Erm, why?


Paul Mason says something that confuses us greatly. It's as if he's never actually heard of the concept of spontaneous order:

But in a smart city, you need data to flow freely across sectors that, in the commercial world, would normally be separate. The energy system needs to know what the transport system is doing. And the whole thing needs to be run like a “God game”: the city government, not the individual, must exercise control.

This is exactly the wrong lesson to take from these new technologies. But it's that old idea again, the idea that "someone" must be in control. Someone must run the country, someone must run the economy, someone must pan and detail what people and systems must do. And we've good evidence, we normally call it the 20th century, that this isn't how to make the world function effectively.

Certainly, there need to be rules, but those that work best are simply codifications, clarifications if you will, of what people are doing already. So look to society, see what people are doing, then write down what people are doing. But the idea that there needs to be a plan, a controller, over and above this is simply wrong.

Which is rather the point of these new technologies. Yes, at our previous stage of technology it was necessary for people to plan cities to some extent. But the entire point of the new level is that we can just hand this back to voluntary interaction. There doesn't need to be a Fat Controller in a system where we can all effectively interact.

That's entirely the point. We're now able to make cities work, if we're to believe this smart city hype in the first place, as markets, not planned systems. And markets don't need that God running the game, they manage it quite happily on their own.

Free Market Welfare: The case for a Negative Income Tax


The government should replace tax credits, Jobseeker’s Allowance, the Universal Credit, and most other major welfare payments with a single Negative Income Tax, according to a new report from the Adam Smith Institute, Free Market Welfare: The case for a Negative Income Tax. This Negative Income Tax (NIT) would act as a minimum income guarantee for all British citizens and be tapered away as people’s earnings rise through work. Britain’s existing welfare programmes are costly to administer, complicated to navigate, and designed for a postwar-style labour market that no longer exists, the paper argues.

Under a Negative Income Tax, if a citizen earns nothing then the automatic NIT payment will be their entire income. As the individual earns more through work, the payment is gradually withdrawn until the citizen begins paying tax. The payment scheme is structured so that the claimant is always better off working more hours or taking higher wages than in their current position. These payments would be automatic for workers within the PAYE system.

The report says that the biggest welfare challenge future governments are likely to face is chronic in-work poverty, as globalisation and technological change lead to lower productivity and pay growth for some bottom and middle earners. This means that Britain’s current welfare system is outmoded and must be restructured to support low-wage workers throughout sustained periods of low-paid work, not just when they are out of employment altogether.

Systems like tax credits and the Universal Credit aim towards this goal, but are still too complex. Instead of a complicated web of different payments, the government should make just one, the report’s author Michael Story argues. Recipients would decide themselves how to spend their benefit, and as they earn more in wages, the benefit would be withdrawn at a rate that guarantees work always pays.

A simpler welfare mechanism like the Negative Income Tax could be integrated into the tax system, allowing the government to shut down the Department for Work and Pensions, take many of its 34,000 staff off the payrolls and save up to £6bn in administration costs.

To read the full press release, click here.

Will Hutton's quite right here, of course he is


Sure, we could have done all of these things, we could even do them now:

Britain, for example, could have had a brilliant civil nuclear industry, a vibrant aerospace sector, the fastest growing windfarm industry, clusters of hi-tech business all over the country – and a hi-tech steel industry. Instead it is no better than a mendicant subcontractor. It does not have a share stake in Airbus, while France and China are building our nuclear power stations. Our green industries, once the fastest growing in Europe, are shutting. Only banks and hedge funds are protected and nurtured in a vigorous, uncompromising industrial policy, but they don’t buy much steel. They are the “we” behind which even ultra-libertarian Sajid Javid will throw the awesome weight of the state. Scunthorpe, Redcar, Teesside and the West Midlands are not; they can go hang.

And for once the Observer's subs have got the heart of the matter correct:

There is no need for the laws of supply and demand to destroy our industries

The point is though, that while we could have done all of these things we didn't want to do all of these things nor do we want all of those things to have been done. For we actually want what is produced to be so as a result of the interplay of supply and demand.

Do not forget Adam Smith: the sole point and purpose of all production is consumption. Supply is, in a very general sense indeed, determined by the resources available and the technologies we know about to transform them. Demand is, well, that's us. And so we want what is produced, that supply within those twin constraints of resources and technology, to be determined by the accumulated desires of us all, which is that demand.

Hutton talks about both steel and football. And if it costs more to produce Accrington Stanley than people are willing to support their demand for Accrington Stanley with then it's not just that the club should close it's that we desire that the club should close, as it did. Similarly with steel: if those resources combined with that technology are a net loser to our society then we'd prefer that those resources go off and combine with some other technology to produce something that is a net addition of value to our society.

Hutton is entirely right that we can ignore both supply and demand and construct the economy according to other metrics. Perhaps the personal desires of the head of an Oxbridge college for example. But the point is that we don't want to do that. We actually desire the economy to be run on the basis of supply and demand precisely because demand is what we all want. Not, say, what the head of an Oxbridge college wants.

Of course we expected nothing different from a political statistic but still....


As we all know political statistics are not used to illuminate, rather to obfuscate. An interesting example of which is the campaign that Unite is running about the changes to tax credits. Examples of that, well, yes it is, propaganda, are here:

Teaching assistants, social workers and other key public sector workers could lose more than £1,500 a year as a result of controversial government cuts to working tax credits, according to calculations by the public sector workers union Unison.

They also provide us with a handy little calculator here. At which point we can say two interesting things about these numbers.

Firstly, they do calculate the change in post-tax income that comes from the rise in the personal allowance. But they don't actually include it in their headline number. Which is to be expected, of course it is, but still a bit sneaky.

The second is that they're only calculating the rise in the personal allowance for this one tax year. Entirely ignoring the fact that it has risen substantially over the previous years as well. Which is distinctly sneaky.

The reason we are interested in this is of course that that large, near doubling in fact, of the personal allowance came about as a result of our shouting about it. That it's simply ridiculous that those on the minimum wage, even part time on that, should be paying income tax at all. An imposition upon their incomes that is then topped up by a hand out of tax credits. The adjustment, as we all would wish it to of course, needs to come with the personal allowance rising first, then the hand out reduced. Which is what has happened and thus we would insist that the entire process is evaluated, not just the effects in just the one year.

Finally, of course, there's the one more point. We have also been advocating that the personal allowance for national insurance payments should rise to be the same as that for income tax. And, more controversially, that this should be the same as the full year, full time, minimum wage. At which point, if this were done, the current reductions in tax credits would leave all but those in the oddest of family situations no worse and possibly better off.

That is, as we've been saying all these years, the problem is not that we don't give the poor enough money, it's that we take too much off them. We do not have wage or benefits poverty in the UK, we have tax poverty.

So, as we keep saying, if you want the working poor to have more money then stop taxing them so damn much.

On entirely misunderstanding the mechanics of capitalism


We'd just like to offer our congratulations, once again, to the founder of Corbynomics, Richard Murphy. Congratulations on managing to entirely misunderstand the methods of capitalism and the implications of bankruptcy. Here he is worrying about the possibility of a system of care homes going bankrupt:

The extent of the crisis at Four Seasons, Britain’s largest care home provider, was underscored on Thursday when it appointed advisers to carry out an emergency review of its finances. And:

Four Seasons, which has 22,500 beds in 470 homes, is weighed down by annual interest payments of £50m and debts of more than £500m — meaning it is making less money than it needs to service bondholders.

So, we have another private sector out-sourcing disaster in the making impacting on an enormous number of vulnerable people and their families.

When will we realise that care of the elderly is not something for which the market has any easy solution whether it concerns care or pensions? Deep financialisation and the provision of essential social solutions just do not mix in either case. But I expect the same old excuses to be rolled out this time as in the past.

One day we might have a government with the courage to admit that this is a problem for all of us. Until the problems will keep on coming.

The potential bankruptcy of Four Seasons (we have absolutely no idea what their financial situation is at all, we're only going on the evidence provided by Murphy) is in no manner an outsourcing disaster. It may not be all that much fun for either shareholders or bondholders but it will make very little difference to anyone else, including those elderly people currently living in those homes.

For we've seen this movie before, when Southern Cross went down. Management messed up their financing, the company went bust. But the homes carried on existing, those elderly people carried on living in them, being cared for by the same staff as before. For capitalism is a system which describes who owns things. And bankruptcy is the method by which transfer of such assets (ie, care homes, contracts with people to live in them, with staff to aid them in doing so) are transferred from one group of owners who screw up to others who may do better.

As far as anyone knows there wasn't even a case of one single cup of nice hot tea not being served as a result of that Southern Cross bankruptcy. And there's not a shred of evidence that anything different will happen in any other future such event. Simply because investors who choose the wrong management lose their money. This is how it should be, this is how the system works. And bankruptcy is the process by which we ensure that it does.

Quite why the transfer of a group of assets from possibly erroneous or not very good management to that of some other group of people is a disaster we're really not sure. Perhaps Jezza, with the aid of his adviser, will be able to explain it all to us one day from the Dispatch Box.

Jamie Oliver is wrong in theory here, not just in fact


While banging the drum for his illiberal and unnecessary sugar tax, Jamie Oliver told Parliament the following:

The tax, he said, would “remind [manufacturers] who is boss. And that is child health and the government.

“We should work out who is running the country. Is it businesses – who are profiting from ill health in our country – or is it us?”

More important than the tax itself, he said, would be the message it sent that the government “is willing to fight tooth and nail for public health, and especially children’s health”.

The tax system is not a communication method. We can send messages by fax, letter, email, telephone call and there might even be the occasional telex left lying around. But tax is not a messaging system so that's not the way we send messages.

Secondly, the only people who profit from ill health in the UK are those people working in the NHS who get paid to deal with it.

But over and above all of this is the entirely mistaken theoretical view he has of the place of government. They do not, and we do not want them to, run the country. This has actually been tried of course. There have been governments which tried to determine who produced what, at what price, and then who was able to consume them and in what volume. We usually refer to such failures as Soviet style socialism. It just didn't work: neither in restricting access to the goods that were considered verboeten (for example, Gorbachev's restrictions on alcohol led to hte entire country running out of sugar as bathtub vodka was made) nor in any other conceivable measure of the Good Life.

What we do want government to do is those things which both must be done and which can only be done by government. Given that we're all entirely capable of determining whether we'd like a nice glass of fizzy pop or not, this isn't an area where we need the government's help. Thus the proposition fails, on both theoretical and empirical grounds.

Why is Mr Osborne going to wreck the best bus industry in Europe?


In London, Belfast and most European cities, buses are regulated and run by local authorities usually through a contracting model. They require very substantial public subsidy. Outside London, mainland UK buses are deregulated with private bus companies making all the decisions about when and where buses will run and what fares will be charged. They take the commercial risk. Because London has a highly developed bus lane network combined with a congestion charge, along with high population density and a growing economy, bus use has grown considerably in recent years. Despite this high use, the regulated system is so bureaucratic that London buses need a subsidy of about £600m per year. Belfast buses make large losses, but as they do not have London funding levels, they are facing big services cuts.

Outside London 90% of buses do not require any subsidy, the rest are mostly deep rural services and a few evening and Sunday services. Where local authorities are very pro-bus, usually to protect their town and city centres from congestion and pollution, or because it is impossible to provide a bigger road network, bus use is growing and companies are providing more comfortable buses with free Wi-Fi.

Places like Nottingham, Reading, Brighton, Oxford and Edinburgh have very high and growing levels of bus use. Customer satisfaction is high. Buses carry about four times as many passengers as the rail network and have the same levels of safety.

Despite the evidence, some of our bright local authority transport officers have decided that the buses are popular in London because they are regulated rather than because of the basic economic and financial situation there. For years these officers have been trying to get buses re-regulated and pass into local authority control. They have persuaded themselves, again against the evidence, that the huge costs of contracting could be met by cutting the profits of bus companies.

The outcome would be huge losses for the local authority, which would be passed on to council tax and business rate payers, along with big cuts to the bus network. Recently Sheffield City Council which had been a bellwether for regulation, changed its mind and signed up to a partnership arrangement with the bus companies. This will cost them very little, but they already have higher bus use and less congestion and better bus services for Sheffield are being delivered.

The puzzle is that in the name of devolution Mr Osborne is unnecessarily giving local authorities contracting powers (being described as franchising – but it isn’t in reality!) with a Buses Bill due to go through Parliament early next year.

A few dinosaur led local authorities such as West Yorkshire and Tyne and Wear are likely to rush into contracting, destabilising city budgets and undoing some of Mr Osborne’s attempts and deficit reduction. If they succeed there will be knock on effects for all Britain’s bus networks, even the best, because companies will no longer be able to raise capital for new buses from the private sector and quite quickly buses will become old and unreliable. Mr Osborne will have ruined one of the Conservative Party’s best privatisations!

Once more on trade and the EU


As Caparo Steel crumbles into the dust we've got the usual appearance of someone arguing for state aid. We don't, we're afraid, accept this argument:

Our steel industry today is in exactly the same position. China’s state-owned enterprises are not just selling steel below the cost of production in the UK. They are selling below the cost of production in China. This is not a fair fight to discover who is the most efficient producer of steel. It is a geo-political strategy for economic domination. As soon as Britain’s steel industry has disappeared, the price will go back up again and major steel consumers like the construction industry and car manufacturers will have no escape from higher international prices.

There's very little evidence that this has ever been a successful strategy for anyone. For no one can ever find a case where the newly victorious survivors of the price war have been able to raise prices enough to make up for their losses in the price war. Such attacks just don't work as an economic strategy: as the results of the Chinese rare earths war show. Once China thought it had an uncontestable monopoly, in 2010, it raised prices significantly. This called forth some 400 companies (at one count at one time) to contest that monopoly and now prices are, only 5 years later, well below what they were in 2010.

Further, even if it is true that prices will rise in the future, it makes absolutely no difference at all whether some of the surviving factories are in the UK. Because the basic problem is that there's more steel plants, making more steel, than anyone wants to use at profitable prices. Therefore some of those plants must close. Offering state aid to certain plants makes no difference at all to that calculus. When the requisite number of plants have closed, whether those closing be in China or the UK, then that steel price will rise again and all will be paying that international price. And all will be paying that international price whether some of the survivors are in the UK or not.

Thus, state aid makes no difference at all to the future price of steel to UK manufacturers. It's just a cost to us taxpayers: a cost that we shouldn't have to bear.

There's also this remarkable lack of knowledge about the situation at hand:

Second, the Government has failed to make full use of the powers granted by the World Trade Organisation (WTO) to prevent nations from undermining economic competition. Selling below the cost of production (called dumping in trade jargon) is against WTO rules. The EU accepts that Chinese steel is being dumped and restrictions have been accepted, but nowhere near enough. Perhaps our government thinks that pursuing claims under the WTO rules is abandoning free-market principles. Far from it; enforcing the rules is upholding free enterprise.

The UK doesn't get to talk to the WTO. Extra-EU trade is a sole competence of the EU.

The Coils of HMRC

To portray the same agony, a modern sculptor would depict Laocoön wrapped in the coils of the tax man.  There is no escape.  HMRC does not do email.  Letters go unanswered for months and one has to wait 45 minutes on the phone before being cut off. The harassed foot soldiers who deal with us are not to blame: their generals creating these labyrinthine coils are.  In a May 2010 speech to the CBI, the Chancellor promised radical tax simplification, saying “The tax system has become hugely complex over the last thirteen years. Since 1997, the tax legislation handbook has more than doubled in length. It is now over 11,000 pages long.”

One can question whether the length of the handbook, or the size of annual Finance Acts, accurately depicts tax complexity but there is no question that both have grown hugely since the 1980s and the Chancellors are mostly to blame.  Tolley’s Annual Tax Guide, at nearly 900 pages, has grown rather than shrunk under this Chancellor’s regime. Up to 1992, Finance Acts averaged below 200 pages.  They then doubled in length.  But rather than exercise any restraint, Osborne’s record is even worse: 668 pages in 2014.  2015 was curtailed for the election but he still produced 352 in March and a further 210 pages in July.

The Office for Tax Simplification was set up in 2010 and is now being made permanent. It has published over 30 reports and made 402 recommendations, starting with abolishing 43 tax reliefs – nice for the Treasury, not so nice for those losing out.  But these are tinkering round the edges.

Rather like the government seeking to engage in more wars with fewer soldiers, the Chancellor has simultaneously cut personnel numbers in HMRC – hence the lousy taxpayer service.

To give, briefly, a worm’s eye view, the forms they sent were completed and returned in early August.  Just before the 31st October cut-off, they were sent back on the grounds of being the wrong forms.  No mention of what the right forms might be.  Several hours of holding my phone next to my ear later, I was informed as to the correct forms.  The file note on that had not been passed on.  

Apparently, if the 31st October deadline was now missed, I would be fined as the original submission “did not count”.  Not to worry: I would win my appeal but I had to be fined first in order to appeal.

The new forms, far more complex than the old, appear to have arisen from HMRC’s new but heavy-handed anti-anti-avoidance rituals.  They have no sense of proportion: my few quid does not need pages and pages of questions.  I can prove my income, where it came from and that one piece of paper would have all the information needed to compute my tax.  The point of the 31st October deadline is that the computation is their job, not mine.  If we were talking large sums, it might another matter.

The same civil service mentality applies money laundering legislation to this village church’s flower fund.  Coils within coils.

Please, George Osborne, give us the radical tax simplification you promised.

Protecting home industry is not a steel


The amount we've heard from politicians and social commentators this week on how unfortunate the UK steel industry job losses are only goes to show how many people are still unapprised of even the basics of economics. Yes it's true, because China can produce and sell steel so much more cheaply than us, it will have a negative effect on our steel industry. But overall that's a good thing - short of wanting buyers to pay inflated prices for UK steel rather than more competitive prices for Chinese steel - which, frankly, only the most narrow Anglo-centric person could desire - it has to be realised that this is just the market's way of signalling that UK steel production is now less efficient than production in other countries, and that the people in the UK steel industry either need to be more competitive or look to do something else. But even if you can't make that argument fly - and goodness only knows why you couldn't - here's something else you should know: artificially protecting UK  industries to stave off foreign competition hurts other UK industries in the process. This was the wisdom of international trade laid down most famously by David Ricardo. Let me illustrate how impeding the process of free international trade actually harms the people the government wants to protect – its own industry (and thus, its own citizens).

Let’s suppose there is a car factory in Newcastle that isn’t doing as well as the executives or the government would like, due to consumers’ preference for cars in Japan. The government introduces a policy that favours car production in Newcastle over car imports from Japan. How on Earth could that not be good for the British economy – Britain’s gain is Japan’s loss, right? Wrong. Quite simply, what you put into the pockets of the car factory in Newcastle you take out of someone else’s pockets elsewhere in Britain (as well as having people probably paying more for their cars). Consider Slough’s boiler factory; what you don’t see is an almost invisible chain of events; the boilers made in Slough are shipped off to Japan and sold to a company that makes its money producing nuclear reactors, the buyers of which are companies who trade in mineral oils, and those companies deal with companies who make cars in Japan and ship them to Britain.

In other words, there is a complex economic process that is going on outside of your peripheral vision, whereby both the car factory in Newcastle and the boiler factory in Slough are both bringing cars into Britain. That is to say, if you protect the car factory in Newcastle from competition you must damage Slough’s boiler factory because somewhere down the line they are the competition.

The Newcastle car illustration is precisely how the argument should be applied to steel in Scunthorpe and Lanarkshire. So the next time you hear a politician announcing how much he or she wants to do to protect British producers in one industry from foreign competition, be aware that he or she is unknowingly proposing an action that hurts other industries in Britain, and amounts to a net loss in economic efficiency.