Tim Worstall Tim Worstall

Clearly, it’s The Guardian that should pay for local journalism

The Guardian tells us that very democracy itself is in peril over the vanishing of local journalism:

In the past Akoto might have stopped off at the market town’s local newspaper office on the campaign trail. But the main Trowbridge office of the Wiltshire Times, part of Newsquest and ultimately US-based media group Gannett, closed in 2019 and was redeveloped for housing.

These days political campaigns are as likely to target local voters on social media as through the columns of regional newspapers or local radio or television, where cutbacks mean far fewer journalists having to cover larger areas.

According to the Charitable Journalism Project, there are probably fewer local newspapers in Britain now than at any time since the 18th century, and the number continues to decline: more than 320 local titles closed between 2009 and 2019 as local newspaper advertising revenue fell 70% between 2010 and 2020.

This is terrible, something must be done etc.

We suggest - nay, insist - that that what be that the billion quid in the Scott Trust Ltd, the endowment that supports The Guardian’s losses, should be directed toward saving local journalism.

You see, we’ve this awful habit. We read links. And footnotes. We even read reports referred to in links and footnotes. Such as this:

An independent report on the future of the British media by Dame Frances Cairncross in 2019 warned the industry’s collapse poses a threat to the long-term sustainability of democracy and concluded there should be an investigation into the dominance of Facebook and Google in the advertising marketplace.

Well, yes, sorta. That Caincross report is one of the very few that we’ve seen that gets to the economic nub of the matter concerning local newspapers:

The starting point for the financial problems of news publishers was the collapse of revenues from print advertising. Print newspapers have traditionally carried advertising in two main forms: display advertising – commercial adverts and spreads in the main section of newspapers; and classifieds – job vacancies, services for hire, car and house sales. The transaction of buying and selling advertising space generally involved only two parties: the advertiser and the publisher. In 2007, advertising in the national and local press brought in £4.6 billion, and accounted for 40% of total UK advertising spend.111 In 2017, the share of advertising appearing in the printed press had fallen from 40% to 12%, and generated £1.4 billion in expenditure – a fall of 70% compared to 2007.

Further:

Perhaps more fundamentally, it is local media, more than any other, that has lost its comparative advantage in the advertising market to new online players. Local news publishers have always relied more on classified advertising than any other news publishers, for the simple reason that geographical proximity is what most local news readers have in common.

A point we have made a number of times both for UK local papers and the American Big City ones. Classifieds were the big revenue source and a much larger than that portion of gross margin that paid for the newsroom. The classifieds have disappeared online. And not, not really, to Google and Facebook, but:

And unfortunately for them, online competitors, first Gumtree and Autotrader,

Aha. So, the local papers are broke because classifieds have moved online and to different people. One of those is Autotrader. It is the capitalisation of selling off those classified ads - the capital value of Autotrader when sold was the fact that it has taken those ads - that created the £1 billion endowment at the Scott Trust Ltd which then funds The Guardian’s losses.

But, if the people who nicked - sure, by free competition in a time of technological change - the ad revenue are the people who should pay to preserve local journalism then it’s The Guardian that has to pay to preserve local journalism, right?

Can’t get away from that basic logic now, can we?

So, there we are, that’s solved then. The logic being shouted at us is that the people who took local journalism’s revenue must support local journalism. As that’s The Guardian then that’s The Guardian.

True, this might mean a reduction in Owen’s, George’s, Aditya’s salaries (we suspect that a reduction in their output would be too much to hope for) or contracts but there are silver linings to every cloud.

Tim Worstall

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Tim Worstall Tim Worstall

All you need to know about the Tax Gap

We’re told:

The gap between tax revenue the UK government expected to raise and the amount paid annually has hit £40bn, putting extra pressure on both main parties over their pledges to crack down on tax avoidance.

HM Revenue and Customs (HMRC) said there was a shortfall of £39.8bn in the 2022-23 financial year, up from £38.1bn a year earlier. This represents 4.8% of the amount of tax theoretically due, down from 5.2% in the previous financial year.

Inflation between 2021 tax year and 2022 was 9.1%. The £38.1 would have been, if it had just risen by inflation, £41.6 billion. There isn’t some vast amount that can be captured just by making sure everyone pays their taxes - don’t forget, this tax gap includes those who go bust before they’ve paid their taxes and so on.

Of course, there are those who disagree:

Richard Murphy, a tax expert, said the assessment of tax losses to the exchequer was “seriously underestimated” and that Labour’s plans would not improve the situation. He said the amount of tax not being collected could be closer to £100bn.

That’s because the ahem tax-expert measures by how much tax he thinks everyone other than him should pay not by what the law says they should - the second being the measure HMRC uses.

We also have some measures proposed:

In its manifesto, Labour has promised to raise £565m a year by closing the carried interest “loophole”. Under these plans, profits made by private equity managers would be taxed as income at a rate of up to 45% plus national insurance, rather than capital gains, which has a lower rate of 28%.

In March the chancellor, Jeremy Hunt, scrapped tax breaks for non-domiciled residents – foreign nationals who live in the UK to avoid paying tax on their overseas income and gains.

Labour has also said that it would remove tax exemptions enjoyed by private schools, adding VAT to fees at the standard rate of 20%. The plans have been blamed for parents paying years of private school fees upfront to avoid VAT using advance payment schemes.

None of which will change the tax gap by a single penny nor iota - by either the legal or laughable measures above - because they’re changes in the amount legally due, not changes in the amount legally due but not paid.

Tim Worstall

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Tim Worstall Tim Worstall

The perils of Private Equity

Apparently there’s some big problem with Private Equity these days. So much so that we’re supposed to use capitals when describing the awfulness of the phenomenon.

This is, sadly, all driven by the awfulness of commentators’ knowledge of private equity.

Take this video from Bloomberg. The High Streets of the nation are being colonised by those dastards from those private equity companies. Morrison's is one example used.

At no point at all is it even acknowledged - not even to say well, yes, but that’s different - that both Lidl and Aldi are owned by private capital. They’re capitalist organisations that aren’t on public markets - private equity. No, that isn’t different. Which leaves us only with the claim that “Private Equity” is Americans, not Germans, and that’s not, really, all that much of a difference.

But note that this is Bloomberg. A financial news organisation. They’re betraying their own gross ignorance on something so simple. They do it at least twice more too:

“Imagine, say, you want to buy a little shop for £500,000. You sue £100,000 of your own money to pay for the deposit, but you borrow the remaining £400,000 usually from a bank. You spend another £50,000 sprucing the place up, then sell it three years later for £800,000……you pocket the difference as profit. Now, imagine that rather than you being responsible for repaying the money you borrowed, the shop itself was responsible. Not you, the shop. You can walk off into the sunset with all the proceeds of the sale. The shop’s new owner now has to find a way of repaying the money that you borrowed. That is sort of how leveraged buyouts work.”

Nonsense. Mindgargling nonsense. People able to type think this sort of thing do they?

The shop is always the repayer of the loan - a bank won’t lend you money without you putting up the shop as security, recall?

But yes, it gets worse. We have a very fine economic theory - contributed to a bloke getting a Nobel no less - called Modigliani-Miller. Which says (in a very short version) that in private companies the blend of debt and equity in the capital structure doesn’t change the overall valuation. Whether this is wholly and 100% true is another matter, but it’s broadly and wholly so. What this means is that in that example, the debt stays with the shop, then the price paid for the equity portion will be the overall value - the £800k - minus the debt - the £400k.

No one ever gets to sell the equity for the full enterprise value without the debt burden being taken into account that is. A claim that they do or can is simple nonsense.

Secondly, why is private equity (even, Private Equity) roaring in UK retail? Because it’s a declining industry. Online is 26% of retail sales now. Commercial property values (delayed by upwards only rent reviews but it is still happening) are falling through the floor. The burst of retail bankruptcies is - as I would argue Body Shop was for example - people trying to get out of long lease commitments at rents of a decade ago.

But that’s exactly when private equity has a chance of doing something different from publicly held. By owning most of the debt themselves they then become preferred creditors in the reconstruction of the now bust retailer - and it’s the landlords who get it in the neck.

Sigh. Sure, sure, it’s possible to not like private equity if that’s your bag. But people like Bloomberg are supposed to know these things rather better than to tell us stories of hobgoblins and capitalist d’stards.

Private equity turns up in declining industries because they’re able to sweat the downwards curve of the business better - or differently - than public equity can. British physical retail is a declining industry. And that’s, erm, about it.

Blimey, if financial journalists cannot grasp this sort of thing then what are financial journalists for?

Tim Worstall

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Tim Worstall Tim Worstall

If investing is down then shouldn’t we cut taxes on investing?

Say we take IPPR seriously - no, stop giggling at the back there, let us just say that we are going to do so - then what would be the implication?

Compared to Japan, the USA, Germany, France, Italy and Canada, the UK languished in last place for business investment in 2022, a spot we have now held for three years in a row. Government investment is also low, volatile, and short-termist. Without resources flowing into new investment, it’s hard to see how UK economic performance can improve.

In this briefing, we identify the policy areas that we believe parties should adopt in government with the aim of raising levels of economy-wide investment.

Well, OK.

So, the returns to having invested are profits. Which can then turn up as corporate profits, as dividends, as capital gains, as, well, as wealth in fact. So, to encourage the creation of more wealth through investment we should cut the tax rates on wealth created by having invested. This would then align the tax system with what is the claimed desire, more investment.

Amazingly, this isn’t what IPPR recommends. In fact, they recommend an increase in taxation of stock buybacks. Which are the way to move capital out of past successful investments and thereby make it available for reuse in new ones.

Ho hum, so, the giggling is appropriate then, as you were, let’s not take IPPR seriously.

We can extend this to near the entire conversation at present as well. For absolutely everyone is indeed arguing for higher taxes on wealth, on returns from investing. Which will even further decrease the incentives to invest.

Folks just aren’t being serious, are they?

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Sebastian Charleton Sebastian Charleton

A Federalised Britain is a Pie-in-the-Sky Fantasy

The need for more devolution is one of the few areas of genuine consensus in British politics. From Boris Johnson’s levelling up programme to Gordon Brown’s proposed constitutional reforms, ‘the more devolution, the better’ has emerged as the unofficial slogan of Britain’s ruling classes. Politicians of all stripes line up to propose new metro mayors, PCCs and obscure assemblies. ‘Only when parliament is abolished and replaced with 37 regional authorities will Britain be saved!’ cry the devo-maxxers. 

Neither the left nor the right is immune from this misguided thinking - but the right should know better. The idea that different regions will compete to lower taxes and slash regulation rests on a series of hopelessly naive assumptions. The UK is not the US - it is a far smaller country where economic hubs bleed across arbitrary regional boundaries. There is certainly no British equivalent to California or Texas. While competition between states works well in the US, in the UK, more devolution simply leads to an expansion of bureaucracy.

The Scottish Enlightenment (regularly marginalised within nationalist discourse) provides an alternative free-market model to decentralisation. This unprecedented moment of intellectual and economic flourishing fundamentally altered the history of human thought, elevating Scotland's worldwide reputation. Edinburgh was dubbed ‘The Athens of the North’ while Glasgow emerged as the second city of the British Empire. It also witnessed the rise of one Adam Smith.

This period of outsized Scottish influence emerged from a climate where independent Scottish institutions had recently been abolished. As Smith himself put it, ‘by the union with England, the middling and inferior ranks of people in Scotland gained a complete deliverance from the power of an aristocracy which had always before oppressed them’. (How prescient those words sound today!)

By joining the UK, Scotland was free to unleash its potential. The vacuum created by the dissolution of its corrupt national institutions was filled by independent civil societies and innovative financial institutions like free banks. It was the distinct absence of government, combined with Scotland’s unique constitutional status, that caused this previously marginalised region to punch above its weight, turbo-boosting its economy and shaping the world in its image. The Scots didn’t produce the likes of David Hume, Thomas Reid or Adam Ferguson by entrenching a national political class.  

Free marketers beware! When regional officials are given more powers, they hoard them, rather than give them away. Instead of empowering their constituents, devolved assemblies create a second layer of ambitious politicians eager to expand their influence. It tends towards pork barrel politics where community champions compete for government pork – often distributed on account of its electoral, rather than economic, significance. The BBC's analysis of the second round of Levelling Up funding demonstrates that Tory constituencies were awarded a total of £1.21bn, compared with £471m in Labour ones. 

Similarly, after being granted control over tax and spending, Scotland has certainly not reconnected with its Enlightenment roots. To the dismay of liberals, the Scottish Parliament has used its newfound powers to raise rather than reduce taxes. According to the BBC, Scots earning over £50,000 are paying £1,542 more than they would elsewhere in the UK while those earning over £200,000 pay £7,478 more. Instead of promoting opportunities for business and improving the quality of essential public services, the parliament has constantly sought to expand its influence, imposing authoritarian dictates on everything from hate speech to alcohol consumption.

Just as spring follows winter, more government leads to more incompetence - and this doesn’t change on a local or regional level. If anything, it is heightened. Operating on smaller scales, politicians lack the resources to properly consider legislation leading to poor decision-making. The recent string of council bankruptcies gives us a flavour of what we can expect following a proliferation of similar regional bodies. Over the next 2 years, bankrupt Birmingham will have to raise council tax by a staggering 21%.  Similarly, a cursory expansion of the scandals facing devolved bodies demonstrates that the murky realities of political power certainly do not dissolve as size diminishes. 

Instead of leasing out its powers to new, expensive assemblies, the UK government should skip the middleman and implement free-market ideas itself, imposing lower taxes and liberalising the planning system. It could even use national powers to create Special Economic Zones, encouraging investment in less productive regions. There is no need to rely on devolved bodies to do this job. Although the UK is regularly criticised for over-centralisation, a strong national government makes sense given our size and economic structure.

With the possible exception of Northern Ireland, decentralisation has caused more harm than good. The vision of a free-market federalised Britain of regional assemblies is a pie-in-the-sky fantasy that must be resisted. Whilst, where identities are strong, some representation may be necessary, these cases must be treated as exceptions rather than rules. Ultimately, a decentralised government is still government, and more government is not the answer to Britain’s problems.

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Maxwell Marlow Maxwell Marlow

The Plan to Make Work Pay Will Harm Struggling Businesses

Labour’s New Deal for Working People, which aims to strengthen workers’ rights, end fire and rehire, put an end to flexible contracts, strengthen trade unions and raise the minimum wage, is an attempt to tread the tightrope that exists between pleasing both the unions and big business. But it risks frustrating growth and productivity gains. 

Take for instance, the Plan’s pledge to make pay ‘fair.’ Raising tips for frontline hospitality workers, raising the minimum wage to a level that constitutes a ‘living wage’ and of course will ostensibly sound like a good idea, but will squeeze the bottom line of pubs, bars, cafes and restaurants. The hospitality industry continues to struggle post-COVID – with over 3,000 pub club and restaurant closures in the UK since 2017 - and being unable to reinvest tips will only add insult to injury.

Similarly, raising sick pay and the minimum wage will pose a real challenge to businesses – both large and small – and frustrate efforts to keep businesses afloat in a difficult economic environment. The consequences will be twofold: first, it will make life more difficult for individual businesses which are trying to stay afloat and secondly, it promises to push the innovative businesses that fuel British growth out of the country as they seek more supportive and growth-friendly political environments. It speaks volumes that M&S Chairman, Archie Norman – who knows a thing or two about attracting investment and driving growth after returning M&S to the FTSE 100 last year after a four year absence - spoke out against the  plan, urging Labour to “consider carefully whether a package that reduced flexibility, makes it more costly to hire people, and seeks to bring unions into the workplace will help attract new investment”.

Meanwhile, the  plan to strengthen trade union powers by repealing the Trade Union Act 2016, the Minimum Service Levels (Strikes) Bill and the Conduct of Employment Agencies and Employment Businesses (Amendment) Regulations 2022, will make it easier for trade unions to strike and and removing restrictions on strike ballotting. As both history and the state of play across the English Channel illustrates, unions are diametrically opposed to productivity, increase consumer prices and carry the ability to bring entire nations to a standstill. For instance, the gilets jaunes protests of 2018 paralysed France for roughly a month and only came to an end once President Macron reluctantly passed an eye-watering €10 billion package of policies, including a €100 per month rise in the minimum wage for roughly five million French households. Empowering unions to the extent that Labour’s Plan vows to could well see the aforementioned disruption and costly concessions make the 20 mile hop across the Channel.

Despite generating - at least in the short- to medium -term - a wage premium, to name just one of the idealistic visions of unionisation, the strengthening of Britain’s unions promises to distort labour supply, restrict employment flexibility and limit research and development (R&D). Restricting flexible employment not only disincentivises productivity as employees are contractually locked-in regardless of personal performance, but it also makes firms less likely to employ experts, who are required, but only on an ad hoc basis - frustrating innovation in the process. 

Furthermore, as Hirsch’s research in the 1980s found, the wage increases brought about by unions in essence serve as a tax on any return on investment. If a firm performs well, unions invariably demand a wage increase, and above competitive levels. Once again, this disincentives productivity and inhibits R&D, as return on investment is forcibly channelled into meeting union demands rather than into innovative and growth-stimulating R&D. What’s more, with improved R&D comes more consumer-friendly services and products, which stand to improve the standard of living of the average joe.

Plans to ban unpaid internships will also have myriad adverse effects. The 58,000 unpaid internships offered annually in the UK afford the country’s youngest, most ambitious and curious young people exposure to the workplace across a variety of industries, helping them decide which industry and role is best suited to them while also improving their employability. Equally, it allows companies to discern whether an individual could add value to their firm before investing in them; it’s always a risk for a company onboarding a new employee, who, to a degree, is an unknown quantity at the beginning of their career. Considering some companies simply don’t have the cash to offer paid internships, outlawing free ones would be at the expense of growth, productivity and recruitment and the employability and education of our youth, all the while stymieing social mobility.

Rather than loosening rules for disruptive trade unions, banning flexible contracts, and making it more expensive for businesses to operate, the next government should aim to incentivise small businesses to take on new employees, cut taxes for working people, and grow our economy, creating more high-quality employment opportunities in the process. At a time when our tax burden is at a historic high and the regulatory state encroaches on every area of economic life, more tax and more regulation surely cannot be the answer. Let’s learn from our cousins in Australia and America, who continue to record admirable year-on-year growth, instead of hopping along in the froggy footsteps of our French neighbours. 

  • Louis Plater

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Tim Worstall Tim Worstall

This joined up government idea - can we have some of it?

The IMF recommends:

Britain and other rich nations should raise taxes on capital gains to support a surge in benefits spending, the International Monetary Fund (IMF) has said.

In a report released on Monday, the IMF urged governments to tax businesses and investors more in anticipation of welfare bills rising across the world.

That’s eating the societal seedcorn to cover current spending. Something that leads to famine down the road. The justification doesn’t even work:

It said higher capital gains taxes should be used to support workers as artificial intelligence was increasingly being used to replace jobs.

As robots produce things more cheaply then consumers become richer - things are getting cheaper. Which isn’t - at least, it’s not a cogent - an argument for consumers requiring more support.

This then meets t’other idea:

Investment in the UK has trailed other G7 countries including the US and Germany since the mid-1990s, according to a report that urges Labour and the Conservatives to reverse planned cuts to investment or risk long-term damage to economic growth.

The Institute for Public Policy Research (IPPR) thinktank found the UK was bottom of the G7 league for investment in 24 out of the last 30 years, using figures from the Organisation for Economic Co-operation and Development (OECD).

A lack of spending by UK companies on technology and innovation over the last three decades was mostly to blame for the underperformance,

We’re willing to entertain - entertain, not insist upon - the idea that low levels of investment in the UK simply demonstrate that we’re more efficient at investment than many other places.

But look at the combination. Companies don’t invest enough and therefore a good policy is to tax the returns to successful investments more so that fewer people bother to invest. We tend to think that’s more than a little confused.

We have heard of this idea of joined up government and we think it would be a jolly good idea. When will it arrive?

Tim Worstall

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Tim Worstall Tim Worstall

But Mr. Hutton, this is a good thing

If you get the past wrong then clearly you’ll get the lessons of the past - those that can inform us about what to do in the future - wrong too. Which brings us to Willy Hutton:

The first catastrophe was the monetarist experiment of the 1980s – a means to roll back the state so it would print less money – which achieved neither a smaller state nor lower inflation. Other countries may have fallen for the same snake oil, but none so emphatically as Britain. Our industrial base was needlessly decimated, with manufacturing employment close to halving in a decade.

We would not suggest that the government - any government - got economic policy perfectly right. We are, after all, the very people who insist that government isn’t going to get the details of economic policy right therefore there should be less attempt to manage the economy in detail. But we need to think of this too:

It’s true that manufacturing employment dropped precipitately. Manufacturing output (as above and yes, of course that is already inflation adjusted) dropped, as it does in a recession, then recovered and continued to climb. Output, at the end of Thatcherism, was perhaps 15% higher than at the beginning but with half the jobs.

That’s also known as a more than doubling of labour productivity. Increases in labour productivity being one of those Good Things.

One of the things that economic policy got right in the 1980s - increasing manufacturing productivity - is being used by Will Hutton as proof of what economic policy got wrong in the 1980s. Which might be why his insistences on what we do now seem so out of kilter with reality. He’s not just failed to learn the lessons of the past he’s actually got the past wrong.

Tim Worstall

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Tim Worstall Tim Worstall

If we could just make a short but important point?

Torsten Bell:

There’s the Tory tax-cutting rhetoric and then there’s the tax-rising reality: between 2019 and 2024 the Conservatives delivered the largest rise in tax as a share of GDP of any postwar parliament (3.3%, equivalent to more than £3,000 per household).

Things have got better over this time period, have they? We are, for example, gaining more and better public services? Frolic more freely now that our wallets are lighter?

We’re not? Ah.

More taxation - that is, more ripped untimely from fructifying in our own pockets to then be spent as others insist, not as we do - doesn’t improve matters.

So, there seems to be a very strong indication that increasing the tax burden so that more of society’s resources are spent by the political system and the bureaucracy doesn’t make things better. So, let’s not do that then.

Of course, we are not anarcho-capitalists here so we do agree that some government - therefore some tax - is a necessity. But less of both sounds like a jolly good idea given the success of having more.

Tim Worstall

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Tim Worstall Tim Worstall

Edmund Burke proven right once again

The latest claim is that we’re all very ill because we do not do that only connect thing Forster was so keen on.

Social health is the aspect of overall health and wellbeing that comes from connection – and it is vastly underappreciated. Whereas physical health is about your body and mental health is about your mind, social health is about your relationships. Being socially healthy requires cultivating bonds with family, friends and the people around you, belonging to communities, and feeling supported, valued, and loved, in the amounts and ways that feel nourishing to you.

Decades of research have proven that connection is as essential as food and water, but this knowledge hasn’t yet made its way into the mainstream understanding of health – and without it, we’re suffering.

Possibly the idea is picked up from, umm, Bowling Alone was it?

But OK, so, we lack social connection. We do too few things communally and too many alone. Well, if true there’s an answer to that.

Burke said that the bedrock of a society, the layer that made it work, was the little platoons. Folk simply getting together, themselves, and doin’ what needed to be done. Rather than some distant ruler or bureaucracy tellin’ them what must be done, or how it must be done. Burke might have gone on to say that it was a more moral society and all that, but the clinching point to pragmatists like us is that it was a more efficient, effective society.

Now we’re being told that these sorts of personal connections are a major determinant of health. Which sounds like an interesting string to the bow of the argument. We have far too much done for us - by those rulers, that bureaucracy - for us to be making those little platoon connections any more. To our detriment and, as Burke and we would also point out, to the detriment of the society itself, not just our health.

Which seems an easy enough problem to solve. Cut government, slash it in fact, because it will make us healthier. For we’ll have to return to those more personal, locally communal, methods of gettin’ things done.

Who knows, cut enough government and we might all become healthy enough that we’ll save the NHS.

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