The confusion of Will Hutton

We've Will Hutton telling us that we really need to be taxing corporations more. For they're paying less in tax on their profits than they used to and this is what ails our State. Sadly, what has really been shown is Will's confusion in reading GDP figures.

If companies in Britain paid, proportionally, as much tax as they did in the last year of Mrs Thatcher’s prime ministership, the country would be £30bn better off.

Well, no. Moving money from one account to another does not make "the country" better off. It might make the Treasury better off, this is true, at the expense of making investors in companies worse off, but this is not the same as the statement that it will make the country better off. For, as we might all have noticed, living as we do in a place where there are things outside the state, the State and the country are not the same thing. But then we get the more detailed confusion:

Nor is that where the bending of the tax system – and the state – to accommodate companies’ chosen behaviour stops. Over the same years there has been a monumental bidding down of wages as the share of company profits has risen by 6%, in terms of GDP, with wages falling by a commensurate amount.

This is a basic schoolboy error and one that's embarrassing for someone who was a Governor of the LSE to make. GDP is not made up of the wage share plus the profit share. there are more components than that: most notably the taxes paid upon consumption and the taxes paid upon employment. And a couple of us have been pointing out what has actually been happening over these years. The wage share has indeed been falling. But the profit share has not been notably rising. The difference explained by those two tax shares, on consumption and employment, rising. It's is not that the capitalists have been stealing the crusts from the workers' mouths, it is that government has been.

But we will admit that this produced a guffaw:

What is striking about the international system is the variety of tax regimes, wage and profit shares – and the lack of convergence, as the IFS’s exhaustive review of the tax system, led by Nobel Laureate Professor James Mirrlees, pointed out. There is plenty of scope for redesigning our tax system to make it fairer, increase its yield and refashion the bargain between companies and the state if we choose.

That's the Sir James Mirrlees of optimal taxation theory fame? Whose major contribution to taxation theory is that we should not be trying to tax corporations or capital returns, but instead should be taxing rents and consumption? And this is what is called in evidence to underpin the clai9m that corporations should be paying more tax?

It is to laugh, eh?

It's Monday so it must be sneer at Will Hutton day

My own antipathy to the European Union is, I think, reasonably well known. But I do acknowledge that there are people who like the institution, the ideas and ideals behind it and that at least some of those people are also being both realistic and also expressing their real views. But I can't help but feel that Will Hutton might be able to manage a better defence than this:

Yet Europe’s peoples are shaped by its Christian past, however secular we have now become, and by the Enlightenment, with its commitment to rationality, rule of law and democracy. Industrialisation and urbanisation in Europe forged a powerful commitment to social solidarity. Common underlying values bind us.

Rationality? When monetary policy in the eurozone is resolutely following exactly the mistakes of the Federal Reserve in plunging the US into the Great Depression? As everyone from Milton Friedman though Ben Bernanke to Scott Sumner, with our own Eddie George and Mark Carney in the middle, has been telling us? Rationality when even the creation of the euro was pointed out to be a non-optimal currency area before it was even formed?

Rule of law when the Commission insists that the UK must include prostitution in the measurement of GDP and then charges the country £1.7 billion for having done so? Or the way that the agreed upon rules and laws concerning referenda rather suddenly got changed when people voted the "wrong way" as several countries have done?

And as for democracy I do hope that someone, somewhere, can point to the elections that we've just had for that new European Commission.

There might even be valid defences for the EU but a supporter and protector of rationality, the rule of law and democracy doesn't really seem to fit. Many of us might be rather more favourably disposed to it if it were.

Where does Will Hutton get these ideas from?

This is just fascinating from Will Hutton:

The fall in real wages is blamed on EU immigrants, when the real culprit is more old-fashioned: workers in general, and young workers in particular, have not been organised enough to offer countervailing labour market power. It is not technology, globalisation or immigration that have triggered such a generalised collapse in real wages – it is the weakness of trade unions.

Where does this confident assertion come from? He provides us with no actual evidence to support it. Just the flat statement that it is so because Will Hutton has declared it to be so.

This is a statement that rather needs to be tested, don't you think? For example, unions are rather stronger in Germany than they are in the UK. Real wages have been declining in Germany:

After a decade of falling real wages, Germans’ purchasing power has started to increase over the past few years. In 2013, wage hikes are clearly outpacing inflation on the back of rising employment and a robust economy.

Unions are rather weaker in the US private sector than they are in the UK. And we all know the complaints about the stagnation and possibly fall in real wages over there.

We even have a report about this. The effects of globalisation upon incomes around the world. By a real economist using actual real data. The finding of which is that the people who haven't seen much gain from globalisation, the people who have had those stagnant real incomes as a result of it, are largely those below median incomes in the already rich countries. We can argue about whether that makes it all worth it or not (the 80% rises in income for almost all of the poor of the world make it so for us) but it's very definitely evidence that it's not the absence of unions that has led to the current situation: it's globalisation.

So where does Willy get his confident assertion from?

If only Britain had joined the Euro?

Will Hutton tells us, in last Thursday's Guardian, that widespread consensus on the UK's staying out of the EU is wrong-headed—joining would have kept our exchange rate low, which in turn would have meant no financial boom and an economy based (more) around producing manufactures. To add to this, our entry would have meant a more activist European Central Bank, which would have been willing to intervene when necessary. There is more wrong with his article than I could possibly tackle in one post, so I will focus on the key elements I've summarised above. None of what I say implies it necessarily would have been bad to have been in the Euro over the past ten years—such an alternative history is almost impossible to conclusively support—just that the arguments Hutton uses are extremely weak.

Pretty much all of his argument is bizarre, utopian and uneconomic. Devaluations work not because they make a country's products cheaper to foreigners, adding to net exports and driving GDP growth. Devaluations work because they boost inflation, which gets around nominal wage stickiness, allowing markets (particularly labour markets) to clear and giving relative prices the space to adjust. They make no difference to the price of a country's goods to foreigners, and in practice often boost imports as much as or more than exports, due to improved conditions. This is even true if we devalue by decree, as Hutton's desired artificially low €-£ exchange rate would be—it's just that the inflation could take slightly longer to come as firms and households bid up prices.

What's more, this is a Good Thing. We don't want to spend energy, time, labour and capital hours, as well as space, producing valuable things only to sell them in exchange for artificially few foreign goods. If countries are happy to send us desirable stuff in exchange for less of our stuff then that's great, and in any case it sows the seeds of its own balance, as consistent deficits (ceteris paribus) will drive down the exchange rate. This may eventually force the UK to run surpluses, but this would not be a Good Thing. Running surpluses means lower social welfare because we are consuming less leisure or goods or services than we would otherwise be able to enjoy. And we may never even have to run one if we keep creating loads of property or financial wealth to pay for our imports.

But let's imagine that Hutton could have subverted economic rules as basic as gravity and magically have kept the exchange rate at his desired low rate without any of the obvious expected balancing effects from wages and prices. And let's imagine that we want to send more goods abroad to get less in return. Would this have supported the manufacturing industries he wants? It's difficult to see how. If the City was providing the best financial services options for the world at £1 = €1.25 then it's not obvious that a cheaper pound, and cheaper financial services, would make them less attractive. The UK's economy contains a relatively large contribution from financial services because the UK is relatively good at financial services—as well as hi-tech manufacturing, advertising, and many service sector areas. These are the UK's comparative and in some cases absolute advantages.

And would the UK be better under the ECB (albeit with some British influence) rather than its own Bank of England? It's hard to see why Hutton thinks this. The BoE let inflation rise to hit 5.2% on the CPI measure, and has consistently allowed inflation to stay above target—the ECB has inflation below its 2% target, despite the obscene jobs crises in Spain, Greece and other crisis-hit countries. It is basically refusing to do any monetary stimulus. There is essentially no debate in Europe over whether the ECB should actually meet its inflation target, or indeed consider other economic variables, or go yet more radical and drop inflation targeting altogether. Would the UK's input really outweigh the massive consensus there, especially when the UK is divided on the issue itself? Again, I am sceptical. Strangely, Hutton seems to think that pointing to the UK's own situation and reminding us we're not living in "a land of milk and honey" is sufficient to gloss over the fact that most of the Eurozone is doing so much worse!

This laughable logical leap is nothing compared to his claim that both sides of the political divide are "united only in their belief, against all the evidence including Britain's export performance, that floating exchange rates are a universal panacea." As might be expected, he doesn't give the tiniest shred of evidence that the consensus view holds that floating exchange rates are not only the best exchange rate policy, but a panacea for all types of economic ills. But really, that's not the point. Even if everyone did—ridiculously—think that floating exchange rates were actually a panacea for economic problems, that wouldn't go any way to implying that they weren't better than fixed exchange rates.

Will Hutton's argument is completely invalid, though perhaps he gets some points for making such an outlandish and unpopular case. If it would have been good for the UK to enter the Euro 10 years ago, then it is not because it would have allowed us to permanently rig all markets to send off more of our stuff for cheaper than it is worth. And it seems completely implausible that the UK could have influenced the ECB enough to see it ditch its destructive hard money policies during the crisis, instead it seems more likely the UK would be just another country suffering under its negligence.