If you'd like to know why economic growth is slow....

Then I shall tell you why economic growth is slow. We've become infested with an overweeningly bureaucratic state. I have examples from my own work but perhaps one from the public domain is better:

There was some bad news for York Potash project developer Sirius Minerals last week, after approval of its mine was delayed yet again, causing the shares to plunge.

I'm perfectly happy with the idea that a mine needs planning permission. Indeed, I've no problems at all with the idea that you need a permit to go dig a girt big hole in a national park. However, there's parts of this process that look absolutely absurd:

The second study essentially concluded that its authors did not see a market for the form of potash Sirius would produce. “In the conclusion, AMEC states that it does not believe there is a significant market for polyhalite and therefore stated economic benefits are unlikely to occur,” Sirius said. “This is followed with a view that, as polyhalite cannot be sold in sufficient volumes, the economic and employment benefits cannot be realised.”

What? One the one hand we've got Jeremy Grantham and vast numbers of enviros and organic nutters insisting that potash (and another fertiliser, phosphorous) is about to run out and therefore we're all gonna die and then we've these nutters employed by the government to say that no one will buy the stuff. A very quick Google indeed shows that there is a market for the stuff. Here. But much more than that, in order to get permission you've got to show the bureaucrats that there is indeed a market for your goods. What?

That's a planned economic system, not a market one. In a market system sure, you might need permission to go dynamiting the North Moors but whether you make money doing so is what you're there risking your capital to find out. It's absolutely damn all to do with functionaries in offices whether you do or not: that's your risk. And the only way anyone will ever find out is by going and doing it.

And this is indeed one reason why economic growth is slowing: because we've erected this system whereby the bureaucrats get to second guess everyone in their atempts at new economic activity. Yes, this is beter than a system in which only the bureaucrats ever initiate new activity: but it's still vastly worse than one in which people get on with what they want to do without having to spend several years waiting for a signed chitty. Economic growth has slowed over the past few decades simply because we've put more paperwork obstacles in the way of economic grwoth.

The Wonga delusion

The Church of England’s plan to drive payday lenders like Wonga out of business by competing with them is wonderful. After years of politicians demanding ‘action’ on the payday loan industry, an organization has finally decided to tackle this perceived social evil by giving people a better alternative, not trying to legislate problems away.

Critics of payday lenders quote the loans’ astronomical APRs — Wonga’s representative APR is 5853%. But this is extremely misleading. Representative APR is designed to show interest-on-interest compounding over a year, and is an inappropriate measure to use for a loan whose term is a month or so. A Wonga loan does not and cannot compound for longer than 60 days beyond the initially agreed loan period (which can be between 1 and 46 days).

Borrowing £200 over 46 days accrues £100.03 in interest and fees, an effective interest rate of 50% over this period. After this point, interest only continues to accrue for 60 days, after which point it stops. It simply does not make sense to look at representative APR for a short-term product that does not keep compounding for long enough for anything like that APR to ever apply.

No Wonga borrower can end up with a 5853% interest rate – the existence of this number is just an quirk of our financial regulations which require all lenders to express their rates in annualized terms. Journalists and politicians who report this 5853% APR figure as the ‘standard’ Wonga rate are mistaken and are misleading the public.

The real problem is that people are poor enough to have to rely on these sorts of lenders. Wonga et al only exist because their customers have no better alternative. Before the emergence of the formal payday loan sector, people had to rely on tattooed guys with a Rottweiler who’d happily break your legs to recover their investment. Nobody wants to borrow from a firm like Wonga, but they're a damn sight better than the existing alternatives.

The Archbishop of Canterbury appears to recognise this. Giving people more choices by offering a cheaper alternative is the sensible way to help payday borrowers.

Chart of the week: Eurozone car sales flat for 10 months

Summary: Euro are car sales have moved sideways for ten months

What the chart shows: The chart shows sales of new cars in the euro area as well as in the four largest EA members, expressed as an index with the average for 2008=100

Why is the chart important: The biggest purchases of households, the ones for which they usually borrow money, tend to be cars and houses. For this reason, both purchases are excellent leading indicators of activity, in that they are usually only undertaken when they buyer is feeling optimistic. EA car sales data give rise to cautious optimism that economic activity in the single currency zone has bottomed out. However, there is still little or no sign of any sustained recovery.

Why are tax campaigners campaigning to make the poorest of the poor poorer?

Most here will know that my favourite blood sport is hunting Richard Murphy and his buddies in the Tax Justice movement. But even I am appalled at the latest demand from them: that multinationals should be forced into paying more corporation tax in poor countries. They make this demand because they are willfully blind to the most basic point about corporation taxation: the incidence of said taxes. Here's what is said:

Corporate taxes are incredibly important to many developing countries. When many in their populations are too poor to pay any taxes and when corruption undermines much of the local tax base from commerce (and this fact has to be recognised at present) then the revenues to be earned from multinational companies form a significant part of the tax base of these states. In that case the base erosion that is now well documented due to transfer mispricing out of these countries on royalties, management services, interest, insurance and other charges levied on an intra-group basis, usually from tax haven subsidiaries within the same multinational entity, is of massive concern to these states and forms a major part of the illicit flows that prevent the provision of adequate services by many governments, undermining democracy and blighting many lives over succeeding generations.

We have argued for fundamental reform on behalf of these countries.

They're arguing that the poorest of the poor should be pushed further into poverty as a result of their determined ignorance about that tax incidence. We've known for well over a century now that companies do not actually bear the economic burden of taxes levied at the company level. It is either the workers, in the form of lower wages, or the investors, in the form of lower returns that do. This is not an arguable theoretical point: it's just a truth about this particular universe that we inhabit. No, don't worry about why for the moment, simply take it as being one of those truths.

We also know what it is that influences who carries the burden, workers or investors. The mobility of capital and the size of the economy of the taxing jurisdiction relative to the size of the world economy. The precise splits are argued about, volubly, but but all economists are agreed on those two basic points. It's some combination of the workers and shareholders and the smaller the economy and the more mobile capital the more it is the workers, the less the investors.

One more interesting point: Atkinson and Stiglitz, back in 1980 or so, showed that the burden could in fact be greater than 100%: the loss to workers and or shareholders could be greater than the sum raised in revenue. And yes, the smaller the economy and the more mobile capital the more likely this is and that this burden will be on the workers. So, what do we know about these developing economies where we are told that companies really must cough up more corporation tax in? In fact, that multinational companies must cough up more tax in? Quite: we know that these economies are very small compared to the world economy. That's why we call them developing economies: because they're small and poor ones.

Further, given that we are specifically talking about multinationals, the capital we're talking about must be perfectly mobile. It is outside investment going in: not domestic investment pondering whether to leave or not. If we piece all of this together then we get the ugly reality. The truth is that the burden of higher corporate tax on multinationals in these poor countries will be upon the backs of the workers. Those workers being, by our very definitions of poor and developing country, the poorest of the poor. These are the people we actually want to help and here the "Tax Justice" campaigners are insisting that their wages should be driven even lower. And as Joe Stiglitz has pointed out, their wages could be driven down by more than the actual revenue raised.

This is not, I would submit, a sensible way of improving people's incomes: imposing a tax which we know will reduce those incomes.

As above I usually take my pursuit of these people as a rather jolly blood sport. A day out with the hounds and if the odd vulpine gets harmed well, no matter and that's not really the point of it all: it's the jolly day out that is. But then we find them proposing something quite as barmy, even evil, as this. They simply will not listen to what they are being told about the incidence of corporate taxation. They just don't want to believe that it's not either the company or the evil capitalists who bear the burden of these taxes. As a result they ignore that their recommendations will grind the faces of the poor even more firmly into the dust. At which point the pursuit of their errors become less a jolly day out and more of a necessary duty.

If you want to raise wages in poor and small economies then you want more multinationals to invest in those poor and small economies. Trying to tax said multinationals more so that they invest less and thus depress wages just isn't a good method of raising living standards in these places. We want to tax less, not more.

The good news about world poverty and globalization

On my own website today I draw attention to the Economist story about the progress of world poverty between 1990 and 2010. I point out that:

"World poverty has halved in two decades. The measure used is the $1.25 a day of consumption that is the average poverty line for the 15 poorest nations. This figure shrank from 43 percent in 1990 to 21 percent in 2010. This was not achieved by redistributing wealth from richer countries, but by having wealth created in poorer ones by economic growth."

The ASI responded to the "Make Poverty History" wristbands that celebrities popularized in 2005 by pointing out that the slogan did not indicate how this might be done. It implied redistribution, with more aid to flow from rich countries to poorer ones.  We produced our own wristbands that read, "I buy goods from poorer countries," and sent them out free to anyone who asked for one.  We gave away many thousands. 

Our point was that poorer countries become richer if we open our markets and buy their goods.  It is this, rather than aid, that has made a difference to the lives of a billion people over those two decades, and can change the lives of the billion still to be lifted from poverty.

Free markets for sustainability!

I expect we're all wearily familiar with the population prodnose. Those who comment (most often seen at Comment is Free but they do spread themselves around a bit), endlessly, along the lines that "this is the problem that cannot be mentioned, the rising population". And who then go on to suggest the compulsory sterilisation of anyone a little browner than they think people ought to be. With rather fewer fascistic overtones we get similar stuff from people like Johnny Porritt and the Optimum Population Trust. There's just too many people, too many of them are peasants who won't do what Baronets tell them to and it's all just appalling.

Very strangely indeed it's largely these same people who insist that there must be a plan to deal with this population thing. Despite the fact that population is one thing that free markets deal with very well indeed thank you very much. As Ron Bailey over at Reason points out:

The crucial point is that increasing economic liberty correlates with increasing life expectancies, and thus falling fertility rates. As data from the Heritage Foundation’s Economic Freedom Index shows, average life expectancy for free countries is over 80 years, whereas it’s just about 63 years in repressed countries.

The causal chain is as follows: economic freedom increases wealth: increased wealth leads to longer lifespans. Longer life spans for women reduce fertility rates (I know, you might think it works the other way: but it doesn't). Therefore economic freedom reduces population growth.

And there we have it: we don't need grand plans to sterilise everyone a racist wouldn't like to bring home to mother for tea. We don't need to pressure the peasantry into doing what an Old Etonian thinks they ought to. We just have to leave people to get on with it themselves. People generally like economic freedom, they certainly like increased wealth and longer lifepsans and the end result of all three is that population growth falls, falls to below replacement rate and thus the gross population falls over time.

No plans, no pressure, no coercion, just free markets and the rule of law saving the planet. Great, eh? Now if only we could get the population prodnoses to understand this....

We shouldn’t subsidise the new political class

In 1911 MPs began receiving a salary. By paying MPs it was hoped the general population could independently enter politics, rather than simply leaving it dominated by a wealthy elite.

MPs compensation has since betrayed this vision. The system now supports a new political class. In the 1970s MPs' salaries were comparable with average UK income, today they seek triple the average, putting them in the top 2% of earners. Not to mention the abuse of expenses or even illegal activities by some of this political class.

Hence the rise of professional career politicians. Consider Victoria Fowler, Labour’s 22 year old Parliamentary candidate. Her (now-deleted) Wikipedia page cites her running the Warwick Speakers (a student society) and two years experience as a councillor, to justify a potential starting salary of £77,000. Glancing over Liberal and Conservative lists, she is not alone in the political class. Many pursue power with a bland CV of nothing more than work in Parliament, brief Party Research Department experience or a token career in PR. The narratives about working class links or special expertise are common but seem to have little bearing on reality.

The solution is simple. MPs should have their pay fixed around average UK salary. After all, there are many perks, like a £5.8m subsidy for food and booze in the Commons, and prestige from the post too. Perhaps they could continue to receive a second home allowance, or basic temporary accommodation to allow them to attend debates. Travel expenses, only from the constituency to Westminster when supported by just cause, such as a vote, might be reasonable.

Rather than cutting the number of MPs and supporting politics as a full time career, MPs should be part time. Politicians should understand real world working Britons as workers themselves. They should bring genuine specialist expertise, not just the skillset of a student hack. This might reduce time for legislation, though the MPs of past debated in the evenings after work and were not supported by a modern Civil Service. Why must every government create more laws anyway? What of simplification and repeals?

MPs should take a pay cut. We need more parliamentarians from the real world rather than the rising political class. MPs should be part time, and driven by a desire for public service not the raw pursuit of power and a fat cheque at the expense of their constituents.

A letter to the Archbishop of York

The Most Reverend & Right Honourable Dr. John Sentamu, Archbishop of York

The Office of the Archbishop of York

Bishopthorpe Palace Bishopthorpe, York YO23 2GE

21 July 2013

Your Grace,

I note from today's Observer that you are concerned about the Living Wage. I write to make a point that I suspect the usual suspects will not make to you. The importance of understanding that the living wage is calculated as a pre-tax number.

We here at the Adam Smith Institute agree that the Joseph Rowntree Foundation is indeed measuring poverty in the correct manner. We derive this from Adam Smith's comments on a linen shirt: it is not a necessity. However, if one lives in a society where being unable to afford a linen shirt means that you are regarded as poor, then in that society, if you cannot afford a linen shirt you are indeed regarded as poor. The JRF numbers are gathered in a similar manner: what do focus groups think people should be able to do in order to be regarded as not poor in this time and place? Add up the costs of those things and we reach that living wage. This is a much better definition of poverty than the more usual reference to some percentage of median income.

However, it is absolutely vital to understand that those numbers are pre-tax. The importance of this is as follows: if it were not for the amount that government takes from such meagre wages then the minimum wage would indeed be, to an acceptable level of accuracy, that living wage.

An example to make this clear. Assume 37.5 hours a week of work for 52 weeks of the year. At that living wage of £7.45 an hour this is a gross weekly income of £279.40 (I round slightly) or £14,527.50 a year. We are all agreed that this is not a large sum.

From this sum the recipient will have to pay employees' national insurance. This starts at £109 per week and is charged at 12%. £20.50 per week in such charges, or £1,063.30 per year.

There is also income tax to pay. This starts at £9,440 this year and is charged at 20%. £1,017.5 in such taxation.

We can see therefore that the net income from the living wage is some £12,446.70 a year. This is not greatly different from the gross income on the minimum wage: £6.19 an hour for 37.5 hours for 52 weeks is £12,070.50. Or if we wish to bring that back to a rate per hour, the difference between the post-tax living wage and the pre-tax minimum wage is some 19 pence per hour.

Unfortunately it does not stop there. There is also employers' national insurance to pay. Some insist that it is actually the employer who carries the burden of this tax. Almost all economists disagree, insisting that it is the employee who does in the form of lower wages. Indeed, we have it on the word of an expert of great eminence, Richard Murphy of Tax Research (who is funded in part of the Joseph Rowntree organisations, just to show his impartiality on this point), that it is indeed the employees who carry the burden of this tax. The calculation is slightly complex, but it's reasonable enough to claim that it is a further 13.8 % of those wages (it isn't, it's 13.8% of the total wages including the employers' NI but let us keep the maths simple) meaning a further £20 to £23 a week deducted from those wages. Or a further £1,196 a year.

If we add all of this together we find that the living wage of £7.45 an hour actually provides a lower post-tax standard of living than the minimum wage of £6.19 an hour free of taxation would provide. That latter would provide £12,070.50 a year to live on. By no means a great sum but still larger than the £11,250.7 that is available from the living wage after the politicians have taken their very much more than tithe.

It is indeed possible to play with these calculations, to make them more accurate. But the same end result will always come out. The current minimum wage, free of income tax and national insurance, would provide a higher standard of living than the proposed living wage under the current taxation system.

It is for this reason that I have been proposing for some years now, in fact ever since the first JRF calculations on the living wage were published, that the personal allowance for both income tax and national insurance be raised to the full time full year minimum wage. This would, at a stroke, raise that minimum wage to a higher standard of living than the proposed living wage. With the advantage that we only have to convince the Chancellor of the Exchequer of the righteousness of this path, not millions of employers across the country.

I look forward to the results of your investigation into low wages and am convinced that you will come to the same conclusion that we have. The shockingly low disposable incomes of the working poor in this country are not the result of any meanness or avarice on the part of employers: it is simply that the government taxes the working poor too much. Given this, that we can convert the minimum wage into something better than the living wage simply by ceasing the political depredations upon the pockets of the populace, I assume that your conclusion will be that the personal allowance, including that for national insurance, should be substantially raised.

After all, it's not really a particularly complex point. If you want people to have more money then tax them less.

yours sincerely,

Tim Worstall

Senior Fellow

Adam Smith Institute

London SW1

If big government doesn't provide more public goods then what's the point of big government?

At the heart of the argument about having a government at all is the idea that there are some public goods that would be underprovided in a pure market system. We thus need some communal (and at times, involuntarily communal) organisation to tax so as to provide these public goods to us. At every stage closer to sanity than the anarcho-capitalists we agree with one or other of the classic examples. National defence is better organised through taxation: we tried the market system once and ended up calling itn the Wars of the Roses. Public health, in the true sense of public health like vaccination, is a public good and there's excellent reason to think that taxing everyone to make sure that everyone is vaccinated is a good idea. The reason being that herd immunity that we get from a lare enough portion of the population being vaccinated.

However, that there are good arguments in favour of the existence of government at all does not mean that those same arguments support having any level of government at all. Which brings us to a fascinating paper looking at the relationship between big government and the provision of those public goods:

Theories explaining government size and its consequences are of two varieties. The first portrays government as a provider of public goods and a corrector of externalities. The second associates larger governments with bureaucratic inefficiency and special-interest-group influence. What distinguishes these alternatives is that only in the former is governmental expansion generally associated with an increase in social welfare. In the latter, the link between government size and public goods provision (or social welfare) is negative. We study the empirical significance of these competing claims by examining the relationship between government size and a particular public good, namely environmental quality (notably, air quality measured by SO2 concentrations), for 42 countries over the period 1971–1996. We find that the relationship is negative, even after accounting for the quality of government (quality of bureaucracy and the level of corruption). This result may not prove conclusively that the growth of government has been driven by factors other than concern for the public good, but it creates a presumption against the theory of government size that emphasizes public good provision.

I'm still perfectly willing to agree that there are public goods. And that there are public goods that only government can provide. But as above, this does not mean that this justifies any amount of government. For past a certain size the government turns out to be not very good at provision of those very public goods that are the justification for it in the first place. Quite why we can argue about: my theory would be that when government tries to micromanage inequality say, or concerns itself with the voluntary activities of consenting adults, then it's taking its attention away from what it actually exists to do, provide us communally with those things that cannot be, or only will badly be, supplied by individual action.

I'd thus suggest the Worstall Measurement of government. There are things that must be done, there are things that must be done that only government can do. So let's limit government to only those things that must be done by government: where it is both necessary that they be done and also that the coercion of either the law or taxation is necessary for them to be done. Everything else we'll get on with ourselves: you know, as those free people we are?

As everyone now seems to agree it's time for Plan Worstall

Quite astonishingly we now have both the OECD and the Tax Justice Network in agreement with each other. Cats will lie down with dogs and it is the end of times. What they're agreein on is that the current international corporate taxation system is no longer fit for duty. The system builds upon steps first taken in the 1920s and changes in the way the world works since then have made the basics of the system just not workable.

However, they're both coming up with the wrong solution to this problem. To find the correct solution we need to go back to some basics. Yes, we do need government therefore we do need tax revenue to fund it. While it would be lovely not to have to tax economic value creation we can't raise enough cash for the amount of government we seem to want without doing so. So, great, we need to tax economic activity.

Both the OECD and the TJN seem to think that that must mean that we tax companies. But we know very well that the economic burden of corporate taxation does not fall upon the company: it falls upon some combination of the shareholders and or workers. The only reason we've ever taxed the companies themselves is because they were a convenient place to tax. Now, as the OECD and TJN are stating, they're not a convenient place to tax.

So, why the insistence that we must find a new way to tax companies? For that's not what we want to do at all: we want to tax the economic activity, yes, because we need the money. But why tax inconveniently where we know the real burden doesn't fall? Why not just tax where we do know the real burden falls: on the shareholders and the workers?

At which point I suggest that we simply abolish corporation tax altogether. Tax corporate capital gains and dividends just like income from any other source and be done with it.

Of course, there have also been people who actually know what they're talking about who have looked at this question. The Mirrlees Review for example. But no one's paying any attention to anyone who actually knows about the subject, far better to have baseless speculation from the ill informed like me. At least I assume this passion for the involvement of the ill informed explains why people are talking to the TJN.