Is Britain good for business?

Is Britain good for business?

On Thursday I debated in the Cambridge Union alongside Damian Reece and Willie Walsh.  The motion was that "This house believes Britain is no longer a capital for business."  I asked for four facts to be entered in evidence.

The first was the 50 percent top rate of income tax which, according to the IFS, the ASI and the Treasury, raises no money and may even cost public funds.  It is there simply to punish high earners and high achievers.  Secondly I cited the 28 percent rate of Capital Gains Tax, pointing out that it motivates people to leave capital tied into yesterday's industries instead of freeing it up to invest in tomorrow's wealth and job-creating enterprises.

Thirdly I listed the current 25 percent rate of Corporation Tax, highlighting the fact that it is double the 12.5 percent levied in the Irish Republic.  This, I said, is why Google and other firms chose Ireland rather than Britain for their European HQs.

Fourthly I identified the retroactive legislation announced to take a further £500m from Barclay's.  For that relatively small sum we had sacrificed centuries of the rule of law and sent a clear message to foreign firms that even if they behaved within the law, the Treasury might change it afterwards to take more money from them.  

In addition to those four facts, there was, I suggested, something else.  It is a widely prevalent anti-business, anti-achievement culture, partly fanned by the media, in which success is disparaged.  Business, which alone creates the wealth whose division is argued about, is derided every day in the media and in popular discourse, leaving politicians afraid to defend it.

For these reasons, I claimed, the Cambridge Union should regretfully and reluctantly conclude that Britain was no longer good for businesses.  By a narrow 4-vote margin they agreed with me and did so.  

The sovereign CDS market is broken

Or so some will tell you these days. The reason given is that ISDA (the committee that decides such things) has just decided that Greece has not in fact defaulted on its bonds and therefore the CDS protection that was bought on those bonds does not need to pay out.

Cue consternation among those who don't quite understand what is going on. Look, we can see that Greece is defaulting, CDS was intended to pay out on default, no payout, that's the end of the CDS market, right? Well, umm, no, as two very different people have independently pointed out.

It is true that we expect Greece to default any time now. Indeed, it's entirely possible to argue that Greece is planning to default. That that swap of bonds, where the ECB gets to have new bonds, everyone else has to take a 70% haircut on their old bonds, that this is a default because of the subordination and the different treatment of two holders of the same bonds.

But, here's the thing. This all hasn't happened yet. The prices of a CDS on Greek soverign debt has been closely tracking the value of the bonds, tracking that price all the way down in fact. So that part of the market has been working just fine. But what about that final trigger, the declaration of default so that not just collateral moves but that money gets signed, not just handed, over?

Well, yes, we all think that Greece is about to default, yes, we all think that the deal announced and about to get underway meets the definition of a default. But that's the point: it's all just about to get underway. This is all still in the future. So the default hasn't happened yet meaning that the CDS does not pay out yet. When the default does happen then they almost certainly will. And the Greek events won't be the end of the sovereign CDS market, they'll be a vindication of it. Those who bought the insurance will get paid out. Those who didn't won't.

Likely to encourage a few more people to buy the insurance, isn't it?

In memoriam: John Marks

Everyone at the Adam Smith Institute is saddened to learn of the death of John Marks, the veteran campaigner for transparency and higher standards in the state school system.

Today it is hard to remember – well, perhaps not so hard – that in the 1960s and 1970s state school teachers consistently refused to make their examination results public. They argued that examination results were only a part of what makes a well-rounded citizen, that parents would not understand what the results meant, and that 'league tables' of school examination performance would stigmatise those performing most poorly.

Whatever small grain of truth there might have been in these claims, the net result was that taxpayers were pouring millions into a school system, with no way of finding out what if anything their money was buying. And parents had absolutely no information on which to judge the quality of their school. When John Marks and colleagues initiated a private survey to gather school examination results, many schools – and indeed entire education authorities – refused to send him any results.

Eventually Margaret Thatcher's administration accepted the need for transparency in school performance measures, and published the 'league tables' – exposing the so-called 'hidden garden' of education and leading to a huge focus on standards, in particular the exposure of bad schools and bad teachers who were ruining the prospects of generations of young people.

A physics teacher at North London Polytechnic, he also exposed the political corruption of the higher education sector, where independent-minded teachers were being sidelined and worn down for standing up to the perversion of the curriculum, and the widespread denial of free speech and debate, that was occurring as a result of the domination of Marxist students, teachers and administrators.

A Suggestion in The Guardian I Agree With: A Fair Tax Commission

Yes, even The Guardian sometimes has sensible reader's letters to publish. And I wholeheartedly support this suggestion:

Surely it's time for Labour and others on the left to set up a Fair Tax Commission to examine the legitimacy of a more progressive tax system which shifts the burden to taxation of wealth, land and the grossly overinflated incomes which have become the hallmark of 21st-century capitalism;

I can't quite see why it is to be a thing of the left: Fair Taxes are the concern of us all. But given that we are all so concerned let us try to sketch out the various constraints within which such a Commission would be operating.

The first and most obvious is that it is obviously immoral that those working part time on minimum wage are paying income tax. Quite apart from the stupidity of taxing them then handing back tax credits there's the moral point. If this minimum wage is the minimum that it is legitimate to pay people for their labour then why is the bureaucracy getting a slice of it? We here at the ASI have been recommending for years that the personal allowance should rise to £12,000 a year. I would go further: if we are to have a minimum wage, something which we probably shouldn't but it's a political reality that we will, then the personal allowance for both income tax and national insurance should be that minimum wage for a full year full time job. If one moves then so does the other, link the two expressly and by law.

Secondly we almost certainly want to merge the income and NI systems anyway. The last benefit that relies upon NI is the state pension and that link is to be removed in upcoming legislation. There is no point in having this hidden income tax anymore: merge them.

We need to take note of this Laffer Curve thing. As Diamond and Saetz point out, given the existence of allowances (and yes, the ability of a UK citizen to leave the UK and thus not pay UK tax is just such an allowance) the peak of the Curve for all taxes on income is 54%. Yes, this includes even employers' national insurance (yes, I know, we've just abolished it up above) so that is the absolute top total tax rate we can have on incomes.

We also need to note the deadweight costs of taxation. Different taxes have different effects on future growth for the same revenue raised. We obviously want to have the least effects on future growth for whatever level of revenue. This means heavy on land and consumption taxes, light on income ones and probably best to do away with corporate and capital taxation altogether.

Now, if we're to set up a Commission to look at Fair Taxes then obviously, these are the sort of constraints that such a Commission should look at. Indeed, if there is to be such a Commission I'd happily take part so that it did look at these very points.

But the real importance of such a Commission would be that it would be an opportunity to force those on the left to understand a very basic point about progressive taxes and government. You cannot pay for Big Government with a highly progressive tax system. There just aren't enough rich people and they don't, collectively, have enough money to pay for everything. It's worth noting that the countries that do have substantially larger government than we do, the Nordics, have tax systems which are more regressive than our own one. That's the only way you can have both a Big State and also any hope of continued growth.

I, personally, am not averse to a system of governance that is paid for entirely by the rich. Quite happy for there to be a progressive taxation system: delighted in fact. For such a government would have to be considerably smaller than the one we have now.

And that would be the great value of a real Fair Tax Commission: bringing this indisputable point out into the open. Progressive taxation, the rich paying for it all, or and do note that it's or, Big Government. You can only have one of those two. So let's have the Commission and bring the point out into the open shall we?

Or if that all sounds like too much hard work and effort we could just get people to read the Mirrlees Review.

The Technology Strategy Board: dirigisme in action

Ever heard of the Technology Strategy Board (TSB)? The TSB is an NDPB sponsored by the BIS! Or, to put that in real terms and not public sector-speak, it is one of those arm’s length, alphabet soup agencies that spends huge amounts of taxpayer’s money in order to ‘stimulate’ economic growth. The TSB should be better known, however, as it serves to demonstrate so many of the problems of government intervention that one hardly knows where to begin.

Ostensibly, the TSB’s role is ‘to accelerate economic growth by stimulating and supporting business-led innovation.’ I don’t think that here it is necessary to get into the fallacies of Keynesian stimulus policies, of which this is one. The TSB has an annual budget of around £200million. It boasts that it has spent £1billion since its establishment in 2004 and has been allocated another £1billion to spend during the course of the present Parliament. Austerity indeed.

To my mind, those who advocate such stimulus will never be convinced of the case against them, no matter how much evidence is presented, because they are fundamentally pursuing non-economic agendas, albeit disguised as economic ones. These policies are dictated by ‘conscience’ as Paul Krugman revealingly tells us. The agendas may be ‘noble’ – equity – or ‘ignoble’ – self-advancement and political gains – but they are not fundamentally related to maximising economic growth and wealth-creation. It should be pointed out, however, that the TSB was created in 2004, at the height of an economic boom. Why, one wonders, does an economy which was clearly overheating need a Keynesian stimulus?

Leaving macroeconomics aside, therefore, let’s examine the TSB as an example of how dirigisme fails in reality. As Lew Rockwell argues (as have many before him), organisations like these are part of the ‘regulatory-industrial complex’. This complex is ostensibly erected by the state in order to provide benefit to the public. In the case of regulatory agencies this is ‘consumer protection’ whereas in the case of the TSB this is to stimulate innovation and create economic growth. As Rockwell points out, the strongest lobbyists for such agencies are actually existing large market occupants seeking to errect barriers to entry, in the form of compliance costs, to their more nimble competitors or to benefit from subsidies. We then end up with oligopolistic industries where, in the absence of competition, they can extract higher profits from consumers. This usually prompts further intervention in the form of ‘competition authorities’ which worsen the problem.

As reported in Private Eye No. 1308 information on the TSB’s grants had to be extracted under FoI requests (some of which is available on the website). ‘Iain Gray, the board’s £199,000 a-year chief executive, was previously general manager of Airbus UK. Funnily enough, the biggest single strategy board grant, of £9.8m, went to... Airbus UK’. Private Eye goes on to list some of the various large organisations that benefit from taxpayer largesse:  Nissan, Rolls Royce, BAE, BMW, Ford and we can also add GSK and GE. Unsurprisingly, large organisations are adept at obtaining such grants, which are ostensibly intended for SMEs, because they are able to devote resources and lobbying beyond the reach of small enterprises. Effectively, the TSB is subsidising large market occupants with research funding which is not accessible to small firms and new entrants. This is public choice in action and it is destructive of public benefit.

Cheerleaders of such programmes will argue to the effect that SMEs and innovation are still being aided by the allocation of government (i.e. taypayer’s) cash. Here we have the age-old doctrine of ‘picking winners’. Even if the TSB were an entirely objective observer – which it evidently is not – how is it to know that such innovation is better than that it does not fund? Here we have the Hayekian knowledge problem in action. The only way to establish the viability of a particular good and a particular firm is to expose it to a free market. Further, as capital is being withdrawn from other areas of the economy via taxation and allocated to these purposes, how is the government to know that the capital would not have been employed more efficiently elsewhere. If you’re not convinced by Hayek, just look at the history of government investment schemes to see an evidence-based approach!

Here we have a clear case of what Adam Smith would call a ‘conspiracy against the public’. Unfortunately, such dirigisme is becoming increasingly likely as a policy choice as there is pressure to find additional sources of funding for small businesses. Such an approach is not only likely to fail but be counter-productive. So, here’s a policy solution; throw the TSB on the ‘bonfire of the quangos’ which will not only free up the hefty officials’ salaries but also £1billion of promised spending which is currently going into the pockets of large firms anyway. If we must ‘stimulate’ the economy, rather than reduce the deficit, use the £1billion to fund some tax cuts.

Is minimum alcohol pricing the answer to binge drinking?

The Prime Minister has announced that England will follow Scotland’s lead and introduce a minimum price per unit of alcohol. That would, it is claimed, protect responsible drinking in pubs but deter the binge-drinkers and the addicted. Unfortunately he has got a bit ahead of himself.

Originally the Scottish government pressured the industry to agree the minimum price, and enforce it, amongst themselves. Despite this being the land of Adam Smith, it took a while for the penny to drop that such price fixing would be illegal.  Then it transpired that the Scottish government setting the minimum price would, or might, transgress EU legislation.  A visit to Brussels by the Scottish Health Minister last month did not resolve the matter but we should hear from Brussels shortly.

Stepping back a bit, minimum unit pricing, i.e. the price per centilitre of pure alcohol, works as follows.  If it was introduced at 40p, then the minimum price of a bottle of wine (9 units) would be £3.60 and a bottle of 70o spirits (units) would be about £10.  The products that would be priced up, and possibly out, would be the high alcohol beers and ciders.  And, it is claimed, they are the drinks of choice of the binge-drinkers and the addicted, i.e. those who drink for the effect rather than more socially and moderately.

Sheffield University has some sophisticated models which indeed show minimum unit pricing would have relatively more impact on the target “harm” groups, but would also cut total alcohol consumption, and Treasury revenue, possibly due to a ripple upwards effect on other pricing.  Of course the anti-alcohol groups applaud.  They see reducing total alcohol consumption as the way to reduce alcohol harms.  According to them this is statistically proven. Actually the theory goes back to Sully Ledermann 56 years ago and it does not stand up at all.  The UK is in the middle of the EU pack in terms of per capita alcohol consumption. It has been falling steadily for some time and faster than the EU as a whole.  Yet the UK has more alcohol problems, alcohol related A&E admissions for example, than elsewhere in the EU.  If Ledermann was right, how come problems are increasing when consumption is falling?

In Ireland half the populace does not drink at all, leading to a low per capita total, despite the best efforts of their compatriots to make up for it.  Per capita averages are misleading.

Another problem is that the number of units does not appear on the packaging.  It would be very difficult for retailers to implement minimum pricing if they do not know how many units are in the package.  The drinks industry agreed with government, in March 2011, to have the number of units appear on the packaging of 80% (by volume) of alcoholic drinks sold in off-licences by 2013.  This, sensibly, lets the very small (by volume) sellers such as Chateau Lafite off the hook.

Apart from one Canadian province, and that is a very different situation, minimum unit pricing has not been tried anywhere in the world. It may turn out to hurt moderate more than "problem" drinkers. What works in Sheffield’s models and what happens in practice are two different things. 

A private schools revolution in Bihar, India

Recent research carried out by the India Institute and Newcastle University's E.G. West Centre in the Indian city of Patna has produced some remarkable findings. The report, The Private School Revolution In Bihar, India, launched this week in New Delhi, and shows that government statistics are currently excluding three quarters of the schools in the city and 68% of school children.  This means that 238,767 school children out of a total of 333,776 were missing from the official data. 

Instead of the official 350 schools, the research located a total of 1,574 schools with 78% identified as private unaided, 21% government and 1% private aided.  Therefore, approximately 65% of school children in Patna were attending private unaided schools, with just 34% attending government schools. According to Professor Tooley, "when plotting the location of 1,182 private schools and 111 government schools using GIS technology, we found that there existed hardly a road or a street in Patna without a private school”.

Based on the monthly fees being charged at each private school, the research also found that 69% of private unaided schools were low cost, 22% were affordable and only 9% higher cost. In other words, the vast majority of private unaided schools found in the city of Patna were low cost, charging fees of less £4 per month.

These findings have two important implications.  First, if these findings reflect the real state of education across India and developing world, then the so called ‘global education crisis’ is much less of a crisis than previously thought. Instead, the widespread under-reporting of the number of children in school may now be a deliberate policy of developing country governments to help attract more international aid. 

Second, Article 18 of the 2009 Right to Education Act in India requires that all unrecognised schools in the country be closed down within three years of the Act coming into force.  For the city of Patna this would involve forcing two thirds of the city’s children out of school and onto the street – all because of government legislation which is supposed to be increasing school enrolments and not dramatically reducing it. 

Thankfully, it would appear that the Bihar Education Minister P.K. Shahi has already read the report. Last Saturday he declared that “I can assure that the government will not implement the Right to Education Act in Bihar and will not force private schools to follow rules under it.”  I suppose the people of Bihar should be grateful to their Education Minister for not shutting down the majority of their schools. However, this does make me wonder – do politicians around the world have any kind of positive impact on the education which children receive, or are they all bent on disrupting and distorting its natural growth and development?

Austerity? What austerity?

Recently a lot of attention has been given to the case against British austerity. It has been blamed for the inability of the UK economy to pull itself out of border-line recession. Krugman, DeLong, Baker and many others attack it claiming that contractionary expansion makes no sense, while on the other hand Sumner and Boudreaux tend to overturn the argument by claiming there is no austerity in the UK. And opposing to both of these views, UK Chancellor George Osborne surprisingly claims it is working.

Who is right? Well, one thing is certain, Britain isn't experiencing any form of robust economic growth, so whatever policy is done by the government clearly isn't working.

The UK government is leading an ambiguous recovery policy which is, unsurprisingly, producing ambiguous results. It is sending wrong signals to the private sector. When it is trying to subsidize, this yields no effects as the people expect it to cut further. When it is trying to build high-profile infrastructural projects, it isn't working as the anticipated costs are much higher than the benefits. When it’s trying to make banks increase lending, it creates less competition in banking making the price of credit still too high. Any intervention it’s trying to make is yielding no positive outcomes. Surprise, surprise.

Austerity or expansion?

The UK had the one of the strongest fiscal stimuli (relative to the size of its economy) in the world as a response to the crisis, during the premiership of Gordon Brown. The result was making the situation much worse with a rising public debt and the third highest budget deficit in the world behind only Greece and Egypt in 2011, and behind Greece and Iceland in 2010. This comparison is striking since these countries were doing much worse than the UK at the time and were countries with highly unstable economies – Iceland before the restructuring, Greece whenever, and Egypt after a year-long revolution which saw the downfall of a dictator and an inability to consolidate ever since.

So the argument of Keynesians is that this wasn’t enough, and that Britain is crippled with austerity. The media is supporting the former view as well. Britain is running the hardest austerity policy in Europe and this is resulting in terrible growth performance and the inability to start up the recovery. However, Britain is far from austerity. Yes, some painful cuts have been made, tuitions were rising, unions were hit, wages in the public sector are stagnant, a lot of public sector workers have been laid off, but what does the government do with this saved up money? It "invests" in credit easing, housing subsidies, the youth contract and infrastructural projects. On the other hand, it's guiding private sector investment and centrally planning credit, it announces an increase of the minimum wage, abolishing of the default retirement age, more regulation after claiming to remove regulation, the 50p tax rate and so on. None of these policies are policies aimed at growth. They are all part of a Keynesian response to the crisis.

After all, if one would just observe the spending data for the UK, it is still increasing, both relatively (as percent of GDP) and absolutely.

As a comparison, during the Thatcher government, spending as percentage of GDP went down from 46% in 1981 (where it stands currently) to 34% by the end of 1989. The New Labour government(s) simply reversed that trend. To be fair, it took the Thatcher government two years to see spending to GDP rapidly decrease, so one might say to give the current government a chance. However, according to the announced policies which haven’t all even kicked in yet, I highly doubt the outcome will be the same. 

The outcomes of the Thatcher government then and the Coalition government now are very likely to produce different results. In the 1980s, Thatcher removed some of the economy's dependency on the government and was able to increase competitiveness in the private sector. The current government is in fact looking to increase this dependency, and yet it naively expects the private sector to step in and grow on its own.

The initial call for austerity in the UK was a necessary solution for an economy left in dire straits after the previous government’s response to the crisis. They needed to avoid the peripheral eurozone scenario and a possible sovereign debt crisis. They have succeeded in doing so and have sent positive signals to foreign investors. But now they need to be brave enough to send similar signals to the domestic economy. Continuing with the cuts is futile if the dependency on the government isn't removed. Having subsidies for youth hiring, housing, banks or businesses won’t remove this dependency.

One does not simply enforce austerity without clearing the way for the private sector to grow again on the principles of competition and an unconstrained business environment. This crucial assumption still hasn't been made in Britain. Until we don’t see signs of reducing business and consumer dependency on the government and until we don’t see signs of more competition and less regulatory constraints to foster economic growth, the current situation will extend itself even further than projected. 

I'm excited about Raspberry Pi

Today sees the launch of the Raspberry Pi, a fully-functional computer the size of a credit card selling for about £22. It’s a brilliantly stripped-down device, with a mobile phone charger power socket, a modest (but functional) amount of memory, a few USB ports and a video output that works with most televisions. It comes bundled with Linux and some software that teaches you the basics of computer programming.

It’s an exciting product. Funded entirely by the project’s developers on a non-profit basis, it’s being aimed at schoolchildren, and the first 10,000 built will be shipping to schools. It’ll be great to see how that goes. I don’t know if learning computer programming in school is going to make many students love it – it’s hard to find good IT teachers and, in my experience, having something forced on you at school is a recipe for hating it. But even still, lots of kids will be able to teach themselves on these, either at home or outside normal class time, and that’s great.

I wouldn’t be surprised if the real benefit of the Raspberry Pi device, though, is the rest of the world. Once production of the Raspberry Pi ramps up to meet demand for it, millions of people will suddenly be within reach of owning a computer, instead of having to rely on internet cafes. That means they can spend much more time on them, learning exactly the sort of computer skills that are easily sold across the internet. Adding wifi to the device through a standard wifi dongle  would mean that businesses could sell wifi access in poor neighbourhoods.

The tragedy of the modern age is how much talent is being wasted in subsistence farming work, with little access to the benefits of the ongoing technological revolution. People across Africa have used cheap mobile phones to develop sophisticated banking and credit systems that have helped to spur investment and remittance transfers from relatives in rich countries. The Raspberry Pi may just be a way of unlocking some of that human capital and unleashing a second, human revolution.

New at AdamSmith.org: The global economics of corporate tax cuts

Jim Flaherty, Canada’s minister of finance, may well be exasperated.  Speaking of the federal government’s plan for a national corporate tax of 25 per cent, the Minister affirmed that ‘we believe lower taxes create investment and jobs.  I continue to encourage our provincial partners to follow our lead.’  Unfortunately, his counterparts remain to be convinced, with British Columbia and Ontario signalling their intentions to halt the downward trend.

How times have changed!  ‘On New Year’s Day,’ reported Neil Reynolds, ‘Canada’s corporate tax rate — federal and provincial rates combined — fell to 25 per cent, giving Canada the lowest rate in the Group of Seven countries, and a more competitive economy on a global basis.’  (According to the 2012 Index of Economic Freedom, Canada’s federal rate of 15 per cent compares favourably with the United Kingdom’s 26 per cent.)

Flaherty could remind officials in the provincial treasuries of the global consequences of their actions, citing an economic truism published in The Wealth of Nations two-centuries-and-a-half ago.

Read this article.