Could Labour split?


The results of Germany's elections are not just interesting because they produced a centre-right majority and saw the tax-cutting FDP increase their share of the vote. They are also worth noting for the fact that, even following an economic crisis for which 'capitalism' has taken much of the blame, the main party of the left, the SDP, had its worst election since World War II.

Obviously, the reasons for this could well be particular to Germany, and have no wider relevance. The fact that the SDP have for the past four years been in an uncomfortable coalition with the centre-right CDU certainly makes one wary of generalising.

But there may be implications for the UK in Germany's election, even if they should be taken with a pinch of salt. One is in the way Germany's political left has fractured, with the Greens and the socialist Left Party getting 11 and 12 percent of the vote respectively, compared with the SDP's 23 percent. Could the same thing happen in Britain?

Perhaps not while our first-past-the-post voting system endures. But there could still be a damaging split on the horizon for the UK's Labour Party. As William Rees-Mogg wrote in the Mail yesterday, many Blairites already feel closer to the Social Democrat wing of the Lib Dems than to their party leadership. If Labour reacts to electoral defeat by swinging back to the left – as seems likely given the financial and constitutional power of the unions – it is not inconceivable that they would jump ship.

For what it's worth, I think the German results also indicate how different British party politics would be if we had proportional representation. It's unlikely that Labour or the Lib Dems would survive such a change in their current forms. We would probably end up with the Conservatives and UKIP to the right, a (very) small liberal party in the centre, and a new 'Social Democrat Party' and a hard-line Old Labour–Green alliance on the left.

P.S. I'm not advocating proportional representation. I'm just suggesting one of the ways it would change things.

Car scrappage scheme extended


altThe government funded car replacement scheme in the UK has now been extended. The program is one of many that have been instituted throughout many countries to help stimulate the auto industry. But are the programs actually worth the money? To help with this question let’s examine the U.S. model since the program did spur large amounts of auto sales and since the program has ended we can look at some solid numbers.

Using average numbers from America - given that an average “clunker” or older car is getting 15 mpg and travels an average of around 12,000 miles per year it would use about 800 gallons of fuel. If the owner of the car took advantage of the government program and traded in for a vehicle that got 25 mpg they would use 480 gallons of fuel less each year. That adds up to a large amount of savings for the consumer so far, and that’s where the politicians would want the analysis to stop.

As reported by the New York Times nearly 700,000 vehicles were traded in during the program which means the total fuel consumption in the United States would be reduced by nearly a quarter of a million gallons which equals out to a little less than 11.5 million barrels (there are 19.5 gallons to a barrel). The problems start to become apparent in these numbers, the U.S. uses 20 million barrels of fuel everyday so the actual savings in fuel are just over a half a day’s worth. Although that isn’t that impressive, it’s still something. However, the real predicament is in how much that fuel is worth compared to the amount of money spent to save it. If there was 11.5 million barrels of oil saved, as of 11/09/09, it would be worth just over 816 million dollars, but the government spent 2.87 billion dollars to save that money. That means that for every dollar saved in the “cash for clunkers” program the government spent around $3.50 which is far from impressive.

Yes there may have been jobs saved, and increases in demand, but I am more than confident in saying that any short term benefits will soon be eclipsed by inflation and even worse by massive decreases in demand over the long run.

Sexism has nothing to do with it


According to the Financial Times, Jack Straw, the UK's justice secretary, believes that "the media and political firestorm engulfing Baroness Scotland is motivated by sexism". Let's review the circumstances of the case:

  • Baroness Scotland, now attorney general, was the Home Office minister responsible for amending Section 8 of the Asylum and Immigration Act 1996, which meant that businesses and individuals that employed illegal immigrants would face harsher penalties.
  • It turns out that that Baroness Scotland has, in fact, been employing an illegal immigrant herself.
  • She claims that she saw documents which led her to believe the employee was entitled to work in the UK, but is apparently unaware that the law requires employers to have checked and copied the documents in question – otherwise they have no defence.
  • The employee in question, Tongan Loloahi Tapui, tells the Mail on Sunday that Baroness Scotland made no enquiries as to whether she was eligible to work in the UK, and that she "didn't have any of the 6 documents that entitled her to work in Britain". If true, this would mean that Baroness Scotland had not only failed to comply with a law that she herself had introduced, but that she had also lied to the UK Border Agency to cover it up.

On that basis, I'd say it is: (a) clear why people are calling for Baroness Scotland's resignation; (b) clear that sexism has nothing whatsoever to do with it; and (c) clear that Jack Straw's assertion to the contrary is pretty pathetic.

Of course, the Asylum and Immigration Act is bad, onerous, illiberal law. This case is a perfect illustration of that fact. But when a government minister is caught breaking a law that they were themselves responsible for introducing, then surely they must resign. There is nothing more to it than that.

A Liberal Party


Liberty does not consist in making others do what you think right. The difference between a free Government and a Government which is not free is principally this – that a Government which is not free interferes with everything it can, and a free Government interferes with nothing except what it must. A despotic Government tries to make everybody do what it wishes, a Liberal Government tries, so far as the safety of society will permit, to allow everybody to do what he wishes. It has been the function of the Liberal Party consistently to maintain the doctrine of individual liberty. It is because they have done so that England is the country where people can do more what they please than in any country in the world.

– Sir William Harcourt, 1873.

Yes, let’s tax home ownership


Last week we featured a number of blogs discussing why Vince Cable's property tax would be a bad idea (see here and here). Today we release a think piece entitled Yes, let’s tax home ownership, written by ASI Fellow Richard Teather. In it he defends the principle of a home ownership tax, but only if the money raised is used to reduce income tax. The question posed is: Can anyone come up with a strong argument against a homeowner tax that doesn’t apply equally to existing parts of our tax system?

It was all those greedy bankers, wasn't it?


It's the cry of the day: the financial system was brought to its knees by the greed of he bankers! This leads to the simple thought that if we stop the bankers from being able to be greedy then we'll have solved the problem.

The problem with this simple thought is, well, apart from the fact that it is simple minded, is that there appears to be no empirical evidence whatsoever that it is in fact true. Jeffrey Friedman pointed this out last week. Given that Richard Fulds of Lehman lost a billion dollars (yes, $1,000,000,000) when the firm went belly up it's difficult to accuse him of risking the shareholders' gelt for his own gain by knowingly taking excessive risk. In fact, the research shows that those banks where the senior executives held more stock did worse than those where they held less.

Further, about those toxic assets: the banks were holding the higher rated (and thus less profitable) AAA tranches rather than the AA ones. They were deliberately, at least as far as they understood matters, eschewing both risk and potential profit.

These studies suggest that bank executives were simply ignorant of the risks their institutions were taking—not that they were deliberately courting disaster because of their pay packages.

If that is true (and no one has as yet offered any proof that it isn't: nothing beyond the "well, everyone knows, don't they?" level at least) then the concentration upon bankers' pay and bonuses is simply Naomi Klein's "Shock Doctrine" as it usually works rather than as she described it. A crisis is when those who would extend State power extend it: when the politicians gather more power to themselves rather than dispersing it to you and I in the markets.

But much more importantly, if that is true then changing the mode of bankers' remuneration will not reduce the risk of it all happening again for it was not the cause this time around. That's much more dangerous than any shortfall at a Chelsea Bentley dealership: the thought that by misidentifying the causes of the problem we assuage populist anger than actually solving the problem itself.

Perhaps instead of the bankers' pay it was indeed cock-eyed regulation? Shouldn't it be more important to fix that, perhaps the real cause of the problem, than please the baying mob?

Methodological individualism


I'm getting worried about methodological individualism. Yes, I know that 'society' has no life or will or organizing mind of its own, as Marx seemed to assume, and that it is just the aggregation of individuals' decisions and actions. I know that the 'price level' does not affect 'aggregate supply' or 'aggregate demand', and that these are mere statistics, summing individuals' reactions to particular prices. And I don't fall the the scientist guff that 'we can predict the behaviour of a piece of a gas, even though we don't know what any particular molecule is doing', because I know that the 'molecules' that social science deals with are individuals who are themselves so complex that their behaviour would fry the brain of the average chemist. And yet...

Former UK Prime Minister Margaret Thatcher famously (or infamously) told Women's Own magazine that "there is no such thing as society", and yes, I see her point. But she went on to say: "There are individual men and women, and there are families." Aye, there's the rub. Are we methodological individualists (the term was, I think, coined by Schumpeter, who I wrote about here recently) obliged to insist that everything comes down to the minds, thoughts, values, and actions of individuals alone? Or can we admit that relationships between individuals, like family ties, are pretty basic too? And what about culture, or history, or religion, or even class? These all shape and constrain our individual thoughts and actions. But to admit them as significant is the thin end of the methodological wedge, because these are social phenomena.

An analogy, if I may. A physicist could describe a football match in terms of kinetic energy, friction, and the forces on the ball that sent it in this direction or that. It would be a perfectly correct description, but a pretty dull one: most of us would prefer to hear the commentator talking about the skill of the players, the positioning of the teams, the tactics and strategy, the chances taken and the goals scored. The physicist's account might be the right way to talk about the workings of the Large Hadron Collider, but it's not much good for a ball game. Likewise, an individualist account of economic or social phenomena may be true in a trivial sense; but to understand what's going on, you do need to know that culture, or history, or religion do in fact shape how people act.

And again, if we do detect statistical relationships between social phenomena like a price index and a money supply figure, isn't that actually rather useful, even if only up to a point? Yes, I know that unless we refer to the individuals, we will make mistakes. A Martian observer may note that every Monday to Friday morning, Grand Central Station becomes packed with Earthlings, and predict this as a scientific law. Except that, one Monday, no Earthlings show up at all. The Martian's 'law' did not account for the fact it was a public holiday. But then, this is how science works – we make a hypothesis, then have to revise it when the unexpected happens. Sure, if we understand the motives of the actors, our predictions will be better. But just because we can't do that very easily, do we still have to throw out statistics that seem to work?

Yes, let’s tax home ownership

Vince Cable’s proposed ‘mansion tax’ on high-value homes has come in for a lot of flak. But is it justified?


Vince Cable’s proposed ‘mansion tax’ on high-value homes has come in for a lot of flak, including from the ASI blog. But is it justified? Despite all the debate, I have still not seen a good argument against it that does not apply equally to parts of our existing tax system.

I agree that’s probably a sign that our entire tax system is in dire need of fundamental reform – but that’s not likely to happen. The question is not whether a homeowner tax is a good thing in itself, but whether it could – with the money used to reduce income tax – be an improvement on the existing system.

Yes there are some problems with Cable’s proposal – by taxing only high-value homes and using the money to raise the personal allowance, it is a redistribution primarily from a minority living in the south east (mainly but not all wealthy) to workers on below-average incomes.

But let’s look at the general principle rather than this particular design. What are the main objections to this type of tax, and how valid are they?

  • It’s a wealth tax, and wealth taxes are bad

Yes, it looks like a wealth tax. But economically it’s more like an approximate income tax on the annual benefit of living in the house – taxing the return on your investment. And Cable’s proposed 0.5% charge is effectively around 15% of the likely rental value – quite low by UK income tax standards.

  • It will discourage purchasers and so reduce property prices

Yes, but that’s a general objection to income tax – taxing anything discourages that activity. We currently tax, and therefore discourage, employment, entrepreneurship and investment – surely that’s worse. The homeowner tax will equalise the treatment of different investments, and if the money is used to reduce the income tax rate it will reduce the disincentive to work and save.

  • It’s my property – why should I have to pay tax on it?

Yes, but again that’s a general objection to income tax. Your investments, your work, your business ideas are being taxed now.

  • I worked hard to buy it – I shouldn’t be taxed now

Yes, but again that applies to all income tax. Is it any more unfair than taxing the salary you worked hard for in order to pay the mortgage?

  • The house was paid for out of taxed income – this is double taxation

Yes, it is economic double taxation. But we already do the same thing to investment income. If double-taxing home ownership is bad, surely it’s even worse to do it to investment in productive businesses.

  • It’s unfair on the ‘asset rich, cash poor’ elderly

Yes, it will disadvantage them compared to the current system. But the current system disadvantages the ‘asset poor’, primarily young families who are trying to buy a house. Getting a mortgage to buy an average house needs a salary of around £50,000 – which means you’ll be paying higher rate tax. Is one really more unfair than the other?

  • It can’t be an income tax – there’s no income

Yes, you don’t get any cash from your home. But by living rent-free there is an advantage equivalent to an income. And there’s nothing new about taxing non-cash benefits – we’ve done it to employees for decades (company cars, health insurance and many other ‘benefits in kind’); this just extends the same practise to property.

  • It’s difficult to collect

Yes, but that’s a tax collectors’ objection, not a principle. The Treasury loves taxing salaries because it hopes that we won’t notice how much they are grabbing through PAYE, but supporters of low taxes should be encouraging tax visibility. The few really problematic cases, such as the elderly widow with no income living in the ancestral manor, can be dealt with through a postponement system with the Treasury taking a charge on the property to be redeemed on her death.

  • It’s based on an estimate

Yes, and so there will be inaccuracies, costs and disputes. This is probably the strongest argument against the property tax, but taxing estimated property values is nothing new. Houses are already valued into fairly narrow bands for council tax, and expensive homes frequently have to be valued for inheritance tax.

So I can’t see any objection that wouldn’t also mean abolishing income tax (which might not be a bad thing, but isn’t going to happen any time soon). Indeed we could go further than Dr Cable, and integrate the homeowner tax into the income tax system. Instead of a half percent tax on values over half a million, we could estimate a notional rent for all owner-occupied housing and add it to the occupiers’ taxable income. But only, repeat only, if the money raised is all used to reduce income tax.

How much money are we talking about? The LibDems expect their proposal to raise £1 billion, but a fully integrated homeowner tax, at full income tax rates and with no threshold, should bring in about £25 billion. That’s enough to reduce income tax by 5p, cutting tax rates from 20% and 40% to 15% and 35%.

Effectively it’s the same approach that Lawson applied to business tax – broaden the tax base in order to cut the tax rate. Yes, overall we’d be paying the same amount of tax, so there would be winners and losers. But crucially the marginal rates – the tax paid on extra effort, each additional pound earned or saved – would be significantly reduced, which should boost the economy. And our competitive position within Europe, weakened by a decade of Brown stagnation, would be restored.

I know; I hate recommending new taxes. But this one could actually work.


The Kuznets Curve and inequality


Simon Kuznets predicted that as an economy develops inequality will rise and then, at a certain stage of development naturally begin to fall back again.

It would seem that he was reasonably correct as well. These estimations of historical income inequality indicate that the Gini was around 51, 52 for the UK in 1801. Current day income inequality in the UK is again around 51, 52 as measured by that same Gini. Those for Sweden and the US are similarly around 48 at present. Now, of course, it is possible to change that inequality of market income through the tax and benefits system and every country does so by various means, lowering the outcome inequality. Some more than others as we know.

However, if that rise in inequality is indeed part of the development process it means that worrying about rises in inequality in China, or India, at their current stages of development is a little silly. We'd do better to not worry about such things (as all too many "in development" do) and concern ourselves with the growth which itself will lower the inequality.

There's another point to be made here as well: which is that the current measures of inequality, by income, grossly overcount the amount of inequality that we do have. Way back when a Gini of 52 meant that some would eat well and others would starve. Now it means that some shop at Fortnums and others at Spar. The difference between having cheaper food than the rich and having no food unlike the rich is a measure of vastly lesser inequality in the modern day. It wasn't until the 1970s that the majority of British households had a fridge: the difference between having one of Comet's best and £8,000 worth of Smeg is hugely smaller than that between a larder or an icebox and a fridge.

We both overmeasure the inequality in our own society and worry overmuch about it in others. Time perhaps that we stopped doing so.