Election Wishlist - a Special Series on How to Reboot Britain
With a surprise General Election called, significantly accelerating timelines, election manifesto drafting has become an urgent task across political parties.
Over the coming weeks we are doing a special series of blogs to explore some of the biggest challenges and opportunities facing the UK. It will offer a radical “wish list” for policy makers of what to do, and by implication, what not to do.
“It’s the economy, stupid”
The UK, along with much of Europe, is in decline. Following the 90’s, similar stagnation in Japan was called a “lost decade”. Having failed to reverse this trend, Japan has since suffered from three lost decades. Unfortunately, things are not much better in the UK.
After almost two decades of stagnation, Britons are rightly frustrated. According to ASI analysis of World Bank data, the UK’s real GDP per capita only rose 1.3% over the seventeen years between our 2007 peak and 2024, in total. By comparison in the seventeen years preceding 2007, it grew 141%.
For many, particularly younger generations, they are actually worse off even in real terms, as the distribution of these tiny (per capita) gains are not evenly distributed. Younger generations have particularly seen their rents rise significantly faster than their wages.
While inflation has now returned to normal levels, it reached its highest peak since 1980. Despite the denial of the Bank of England, inflation was not a transitory phenomena, and it was avoidable.
The tax burden has been consistently rising too. Inflation-driven fiscal drag and other tax rises have undermined claims of tax cuts. So while Britons have seen their incomes stagnate, taxes have risen.
“It’s the economy, stupid” became the mantra of Clinton’s 1992 U.S. presidential election. Similarly, the “Keys to the White House” prediction system uses the short-term economy and long-term economy as two key checklist items to assess the situation of the country ahead of an election. Political fortunes can rise and fall for many reasons. While other factors are also important, including the relative charisma of candidates, foreign policy outcomes, social conditions and perhaps even the campaigns themselves, elections are heavily influenced by economic circumstances.
Leadership not Point polling
More broadly, voters over time judge based on outcomes and whether they feel the country has been governed well. Polling provides a diagnosis as to what is electorally popular, However, polling topics in isolation is not the path to long term success. It ignores the salience of policies or their long term impact.
Popular policies may not be effective policies - the public look for leadership and judge outcomes too. Slavish devotion to point polls can lead to vacuous policies that distract Government or worse, to bad policies. Bad policies deliver bad outcomes, and bad outcomes are unpopular. By contrast, some good policies may be unpopular in the short term, but if they delivery prosperity, they can be rewarded electorally long term, as Thatcher found with her three successive electoral victories.
So, while this series offers some reflections on the electoral feasibility of its recommendations, its primary focus is on what policy makers ought to do, rather than on what will deliver short term popularity alone.
Crisis of collectivism not capitalism
Today our politics is plagued by corporate cronyism (interventions to support special interests), de-growth (policies that hinder growth), vetocracy (blocking development of all kinds), and safetyism (risk aversion).
The common theme is the destruction of the price mechanism, and decision making guided by the state rather then the markets. Collectivism has won the day, not as a radical top down plan or through ownership of the means of production, but through a steady expansion of the frontiers of the state across almost all domains.
Decline is not an inevitability. Things do not have to be this way. A brighter future for Britain is possible. The solutions are already known to us, and have often been proven to work in the real word.
The path to restoration lies in re-embracing the power of markets, promoting innovation, protecting our free society, and defending the rule of law at home and abroad.
This series will explain how across key areas of government.
These debt numbers don’t add up
But then given the source we didn’t really expect them to:
Debt payments by the 50 countries most vulnerable to the climate crisis have doubled since the start of the coronavirus pandemic and now stand at their highest level in more than three decades, campaigners have warned.
The Debt Justice charity said countries at the highest risk of being affected by global heating were paying 15.5% of government revenues to external creditors – up from less than 8% before Covid-19 and 4% at their lowest recent point in 2010.
The report is here and - at least as far as we can track the numbers back - they’re comparing all foreign debt payment with government only revenues. Which is very apples and oranges. The government does not have to pay for privately contracted debt so a comparison with government revenues is meaningless. But, well, if you want to count up to big and scary numbers that might be what you have to do.
However, basic numeracy aside there’s a much more interesting point here. Which is that the list of the 50 climate vulnerable countries is a pretty good recount of the 50 poorest places on Earth. Which gives us a plan to deal with climate vulnerability - economic growth.
Which is excellent, so we should be lending lots to, investing more in, those poor places so that they can grow and become less vulnerable to climate change.
Sounds like a plan to us, economic growth for the win.
Tax the rich to provide public goods!
In one of those odd happenstances we agree with The Guardian here:
G20 countries will discuss proposals to make the world’s wealthiest individuals pay more towards funding public goods. The debate is overdue.
Well, there’s certainly a reasonable point there. We institute government in order to gain the public goods we cannot gain in any other way. That doesn’t necessarily mean that government must provide the public goods, only that government must do something to make sure the public goods are provided. The US insists children must be vaccinated to be able to attend school. The NHS provides childhood vaccinations directly. There could indeed be differences, at the margin, between those two methods but both do provide that public good desired, herd immunity (no, vaccinations are not a public good, herd immunity is).
We have from Adam Smith that taxation “more than in proportion” to income is not so very great an imposition. We even have an interesting example of a public good given by Smith. Living in basically literate and numerate society probably is such a public good and therefore tax subsidy - at the least - to primary schooling could well be justified. As and when we return to having primary schools that produce literacy and numeracy we should definitely think about it.
But it’s also possible to differ. For this is then used to argue for a wealth tax - a terribly bad idea. But also, The Guardian links through to a piece giving us a definition of the public goods they mean:
Higher tax rates for the wealthy kept inequality in check and helped fund the creation of social safety nets like Medicare, Medicaid and food stamps.
The definition of a public good is something non-rivalrous and non-excludable. This is why there must be - or it can be justified at least - government action in the provision. Because without rivalry and excludability it’s very difficult indeed to make a profit and therefore there’s a good chance that the item will be underprovided by a capitalist and or free market system. Note the “good chance” there, it’s not an absolute proof.
OK - but Medicare, Medicaid, food stamps, are not public goods. People are denied access to them each and every day - excludability. They’re also rivalrous as well, my hip replacement is not your one. We’re decidedly unconvinced that greater equality is even good let alone a public one.
Sure, all of these things can be argued for. As good for the public, goods for the public even, but that’s not the same as a public good. Therefore the argument The Guardian is reaching for - government is for producing public goods, the rich should pay more than in proportion - doesn’t work because they want to spend the looted cash on things that aren’t public goods.
As well as wealth taxation being a seriously bad idea anyway for the usual deadweight costs reasons.
Equalising Capital Gains Tax means abolishing Corporation Tax - an excellent idea
We’re told, in The Observer, this:
There is an overwhelming economic and ethical case for higher taxes on wealth and for taxing capital gains at the same rate as income, not least the soaring levels of wealth inequality in Britain.
We’re really, really, uncertain that there are soaring levels of wealth inequality in Britain. The usual calculations don’t take account of lifetime effects and given that the main sources of household wealth are pensions and housing equity that makes them all an entire nonsense.
We’re also really very certain that any capital gains tax rate has to have some allowance for purely inflationary gains. That can be through a different rate or through indexation. We’re then deeply uncertain that adding in indexation to an equalised rate would increase the revenue collected. The current system of a lower rate without indexation might collect around the same amount that is - that was the claim when the rate was lowered and indexation abolished after all.
But there’s another issue here. Corporation tax.
Now, yes, it’s true that it’s the corporation that pays that tax. But we all know that the incidence of the tax is not upon the corporation for corporations are not natural people and all tax makes the wallet of some natural person - some real live human being - lighter. The study of tax incidence is whose wallet gets lighter from this specific tax?
Estimates for the UK say that perhaps 50% of the incidence is upon shareholders, 50% upon all workers in the economy that now has lower levels of investment as a result of the tax upon investing successfully. That’s a rather free market, classically liberal, estimate, put forward by, well, people like us actually. Rather more leftish estimates are of 20%, 30% on the workers, the rest on the shareholders. Real proper lefties will shriek that of course the b’stard capitalists pay it all.
We can note that the work of Joe Stiglitz and Tony Atkinson points out that the incidence of a tax can be over 100% - the economic costs of the tax in burdens bourne are higher than the revenue raised by the tax. We can also point out that we acknowledge this issue in our taxation of dividends. Corporation tax is collected at the corporate level, it is that tax plus the dividend tax which approximates to the standard income tax levels for the gross annual income received.
OK, so corporation tax is paid by shareholders. Therefore if we are to tax gains from shares equally to income from labour then we must have a capital gains tax rate which allows for that tax already captured at the corporate level.
The only alternative to this is to abolish corporation tax. Then we can indeed have dividend and CGT rates (with CGT, we’d still need that indexation) the same as those upon labour incomes.
Note what we’ve done here. We’ve not made any of the deeper economic arguments about not taxing investment because we prefer capitalists. Nor because investment’s a good thing that makes the future richer. Nor are we allowing that idiot mistake of thinking that government will invest better than people deploying their own money - the argument for taxing the capitalists to invest.
We’re simply taking people at their word. They want equal rates for income tax and capital gains. OK - but there’s already a tax upon corporate incomes. If we want equal headline rates then we’ve got to abolish that other tax first.
Now, we do think that abolishing corporation tax is an excellent idea for all the usual deadweight reasons. But we’re considerably doubtful that doing that plus equalising the dividend and CGT rates is going to be revenue enhancing. In fact, we’d insist rather strongly that it wouldn't be.
And here’s the thing. How many of those making this “ethical case” for equal rates would still do so if, as above, it were revenue reducing?
So much for ethics, eh?
All economics is just footnotes to Adam Smith - or wrong
Adam Smith goes to great lengths to point out that - other things like amount of capital, level of technology etc being equal - the jobs people enjoy doing more pay less cash money than the jobs people enjoy doing less:
The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality. If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to chuse what occupation he thought proper, and to change it as often as he thought proper. Every man’s interest would prompt him to seek the advantageous, and to shun the disadvantageous employment.
As ever, many pages of 18th century prose to explain further.
In the newspaper:
I earn around £50,000. It’s a good salary and I have a comfortable life but I don’t think vets are well paid when you consider the amount of training we go through, the cost of that training, the hours we work, the stress and dedication that goes into the job – particularly when you compare us to similar professions such as dentists and doctors who can expect a much larger salary.
What bothers me the most is the public’s misconception of how well we are paid. I think a lot of people think vets are paid more than we are. If I told certain friends and family what I am paid, they would be shocked.
Sometimes angry clients will say, “you’re only in it for the money, you don’t care about my animal,” and that is a hurtful comment. Veterinary teams are made up of highly qualified and intelligent people and if we wanted to earn more money, we would be doing something else. We are all in it because we love animals and we really care about pet owners.
This is, of course, one of those footnotes to Smith.
The total pay for a job is the compensation and doing something you love - as we here know very well - is one of those compensations of a job.
This is not, in fact, science, it’s political wishing
Some climate change news:
The world has enough fossil fuel projects planned to meet global energy demand forecasts to 2050 and governments should stop issuing new oil, gas and coal licences, according to a large study aimed at political leaders.
If governments deliver the changes promised in order to keep the world from breaching its climate targets no new fossil fuel projects will be needed, researchers at University College London and the International Institute for Sustainable Development (IISD) said on Thursday.
No new fossil fuels required being predicated on government projects coming in on time. That’s, umm, useful.
Dr Steve Pye, a co-author of the report from the UCL Energy Institute, said: “Importantly, our research establishes that there is a rigorous scientific basis for the proposed norm by showing that there is no need for new fossil fuel projects.”
“The clarity that this norm brings should help focus policy on targeting the required ambitious scaling of renewable and clean energy investment, whilst managing the decline of fossil fuel infrastructure in an equitable and just way,” Pye said.
As we say, that’s not science, that’s political wishing. If governments do such and such on time then governments can also do this other thing. There’s an awful lot resting upon that “on time” qualification to government action.
As far as we know there has been only one British Government major engineering or infrastructure project that came in under or on time. That was Polaris and that was bought off the shelf from the Americans.
The “if therefore” logic being used here makes us think that rather more fossil fuel projects should be approved in fact. For what does happen in 2049 if the Minister has to start saying there’s been a bit of slippage here and there?
Our Word, Really?
Apparently certain rental properties in this country are not up to standard:
It started when we moved into a housing association flat on the Eastfields estate in Mitcham, south London, in 2018: my father, my two sisters, aged 17 and 20, and 19-year-old me. Before that, we were in temporary accommodation: a half-converted garage that had mould and damp on the walls and a bathroom the size of a cupboard. We had been there since 2016, waiting to get a permanent council property, but the new place was no better. The carpets and wallpaper were decades old. There were cockroaches, flies and woodlice. The mouse infestation in the kitchen was so bad, we didn’t want to use it. The glass patio doors were broken, so the place was freezing. We had lights that filled with water whenever it rained, especially in the bathroom, which had no windows. It wasn’t just us; the whole Eastfields estate was dilapidated, but despite residents complaining to Clarion, the housing association, nothing seemed to get fixed.
Our Word, that is bad. We can all think - should think - that something should be done about that. But the important part there:
Clarion, the housing association
As a non-profit distributing housing association, Clarion is subject to the Regulator of Social Housing's regulatory regime. The Regulator of Social Housing sets standards that social landlords are expected to meet. The Regulator focuses on economic regulation and will expect landlords to meet expectations on governance, financial viability, rent setting and value for money.
So, a bureaucracy, subject to bureaucratic regulation but not to market pressures, provides a lousy service, does it? Colour us very shocked indeed.
We can - should - all do something about that as well. Expand the private, not social, rental sector so that landlords are indeed subject to market pressures. Obviously.
As ever it’s entirely possible to make a case against private profit but such cases always do come up against that uncomfortable reality of what happens in the absence of private profit. As Joan Robinson pointed out the only thing worse than being exploited by a capitalist is not being exploited by a capitalist.
There’s an excess “Fortunately” in this phrase
Professor Mazzucato tells us all proudly that:
Fortunately, industrial policy is back in favor around the world,
For those who get to sit in offices and design industrial policy it is, of course, as in favour as it ever was. The rest of us are going to - are getting - get it in the neck having to pay for this series of disasters.
We think of the American and EU ideas about electric vehicles. Vast subsidies to try to make them cheap so that people will buy them allied with vast taxes on any Johnny Foreigner with the temerity to make cheap electric vehicles that anyone wants to buy.
Or there’s this from the world of computer chip making:
Semiconductor manufacturing subsidies announced in the past 2 years:
US: $52 bln, India: $10 bln, Japan: $25 bln, EU: $46 bln, S Korea: $19 bln, UK: $1 bln, China: $47 bln
The subsidies are greater than the total costs of the next two, possibly three, generations of chip fabs. All to make fabs that are less than economic in size - as with the analysis that gained Paul Krugman his Nobel there really are industries where the efficient producer size is global.
Then of course there’s Our Own Dear HS2, £100 billion and counting to knock 10 minutes off the time - currently about an hour - from a suburb of London to a suburb of Birmingham.
That “fortunately” doesn’t really belong in that phrase now, does it?
Bad climate science is still just bad science
That doesn’t stop people doing it of course. From Sir David King, former chief scientific advisor to the UK Government, now at CCAG:
Recent analysis shows that annual global GDP costs due to extreme weather events could rise towards 100% of global GDP around the end of the century.
Therefore we must do everything to avoid climate change, right?
It’s that second part that isn’t correct. The warning is drawn from this report to actuaries.
A relatively simple log damage function could be used that assumes 100% GDP loss at a certain level of warming, say 6˚C, 5˚C, or 4˚C, although some may argue that even 3˚C would be extremely challenging to adapt to, and certainly sensitivities should be undertaken at all of these.
That’s the 100% mention - we should model, as an outlier, that this might be true. Which is entirely and wholly different from a statement that damages will be that much.
It’s also not what some will think, that the entirety of the economy - a 100% loss - will disappear and so we all die. Aiee.
It is, instead, that climate change will reduce the size of the global economy in 2100 by about the size of the global economy today. We are talking of GDP then being reduced by 100% of GDP now. Which is indeed an entirely different statement.
For we also have to think about economic policy between now and 2100 and how much that will influence the growth of the global economy. Which has, in fact, been done, in the SRES, that report on economic models and climate change from the 1990s. In which we are told that globalised free market capitalism (A1) will lead to an economy 11 times larger in 2100 than in 1990. Or, a regionalised, more socially democratic system (B2) about 5.5 times larger.
Which economic system we use for a century has far more impact on the final size of the economy than climate change or not climate change that is.
Good science is about balancing those two gains and losses to produce the best overall outcome. Don’t, for example, use bad economic policy to avoid climate change damages where that bad economic policy produces more loss of GDP than the climate change damage does.
A balancing act which has also been done in that very SRES. A1FI (where we run out of conventional fossil fuels, don’t frack and so turn back to coal) has high climate damage costs. A1T (where we still use globalised free market capitalism but also move to fossil free energy generation) produces low heating, thus low climate change damages and also the highest GDP of the modelling set.
Another way to approach the same point. Sure, OK, Greenland melting will produce loss of potential GDP in the future. Now, these policies being recommended - how much potential GDP loss will they cause? The correct - economic - answer is, of course, whatever set of policies produce, on balance, the highest final GDP number.
As the IPCC’s own modelling shows, that’s globalised free market capitalism along with the transition away from fossil fuels.
OK. Sounds like a plan to us. So why are scientists not saying so?
Basic Economics in Education
Education, not unlike all sectors of industry, benefits from a free market understanding. The competition that arises from private and public schools is one that creates a more innovative and sensible product, that being students.
The value added tax (VAT) on private schools is another of many regulations attempting to downplay this competition. Christine Maxwell does not see it in this way listing three reasons she disagrees with those against the VAT on private schools through the lens of a proposed secondary option of giving free places to low-income students in independent schools in avoidance of paying the tax:
1. State schools will still need to exist, albeit with fewer pupils. This would result in budget cuts for them as their income is directly linked to the number of pupils on their rolls. In order to run effectively, they would have to cut staff, or the state would have to increase the amount paid per pupil.
2. Most independent schools select their intake. Independent schools that claim to act charitably when educating, at a discount, children from poorer families are more likely to take pupils with special education needs and disabilities or behavioural problems. Indeed, this is demonstrated in the statistics.
3. There is a benefit for all students, no matter their background, character, or make-up.
I do not believe that anyone is arguing for the dissolution of state schools, however, the line of thinking which is used in the first argument is incorrect. As highlighted in the ASI’s paper Short-Term Thinking: Analysing the Effect of Applying VAT to School Fees, the tax would not only generate no net revenue, resulting in no net change to the funding for state school staff, but further resulting in a greater competition for preferred state schools.
Christine Maxwell likens the absence of a VAT to pauperisation, instead it drives competition leading to a more efficient and productive market for everyone. With the VAT exemption, independent institutions may poach some pupils from state schools, leading to less state school funding, however this funding should correlate efficiently with the cost to the school for each student. Even if staff cuts happen, there should be an inverse need for staff at independent schools, resulting in no net market change.
While the second argument, that independent schools take only more able students (which is not true) is an issue which is not facilitated by some ableist form of thinking, rather, it stems from a lack of resources for students with special education needs and disabilities in state schools. While one cannot argue that the resources in which these pupils need is necessary, the competition that arises between the different types of schools, benefits students by offering a school that best fits their needs, which may be the independent school.
Furthermore, fairness is something difficult to discuss, through its apparent subjectivity, but looking through an economic framework there is still no net social benefit. When a tax such as the VAT is applied to only part of the independent sector, not to mention favouring the tax-funded supplier in state schools, it further distorts competition harming the little competition that the state has.
Finally, the last argument, which I believe to be true, goes both ways. In the same sense that there is a benefit for all students when there are more affluent families and more able pupils in the mix, one must also argue that there is an equal, or possibly greater, benefit to the inclusion of low-income students to independent schools.
Stick with Harris and keep the VAT off private schools.