With Jesse Norman as a Tory MP why bother having a Labour Party?

Jesse Norman weighs in on this thorny question of whether and how much companies should pay in tax.

The issue of taxation is never far from the headlines, and doubly so in times of austerity. So it’s hardly surprising that the likes of Google, Starbucks and Goldman Sachs have come under fire in recent years for under-payment of tax.

Details, schmetails, but Starbucks doesn't make a profit in the UK, even after you add back in those royalties and interest payments. So no tax is possibly due.

For many of these firms, tax is effectively optional. In avoiding it, they are using their size to advantage themselves over purely domestic competitors – as anyone who has tried to compete with Amazon can testify.

That's even worse: in 2012 Amazon made a global loss: what tax is anyone talking about that can be due from a loss making company?

So, again, how much tax should these companies pay? Patently, the law cannot answer that question. But neither can economics. For economics sees companies merely as bundles of contracts, which allocate different financial incentives to shareholders, directors, managers and employees.

Facepalm. Coase on The Theory of the Firm. No, the whole point about the existence of companies is that they are not merely bundles of contracts: if that's all they were they wouldn't exist and we'd have bundles of contracts instead.

But a politician being ill informed and unaware of the finer points of economics is hardly new so why am I complaining? Well, really, it's about this part:

First, the law. The Companies Act 2006 requires directors to promote the success of the company, but with regard to six factors: the likely long-term consequences of a decision; the interests of employees; relationships with suppliers and customers; the firm’s impact on the community and the environment; its reputation for high standards of business conduct; and the need to act fairly between shareholders. The effect is precisely to prevent managements from automatically pleading a duty simply to maximise shareholder value.

Well yes Jesse: but you're a Tory MP, not a Labour one. You're not there to defend the idiocies of the past Labour Government you're there to try to correct them. This part of the CVompanies Act was deliberately brought in to try and appease the more drippingly social democratic parts of the Labour Party. Rather than now stating that this is the aim and purpose of a company you're supposed to be shouting from the rooftops that they got this wrong. The point and aim of a company is the enrichment of its shareholders, nothing else. You should be agitating to get the law changed to reflect reality, not accepting the fantasies of your predecessors: otherwise what's a Tory for if not to be a reactionary?

Alternatively, if we're to have Tory MPs being so drippingly wet what's the reason for the existence of the Labour Party any more? Who would need them?

Dearie me, oh dearie, dearie, me, do we have to have fools running the country?

Sigh:

Backing a report by CentreForum, the think tank, Sir Ian said that “many companies, especially the private equity infrastructure funds, have paid out excessive dividends to their owners”. He advocated the introduction of “some form of dividend control”, whereby “payments of dividends above those assumed by the regulator when setting price limits, would be accompanied by reductions in the tariffs paid by customers”.

No, absolutely not. Sir Ian has clearly forgotten what happens when you place those sorts of detailed restrictions upon regulated companies. They'll inflate their capital base, play around with loan interest, pay the management more: whenever you try to micromanage like this you'll find people gaming your micromanagement.

What we actually want to happen is how we did this regulating of prices immediately after privatisation. We set a target for prices (RPI plus or minus something, depending upon the industry) and then let everyone rip with capitalist glee as they slashed and burned through their overstuffed workforces. Or as I suppose I should put it, increased productivity to the benefit of all. They did indeed make vast profits in doing so. Now if we had just left them alone for all time this would not have been a good solution: but we didn't. We told them that their pricing regulatory structure would be reviewed after some years. And then, that's where we got them. Because we revised the regulated prices to take account of the productivity improvements they'd already made. And quite deliberately made sure that in the next period they lost those excessive profits they'd made in the first.

There's good reason to manage affairs this way as well. Sir Ian doesn't know what an "excessive dividend" is, nor do I. Nor do either of us have a clue as to how to increase the productivity in these companies and thus their profits. So, what we do is set prices (they are natural monopolies after all, we're not going to leave them alone entirely), then let them make as much money as they can for, perhaps, 7 years. They know how to increase their own productivity and so they do and they increase their profits. But we don't let them keep those for all time: we now reset after 7 years and see if they can do it again.

We're giving them the incentive to become more efficient and profitable: but the regulation of how much more grossly, fatcatterly, profitable they become lies in the reset of the regulated prices, not fiddling with dividends and rates of return inside the regulator period. For that fiddling removes the incentive for them to become more efficient, y'see?

We did in fact get the price regulatory process correct the first time around. We didn't set the right numbers, no, not at all: but we did get the process right. Go make as much money as you can for the next regulatory period. And the more you make the tighter the next set of regulations will be. This is the correct mixture of the necessary regulation over monopolists and the drive for greater efficiency.

I'm afraid that this really does make me laugh

I agree that this shouldn't make me laugh of course. Abortion is such a serious subject that let us simply ignore that this story is about that subject. Instead, let us look at what Texas has just done:

Requirements for wider hallways, janitor closets and back-up generators will likely be the downfall of Amy Hagstrom Miller’s abortion business in Texas. Texas lawmakers last week approved a law requiring that abortion clinics become hospital-like outpatient surgical centers, with detailed rules for how the buildings are designed. Owners of the state’s 36 clinics, including five run by Miller, would need to spend millions of dollars to comply -- adding features such as showers, single-sex locker rooms and special airflow systems -- or either relocate or shut down.

As I say, leave aside the specific subject itself and look at the tactic that has been used. For one can trace through American politics and law making a definite strand of those who insist upon more regulation and those who insist that excessive regulation kills businesses.

We could think of the Americans with Disabilities Act (ADA) for example, something that insists that all public (by which they mean private business premises as well) must be disabled accessible. Which might be just fine but it is also true that there will very definitely be expenses connected with conforming to such regulations. And the businesses that complain about those have been told to just suck it up and stop complaining. Or we might look at the insistence that restaurants must provide calorie counts on the menu. Perhaps that cost is trivial but it is still a cost which the regulators have happily forced upon such businesses. There are, of course, myriads of such regulations and costs.

And what has me giggling here is that the positions are reversed from their general set up. Being against regulations because of the costs to business is, in the US, generally a "right wing" view. As is, to a very large extent, being anti-abortion. Being pro-regulation whatever the cost is a more lefty position, as is being more pro-choice. Here it is, largely, the right imposing those regulations upon something supported by the left: and my, aren't they shouting about it?

It isn't, of course, a principled stand by the righties: not a bit of it, it's a tactic to do down their perceived ideological enemies. But I'm afraid that I do still find it amusing, it's a sort of political ju-jitsu. You like regulations, well, here, have some regulations.

Would you blame a cockerel for crowing? A bureaucrat for empire building?

This criticism seems entirely misplaced to me: we should no more be blaming Baroness Ashton for this behaviour than we should be for a tree whispering in the wind or a cockerel crowing at dawn:

EU foreign affairs chief Baroness Ashton has been criticised for seeking to "expand her empire" at a time when other EU agencies are having their budgets cut.

This is simply what bureaucracies do: the aim and point of all bureaucrats.

As the late great C. Northcote Parkinson pointed out a bureaucracy does not exist to actualy do anything. There are no tasks by which it can be measured, no metrics that allow us to decide whether they've all been good little diplomats or not. Therefore the only institutional goal of any such bureaucracy will be to increase the inputs available to it. More money allocated in the budget, more staff hired, these become the measures by which it definies its own success. This is how the Royal Navy ends up with more Admirals than ships, more desk bound pen pushers in their £1,000 chairs than soldiers or seamen who do the fighting.

To complain of this behaviour is no more effective than a parp in a thunderstorm. The only way that one can prevent a bureaucracy from doing this is not to have the bureaucracy in the first place.

The European External Action Service, the EU's much-criticised diplomatic corps, already has 141 embassies or delegations across the world.

Now that it has been invented, now that a budget has been allocated, I confidently look forward to the day when it has more ambassadors than there are countries to be an Ambassador to. It will inevitably happen, assuming that it hasn't already.

Parkinson really was correct: the only way to stop the metastatisation of a bureaucracy is to cut it out of the body politic entirely.

Libertarian film screening of Brazil

Tom Stringer has arranged a really fun Saturday morning outing on Saturday August 3rd.  It's a showing of the movie "Brazil" in the Everyman theatre at 96-98 Baker Street.  There's a coffee bar for pre-movie snacks, and a real bar for those who can't wait for their gin and tonic.  Everyone's in for a treat, with most going along to local pubs afterwards for lunch with a pint.

"Brazil is set in a dystopian world in which there is an over-reliance on poorly maintained (and rather whimsical) machines. Brazil's bureaucratic, totalitarian government is reminiscent of the government depicted in George Orwell's Nineteen Eighty-Four, except that it has a buffoonish, slapstick quality and lacks a Big Brother figure."

Sign up quickly for this on the facebook page.  You won't want to miss the movie and the camaraderie of like-minded  fans.

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It must be difficult being Willy Hutton

Will Hutton presents us with this startling statistic:

Britain is 159th in the world league table that ranks investment as a share of GDP. This is not new. Owners of British companies have long been permitted a feckless lack of responsibility. Smart countries, from the US to Germany, make sure that they insulate their companies as far as they can from the myopia and short-term greed of stock markets. Instead, the British approach to ownership exposes our companies to stock market thinking: shrivelling investment, cutting back on innovation, minimising training and hoarding cash to please their irresponsible, transactional owners.

As usualy in HuttonWorld this means we must have much more investment, a more socially democratic form of investment, more politics and bureaucracy about investment and generally we must buck up and stop being so Anglo Saxon about things. And it is true that on this list the UK is a long way down ther rankings concerning fixed investment as a percentage of GDP.

But do note the general distribution (there are exceptions of course) there. The countries at the top of the list are the places that are poor. They're still trying to build things like a basic road system, a primary education system. We've already done all of those things: thus we need to invest rather less. A second related observation is that of course the richer countries will have lower levels of fixed investment. Firstly for the obvious reason that there's a diminishing marginal return to anything at all. Secondly because the richer nations are, almost by definition, those with very much larger portions of the economy in services, not manufacturing or basic commodities and agriculture. Services famously require less such fixed investment (and correspondingly higher human capital which is not included in Hutton's number).

So we'd expect a rich nation to have lower fixed capital investment as a portion of GDP. That's something (again, with exceptions like Singapore) that we can see by eyeballing the list.

But if we restrict ourselves to those already rich nations we do see that the two most "Anglo Saxon" economies, the UK and US, do have lower portions than the more socially democratic places. Does this mean Hutton wins? No, sadly not. For the economic performance of those various rich countries doesn't vary that much, certainly not in any direct proportion to the variance of the investment as a percentage of GDP number.

The background to this is that we don't in fact care how much is invested: we care what is the return on what is invested. That is, we're interested in output, not input. And if we're getting generally the same sort of output from a lower input this is regarded as a good thing. We're more efficient in the use of our investment than those more socially democratic, politically directed and stakeholder inclusive places that Hutton thinks we should be more like. This is of course a recommendation for the more Anglo Saxon form of capitalism as against the Rhineland that Hutton has spent his life trying to force down our throats.

Which is why it must be so difficult to be Willy Hutton. To set oneself up as the arbiter of how the world should be, only to find that everytime one calls facts into consideration in support of one's basic contention, that the Man in Whitehall knows best, one finds that the facts contradict the contention. That we invest less while getting much the same result is evidence that Anglo Saxon marketism is a better system than others. For we spaff less of our money on investment as a result of having fewer politicians, bureaucrats and stakeholder interests lowering the efficiency with which that investment is deployed.

How the European Union is shafting the Cambodian farmers

Apparently the actions of the European Union mean that scores of thousands of dirt poor Cambodian farmers are being thrown off their land. This could indeed be something that we could become righteously outraged about: despite the fact that the information source is The Guardian.

If you're reading this article with a cup of coffee, you should think twice before adding sugar to your brew. If it's from Cambodia, it may be tainted – not by chemical pesticides or fertiliser, but by human rights abuses. And if you're reading this in the European Union, here's something else you should know: EU trade policy is encouraging these abuses, and the European commission has yet to do anything about it.

Cambodia falls under the Everything But Arms (EBA) tier of the EU's Generalised Scheme of Preferences (GSP), which means that it – like other least-developed countries – can export sugar and a host of other products to the EU duty free. It might seem like a pretty sweet deal in theory, but it has not been so great in practice for many Cambodians. In fact, it's been a disaster. The underlying issue is a fight over land. Cambodia is in the midst of a massive land-grabbing crisis that has seen nearly 2.2m hectares taken from mostly poor farmers and given to private firms as long-term economic land concessions.

In just half of the country where the Cambodian League for the Promotion and Defence of Human Rights (Licadho) works, land-grabbing has affected at least 400,000 Cambodians since 2003. These victims are rarely, if ever, paid appropriate compensation. Sugar is among the worst sectors for land-related human rights abuses, marked by violent evictions, the use of the military against civilians, and attacks and arrests of community activists.

OK, yes, I am righteously outraged. The EU gives trade preferences to Cambodian sugar, these trade preferences lead to evictions and further impoverishment of some of the poorest people in a very poor indeed country.

The question is, what should we do about it? The suggestion in the article is that the EU should refuse those trade preferences for Cambodian sugar until there is evidence from the various NGOs that such abuses have ceased to happen. Hmm, forgive my cynicism but that sounds like a great way to embed the NGO budgets in the Brussels one.

So why not have a truly radical policy? Why don't we just abolish sugar trade preferences for everyone? Including, of course, all those sugar beet farmers within the EU who currently get vastly over the world price for their sugar. And the massive import duties imposed upon cane sugar from elsewhere that allow that sugar beet price to stay high. For if there are no import duties upon cane sugar then there will be no benefit to thowing Cambodians off their land in order to grow sugar that doesn't have to pay those import duties, will there? Cambodian sugar would be worth only the world price and that's not enough to encourage these evictions: clearly not, for the evictions didn't start until the sugar barons could get that vastly higher EU price for the Cambodian sugar.

That is, the whole problem really starts with the way that the EU makes the intra EU price of sugar some multiple of the world price. Remove that distortion and we remove the Cambodian one.

Oddly, that's not a solution that the NGOs suggest: but then I'm already sufficiently cynical to have an idea why.

Krugman the economist and Krugman the commentator

Scott Sumner, a friend of this blog, has noted that there's something of a difference between Paul Krugman the excellent economist and essayist of the nineties and Paul Krugman the political commentator of the teens.

I suspect that Krugman wants to believe that government regulation can improve the appalling working conditions in Bengali factories. So would I. But wanting to believe something doesn’t make it true.

That's actually something of a forlorn hope. For Bangladesh has many regulations about factories and buildings: it's just that everyone ignores them or bribes their way around them. Introducing more regulation into such an environment does not improve conditions, it increases either the ignoring or the bribery. The more specific complaint is that Krugman today says this:

At this point, however, there really isn’t any competition between apparel production in poor countries and rich countries; the whole industry has moved to the third world. The relevant competition is instead among poor countries — Bangladesh versus China, in particular. And here the differences aren’t as dramatic: McKinsey (pdf) estimates Bangladeshi productivity in apparel at 77 percent of China’s level. Given this reality, can we demand that Bangladesh provide better conditions for its workers? If we do this for Bangladesh, and only for Bangladesh, it could backfire: the business could move to China or Cambodia. But if we demand higher standards for all countries — modestly higher standards, so that we’re not talking about driving the business back to advanced countries — we can achieve an improvement in workers’ lives (and fewer horrible workers’ deaths), without undermining the export industries these countries so desperately need.

As above, everywhere already has regulations: it's whether anyone takes any notice of them or not that is the issue. But beyond that, there's that very odd reference to productivity. For old Krugman wrote this very perceptive essay:

- Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries. This has several consequences. First, unless it is carefully explained, the standard demonstration of the gains from trade in a Ricardian model -- workers can earn more by moving into the industries in which you have a comparative advantage -- simply fails to register with lay intellectuals. Their picture is of aircraft workers gaining and textile workers losing, and the idea that it is useful even for the sake of argument to imagine that workers can move from one industry to the other is foreign to them. Second, the link between productivity and wages is thoroughly misunderstood. Non-economists typically think that wages should reflect productivity at the level of the individual company. So if Xerox manages to increase its productivity 20 percent, it should raise the wages it pays by the same amount; if overall manufacturing productivity has risen 30 percent, the real wages of manufacturing workers should have risen 30 percent, even if service productivity has been stagnant; if this doesn't happen, it is a sign that something has gone wrong. In other words, my criticism of Michael Lind would baffle many non-economists. Associated with this problem is the misunderstanding of what international trade should do to wage rates. It is a fact that some Bangladeshi apparel factories manage to achieve labor productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5 percent of the US level. Non-economists find it extremely disturbing and puzzling that wages in those productive factories are only 10 percent of US standards.

New Krugman is implicitly equating working conditions with wages: for obviously, the cash is coming out of the same pot whichever it is spent upon. In a static analysis more spent on conditions will mean less for wages and vice versa. But he then goes on to say that we can adjust those working conditions without any blowback because productivity rates are close enough to be similar..

Old Krugman saw through that assertion: wages and working conditions are not set by the productivity in whichever sector it is. They're set by the productivity levels of the entire economy of the nation. That's why Bangladeshi wages are low, why working conditions are crap. Not because of anything about the apparel industry at all and certainly not because of any measurement of the productivity inside it. They're, respectively, low and bad because the rest of the Bangladeshi economy is a basket case.

It's worth recalling that Krugman was and is an excellent economist, that Nobel was truly deserved. Read and enjoy his early essays by all means. The stuff that turns up in the New York Times not so much.

Would you prefer your subsidy to a public good as a tax break or a grant?

Let us, for the sake of the argument, agree that tertiary education is a public good. I'm not so sure myself, it being both rivalrous and excludable but let's just accept that it is. Now, having determined that it is a public good then there's a reasonable argument that there should be government subsidy to it. For we're pretty sure that markets unadorned don't produce quite the quantity of public goods that might be desirable. If you prefer, public goods are, like negative externalities, one of those times when we might righteously consider intervention in the pure and unadulterated free market.

Given all of that would we prefer our government subsidy to be in the form of tax breaks, taxes not paid, by those undertaking the activity or would we prefer that it be a system of grants to those who do? I ask because Felix Salmon over at Reuters thinks that the grants are, by definition, a better manner of subsidy:

If state and federal governments are going to spend billions of dollars subsidizing tertiary education — and they should — then they should spend those billions wisely, with a focus on education. Instead, they spend those billions through the tax code, with no kind of oversight at all, pushing their thumb on the scales so as to encourage, at the margin, the purchase of buildings and the building-up of large endowments.

At which point I entirely disagree: I think that tax breaks are much the better subsidy delivery scheme.

This is really a difference of world views. If you believe that politicians, those who direct such subsidies, are knowledgeable, clever and honest beings, striving only to do what is right for the common weal, then you might well argue that they should direct, in detail, where the taxpayers' money goes. If you're over the age of seventeen you will have been disabused of that notion, that politicians are honest, knowledgeable and clever, and so would prefer that politicians do not direct in detail. Rather, we might accept that public goods exist, that they should be subsidised in some manner, but having done that we want to keep the politicians as far away as possible from the details of what happens next.

I would go further too. A tax break means that anyone who meets the rules gets the tax break. A grant making system means only those who suck up to the politicians get the grants. And let's face it, we really don't want our impressionable youth educated by those who can stand interacting with politicians now, do we?

All of which leaves me with only one problem. I know very well that Felix is over 17 so how come he still thinks of politicians as they are not?

Great moments in economic punditry

This is an interesting assertion by the American writer Matt Yglesias:

The big issue that gets left out in pious lectures about comparative advantage is that Smith and Ricardo didn't believe that long-term economic growth was possible! This was the era of economics as the "dismal science", meaning that political economy was essentially the study of how to optimally allocate a fixed pool of resources.

Well, no, the dismal part of the dismal science came a little after Smith and Ricardo. The coinage is actually from Thomas Carlyle in 1849 (long after the deaths of both Smith and Ricardo) and was referring to the awkward fact, awkward for Carlyle, that economics indicated that reintroducing slavery might be a not very good idea. A very bad one in fact and given that Carlyle was advocating its reintroduction in the West Indies a finding that he was a tad angry about and thus the naming.

But over and above that it's quite remarkable to think that the man who has bored us all senseless for two centuries with that reading about the pin factory thought that long-term economic growth was impossible. For that passage, in exhaustive detail, is laying out the foundation of what we now call Smithian growth (or at least Deepak Lal calls it that). The division and specialisation of labour makes that labour more efficient in production. This is exactly how this form of long term economic growth actually happens: more division, more specialisation and trade in the resultant production in fact. Further, to think that Ricardo thought such growth was impossible is most odd. For in laying out comparative advantage he showed how it was true that even if you were worse at doing everything than everybody else then you'd still gain from the economic growth that would come from that division and specialisation: if you and everyone else concentrated on their comparative advantages.

This is more than just a minor snark: Yglesias is edging towards the idea that mercantilism might not be such a terrible idea. Yet it is a terrible one: precisely and exactly because it puts artifical barriers in the way of that division and specialisation of labour across national boundaries. Something that limits that Smithian growth: as Adam Smith was pointing out when he gave us the theoretical basis as to why there can indeed be long term economic growth.