests can still be satisfied as long as they serve their customers effectively and make a profit – consumerism prevents the extraction of excessive profits via rent-seeking behaviours).
The second potential definition is also of great interest to Classical Liberals. It bears witness to the idea of caveat emptor that must prevail in free markets. (I define a free market as one in which governmental authority is restricted purely to the upholding of property rights, although it may be possible to adopt a more libertarian position.) Consumer groups, price comparison websites, trusted brands and so on all emerge spontaneously in order to prevent the exploitation of consumers and mitigate against ‘market failures’. When government attempts to replicate such private initiatives via regulation and statutory protections, it invariably fails and instead assists established market players and the unscrupulous to exploit consumers – ‘government failures’ – which are more pernicious because they are upheld with force and cannot easily be rectified.
The function of government is not to regulate but to provide recourse where property rights have been breached. Sean Worth seems puzzled that comparison tools do not spring up for socialised ‘public’ services as they do for private ones – this is not surprising as socialised services, even those with heavy private involvement, do not allow choice and competition and do not operate within the price mechanism which is so vital for signalling demand and supply.
Definition (i) of consumerism is sometimes mere snobbery or envy as self-determined members of society often feel that they know better and should dictate to others how they should use their resources. Such a position should be recognised for what it is, an attack on other’s lifestyle choices based upon feelings of envy or superiority towards others. Of course, it may be sincerely intended and may even be correct in certain cases, but that does not justify forcible imposition of personal predilections onto others. Liberals reject such impositions in terms of, say, sexual preferences so why adopt them in terms of other lifestyle choices? Where there is a social cost, such as the obese on the NHS, the correct response is to eliminate the perverse incentive system of socialised healthcare rather to introduce further interventions attacking freedom of choice.
Given definitions (i) and (iii), however, it is ironic that so many statists denounce consumerism but at the same time advocate policies which encourage it. The nature of many Keynesian and egalitarian economic policies is that they encourage consumption and the depletion of capital rather than saving and increase in productive capacity. However, there is no reason to assume that a consumerist economy is one in which consumers will necessarily aspire to nothing other than the ‘acquisition of consumer goods’. Some may, but that is their choice of course. Others will take different choices, as they deem fit and given their particular preferences. If individuals feel they are unhappy with ‘keeping up with the Joneses’, there is no reason why they should do so other than their choice – having governments making such choices for us impoverishes everyone and results in worse outcomes.
As observed, governments very often encourage such ‘consumptionist’ behaviour. Savings are taxed or depleted away by inflationary measures. Some benefits encourage recipients towards consumption; redistribution is often designed to enhance consumption. Thus the type (i) consumerism so derided by those on the ‘left’ may be, at least in part, a consequence of prevailing governmental interventionism and corporatism itself. Environmentalist efforts to reduce consumption via the intervention of governments frequently have precisely the reverse effect to that intended, resulting in inefficient outcomes which consume resources less efficiently. Of course, it may be that a free market economy is more ‘consumptionist’, it’s rather a counter-factual question, but there is also an ethical problem with denying individuals the ability the freedom to choose whether they would like to consume more or less.
A consumerist economy would be one where resources are allocated to those who value them most and who are prepared to make the greatest sacrifices to acquire them. It would also be one in which the general good would be able to triumph over the particular interests of whichever groups manage to capture governmental power. Such an eventuality remains a remote possibility not because it would be difficult to achieve in a truly practical sense but because of the misguided and vested interests of those who would seek to prevent it.
Shiny happy people? The madness of the Happy Planet Index
The index is made up of three elements—self-reported well-being, life expectancy and size of ecological footprint—but is so heavily weighted towards the latter that economic basket-cases, police states and peasant societies score highly at the expense of places in which you would actually want to live. Consequently, Luxembourg, where life expectancy is 80 years and the well-being score is 7.1, finds itself 30 places behind Rwanda, where life expectancy is 55.4 years and well-being is scored at 4.0.
If the good people of Luxembourg (ranked 138th) have not already bought a one-way ticket to more desirable destinations such as Malawi (72nd), Haiti (78th) or Afghanistan (109th), they can console themselves that they are still one place ahead of Sierra Leone (139th), although that could all change if the Sierra Leoneans buy a wind turbine.
The Happy Planet Index has been criticised in the past for bearing no relation to other happiness surveys and for implying that Burma is a nicer place to live than Sweden. This year, the Swedes leap-frogged the Burmese to climb to 52nd place, but still trail such mighty nations as Belize, Honduras and the reigning champion Costa Rica.
NEF has responded to critics by saying that their index is not supposed to be used as a measure of happiness per se, but it was not their critics who called it the ‘Happy Planet Index’, nor was it their critics who called it a “new measure of progress”. If, as the NEF claim, the index gives us “a clear compass to help us all move in the right direction”, one must infer that there is something about such places as Vietnam (2nd) and El Salvador (5th) that the West should emulate.
It is difficult to take an index seriously when it places Iraq (36th) and Albania (18th) ahead of Iceland (88th) and Australia (76th). It is not just that the list contains some strange anomalies, rather that it defies common sense from start to finish. It is not even consistent with NEF dogma which dismisses GDP and worships equality.
Economic prosperity is predictably excluded from the index, thus allowing an assortment of developing countries to rise to the top, but these countries are not just poor, they also distribute their limited wealth in a most uneven fashion. With the exception of the nominally communist Vietnam, the top ten is made up of countries which are ‘less equal’ than even the USA. Whereas America’s Gini coefficient is 40.8, income inequality in those nine countries ranges from 43.5 (Venezuela) to 58.5 (Colombia).
One of the bon mots of Richard Wilkinson, co-author of The Spirit Level, is “if you want to live the American dream, move to Denmark”. The Happy Planet Index supports that assertion only insofar as these two countries are close together on the list. The egalitarian Danes rank 110th, while the Great Satan sits at 105th. Neither are within touching distance of Bangladesh (11th).
Just as Wilkinson has so far resisted the temptation to emigrate to the Scandinavian nations he so reveres, it is doubtful that the NEF wonks who consider Colombia and Costa Rica to be models of “sustainable well-being” will be moving to either. It is much easier to romantise subsistence living in Nicaragua (ranked 8th) from the comfort of the United Kingdom (ranked 41st), just as it is easier to dismiss the importance of per capita GDP from a semi-detached house in Belgium ($33,357 - ranked 107th) than from a hut in Vietnam ($2,953 - ranked 2nd).
The Happy Planet Index does, however, serve a valuable purpose in that it tests the NEF’s priorities in the real world. Having eschewed economic growth in favour of a questionable definition of environmental sustainability, it is not surprising that the “successful” countries turn out to be the kind of places that would deter the most intrepid backpacker. Having arrived at these findings, most researchers would question the fundamental assumptions that underpin their methodology.
The NEF, however, not only doggedly insist that these failed states are the new Jerusalem, but seriously suggest that we become more like them. Those who fear that far-left environmentalists use climate change as an excuse to send us back to the dark ages will find much to encourage their beliefs here.
The real lesson to be learnt from the Happy Planet project is that small ecological footprints are incompatible with economic prosperity, for the time being at least. The report itself notes that only four of the top 40 countries have a per capita GDP that exceeds $15,000, but it does not mention the crucial and closely related fact that those four countries are also the only ones in the top 40 to have a large ecological footprint and are the only ones to have life expectancies that exceed 80 years.
There are clearly trade-offs to be made and since the world and his wife differ from the staff of the NEF by valuing income, political stability and houses made of bricks, the minutemen of the USA will be busy watching out for would-be immigrants from nations ranked 100 places below them for the foreseeable future.
The case for single-issue activism
While there are some elements of the Conservatives and perhaps Liberal Democrats with (some) Liberal ideals – and one or two Labour politicians have sensible ideas on particular issues – there are no elements of mainstream political life we can call home. Fortunately, one might say the same for out-and-out socialists but I would argue that, given the size and reach of government and the state of public discourse, they are rather more at home in contemporary politics.
Of course, think tanks like the ASI do much to promote Liberal ideas and convert them into workable proposals which even manage to gain political traction and become policy and, just occasionally, get implemented. For all the good work of these organisations, I think most of their members would be forced to admit that they are fighting an uphill battle. If nothing else, public choice theory dictates that the odds are stacked against them. As I suggested, I find the prevailing political discourse extremely dispiriting, featuring as it does constant calls for state intervention and constant opposition to liberalising reforms. There is certainly no popular, broad-based movement for Liberals in the public sphere. There seems precious little Liberalism in the press and only a handful of Liberal academics. We have no Tea Party equivalent here in the UK (I have my reservations about the US Tea Party but at least it’s something) but we do have an Occupy movement.
We need to start growing popular support and become a serious voice to be considered in national political and public life. We need some nodal points around which to coalesce and some banners to follow. Liberals, myself included, tend to shy away from such activities – many of us are quite conservative in the Burkean sense and others are too busy trying to earn a crust, or what’s left to us after the state has taken its share. Others are simply too bookish or lacking in a can-do outlook. I think it’s time to change this and to get a broader range of people introduced to Liberal issues. Broadening the base of support is, necessarily, going to mean taking a more limited, gradualist approach as well as, not instead of, pointing out the flaws of central banking and moral problems of interventionism. The Taxpayer’s Alliance is the right sort of direction; my approach would differ in that it promotes a definitely single-issue approach. This is not really a job for think tanks or academics – their task is to come up with the ideas and provide the supporting arguments. At the moment, the Liberal movement is all brain and no body.
The only period, as I see it, when the supporters of freedom have made really sizeable inroads against the state was in the early nineteenth century where single-issue campaigns against the Corn Laws, slavery, emancipation of Catholics and so on brought substantive achievements. Many of those involved were, as Lord Acton observed, not true supporters of freedom. Similarly, amongst Thatcherism’s greatest achievements must surely be the great utility privatisations or curbing of excessive union powers even though many Thatcherites were hardly typical supporters of Liberal freedoms. It is this limited, achievable and comprehensible type of reform we first need to find and then unite behind. Otherwise we’re simply wasting our efforts on too many fronts and on theoretical niceties which have no relevance and resonance to daily life. Surely it is better to achieve several modest victories for liberty than preserve ideological purity whilst government continues to expand?
I would like to suggest therefore, that we adopt a slightly different approach and learn from our opponents and other groups who have proved successful in achieving some of their goals. I think that Liberals should consider emulating activist and single issue groups in promoting and popularising their agendas. Consider the modern environmental movement for a start. This started as a rather obscure minority sport. However, single issue campaigns such as that against CFCs saw a marked growth in environmental awareness. Like them or not, Greens and green issues are now a serious force in mainstream politics.
I’m not proposing that we man the barricades or start camping in churchyards, although at least that would be something. Nor do I think that these kinds of activities ought to be at the exclusion of intellectual and policy work already extant. I do think, however, that serious, organised, single issue campaigns with professional and volunteer activists should also constitute an important part of the Liberal ‘movement’. These organisations should have websites, professional PR, use social networking, host seminars and events and all the various other mechanisms that campaigners use to get their causes heard.
I’d like to propose a few areas which I think are ripe for single issue-type campaigns. However, to be successful these would need to be carefully and seriously thought out.
i) Perhaps the most obvious candidate for a campaign would be school vouchers. Whilst these may be a sub-optimal choice in terms of theory, most would agree that they represent a vast improvement over the status quo and would at least be the first means to break the state monopoly over education provision. Combined with the Free School movement, such a campaign would provide a clear, single-issue campaign which could potentially bring in a wide range of supporters and perhaps expose them to wide libertarian issues. At the moment, a search for “school vouchers” brings up Tesco’s sports voucher scheme! Privatisation of universities would be another clear target.
ii) In the social welfare sphere, perhaps the most obvious campaign would be the privatisation of state pensions along Chilean lines. Whilst there is already a basis for a campaign by the ICPR there is surely a case for a localised, British campaign with a clearly defined set of goals. A campaign for the complete privatisation of social housing along these sorts of lines would surely present the kind of limited, single issue where progress could be made.
iii) The monolithic dominance of the NHS and its position as the sacred cow of British politics leaves few avenues for discrete campaigns in the field of healthcare. Efforts like the Dutch to convert the NHS to an insurance-based, or better yet an individual healthcare account system a la Singapore are unlikely to succeed although of course are worthy of effort. It is amazing how little successful opposition there has been to the serious attacks on freedom for smoking, drinking, consumption of fatty foods
iv) In transportation, privatisation of the motorways would seem to present a more popular choice than, say, congestion charging. This would be especially true if paired with some reduction of road tax or fuel duty. It would be easily implemented and has the example of the M6 Toll to support it to some extent.
v) In monetary terms, I would love to see a campaign for a return to the gold standard. Of course, this would be enormously far-reaching and complex but it could build upon the excellent work of the Cobden Centre. That said, more focussed campaigns on behalf of savers against, say, QE and low interest rates might actually prove more valuable initially.
vi) The 2020 Tax Commission’s report was excellent but I feel its aims were rather too broad and aren’t likely to have great follow-through. However, a campaign devoted to the abolition of a particular tax such as the abolition of IHT, SDLT or NICS would present a perfect opportunity. The taxation and benefits system is so complex and intertwined that it seems to defy comprehension, let alone reform. This would seem to make it hard to sell as a single issue but surely tax simplification in some form is an obvious area
vii) Campaigns against specific aspects of legislation and regulation might be worth exploring. The Human Rights Act is a particular bogeyman, so surely certain pieces of legislation are ripe for attack. Abolition of the national minimum wage is urgently needed, this could perhaps be best sold by regionalisation combined with an attack on national pay bargaining in the public sector. Similarly, the abolition of various QUANGOS and their functions could be represented.
viii) One can think of other discrete areas of public life which are ripe for privatisation. Royal Mail is the most obvious and is perhaps already in the headlights, but a vocal public effort could hardly hurt and would keep media attention focussed. Drug decriminalisation is another area where serious campaigns could be developed and might even get the Guardian onside. The censorship of broadcasting freedom and the BBC must be gradually undermined as well. Overseas aid needs some lobbying voices against the loud noises from the aid lobby. There are many, many more.
Of course, there are some existing groups and individuals out there, but they are few and often lacking in organisation and funding. The big question, of course, is: who is going to start these campaigns going? Unfortunately, I can’t answer that, but perhaps there might be someone or some people reading with the inclination, knowledge, skill and most of all funds to try? If I had any funds to do so, I’d be the first to put my money where my mouth is – but you certainly have a volunteer. So, any takers?
Review: Keynes Hayek, The clash that defined modern economics
The origins of this debate can be traced back to the book ‘Treatise on Money’ (1930) written by Keynes, a rather obscure book, that was superseded by his masterpiece ‘The General Theory of Employment, Interest, and Money’ (1936). ‘Treatise on Money’ was a difficult book to read, and this probably caused Hayek and Keynes to misunderstand each other. As Keynes and Hayek were building their economic models at the same time, their debate was very much dominated by terminological definitions. One of the main topics that Keynes and Hayek corresponded about was the definition of savings and investment, and Hayek wrote three extensive systematic reviews of ‘Treatise of Money’. (1 - footnotes below) In turn, Keynes wrote only one article in response accusing Hayek of misrepresentation. (2)
The debate on ‘Treatise of Money’ was rather one sided, and in 1932 Keynes withdrew from the debate to reshape and improve his central argument, which was to become ‘The General Theory’. This work became probably one of the most influential economic treatises immortalizing Keynes as one of the greatest 20th century economists. His lasting legacy, that was to become known as Keynesianism, is an economic perspective that argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes. The theory, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank, and fiscal policy interventions by the government, to stabilize economic output over a business cycle.
Many Keynesian economists have not regarded Hayek as their man’s equal. However, there is an increasing agreement today that Hayek, although controversial, was one of the most influential 20th century economists. He made fundamental contributions to economics in the theory of business cycles, capital theory, and monetary theory. He was also awarded the Nobel Prize for economics in 1974, jointly with Gunnar Myrdal, “for their pioneering work in the theory of money and economic fluctuations”.
Most of Hayek’s work in the 1930s and the 1940s focused on the Austrian theory of business cycles. He believed that the price system of a free market was an efficient mechanism to coordinate people’s actions, and that markets were a result of spontaneous order that had evolved slowly over a long period of time, as a result of economic exchanges between people. Contrary to the statement in Wapshott’s book, that the Austrian School economists were more theoretical and mechanistic in their approach to economics, Hayek believed that markets were highly organic, and any interference with the spontaneous order of free markets would distort their efficient operation. In fact, it can be argued that Keynes’ economic theory was more mechanistic, as economies could be manipulated in a machine-like fashion to behave according to the wishes of economic planners.
A true Renaissance man, Hayek also made intellectual contributions in political theory, psychology, and methodology. It is perhaps because of his work in political theory that some economists, especially those with a Keynesian orientation, have wrongly dismissed his core economic research as ideologically motivated. This is the trap that Wapshott seems to walk in, either intentionally, or because of Hayek’s criticism of the Keynesian model, that had become de facto orthodoxy for the most part of the 20th century, extends many decades, and to some extent, has remained unnoticed, or ignored, by many economists and policy-makers.
Wapshott’s book ‘Keynes Hayek: The clash that defined modern economics’ is a commendable effort to bring economic thought to the attention of the general reading public. It is written in an engaging ‘human interest’ style, and I am certain it will sell well. Its publication is also well timed, because there has been a marked increase in public interest about economics and economic policy, as a consequence of the ‘Great Recession’, and sovereign debt crisis that currently grips the world. And this is where the book fails to deliver. A reader should not expect any great insight into how Keynesian or Hayekian economics could be applied in today’s economic situation beyond ‘truly Keynesian’, e.g. political, government policy interventions, as outlined in Wapshott’s book.
Nevertheless, the book provides a delightful insight into the personalities of Keynes and Hayek. Keynes is portrayed as a privileged and bright economist at the top of his game effortlessly moving between academia, political elites, and his bohemian ‘Bloomsbury group’ of friends. Hayek, however, is painted as a stiff, humorless, theoretical, and linguistically challenged, central European scholar, brought to London School of Economics (LSE) by Lionel Robbins to provide an alternative to the theories of Keynes and his ‘Cambridge circus’ of almost evangelical followers. (3) Robbins, and the dons of the LSE, considered Keynes’ view that when free markets were left to their own devices, this sometimes caused economic slumps, and that decisive government action was needed to pull the economy back to an equilibrium state of full employment, as heresy. In contrast to Keynes, the Austrian economists thought that free markets, driven by people’s choices tended to adjust to equilibrium if left alone, and free from government intervention. Concerned with the increasing intellectual and policy influence by the new generation of Keynesian economists at Cambridge, Hayek was appointed to LSE to counterbalance Keynesian interventionist doctrine.
Much of Wapshott’s book is about the political philosophy that divided Keynes and Hayek in terms of the role of the government in the running of an economy. Much less is spent on understanding the economics upon which the big-picture conflict was based. Indeed, Wapshott overemphasizes Hayek’s 1944 book ‘The Road to Serfdom’, on the dangers of socialism. This book was written after Hayek moved to Britain where he observed that many British socialists were advocating some of the same policies of government control that had been advocated in Germany in the 1920s. His basic argument was that government control of people’s economic lives was a form of totalitarianism: “Economic control is not merely control of a sector of human life which can be separated from the rest…. it is the control of the means for all our ends” (1944). The book became a best seller in the USA and it established Hayek as a leading classical liberal, or ‘libertarian’, as he would be called today. However, the success of the book, which was serialized in ’Reader’s Digest’, typecast Hayek as a free market ideologue, detracting attention away from his scientific contribution in economics.
Wapshott provides a ‘workmanlike’ description of Keynes’ theory, but his treatment of Hayek’s economics and the critique of ‘The General Theory’, is woefully inadequate. The fundamental tenet of ‘The General Theory’ is that there is a direct and positive relationship between employment and the aggregate expenditure in an economy. Therefore, according to Keynes, total demand determines the employment level in the economy, and the existence of unemployment indicates that aggregate demand is insufficient to employ all factors of production. Keynes considered that the capitalist system was volatile, and there were times when the level of demand would be insufficient to maintain full employment. Therefore, Keynes recommended that the public sector should address this by controlling the level of aggregate spending in the economy. His recommendations to reduce unemployment can be categorized as follows:
• Interest rates should be reduced as far as possible to encourage private investment;
• A progressive tax system should be used to divert income from the wealthy to the lower paid, as their propensity to consume is higher; (4)
• The government should actively participate in public investment activity to supplement private investment, should this prove insufficient to maintain a level of aggregate expenditure that corresponds with full employment.
After the publication of ‘The General Theory’, Hayek did not critique Keynes’ work as was expected; this he regretted ever after (Hayek in Sanz-Bas, 2011). However, Hayek’s critique of Keynes is incorporated into many of his works including ‘Monetary Nationalism and International Stability’ (1937), ‘Profit, Interest, and Investment’ (1939), ‘The Pure Theory of Capital’ (1941), ‘The Campaign Against Keynesian Inflation’ (1974), ‘The Fatal Conceit’ (1988). (5) It is perhaps because of the extended period of Hayek’s writing that Wapshott fails to provide a full account of Hayek’s economic thinking in general, and the critique of Keynesian theory in particular.
It is beyond the scope of this review to discuss Hayek’s critique in detail. However, one of Hayek’s main criticisms of ‘The General Theory’ was about Keynes’ assumption that unemployment could be solved through increases in aggregate spending. Keynes linked aggregate spending with employment; if spending in the economy was increased sufficiently, this would result in workers getting their old jobs back, and the economic crisis would be averted. In contrast to Keynes, Hayek argued that the crisis was a direct result of the misallocation of resources during the previous economic booms. Hence, Keynes’ solution to reestablish the same distribution of resources would not provide a sustainable solution to unemployment. The only solution to systemic unemployment, according to Hayek, required a liquidation of wrong investments and reallocation of productive resources. To quote Hayek:
“If the real cause of unemployment is that the distribution of labour does not correspond with the distribution of demand, the only way to create stable conditions of high employment which is not dependent on continued inflation (or physical controls) is to bring about a distribution of labour which matches the manner in which in which a stable money income will be spent” (1950).
What we can infer is that Keynes’ solution to economic crises was a short-term panacea, while Hayek advocated a market driven solution that would result in a more sustainable productive economic structure. Such a structure would be consistent with consumer preferences. Trade cycles, according to Hayek, were a result of the government interference with the spontaneous order of the markets. Hence, the only way to avoid booms and busts, trade cycles, is to prevent them form occurring in the first place.
Wapshott concludes his book by crediting Keynes for “saving capitalism a second time”. He makes a reference to Keynesian doctrine for solving the Great Depression, and the applicability of the same dogmatic panacea for the Great Recession from the 2008 onwards. He conjures the ghost of the Keynesian high priest, John Kenneth Galbraith, who scolds conservatives in the English-speaking countries for embracing Hayekian economics: “better to accept the unemployment, idled plants, and mass despair of the Great Depression, with all the resulting damage to the reputation of the capitalist system, than to retreat on true principle….”. What Wapshott misses in his argument is Hayek’s central proposition: booms and busts are a result of malinvestment created by the government interference in the operation of free market, a result of the very policies advocated by the dogmatic Keynesians of today.
In contrast to Wapshott’s conclusion, I leave the reader with Hayek’s comment, that is particularly appropriate to this review:
“I find myself in an unpleasant situation. I had preached for forty years that the time to prevent the coming of a depression is during the boom. During the boom nobody listened to me. Now people again turn to me and ask how we can avoid the consequences of a policy about which I had constantly warned. I must witness the heads of governments of all Western industrial countries promising their people that they will stop the inflation and preserve full employment. But I know that they cannot do this. I even fear that attempts to postpone the inevitable crises by new inflationary path may temporarily succeed and make the eventual breakdown even worse” (1979).
Footnotes:
1. Hayek, Economica, August 1931; Economica, February, 1932; Prices and Production, 1931
2. Keynes, Economica, November 1931. Keynes on Prices and Production: “The book as it stands, seems to me be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it…. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam.”
3. A critical reader of the book can’t help notice the leading language used by Wapshott from the start. Keynes is described to have a ‘commonsense understanding’, while Hayek is described as ‘intellectual’, rather than practical. Keynes is motivated by understanding ‘real life dilemmas’ and ‘improving the lives of others’, whereas Hayek is boxed in as a ‘theoretician’.
4. Keynes assumed that as incomes rise, people tend to save more. Therefore, the society’s propensity to consume reduces as more of the income is saved. As a result, the society’s investment multiplier will be lower. According to Keynes, the market mechanism is incapable to connect savings with investment. Instead, investment is dependent on business expectations and the creditors’ liquidity preferences that determine interest rates. As a result, the capitalist system is prone to suffer from a systemic lack of demand and, as a consequence, a chronic level of unemployment.
5. For further discussion: Cochran, J. P. (2011) 21st century boom-bust and recession-recovery; Sanz Bas, D. (2011) Hayek’s critique of Keynes; Caldwell, B. (1998) the reasons why Hayek did not critique ‘The General Theory’.
References:
Caldwell, B. (1998) Why didn’t Hayek review Keynes’s General Theory, History of Political Economy, 30:4.
Cochran, J. P. (2011) Hayek and the 21st century boom-bust and recession-recovery, The Quarterly Journal of Austrian Economics, Vol. 14: 3.
Hayek, F. A. (1944) The road to serfdom, Routledge, New York (2007)
______. (1950) Full employment, planning, and inflation. In Studies in Philosophy, Politics, and Economics, University of Chicago Press, Chicago.
______. (1979) Unemployment and monetary policy: government as generator of the business cycle, Cato Institute, San Francisco.
Sanz-Bas, D. (2011) Hayek’s critique of the general theory: a new view of the debate between Hayek and Keynes, The Quarterly Journal of Austrian Economics, Vol. 14: 3.
A critique of the GAAR Report
For many years, the boundary between acceptable and unacceptable plans to reduce a UK tax bill has been depicted by tax “avoidance” versus tax “evasion”, the former being acceptable and the latter not.
The General Anti-Avoidance Rule (GAAR) report (commissioned by the Government in December 2010 and published in November 2011) has chosen to up-the-ante by using avoidance for unacceptability, and combining it with “abuse” (i.e. “egregious” tax planning) thus dropping off “evasion” altogether. The document refers more than 40 times to “avoidance”, 18 times to “abuse”, 5 times to “egregious”, and 60 times to “reasonable”.
Apart from some unnecessary changes to current terminology, this may not matter were it not for the clear views of the author, Graham Aaronson QC: “My own approach … is based on the premise that the levying of tax is the principal means by which the state pays for the services and facilities which it provides for its citizens”.
This sentence, together with a belief that tax rates should be progressive according to income or wealth, encapsulates the whole ethos of the report. There is no question or worry as to who decides on what and how large these “services and facilities” are to be. There is no evidence that Mr. Aaronson understands that all taxes reduce aggregate living standards – irrespective of whether or not collection costs exceed tax revenue – as they often do in respect of higher rate taxes for the “wealthy”.
I return later to both these points and the general dynamics of taxation. In the meantime we can reflect that whichever minister (behind the scenes) it was who asked Graham Aaronson to head up this enquiry chose very well indeed. Of course, no government is likely to commission an “independent” report unless the author is sympathetic to government in the first place, and will select his team of advisers accordingly.
It is interesting, therefore, to first concentrate on the GAAR report’s scope and methodology. At the outset Mr. Aaronson himself selected a small Advisory Committee, consisting of four top-ranking lawyers, a Professor of Taxation Law at Oxford University (also a lawyer), and the Group Head of Tax at BP plc. The plethora of lawyers is unfathomable and surely a major concern, as is the complete absence of any kind of economist.
For the first five months attention focused on the possible need for some kind of GAAR, and included discussions with nine representative bodies (basically from Tax Committees at trade groups such as CBI, Accountants’ Institutes, Institute of Directors, TUC, Law Societies, Revenue Bar Association).
Mr. Aaronson soon decided that the crucial question (for him) is whether current powers and legislation are effective enough to prevent “the sort of tax-avoidance schemes which many citizens and taxpayers regard as intolerable”. This is populism at its worst, and for what it is worth it certainly wouldn’t satisfy two of the Ten Commandments (8 and 10). I show later that in both moral and practical terms progressive taxation according to earned income is truly egregious. In a free market, which we unfortunately no longer have, all earnings are the direct result of successfully serving others, pro-rata to the amount involved. To me, at this point the whole of the GAAR argument falls down; surely it is a dereliction of duty to allow sheer envy to hold sway, especially when, as shown later, every person in the land is poorer as a result.
Representative bodies
I now return to the representative bodies and their views, which were sought on two separate issues, firstly current tax “avoidance” schemes and secondly (later in the proceedings) reactions to specific proposals in the early drafts of an illustrative GAAR. Specifically, their views were sought on (i) attitude to tax “avoidance” (per se), (ii) GAARs in general, (iii) the illustrative GAAR (developed during the proceedings) and (iv) aspirations. Tax “avoidance” was unanimously held in disapproval, but there were several concerns on the other three items, with particular regard to the discretionary powers of HMRC officials.
The report goes on to say that there was “strong support” from these representatives for the concept of an Advisory Panel, with an independent chairman and a non-HMRC (HM Revenue & Customs) member. At this point the report appears to assert not only that the representative bodies supported such an Advisory Panel, but also that this would remove all their previously expressed worries. This may be just my cynicism but readers may wish to look at pages 23 – 27 of the report (http://www.hm-treasury.gov.uk/tax_avoidance_gaar.htm) and form their own views. I would have thought that concerns about HMRC officials would hardly disappear via the creation of a 3-person advisory panel which includes an HMRC representative!
The GAAR Report's appendices
Appendix 1 provides an illustrative Draft GAAR, essentially concerned with supporting rules – in particular a General Anti-Abuse Rule, under which “Abuse” depends heavily on what is “reasonable” and other such elastic words. The burden of proof would be on HMRC but any comfort from this would seem to disappear, given the “reasonable” qualification. HMRC investigators may receive bonuses for increasing the tax take, irrespective of the costs incurred (which it appears can be unlimited). At the same time, HMRC charges interest on late submissions of tax returns yet pays nothing on late refunds! Finally senior HMRC staff and the whole of the public sector appear to be up there with the best of us in trying to minimize our tax bills as well as cosying up to business executives in return for favours such as wining and dining.
Appendix 2 provides an Illustration Draft Guidance Note, similar to Appendix 1 in that it talks of “anti-abuse rules”, “abnormal arrangements”, “reasonable tax planning” and suchlike. It also confirms the proposed Advisory Panel of 3 referred to earlier.
Given my conjectures above on Appendix 1, it seems that words like abuse, abnormal, and unreasonable, fit the tax collector at least as much as the taxpayer.
The Dynamics of Taxation
I now turn to an investigation of what I call the dynamics of taxation, which can be considered in three parts namely;
(i) The shifting of the tax burden to other groups (an economic fact rather than a deliberate ploy). (ii) taxation and economic growth. (iii) income taxes levied as a proportion of income, with or without the proportion itself increasing with income. `
Tax-shifting
Most people do not realize that the physical payer of a tax may not be the person who actually suffers the burden. It is often said that the true burden of sales tax such as VAT or other excise duties are shifted forward to the ultimate consumer. In fact this is utterly wrong; no tax can be shifted forward in this way. The main point to note here is that most taxes are shifted backwards to income tax and cannot be shifted anywhere else. (See Man, Economy & State by Murray Rothbard, The Ludwig von Mises Institute, Chapter 12). This applies to all four of the taxes proposed for GAAR — income tax, corporation tax, capital gains tax, and petroleum revenue tax.
Furthermore, income taxes fall more heavily on savers than consumers. This means that there is huge scope to radically reduce the number of taxes (from well over 20 at present). A simple case would be corporation tax, which is actually paid by company shareholders, to the detriment of savings, and hence of capital itself, which is the fountain of growth.
Corporation tax could be subsumed very easily into income tax, bringing far greater clarity. The same could apply to the other 2 taxes relevant here, namely capital gains tax and petroleum revenue tax. Of course, this will never happen; governments don’t do clarity. As first remarked by Jean-Baptiste Colbert in the 17th century “the art of taxation consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing”.
Taxation and economic growth.
Firstly, it is an incontrovertible truth that all taxes reduce living standards, in the aggregate. The reason is that living standards rely heavily on both the division of labour and the amount of capital stock in the country concerned. The division of labour into specialist skills means greater production via greater efficiency, as argued by Adam Smith (1776) and David Ricardo (1817). There is no tax on do-it-yourself labour (DIY); the tax comes only when labour is exchanged for money.
This means that under a total tax rate of 50% (as in the UK) inefficient DIY will be cheaper unless the division of labour amongst specialists creates at least 100% increase in output. I calculate that at the margin almost 70% of output is lost in lower productivity, ignoring any waste via bureaucrats operating the tax-and-spend system. All of this should be common knowledge, and probably it would be without the indoctrination of state “education”.
Innumerable statistical studies back up these numbers up in showing time and time again that high economic growth is associated with low taxes. For example, Hong Kong (which actually has a GAAR, but more to the point has an overall tax rate of 17% compared with the UK’s 50%) has turned itself into one of the most free and wealthy countries in the world in the last 50 years or so.
A paper for the Adam Smith Institute written a year ago by Peter Young and Miles Saltiel makes the effects of high personal tax rates abundantly clear throughout the world. For example, under the new 50% tax rate introduced by Alistair Darling, the paper shows that over a ten year period, the level of economic activity would be 20% less as a direct result of this measure. Eight reasons cited include working less or retiring early, emigrating, maximum use of (valid) tax shelters, transferring income-producing assets top lower-rate taxpayers in the family, and deferring income to later years.
Corporation tax is a double whammy, with corporation tax first taking a slice of profit and secondly on the net income paid to shareholders. This double whammy should be removed whether or not corporation tax is merged with income tax. Exactly the same could be done with Capital Gains Tax.
The taxation of savings – from which latter all capital equipment derives, is a similar double whammy. It is a tragedy that while much bile is aimed at capitalists for “obscenely high” earnings, sports stars and other celebrities and entertainers are considered well worth their money even though the element of capital equipment (the fountain of all growth as explained above) is largely missing.
"Proportionate" taxation
This is yet another double whammy, guaranteed to reduce the country’s capital stock and therefore its living standards, as well as being totally immoral, as per Denis Healey in his prime, “squeezing the rich until the pips squeak”. In a free market, those with the most income have shown by definition the biggest and the best discoveries of products and prices which enable consumers to satisfy their desires in (voluntary) purchases to the highest degree possible.
Consumers alone are the great beneficiaries, multiplying many times over the take of the entrepreneurs in providing the items most desired. Yet these entrepreneurs are penalized, not rewarded, by the tax system, suffering not only in paying higher amounts at the same tax rates but also paying higher rates altogether. These conditions cost the country dearly.
I find it astonishing that consideration of a GAAR, clearly aimed at collecting more tax (and seemingly irrespective of whether the resulting increase is or is not negative after collection costs) can be attempted prior to a full investigation of a tax system which draws money from so many sources, most of which are clearly anti-growth. If this isn’t putting the cart before the horse then I don’t know what is.
The abuse of taxation power by government
The mind still rankles over Mr. Aaronson’s bare-faced and open-ended claim that “tax is the principal means by which the state pays for the services and facilities which it provides for its citizens”. Not only does this ignore whether or not all these “services and facilities” are desired; it also ignores the abuse of taxpayers themselves, in ways that are far more reprehensible and indeed egregious, as I shall show below.
Unfortunately the view that governments hold about themselves as highly moral guardians is very deep-seated. Thus David Cameron in a speech praising business on 23rd February said that “business can be every bit as moral as the public sector” and refers to “anti-business snobbery that says business has no inherent moral worth, like the state does” (my italics). Like the state does? Who are you kidding David? I can see precious little “inherent moral worth” in either the state or the public sector.
As if to illustrate my point, the former Mayor of London, Ken Livingstone who according to Andrew Gilligan of The Sunday Telegraph has attacked tax avoiders as “rich bastards” who should “not be allowed to vote”, has avoided at least £50,000 in tax by having himself paid through a personal company.
Two examples out of many are (i) the lack of any principle of protecting retrospectively accrued rights and (ii) the vested interests of those wanting to live off others. A prime example of destroying accrued rights is Gordon Brown’s removal in 1997 of Advance Corporation Tax relief for occupational pensions schemes – which covered not only future contributions but also applied to assets already accrued on behalf of pension promises for past years of service, which meant an immediate loss of value at that time of £100 – £150 billion, around 25 per cent of the assets backing pensions in payment and past service pensions, and far more for mature schemes. (An updated number is at least £300 billion.) Quite literally this retrospective tax has virtually killed off one of the world’s greatest pension scheme systems.
The second feature is the transformation over less than a century from a workable democracy into a country in which millions of people (both poor and rich) and including the politicians, see it as their right to receive special favours at the expense of others.
Bill Bonner, writing for Money Week on 17th February, is right on the button regarding the American “Democracy”.
“Hillary Clinton calls up Egypt, Syria, Libya, and China to “democratise”. But democracy, as practiced by the US and other developed countries, is a fraud. It is just a way for insiders to scam money and power from the outsiders, by pretending that the voters are in charge.
Just ask how many taxpayers would vote to spend about $10,000 each on the war against Iraq? How many would vote to spend $1.60 cents for every dollar in tax revenue? How many would vote for the latest mortgage deal where homeowners who saved their money and paid their mortgages are forced to make up for those who bought houses recklessly… then couldn’t make their payments? How many would vote to bail out Goldman Sachs, Bank of America or Citigroup?
But voters never get the chance to vote on the issues. They vote for candidates financed by insiders, with agendas the outsiders cannot even imagine.
The word “democracy” arose in small, Greek city states, where the voters actually voted on the concrete issues, not just the slippery candidates. Citizens voted to go to war knowing not only that they would have to pay for it… but that they could be killed in the battles themselves. War was a matter of life and death, not just a campaign slogan of a chubby, middle-aged draft-dodger.
American democracy, circa 2012, has no more in common with real democracy than American capitalism has in common with real capitalism. Both are degenerate, corrupt and geriatric”
And the same goes for the United Kingdom, where the politicians fix the agendas and the voting intervals. That the GAAR would further undermine British capitalism is clear; and that the government may press on with it nonetheless is no surprise.
The global economics of corporate tax cuts
How times have changed! ‘On New Year’s Day,’ reported Neil Reynolds, ‘Canada’s corporate tax rate — federal and provincial rates combined — fell to 25 per cent, giving Canada the lowest rate in the Group of Seven countries, and a more competitive economy on a global basis.’ (According to the 2012 Index of Economic Freedom, Canada’s federal rate of 15 per cent compares favourably with the United Kingdom’s 26 per cent.)
Flaherty could remind officials in the provincial treasuries of the global consequences of their actions, citing an economic truism published in The Wealth of Nations two-centuries-and-a-half ago:
The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could, either carry on his business, or enjoy his fortune more at his ease. By removing his stock he would put an end to all the industry which it had maintained in the country which he left (V.ii.f.6).
Proponents of raising corporate taxes make two fundamental mistakes. First, since the fundamental reason for taxes is to fund public expenditures which benefit the common good, a logical corollary follows: You can’t tax what you don’t have. ‘Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible,’ Adam Smith cautioned, ‘over and above what it brings into the publick treasury of the state.’ But a rise in corporate taxes will punish native industry, as Henry Hazlitt noted in Economics in One Lesson:
It does not expand its operations, or it expands only those attended with a minimum of risk. People who recognize this situation are deterred from starting new enterprises. Thus old employers do not give more employment, or not as much more as they might have; and others decide not to become employers at all. Improved machinery and better-equipped factories come into existence much more slowly than they otherwise would. The result in the long run is that consumers are prevented from getting better and cheaper products, and that real wages are held down.
Moreover, in to-day’s globalised economy, high corporate tax rates serve as incentives for businesses to move to countries with more favourable tax structures. Thus it was even in Smith’s day: ‘A tax which tended to drive away stock from any particular country, would so far tend to dry up every source of revenue, both to the sovereign and to the society. Not only the profits of stock, but the rent of land and the wages of labour, would necessarily be more or less diminished by its removal (f.6).’
Second, a rise in corporate taxes will not necessarily raise more revenue. Businesses will simply transfer the burden of the tax to the ordinary consumer, whether through price increases (thereby shifting over-all demand) or through lost employment. Smith alluded to this ‘expence’ when he wrote that ‘much unnecessary trouble, vexation, and oppression (b.6)’ is visited upon the tax-payer by the tax-gatherer. Ultimately all will suffer in the drag on capitalist accumulation, which in turn effects innovation — and a contributing factor why businesses are ‘hoarding’ profits and not investing in either human or capital resources.
Worse, a rise in corporate tax rates may raise less revenue. As John Ivison noted in his report on Flaherty, ‘Corporate tax reductions increase after-tax profits. When after-tax profits rise, there is more money available for wages, machinery to improve competitiveness and dividends — which can, in turn, be taxed.’ The data contradict the critics:
In fact, the federal government’s corporate income tax revenues have been on a steady incline since the recession, averaging around 1.9% of GDP. At the same time, the Bank of Canada’s latest business outlook survey suggests 40% of businesses plan to increase investment this year, with only 19% saying they plan less investment. More than half said they see increased employment.
These rosy projections are shared by Reynolds. ‘Remarkably’, he wrote, ‘the gradual lowering of the corporate tax rate appears to have resulted in little loss in corporate tax revenue’, noting that revenues were higher with a lower tax than a higher tax — the Laffer curve hypothesis at work.
All this would be old hat to Smith, who had observed in 1776 that excessive taxation ‘may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy some of the funds, which might enable them more easily to do so (b.6).’
All open-market countries can either accept global economic realities and tailor their tax systems to encourage industry; or bow to calls for ever-higher rates, subjecting corporations to uncompetitive taxation, and in the process ‘dry up every source of revenue, both to the sovereign and to the society.’ Adam Smith knew the right answer — does Canada?
The triumph of global capitalism
A freer world economy
World trade has become considerably freer over time – the median global tariff rate has decreased from 26 percent to 9 percent since 1980. (Gwartney & Lawson, 2009) Today, 80 percent of developing countries’ exports to industrialized countries do not face any tariffs, up from 54 percent in 1998. (UN, 2010, p. 68) Government intervention in agriculture has become less pervasive. An obvious case is China, where agricultural output has increased considerably since liberalization. In other developing countries, the government has historically maintained a monopoly on the purchasing of agricultural produce or regulated food prices, typically as a way of supporting politically powerful urban residents at the expense of farmers. But around 1990, many countries implemented wide-ranging market reforms and abolished the monopolies. (Giuliano & Scalise, 2009, Swinnen et al., 2010) Government intervention in agriculture has declined also in rich countries and subsidies have become lower as a share of farmers’ income, but much remains to be done. (Primdahl & Swaffield, 2010, p. 162, The Economist, 2010)
Macroeconomic policy has improved significantly over the last few decades. Since 1980, the median inflation rate has fallen from 14 to 4 percent. Destructive manipulation of exchange rates of any significant degree is only taking place in three countries today, compared to 50 countries in 1980. During the same period, the number of countries with a top marginal income tax rate exceeding 50 percent shrank from 62 to 9. (Gwartney & Lawson, 2009) Direct government intervention has also decreased, as well as bureaucracy and red tape. The World Bank has documented 1,835 privatizations between 2000 and 2008 at a total value of $453 billion. (World Bank, 2010d) It has become easier to run a business in 153 countries over the last five years. The situation has worsened in only 20 countries. For example, three out of four countries have implemented reforms to make in easier to start a business and six out of ten countries have made it less troublesome to trade across borders. (World Bank, 2010c)
All the indicators of a well-functioning market economy mentioned above can be summarized by an index referred to as economic freedom. A network of think-tanks puts a number on economic freedom in the countries of the world each year. As figure 1 indicates, average economic freedom has increased by one and a half points on a scale of ten since 1980. 87 percent of world population reside in countries that have increased their economic freedom since they were first included in the index.
Figure 1. Population-weighted economic freedom in the world on a scale of ten. Source: Author’s calculations based on Gwartney & Lawson (2009)
Economic theory tells us that more economic freedom should result in faster economic development. Free trade allows countries to specialize in activities that they are good, low taxes give people an incentive to work and invest and private firms with profit motive have greater incentive to rationalize production than state-owned enterprises. This intuition is confirmed by the empirical evidence in figure 2, where GDP per capita in the countries of the world is plotted against economic freedom. Almost half of the variation in income is explained by economic freedom and the relationship is statistically significant. The experiences of similar countries that tried different economic systems – such as North Korea/South Korea, Dominican Republic/Cuba and Finland/Estonia – also imply that economic freedom fosters growth. (Paldam & Gundlach, 2008)
Figure 2. Association between economic freedom and income across countries. Source: Gwartney et al. (2010), Maddison (2010)
However, figure 2 does not prove the existence of a causal relationship between economic freedom and economic growth. In order to show such causality, more advanced statistical methods need to be utilized, also making use of the available historical data on economic freedom. An entire academic literature does exactly this, and the picture that emerges is clear: economic freedom is good for growth. It does not seem likely that there is reverse causality – growth causing higher economic freedom – as the increase in economic freedom precedes the increase in growth. (Berggren, 2003, Doucouliagos & Ulubasoglu, 2006, Justesen, 2008)
Rising incomes – and the poor benefit the most
Figure 3. World GDP per capita with a prognosis. Source: Maddison (2010), IMF (2011)
Figure 3 indicates that the increase in economic freedom has had an impact on growth of world GDP. Growth has been particularly strong since the turn of the millennium. The only decade that compares to the 00s – including the financial crisis – is the 60s post-war boom. But during that period growth was strong mostly because rich countries became richer and diverged from many poor countries. This time it is the poor countries that are growing the most. Asia and Africa grew faster in the 2000s than in the 1960s. For Europe and the Americas, the reverse is the case.
But the conventional way to compute world GDP growth may not give a fair picture of economic development for most people in the world as the rich countries dominate when average growth is calculated. (Collier, 2007) If the populations of the countries are used as weights rather than GDP, a different picture of average GDP growth emerges. Annual growth remained within the band 2.4–3 percent during every decade of the second half of the 20th century. During the 00s, growth was 4.3 percent. Never before have so many people experienced as fast economic development as during the first decade of the 21st century. (Author’s calculations based on Maddison, 2010)
This development has consequences for world income inequality. There are many different ways of calculating inequality, but a majority of the studies in this area conclude that the world Gini coefficient – the most common measure of inequality – fell during the 1990s and probably also during the 1980s. Within-country inequality has risen while between-country inequality has declined. And since the big inequalities in the world are between rich and poor countries, total inequality has decreased. (Anand & Segal, 2008)
Economic growth is by far the best way to fight poverty. The countries with the highest income growth are also the countries were the incomes of the poor grow the most. (Dollar & Kraay, 2002, Adams, 2004) Strong growth over the last three decades has lifted almost a billion people out of extreme poverty – when consumption falls short of a dollar per day, inflation adjusted. As a share of world population that represents a decline from 42 to 21 percent between 1981 and 2005. The World Bank predicts that poverty will continue to fall to 11 percent in 2020.
But even this might be understating the fall in poverty rates. Two economists in the United States claim that the household surveys used by the World Bank to estimate poverty are biased as the increase of consumption in the surveys is lower than the income increase implied by the national accounts. The reason could be that rich people are less able to recall everything they have consumed. The economists therefore estimate that poverty has declined by almost two thirds since 1981, rather than halved as the World Bank data suggests. (Pinkovskiy & Sala-i-Martin, 2009)
Figure 4. World extreme poverty and hunger. Sources: Chen & Ravallion (2010), World Bank (2010b), FAO (2010b)
Higher incomes allow people to purchase more and better food. Daily calorie intake rose from 2,200 per person in the 1960s to 2,800 in 2007. People consume 37 percent more fruit and 56 percent more vegetables today compared to twenty years ago. Protein intake has also increased – by ten grams per person and day since the 1980s. Contributing to this is the fact that meat consumption rose by a third and fish consumption by a fourth during the same period. (According to production statistics from FAO, 2010a) The share of people who get so few calories that they are classified as undernourished has halved since the 1970s, but undernourishment has not fallen by very much over the last two decades and increased temporarily in 2009 (see figure 4). Still, the undernourishment among children fell from 31 percent to 26 percent in developing countries between 1990 and 2008. (UN, 2010) Improved nutrition is an important explanation of the Flynn effect – the substantial increase of average IQ test scores over time. (Boix & Stokes, 2003)
Democracy is on the rise
Economic growth has positive effect also in the political arena; there is a clear association between economic development and democracy. Dictatorships are more likely to democratize the richer they are and democracies are less likely to collapse the richer they are. There is an exception, however: if national income increases due to oil, the country becomes less democratic on average, not more. The oil curse, as this phenomenon is called, is probably caused by the concentration of power generated by oil money, giving politicians the opportunity to buy political support. (Ross, 2001, Asleksen, 2010)
Researchers have noted that countries that are richer than a certain level of income are almost guaranteed to be democracies. (Gilley, 2008) A look at the list of the countries with a GDP per capita exceeding 15,000 dollars confirms this. Of the 56 countries on this list, 45 are democracies. (IMF, 2011) Ten of the eleven nondemocracies are oil exporters. The only country that is neither a democracy nor an oil exporter is Singapore. An important test of this theory takes place in the late 2010s when China is likely to surpass 15,000 dollars.
Figure 5. Share of world population in democracies, nondemocracies and countries without data. Source: Author’s calculations based on CIDCM (2008)
Bearing in mind that the world has become considerably richer, it is not surprising that democracy is reaching an increasing number of countries. Figure 5 shows that a wave of democratization started in the 1980s.
More than half of world population now live in democracies. Some of the countries that were part of this wave of democratization are listed in table 1.
Table 1. Some of the countries that democratized over the last 30 years. Source: CIDCM (2008) and others
The human rights situation is also improving. During 2010, 23 countries carried out executions; during the 1990s, more than 30 countries performed executions each year. (Amnesty, 2011) The latest country to abolish capital punishment is Gabon. At the same time, the rights of sexual minorities are progressing. Since 2009, same-sex marriage has been introduced in Sweden, Iowa, Vermont, New Hampshire, Portugal, Iceland, Argentina and New York.
The rise in the number of democracies is a good thing in itself, but it can also have positive effects in other areas. It is now generally accepted that two democracies have never waged war against one another in world history. The possible exceptions to this empirical rule are marginal cases where it is disputed whether the countries involved were democracies or whether the conflict was in fact a war. (Russett, 1993, Ray, 1998, Wayman, 2002) Democratic regimes do not murder their own people, either. (Rummel, 2009) The reasons for the democratic peace may be that those in power are kept responsible by the public for costly wars, that governments who respect the rights of their own citizens also respect the rights of foreigners or that democracies perceive other democracies to be legitimate. (Doyle, 2005)
The progress of democracy is in all likelihood an important explanation of the declining frequency of war. Between 2002 and 2007, annual battle deaths are estimated to have been three per million people. That is a fall by 95 percent compared to the Cold War average. According to Harvard psychologist Steven Pinker, this is a part of a trend of declining violence that stretches over long time periods. (Pinker, 2007)
Figure 6. World battle deaths (conservative estimate). Source: HSRP (2010)
Better health for women, children and everybody else
The situation of women has improved dramatically over the last few decades. The proportion of women that marry before the age of 18 has decreased in most countries, as has the share that is forced to go through genital mutilation. Women’s own acceptance of men’s violence against their wives is also on the decline. (Unicef, 2011) In addition, women’s work outside the home is increasing. (UN, 2010, p. 22) The number of births attended by skilled personnel is rising and maternal mortality has decreased by over a third since 1990. The trend is similar for child mortality: since 1970, it has halved in Africa, declined by two thirds in India and by five sixths in China. Globally, child mortality has fallen by 57 percent.
Figure 7. World life expectancy. Source: World Bank (2011)
Life expectancy continues to increase – it is now 69 years. Life expectancy reaches record-high levels every year even in sub-Saharan Africa; it has increased by three years since 1990, despite the devastating impact of the aids epidemic on some countries. Most improvement has taken place in Asia, however: Indonesia has raised its life expectancy from 41 years to 71 years since 1960 and Vietnam has enjoyed an increase from 57 years to 75 years since 1980. (World Bank, 2011)
Increased chances of survival enable people to have fewer children, as parents face less uncertainty about whether their descendants will survive to adulthood and care for them during old age. Except for sub-Saharan Africa and a few other countries, the normal number of children is now one, two or three. The falling number of children causes world population growth, expressed in percent, to continue to fall – a trend that started in the 1960s. The UN predicts world population to increase at a decreasing rate during the 21st century, stabilizing around ten billion towards the end of the century. This is bad news for those of us who like people. However, it is good news for children that grow up in small families were parents can invest more in each child. (UN, 2011)
An important explanation of declining child mortality is progress in the struggle against malaria, a disease that mostly affects children in Africa. The proportion of African households who own an insecticide-treated bednet is estimated to have increased from 3 percent to 42 percent over ten years. During the same period, malaria deaths declined by a fifth. (WHO, 2010, p. 20 and 61) There is also progress in the fight against aids. The number of new infections is on decline since the mid-1990s and deaths peaked in 2006. (UN, 2010, p. 40)
The world is also becoming a safer place. During the years 2000–2010, there were 17 documented fatalities per million people per year in disasters such as droughts, epidemics, floods and earthquakes. That is less than any decade in the 20th century, despite the 2004 Indian Ocean tsunami and the 2010 Haiti earthquake. The death rate was 305 per million during the first half of the 20th century and 38 per million during the second half. (CRED, 2011)
Education, education, education
World literacy has been increasing for a long time (see figure 8). And the positive trend will continue: more than nine out of ten children attend elementary school in almost every part of the world. The only exception is sub-Saharan Africa, where 76 percent of children go to school. This is still an increase from 58 percent in 1999. Participation in tertiary education has increased by 50 percent over the same period. (World Bank, 2011) Children in developing countries are now educated for 10.4 years on average (up from 9.1 years in 1999) and children in developed countries are educated for 15.8 years (up from 15.2 in 1999). (World Bank, 2010a) Parallel to increasing school enrolment, child labour is declining. It is believed to have halved during the second half of the 20th century. The trend continues into the 2000s: the share of 5–14-year-olds who work fell from 16 percent in 2000 to 13 percent in 2008. (Basu, 1999, p. 1087, ILO, 2010, p. 8)
Figure 8. World literacy. Source: Unesco (2008)
The growth of cities is contributing to social progress. There are fewer malnourished children in cities than in rural areas in every region. The proportion of children not attending school is twice as high on the countryside as in urban areas. Male-female disparity in school enrolment is also lower in cities. (UN, 2010, p. 14) For these reasons, it is a fact to be welcomed that the share of world population who live in cities has climbed from a third in the 1960s to about half today. It is especially hopeful to note that African urbanization is progressing at high pace. (World Bank, 2011) In addition, fewer city dwellers reside in slum areas. A third of urban population in developing countries is classified as slum dwellers, down from 46 percent twenty years ago. (UN (2010), p. 64. A small part of the decrease is due to a change of definition.)
Urbanization is contributing to improved access to water. The proportion of people with access to safe water has increased from 77 percent to 87 percent since 1990. Two thirds of the increase consisted of expanding coverage of running water, while the remaining third consisted of protected wells and other improved water sources. A little more than half of world population now have running water in the home. During the same period, the share with access to improved sanitation facilities that prevent human contact with human excreta increased from 52 percent to 61 percent. (World Bank, 2011, WHO, 2006)
80 percent have a TV
The proportion of people with access to electricity in their homes has risen from 49 percent to 79 percent since 1970. (IEA, 2002, IEA, 2010) Four out of five households own a television, an increase from three out of four in 2003. There are 76 mobile subscriptions per 100 people. That is twice the number of five years ago. Three out of ten people are internet users – also twice the number of five years ago. People in developing countries already make up the majority of internet users and those regions are where most future growth will take place. (ITU, 2011a) Progress is helped by privatizations and increased competition. 126 countries have privatized their national telephone companies. The share of countries with a competitive market for information and communication services has increased from a third to two thirds over ten years. (ITU, 2011b)
A rising number of people have access to an automobile, expanding opportunities to recreation and commuting. There were 8 cars per 100 people in 1990. By 2005, the number had increased to 10. It is estimated that there will be 14 cars per 100 people in 2020. (Chamon et al., 2008) This trend will of course have an impact on the environment in general and on global warming in particular, but it should be noted that the concentration of carbon dioxide in the atmosphere increased from 300 ppm to 370 ppm during the 20th century. At the same time, the average temperature of Earth increased by 0.6 degrees and sea level rose by 20 centimetres. But the world became a better place from practically all points of view during this period. If fossil fuels had not been used, progress would probably not have been as fast. The costs of global warming must therefore be weighed against the cost of emission abatement, and simply pointing to environmental factors is not a legitimate argument against the thesis that the state of the world is improving dramatically over time.
Some environmental indicators deteriorate in a country’s initial industrialization phase but subsequently improve as the country becomes richer. During the last few years, methane and sulphur dioxide emissions, as well as per capita carbon dioxide and nitrogen oxides emissions, have declined in rich countries. It should therefore be expected that the environment of today’s poor countries will improve as incomes grow and people raise their valuation of the environment.
Some aspects of the environment are already improving on a global level, for example air quality. The concentration of particles in urban air fell by 42 percent between 1990 and 2008. Africa saw the largest decline. (World Bank, 2011) The concentration of CFC-11 – a Freon that contributes to ozone depletion – in the atmosphere peaked in 1994 and has decreased by seven percent since then. (WRI, 2007)
The meta-good news
Another positive trend is that more and more people seem to be aware of the fact that the state of the world is improving. The interest for global development issues has increased and most people appear to realize that economic growth and a market economy is the only way to achieve sustainable development. It was shown in an experiment that individuals who live in globalized countries or are in contact with foreigners cared more about people in other countries when asked about how a pool of resources should be distributed. Perhaps this is an explanation of the fact that the volume of non-governmental aid from the OECD to developing countries more than doubled between 2002 and 2009. (Buchan et al., 2009, OECD, 2011)
Migration is rising, especially with developed countries as the destination. This might be a result of more liberal policies – immigration to the United States has increased considerably since the 1965 immigration reform. Emigration often yields significant incomes when guest workers abroad remit money to family members back home. In 2009, migrant workers across the world sent home more than 400 billion dollars to their families. As a share of world GDP, this is twice the levels of the 1980s and 90s. (IOM, 2010)
In all likelihood, people’s standard of living will continue to improve. Life expectancy is believed to increase by three years between now and 2020. Extreme poverty is estimated to decline by six percentage points over the same period. This is possible because of continued economic growth. China, India, Indonesia, Vietnam, Ethiopia and Tanzania are among the countries expected to growth the most – all by more than five percent annually. (Inflation-adjusted GDP per capita growth according to IMF, 2011)
Maria Vargas has experienced most of the improvements of the last few decades. Brazil’s favelas now have running water and electricity and almost everyone has a television. All of Maria’s sons attend school and aim to proceed to university. They work when they do not study and have each bought a car. And in contrast to Maria, her children have grown up in a democracy. Maria’s life story is in many ways typical – she is one of billions of parents who know that their children will live a better life than they did.
This article was originally published as “Globaliseringens triumf” in Cooper, Eva (ed.), Globaliseringens triumf? (Stockholm: Timbro)
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The future of European Monetary Union
Until a couple of years ago, any suggestion that the great experiment of European Monetary Union was in trouble met with a hostile response, but since then the problem has become more obvious and much has been written on it in the daily and weekly press. The 10th anniversary of the introduction of the currency and an apparent period of relative calm seems an excellent opportunity to stand back and look at the broader context. Where are we now, how did we get there and where do we go from here?
European Monetary Union (not an obvious "optimum currency area") was launched with fatal design faults: the long awaited, but disappointing, 1995 Green Paper [2] completely failed to address the real economic problems which those of us looking sympathetically but critically at the project had identified. The rules adopted made the change "irreversible" with no provision for countries to leave, or be expelled from, the union and no mechanism for dealing with asymmetric shocks. Creating the euro in such an inflexible form was a disaster waiting to happen, but had believed and hoped that, given the political will behind the project, the need for changes would be recognised and acted on before it was too late. This has not happened and the taxpayer’s money has been thrown at a futile attempt to “save the euro”, when the real problem is to prevent a financial catastrophe. Whether this was deliberate is a matter for future political historians but Peter Oborne and Frances Weaver (CPS September 2011) think they were `Guilty Men’. See also Irene Kyriakopoulos, World Economics, October-December 2011.
This paper gives only a summary of recent events and a critical analysis of the measures. None of them is likely to prove a pain-free solution particularly if introduced at this late stage. (Theory would predict, history confirms, and George Soros knows to his profit, that early and properly considered action to deal with a financial imbalance, though expensive, is cheaper in the long run than delaying with fudges.) There are no simple solutions (this is not a submission for the Wolfson prize!) but I discuss the problems of the ones proposed (including fiscal union) and very tentatively examine possible alternatives.
Whatever else happens, Greece will surely have to default and leave the Eurozone. This would have been expensive and messy even if it had been done at the first sign of trouble. It will now be far more of a problem, cost more and be very difficult to deal with contagion. Most of the relevant recent talk has been on Spain and Italy - we have heard little about Portugal.
Early history and the pensions time-bomb
Geoffrey Wood and I had worked and written on the general concept of monetary union from the early days when it was being discussed. My book "A History of Monetary Unions" (Routledge 2004) summarises the issues. Our joint 1989 pamphlet "The Right Road to Monetary Union" [3] had earlier suggested the immediate use of the `basket ecu’ as a secondary currency. This, a road obviously not followed, would have immediately achieved most of the promised "transaction costs" which we still do not enjoy, (Graham Bishop still claims this as an achievement of the EMU.) and later progress would have been driven by market choices rather than politics. Later, I worked with Christopher Johnson's “Sherpa” group looking at the prospects for the introduction of the euro from the point of view of the UK. My accepted role in the group was to draw attention to problems in the hope, dashed by the Green Paper, that they could be solved.
When the final details emerged, it was obvious to us that there was a disaster waiting to happen but we did not know when and how. One long-term shock which seemed inevitable unless there were urgent policy changes, involved pensions. My 2001 paper for a Chatham House economics meeting under the title "Will the Pensions Time Bomb blow apart EMU?" analysed the figures produced by Eurostat that year [4] showing a huge difference in the effect of the pensions time bomb on different member states. This continues to be a key problem and will certainly have to be taken into account when we come to reorganise the structure of the Eurozone. These figures showed that the UK should certainly not join, given that UK pension liabilities were largely backed by independent pension funds (some €1 trillion) while very similar expectations while the equivalent in France and elsewhere were an off balance sheet liability of the State. Very oddly, the Commission very recently claimed that the UK pension funds needed “topping up”. This may be correct but what about the others? The problem persists on `unchanged policies’. The French made a very modest change in increasing the retirement age from 60 to 62, but one of the Presidential candidates now `promises’ to reverse even this!
This problem has been recognised for a decade but it would have taken at least another before it was obvious in actual budgetary outflows. We knew that another shock might hit earlier - and one now has. There have been rifts in the Eurozone for some time, partly because of the convergence of interest rates to a level which was not right for everyone (the “Impossible Trinity”). The apparent benefit to the weaker countries proved to be a dangerous trap, leading to an over-borrowing (e.g. Greece), or an unsustainable asset price bubble in Ireland. The more general financial crisis did not cause, but simply precipitated, the crisis.
The rake's progress — Greece
The current phase of the crisis began with Greece. Why does it cost so much to bail out such a small country and why was it delayed so long? It was obvious that Greece is insolvent and could never meet its obligations. It had a continuing primary deficit and the attempt to solve this by deflation is making the long term problem even worse. Early action to deal with Greece and to take convincing steps to prevent contagion would have cost less than what is happening now and would have given time to find a long-term solution.
In October, we all thought it was decided to allow Greece to impose an alleged 50% "haircut". Because of the `banking’ problem, the relevant authorities seemed desperate to avoid having this treated as a technical default precipitating credit default swaps. Soros pointed out that this would only effectively be 20% on the original proposals (still not agreed) while even a 50% effective rate would still leave Greece with unsustainable level of debt. Since then, both Greece and Italy have acquired "technocrat" governments but thanks to earlier inaction more countries are now involved. Far from converging, the spread on different sovereign bonds has widened enormously, and several countries including France have now had their ratings down-graded.
Greece should never have joined the Eurozone which only tempted the country into an unsustainable economic policy, and however it got there, it was an obvious case for the classic solution of devaluation and default. There are excellent examples of such a policy succeeding. In Russia, it took only eight months for a substantial recovery to begin. There was a similar experience in Argentina, [5] and from the UK’s exit from the ERM and more recent events in Iceland. (In all these cases, though, postponing necessary action added substantially to the transitional costs.) What would have happened if there had been a well-planned debt restructuring on Brady bonds lines? Either way, instead of throwing money at Greece, Germany, the IMF, the ECB, and others could have incorporated an element of subsidy into the deal and where necessary recapitalised banks – or at least the banking system. Was it wise really to bail out failed banks while leaving the regulatory delays restricted new entrants into the market?
How they are trying to solve it
Most of the solutions have involved throwing money at the problem sometimes indirectly by borrowing from third parties, but more usually by “quantitative easing" ("printing money" in my schooldays), but this will only buy time, a commodity which, when bought at taxpayers’ expense, politicians do not, typically, use wisely. The main concern has been with the banking system which was inadequately reformed after the 2008 crash and many banks continue to hold the debt of the less stable countries although the figures have now been reduced. In spite of Germany’s objections to a `fiscal union’ and a `no bail out clause’, the support fund now looks like needing at least €1 trillion. The European Financial Stability Fund was based on packaging high risk debt into tranches which they hoped would achieve AAA status. Financial markets have short memories, but surely not this short.
“Eurobonds” guaranteed collectively by the Eurozone Member States would achieve little. If these are the pro rata liabilities of each State, they certainly would not have the AAA rating (which several of them have actually now lost) assumed. Bonds of even the Netherlands, Austria and Finland, surely core countries, have at times traded at around 100 basis points above Germany, and as for the others …! If they are jointly and severally liable, this would in the last resort fall on the Germans, which they certainly won't accept and if they do, it would even threaten their own rating.
The current proposal, if the agreement between twenty five countries survives a discussion of the small print, would enforce fiscal discipline on German lines on weaker Members. This will inevitably mean tax rises and expenditure cuts and a sharp contraction in the economies which will adversely affect all of us. Given that the exchange rates of these countries are uncompetitive, the only alternative to devaluation (the classic remedy) is deflation. As often noted, "if the Greeks started behaving like Germans they wouldn't be able to buy German cars."
Internal devaluation by deflation is actually working quite well in Ireland where the problem was an unsustainable property bubble which could not be checked by interest rate policy. The country’s finances were sound enough but they then made the big mistake of guaranteeing the banks.
One rather mischievous thought: if "quantitative easing" effectively increases the money supply proportionately across the Eurozone, it could generate inflation in all relevant countries. If this caused prices in Germany to rise (unthinkable?) and (possible but not inevitable) the weaker countries took the opportunity to create an internal devaluation by holding down nominal prices, this would offer some of the benefits of devaluation and also reduce the real cost of Euro debt. To be effective without damage, it would have to be unanticipated inflation and the ECB would then need to convince markets that this had created a one-off adjustment rather than a continuing propensity to inflate.
A fiscal union?
It is in theory possible, but difficult, to create a monetary union without a fiscal union. The essential conditions are balanced budgets and great labour market flexibility, including wage flexibility. And even unions which had those, such as the Latin Monetary Union, could not survive all the strains that hit them. In fact, all such unions (unless they preceded political union) eventually came to an end.
The latest proposal would involve a botched fiscal union. It is hard to know what this means. Politically, it would fall far short of a federal union (which would require a very different constitution) but economically may go even further as even these typically give more freedom, on tax and expenditure to States, Provinces and Cantons.
There seem to be two main issues, greater transfer of funds from the stronger to the weaker Members (will the Germans accept that?) and a far more central control of broad economic policy in Member States. (Who would take the decisions?)
Over the years, there have been many proposals for "tax harmonisation" and although these have got nowhere, it has been argued that one cannot have monetary union without something approaching a common tax system. This is the reverse of the truth: the only economic weapon left to Member States for dealing with asymmetric shocks would then be on the "expenditure" side! What is now being proposed is actually more central control of expenditure.
Some members of the EU political class keep persisting in trying to find some way of creating a "tax collectors’ cartel" forgetting that this would weaken the competitive position of the EU with the outside world notably, for different reasons, North America and Asia. Fortunately, tax is one of the issues which requires unanimous agreement, although attempts keep being made to bypass that, including the recent pressure on Ireland and the suggestion of introducing a Financial Transactions Tax (by finding a loophole in the “unanimity” provisions of Article 113). [6] This issue, like so many in the EU, raises the question of whether the State exists to serve the citizens, or the citizens to serve the State. Can tax competition be reconciled with the free movement of capital within the EU? I have written on this over the years, see (e.g.) the 2007 paper I gave at a conference in Trier, "Eliminating Tax Obstacles for Cross-Border Operations.
A full fiscal union would have to include only those who had signed up for it. Any country considering signing up for such a union would be well advised to compare their properly calculated Balance Sheet as a nation with those of the intended partners. This would obviously mean looking at the present level of formal debts, projected budgetary cash flows and other figures which are at least in theory readily available to the enquirer but they would need to look much deeper. There are several other ways in which the nation's solvency (and therefore whether it will contribute to, or make claims upon, the group as a whole) can be seriously affected.
Part of the deal will and indeed already does involve substantial fiscal transfers which probably fall outside the scope of the intended eurozone rules. This will be viewed differently by different countries. Voters in the paying countries will not like this while the beneficiaries will take a different view. They may, but should not be, encouraged to delay taking internal remedial action. Help should be carefully designed to ease the transition rather than to postpone action.
In the United States, the individual States have their own credit ratings even though the country is far better placed to act as a union having a much higher degree of labour mobility then multilingual Europe. Switzerland is a rare example of a multilingual federation - but we do not think the type of people who are pressing for a closer union of Europe would welcome the degree of taxing rights enjoyed by Swiss Cantons and Communes. Instead of political parties competing to bribe voters for their money, Cantons compete to attract people and business, keeping tax rates sensible. Some forms of social payments are handled at the level of the Communes which it is said ensures efficient monitoring - people realise that neighbours who are cheating the system are cheating them. The Australians have complex arrangements for leaving their States with a degree of control over some taxes and expenditure, calculating the Federal contribution on perceived standard needs rather than on actual expenditure.
A two-speed Europe?
If some Members under the leadership of German formed a smaller eurozone with transfer capabilities, proper central sanctions on government expenditure and a Central Bank capable of being a lender of last resort. Those staying outside would divide into three categories: the “opt out” countries, notably ourselves, Denmark and Sweden, who would clearly not join; Those like Greece and maybe others which would leave the eurozone, devalue and default and an intermediate group including those mostly in the CEE who are committed to membership and will have to choose one side or the other.
A multi-speed Europe would raise several major problems, most obviously about which assets and liabilities could be converted into a new currency, the impact on the banking system and the inequitable way in which the inevitable loss of capital assets would be distributed partly to the benefit of the well advised who will have already moved their money. This will keep the lawyers in business for many years.
This raises a very delicate diplomatic problem. The inner group wouldn't want outsiders having an equal say in their relevant discussions and for them the unanimity rule on tax policy would not work. The non-members, including the UK, would need to negotiate considerably less interference, particularly in financial regulation and employment policy in case these could be abused by the fiscal union group to force us to share their uncompetitive practices. We economists need to ensure that those negotiating really understand what is at stake. It would be politically unwise to see this as an opportunity to “bring back powers from Brussels” but we must take great care to ensure that our own markets are protected.
The weaker countries would have to be given the right to opt out of the eurozone, raising very difficult questions which may, or may not, involve default. It must be made absolutely clear that their debts, both internal and external, were entirely their own responsibility - an aim intended (unsuccessfully) to be achieved by the Stability and Growth Pact.
What could have been done — plans for the future?
My "History of Monetary Unions" inevitably covered "dis-unions" but most of the interesting unions based on non-metallic money (the Soviet Union, Austria-Hungary, former Yugoslavia etc.) collapsed at a time of hyper-inflation which solved that problem while creating others. There are more useful lessons from two "sort of" unions – Bretton Woods and the Sterling Area.
The Bretton Woods (40th anniversary in this case) approach involved initially fixed exchange rates bolstered by international transfers negotiated by the IMF but with the right, and indeed the obligation, to change the rate when there was a "fundamental disequilibrium". There were many examples often in Latin America. The original design of EMU should have included such a workable proposal for exit. This could well be on the lines of the “living wills” to deal with the problems of banks deemed too big to fail, making sure that both countries and banks could not be treated as too big to fail. Is it too late to achieve that?
The essential step is to make it absolutely clear that each Member State is responsible for its own debts. They could then make their own arrangements, on the classic gold standard procedures, for maintaining external balance: surely there should be a "living will" procedure as proposed for banks for dealing with the inevitable occasional default in a less damaging way. "Convergence" would cease to be an intelligent tactic for investors (if it ever was) and interest rates on each country's debt would reflect investor perception of its government actions and give early warning of possible troubles to come. There would remain the problem of how to adjust interest rates to deal with internal problems when the international balance was perceived to be satisfactory.
The Sterling Area, being informal, worked well for many years, but because of that, quietly fell apart when it became less relevant. The only Monetary Authority was the Bank of England, others had neither any say in UK monetary policy, nor (after they ceased to be colonies) any obligation to follow it but they had, in the Area’s heyday, strong incentives to remain in the club, which had substantial benefits for most of the time including freedom from exchange control. The "early leavers" such as New Zealand introduced their own currency without any immediate or expected change in parity. This arrangement had some similarities to, but was distinct from the Currency Boards used in the old colonies and which could be an alternative for smaller EU members.) [7]
The same result could have been achieved economically, but certainly not politically, by countries accepting Germany’s Bundesbank as the monetary authority and voluntarily adopting their currency. This could be achieved either by simply shadowing the currency, adopting it by “dollarization” like Panama, Montenegro and Zimbabwe, or by the more formal procedure of a Currency Board familiar in the old colonies and introduced in many countries as diverse as Estonia and Hong Kong. This could well be the right answer for smaller EU Members. Note issues and the monetary base would then be the responsibility of the Central Bank or Currency Board of the country concerned.
Countries which leave the Eurozone and others (even outside the EU) might well find that a “New Euro” becomes widely used as a secondary currency creating the partial advantages of our old 1989 proposal. It may even become the currency of choice for internal contracts, a role which the US dollar once had. This might reach the stage when they would accept "euroisation" and partly or wholly abandoned their own currencies. A currency board could be used which would have, these days, to involve any "lender of last resort" holding "euros" not only against banknotes but against the prudential reserves of banks.
There are broader issues of future world monetary arrangements. The November 2011 issue of "Central Banking" has several articles extolling the virtues of gold bonds and a "hard SDR", and discussing other approaches.
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[1] Chown Dewhurst LLP, 51 Lafone Street, London SE1 2lX. Tel: +44 (0) 20 7403 0787; Fax: +44 (0) 20 7403 6693; jchown@chowndewhurst.com; www.chowndewhurst.com.
[2] Green Paper on the Practical Arrangements for the introduction of a single currency. Commission of the European Union 31 May 1995.
[3] John Chown and Geoffrey Wood "The Right Road to Monetary Union", Institute of Economic Affairs, 1989
[4] Eurostat's “2009 Ageing Report” gives updated and very detailed figures covering all 27 members.
[5] John Chown, “Currency Crises Compared”, [Argentina, Turkey, Russia] Central Banking, Volume XIII, No. 2, November 2002, pp. 64-68.
[6] I have given oral evidence to the House of Lords Committee on this.
[7] My book discusses briefly how colonies created independent currencies and, at rather more length, the history of the Irish pound. Exchange controls ruling at the time means there are no real helpful messages from these.
Fiscal and economic stability in the eurozone
The origins of the EU lie with the formation of the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), which were formed in 1958 by Belgium, France, West Germany, Italy, Luxembourg and the Netherlands. The primary rationale at the time was to find a way to put behind the enmity that had led to two World Wars being fought primarily on European soil during the twentieth century. It was believed that when nations trade freely with one another they are less likely to engage in hostilities (in addition to the potential economic benefits as outlined in Ricardo’s Principle of Comparative Advantage). Seen from this perspective the EU has been something of a success, with Europe being a peaceful region and one that is likely to continue as such for the foreseeable future.
However, since the start of the financial crisis in 2007, and the consequent recession of 2008–2009, both banks and governments have found themselves under increasing financial pressures. In particular, while governments were happy to borrow increasing amounts during the “years of plenty” before the financial crisis, the lack of more recent economic growth has seen fiscal deficits grow in some countries to unsustainable levels. This was especially the case with Eire, which required an EU-IMF bailout in 2010 to assist both the government and Irish banks. The imposition of austerity measures since then appears to have been relatively successful, although the government may yet require further funding from the European Financial Stability Facility (EFSF).
While the fiscal problems in Eire were dealt with relatively quickly and decisively, this has not been the case with the EU more recently. It is increasingly clear that the continued failure to tackle fiscal uncertainty in the eurozone has the potential to generate a recession far worse than that of the “Great Depression” of the inter-war years of the 20th century. The prolonged and monotonous euro-crisis debate among Europe’s capstone political, financial and economic leaders has so far produced very little decisive action, largely as a result of competing, entrenched national interests. The outcome has been a series of too-little, too-late agreements on stimulus packages in some countries and austerity measures in others. Decisions that have actually been made by eurozone leaders have fallen short of inspiring the confidence necessary to prevent financial collapse. The more fiscally-troubled nations, such as Portugal, Ireland, Italy, Greece and Spain (PIGS or PIIGS), have experienced severe economic and financial problems, leading to outbreaks of unrest and sometimes violence on the streets. The potential social and political consequences of fiscal retrenchment by government in the PIIGS is more stark than in the wealthier nations of the eurozone. The contrast between national and broader EU/eurozone interests has brought clearly into focus the question: is there a solution that European leaders might make to offset the possibility of widespread sovereign and commercial default?
Despite some attempts to introduce emergency stimulus packages in wealthier eurozone countries and austerity measures in countries with increasingly untenable sovereign debt problems, the financial damage has become deep-seated. Because banks in the EU have bought much of the debt of the PIIGS governments, many major banks have found their balance sheets further stretched (beyond that induced by the financial crisis), with the fear of possible insolvency if the sovereign debt issue is not rapidly resolved. Despite the presence of record levels of expansionary monetary policy (or “quantitative easing” as it has become known) in many countries, the further fear of contagion has led to the European economy stalling. There is every likelihood of a “double dip” recession in the EU as the government budgets of usually stable states such as Germany, France and the Netherlands become too limited that they are unable to deliver any large amounts of funds to “failed nations” without incurring dangerous levels of debt themselves. The IMF has been encouraged to take all necessary steps to ensure that the eurozone does not fall to a point where there is no hope of salvation. In some quarters it has been suggested that the assistance of China should be sought, although even China has experienced a reduced level of economic growth recently. UK Chancellor, George Osborne, has urged that the eurozone seriously considers a “culling” of certain nations from the eurozone, with a return to their previous national currencies as a first step towards rebuilding their economies, and repaying their debt with a currency which might help promote favourable exports and slow but independent growth. However, any secession of countries from the eurozone is likely to be regarded negatively, both for the eurozone per se and for those countries unable to meet the conditions necessary to remain within.
Interest rates on government and corporate bonds have risen recently within the eurozone, partly as a result of bond market forces but also as the result of downgrades by the ratings agencies. Naturally, there is a limit to the levels of financial stress that countries can incur while maintain conditions necessary to remain in the EU. However, the alternative would bring into question the entire existence of the “European project”, potentially leading to the destruction of the EU as a major economic entity, something unthinkable given its origins.
We believe that there are benchmark decisions that can be made to prevent the further systemic meltdown of the eurozone. The following are feasible actions that might be considered for the eurozone to rise out of the abyss of uncertainty and avoid an inevitable doomsday ending:
• Borrowing: Macroeconomic theory suggests that government borrowing to fund initiatives (“priming the pump”) that can lead to economic growth is one possible solution to a recession. The economy is given a kick-start which improves business confidence so that the private sector’s expectations are revived, fuelling further economic growth. However, the current recession is no ordinary recession. However, many governments are already borrowed to the point where their creditworthiness becomes questionable. The recent (23 November) failure of the German government to sell all of its offered bonds (“bunds”) and the concomitant rise in yields is an indicator of the market’s sense of German government creditworthiness. This should come as no surprise. The original thinking behind government borrowing as a counter-recessionary element (Keynes 1936), also talks of governments running repaying debt and running budget surpluses during the years of economic growth. However, it has long been clear that many politicians have abused this technique in an attempt curry favour with their voters, by generating above-trend levels of growth. However, while borrowing during the “good years” has been occurring since the 1960s, the long run of growth during the 1990s has led to excessive, unsustainable levels of debt, particularly in the more peripheral countries of the EU. One of the conditions behind this was the eurozone itself: instead of accepting the reality of the situation and allowing default, other eurozone members decided that the solution to this is further debt in the form of “bail-out packages”.
• A properly functioning single currency: The EU failed to develop a meaningfully functioning system for seventeen nations to share a single currency. Pioneered by Robert Mundell, the conditions for a single currency (or “optimal currency area”, OCA) have been well defined for long enough to be part-and-parcel of every textbook in International Finance. The four most commonly-cited criteria include:
- Labour mobility across the region.
- Capital mobility and price and wage flexibility across the region.
- A risk-sharing mechanism, such as an automatic fiscal transfer mechanism to transfer funds to areas adversely affected by 1 and 2. Usually this takes the form of taxation redistribution.
- Participant countries have similar business cycles.
Despite their trading connections, it was always going to be difficult for different European economies, with diverse backgrounds (historical, political, social, fiscal) to ensure the long-run success of a single currency arrangement. This was particularly the case when most of the conditions for an OCA were not in place. One innate problem was that before the euro was established, countries considered “risky” had to pay more (in the form of higher interest) to attract skeptical investors. With the implementation of the euro, a common consensus grew up to the effect that the eurozone countries would “stick together” to ensure that the debt is repaid. Risky countries (such as the PIIGS) came to be considered safer, and were consequently able to borrow a lot more, even though the actual risk was virtually unchanged. Now that the possibility of default is apparent, with very high levels of debt it has become a very real burden for the other, less risky nations to help out, and some degree of animosity has replaced togetherness.
• The cultural mindset: By looking superficially into the notion that debt-ridden Italy could be considered a “spendthrift playboy”, in Spain the throwaway phrase “less-is-more” is often factored in when companies slash their employent levels, and the reaction of many Greek people reacting to the possibility of necessary austerity measures has been “it’s the government’s fault and everyone is still enjoying their wine and weather”, it is clear that the cultural mindset in these countries forms an element of the problem. With Greece, there is a clear sense that a large section of the Greek population would like to have their cake and eat it too. That is to say, the other EU members must use a portion of their tax revenues to attempt to bail out the Greek government. In order to get the Greek economy back onto the path of sustainable growth, they also place conditionality conditions, regarded as austerity measures which diminish the Greek ability to live a lifestyle that they can no longer afford. The November 5th-11th issue of The Economist pointed out in an article that “the polls show that 60% (of Greek citizens) are against the rigorous terms of the bailout, but 70% want to stay in the euro”. Coupled with Papandreou’s talent for infuriating President Sarkozy, Chancellor Merkel and even his own partners by calling for a referendum on the euro crisis, makes tensions among the Eurozone members even greater. This contrasts with the Irish, who demonstrated initially against the austerity measures, but rapidly became persuaded that such measures were indeed necessary for the long-term future of the Irish economy.
It is clear that stabilising the PIIGS is key to restoring confidence and hence stability to the eurozone. What is required swiftly is a detailed assessment of whether or not it would be beneficial to allow them to default, implement non-negotiable austerity measures combined with structural reforms, implement further bailout packages (with the use of a combination of funds from Eurozone members and foreign assistance), or to decide in eliminating some or all PIIGS from the eurozone, on the grounds that they might be better able to grow without the euro.
To conclude, it is clear that certain decisions need to be made by the member-leaders of the Eurozone and this paper consequently suggests the following:
• Countries such as Greece, Portugal, Spain and Ireland need to come to terms with the possibility of default. They must quickly analyse predict the consequences of two key scenarios: what would happen in the event of a default, and evaluate if they would be better or worse remaining within the eurozone or attempting to solve their problems by regaining their monetary sovereignty with a return to their national currency. Putting aside the costs of a currency change, it is likely that this latter path would lead to increasingly worse debt ratings and a depreciation of the national currency. Unless there were growth in the trading partners’ economies it is hard to see any economic benefits from such a choice.
• Structural reform should be given a higher priority than tax increases and spending cuts. With Greece, a judicious budget devised by the region’s top economic advisors and finance ministers, might be able to put what little government capital that the Greeks possess to good use. Meanwhile, the private sector of Greece could begin to aim for growth without having to pay increasing amounts of taxes. Corporate tax could be made low enough to attract foreign and local entrepreneurs to start new businesses within Greece, and make the climate more favourable for investors who might wish to purchase government and corporate bonds.
• There should be more greater and clearer scrutiny of the conditions for monetary union among eurozone leaders. The sovereign debt crisis is a clear example that in troubled times the single currency can become a problem rather then the cause for good for which it was designed. Certain countries must therefore contemplate whether a temporary or permanent return to their currency before the monetary union is a good option towards the path to stability. Equally, the EU needs to consider fully implementing the conditions for OCA to improve the euro in the future. This should include further political integration of the eurozone states, with a fully democratic and accountable European parliament, closer to the model established in the USA. For wealthy European countries such as the UK, whose currencies are very widely traded, with fully functioning futures and options currency markets, the necessity of joining the eurozone is less clear.
• Lastly, in working together to solve the recent series of unfortunate events, the eurozone members need to put their differences aside and focus their mindset on stability. This requires a change from narrower national interests towards a stronger focus on European interests. It is a given that countries such as Germany, France and the Netherlands are a lot more affluent than the PIIGS, and that must be used as a non-biased benefit for the greater good of the union. German taxpayers should not bicker about their money being “wasted” on failed governments, but rather as a pursuit for safeguarding the economic climate of the entire region. Conditionality should ensure that moral hazard does not become a longer-run issue. Likewise, the PIIGS should not view the aid and measures given as a loss of sovereignty but more so an opportunity to repay, reform and repair their economy in an orderly, humble and productive manner as part of a much larger club.
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Authors
Ivan K. Cohen, Ph.D. Associate Professor in Finance and Economics, Richmond University, The American International University in London. coheni@richmond.ac.uk
Bryan McIntosh, Ph.D. Associate Professor of International Business, Richmond University, The American International University in London. bryan.mcintosh@Richmond.ac.uk
Marc-Anthony Richardson, Richmond University, The American International University in London.
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References
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