There's a serious problem with this living wage idea

The Living Wage Commission has pronounced: yes, it would be an exceedingly good idea if everyone got the living wage. Bit difficult to think of them saying anything else really, eh?

When this was all first announced, the existence of the Commission and the preparing of this report, I took the time to write to the Archbishop. To make my usual point that the difference between this desired living wage and the current minimum wage is entirely the income tax and national insurance that we, heinously, try to charge to the working poor. Clearly not much note was taken of this point for in the report they note that:

Savings and additional revenue An analysis of the impact of the fiscal impact and public sector cost of extending coverage of the Living Wage provided by Landman Economics for the Living Wage Commission shows that universal coverage of the Living Wage would result in a net increase in revenue to the Treasury of £4.2 billion. This is shown in Figure 3 and is made up of an additional £2.8 billion in increased tax and National Insurance receipts, together with a decrease in in-work benefit and tax credit spending of £1.4 billion.

It's not just that they've ignored the point it's that they positively revel in it. They really are saying that it's a good idea that we should raise the incomes of the poor so that they can pay more in tax. Completely missing the point that what we actually desire is that the poor have more money after tax, more money to consume with, meaning that we should be attempting to reduce the tax bill on those working poor.

This isn't just an economic point this has crossed over into being a moral one. They're glorying in the idea of taking more money out of the pockets of the poor: this is simply an inexcusable moral stance.

The BNP Paribas $9bn. and International Financial Regulation

Over the weekend BNP Paribas accepted a US $8.9bn. fine for breaking US sanctions on Sudan, Iran and Cuba and concealing that from US authorities.  One question arising is whether the US authorities are using regulation to gain competitive advantage over foreign banks.  This was a French bank that broke no French or EU law and dealt directly with non-US sovereign countries.  Why should the US be allowed unilaterally to impose US regulations? The technical reasons are that BNP Paribas relies on the US dollar for global trading and that they concealed their dealings from the US authorities, i.e. the sin was the concealment.  Of course, revelation of the deals would have got them into the same hot water.

Supposing all this had been in sterling in the days that the pound was the global trading currency.  Had the French then infringed some British law, would we have been able, successfully, to remove a ton of money from their vaults?  The thought is ridiculous.

The reality is that the US is using regulation to gain competitive advantage for their banks.  EU financial services have to comply with regulation in their own member states, additional EU regulation AND US regulation wherever in the world they may be trading.  US financial services have only to comply with US regulation unless they are trading in the EU.

The US authorities seem to be fining non-US banks more often and by larger amounts than US banks.  That raises the suspicion that the US authorities are partisan but it may, of course, be that US banks are simply more virtuous.

The US authorities using the extra muscle of the US unfairly is only the smaller part of my point.  The global regulatory authorities are not in competition trying to attract more companies to come under their jurisdiction by lighter touch regulation.  This kind of Darwinian evolution may apply to corporate tax rates where company HQs can, and do, move to lighter tax zones.  The regulatory authorities are trying to bring more and more companies under their control. Financial regulation is not shrinking due to competition between regulatory authorities, quite the reverse.  It is growing because of competition between jurisdictions trying to enmesh more companies in their tentacles.

Those who are against excessive regulation should not attack just the number of regulations from any one authority but attack the number of authorities seeking the regulate their business.  The fewer authorities, the better.

Of course we should have a more progressive tax system

The Guardian is getting very het up about the fact that we don't seem to have a very progressive tax system:

These last two charts suggest that while redistribution of income does happen, it’s mainly due to receipt of benefits by the poor instead of progressive taxation.

There's a reason why we don't have a more progressive system too. Which is that there's a limit to how much you can tax incomes and capital returns before you manage to completely cease all economic growth (or, in the extreme, all economic activity). Which means that if you then still want to stuff ever more gelt and pilf into the maw of the State then you've got to tax consumption, sins and other things, those consumption taxes inevitably being regressive taxes.

And we're around and about at those limits of income and capital taxation. The Treasury certainly believes we are: they've said that income tax at 45% (plus employers' NI etc) is the peak of the Laffer Curve, capital gains tax at 28% is similarly at that peak.

At which point we find that we thoroughly agree with The Guardian: we too believe that the UK tax system should be made more progressive. And given that we cannot increase taxes on incomes any further and that consumption taxes are regressive, this means that the only way to do so is to reduce the income taxes on the poor. So, as we've said around here before, the personal allowance for both income tax and NI (yes, employees' and employers') should be raised to, at the very minimum, the equivalent of the full time full year minimum wage. Or around £12,500 at present.

This would make The Guardian happy as it would make the tax system more progressive. It would also mean having to shrink the size of the State which would make us doubly happy. What's not to like?

Is the UK too equal or too unequal?

Whether the UK is too unequal or too equal is not something that actually has a certain answer. Sure, we can posit that some of the things we do to reduce inequality might make us all poorer (and some of the things we do do) but what is the "right" amount of inequality is something that's up to the moral precepts of each observer.

However, what we can do is make sure that we understand how much inequality there actually is. That figure above comes from here. My thanks to Christie Malry for pointing it out. And yes, of course the ONS is telling us the truth here. It might well be that you think that the original inequality in the UK is unfair, something that should be changed. That the top 20% have 15 times the income of the bottom 20%. But do note that things are indeed done to change this. So much so that the final inequality, after all taxes and benefits are accounted for, is only 4 to 1. It's even possible to think that this is still too high but everyone should be able to agree that it's very different from 15:1.

Malry has named my repeated insistence that this difference matters "Worstall's Fallacy". We can't make decisions on whether we should be doing more about something unless we look at the effects upon whatever it is of what we're already doing. We need to know how much we're already changing income inequality before we can demand that more (or less) be done. The same is true of wealth inequality, people living under the poverty line, even the concept of the Living Wage (where the only difference between that Living Wage and the current minimum wage is the amount that we shamefully tax off those earning low wages). We muct look at the current end result before deciding upon any future action. BTW, the TUC did a very similar exercise a couple of years back but looking at the top and bottom 10%s rather than quntiles. Inequality of market income dropped from 30:1 to 6:1 in their results.

We already do a great deal to reduce income inequality in the UK. And the only way we can possibly decide upon what to do next is by acknowledging that fact and discussing whether, after all of the taxes and benefits, we have too much or too little income inequality.

The EU's purpose may depend on tariffs

What does business want from the European Union? One answer is that of the Confederation of British industry, in its report Our Global Future, which I came across recently. That answer is that business wants to remain in – but ideally, in a reformed EU.

One reform they would like is open trade. The UK is well placed to trade with developing countries, but the high tariff (and non-tariff) external barriers that we sign up to as EU members make this nigh-impossible. Also, the CBI wants the single market to be completed. At present there is a single market in most goods (though often it is very much harder to export to other EU countries than it should be under the rules). But we are still waiting for a single market in financial services, in which the UK has a particular strength.

Will the CBI get the reforms they want? Unlikely. There are just too many vested interests wanting to prevent the UK's financial sector from getting in to their markets. And if the EU were to drop its barriers against foreign trade, why would anyone want to remain an EU member? They could quit and still get the free trade benefits. The EU would have no members left, except the ones living on its subsidies.

People dream of other scenarios. A Norway solution where, as an EFTA member, it enjoys access to the EU market. The downside is that it also pays a contribution to the EU despite getting no say over how its rules are made. But then the UK gets no say in how its export markets in the US, China and elsewhere set their rules either. The Switzerland arrangement has been mooted. It has negotiated scores of bilateral trade deals with the EU. But it is a very complicated set of arrangements. Another model is Turkey, part of a customs union with the EU. But again, it faces non-tariff barriers and has no say in things.

Sadly the EU cannot grant any such arrangement to anyone – otherwise the whole membership, led by the UK, would be queuing up to demand the same concessions. So I remain skeptical that the EU can be reformed in any meaningful way. Of course, if you believe it has a mission in promoting ever-closer political and cultural union, it still has a purpose. But economically, it can only stick together if it keeps its trade barriers high. That is not good for the EU, nor the world.

Well of course we should reform inheritance tax

Another report into inheritance tax and another observation that it doesn't actually do what it says upon the tin:

People with estates worth many millions are able to avoid the brunt of inheritance tax through complex schemes, including moving the cash offshore or investing in agricultural land and small business shares. Those avenues are closed to "moderately well–off" people whose only assets are their home and pension, Mr Johnson said.

It's just about possible to see that the great plutocratic fortunes should be broken up every generation or so to prevent the fossilisation of society: if that's something you tend to worry about which we don't very much. But to have a taxation system which attempts to do this and then doesn't is obviously entirely dysfunctional.

Our current system manages to tax the small capital of the bourgeois while leaving those plutocrats untouched. We therefore really rather do want to change that taxation system.

This is not, I hasten to add, the official ASI line here, rather being a personal musing. But I take it as a given that we don't actually want to tax the petit and haute bourgeois accumulations of capital. Far from it, we'd much prefer to see modest estates cascade down the generations. For reasonable amounts do provide freedom and liberty. In that currently fashionable phrase, enough to do anything but not enough to do nothing. It's also, even if you do worry about the plutocrats, not how much money is left that is the problem but how much money is received. Someone leaving a few billions to be spread among thousands is very different from a few hundreds of millions being left to just one.

So I would muse that we might want to move to a system something like the following. It is the receipt of an inheritance which is taxable, not the leaving of one. Further, there's a substantial lifetime exemption from having to pay tax on receiving one or many. Several millions perhaps: that need to still do something amount.

Alternatively, of course, we could just move the entire taxation system over to being a consumption tax. In that manner we don't actually mind who has what amount of capital nor where it came from. We just tax people when they spend with the capital or the income from it. and given that that's the general trhust of the Mirrlees Report there's good academic backing for the plan.

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The Living Wage campaign is wrong-footing the right

I’ve long taken an interest in the Living Wage campaign, both as an opponent of their ultimate goal but also as an admirer of their strategy. Their aim, I believe, is the statutory enforcement of a ‘Living Wage’, which would effectively mean a pretty hefty hiking of the National Minimum Wage across the country. Though well intended, this is a bad idea: we would need a lot of evidence to discard the Econ 101 principle that price floors cause oversupplies, which in the case of labour we refer to as ‘unemployment’ and the evidence is, at best, divided.

But the Living Wage Foundation (and the LW campaign in general) has been far too canny to call for this outright. Instead, they have focused on getting big firms like Goldman Sachs to voluntarily sign up to pay their workers at least a Living Wage.

This isn’t hugely significant in financial terms: it's fair to assume that most employees and contractors at firms like Goldman Sachs were already earning above the Living Wage before they signed up. A jump from the NMW to the London Living Wage is very significant from the point of view of the individual employee (an extra £100/week for someone on 40 hours a week) but not too significant from the point of view of an employer like Goldman Sachs.

For these firms, signing up to pay a Living Wage may be a relatively cheap PR move. Or, to go back to that Econ 101 point: what these firms are paying for is not just the cleaning, but the image boost that comes from paying all of their their employees well. It’s possible that they’ve reduced employee breaks or labour hours, as often happens when the minimum wage is raised, but who knows.

I'm very pleased that Goldman Sachs is paying its cleaners more. I'd be pleased if more firms spent more of their marketing budgets on cash transfers to low-income workers in this way. But, as they say on the internet, the obvious point is obvious: even if Goldman can afford to pay a small number of its workers more to improve its image, firms in a less financially secure position may not be able to increase wages without bringing on the negative side effects previously mentioned. And, again pretty obviously, such PR only works if there are other firms that do not pay their workers a Living Wage.

The other interesting thing that the Living Wage Foundation has done is focus on government contractors – usually cleaners – who earn less than a Living Wage. Again, I don’t really mind this – there are reasonably good arguments that the government should set pay for civil servants as competitively as possible, but when it comes to cleaners earning a pittance, who really cares? As 'wastes' of taxpayer money go, this is hard to get worked up about.

This is all interesting to me because it puts free marketeers in an extraordinarily difficult position. Say nothing and the case for the Living Wage appears to be unopposable – perhaps allowing it to gain enough credibility that eventually it seems completely obvious that it should be legislated for. Go up against them, and we’re in the bizarre position of at least appearing argue against a private firm voluntarily paying its workers more because of consumer pressure. Isn’t that exactly what the market is supposed to do?

Low pay is a serious problem that will probably get worse before it gets better. We on the right do have our own answers: Tim Worstall has pointed out again and again that not taxing minimum wage workers would effectively give them a Living Wage. And reform of the welfare system to subsidise wages (perhaps through a Negative Income Tax) would be a very market-friendly way of helping the poor. But these don’t seem to have gained much traction as specific alternatives to raising the minimum wage. I'm left feeling quite glum: a voluntary Living Wage is basically a good thing, but a mandatory one would be terrible. Is there anything we can do to oppose one without seeming to oppose the other? I'm not sure.

George Monbiot really is a national treasure, isn't he?

If it weren't for the fact that The Guardian is where we send our national treasures to fossilise already we'd have to send George Monbiot there tout sweet. For he's now come up with an argument so absurd that nothing other than the journalistic equivalent of a peerage, that home at Comment is Free, could possibly be appropriate:

Planning laws inhibit prosperity. That's what we're told by almost everyone. Those long and tortuous negotiations over what should be built where are a brake on progress. All the major parties and most of the media believe that we would be better off with less regulation, less discussion and more speed. Try telling that to the people of Spain and Ireland. Town planning in those countries amounts to shaking a giant dustbin over the land. Houses are littered randomly across landscapes of tremendous beauty, and are so disaggregated that they're almost impossible to provide with public services. The result, of course, is a great advance in human welfare. Oh, wait a moment. No, it's economic collapse followed by mass unemployment. Spain and Ireland removed the brakes on progress and the car rolled over a precipice. Their barely regulated planning systems permitted the creation of property bubbles that trashed the economy along with the land.

No, really, we've not made this up. That really is what he said. That the absence of strict planning regimes creates housing bubbles. That free supply of land to build upon increases the price of housing.

This is, of course, a confusion of the difference between correlation and causation. It's true that the two countries had liberal planning systems (the Spanish one driven more by bribery than the law but still) and it's also true that the two had housing booms and subsequent busts. But the causation is not between those two things: rather, it's to their joint membership of the euro. Both economies were doing well while that of Germany was not. And within the eurozone interest rates were set to benefit the German economy, not the booming periphery. Thus rates were far too low for the broader economic conditions in Ireland and Spain: thus an asset bubble.

It was free money that drive those booms, not free planning permissions.

Video: Adam Smith Lecture 2014 by Scott Sumner

Scott Sumner's Adam Smith Lecture, delivered last week, is now online. For my money it's the best outline of his view of the Great Recession and the correct role of monetary policy that I have yet seen. Scott's presentation can be downloaded here, and Scott wrote about his trip for TheMoneyIllusion here.

Should we be concerned about the UK's current account deficit?

Every year since 1984 Britain has run a deficit on the current account of her Balance of Payments. What this in effect means is that each year British businesses and consumers have purchased consistently more goods and services from abroad than they have been able to sell. But is this a problem?

In his repudiation of mercantilism, Adam Smith believed that exchange rates and world trade contained a self-correcting mechanism. A trade deficit precipitates an outflow of currency from Britain, which in turn demands a greater supply of sterling, thereby naturally devaluing the currency. This in turn has the effect of making goods and services appear more price competitive, and should readjust the imbalance in trade to equilibrium.

However, since the 2008 recession and despite a 25% fall in the value of sterling, exports have increased by just 5%. Britain was unable to repeat the export-boom of 1992 which fostered a strong recovery from the 1993 recession.

On the one hand, the deficit stands at around 4.4% of GDP, and therefore is hardly an unmanageable anchor on the economy. Moreover, Britain has undergone significant restructuring since the end of the Second World War, away from manufacturing goods, and toward exporting invisibles, such as financial and education services. One effect of this has been that an economic upswing in the domestic economy tends to correlate with a widening trade deficit. British consumers and businesses have a considerable hunger for imports, and as they become wealthier and more prosperous, they buy goods from abroad at a faster rate than they can sell them overseas.

The import hunger is partly encouraged by the UK’s open and liberalised economy. Free trade pushes down the price of imports and provides domestic producers with the added pressure of foreign competition – a strong incentive function to become more efficient. Firms such as Dyson, with a strong Research and Development base in the UK, tend to import manufactures from South East Asia due to the absolute cost advantages these countries offer. Really then, the alternative to the current arrangement would be a return to the 1970s – with inefficient, over-manned industries dominating the landscape - and promoting import substitution. This would make most contemporaries baulk.

Perhaps then a current account balance is merely a reflection of the times we live in. Globalisation and the subsequent fall in transport costs have allowed the free movement of goods across national boundaries. The economy is simply adjusting to David Ricardo’s theory of ‘comparative advantage.’ Indeed, the UK will not return to building battleships or manufacturing textiles because production costs simply won’t permit it. Far better we produce the goods we are competitive at producing – in aerospace and pharmaceuticals – and focus on service exports – financial and legal.

The only caveat, perhaps, concerns the underlying message the persistent trade deficit is transmitting about Britain. A weak export base implies a fundamental lack of competitiveness in the economy. Productivity levels in the UK have been low by European standards for decades now. According to the ONS, in 2011 output per worker in the UK trailed 21% behind the rest of the G7. In effect what this means is that a British worker must work for 21% as much time in order to produce exactly the same amount of goods as his or her equivalent in France or Germany. This is a concern.

The government’s investment in British industry: through cutting corporation tax, encouraging inward investment and developing tight and highly skilled labour markets shows encouraging signs of progress in addressing these deficiencies in the UK’s competitiveness.