Budget tax hikes would bring disaster

Just when we can finally see the end of lockdown and life possibly returning to some sort of normal, we have a flurry of rumours that the Chancellor is about to shoot the recovering economy in the foot with all sorts of tax rises.

This would be a disaster, and the people it would hit worst would not be ‘the wealthy’ or ‘big corporations’, but young people looking for their first jobs.

Before coronavirus, the government was taking over 37% of the economy in tax, and even if the Chancellor does nothing in the Budget, that is expected to rise to around 39% (because although tax revenues are dropping, the economy is dropping faster).

That is dangerously close to the top level that an economy can bear without suffering badly. Yes, other European countries have higher levels of tax (although overall not by much - the average was just over 40% in 2019), and 39% would have still left 11 European countries with higher taxes than us.  But they are not a good example to follow because they generally have shamefully high levels of youth unemployment.  

Even in 2019 (before coronavirus and well after the banking crisis) France had a youth unemployment rate of 20%; Sweden was similar; Italy’s rate was 30% and Spain’s even higher – is that really something we want to copy?

There is a clear link between tax levels and the economy’s ability to create jobs, as the graph below shows – as overall tax levels rise (towards the right of the graph), the number of new jobs created falls.  More importantly, it falls off a cliff once levels go over about 42%.  In the period examined, every EU country with long-term tax levels below 42% of GDP created at least 10% net new jobs, but none of those above 42% were able to do so (the graph does show one, Italy, that just creeps over the line, but its subsequent performance suggests that was unreliable statistics rather than an economic miracle).

Failing to create new jobs is not so much of a problem for those already in work (although with many losing their jobs due to lockdown, it will increasingly be so for them as well), but it is a huge problem for young people looking for their first job – hence those shockingly high youth unemployment rates in Europe’s big high-tax countries.  That is what we are risking if the Chancellor pushes up taxes in the Budget.

Tax levels in the UK were getting into the danger zone even before the virus hit us, and even if the Chancellor does nothing, the drop in the economy over lockdown will mean that the government is already taking nearly 40% of the nation’s income in tax.  Any tax rises risk pushing us off that job-creation cliff.

Not only would that cause the huge personal problems of unemployment, it would also be counterproductive as, with fewer jobs, those tax rises would bring in less and less extra revenue.

I would not normally advocate increasing government borrowing, but in this case the money has already been spent, and whether or not it was spent wisely, it was in response to an emergency.  We can do nothing about that.  But what we must not do is stamp out the post-virus recovery before it even gets underway by raising taxes now.

Yes, in the medium term we need to get government finances back into line, but that needs to be done through economic growth and long-term spending restraint, not crippling tax rises.

There is a good argument that the people hit hardest by the lockdown are those in their late teens and early 20s.  They have seen their education sacrificed – schools and universities closed, training and apprenticeships reduced, workplaces closed so that, even if they have a job, they cannot pick up that vital early practical experience that the rest of us benefited from.  Not to mention the isolation and the lack of social activity that is so important at that age – the experiences lost, the relationships never formed.

After suffering from lockdown, is it fair that the country’s youth also bear the brunt of the cost of the recovery?

By Richard Teather

We're in for decades of austerity

It doesn’t matter who runs the place, which side or tribe wins any elections, the country is in for austerity over decades to come.

That is, if we use the currently fashionable definition of austerity.

For that definition is “government spending less this year than last”. That is what has been shouted over this past decade after all.

We have various possible definitions of spending of course, real terms, nominal cash, but the most obvious one to use is percentage of GDP. That is, how much of everything does government get to direct and how much fructifies in our own pockets?

Public spending has been declining over this past decade by this measure, this is most certainly true. We can see it here. From 40.8% of GDP in 2010/11 to 35.6% in 2017/18. That is what all that screaming about austerity is.

The bit that always gets missed in this is that government spending was 35.6% of GDP in 2006/7 as well. That is, as a nation, we did that Keynesian thing. We’ve a recession - quite a recession in fact - therefore government spending will rise. Whether or not we particularly believe in specifically raising spending in order to boost demand or we just observe that spending will automatically increase on welfare doesn’t particularly matter. Nor does that idea that more should have been spent, or less.

Spending did rise, considerably, as a result of the recession. It’s not all that terrible that it then declines to its former level as the recession ends. Indeed, to fail to do this would mean that every recession just ratchets up the portion of the economy that flows through politics and reduces that which fructifies.

We’re about to go through all of this again too. Spending did rather blow out this past year. Quite possibly righteously and all that but that’s not the point being made here. Rather, public spending off into the future is going to decline as a percentage of GDP. For we can’t keep printing hundreds of billions of new money every year, can’t run QE at that level forever.

But, given our definition of austerity in current common use this means that public expenditure falling each year, from last year’s massive bolus, will be defined as austerity. Which, of course, it isn’t, it’s at least an attempt to return to normality.

Yes, obviously, this is all about political rhetoric and this is just a warning, a placeholder even, over what is going to be the staple of many an opinion piece.

Government spending will fall from the levels of 2020/21. There will be screams that this austerity will eviscerate all that is good and holy from the British state. The correct observation will be that it is just a return to normality after Covid has passed.

Rawlsian ignorance

The centenary of the birth of philosopher John Rawls has prompted the usual claims that his best known philosophical tool, the veil of ignorance, is an argument in favour of redistributive taxation aiming at a much more equal income society.

In his thought experiment, Rawls imagined people meeting to design the society they would then live in, but without knowing anything about themselves that might help determine their position in that society (intelligence, skills, gender, age, etc.).  Rawls and his disciples argue that, if we do not know where we are going to end up on the income spectrum, we will want to create a much more equal society so that our position does not matter.

My friend Hannes Gissurarson rightly points out that, if the sages made this decision, they would make themselves (and everyone else) worse off, since even poor people in free-market capitalist countries tend to have higher incomes than even rich people in socialist ones.  But my objection to Rawls is more fundamental – if Rawls’ thought experiment were possible to conduct in the real world, rather than just imagined by people like himself, would it really reach the results that he claims?

What I wanted was a practical experiment to see what decisions people would make about how they would like income to be distributed in society.  This would have to be real consequences (all good economists know that what matters is revealed preferences – not answers to a questionnaire but our real practical decisions when they actually affect us), and it would have to be behind a genuine veil of ignorance, so that the people making the decisions could not have any idea where they would end up on the income spectrum in the resultant society.

Sadly the ASI would not give me the budget to create such a realistic large-scale experiment, but fortunately one is already being done for us, twice a week, involving over 40 million people, and the results are not at all what Rawls would have thought.  I think of it as a practical application of the Rawlsian ‘original position’ thought experiment behind the veil of ignorance, but it is more commonly referred to as the Lottery.

It meets Rawls’ tests.  The decision to play is made behind a very effective veil of ignorance – the lottery is completely random, so there is no way of knowing where you will end up.  It is a free decision to buy a ticket, but one that has genuine consequences (lose and you are poorer than you were before; win and you are richer).  It is also a decision that is made with a reasonable understanding; 70% of adults in Britain play on a regular basis, so the experience of regular losses will soon teach them the unlikelihood of a big win.

Think about it - by buying a lottery ticket, 40 million of us are buying into a proposal for a profoundly unequal society, where 89% lose out entirely, 10% make modest gains and, if 45 million play, just one of them might become staggeringly wealthy in an evening.  Over two thirds of adults in Britain play regularly, so from behind the veil of ignorance, most people are choosing not a more egalitarian society, but one far less equal than the one we have already.

We should not take this too far; although buying a lottery ticket does cause a loss, for most people it is a small one compared to their income.  Although the result supports a libertarian view, it could also be consistent with a safety-net welfare state with a certain level of tax and welfare to support a sufficient minimum income before taking a gamble on the rest.  But what this practical application of Rawls’ veil of ignorance does not justify is any idea of financial equality as an objective for society.

By Richard Teather

Reasons for optimism - wealth

Some commentators suppose that following the Financial Crisis of 2008 and the current worldwide pandemic that world output will never regain its previous levels, and that people in the future will have a lower standard of living than their predecessors did. Others allege that such increases in wealth as have happened have been concentrated in the hands of the super-rich, leaving poorer people worse off.

Neither of these somewhat pessimistic views appear to be justified. Periodic shocks such as the Financial Crisis and the pandemic happen from time to time. They provide a shake-up and a reallocation of capital and resources. Some businesses go to the wall, but they free up space into which new business can move. The wealth-creating process picks up the slack, and new products and processes are introduced to take the place of those no longer viable. The explosive growth of firms such as Uber and Airbnb and the value they have brought into the lives of millions both occurred after the Financial Crisis.

The pandemic has accelerated trends that were already evident before it. Lockdowns have led to an upsurge in buying goods online and having them delivered. They have also led to a huge increase in the numbers working from home. The likelihood is high that after the pandemic is over people will resume the habit of shopping in person, though it is unlikely that online purchases will go down to their pre-virus levels.

 People will undoubtedly return to offices, though there will be more home working than there was previously. The economy will adjust. More high street retailers will probably join the ranks of those which have already closed, but the vacated premises will be put to other uses. Some of them will probably be converted into apartments to help redress the housing shortage brought about by current planning laws.

The UK economy has shown over the last 150 years or more an average growth of about 1.5 - 2.0% annually. This includes the various shocks and crises that it has gone though, including the 1930s slump. We grow richer because innovations raise productivity and enable us to buy things more cheaply in terms of the man-hours it takes to afford them.

The notion that this new wealth flows exclusively to the super-rich is incorrect. True, the likes of Jeff Bezos, Tim Cook and Elon Musk become billionaires, but they do so by adding value to the lives of billions of people and making them better off as well. Amazon makes people richer by selling them goods online at prices lower than high street ones. Apple makes the money we spend buy far more valuable goods than the same money would have bought only a few years ago. Elon Musk made online payment safer with PayPal, and has since made a Tesla electric car into an affordable, high quality product. They have all become richer by making others richer.

The world has not passed “peak wealth,” leaving children to be poorer than their parents were. On the contrary, wealth will continue to be created. The economy will adjust to changing circumstances, as it has done before. The prediction that people worldwide will be wealthier in the future than they were in the past is not just optimistic. It is realistic.

A golden chance to correct a pensions unfairness

We are not, particularly, in favour of limits on what may be saved into a pension pot. If that’s how people wish to redistribute their lifetime income, to smooth consumption out over time, then that’s fine by us. We’re also not sure what the problem is with the higher savings rate that results from people, well, saving more. Even the tax issue seems trivial to us, for pensions tax relief is more a delay on the date it is paid, not an exemption - pensions incomes are taxed after all, even if possibly at lower marginal rates.

We’ve also noted several times that the current limits on the size of pensions pots have taken us well over the peak of the Laffer Curve - we’ve had repetitive stories of doctors refusing extra work, even during the pandemic, because of the tax rates applied to their associated pensions contributions.

However, there is an opportunity here:

A healthy 65-year-old who bought an annuity for this upper limit would receive a payout of £28,000 a year, according to Canada Life, a pension provider. However, those with gold-plated defined benefit pensions can achieve nearly double that while remaining under the lifetime allowance.

The current limit translates to an annual retirement income of around £53,600 for those with defined benefit pensions. For DB schemes, the lifetime allowance is calculated by multiplying retirement income by a factor of 20.

DB schemes tend to continue their existence in the public sector only. Which causes a problem. As with so many economic points there is a tension here between efficiency and equity. That second point here being that it’s just unfair that a civil servant or public sector employee should be able to rack up a pension at a lower tax rate than a private sector one.

As Sunak considers whether to change, freeze, otherwise limit, the allowable size of the pension pot before punitive taxation is applied he should insist that those DB - and thereby largely public sector - pensions be valued by the same calculation as private.

If we really want to put the cat among the pigeons we could value DB pensions using the Ogden Rate. OK, probably a step too far but it would be fun to hear the squealing and we could always then move back to the equitable position of valuation just like any other pension pot.

We wouldn't say this is, necessarily, evidence of structural racism

The TUC tells us that the unemployment rate for non-White Britons - or BAME - has risen more than that for White Britons during the events of the past year. We have no doubt that is true. The TUC goes on to insist that this shows the structural racism of the British economy etc. That’s the part we’re not so sure about.

The coronavirus pandemic has held up a “mirror to the structural racism” in the UK’s labour market, the TUC has said, as a study reveals that jobless rates among black, Asian and minority ethnic (BAME) groups are now double the rate for white people.

The report is here. There’s an unfortunate omission from the calculation. We can’t see the numbers presented simply but it’s possible to back calculate from the ONS - note, the same source as the TUC’s numbers - from here and here. Some substantial portion of those BAME are first generation immigrants.

No, we are not against immigration, nor do we think that racism - structural or not - is just hunky dory. But we are entirely unsurprised that the unemployment rate among first generation immigrants is higher than of the domestically born. Especially in times of stress when it’s those lower down the societal pecking order who are more likely to lose their jobs. After all, it’s not entirely the way we would think things happen that recent immigrants leap to the top of that societal pecking order.

Just as a rough, back of the envelope, something like more than 50% of “Black African” residents in the UK are foreign born as an example.

For us this isn’t in fact about race or immigration. It is, rather, an example of our continued insistence - we have to work out why a thing is occurring before we can craft a response to that occurrence of that thing.

If x is happening because y then that leads to one set of possible solutions, if x is happening because of z then that requires a different response.

If the higher BAME unemployment rate is a result of the recent immigrant status of that healthy portion of the BAME population then responses are - and should be - different from the same problem caused by structural racism.

After all, classes in unconsciously racist bias aren’t going to solve a problem caused by the possibly different linguistic, knowledge capital, educational backgrounds, of immigrants, are they?

Again, to emphasise, the point is not to dismiss the problem, it’s to insist that a solution depends upon why it exists. Something we might therefore spend a little effort upon divining rather than just assuming that the cause is today’s fashionable explanation for everything.

A democracy or a managed society?

Polly Toynbee is most indignant over the attitudes of we British. Apparently we don’t care about the things that she does. Inequality isn’t something most care about all that much. Higher taxation to pay for more government isn’t something most agree with. At which point she says:

This research shows that enthusing the public with a strong enough will to significantly reduce inequality requires exceptionally clever efforts of persuasion.

Well, yeeees.

This brings up the important question. Are we to be a democracy - in which the people get what they vote for, good and hard - or are we to be a managed society? Managed, cajoled, persuaded, forced, into doing what some few think we ought to be doing rather than what we, ourselves, think we should?

We ourselves don’t worry very much about inequality while we do think that poverty itself should be anathematised. This is why we support that free market capitalism - in all it’s neoliberal globalisation - stuff precisely because it significantly reduces poverty while having ambivalent effects upon within nation inequality. We don’t do this because that’s the outcome the British largely seem to want, as Polly complains about, but because we think it’s right.

However, put aside that connection between our desires and those of the people. This really is the big question - whose vision of society should prevail? That of the society or that of those who would manage it?

We go with the idea that governance should be about our concerns, not those people would like to impose upon us. The final structure of the society is then emergent. But then as is obvious we’re not Polly Toynbee nor are we at The Guardian.

GameStop, Reddit and irrational markets

A critique of the use or markets to decide upon things is that markets can, at times, be irrational. So, given irrationality we should use the rational method - all the clever people in government tell everyone else what to do.

Hmm.

GameStop and bear squeezes and Reddit and:

GameStop shares more than doubled in afternoon trading on Wednesday, surprising those who thought the video game retailer’s stock price would stabilise after a fierce rally and steep dive that upended Wall Street in January.

The shares soared nearly 104% during the session in which trading was halted several times, then jumped another 85% after hours.

We agree that we have a certain difficulty in picking the rationality out of that. However, it’s also pretty obvious that whatever is going on there is going to be over in a month or three. Keynes did say that markets can stay irrational longer than you can remain solvent (Redditors adapting that to “We can stay retarded longer…..” which we think is fun even if not wholly rational) but that time horizon is still pretty close.

By contrast, the government is to try to bring in E10 fuel to reduce emissions. By their own calculations this makes us half a billion poorer. Yes, that’s after the benefits of the lower emissions off into the future.

The government was also told, that 17 years ago, in the Stern Review that such planning wasn’t the way to deal with the matter. Instead, a carbon tax and we’re done and dusted on this matter. The Review even pointed out that if we use inefficient methods - planning - rather than efficient - markets suitably adjusted - then because of the increased cost we’ll do less climate mitigation because of those higher costs.

Markets can indeed be less than rational but for decades long pighead irrationality there’s nothing to beat government. The argument in favour of markets being that sure, to err is human, but what’s the best correction method we’ve got?

It's the right method even if the specific experiment may or may not work

Certain facts about the retail estate:

Online sales soared more than a third last year, according to data experts IMRG - the highest growth in 13 years and in stark contrast to overall retail sales that fell into negative territory.

Meanwhile, oversupply in the casual dining market means the biggest restaurant chains are shutting sites rather than opening new ones.

This has forced property owners to find new ways of tempting customers back to shopping centres and high streets when the economy reopens.

The pandemic associated lockdowns have accelerated that change from bricks and mortar retailing to online. We thus need - require - less of that built environment to be devoted to the delivery of retail services.

OK, economies have gone through such changes before, no doubt will again. Somewhere between 1890 and 1920 vast numbers of urban stables had to be repurposed and they didn’t all become mews cottages. Hay and oats supplies were replaced by those of petrol.

The question is not whether the change, but how to achieve it?

Last spring Harvey Jenkinson decided to take a gamble. The chief executive of Gravity, an indoor trampoline park operator, signed a deal to take on an 80,000 sq ft space in a shopping centre in southwest London, previously rented by the now-bust department store Debenhams.

“We signed the lease at the height of the pandemic, which many people might have thought was a bit crazy,” he says. “It’s not been easy for us. We’ve had to apply for government support to survive, but we had to push forward and see beyond this.”

The company is now preparing to open the four-floor venue in Wandsworth’s Southside shopping centre this summer, filling the space with a Japanese-style go-karting area, 16 full-length bowling lanes, pool tables, ping pong and crazy golf.

We haven’t the slightest as to whether that’s a good idea or not. Our point though is that nor does anyone else. No one in central government, no combination of local authorities, us all out here as consumers, even the people building and paying for the conversion. We can all have opinions, sure, but none of us actually knows.

Because no one does know what to do with the urban estate. We face uncertainty here, not probability. Within the universe of things it is possible to do what is it that people want done? Our only method of finding out is to do many different things and see what sticks.

That is, we have to use market methods - which is what just allowing people to get on with experimenting is - rather than planning. The reason we can’t plan being that we’ve no damn idea what will work.

Full on laissez faire - allowing the employment of the Fleet River as the drainage for an open air slaughterhouse again - isn’t required. But the freedom to just get on with changes of use is.

How else are we going to work out what to do with cities if we don’t experiment?

Republicans and Redistricting

2021 will define politics in the US for the next ten years. With the 2020 census complete, state legislatures have now begun the redistricting process.

For those of you that don’t know, every ten years the American political system undergoes a major shakeup, known as redistricting, in which congressional district lines are redrawn to accommodate for population changes amongst the states. Article 1, Section 2 of the US Constitution requires that Representatives are reapportioned amongst the states after the decennial census, to ensure that that no state is over or under represented (relative to their population) in the House.

However, since state legislatures have primary control over the ‘times, places and manner’ of congressional elections, the act of dividing their state into districts, from which their representatives are elected, is entirely up to them. While some states have, in the interest of fairness, opted to have their district boundaries drawn by independent or bipartisan commissions, a great deal are still drawn by whoever happens to control the state legislature at the time.

The parties that are in control are able to advantage themselves by drawing district lines in their favour. This practice is known as gerrymandering and is done by a method known as ‘packing and cracking’ in which the redistricting party will attempt to group all opposition party voters into a single district with an incredibly high victory margin (packing) and spread their own voters out amongst numerous districts with low victory margins (cracking), meaning that while the opposition wastes a great deal of votes in the safe district, their votes will tip the scales in marginal districts.

But what about this decade’s round of redistricting?

Now that the 2020 census is complete, state legislatures have begun their redistricting efforts - meaning that the parties who have gained or maintained power at the state level are in a position to make the rules for the next decade’s elections.

Interestingly enough, while Republicans performed comparatively poorly on the national level, it was the opposite story at the state level - holding every previous majority as well as flipping the State Senate and House in New Hampshire. In fact, it is estimated that Republicans will have control over 188 district boundaries compared to 73 for the Democrats (Wasserman, 2021) - the rest being controlled by independent or bipartisan commissions. On top of this, Republicans control the legislatures in some of the 2020 Election’s most contentious states, such as Texas and Florida which are also the states that look likely to gain representatives due to an increase in population. With this significant advantage, Republicans need only find a way to gain seven more seats to secure a majority in the next election. This news should provide new hope for any supporters of the GOP that might have given up.

However, while on the surface this seems promising to Republicans, it is less encouraging when we consider that in the 2011 round of redistricting they were in control of a far greater proportion of district lines. This is important for two reasons. Firstly, it means that a great deal of Congressional Districts already benefited the GOP and so redrawing these to create an even larger advantage, even when we consider the heightened accuracy that their boundaries will get from the more recent information available, will be very difficult. And secondly, if the Democrats have been able to win a majority in the House despite the last round of redistricting heavily favouring Republicans, the fact that the 2021 round of redistricting provides a smaller additional advantage than the one that Democrats were already able to overcome may mean little for the Democrats’ prospects at the midterm elections.

All things considered, it looks like the GOP are in for a rough one!