How Jeb Bush could get his 4% growth (for a few years, at least)


US presidential hopeful Jeb Bush says that, with the right policy reforms, the US can achieve 4% annual growth. As economic historian (and Adam Smith Institute Fellow) Anton Howes has pointed out, historically it’s very hard to sustain growth above 2% except when you’re catching up, either after a recession or as a poor country converging on rich ones. For the US, 4% growth would mean catching up to the pre-2008 trend for a few years, and then reverting to normal. Glenn Hubbard and Kevin Warsh, two economists who are likely to advise Bush on economic issues during the campaign, suggest that investment-focused tax cuts and pro-competition deregulations might help the US to recover back to the pre-2008 trend. Well, maybe.

One thing they did not mention was liberalising planning (or urban zoning, in American English). But that could deliver a big boost to GDP. An NBER working paper by Chang-Tai Hsieh and Enrico Moretti released earlier this year argued that:

…worker productivity is increasingly different across cities. We calculate that this increased wage dispersion lowered aggregate U.S. GDP by 13.5%. Most of the loss was likely caused by increased constraints to housing supply in high productivity cities like New York, San Francisco and San Jose. Lowering regulatory constraints in these cities to the level of the median city would expand their work force and increase U.S. GDP by 9.5%.

Basically, making it easier for people to move around makes it easier to put people into the jobs where they’re most productive, and constraints on housing supplies make it much harder for people to move around.

Deregulating planning, then, could massively boost US GDP – even bringing constraints in the most productive cities down to the average level would increase it by nearly 10 percent. Spread over a few years, and combined with the standard 2% we’d expect from the US economy normally, that’s about one Presidential term’s worth of 4% growth.

This is really just a moot point – the President doesn’t have much say over local zoning laws. But who knows? This might be one time where the Presidential bully pulpit comes in handy.

Mostly, this is instructive for those of us in other cities where supply constraints make it difficult for people to move in. How much richer Britain might be if it was a little easier to build houses in the places people want to live – and work.

A proposal to solve the housing crisis


The problem is not that people lack the resources to buy houses; it is that there are simply not enough houses.  People are living longer, more choose to live singly, and immigrants increase the population.  Schemes that help people to obtain mortgages direct extra funds into housing without increasing the supply, and put more upward pressure on house prices.

The Green Belt acts as a corset around our cities, forcing people to live beyond it and commute through it, with attendant pollution and congestion.  They need houses near the edge of cities, but the Green Belt stops them.

The first step is to classify Green Belt land into its three types.  There is verdant land, with fields, meadows and woods - what most people think of when they think about Green Belts.  There is 'brown,' or damaged land, including abandoned mines and quarries and former industrial buildings.  Thirdly there is agricultural land, much of it given to intensive cultivation on vast fields using fertilizers and pesticides.  It falls well short of being environmentally friendly.

Once the land is classified into its three types, the verdant land should be left untouched.  All of the 'brown' land should be made available for building.  In addition a one-mile deep strip of agricultural land at the inner edge of the Green Belt should be made available for house-building.  In compensation, at least a mile of agricultural land beyond the outer edge of the Green Belt should be added to it as verdant Green Belt.

The grant of planning permission within this extra land near cities would dramatically lower the cost of housing land, putting downward pressure on house prices.  The million extra homes that could be built on this land would have a similar effect.  A move such as this would increase the supply of housing and make it less expensive, bringing home-ownership within reach of many.  

Furthermore, there would be a net gain of properly 'green' land by the outer extension of the Belt with more verdant land.  The prospect of extra housing, a curb on the upward spiral of prices, and with no loss of green land, all suggest this might be a practical and popular help to the housing problem.

Beat combos are not quite our thing, however


There is something of interest to be gleaned from this little story about Taylor Swift and her interaction with Apple's new music streaming service:

Apple has apparently changed its policy and pledged to pay musicians for the use of their work during a free trial of the Apple Music service following an open letter from US pop star Taylor Swift.

We'll admit that which young lady warbles away at the front of the latest popular beat combo is not normally our thing. [Speak for yourself! – Sam] But it's worth noting who has the economic power here. On the one hand, the most valuable publicly listed corporation on the planet, one that makes a Bill Gates sized fortune in profits each and every year, with cash reserves measured in the hundreds of billions. On the other one young lady in her 20s.

Yet when the two clash over the division of revenues it is that young lady who wins. The interesting economic lesson being that it is not size, or the corporations, or wealth, that wins. It is who controls the scarce resource that does.

Swift's music is (oddly to us but there we go) extremely popular. It is a must have for any music streaming service. Thus she being the one hold out will make that giant corporation change the terms it offers to everyone.

It is not size, or who has the most lawyers, or the most money, which wins in a market economy. It is scarcity that rules. Which is, of course, just how we like it, for our task in an economy is to decide how scarce resources are allocated.

Yes, this is our fault


While this is indeed our fault we're not going to apologise for it. The this being the insistence that we do not want to harmonise tax codes, tax rates or the corporate tax system across jurisdictions. The OECD, the G7, the EU and every other assemblage of our governors is trying to get to a system that taxes corporations "fairly". And we would very much prefer to have competition in such matters. As one whining about our stance says, we have indeed said:

In this context there should be no mistaking the fact that those who propose tax competition are the ones who are seeking to exercise control. Time and again right wing think tanks have said things like this by Dan Mitchell of the US based Center for Freedom and Prosperity[i], writing on this occasion for the UK based Adam Smith Institute:

Tax competition exists when people can reduce tax burdens by shifting capital and/or labour from high-tax jurisdictions to low-tax jurisdictions. This migration disciplines profligate governments and rewards nations that lower tax rates and engage in pro-growth tax reform.

The emphasis is mine, and appropriate. Think tanks like those Mitchell works for go out of their way to defend tax havens. And what they are really saying is that tax havens should be able to use their laws to undermine the tax laws of other states by inducing the relocation of economic activity to low tax jurisdictions. This is what tax competition means, and this is what the UK is subscribing to.

We stand by this and we stand by it, the insistence on the benefits of competition, for two reasons.

The first is the entirely uncontroversial idea that tax rates can be too high. Where the good of raising the revenue to perform the (sure, we think these necessary functions are rather fewer than many others do but we're fine with the idea that there's some necessary functions of government) necessary functions of government fails to outweigh the harms done by the raising of that revenue. It's only competition between jurisdictions that is going to beat down rates to where less harm is done. Just as competition between suppliers of other goods and services beats down the price charged for them.

The second reason is a little more subtle: there are some taxes that are "bad" taxes, in the sense that they have higher costs in economic activity foregone for the revenue raised. That is, they have higher deadweight costs. Again, competition among jurisdictions is required to shift revenue raising from such bad taxes to ones that are less bad. The standard hierarchy here being that corporate and capital taxes are bad, income such less so and consumption and land taxes even less. It's worth noting that those higher deadweight costs apply to taxes on those factors which are more mobile: that's what actually causes those higher deadweight costs. Thus we want lower or no taxation of highly mobile factors of production (for the mobility leads to a greater elasticity of supply) and higher taxation of immobile and inelastic ones.

Again, competition between jurisdictions is what will provide this outcome for us. For the taxers will note that as they try to tax those mobile factors more highly, they'll get less revenue as it hightails it over the jurisdiction's boundaries.

The complaint about all of this is that by having competition then the taxing authorities cannot tax as they would wish. Yes, correct, that's the point: we want the taxing authorities to be taxing efficiently, not as they wish, and it's competition that will cause this. Thus we are in favour of competition and not of harmonisation.

Will HM Treasury learn lessons from HSBC?


HSBC executives have done stupid and illegal things for which they should be penalised but mostly the bank itself has carried the can: that’s you and me and the other customers, shareholders and employees.  The reality is that HSBC is far weaker than it was 10 years ago due to management folly but fines and punitive taxation makes the corporate entity weaker still.  We are the losers from that cycle, not the miscreants.

The big banks have wrongly been blamed for the 2008 financial crash.  Governments, notably the US government, and poor performance by the regulators were far more responsible. UK financial services were indeed silly to get involved in the game of “pass the parcel” with the massive dodgy debts but that problem was secondary.  UK management was hooked by the algebra which they pretended to understand when more sensible bankers, like the Rothschilds and the Canadians, did not join in.

Mark Carney assured the City this month that the bad old days are over and banks are cleaning up their act.  Management is better than it was but it has a long way to go.  Unfortunately they are impeded by government in the two ways that HSBC cites as reasons to leave London: excess taxes and regulation.  Banks no longer make huge profits and even if they were, that is no reason to tax them more than any other profitable company.  A better solution is greater competition.  New banks are trying to break in but the regulators, contrary to what they say, make than difficult.

The Chancellor may lighten the banks’ tax load next month but, in any case, excess regulation is the bigger problem.  One of the new homes HSBC is contemplating is Luxembourg.  That is interesting: they would then have to meet all the EU financial regulations but not the extra burden dreamt up by London’s regulators.

It is baffling that the Chancellor, in calling for a single EU market for financial services with less regulation, does the very opposite himself.  A single market needs a single set of regulations and yet the British insist on having our own which can only be additional to the EU rules.  This form of jingoism is suicidal: ultimately it will lead to the demise of the City of London as Europe’s financial capital.

Compliance with these London regulations loads costs on financial services and their customers at least twice over.  The costs of the regulatory agencies have to be more than matched by the compliance teams in the sector.  The competitiveness undermined in the City will be taken up elsewhere in the EU and the global markets.  HSBC are not the only company considering departing these shores.  When they are gone, it will be next to impossible to get them back.

But is anyone in HM Treasury listening?   

Yes, let's blow up the planning system


Today Marina Hyde suggests that instead of spending £7.1 billion to do up the Palace of Westminster we could just hire an arsonist for rather less. Amusing although we think there might be a trick being missed there: shouldn't we be running a competition to see who would pay most for the privilege? But on to other things that we might burn down, blow up. Here's something about "affordable housing":

Coming at the problem from these different starting points, both reports make an estimate the gap between what genuinely affordable homes would cost to build and how much of the cost could be financed from rents. They both conclude that this gap is about £59,000 per house (on average, with considerable variation between London and the rest of England). This is the amount that would need to be provided by a combination of government grant, free or low-cost land from local authorities, contributions from developers and – potentially – cheaper debt through government guarantees.

That's the cost to us of the planning system. Or at least one incomplete but roughly accurate method of measuring it. The value of an asset really should be the net present value of all future income from it and that's roughly what they're estimating there. And yet the land to build a house upon costs around £1,000. It's the planning permission that allows you to build a house upon that land which is the thing that is in short supply. And that's where the £58,000 is. The scarcity value of the planning permission.

Given that planning permission is something that is manufactured very simply within the bureaucracy it is therefore not beyond the wit of man to make more of it. Or we might observe that the last time the free market did provide the housing needs of the nation was the 1930s. Before the imposition of the Town and Country Planning Acts which led to this artificial shortage of planning permissions. Thus the solution to our housing woes is really very simple indeed.

Burn down the planning permission system.

We'd happily pay for the privilege of applying the burning brand: but who is willing to outbid us?

Aim: Here’s to 20 more years


The Alternative Investment Market (Aim) – a sub-market of the London Stock Exchange that allows smaller companies to participate with greater regulatory flexibility than applies to the main market – is today celebrating its 20th anniversary. Aim has seen over 3,600 companies join since its 1995 launch and is now home to around 1,100 small and midsized companies. A less tightly regulated market than the main exchange, Aim provides a lower-cost alternative for small and mid-sized companies seeking investment.

But crucially, once afloat firms can raise further finance from their shareholders without going through the procedures enforced on those listed on the London Stock Exchange. And in a bid to ensure the flexible ambitions of SMEs are served even further, acquisitive companies and those looking to be acquired encounter far fewer controls than those on the main market.

Many successful companies have listed on Aim, including:Arbuthnot Banking Group Arbuthnot Banking Group, previously known as Secure Trust Banking Group, listed on the Alternative Investment Market (having previously been listed on the London Stock Exchange). Over the past five years, share prices have steadily risen, and have seen a 22.66 per cent rise in the past 12 months.

Asos Asos, the online fashion retailer, is one of the most famous success stories since Aim’s debut in 1995. Asos was initially priced at 3p and share prices once soared as high as £70 (now close to £38, after a major swing in value). Since the beginning of the year, shares have risen by 49 per cent.

Fevertree Drinks In 2005, Charles Rolls and Tim Warrillow joined forces to change the face of tonic water, finding an alternative preserver to sodium benzoate and instead using high quality quinine. A newbie to Aim, share prices have soared 65.51 per cent in the past six months. Today, the company sells more than 60m bottles of its premium mixers in 50 markets.

Fitbug Fitbug tracks sleep, steps, and estimates calories burned, and was founded in 2005 by ex-management consultant Paul Landau. At around £40, the Fitbug Orb device affordable compared to its competitors and it is now stocked by major retailers. Its share price soared late last year, and despite a correction this January, is still up 675 per cent in the past 52 weeks.

GW Pharmaceuticals One of Aim’s great success stories, GW Pharmaceuticals – the biopharmaceutical company founded in 1998 and best known for its MS treatment product Sativex – is listed on both the Nasdaq Global Market and Aim. In the past five years, share prices have rocketed from just over a pound, to 655p today.

Majestic Wine A favourite tipple of investors in the Aim for years, Majestic Vintners opened its first wine warehouse in Wood Green in 1980. In 1996, the company floated and it now has 200 stores and an online platform. Despite a rocky 2014, Majestic’s share price has risen 4.67 per cent in the past year.

Portmeirion You may be surprised to learn that a company specialising in tableware has become one of the most successful in the UK today. Over 40 per cent of its sales are to the North American market, and the company sells almost as much to South Korea as it does to the UK. Portmeirion has never cut its dividend and has been paying out since 1982.

Nevertheless, the market has been plagued by poor returns and a host of corporate failures – including some high profile fraud cases (the Langbar International fraud was once branded “the greatest stock market heist of all time”). And let us not forget that the market has performed pretty poorly over the years, with annualised total returns of -1.6 per cent per year when measured over the past two decades.

Nonetheless, Aim shares have surged in popularity since 2013, when they became eligible for inclusion in Isas. The high-risk factor had previously stopped the government from removing the restriction, but a desire to ensure that small and medium-sized companies – which are driving the economic recovery – have sufficient access to funding led to it reversing this decision.

It was the right choice: without Aim, there was a risk these companies would have turned to Nasdaq, or simply failed to grow. Research from Grant Thornton has also revealed that the companies listed on Aim paid £2.3bn in taxes in 2013 and directly employed 430,000 people at the end of that year.

For investors, Aim shares remain one of the most tax-advantaged options. If held through an Isa, benefits include no capital gains tax (CGT), no tax on dividend income, and no stamp duty. In addition, once certain Aim shares have been held in an Isa for a two-year period, they can qualify for Business Property Relief (BPR) and thus up to 100 per cent exemption from inheritance tax (IHT).

But the market is volatile: in 2008, for example, it lost around two-thirds of its value. Neither does the market offer plain sailing for the smaller companies that choose to list on it. Analysts predict that floating on Aim can cost anywhere between £400,000 and £1m – so for businesses with a projected market capitalisation of less than £25m, it may not be worth considering. 2014 research from accountancy firm UHY Hacker Young found that professional fees paid by companies to brokers and nominated advisers for a placing on aim accounted for 9.5 per cent of all funds raised.

And many of the mining, oil and gas companies (which account for a whopping 40 per cent of the market) that listed on Aim have since gone bust – among them ScotOil, African Minerals and Independent Energy Holdings. Firms involved in exploration for natural resources are among the riskiest of all: if a company digs for oil and there’s none to be found, the money raised for exploration has all but gone down the drain.

But should the government be doing more to serve the needs of smaller companies? Xavier Rolet, chief executive of the London Stock Exchange, certainly thinks so. Compared to the US, there are relatively few UK companies that progress to mid-size (and then on to become multibillion pound corporations like Facebook or Google). And as Rolet recently told the CBI:

“The entire business and financial community is working to nurture and celebrate these firms. But we must continue to challenge the status quo and not become complacent. We need to carry on fostering, through policy and practice, a richer, more diverse entrepreneurial ecosystem, so that the UK’s high-growth firms can take root and flourish.”

Rolet is right. Although floating your company isn’t the only way to grow a business, it needs to remain a workable option: particularly if we are to get the share-owning democracy that so many in the current government crave.

This article was first published by The Entrepreneurs Network.

The Bank of England’s non-convincing non-response to yesterday’s ASI report on its stress tests


The Bank of England declined to comment on the ASI report “No Stress: The flaws in the Bank of England’s stress testing programme,” released yesterday. They did however point to evidence given by Bank of England official Alex Brazier to the Treasury Committee, in which he described the stress tests as “really tough”.

Oh yeah? 

Well, the stress assumes that GDP growth falls to -3.2 percent before bouncing back, inflation rises to peak at a little over 6.5 percent, long-term gilts peak just below 6 percent and unemployment peaks at 12 percent. 

This is not a particularly severe stress when judged historically or by contemporary experience in the parts of the Eurozone, where we have much larger falls in economic activity and much higher unemployment rates.

The impact on this supposedly severe test on the banking system is also very mild. The unweighted average of capital to risk-weighted assets falls from 10 percent to a low of 7.3 percent before bouncing back a bit, and there is a similarly mild dip in aggregate profits. One gets no sense of large losses on banks’ bond or interest-sensitive collateral and loan positions, and the Bank’s scenario is notable for the absence of any major institutional failure: the scenario omits the severe knock-on effects one would expect from a severe downturn. 

This suggests to me that the modelling of the banks’ response to the external shocks assumed in the stress is, well, not particularly stressful. 

One would like to stress that the whole point of a stress test is to actually stress. 

Kevin Dowd is the author of our new publication 'No Stress', which you can read here

Compass come up with the most wonderful ideas


Compass is that little gabfest that wants to pull Labour in a more lefty direction. Which is lovely of course, the more Corbyn-like it becomes the less anyone else ever has to worry about it winning an election ever again. But it also does have to be said that the folks at Compass aren't really all that au fait with reality. Which is rather part of their charm in fact:

Sales offer a one-off windfall – the family silver can only be sold once. They mean the permanent loss of collectively owned public assets, and the income that they deliver over time, both built up over many decades. Although such sales can reduce the cash debt at a given moment, they aggravate the problem of public indebtedness as the asset base which helps to balance the debt shrinks away. This is simple short-termism that will be paid for by subsequent generations.

Yet there is an alternative approach that would limit the long term impact of persistent privatisation. The sell-off of what remains of the family silver is set to continue, but at least the proceeds should not be passed lock, stock and barrel to the Treasury.

Instead of disappearing into the Treasury black hole, the proceeds from privatisation could instead be paid into a newly created Public Investment Fund, a collectively owned, social wealth fund. In this way, the benefits of historically accumulated public assets could be used to fund a range of public projects that benefit society as a whole, including investment in economic and social infrastructure. There would also be much greater transparency in the way the revenue is used.

Strangely, we find that we agree with them. Yes, instead of privatisation receipts being frittered away on whatever the government of the day think will buy it votes, why not have a fund that's all about investment? Which is where reality raises its ugly head. We've already got one of those, it's called the national debt. For that national debt is the accumulated balance of public "investment" in all these lovely things that are being sold off. And we're OK with the idea that the lovely profits that we're all making from selling off those public assets be reinvested in creating the next generation of them that can be sold off in the future.

But do note what profit means: it means that there will be an excess left in that national debt, that there will be a national surplus, after we've done our privatising. For it's only if that is true that we can say that those past public investments have been profitable. So, when Compass manage to identify those assets that can be sold off to pay off the entirety of that national debt, that national debt which is the result of all of those past public investments, we'll be right there with them calling for not only the sales but also of the proceeds of those sales to that special fund. And then, once they've shown that public investment is indeed profitable then we'll let them do some more, shall we?

The Chancellor should unleash his inner self


As Chancellor of the Exchequer Nigel Lawson made it a feature that in every one of his budgets he would simplify taxes and abolish at least one tax altogether.  George Osborne has been dealt a difficult hand, but has played it reasonably well, achieving the highest growth rate in Western Europe, and helping the UK economy create more jobs than the rest of the EU combined, more than 1,000 each day.

One senses that he is at heart a believer in simplifying taxes and lowering them wherever possible.  He wants to emulate Nigel Lawson, perhaps, but is constrained by the need to bring down the deficit and the debt.  Nevertheless, he could take his first steps down Lawson Street in his July budget.

First the abolition.  He should end stamp duty on shares.  This tax diminishes the capital available to companies for investment and expansion.  It takes money from pension funds and decreases both the size of people's pensions and the incentives to save for them.  Its abolition would immediately increase the value of listed companies, augmenting their capital, and, as Tim Worstall points out, extra capital allied to labour increases productivity and the potential for wage increases.  Abolition would thus be a gain for both pensioners and workers, and the growth generated would soon repay its Treasury shortfall.

For simplification, National Insurance must be a prime candidate.  It is a tax in all but name, and a complex one at that with its various classes and sub-classes.  It is calculated differently from income tax and with different thresholds.  It is a huge burden on employees, especially on the low-paid.  Even the so-called "employer" contribution in fact comes from the wage pool that would otherwise have gone direct to the employee.  Many business leaders and economists have called for NI to be merged with income tax.  The Chancellor could make a start in his July budget by having NI calculated in the same way as income tax, and subject to the same thresholds.  This would avoid many of the costs that the present duplication entails, as well as making life simpler for employers calculating deductions for their workers.  It would also make it more transparent.

The call, therefore, is for lower taxes and simpler taxes.  Over to you, Chancellor.