Government wants growth; shame it knows not how

When the Chancellor introduced his “Growth Plan” in the Commons on 23rd September, he used the word “growth” 142 times but did not mention “innovation” even once. The closest he got to it was: 

“Of course, to drive growth, we need new sources of capital investment. To that end, I can announce that we will accelerate reforms to the pension charge cap so that it will no longer apply to well-designed performance fees. That will unlock pension fund investment into UK assets and innovative, high-growth businesses. It will benefit savers and increase growth. And we will provide up to £500 million to support new, innovative funds and attract billions of additional pounds into UK science and technology scale-ups.”

Making money to support innovation is indeed helpful but not the way Business, Energy and Industrial Strategy (BEIS) does it nor stodgy pension funds, nor large companies.  Procter & Gamble discovered it had too many committees blocking new product development, so it gave up and restricted itself to buying the new products once they were already doing well in the market. Baileys Irish Cream, one of the most successful drinks brands in the last 100 years, was born because the Irish Finance Minister offered a 10 year tax moratorium on a new product’s exports if the parent company came up with one. They did, but the main board considered it dreadful. Management turned a blind eye and went ahead anyway.

Growth is driven by innovation, sometimes in the form of new, or changes to, products or how they are made, perhaps using new technology, or how the producer businesses are run. Stifling immigration and declining birth rates mean that growth has to come from increasing productivity, i.e. output per capita, and that can only come from innovation. Mathew Syed, in the Sunday Times on 25th September, wrote a misguided article claiming that growth is driven by the availability of energy: “growth in real economic systems (as opposed to abstract economic models) is ultimately determined by thermodynamics — that’s to say, energy.” Of course if we consume more (growth) we have to make and then use more energy, cars for example. But Syed is confusing correlation with causation. Innovation drives growth and that needs more energy. Professor Karl Pearson was teaching the difference between correlation and causality at UCL back in 1911. It is time Syed caught on.

At the Labour Party Conference, Sir Keir Starmer promised to “turn the UK into a growth superpower” although he did not say how and, almost certainly, does not know.  Handing more power to the unions will certainly undermine growth. Blocking change, whether by boardrooms or shop floors is the enemy of innovation, and therefore growth.

BEIS means well. It invites people to pitch for money and has middle-aged committees to sit in judgement. Sometimes they get lucky and back winners but usually not. The real-world market does not operate that way. Offering tax breaks is a far better way to go: if the innovation fails, it makes no money and therefore costs the government nothing. If it succeeds, it is a win-win.

The simple truth is that neither Truss nor Starmer have a clue how to achieve innovation, and with it increasing productivity, because they have not studied how innovation, and therefore growth, comes about.  It is time they did. Or at least tell BEIS to go find out.

Jobs are a cost, not a benefit

It seems ridiculous that it’s necessary to make such a basic and obvious economic point - jobs are a cost of doing something, not a benefit of the thing being done. But sadly it is indeed necessary to point this out:

A clean power system by 2030 will lay the foundations of the drive to net zero, but it will also unleash waves of dynamism and industry across our country with a million well-paid jobs in the renewable and nuclear industries, built on strong trade unions.

A clean power system may or may not be a good idea. Judge that as you wish. But human labour is a scarce economic resource. If we use more of it to achieve one particular goal then we have less of it to master any other problem that may face us.

Jobs are therefore a cost of doing something, not a benefit.

It could be true that the jobs building a clean power system are the best allocation of that limited labour at our disposal. Judge that as you wish. But it is still true that the human labour - those jobs - are a cost of doing this thing, not a benefit.

All of which does give us an interesting insight into what’s wrong with the modern economy, doesn’t it? A substantial portion of those who would run it are ignorant of the most basic economic precepts. They’re touting jobs, costs, as a benefit of doing a thing. Really, catching up with the most basic ideas within economics would be a useful start to building economic plans.

Jobs are a cost, not a benefit.

It's not obvious that killing the 45% rate is actually a tax cut

Eliminating the 45% income tax rate is clearly a cut in tax rates. Whether it’s actually a cut in tax is another matter. Will those high earners end up paying more actual cash in tax as a result of the cut in the rate to be paid?

This is, of course, to consider where the peak of the Laffer Curve is. What is the tax rate that maximises tax income?

The usual and standard source for considering this has been, for the past decade at least, the Diamond and Saez paper. About which we should say a couple of things. It looks not at income tax rates, but taxes incident upon incomes. So, this includes employers’ national insurance, along with any other taxes that might be incident upon incomes (for the US Social Security perhaps, Medicare taxes, state taxes and so on). It’s also directed at the US tax system which is, most importantly, a passport based system. If one is an American citizen one does not leave the American tax system by leaving the country, earning no money there (and deriving all income from outside the US) and so on - as Boris found out when he sold his house. This is entirely unlike the system everywhere else (except Eritrea) where leaving the country means leaving the tax system by and large.

Within the calculations by Diamond and Saez this would be known as “a deduction”. Or even a possible method of tax avoidance - which is, note, the entirely legal process of reducing tax bills. As they say:

“When a tax system offers tax avoidance or evasion opportunities, the tax base in hen a tax system offers tax avoidance or evasion opportunities, the tax base in a given year is quite sensitive to tax rates, so the elasticity given year is quite sensitive to tax rates, so the elasticity e is large, and the optimal is large, and the optimal top tax rate is correspondingly low.”

Given that moving those 26 miles to Calais takes one out of the British tax system the optimal (by which they mean top revenue generating) top tax rate is lower in the UK than it is in the US. In fact, they give a useful estimate of what that rate might be:

As an illustration using the end tax avoidance responses is critical for tax policy. As an illustration using the different elasticity estimates of Gruber and Saez (2002) for high-income earners mentioned above, the optimal top tax rate using the current taxable income base (and ignoring tax externalities) would be and ignoring tax externalities) would be τ * = 1/(1+ 1.5× 0.57)= 54 percent, while the optimal top tax rate using a broader income base with no deductions while the optimal top tax rate using a broader income base with no deductions would be τ * = 1/(1+ 1.5× 0.17)= 80 percent.

In simplistic - too simplistic - terms 80% if there are no dedictions, 54% if there are. And shave a bit more off again if people can simply leave the system by leaving the country.

Again, this is taxes incident upon income, not income taxes. This month (it goes down again next) employers’ national insurance is 15%. We have to add that to the income tax rate to gain the full tax upon income rate.

The top tax collecting rate in the UK is lower than that in the US because of that construction of the tax system itself. We don’t tax citizens living in foreign. With the 45% income tax rate the combined rate is 53%, with 40% it’s 49%.

We do not, not at all, insist that this cut in the tax rate moves us from over the Laffer Curve peak to at it or under it. We’re deeply uncertain that something as complex as an economy can be modelled to this level of certainty. But we do point out that the currently accepted best guess at it leaves the possibility entirely open that it does.

That is, this might in fact be a tax rate cut and an increase in tax collected - so not a tax cut at all.

To reduce rents abolish tenants' rights

This is not some Dickensian cackle about how to increase pain in society - it’s an observation about reality. In order to reduce rents we should abolish tenants’ rights:

They pay less than the market rent but the trade-off is that they have fewer rights and, often, worse living conditions.

There we have it, from The Guardian no less. Fewer tenants’ rights lead to lower rents. So, if we desire there to be lower rents we should pare back upon, abolish, tenants’ rights.

Now, it is also possible to say that those tenants’ rights are, or should be, inviolable. Which is fine, that’s a choice, a trade off. But that does - see above - mean that rents are going to be higher.

What we can’t do is insist upon those rights and then whine about the height of the rents.

Hmm, sorry, obviously that is possible because some 99% of political discussion is a combination of both of those - joint insistences that tenants should gain even more rights and also that rents should be lower. Which, given the ineluctable logic of the situation is about as useful as shouting at the Sun rising in the east each day.

Our insistence is not in favour of the - admitted and obvious - joy of being able to evict Tiny Tim. It is rather that there is indeed this trade off here and reality says that it’s there, not politics, economics, morals or anything else. It simply is. Therefore it’s something that has to be acknowledged and dealt with, not shouted at.

Want lower rents? Relax tenants’ rights. Want stronger tenants’ rights? Put up with higher rents. To think that it can be otherwise is to be shouting at the universe on the street corner.

We're afraid that the Real Living Wage people are telling an untruth here

It could be that they’re just allowing their own propaganda to run away with them, or that they’re actively trying to dissimulate, but this is an untruth:

The real Living Wage rates remain the only wage rates independently calculated based on what people need to live on.

As they’ve spent a couple of decades telling us, the calculation is based upon Adam Smith’s linen shirt example. A linen shirt is not a necessity, but. If you live in a society where not being able to afford a linen shirt is regarded as being in poverty, then, if you cannot afford a linen shirt in that society you will be regarded as poor. From which it is possible to ask representative groups what it is that you should be able to afford in order not to be regarded as poor - we seem to recall a carvery meal once a month, a couple of pints out once a week as making such a list - and back calculate to the wage necessary to be able to afford those things.

But it is not, it is not by design, the amount “people need to live on”. It is the amount to be had and to not be regarded, by this current society, as being poor. To switch that statement is to tell an untruth.

Tsk.

There is also the criticism that we have been levelling at this calculation for this past couple of decades too. Exactly the one which led to the personal allowance for income tax and national insurance to be raised to the current £12,500 or so. The Real Living Wage is a pre-tax number. Meaning that a significant reason it is so high is the appallingly high tax rates faced by those on or around that minimum wage (of whatever kind, the minimum wage, national minimum wage or this, the real living wage). Thus also why we have been arguing - these past couple of decades - that the solution is to lower the tax rates on those at around this level of income. By increasing the personal allowances, of course.

The claim is that this real living wage is now £10.90 an hour, 37.5 hours a week, full year working. £21,294 a year. On which, under the current system, £12,570 is free of income tax, the rest pays 20% - £1,744.80. National insurance starts at £242 a week at the rate of 13.25%. On £408.75 per week in earnings, that’s £22.09 a week in employees’ NI or £1,148.68 a year.

That’s £2,893.48 charged in tax to this real minimum wage income. Or, post tax, £18,400.52 in net income.

If you work on the current national minimum wage of £9.50 an hour for the same working hours then your gross income would be £18,525. This before we even think about the influence of employers’ national insurance (which, yes, is incident upon wages).

So, if the national minimum wage were tax free then it would be higher than this real living wage post-tax. The problem is not low wages, it is high taxes. So, the solution is also obvious, lower taxes.

As we’ve said - again over these past two decades, repeatedly - the only real and accurate minimum wage is £0. But assuming that there is one then that should - must, on equity and good sense grounds - be the personal allowance for both income tax and national insurance. For the only argument for a minimum wage is that this is the de Minimis amount that an hour of labour is worth. So, why should Westminster get a chunk of that minimum amount?

So, again as we’ve been saying this past couple of decades, raise the personal allowance to the level of the minimum wage and the problem is solved. All those earning it will now, by the standards of the society we live in and as constructed by the real living wage campaigners, be earning both the real living wage and not be in poverty according to the standards of this population and society.

When we’ve raised this with the campaigners - again, that couple of decades - we’ve been told “Yes, yes, but” and the but has never been very convincing.

Increase the personal allowance and the minimum wage will be higher than the real living wage. So, let’s do that then, shall we?

We also note this little line they use “This year’s Living Wage rates have been brought forward in recognition of the sharp increase in living costs over the past year.” Hmm. In previous years the real living wage was calculated in November. The recent national insurance rise will be cancelled in November. So, if we were extremely unkind, possibly even conspiracy minded, we might suggest that the calculation has been brought forward so as to not include the effect of that tax cut upon the real living wage. But who would believe something like that of the Resolution Foundation? Tsk, it’s unthinkable.

Some things in life really are simple. If you want the working poor to have more money then stop taxing the working poor so damn much.

Action This Day, as the man said.

The laughable UN rankings

This is one of those assumptions that can bring one up short:

The UN recently demoted the US to 41st, down from 32nd, in a global ranking based on its sustainable development goals.

…

And, on this measure, the US comes just behind Cuba and just above Bulgaria.

The SDGs being a series of plans about how places should develop economically. Thus, by those very standards, Cuba is a more desirable end goal for economic development than the US is.

Which is, how should we say this, odd.

The trick to this is that the SDGs are deliberately constructed in order to make places like Cuba look good and nasty, capitalist, places like the US look bad. Take, for example, poverty. We do indeed agree that the aim of having an economy, even of the existence of a society, is that the life and living standards of the poor improve.

Here are those SDGs on poverty. They’re very much more complex than the earlier Millennial Development Goals for an obvious reason. That one was just to reduce absolute - the below $1.90 a day type - poverty and that was the only MDG overachieved and early. But that would never do as it was the spread of free market capitalism to places like China that achieved it - not the point at all. So, in the SDGs there’s lots and lots about relative poverty within a country instead of about actual poverty so much. Ta Da! Communist dictatorships look better.

Which is a goodly part of what explains the US ranking. On poverty it is agreed that the US has no $1.90 a day poverty nor any $3.20 a day - just none. However, there is a poverty line (the usual 50% of median household income used in international comparisons) and this means a significant downgrading of the US position on poverty. Despite the fact that by any measurement of absolute poverty the US doesn’t have any. They’re mixing inequality of income with poverty that is.

Cuba is of course entirely different. There we have no information - none on $1.90 a day poverty, none on $3.20 a day and none on inequality. But Cuba ranks better than the US becausesomethingmutter.

We can attempt to divine those numbers in a different manner. GDP per capita at PPP (so, accounting already for differences in costs) is a shade under $10,000 for Cuba. So, if we assume that all income is entirely and wholly equally distributed (it isn’t) and also that incomes to people are the only thing in an economy (by one GDP calculation of course they are, but here we mean for consumption, and they’re not) then that puts the entire population of Cuba below the American poverty line (around $13,000 or so these days).

But the UN seems to think that Cuba does better on poverty than does the US.

Well, yes. At which point we’re not going to take the UN rankings by SDGs seriously now, are we? Unless, of course we were a Guardian columnist.

Liz Truss is all about growth

Liz Truss is all about growth. We saw something like this in 1972, when Barber dashed for growth with monetary and fiscal loosening. In the event, seventies Britain got no growth, just inflation. In the eighties, Thatcher got growth by addressing the supply side, specifically, capital with Big Bang; labour with the union reforms and council house sales; and microeconomic institutions with the privatisations. 

We all know where the big bottlenecks lie: healthcare, energy and land-use. So where to focus? To answer that we need to consider how much opposition will reform provoke; and how may the benefits be shared. This is not just for the high road of balancing the chancellor’s books and goosing up the economy. There is also the low politics of creating constituencies of interested parties, as Thatcher did with privatisations and council house sales; and placating the opposition, as Bevan did with the doctors when he “stopped their mouths with gold”.

Healthcare. At first sight healthcare has its attractions, with Covid flushing out its dysfunctional regimes of capital, labour, organisation, research, sourcing, talent and treatment. There could be some £300 billion available to the Exchequer after turning the liability of the NHS into an asset. Politically, however, it’s still too hard. Taking money from hospital operators and insurance companies won’t mollify the King’s Fund, the Royal Colleges or the health service unions. Nor will it create a popular constituency sufficient to overcome the national sentimentality towards the NHS. On the other hand, it’s worth ventilating the issue energetically to prepare opinion for reform, after the decisive collapse in the NHS to be expected within an electoral cycle or two.

Fracking and oil in general. We could see a tax take of £280 billion on newly recognised onshore and offshore reserves, assuming that the UK levies royalties at 10%. This would be over the lifetime of the reserves, so perhaps £28 billion per year. Truss has made a good start by removing the ban on fracking, but we couldn’t be sure that the sums involved will be enough to mollify the nimbys, while net-zero campaigners plain can’t be mollified. There is much to be said for improving our energy resilience, but the climate of the times may not wear it.

Land-use reform. Once again, Truss has made a good start, speaking of her enthusiasm for “roads and houses”. This would be after a bonfire of planning, plus dysfunctional building and fire regulations. Developing green belts would give rise to at least £12 trillion of appreciation in land values, to be shared between owners, developers and the exchequer. Over a twenty year period this is some £600 billion a year. Realising these sums involves securing the land, distributing the appreciation in value and managing the flow of development to avoid depressing values. This calls for private sector development skills and capital market instruments. 

Such reform would also offer an opportunity to reverse three generations of architectural misadventure. This has left Britain as something of a pre twentieth century theme-park, with inadequate roads and elderly houses which are attractive but draughty, punctuated by the popularly relished but professionally despised (e.g. the interwar suburbs and Milton Keynes) and the reverse, (e.g. the housing estates and other postwar new towns now becoming slums together with brutalist public buildings). Indeed, why not reform the listing regime so that the latter can be demolished, also taking in the last two decades of cramped private housing? Regardless of this last point, introducing international standards of design and construction would avoid repeating postwar mistakes.

The sums involved are so substantial as to hold out a realistic prospect of placating the anti-car lobby, architectural profession, heritage lobby, levelling-up campaigners, local authorities, nimbies in general, plus planning and other dysfunctional regulators. In addition, it opens the door to creating a constituency of new homeowners, enjoying something which no Briton has seen in seventy years: attractive homes with modern amenities and spacious accommodation at reasonable prices and with proper infrastructure. This makes eminent political sense. 

Land-use reform offers substantial upside for the economy and the exchequer. The sums make it possible to contemplate buying out the opposition with generosity, leaving plenty left over for energy, transport and other infrastructure throughout the country. But it will call for deft communications and politics, to conciliate antagonists and create supporting political constituencies. 

If there are to be sweeping tax cuts then raise the personal allowance

So it is said there are to be sweeping tax cuts. At which point, well, which taxes should be cut how hard?

The correct answer, we insist, is simply to take people out of the tax net altogether. As with Nigel Lawson’s gleeful aim of abolishing a tax each budget. Don’t lower a tax rate, kill a tax that is in his ambition.

Liz Truss suggested further sweeping tax cuts were on the way as she put economic “freedom” at the heart of her premiership.

The Prime Minister gave a heavy hint that she would go much further than reversing the rise in National Insurance and cancelling planned increases in corporation tax, with cuts to income tax and VAT potentially in the frame.

She told reporters there was “no doubt” in her mind that tax cuts promoted economic growth, saying her government would be looking at tax rates across the board.

So, to repeat something we started saying near two decades back - and which did work, until inflation caught up with it again. Reverse fiscal drag.

We shouted for a number of years that the personal allowance for income tax and national insurance should be the same - at minimum - as the full year, full time minimum wage. On the very simple grounds that the entire claim of the minimum wage proponents is that there is some minimum amount labour is worth. No, we don’t agree - that minimum is £0 - but within the debate as framed that this is the minimum allowable does mean this shouldn’t be taxed directly.

That personal allowance has risen to £12,500 now - which is what the full year, full time, minimum wage was back when the ambition was announced, in 2010.

So, the tax cut now should be to do the same. Further, to nail the two together. The minimum wage is the personal allowance, the personal allowance is the minimum wage. The Chancellor wants to change one of those two then the other must also be changed. The advantage of this is that a politician giving away other peoples’ money in a wage rise might think a little more if it makes collecting his tax money more difficult too.

But the base logic here - minimum wage is tax free allowance - makes perfect logical sense to us. Simply because what is the argument for a minimum wage other than this is the minimum amount people should be getting? So, why does the bureaucracy get dibs on it?

Scaling the Heights - A History of the Mont Pelerin Society

My colleague at the Adam Smith Institute, Dr Eamonn Butler, has written a thoroughly absorbing history of the Mont Pelerin Society, originally founded by FA Hayek and other liberal (pro-freedom) intellectuals shortly after the Second World War. It was founded to provide an intellectual antidote to the centralism and socialism then so prevalent.

Eamonn’s book, “Scaling the Heights,” is published by the Institute of Economic Affairs, and presents a blow-by-blow account from the society’s early years to the present day. Far from the conspiracy theorists’ idea of it as a sinister, secret organization funded by dark corporate money and focused on world domination, the reality is of a hand to mouth existence, a string and sealing wax affair, always struggling against inadequate funding, and with different views about what its purpose and method of operation ought to be.

Hayek’s original insistence that the MPS be intellectual, rather than political, met with some disagreement from those wanting it to be more pro-active, but Hayek prevailed, and the MPS remained an organization that held meetings to discuss ideas. There was disagreement, too, as to the degree to which a free society could encompass some degree of redistribution to those needing help.

These disputes could be rancorous, sometimes prompting bitter personal exchanges, and Eamonn makes no attempt to sanitize and gloss over them. Disagreements about how the MPS should be organized sometimes led to resignations, and Eamonn covers these events in a very readable, and indeed at times thrilling account. 

The success of the Society is a matter of record. Several of its members were awarded Nobel Prizes, and its ideas on how a free society and a free economy could promote prosperity better than the alternatives gained widespread, though by no means total, acceptance. More of the world today is freer and wealthier than it would have been without the ideas put across by Mont Pelerin members. In some countries it was able to give to isolated supporters of freedom and free markets the assurance that they were not alone, but part of a worldwide movement.

It’s an enthralling story. An isolated minority viewpoint became widespread and influenced governments around the world, not by political pressure, but by the strength and intellectual rigour of its ideas, 

They didn't even agree on the name, so after much debate, they decided to call the society after the place in Switzerland where they were meeting. I went there for the 50th anniversary of the society, and was impressed by the fact that a small band of scholars meeting there in 1947 went on to change the world. Eamonn’s account of how they did that is written in a very readable style and makes a huge contribution to understanding what the MPS is about, and how it became what it is today. Highly recommended reading for lovers of liberty.

What lithium shortages?

We have a warning that lithium will be in short supply and so therefore…..

Now, as it happens, the resident energy geek here (me) thinks that hydrogen and fuel cells will turn out to be a major part of the solution to all this climate change stuff. As also will synthetic fuels, meaning that batteries aren’t going to be as much of the mix as many seem to think. But that is just opinion.

And yet this claim is, in our opinion, still wildly wrong:

The government-backed agency helping to fund the motor industry towards a zero-emission future has warned that with likely shortages of lithium for electric battery production, Britain must lead a transition to hydrogen fuel cell vehicles.

The first issue is as we put it in this report. There simply is no shortage of any of the metals that we might want to use. The amount of whatever out there in the crust of the Earth is simply so vast that we’re not going to use it all for millions upon millions of years - in many cases before the expansion of The Sun to a Red Giant. Sure, there’re shortages of plant able to extract and deliver right here right now but that’s a relatively trivial problem - the very point about plants being that we can build more.

The second is that people just aren’t grasping what happens in a market society when a mineral becomes more expensive. Vast armies of people rush off to test this and that and t’other potential source.

Historically the world has depended upon lithium from either brines or as a byproduct of spodumene. Recent years have shown that ionic clays, geothermal brines are also viable sources, varied micas are getting a look in. There’s even one - a bit hopeful perhaps - who thinks the Red Sea is a viable resource (which brings to mind the closing of this Goon Show).

People just aren’t getting how large the world is, how much of everything there is out there. Change demand, that changes the price, vast mountains of a mineral or element thereby become viable sources.

We can well imagine - indeed believe it to be true - that fuel cells are the answer to part of the puzzle, more than folk currently seem to think. That batteries are going to be a much smaller part of any solution than current plans seem to indicate. But there’s not going to be a shortage of lithium so that’s not going to be the cause of those, nor the hold up in that battery driven world.

Better technologies might cause all sorts of things, mineral shortages just aren’t going to happen.