This is an interesting justification for higher wealth tax rates

There are, of course there are, those who just want more people to be paying more in tax. Which brings us to this interesting supposed justification for higher capital gains tax rates:

It said the Treasury was likely to suffer steep falls in capital gains tax (CGT) receipts over the next two years as property and other assets slump in value, adding further pressure on Sunak to increase tax rates to fill the gap.

Those rich people are making less money therefore they should pay more in tax?

As is so often true it’s possible to invert the argument to see if it sounds ridiculous. So, let us do that. Imagine a roaring economy with capital gains mounting up as far as the eye can see. Would we - anyone in fact - then accept the argument that capital gains taxes should fall?

To ask the question is to know how such a suggestion would be received. Thus the initial claim is invalid as well. Some people just want MOAR TAX and any excuse will do that is.

Adam Smith's Anniversary

If you had been standing on this spot in the late eighteenth century, you would have seen a plume of smoke rising up from this house here. It was Adam Smith’s executors burning his papers, just as he directed before he died on this day in 1790. 

Though it seems odd to us—and is a great loss to later generations—that was quite normal among prominent people at the time. They did not want to be judged on their personal letters and their sketches of half-thought-out ideas. 

And Adam Smith was a prominent person. He had risen to fame in his mid-thirties, having published The Theory of Moral Sentiments, a book that tore up the ethical theories of the time and explained morality in terms of social psychology. It landed him a plum job—personal tutor to the teenage Duke of Buccleuch, with a salary of £300 a year—for life!

That income gave him the freedom to research and write his next book, published 17 years later—Smith never did anything without a great deal of deliberation. This was The Wealth of Nations, his revolutionary work in economics, for which he is best known today. 

Smith loved discussion and debate with friends. In that July of 1790, during one of many such evenings at his home in Edinburgh, Smith felt tired, and retired to bed, saying—so we are told—that the discussion would need to continue in some other place. 

He died a few days later and was buried under a generous but restrained monument in the churchyard near his home.

The VAT cut and a natural experiment in economics

There is a VAT cut coming on certain items and services. There is a claim that not all of this will be passed on to consumers. This provides us with a nice natural experiment - which sectors of the economy are fully and properly competitive:

Shoppers and tourists expecting to see a cut in prices on Wednesday following the chancellor’s decision to slash VAT on hospitality could be in for disappointment as some organisations pocket the saving rather than pass it on to consumers.

Last week Rishi Sunak announced that the tax, which is charged on most goods and services, would be cut from 20% to 5% from 15 July until 12 January 2021 for entrance to restaurants, cafes, hotels and attractions such as zoos and cinemas.

The standard analysis says that VAT is a tax upon consumers. Which, in a competitive market, it will be. We can run this in reverse too - those sectors where the cut is passed on in full are competitive. Those where it is not are showing a sign of pricing power on the part of the producers.

So, here we have one of those nice natural experiments. We can assume, even though it’s not absolute and total proof, that those sectors where the VAT cut is passed along are indeed competitive. This being something we’d really like to know too.

For the argument in favour of the minimum wage is that producers do have pricing power and thus increasing wages by fiat reduces their profit margins rather than stings the consumer. Something which doesn’t happen in one of those competitive markets.

Our own intuition is that precisely those areas that are affected substantially by the minimum wage are those where the producers don’t have that market power and therefore are where the VAT cut will be passed along. Which does rather kill the intellectual base for that minimum wage. But that is only our intuition at this point - it’ll be nice to find out, won’t it?

Once bitten twice shy baby, once bitten twice shy

A certain portion of economics is just the observation of what we humans do written up into expensive language. There should be little surprise at this given that economics attempts to describe what we humans do and we humans are, by necessity, pretty good observers of what our fellows are likely to do. How else would we know how to interact with each other?

At which point Ian Hunter explains a matter of the macroeconomics of debt to us. Americans will be more familiar with Great White doing the same. Hunter having repeated the point more recently.

Or in that more expensive language:

Britain should not kid itself that soaring national debt can be addressed by high inflation because roughly a third of the £2 trillion debt stock is linked to the retail prices index, the incoming chairman of the Office for Budget Responsibility has said.

Richard Hughes, a former Treasury official who has been nominated to succeed Robert Chote, told MPs that UK public finances had a peculiar vulnerability to inflation because about 30 per cent of gilts were inflation indexed.

“There has been a lot of somewhat idle chat about the prospect of inflating our debt away, that we don’t have to worry about elevated levels of debt because we can pull the same trick as in the 1950s and 60s of using inflation to erode the real value of our debt,” he said. “That is not going to work. We have lost one tool we have used in the past.”

Why is so much of the debt index linked? Because that dispossession of investors through inflation is something we recall, remember. Therefore once the trick had been used there was a certain difficulty in financing government debt without removing that inflation risk. So, it is inflation linked and thus it cannot be inflated away.

Sure, Ian Hunter’s singing about groupies but that lesson clearly applies to investors too. My, my, my, humans actually learn through experience - once bitten twice shy baby, once bitten twice shy.

Of course is isn't communism, it's the Solow Residual

A gentleman running a rent out what you already own company assures us that this isn’t communism. Of course it isn’t, it’s the Solow Residual:

The new app that lets users rent strangers’ stuff. ‘This isn’t about communism,’ says founder

Quite so. The essential idea is that there are many - say - lawnmowers out there and most of them are not in use at any one time. So, rent out some of those that do exist during their downtime.

This has the effect, obviously enough, of reducing sales of lawnmowers which will not be to the taste of lawnmower manufacturers. But it’s not communism - the intermediation is being done by a paid market which doesn’t sound very communist - for it’s making the society richer which isn’t a great feature of that socioeconomic system.

Why this makes us all richer is the Solow Residual. That’s the increase in output that comes from whatever it is other than an increase in capital and or labour going into the system. Productivity increases for example.

The lawnmower here is the capital, by having the one for many lawns we get many lawns mowed for the use of one dose of the capital. It’s a pure increase in the productivity of lawnmowers that is.

The same is true of all of these different schemes that do this. By more efficiently using the things that already exist we gain more output from the current capital base. We’re richer.

It’s also nothing at all to do with such hippy dippy concepts as the sharing economy etc. It’s also not new economics or anything droll like that. Which is why we’ve already got the description of what’s going on in the textbooks of course.

An interesting question concerning Boohoo and the Leicester factories

This might sound a little off the wall but we should take our economic illumination where we can find it. There have been claims of subcontracting factories in Leicester paying less than minimum wage. As we’ve already noted we think this is more about workers without work permits than anything else. But The Observer asks an interesting question:

Rival retailers ask a good question: how is it possible to make a profit from £8 dresses in the minimum-wage UK?

Think on the assumed answer to that question - that it isn’t. What does that tell us about the minimum wage?

What it tells us is who carries the burden of the minimum wage. For things which are not profitable are things that don’t get done in a capitalist economy. Thus if it is not possible to sell £8 dresses at a profit in a minimum wage economy then £8 dresses don’t exist as a result of the minimum wage. It is thus the consumer who pays for the minimum wage through having to pay £10, or £15, or whatever it is, as a result of that minimum wage.

The burden of the minimum wage lies on the consumers’ shoulders. Something that makes it harder to support that minimum wage.

Britain still hasn't paid off the slavery compensation debt

Something that seems to be extremely common these days, this idea that Britain paid off the debt for that £20 million in compensation to slave owners back in the day. As an example, although we’ve seen it around several times in the past couple of days alone:

Indeed, the “compensation” paid to slave owners after abolition was so vast that it took until 2015 for Britain to finish paying the bill.

Entirely piffle.

As to the compensation, or as some call it reparations that didn’t make it to the ex-slaves, we tend to a different view. It was a bribe and one well worth it. The slave interests had considerable political power in the Britain of the 1830s. The abolition of slavery wasn’t going to happen anytime soon unless those interests were appeased. £20 million was the price and we regard it as an excellent one, a bargain, to free that upwards of 800,000 people from durance vile.

The point here being that the debt was not paid off, has not been paid off and some infinitesimal portion of everyones’ tax bill is still servicing that debt.

Varied old debts - the slavery compensation, the Crimean, Napoleonic Wars - were swept up into Consols (Consolidated Loan Stock) which were perpetuals. There was no repayment date, they lasted forever. The interest rate was fair enough - although horribly manipulated - for a zero inflation environment but of course that’s hot what we had post-WWII. Thus these perpetual bonds traded at 20 pence, perhaps 30 pence on the pound. The debt managers could have called them in and paid them off at any time but to do so they would have had to pay 100 pence on the £. Allowing government creditors to recoup their inflation losses was never high on anyone’s list of things to do so therefore they weren’t called in, those Consols.

Then post-QE interest rates fell to something like was being paid on the perpetuals, as naturally happens at that point Consols traded at about 100 pence on the £. This gave George Osborne the chance to do something - perhaps the only thing - he was good at, make a political gesture. Call in those Consols and claim to have paid them off.

Except anyone noted what was the government’s debt position in 2015? That’s right, it was still borrowing an extra tens of billions of £s each year. It didn’t, because it couldn’t, pay off debt. It could pay off a particular set of bonds, sure, but not actually retire the debt because the only way it had of paying off debt was to issue more debt. The Consols, that is, were rolled over into the standard Treasury (Gilts) issues of 2015.

The slavery compensation bill is still there in the national debt. Tax bills still include some portion of debt servicing on that sum.

Again, we think that bribe of £20 million to have been money well spent considering what it bought. But we do insist that we’re all still paying it.

The market has spoken - Open the UK to American foods

The market has told us what is wanted about these American frankenfoods - the chlorine chicken and the hormone beef. We should change the law to let them in because no one will buy them.

A series of leading UK supermarkets have told Business Insider that they will never sell chlorinated chicken or hormone-injected beef from the US, in a blow to those pushing for UK food standards to be dropped in order to secure a post-Brexit trade deal with Trump.

The Trump administration has insisted that US agricultural goods must be included in any free trade agreement between the two countries.

The UK's current strict food standards prohibit such products from being imported. However, Boris Johnson's government last month opened the door to dropping the ban on the products once Britain leaves EU trade rules in 2021.

We have mentioned this point before. The more it is protested that no one in Britain wants to eat this filthy foreign muck the more insistent we are that this means - that this means, not just that it is meant more generally - that the ban must be lifted. For if no one will buy it, or in this case sell it, then the ban has no effect, does it?

It is only if you suspect that people will cheerfully chow down upon the stuff that there is a reason for a ban in the first place. And why would that some wish to have it be a justification for a ban?

We can also go one stage further. As is said, Trump will only allow a free trade deal if that food is allowed in. But as we can see, no one will sell it so no actual food will arrive. At which point we get the free trade deal without giving up anything at all - our market will still be frankenfood free and we’ll also have that trade deal.

We don't believe this for a moment and yet.....

This level of macroeconomic forecasting is only done to make astrologers look good:

Brussels is forecasting an 8.3% drop in GDP for the 27 economies of the European Union in 2020 followed by a 5.8% rebound in 2021. The eurozone is forecast to contract by 8.7% this year, with 6.1% growth in 2021. Both are worse declines and weaker rebounds than the historic downturn that the commission had forecast in May.

The UK economy will shrink by 9.75% in 2020, putting it among the worst-hit economies in Europe, although France, Spain and Italy are facing even steeper falls in output (10.6%, 10.9% and 11.2% respectively). Germany, facing a 6.3% fall in GDP in 2020, and the Netherlands (-6.8%) confront less severe downturns, while Poland is forecast to escape with the shallowest recession (-4.6%).

It would appear, from the way that is put, that flouting the EU’s strictures on civil liberty and democracy - as it is claimed Poland has done and we make no comment on whether it’s true or not - protects the economy against the effects of the coronavirus. We think that’s unlikely.

The mistake being made here is to be using zero as the baseline to measure those effects. Something which is always wrong - the effect of something is what we expected to happen without it as compared to the what happens with it. Poland has been growing at around the 5% level and we’d expect, as it climbs up out of the effects of far too many decades of socialism, that growth to continue. Thus the effect upon that country is 9.6% (the decimal point being used to show a sense of humour, see above about astrologers) not the 4.6% listed.

Yes, this is important and is of much wider application. For example, it is indeed true that Cuba has free at the point of use healthcare. This is not a justification of the Cuban Revolution as so does the UK have free at the point of use healthcare and we got there without shooting the bourgeois and driving everyone else in destitution. Actually, darn near everywhere has free at the point of use healthcare for those who require it. Thus our judgement of Cuba should be based upon not where it is but where we should expect it to be - as with Poland and GDP, the effect is not the baseline of zero but where would it have been without the coronavirus?

Fast fashion and sumptuary laws

Various societies at various times have passed sumptuary laws. Detailed regulations upon who may wear what that is. The aim being to make clear, rigid even, who are the top dogs by preventing the mere rabble from wearing the insignia of being a leading hound.

Of course, we’re entirely beyond that now:

Legitimised by Kourtney Kardashian and anyone who has ever lasted more than a week in the Love Island villa, fast fashion has become an accessible and budget-friendly way for “normal” people to embody the aspirational lifestyles they see on their screens.

Perhaps we’re not so far beyond it. For the sniff of contempt there is audible, isn’t it? That the rabble, the mere proles, are able to dress up like those they see as being socially superior to them.

That the poor have more than the one change of clothes, the Sunday best and the other set, is one of the great equalisers of our time. These past few decades have been first time in human civilisation that this has generally been true, it’s not all that long ago that the poor were not considered to need a wardrobe given they had so few robes.

One ethical commentator back in history suggested that our reaction to the naked should not be just to donate clothes, but to split our cloak so as to share both the covering and the cold. Today’s fashion seems to be to sneer at people for being uppity enough to desire their own clothing. That they can have it shows that we’ve advanced materially, the reaction to their being able to do so shows that there’s still some ethical work to do.

Seriously, where do these people get off when they insist that even the poor having a change of clothes is a bad idea?