It would appear that Larry Summers was right

We tend not to talk or worry too much about macroeconomics around here, thinking as we do that getting the microeconomics of market structure, incentives and voluntary cooperation right is more important. Hugely more important, meaning that getting that important part right obviates the need for much concern about the other.

Others disagree with us, as with Larry Summers. Who recently pointed out that the American economy is indeed a little inside its potential production capacity envelope. There are economic resources lying unused. He goes on to recommend some Keynesian pump priming to bring them back into use. Not our favoured policy but it is, within the models being employed, sensible enough.

Summers goes on to point out that there’s only so many of those unused resources. So, if they’re brought back into use by simply spraying money over the economy - sorry, stimulus checks to American voters - then the available room for spending on the infrastructure he thinks it necessary to revitalise is constricted. In fact, trying to do both will mean all those unused resources get used, and more, meaning that interest rates will have to rise to choke off excessive demand for them.

This has, of course, been entirely laughed at by the political class. They’ve got the societal chequebook and they’re going to enjoy their control of it. Even the sometimes sensible - Paul Krugman for example - have been insisting better to do too much rather than too little.

American interest rates might need to rise to ensure that the world’s largest economy does not overheat, the head of the US Treasury has said.

Ah, there appears to be more than just a modicum of truth to the Summers view.

We would take a larger lesson from this. That Modern Monetary Theory for example. It states that politics can spend as much newly created money as it likes the limitation being good sense and taste. The good sense to not spend too much and the taste for restricting the spending when it is too much.

We do think that fails, not on economic grounds but upon human ones. Taste and sense, let alone good versions of either, seem not to be all that evident in politics.

We agree with the sentiment but not the specifics

The contention is that the UK’s common law approach - it is really the law of England and Wales here - is better than the Roman approach of the continent when building financial markets. We agree with that sentiment but the specifics seem a little garbled to us.

In all the maelstrom of debate about the future of global financial services in light of Brexit, one key point is often forgotten. That is, that the UK’s common law, pragmatic approach to law and regulation is intrinsically the safest for financial services, and conducting financial business under other available regimes introduces dangerous risk into the system which cannot be quantified or managed.

A rousing chorus of Flanders and Swann seems appropriate here, tuppence not being given etc.

However, much too much emphasis is being placed upon the institutions of the law. We agree that London being filled with people who know what they’re doing in this area is useful. As with Delaware’s Chancery Court competence and speed - if that can ever be applied to the law - is an aid to a business environment. But that doesn’t explain why the advantage arose in the first place, nor why it is likely to remain.

For that we need to look at the underlying concept of English law in commercial matters. Which is, broadly enough, that it does not follow the precautionary principle. As long as an arrangement is not obviously illegal already then it may be done. There is freedom of contract that is. It is not necessary to go around the corner to some bureaucrat or, worse, politician, to ask whether this may be done. Or even done in this manner. Some such arrangements that are tried out later prove to be illegal in new and interesting ways, true, but this is a cleaning up exercise that happens afterward.

The effect of this is as in any other area of innovation. Financial markets are webs of contracts. As contracts can be varied, tried out, experimented with, without the requirement of an imprimatur or political acquiescence then that innovation can and does proceed more speedily. London’s financial markets work, dominate even, simply because they are closer to free markets than those in many to most other places. Free in this sense of allowing innovation.

Once this is understood we can see the dangers of certain proposals floating around. There’s a suggestion that takeovers should be subject to a public interest test for example. You may only buy this if you can show how it benefits the wider economy. But this is to stick that crowbar of the precautionary principle back into markets which work precisely because they don’t already incorporate it. That you may not do this because it will be obviously harmful is one thing, it’s the reversal of the proof which is the damaging thing.

It’s all an example writ small of the larger point about economies in general. Those where the base presumption is that anything not obviously illegal may be tried have lots of innovation. Those where permission must be obtained have less, the amount less of innovation being directly proportional to the difficulty of gaining the permission. As innovation is what makes us all richer over time - it is how productivity and technology advance - then we desire, positively lust after in fact, a permit and permission free society.

It’s possible to confuse this, as we think has been done here, with the joys of our bewigged and peruked lawyers. The importance however is in the base assumption about liberty underpinning the system. Which is that we have freedom of contract, not just with whom but also in form.

BBC Brexit Editorializing

On Monday at 6.45 on the BBC News Channel, Ros Atkins asked “whether the pledges made by the Leave campaign have been borne out by reality across fishing, trade, Northern Ireland and divergence - and whether some of the warnings made by Remain about Brexit have come to pass” (quote from BBC Website).

I recall four segments of more or less equal length: fishing, Northern Ireland, trade and warnings. To quote the BBC website, Mr Atkins failed in his pledge to discuss divergence, neglecting the vaccine/nimble/speed-boat story, which most would see as divergence’s headline fruit, indeed the headline post-Brexit story so far.

He admitted that fishing was trivial but proceeded to devote one quarter of his time to it. He could have disposed of the matter summarily by saying that fishing is unique: for a few years, we must balance EU access to our waters with access to the EU markets which take almost all of our catch. He failed to ventilate the medium-term solution: investing in supply chains (and negotiating access) to other markets. Instead, three months in, he chose to editorialise it as a failed promise.

He dealt with the facts of Northern Ireland accurately enough. Even so, he failed (a) to identify as an underlying cause the EU’s insistence that its single market obliged the countries of the British Isles to accept either a border across the Irish Sea or a border within the island of Ireland; and (b) to identify as an error the negotiators’ sole focus on the risk of Nationalist disaffection. Instead, once again, he editorialised a failed promise

His treatment of trade agreements was accurate in saying that the UK’s 60-odd novated agreements follow the EU’s paperwork. He failed to note that pre-Brexit, the EU was only able to make agreements with marginal economies and that none of them matter. If he mentioned Australia, India or Japan, I missed it. Once again, an editorialised failed promise.

He treated the mistaken warnings fairly but gave them only equal time with any one of the other three points. Most would see them as a bigger story. He was silent on our biggest industry, financial services, where jobs have conspicuously failed to move to Europe.

What we got felt like sectarianism from Mr Atkins. Has the BBC no time to broadcast other views?

We'd suggest that Dame Margaret, Lady Hodge, turn the autoquote machine off

Apparently the Amazon subsidiary in Luxembourg has raised the ire of Dame Margaret, Lady Hodge:

Margaret Hodge, a Labour MP who has long campaigned against tax avoidance, said: “It seems that Amazon’s relentless campaign of appalling tax avoidance continues.

“Amazon’s revenues have soared under the pandemic while our high streets struggle, yet it continues to shift its profits to tax havens like Luxembourg to avoid paying its fair share of tax. These big digital companies all rely on our public services, our infrastructure, and our educated and healthy workforce. But unlike smaller businesses and hard-working taxpayers, the tech giants fail to pay fairly into the common pot for the common good.

There’s something almost Alf Garnett about that, dirty capitalists comin’ over ‘ere and exploitin’ our taxes.

Except that’s not what is happening at all:

Fresh questions have been raised over Amazon’s tax planning after its latest corporate filings in Luxembourg revealed that the company collected record sales income of €44bn (£38bn) in Europe last year but did not have to pay any corporation tax to the Grand Duchy.

Accounts for Amazon EU Sarl, through which it sells products to hundreds of millions of households in the UK and across Europe, show that despite collecting record income, the Luxembourg unit made a €1.2bn loss and therefore paid no tax.

If you were to be avoiding tax by squirrelling profits away in Luxembourg then there would be, well, there’d be profits squirrelled away in Luxembourg, wouldn’t there? When in fact Amazon makes a loss there and, as we’ve seen from the accounts of the UK companies, profits here which do pay tax.

Reality being that Amazon continues to invest in expanding its business and so makes a loss. Which does seem to be what we’d like Amazon to be doing too. We consumers out here like what Amazon provides so their spending more on us being able to have more of it is producing what we want more of. The problem with this is?

Our advice to Dame Margaret, Lady Hodge, is to turn that autoquote machine off, it has become out of synchronisation with reality.

Tax competition — or tax tyranny?

Tax Tyranny – I wish I had thought of that as a book title.  Fortunately Pascal Salin did, and has done the title justice; this is a broad-ranging book about the many problems of tax, and one that manages the difficult task of being very knowledgeable about taxation, both the theory and practicalities, whilst also being very readable.

Written for the general reader, it avoids the technical language of tax economics, instead illustrating the principles with plenty of interesting examples.  Most of these are French, but it is always beneficial to realise that other countries have their problems too; indeed one of the disconcerting things for a British reader is to see our tax rates regarded as comparatively low!

Rather than a textbook for tax wonks, this is political philosophy informed by tax economics.  Professor Salin gets into the real basics of what tax policy should be about – the reality of human nature; voluntary co-operation; human rights and ethics; liberty vs slavery.  Reducing taxes is, he shows, not just an economic imperative, but essential to give us humans the space “to act in accordance with our very nature”.

But the philosophical theory is combined with robust practicality; for example, after showing why a poll tax is better than an income tax, he then goes on to explain why it would still be worth working for a flat income tax of 20%

The book aims “to put taxation back in the context of the actual working of human societies” rather than leaving it in the hands of those who see their role as directing the wise allocation of resources, and as such it neatly skewers many of the arguments used by proponents of higher taxes.  For example the principle of progressive tax, higher rates on higher incomes, is shown to conflict with human nature, since in voluntary contracts overtime is frequently paid at a higher rate than base salary – we naturally need more incentive to work harder or longer, but a higher rate tax removes that incentive and leaves us with less benefit from extra work.  

That illustrates the trade-off between work and leisure that is a frequent theme of the book; tax is a disincentive to our natural tendency to work for each other, so it reduces the trade (domestic and international) that is “a key driver of progress”.  He contrasts the entrepreneur, doing productive good for society, with another individual of the same ability who “prefers to walk in the countryside humming music”.  How should the two be taxed, and what incentives – or disincentives – would those taxes have?

Like myself, Professor Salin sees tax competition as beneficial – the risk of productive individuals moving to lower taxed countries acts as a restraint on politicians’ desire to increase taxes too much.  At a time when the US and EU politicians are calling for worldwide minimum levels of taxation, it is good that someone points out that the emperor has no clothes - “if a tax is stupid, it is no less stupid because it is harmonised” – and useful to be reminded that taxes should really be set “at the level of the smallest possible community”, encouraging tax competition and giving a genuine diversity and choice between different levels of taxation and government spending, so that people can vote with their feet.  And he really does mean “the smallest possible community”, suggesting that tax policy could be set by each town or even village.

I was almost disappointed when the book actually suggested a tax system – it seemed something of a surrender after the splendid opposition to the whole principle of tax.  However it is prefaced by the comment that “there is no good tax” and that his recommendation is merely the least bad.  And this is a comprehensive reform proposal, rather than his opposition to the illogicality of much tax policy, where governments solve the problems of the bad design of one tax by introducing another tax in addition to it.

For those who collect tax proposals, his is an individually assessed consumption tax, with consumption calculated as receipts minus investments (Professor Salin, like myself, prefers VAT to income tax, whilst opposing having both).

But far more interesting than his proposed tax are his proposals for tax constitutional provisions, particularly the “tax house” of parliament, separately elected, which would have to approve all tax and borrowing but which would have no responsibility (and therefore could not seek electoral credit) for expenditure.

There is a recurrent theme of “the destructive nature of taxes”, particularly their destruction of human capital and interactions.  Rather than the usual claim that tax is “the price we pay for a civilised society”, Professor Salin warns that “civilisations die … when individuals have lost the desire to create and the enthusiasm to innovate”, and that tax stifles that creativity.

At the root of taxation and public spending is the bizarre idea that it is better for decisions to be imposed by politicians rather than by the free interaction of people.  This book is a splendid call for human relations based, not on coercive taxes and top-down government-directed spending, but on free will and the voluntary interaction of people living in liberty.

Buy the book here.

Karl Marx was right on one thing

Most of the bits that Karl Marx got right were cribbed from Adam Smith which is a good source to use of course. There is one part of his analysis that is useful to us today though.

Marx insisted that it was competition among the capitalists for the labour they desired to profit from which raised wages. If there was that reserve army of the unemployed, meaning there was no need to compete for labour, then rises in productivity would feed through into profits and nothing else. If, however, there was full employment then some would have to raise wages in order to gain access to that desired workforce. This then pulled up wages across the economy.

This is correct.

The hospitality industry is facing a staffing crisis as restaurants and pubs say that up to a quarter of those employed before the Covid-19 pandemic will not return.

The UK’s largest listed pub group, Mitchells & Butlers (M&B), has lost 9,000 of its 39,000 staff since last year; D&D, the owner of more than 40 upmarket restaurants including Le Pont de la Tour and Coq d’Argent, is looking for up to 400 recruits out of a total 1,300 UK workforce; and Pizza Express is looking for 1,000 staff, having laid off thousands less than a year ago.

Pubs and restaurateurs agree that there is a particular challenge in the south-east of England and London as a lack of supply of skilled people from the EU, post-Brexit, is causing issues with hiring staff, especially in the kitchen. More than 30% of hospitality workers across the UK are thought to have come from Europe pre-Brexit but that rises to more than half of those employed in London.

We have had, by and large, full employment at times these past couple of decades. Domestically, inside the UK that is. But wages haven’t been rising as we might think they should. The reason being that the reserve army has still been there, just not wholly visible. It’s been in Brno, Budapest and Bialystock, a £50 flight away. Thus any increase in demand for labour has been met without wages needing to rise.

Of course, this is one of those economic things, as so many are, which is largely true instead of being wholly and exactly so. A tendency not a defining truth in our economy. But true as far as it goes for all that.

We’re entirely happy with that mobility of labour and moves for a better life. But it is worth noting the effects of the new legal restrictions upon it. Low end wages and working conditions are likely to improve in the UK as a result of Brexit. On the basis that on this one thing Karl Marx was in fact correct.

A Course on Integrating Economics and Philosophy

In May, our friends at the Objective Standard Institute will be running a course on how to integrate the free market economic ideas of Henry Hazlitt with Ayn Rand’s philosophy of Objectivism. Hosted by economics professor Raymond Niles, the course will teach:

• Why production and trade are fundamentally driven by reason and self-interest—and why grasping this principle is essential to making the moral case for capitalism;

• How supply and demand jointly determine market prices, and why establishing and maintaining freedom for this “pricing mechanism” to work is in everyone’s self-interest;

• Why coercive policies, such as wage controls and tariffs, harm all parties involved—employers and employees, job-holders and job-seekers, businesses and customers, exporters and importers;

• What free-market banking is, why it is in everyone’s self-interest, and why government intervention in banking is morally and economically disastrous;

• Why free markets result in better and safer health care, food, travel, education, etc.

If you want the most powerful tool in the world for advancing freedom and capitalism, this course is for you. By integrating the principles of economics with those of Objectivism, you will equip yourself to think, write, and speak in support of freedom with greater confidence and efficacy.

Full scholarships are available to students and under-30s. Full or partial scholarships may also be awarded to those with financial difficulties. To apply for the course and submit a scholarship application, just follow this link.

That public choice concept gains another proving

A proof as in a test of the veracity rather than an insistence upon it:

Specifically, “bad” outcomes, such as apartment blocks being built (which locals oppose) or school closures, are significantly less likely in neighbourhoods where politicians from a local ruling party live (compared with areas where local opposition politicians live).

The effect is large: when a party wins power it leads to a 19 percentage-point fall in the chance of proposed school closures in areas where politicians from that party live.

The authors say this is a sign that favouritism drives decisions and surprising to find in Sweden, with one of the world’s lowest corruption levels. Some might now want to break out the champagne when an MP moves next door but I’m old fashioned. Maybe it shows why we should care about them failing to live up to important ideals of public service, even if they’re not technically corrupt.

Public choice economics is simply the observation that politicians and their bureaucrats are humans like the rest of us. As such they are incentivised by their own self-interest along some spectrum of purely selfish to enlightened.

The corollary of this contention being true is that we should give politicians - and bureaucrats - minimal control over our lives so as to reduce the portion of it subject to their self-interest. That is, minarchy is the solution to the problem that we are all human, yea even those who rule over us.

Put not your faith in central government

We’re told often enough that government must intervene, take charge, because of market failure. Part of this is simply because the general conversation misunderstands what economists mean by market failure. Which is not that all flavours of all markets have and will fail to deal with a particular point or problem. Rather, that markets as currently constituted aren’t doing so.

Thus we get Nick Stern’s statement that climate change is the world’s largest market failure ever. His point being that carbon costs and prices are not in market prices, they are externalities to the market processes. As his Review then goes on to insist the solution is not then to use non-market processes. It is to lever the externalities into market prices and so use market processes to solve the problem. Market failure is not, in this and many other insistences, a declaration that markets fail, it’s that they don’t exist and must be created. The same is true, for example, of dealing with the commons problems of fisheries through individual transferable quotas, one of the few things known to actually solve the problems.

Along with this is insufficient consideration of government failure. Even in those cases where markets don’t work and cannot be created or adapted to do so it is not therefore true that government will. Government has its own modes and methods of failure. Consider, say, water provision to First Nations in Canada:

Amid mounting frustration, Whetung and other Indigenous leaders have launched national class-action lawsuits against the federal government. Arguing the federal government failed to provide clean water and forced communities to live in a manner “consistent with life in developing countries” they are suing the government for C$2.1bn (US1.7bn) damages – the costs associated with years of bottled water trucked and a water treatment system for the whole community.

Despite being one of the most water-rich nations in the world, for generations Canada has been unwilling to guarantee access to clean water for Indigenous peoples. The water in dozens of communities has been considered unsafe to drink for at least a year – and the government admits it has failed.

We’ve known how to do this for a couple of centuries now. Millennia if we think about water itself, the Romans and their aqueducts, if we emphasise the clean part then since perhaps the 1850s and that incident with the water pump handle in Soho. Providing potable water is something we collectively know how to do. So, why isn’t it being done?

As a consequence of colonial-era laws, Indigenous communities have been barred from funding and managing their own water treatment systems, and the federal government bears responsibility for fixing problems.

Ah, yes, government does have its own modes and methods of failure. Central government, far away from the problem, perhaps more than most.

A water treatment system for a community is certainly a collective problem but it’s not obvious - to be polite - that government is the solution now, is it?

Curve Lake First Nation, a forested community in southern Canada, is surrounded on three sides by fresh water.

But for decades, residents have been unable to safely make use of it.

Perhaps we should stop being polite about it? That comment about government being short of sand in a desert is meant to be a joke rather than a diagnosis, isn’t it?

There's an easy answer here - public choice economics

A piece in The Guardian lauding the end of neoliberal economics and politics:

Taken together, these developments indicate that neoliberalism is dying in Britain, for the time being at least. But those who have long dreamt of neoliberalism’s demise should think twice before popping the champagne. A more assertive state does not inherently lead to more progressive outcomes. Instead we must ask: in whose interest is the state intervening?

In the UK, the unprecedented levels of state support in the economy have been accompanied by what appears to be widespread cronyism and potentially corruption.

Not that we agree with either the description of neoliberal being used or the recognition of its imminent demise. Still, to answer that question about whose interests state intervention will deployed in favour of - public choice economics.

The central observation here is that those who are in government and the bureaucracy are human beings just the same as the rest of us outside those gilt-edged offices. They react to, suffer from, the same temptations and incentives as the rest of us too - gaining office does not suddenly turn you into a morally pure and self-disinterested saint. It also doesn’t proffer omniscience but that’s a slightly different point.

Think on what the complaint - untrue but the complaint all the same - is about neoliberalism. That the capitalists have gained power and are using it to enrich themselves. A rational observation of human beings in all their glories would be that those who do gain power will use it to enrich themselves. Government and the bureaucracy gain power over the economy and the governors and bureaucrats will use it to enrich themselves.

So, whose interests will prevail in this new and non-neoliberal world? Those of the governors and the bureaucrats. Any connection between their interests and our own out here in the citizenry will be somewhere between a coincidence and a mistake.

Those with power in the economy will use it to bend that economy to their interests - the underlying failure in the critique of neoliberalism is to believe that we neoliberals don’t already know that. Neoliberalism is an insistence that power and economic benefit are intractably, ineluctably, intertwined. Which is why we must have that neoliberalism.

For only in a market economy, one of competitive markets, are we as individuals in control. Therefore and thus we need a competitive market economy so that we are the people with that control and thus the economy works for us - not for any of those other groups that may gain power whether capitalists, bureaucrats or the people we elect to get the rubbish taken out.

As PJ O’Rouke once remarked, never let the people with all the money be the people with all the guns. The neoliberal revolution is exactly that, an insistence that we the people be the ones with the economic power. So that the economy works for us, the people - not any other grouping that might gain the power to manipulate in their interests.