Red Lines
At the outset of Putin’s invasion of Ukraine, he warned the west against intervention, lest it meet “consequences greater than any you have faced in history”. Since then, Russia has shown no compunction in shelling the cities it attacks, possibly recklessly, possibly missing military targets; most likely targeting indiscriminately to demoralise defenders. Russia is also accused of shelling the humanitarian corridors it promotes so energetically; of firing on protesters in the occupied city of Kherson; and of deporting civilians to Russia. Whatever the details, ten million Ukrainians - just under one quarter - have been displaced.
When Herman Kahn wrote On Escalation in 1965, he noted the parallel of the fifties game of “chicken”, in which American teenagers drove their souped-up bangers at each other, to see who would swerve first. He noted that one winning strategy is ostentatiously to throw away the steering wheel, to convey that swerving is off the cards. Is this what Putin is doing? If so, how should NATO respond? Any answer is complicated by NATO’s own game of chicken: “strategic ambiguity”, intended to leave first the Soviet Union and now Russia uncertain about where the West’s red lines lie and what happens if they are crossed.
It is arguable that the present pass calls rather for a programme of deliberate and proportionate responses, well telegraphed to the other side. There are two elements to such a programme. One is to establish the threshold for action - those famous red lines. These may be territorial, attacks on the territory of a NATO member; or they may be escalation on the battlefield, that is using the chemical, biological or nuclear “weapons of mass destruction”. Complications arise out of stealth - there is evidence that in October 2014, the Russians attacked NATO facilities in the Czech Republic with deniable special forces; ambiguity - both sides have low-yield tactical nuclear weapons; and bad politics - the West funked it when Russia and Syria used chemical weapons in 2013. This may be a reason for some of that “strategic ambiguity”.
Then we turn to military responses. The West is well-informed and well-armed, so has ample options. The proportionate course is to limit retaliation to the military units violating the threshold and their associated logistics and command systems. For example, a drone strike on NATO territory may be held to justify destroying the launch-pads themselves, together with their associated radar and HQ set-ups. This is complicated, if (to take this example further) drones are launched from aircraft, warships or remote locations. Further complications arise out of the use of weapons of mass destruction, where the West is well enough armed to have the choice of not responding in kind.
These are serious matters, to be treated accordingly. How else to walk the narrow tightrope of deterring our antagonist by keeping retaliation on the agenda, without going straight to Kahn’s terrifying climax, “insensate or spasm nuclear exchanges”?
Things that are not quite as they are said to be
Apparently there’s an ethnicity bias in the way car insurance is charged for:
Hundreds of thousands of people of colour may be paying an “ethnicity penalty” of at least £280 a year each in higher car insurance costs, an investigation by Citizens Advice has claimed.
The national charity said its year-long investigation had uncovered a “shocking trend” of people of colour paying a lot more for motor cover than white people, and that the penalty was up to £950 in some locations.
Except that’s not in fact what was found:
For the “customers” the researchers picked names often associated with certain ethnic groups, though Citizens Advice said these ended up not having much impact on the prices being quoted. “This suggests this penalty is paid by everyone who lives in an area, regardless of their ethnicity.
So it is in fact not an ethnicity bias. That being the standard way that such ethnicity bias is measured in such surveys - send out equal CVS but with ethnically identifiable names and see who gets the callbacks for interview as one example - and by that standard measure there is no such bias found.
What Citizens Advice has actually found is that insurance rates differ by geographic area. Which most of us would grasp as they do ask us for our postcode before giving us a quote.
But those first paragraphs will still do their work, be referred to again and again in the future as a brick in that wall of evidence insisting society is structurally racist. The study which shows there is no ethnicity bias will be quoted as proof that there is.
Ukraine’s latest weapon—tax reform
In the midst of their amazing work fighting off a Russian assault, the Ukrainian government has found the time to reform their tax system. Glorious indeed!
Some people might question their priorities, but it makes sense to put the tax system onto a war footing, like the rest of the country.
There is a famous precedent – the British PAYE system (for deducting tax from employee wages, paying it straight to the Treasury without the employees even seeing it) was created as we were facing the Nazis in the Second World War, allowing the government to collect more tax, more quickly, more certainly and more cheaply.
But there are questions about whether PAYE was the best system – either for the war or to rebuild the post-war economy. Has 2022 Ukraine done better than 1940s Britain?
There are three parts to Ukraine’s reform (based on an unofficial translation of the announcement):
business profits tax and VAT have been abolished, and replaced by a 2% turnover tax;
for small businesses the tax will be voluntary;
alongside the tax reform is a radical regulatory reform – business regulations are all abolished.
The regulatory reform is definitely a good thing. Regulations prevent new businesses from being formed, and restrict existing businesses so that they produce less, at a higher cost, than they would otherwise be able to do. The pronouncement says that the government will “cancel all checks for all businesses…so that the cities can live”, and instead businesses will simply have to operate “within the law”. With permits, restrictions, regulation and government forms abolished, businesses can operate within a simple rule of law rather than an overbearing bureaucracy.
That will help keep their wartime economy functioning as well as it can, and will give the best chance of rebuilding and starting new businesses to encourage a fast recovery after the war. I hope there is a Hero of the Ukraine medal for whichever government official thought of this – a functioning economy is an even stronger service to the country than destroying an enemy tank.
The tax reform also is a good emergency measure for during the war. It is simple and allows businesses to concentrate on maintaining production and supplies in almost impossibly difficult times. But my enthusiasm is not quite as great.
Making the tax voluntary for small businesses is a generous emergency response that is unlikely to be continued once the war is over (although some sort of tax relief for small businesses should probably continue).
Abolishing the profits tax is also good; we know that they result in less investment, less company formation, lower growth, and ultimately a smaller economy and fewer (or less well paid) job opportunities.
But although I like low, simple taxes, a turnover tax can cause problems. It is not necessarily the best way to run a war economy, and it is certainly not the best long-term way to rebuild the economy after the war.
The first problem with a turnover tax is that its impact depends on the profitability of the business. For a business with a 20% profit margin – so that 20% of its turnover is profit – a 2% turnover tax is only a small problem. But for a business with a 5% profit margin, a 2% turnover tax would take out two fifths of its profit. And for a business with a 1% profit margin, a 2% turnover tax is disastrous.
In reality many businesses would pass a turnover tax on to their customers, by increasing their prices (which they can probably do without too much loss of sales, because all their competitors will be doing the same), and in this case the increased prices should mostly be cancelled out by the abolition of VAT.
However, even then it is possible for a low margin business to have to pay more tax under a 2% turnover tax than a 20% VAT, because VAT effectively allows you to deduct the VAT paid by your suppliers. For that reason, even in war, I would have considered keeping VAT, perhaps at a reduced rate, but with the option for small and medium sized businesses to pay a 2% turnover tax instead.
But the bigger problem with a turnover tax will come after the war.
A turnover tax is known as a ‘cascade tax’ because, like a waterfall, it gets more dangerous the further it falls - the tax becomes more damaging the more layers of business it goes through, because each separate business in the supply chain is charged the turnover tax again, without the credit that VAT gives for the tax paid by the layer below.
This encourages conglomerates, with one company doing everything, to reduce the tax bill, rather than outsourcing to lots of different suppliers. If one business does everything, from producing raw materials, then manufacturing, to selling the finished product, then there is only one lot of tax. But if components, for example, are bought in, there will be two lots of tax (on the producer and the seller), on what is ultimately the same money received from the end customer.
But modern businesses are more complex than that; it is very common for the raw materials to be produced by one company, then refined by a second company, then components to be made by a third, then the product to be assembled by a fourth, sold to a wholesaler as the fifth company in the chain, and then finally sold by a retailer as the sixth. Six companies in the chain, so six lots of turnover tax - and many supply chains are more complex than that.
The turnover tax therefore encourages businesses to try to do everything in-house, to reduce the number of layers in the supply chain and so reduce the number of times the tax is charged on the same ultimate product. And not just the main production, but all the ancillary business services as well— premises cleaning, accounting and other professional advice, transport, and many others—everything tends to be brought in-house to save tax.
That is usually inefficient, because one company is unlikely to be good at everything. It tends to have less innovation than when you have lots of different businesses each trying to improve their own little bit of the supply chain. And it damages small businesses, because they do not have the capacity to do everything themselves and so need to outsource—thus giving them a higher tax burden than a big company.
So Ukraine’s tax reforms have the right spirit: removing the burdens on businesses so that they can continue to produce and supply goods and services through these appallingly difficult times. But if they continue in the same way after the war, it risks damaging the recovery, particularly by restricting the formation of new, innovative, specialist smaller businesses.
A better plan would be to continue with a VAT, but a reformed one that is as low and simple as possible, and with the option of a turnover tax for small businesses who find VAT too complicated and would prefer a simpler, but less efficient, system. Any profits tax that is reintroduced should be as low and simple as possible, because we know that profits taxes are damaging to business growth and job creation.
I wish the Ukraine a speedy victory, and that they can soon make the Adam Smith toast to “peace and low taxes”.
Richard Teather was a university academic for twenty years, specialising in international tax, and advising governments and business organisations around the world on tax reform.
We did say this would happen - and lo, it is happening
Banning high-interest rate, small sum and short-term loans being made by legal companies does not ban high-interest rate, small sum and short-term loans from being made. Nor does making it near impossible to obey all of the laws on the issuance of such loans. It just means that such loans will be issued by those who do not obey the law:
More than one million people are in debt to loan sharks, new research suggests, as it emerges illegal money lenders are demanding sexual favours in repayment contracts with borrowers.
Around 2.4 per cent of the population - or 1.08 million people - admitted they had borrowed money from “someone locally who charged interest” who operated outside the conventional banking sector, according to the report by the Centre for Social Justice (CSJ).
We have been making this point widely for some years:
Perhaps no such technology exists, in which case we’ll be stuck with something expensive and somewhat dangerous that 10 million people want each year. It’s a bit like drinkable wine, and we should recall what happened when we tried to ban that: prohibition of the best credit we have to offer will inevitably lead to Fat Tony and his friends running amok again.
As it is being complained about. The thing to recall here is that making something illegal, if people still desire it, doesn’t stop that thing from happening. It just makes that thing illegal, without the law.
We’ve even pointed out what is the solution. If you don’t like the thing then innovate to create something better. As it is better then folk will naturally use it and the thing disliked will disappear.
A little advice on what we think would make a better world. Why not come up with the solution first? Create the better system then compete the old out of business instead of using the law to ban. On the basis that people might really need the goods or services on offer. Depriving people of what they need is not quite the way to do things now, is it?
And if it’s not possible to create something better that will so outcompete then, well, the current system is as good as it gets then, isn’t it?
Hoist by the petard of the poverty definition
The problem with strange definitions of things is that events can make that thing - as defined by that strange definition - move in opposition to reality.
Take poverty currently. We have no doubt that current economic events mean that many people will have less - they will be poorer. And yet given the official definition of poverty we’re really very certain indeed that poverty will be declining.
UK household incomes are set for the biggest annual fall since at least the mid-1970s this year,
Not that we’re happy about this, but we’re happy to accept that the statement is true.
However, campaigners say urgent further steps are required to prevent a dramatic rise in poverty this year
But that’s not how poverty is defined. Poverty is not defined as the absolute level of income. The reason it isn’t is that by any historic or global standard the UK doesn’t have any poverty by any absolute standard of income. Just the Jobseeker’s Allowance, alone, puts an income in the top one third of global incomes (this is before any housing benefit, other benefits or allowances, certainly before free health care, free education and so on. And yes, adjusted for the fact that prices differ across geography). Given that admitting that would rather kill off the constant insistence for tax and redistribution - we’ve already solved poverty that is - the definition has been changed.
Poverty is now defined as relative poverty. Less than 60% of median household income, adjusted for household size and can be either before or after housing costs. It’s a measure of inequality, not some absolute standard of living that can, or cannot, be achieved.
By this standard poverty isn’t going to increase as a result of current economic events. There will, in fact, be compression of income differences. Benefits provide a floor to low end incomes in a manner that doesn’t happen for the rest of the income distribution. Inequality will decrease - as it always does in a recession as well.
We have a definition of poverty now which decreases in bad economic times and increases in the good. Which is really a very strange definition of poverty to be using, isn’t it?
Perhaps we should stop doing so?
We have some bad news for the International Energy Authority
Oil prices are up, the International Energy Authority has some ideas about how to cut demand. We have some bad news for them:
Alternate private car access to roads in large cities (eg every other day)
Saves about 210,000 bpd.For example, cars whose number plate ends with an odd number can drive on Monday and those with an even number can drive on Tuesdays. Such schemes have been deployed to tackle congestion and air pollution peaks in Athens, Madrid, Paris, Milan and Mexico City. Exceptions could be made for electric vehicles. One downside is that households with multiple cars could game the rules.
The bad news is that it’s not “can” game the rules but “will”. There is considerable evidence from places where this has been tried on a permanent basis that one vehicle households rapidly become two such. As is likely when people are trying to run two capital assets they tend to run older, lower mpg and higher polluting vehicles as a result. The actual reduction in oil usage can thereby become negative.
Running two £500 beaters does not reduce petrol consumption that is, even if both are used only half the time.
This being the problem with these clever little plans. Every time that is, people can and do game those plans. The way to change consumption behaviour is to change the price. And with petrol asymptotically approaching £2 a litre that’s already been done, hasn’t it?
The nerds with spreadsheets isn’t the way to build a socioeconomic system. Something that should be obvious enough because economics really isn’t that difficult. No, really, it isn’t.
Surprisingly, we agree with Mariana Mazzucato here
Nature ponders the question of whether there are limits to growth. The answer is of course yes. Economic growth is, by definition, the addition of value. Once we run out of ways to add value then economic growth will stop. However, in this they also refer to another paper led by Mariana Mazzucato, in which this is said. With which we also agree, at least in part:
Economics has until now measured the price of everything and the value of nothing. That needs to change now. We need to measure the value of everything – the things that truly matter. We need to revalue health and wellbeing – and its sustenance through care without financial burden – as the central measure of success in society and economy.
Of course that first sentence is wildly wrong. As we’ve already pointed out, growth is more value add, GDP is the measure of value add. The whole thing is about value. Which means we do agree with the next part, that we need to measure the value of everything. Which, in large part, we do.
For what we’re measuring when we look at monetised transactions (we agree entirely that GDP leaves out non-monetised transactions on the simple grounds that counting stuff that doesn’t have numbers attached is difficult) is the value that individuals put on those things. Their utility maximisation leads to their valuing them at this.
So, the value add that we measure is that which is truly important to the people doing the doing, the people themselves. Which is, we think, as it should be.
Of course, we’re aware that this isn’t what Mazzucato means, that we all get to make our own valuations in our own lives. Her point is that we should be valuing everything as she thinks we should. But it’s still true that economics does value everything, the things which really matter. It’s just the valuations applied aren’t those that Mazzucato thinks they should be.
Ministerial Staff College
The Army learnt, over two hundred years ago, that before officers were given charge of major units, they attended Staff College. Yet our ministers are given charge of departments employing thousands of people without any training at all. No wonder the government cocks things up so regularly. At our Ministerial Staff College, they would be taught, on day one: “Central Government: includes Government Departments and their ALBs: Executive Agencies, Non-Departmental Public Bodies, Non Ministerial Departments, and any other non-market bodies controlled and mainly financed by them.” They would soon discover that Executive Agencies and Executive Non-Departmental Public Bodies (ENDPBs) are almost the same, i.e. the parts of their parent department that implement policy, except that Agencies are part of their parent departments whereas in theory, but not in practice, ENDPBs are independent. We do not need ENDPBs.
If the Ministerial Staff College is to stand a chance of success, civil servants, no matter how charming, experienced and persuasive, should not be allowed near the place. Yes Minister may be amusing but it is also a dire warning. Teachers should be drawn from top business schools and retired ministers who achieved success in their day. Potential PMs should be taught not to move a minister who is just getting the hang of the job.
Students of best ministerial practice would also learn that Public Corporations, such as the BBC, which are supposed to be independent, should not be considered integral by their parent departments – the DCMS in this case. It would not take the first Staff College intake long to work out that the Executive Agency is the only form of ALB that any department needs. Advisory NDPBs are merely committees and ministers can invite advisers to advise without such formal trappings. Non Ministerial Departments should not continue unsupervised but be assigned to the most relevant ministers.
Executive agencies are excellent. Carrying out departmental policy requires a different mindset, and usually many more people, than devising policy and framing legislation. They will have, or should have, clear objectives and are required by law to publish annual reports on their achievements, costs, headcount, and the matters normally contained in any corporate report. The DWP is a flagrant example of a department that fails to understand this. According to its latest annual report, 75,368 of its 80,250 staff occupy its HQ, an unusual Chiefs to Indians ratio.
Governments wage war, from time to time, on ALBS, usually known as quangos, but then their numbers creep back up. In 2019, there were 295; according to the latest departmental annual reports, their number has grown back to 371. The DCMS sports no less than 45 of them, although its latest annual report claims only 38, including the BBC which is not an ALB at all. 15 are museums. The idea that we are governed by a museum culture may indeed have some merit. Certainly, the DCMS is not governed by numbers: in their annual report, the BBC headcount is 18,977, whereas according to the BBC’s annual report for the same period (p.262) it is 20,279.
Ministers are busy people with many claims on their time. Ministerial Staff College should teach them how to prioritise and how to focus. One key to how woeful this is at present is the length and dreariness of content of departmental annual reports. At 300 or more pages each, one wonders if ministers have even read their own department’s, never mind anyone else’s. Instead of clarification of priorities and quantified performance indicators (though there are some of those) we have fascinating things like half the workforce being female (as they are every year). 50 pages would be better than 300 if they provided learning as distinct from varnishing reality.
Sweating assets
The UK has launched a very imaginative scheme to help Ukrainian refugees to find sanctuary in the UK. The “Homes for Ukraine” programme offers compensation to UK homeowners who take a refugee into their home for at least 6 months. It is a clever idea, with features that run parallel to the so-called “gig economy,” in that it makes greater use of existing resources instead of putting in the time and investment it would take to provide new ones.
Unlike many previous refugees, the new ones will not be housed in temporary camps, created or converted for the purpose, nor will they be assigned temporary space in hostel or hotel accommodation. Instead they will move into underused private space that is already in existence. Furthermore, they will have the support of those who provide space for them, and will not need extra staff to be trained and employed to help them.
This is an example of what the City calls “sweating assets.” It’s a phrase used to describe extracting more value from an asset beyond its original intended use. It means extracting more value from resources already in place, rather than creating new ones. In this case the assets sweated are the spare space in the host’s accommodation, and a little of their spare time to help their new guest settle into the country that has welcomed them.
“Sweating assets” has received much attention in the 21st-century, but its roots go back earlier. In 1972 a McDonald’s franchisee put it to Chairman Ray Croc that they had buildings and staff and were incurring operating costs all day, whereas their overwhelming use came twice a day at lunch and dinner. McDonald’s breakfast was born, and was soon followed by the celebrated Egg McMuffin, designed for the purpose, along with other morning goodies. In 1977, the company introduced a full breakfast menu that included pancakes, sausage, hash browns, and more. Within 20 years, McDonald's was making $5 billion a year on breakfast alone. They had found how to sweat their assets to good effect.
In 2008 three San Francisco entrepreneurs found a way to use the extra space in people’s homes by constructing a site that would allow visitors to rent it, usually on a short-term basis, especially for holiday visits. Airbnb was born, and people were able to afford far less costly accommodation than that proved by hotels. That spare domestic space asset was sweated.
In a similar story, 2009 saw the birth of another idea, that the unused assets of private cars and the spare time of drivers could be sweated to provide a telephone ride-hire service that used modern technology to link would-be riders with willing drivers. Uber was born, and the face of urban transport changed. People were able to secure a ride, even when there were no taxis around, and they could secure it at a lower cost.
Less dramatically, other assets have been sweated, including the drive-ways of private homes rented out as parking spaces during times when it was not being used by the owner’s vehicle.
Sweating assets has environmentally-friendly elements, because it makes the development and use of new assets less necessary. It just makes more use of the current ones. It depletes fewer resources. It is, of course, disruptive. Most innovative ideas are, as the old vested interests have to give ground to the new opportunities.
The new “Homes for Ukraine” programme will not be disruptive, however; it was the war that did that. Instead the new programme will be constructive, sweating the asset of spare domestic space to give our new guests the best chance of a better life because of it.
Mr. Piketty suggests we become what we fight
There’s a certain logical problem with this suggestion:
To implement this type of measure, it would be sufficient for western countries to finally set up an international financial registry (also known as a “global financial registry” or GFR) that would keep track of who owns what in the various countries. As the World Inequality Report 2018 has already shown, such a project is technically possible and requires the public authorities to take control of the private central depositories (Clearstream, Euroclear, Depository Trust Corporation, etc) that currently register securities and their owners.
So government will own the bodies that register ownership. So as to increase the control government has over who owns what. This is not us being unfair about what Mr. Piketty suggests:
In Europe and the United States, everything is done to distinguish useful and deserving western “entrepreneurs” from harmful and parasitic Russian, Chinese, Indian or African “oligarchs”. But the truth is that they have much in common. In particular, the immense prosperity of multimillionaires on all continents since the 1980s and 90s can be explained to a large extent by the same factors, and in particular by the favours and privileges granted to them. The free movement of capital without fiscal and collective compensation is an unsustainable system in the long term. It is by questioning this common doxa that we will be able to effectively sanction autocracies and promote another development model.
That is, in the name of fighting an economic autocracy we should all become economic autocracies. For one of the major powers that Putin holds over the Russian economy is that ownership rights, ultimately, depend upon his favour. The saga of Yukos is evidence enough of that.
Thus, the suggestion is that we should hand such power to our own governments so that they hold such power over us.
It’s also worth considering the role of jurisdictions like Cyprus in all of this. Russian use of that place isn’t, in fact, about taxation - Russian taxes, well, those imposed legally by the state, are low by international standards - it’s about access to at least a modicum of the rule of law. Also, given that the Russian state is not the only taxation body in the Russian economy it’s to provide a certain security against extralegal taxation.
Piketty’s claim is that in order to deal with people fleeing that authoritarian state, with its by and large absence of the rule of law over matters economic, we must hand our own governments the same powers over us as the authoritarian state already exercises over those fleeing it.
As if we should deal with the Nazi confiscation of emigrants’ valuables in the 1930s by taking the power to confiscate the valuables of those who might emigrate from our shores.
Somehow we don’t think that fighting fascism by becoming fascists quite works as a logical construct.