So, let's not do that then

Ikea is entirely correct here:

The boss of Ikea has told the BBC he fears that global trade tensions will lead to higher prices for customers.

Jesper Brodin, chief executive of Ingka Group, which is the furniture giant's holding company, said imposing restrictions such as tariffs "normally doesn't benefit the ordinary people".

Perhaps we should revise that headline slightly. The “normally” is incorrect, tariffs never benefit the ordinary people.

Taxing people just because they desire to buy something made or built by foreigners never does benefit those people. That being exactly what a tariff is, a tax upon buying something made or built by foreigners.

As tariffs don’t benefit us out here, us ordinary people, therefore we should not have them.

As is easily derived from both Adam Smith and David Ricardo the only logical or even sensible trade stance is unilateral free trade. So, that’s what we should do then, clearly. Further, this is the first time in 40 years that we can do this so this is the right time to do so as well.

Yes, we know we keep banging on about this but the wisdom is over 200 years old now. We’ve even done it before, in 1846, and it worked. It’s just that so few of those in power wish to believe it that it needs to be banged on about.

Reasons for optimism - invention and innovation

Ten years ago, Tyler Cowan published “The Great Stagnation: How America Ate All the Low-hanging Fruit,” arguing that the US economy since the seventeenth century enjoyed free land, immigrant labor, and powerful new technologies, the “low-hanging fruit.” He argued that since 1970 the fruit tree became bare, and the easy access to growth gradually disappeared.

His book became a best-seller and stimulated much debate, but events since its publication have combined to cast doubt on its central thesis. Uber and Airbnb had started before he wrote it, but had not by then revealed the massive economic effect they were to have by lowering the cost of travel and accommodation and bypassing the entrenched dominant city transport and accommodation systems.

Similarly, the CRISPR gene-editing technology had been developed, but few, if any, appreciated what a powerful tool it would become for its potential improvement of the human condition. Autonomous (self-driving) vehicles were the stuff of science fiction when he wrote, as were people-carrying and delivery drones and cultured (lab-grown) meats. All of these innovations and new technologies have shown that the economic tree has a great deal more fruit on it than the low-hanging ones that had been picked.

Each of these innovations is a potential game-changer, displacing an established way of doing things with a novel and disruptive alternative. Each has the potential to stimulate new and unpredictable economic developments that might result from it.

Those who oppose invention and innovation because of the economic growth they bring, and who say that the planet cannot sustain what they call “the drain on its resources,” are misguided. It is invention and innovation that enable us to produce greater value with fewer inputs.

Some oppose technological developments because of the disruption they bring, and it is true that they can displace established players. This is, however, the way the world became richer, and able to support new types of employment more rewarding than the ones they displaced. There are no longer spinning wheels in every peasant hut, but there is a giant textile industry that provides most of the world with affordable clothing of far better quality than it had before.

Established players have often opposed new products and processes that threatened their comfortable places in the economic order. They threw wooden shoes into the textile machines. They lobbied Parliament to require a walking man with a red flag to precede each of the new motorcars. They usually fail because the benefits of the new technology spread more widely to people beyond the narrow group that opposes them out of self-interest.

There is cause for optimism because human ingenuity shows no sign of faltering or failing, and continues to produce and develop innovations that can add value to our lives. It is also highly unlikely that human aspiration will falter or fail, and highly likely that people will continue instead to welcome and accept the new developments that present hem with new opportunities. We can be optimistic that progress will not stop.

But why does the NHS obviously need more money?

A common enough assertion, here being made in The Observer:

One of the lessons of the impact of Covid-19 and the manifest long-term pressures on the health service is this: once the economy is on an even keel again, there will need to be an increase in taxation – probably, and appropriately, via national insurance – to finance the NHS properly.

Leave aside the current issues which we think very much overblown indeed. We have a health service to take care of our health. When we needed our health taken care of we had a health service to do so. Well, that’s good but why does that mean everything must change? Isn’t that why we went to the bother of having a health service in the first place?

Think instead of that longer term issue. Clearly, obviously, spending on the NHS must rise. But why?

The argument in favour of the state-led model - an argument routinely deployed by the likes of Polly Toynbee et al - is that it removes all that waste caused by competition and markets. That this misses the point entirely isn’t our point here. Let’s accept it for the moment. So, we have, in the NHS, a more efficient health care system than others who use those pesky markets models.

This means we should gain more health care for any specific amount of money, or the same amount for less money. That very argument in favour of the NHS proves that it should have a smaller budget than other systems precisely because it is more efficient.

Yet UK health care spending is near bang on EU average as a percentage of GDP. It’s above EU average in per capita terms and right about where it should be given relative GDP per capita.

We’re spending, that is, about what everyone else does in relative terms. If the NHS is more efficient then we should be gaining more and better health care than they do as a result of that spending. If we’re not - which is the common complaint, isn’t it? - then it must be that the NHS model isn’t more efficient and therefore that’s the thing, not the spending levels, that must change.

Either the NHS is better in which case it doesn’t need more money or if it needs more money then the NHS isn’t better.

A fairly naked beg for our money

Of course, it’s all our money whichever route it takes to get there but still:

The sector needs big pockets to fund the electric revolution, but analysts fear that without state aid, it will run out of road...(...)...combined with supportive governments...(...)...Burn agrees: “Manufacturing in the UK is down to government’s appetite for it. Does it support it or not?”...(...)...Vauxhall boss Michael Lohscheller said he expected the Government to “behave in the interest of the UK economy… we need UK Government support to make it happen”....(...)...Investors might need to see concrete government support to be willing to back these factories....

“Support” obviously meaning our money as filtered through the tax and political system.

The problem with this claim upon our wallets is that the stock markets are willing to fund just about anything in this space these days. Add the words “battery” or “lithium” or even “EV” to a company name and the money pours in. One innovative company even freewheeled a truck downhill and raised money for its as yet non-existent fuel cell that wasn’t, in fact, powering said lorry.

For this particular sector markets haven’t been so monumentally febrile since perhaps the South Sea Bubble. Capital is, to a useful level of approximation, free simply by asking investors for it. This is not the time to be forcing, through government, the subsidy by us all of such plans when there are some who will do it voluntarily - even if not perhaps wholly wisely.

After all, the point of government is to do those things that markets don’t - given that the markets will fund alternative vehicle technologies currently government shouldn’t.

Polly Toynbee really doesn't understand how markets work

We’re told that the only solution to Britain’s housing woes is more social housing. Because, as Polly Toynbee tells us:

The market will never build enough homes, and certainly not enough “affordable” homes, as scarcity drives up prices. Rather than treating housing as something for the market to rectify, the state should start building more social housing. It already owns land aplenty, and doing this would be a double win: it would both help to solve the housing crisis and deflate house prices by introducing more social rent properties on to the market.

It’s entirely true that scarcity drives up prices. But that’s the very thing, higher prices gained for producing a greater supply, which calls forth the new supply which then lowers prices again. The only time this doesn’t happen is when there’s a monopoly supplier. Only a monopolist can, that is, prevent the new supply which brings prices back down again.

We do not have a monopoly housebuilder. Therefore the market, unadorned, would be entirely capable of producing more houses to take advantage of these higher prices. As it did in the 1930s, back the last time we actually had something approaching a free market in house building.

For the problem is that we do have a monopolist in the marketplace, the state. Which decides, and decides alone, who may build what where. If we see results that are akin to those of a monopoly - supply not rising as price does - then we should really be ascribing that result to the monopoly we see within the system.

Free the market from those planning restrictions and watch housing become more affordable. As Polly does manage to grasp with social housing - more housing would reduce the price of housing. So, all we need to do is remove the monopolistic restrictions upon the housing market and we’re done.

That is, as we’ve pointed out before, abolish the Town and Country Planning Act 1947 and successors. We didn’t have this problem before that Act, we have done since, it is the Act itself causing the problem. The solution to housing is actually to have a free market in its provision.

Mired in archaic thinking

A useful point to grasp is that physical investment - investment in physical things - isn’t the way that a modern economy adds value. Or not the bulk of the value being added. It is, rather, investment in knowledge and intangibles that does add value.

For example, the value of Amazon doesn’t depend upon warehouses and the silicon in servers, although those obviously contribute, but in the software and brand that makes the whole thing work.

Companies paying corporation tax will be eligible for a new “super deduction” equal to 130pc of the value of qualifying plant and machinery investments.

Why, therefore, would we institute a subsidy for the unimportant part of investment and not one for the important part in this modern world? And yes, 130% allowances are, in part, a subsidy in a manner that 100% allowances are not.

Consider the one single product class of the past year with the greatest value to us all - vaccines. The reactor tanks to make it in are plant and machinery and so would gain this new allowance. The far larger and vastly more important research work, clinical testing and intellectual property would not. But we all know that the second group is the vast majority of both the costs and the value added - the reactor tanks really are just the reactor tanks and are of insignificant comparative value.

The modern economy adds value through knowledge, not physical plant. To subsidise the second and not the first is to be trapped in very archaic thinking.

Sure, tax cuts are nice, all tax cuts are good. But we do also need to be up to date with our analysis of how an economy works.

Do note that full expensing is still a great idea. It’s the restriction of it to just the one type of investment that is the error here.

Reasons for optimism - trade

Free trade had a good run with first GATT and then WTO, and has brought a very large part of humankind unparalleled prosperity, enabling people in poorer countries to sell their labour and its products on the world market. But there has recently been a return to a degree of protectionism, and some observers predict that economic nationalism will come to dominate, meaning that trade will be much less free than it has been, and that the prosperity that it brought might prove transient.

President Trump in the US renegotiated the North American Free Trade Agreement so that its replacement incorporated fairly onerous rules of origin and minimum wage requirements. Some critics have described it as “government managed trade policy,” and Edward Alden of the Council on Foreign Relations said, “if a new hybrid of Trumpian nationalism and Democratic progressivism is what it now takes to do trade deals with the United States, there may be very few takers.” Trump also imposed tariffs on China as part of his ongoing trade dispute with them, and China responded in kind. The same happened between the US and the European Union.

The election of President Biden looks set to see the reversal of at least some of Trump’s protectionism, and it is quite likely that the US will apply to join the free trading Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that replaced the Trans Pacific Trade Partnership that Trump pulled out of. The UK has applied to join the CPTPP itself, now that it is no longer a member of the EU and is free to do so.

Although some within the European Union and some outside it have loosely called it a free trade area, in reality it bears more of the characteristics of a Zollverein, a protectionist customs union that uses external tariffs to give advantage to its domestic producers at the expense of outside producers and its own consumers.

Outside the EU, the UK has made agreements to continue trading with 60 countries that had EU trade arrangements with. It has also signed deals with Canada and Mexico, and has more trade deals still being negotiated. When the UK joins the CPTPP, it will enter the Pacific stage and become a global free trader in a way that the European Union is not, and will enjoy the benefits of lower import prices as well as access to more markets for its exports.

It is thus the case that the defeat of President Trump, and the UK’s departure from the EU, both herald a brighter future for international free trade and a retreat from the protectionism that threatened to replace it. Far from a pessimistic outlook that suggests an increase in nationalist and protectionist trade polices with tariffs and import barriers, the future looks set to offer more free trade agreements, wider free trade, and the increased trade that comes about when good can cross borders unimpeded. It offers grounds for optimism, rather than pessimism.

Just to test David Sainsbury's ideas

Lord Sainsbury tells us how we can achieve the much desired levelling up:

If, however, the Government is going to grow high value-added businesses outside London, some important changes need to be made.

The first change is to give the metro mayors the clear responsibility for spatial planning and transport policies in their cities, bringing their powers in line with those already held by the Mayor of London. This would be a significant change, but granting mayors these powers would improve the management of our cities and create a more favourable business environment.

The second change would be to give mayors the power to align the courses run by FE colleges within their boundaries with the needs of industry. Currently, FE funding rules mean that, to survive financially, many colleges must spend a great deal of time competing to attract students to courses that are cheap to run. By giving mayors the authority to co-ordinate the courses put on by FE, and by incentivising collaboration between colleges rather than competition, this could be stopped, and the courses delivered could be brought in line with the needs of industry.

These being ideas that should be put to some sort of test.

So, are we sure that putting Sadiq Khan (or Boris Johnson, Ken Livingstone or Shaun Bailey) in charge of business and industrial planning has been wholly and wondrously beneficial to the economy of London? Do we think that their detailing the curricula of the capital’s educational establishments would further boost growth?

Do we then think that putting Andy Burnham (or Derek Hatton, or Joe Anderson or T Dan Smith) in charge of such things elsewhere is going to similarly boost the economy?

Our answers to those are no and hell no. We agree that others will differ on one or possibly even both of those. But that is still the correct test to put the assertions to. Have they actually worked where they already exist? If not then we’d best not expand the policy, had we?

Postponing tax rises doesn’t help

There is a scene in Yes Minister where Sir Humphrey, goaded by Hacker into giving a straight answer for once, blurts out:

“If you’re going to do this damn silly thing, don’t do it this damn silly way.”

The Chancellor could have done with that sort of straight talking before today’s Budget speech - it might have stopped the announcement that corporation tax will be increased from 19% to 25%, but only from April 2023.  It fits perfectly – not only the wrong thing to do, but done in the wrong way, making it even worse

I wrote just before the Budget about what a bad idea tax rises would be and that applies especially to business taxes.  

Taxing companies sounds like a free ride for the government - more money for the Treasury without taking it from voters. But it is voters – especially people looking for work – who actually bear the burden of corporation tax.

A company is just a legal structure, so whenever a company pays tax, the cost has to fall on real people:

• either the company has less money, so the shareholders become less wealthy;

• or the company puts up its prices to maintain its after-tax income, meaning its customers have to pay more;

• or the company cuts its staff costs, perhaps freezing wages, hiring fewer staff or automating more, so that the workforce suffers.

The bad news for the Chancellor is that most of the pain of corporation tax rises falls on workers. This is one of the things about tax economics that we are fairly certain about. A huge study by Oxford University found that, for each extra £100 that the Chancellor taxes from business, the workforce will lose £75.  Few economists think that estimate is excessive; many would put it even higher.

This does not usually mean direct wage cuts – those are rare. More likely is a hiring freeze – not replacing staff when they leave. But most damaging are the jobs that are lost because they were never created – the new businesses that were not formed, the expansion plans that were shelved, because the higher taxes meant that investment plans were no longer viable.

This means that corporation tax rises are very unfair, because the burden of the tax falls in an uneven, random manner.  Increasing income tax might cause problems, but at least we have a rough idea of who will pay what. But as corporation tax causes staff to be laid off, or new staff not to be hired, its effect is random. Worse, it tends to hit hardest those who are looking for work – the unemployed, or young people looking for their first job – or those in marginal jobs.

That is not a sensible or equitable tax policy, especially as we try to recover from the already unequal effects of lockdown.

Neither does it help to postpone the tax rise. Does the Chancellor really think that businesses only do their planning based on today’s tax rates? Of course they don’t. Potential investments are judged by looking at the future returns that they will generate — the after-tax profits — and any significant investment will be looking years into the future to judge whether it is worthwhile. Of course those projections will take account of planned tax rises – it would be negligent not to.

So the announced 2023 tax rise is already going to cause its damage, because any business considering investment will already be factoring it in.

The Chancellor has chosen the worst of all worlds – damaging jobs now and putting the post-lockdown recovery at risk - doing so in a way that harms the young and the unemployed, those least able to bear the burden - but not even collecting any money from his tax rise for over two years.  

Don’t do this damn silly thing.  But if you must, don’t do it this damn silly way.

The boss of Uber might well be right here

The boss of Uber claims that the people who work for the company as drivers prefer the flexibility or independence of the manner of working to the possibly benefits of being classified as either workers or employees. He might be right too:

The chief executive of Uber has insisted that its drivers want flexibility above the benefits of employment in the wake of a landmark UK court ruling that classified them as workers.

Dara Khosrowshahi, who has run the taxi-hailing app since 2017, said its 3.9m drivers across the world "overwhelmingly" value changeable hours as their first priority, without addressing the UK case directly.

There are jobs out there which do not offer the flexibility. There are jobs out there that do offer those benefits of other employment statuses (statii?).

That people - entirely voluntarily - take the jobs which offer the flexibility among the employment benefits and not the, say, holiday pay, shows that those workers value the flexibility above the holiday pay. And so on through any and every of the varied different combinations of employment benefits, including pay, hours and so on.

That people do the job, as is, shows that for those making the decision the deal is as good as is on offer, at least, elsewhere.

Now, whether people should be allowed to make their own decisions in this manner - we insist yes, of course, this is what liberty means - is another question. But given the number of people who volunteer to become Uber drivers they must be at least satisfied with the mixture of employment benefits on offer.