Henry Dimbleby is entirely missing the point

Apparently we must do this and that and all because:

The only way to have sustainable land use in this country, and avoid ecological breakdown, is to vastly reduce consumption of meat and dairy, according to the UK government’s food tsar.

Henry Dimbleby told the Guardian that although asking the public to eat less meat – supported by a mix of incentives and penalties – would be politically toxic, it was the only way to meet the country’s climate and biodiversity targets.

“It’s an incredibly inefficient use of land to grow crops, feed them to a ruminant or pig or chicken which then over its lifecycle converts them into a very small amount of protein for us to eat,” he said.

Except this is to entirely miss the point of the task. Our aim is to maximise human utility over time. Utility is something defined by the person doing the consumption.

Yes, of course, there are third party effects and those need to be considered. But so too does the utility - that’s what is damaged by the third party effects either way. Either by an action causing that decline in utility, or the consumers’ decline in utility by not performing the action. It’s the balance that matters - the optimal position which maximises utility within the constraints the universe sets upon us.

Once the correct logical basis is established it’s possible to see what’s wrong with Dimbleby’s pronouncements. He’s forgotten that people like to eat meat. Therefore there’s a trade off in that utility. To be more extreme than he is, a fully vegan world would have lost that pleasure of meat eating, that’s a cost to be set against whatever effect that would have upon climate change.

If plans are made without even understanding what the goal is then they’re going to be bad plans, aren’t they?

Of course, we can go further too - there’s no reason whatsoever that the land of England needs to feed England. We do have this thing called trade which can aid in that. Missing out that little factor moves this all from a bad plan to a grossly stupid one. But then as the Stern Review itself said, we just musn’t try to plan our way out of climate change because every idiot with an obsession will come out of the woodwork (we might have changed the language there a little bit). Instead change prices the once and then leave markets to optimise utility - you know, the thing markets are good at?

Introduce School Choice to Save Children with SENs

Earlier this year, the children’s commissioner Rachel de Souza released her report into England’s ‘missing children’- those who have fallen through the gaps of our education system. Unfortunately, the number of these missing children have soared in the wake of the pandemic, with pupils with SEN among those being let down in England’s schools. 

In fact, children with SENs or an Education Healthcare Plan (EHC) have a persistent absence rate that is more than double those without an identified SEN. Two years of disrupted learning has only exacerbated this issue, with SEN children being disproportionately affected by the lockdown. 

It is, then, welcome news that the Government has acknowledged that things need to change. Education Secretary Nadhim Zahawi announced plans to train 5,000 more early-years teachers to be SEN co-ordinators, aiming to:

“…give confidence to families across the country that from very early on in their child's journey through education, whatever their level of need, their local school will be equipped to offer a tailored and high-quality level of support”.

But throwing more taxpayer money at a centralised education system—one that restricts families in the choices that they make—is ineffectual. The current “one-size-fits-all” model assumes that every child learns in the same way, meaning that children with SENs are not adequately taught. 

By contrast, giving parents greater choice over where they send their children would encourage greater specialisation in learning techniques, meaning that education would truly become “tailored and high-quality”. A system of school vouchers through a public-private partnership would ensure that every family in the UK could choose for themselves where, and by extension, how, their children are educated.

Under such a system, the government would allocate a voucher to families, so that they are free to make the decision on where to send their children themselves. Parents would then have the option to top-up these vouchers if they deem this to be financially feasible, giving them the freedom to choose how their child is educated, whilst also ensuring that no one goes without an education. 

School vouchers are not a novel idea- they are based on Milton Friedman’s arguments for greater freedom of choice, as he set out in his classic 1962 book “Capitalism and Freedom”. A number of these market oriented reforms have been implemented based on Friedman’s fundamental belief that governments should fund schools, but not administer them.

This school voucher system would give families greater freedom of choice. This means scrapping the current “one-size-fits-all” model, which does not cater to anyone’s learning needs adequately, and is an especially poor system for those with SENs. Parents know their children’s learning needs the best, and so a system of educational freedom would allow families to make educational choices specific to their child. 

It also opens up the education market, allowing for schools to specialise in particular learning methods and styles. Just as a blanket insurance plan would not cater to every insurance need, and individual consumers choose insurance plans based on their specific needs, families should have the freedom to choose what works for them. A voucher system hands parents the power to demand what works for their child. 

Furthermore, a voucher system means that teachers are directly accountable to parents, giving schools strong incentives to meet the needs of their students. Just like any other consumer, an unsatisfied family can take their voucher money elsewhere. If a child with SEN is not being adequately taught at one school, families are able to simply move to another. This puts competitive pressure on schools, increasing the overall quality of education. Research has shown that student performance in both Milwaukee and Florida improved following the launch of school choice opportunities for this reason. 

Competition drives up both quality and choice: education is no exception.

Addressing the Right Problem

Last month, in a somewhat bizarre throw-back to the 2010 General Election, Suella Braverman diagnosed one of the causes of Britain’s current woes; “There are too many people in this country of working age, who are of good health and also are choosing to rely on benefits.”

She is missing the central point. Britain is indeed on the verge of entering another recession, but unlike the 2008 down-turn, it is not one—at least yet—that is underlined by a high unemployment rate. In 2011, the unemployment rate reached a peak of 8.5%. In comparison, the UK’s unemployment rate currently sits at 3.8%, while the economic inactivity rate has also been in decline. Indeed, the Department for Work & Pensions has spent the last few months gleefully sending out press releases announcing how many more people they have helped into work.

Source: Office for National Statistics

This rhetorical appeal to ‘work-shy Britain’ also omits the fact that 40% of people on Universal Credit (UC) are employed, whilst 1.4 million people are claiming working tax credit. The cost of living crisis isn’t a symptom of a high unemployment rate; it is shining a harsh light onto the problem of in-work poverty. 

When I talk about poverty, I do not mean ‘relative poverty,’ which is often how it is defined. Those living in relative poverty live in a household which has an income below 60% of the inflation-adjusted median income of a base year (usually 2010/2011.) Of far more use are more measures such as the Joseph Rowntree Foundation’s conception of a minimum income standard, which is an annual calculation of the cost of items and activities we deem to be necessary for an acceptable standard of living in the UK. This is analogous to Adam Smith’s own conception of poverty in his Wealth of Nations:  

“A linen shirt, for example, is, strictly speaking, not a necessity of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt.”

The inability of many people in work to afford items we would consider essential is precisely the problem; the price of food and energy are the top two reasons behind UK adults reporting an increase in their cost of living. Unsurprisingly, lower-income households are the most affected by rising prices as they spend a larger proportion of their income on energy and food. Worse still, lower-income households are facing inflation rates around 1.5 percentage points higher than higher-income households due to rising energy prices.

Source: House of Commons Library

Unfortunately, there are no immediate fixes. But there are a few reforms that the Government could enact to reduce in-work poverty. Firstly, it could help to reduce some of the higher costs facing workers through enacting supply-side reforms. This would include reforming our hideously outdated planning laws in order to drive down house prices, and relaxing child:staff ratios to reduce childcare costs. 

Secondly, it could reduce the tax burden on workers. One simple way of doing this would be to index tax brackets, in particular the Personal Allowance, to inflation in order to eliminate fiscal drag. 

Thirdly, it could seriously consider introducing a system of Negative Income Tax, (NIT), which would act as a minimum income guarantee, tapering away as peoples’ wages rose through work. 

Fourthly, it could stimulate an increase in productivity, which is linked to workers’ wages, through replacing the super-deduction policy, thereby incentivising greater investment in capital. At present, the UK is forecast to be the slowest-growing economy in the G7 by 2023—if the Government is serious about wanting the UK to be a high-wage economy, this is something that needs addressing. 

The outlook for those on lower wages over the next couple of months is bleak. The Conservative Party will not do itself, nor the public, any favours by complaining that Britons simply ‘aren’t working’ and reproaching a ‘culture of dependency’ which they have served to entrench through failing to enact necessary reforms for economic growth, rather than accurately diagnosing the problem. 

What you measure, and how, is the essence of any sort of planning

Yet it’s not obvious that those who would plan actually understand this:

In 2018, a report by the TUC revealed that private and public investment as a proportion of national income put us 34th in a ranking of 36, trailed only by Portugal and Greece. In the 40 years to 2019, fixed investment in the UK averaged 19% of GDP, the lowest in the G7. Now, business investment in the UK remains more than 9% below its pre-pandemic level. Crucial parts of our national infrastructure have been failed twice over: first when they were state-owned and let down by the stinginess of the man from the ministry – and then when they became privatised victims of modern capitalism’s increasing fondness for stripping out, squeezing down, and chasing dividends.

Well, yeeees. Part of the TUC’s case there is that because we in Britain have a smaller manufacturing sector than many other countries therefore we invest less in manufacturing. Which seems entirely logical.

We might also ponder that investment is a cost. Therefore decrying the low levels of investment could be seen as complaining about how low our costs are.

However, there’s a deeper problem here, one of simple measurement. Or perhaps complex measurement. If we are to decide to plan, which is the insistence here, then we’ve got to understand the data that we’re trying to plan from. After all, it’s only that understanding that turns data into information. And the truth is that there’s a distinct lack of understanding of that data here.

The definition of investment is, in fact, non-current spending. For the GDP numbers - which all of this is drawn from - that becomes that spending which is accounted for across accounting time periods. Current spending is that which is accounted for as spending in this, the current, accounting period. Investment is that which is written off over more than the one accounting period. The inverse of this same statement is that investment is whatever it is that we depreciate, current spending is what we do not. We can get more complex than this but that is the essence of it in the national accounts.

That switch from manufacturing to services - the thing which we’ve done more than most nations - has an effect upon this. Because an awful lot of what could be called “investment” in services is in fact written off in the one accounting period. Very few firms capitalise their software development these days, just as one example. Those costs are - usually you understand - accounted for as current expenses in the wages of the developers, not something that is then depreciated across time.

This then goes further. This distinction causes other national accounts problems too. The old way of buying in software was to buy a license - that was a capital investment which then was written down, depreciated over time. The new way is to rent by the month - Software as a Service, or SaaS. That’s a current expense, not an investment. And as the developing firm is also accounting for the software development costs as a current expense - mostly to often enough - we seem to have a fall in investment within the economy. Switching from Office, on a 2 year licence, to Office 365, on a monthly rental, reduces investment in the national accounts even as exactly the same activity, by the same people, in the same place, happens.

This might all sound a little recondite and it is. It’s also not the full explanation but it is at least a part of it. The national accounts were drawn up in a different age, measure the world of that previous time. They don’t deal well, the definitions, with our modern world. They are, therefore, not all that useful as a base to plan the future from. Because they’re not telling us what most think they are.

If, just to pick an example, Trotters Independent Traders switches from a purchased copy of Sage to a monthly subscription to Sage then investment as classified in the national accounts falls. This does mean that looking at the levels of investment in the national accounts is not a good guide to the current state of the economy and is thus a very bad base from which to try to plan the future.

Just and only the public cloud part of SaaS amounts to some 0.5% of GDP.

Of course, Hayek said all of this rather more carefully but it is still true. The centre doesn’t have the information necessary to do the planning so many people want the centre to do. Therefore that planning from the centre isn’t going to work.

It's astonishing how little Willy Hutton knows

Given that it always takes more time to clean up intellectual ordure than to create it to concentrate on just the one point here from Willy Hutton:

As British exports stagnate, there is not a nod to the role of trade as a propellant of growth. The UK, as the second largest exporter of services in the world – built on intangibles that sit behind sectors as diverse as finance and the creative industries – is locked out of the country’s largest markets in Europe. It is a growth plan built on sand.

British finance locked out of its largest markets in Europe?

London remains the world’s second-biggest financial center behind New York when infrastructure, reputation and business environment are taken into account, according to the Global Financial Centres Index 2021.

Well, that’s a disastrous result. So is this:

The London Stock Exchange's LCH unit in London clears about 90% of euro interest rate derivatives, a contract widely used by companies in the EU to insure themselves against unexpected moves in borrowing costs.

We can even go further from that same source:

The European Union agreed on Tuesday to prolong until June 30, 2025 permission for Britain's clearing houses to continue serving customers in the bloc, with officials saying it would be the final extension.

Why has the EU done so? Because 90% of the business is in London, that’s why. What we’ve got here is an extreme and clear example of the usual and general truth. The people who benefit from a service are the people who buy it, not those who provide it. That’s why they buy it, see? London finances business in the EU. The EU - and the businesses in it - benefit from that financing. As to why it’s all in London, the EU’s own evaluation is:

The place of London as a major financial centre largely predates the single market and relies on a dynamic business environment, the predictability of the British legal system, the worldwide use of English as language for business, and the attractiveness of a cosmopolitan city.

It’s not about trade barriers nor being inside them. In fact, London has often benefitted from being well outside regulatory systems - the Eurobond market is proof of that.

We do not pretend that everything is rosy in this financial garden but it’s also true that the old, apocryphal, headline applies here - “Fog in Channel, Continent Cut Off”. This being something the EU recognises. The City, those London based wholesale financial markets, is not locked out of its largest markets. Entirely the opposite.

Now “someone is wrong on the internet” is not really a reason to stay up at night. But it is worth pointing out how Willy Hutton is an exemplar of that more general point. Those who would plan our lives, the economy, the country, always do seem to be those with the least knowledge of how it all currently works. Which isn’t, when you think of it, all that good a method of deciding what to do next. For if you’ve no clue where you currently are then how can you decide a path to any destination?

It's necessary to understand that corporation tax is a bad tax

All taxes make the wallet of some live human being lighter. There is no exception to this rule. The study of whose, when, is that of tax incidence.

The incidence of corporation tax is split between the shareholders and all the workers in the economy where the tax applies. For if you tax the return to capital then you will have reduced the return to capital thereby reducing the amount of capital invested. Since it is capital added to labour which increases labour productivity this then reduces the growth of wages - average wages are determined by average labour productivity.

All of this is well known. Where disagreements come in is what is that split between capital and labour? It is absolutely not the corporation that pays - that might be a legal person but it’s not a live human being therefore it cannot carry the economic burden of the tax. Reasonable studies of the US state that it’s 70/30 capital to labour in that market. Other, equally reasonable, studies indicate 30/70. A study here argues 50/50 for the UK.

One study by Kimberly Clausing argues that it’s 0% the workers. Although when directly questioned when that came out (by this writer asking the question of her) Professor Clausing did agree that the result could be driven by multinational companies already using offshore to reduce their tax bills, severely limiting the relevance of the result.

We also know what drives the split. The smaller the economy in relation to the global one, the more mobile the capital under discussion, the more it will be the workers carrying the burden. It was also a result from Tony Atkinson and Joe Stiglitz that the burden could be more than 100%. That is, the workers could lose in wages more than the amount raised in tax - although we’d expect that result to apply in small and poor countries where the capital under discussion is foreign investment.

This loss from this form of taxation is known as the deadweight cost. What is lost purely from the amount of tax raised, the method of doing so. This is nothing at all to do with hte good that may be gained from the spending of the money, it’s purely a commentary on how the tax is raised, how much is, from whom.

We have a spectrum of rising deadweights too. From repeated taxation of real property (so, an LVT, the taxation of resource rents and so on) through consumption taxes (VAT say), to income taxes, to capital and corporation taxes. Topping out at vastly the most expensive in this sense are transactions taxes (the Robin Hood tax on financial markets say).

So, corporation tax is a bad tax because it has high deadweights - we lose more economic activity this way than by raising the same revenue from less damaging taxes. This birden also falls ever more heavily the smaller a place is, the poorer it is. In developing countries the damage is more than the revenue raised.

All of which is a prelude to this:

Liz Truss could pull the UK out of a deal agreed by Rishi Sunak to “stitch-up” global corporation tax rates at 15 per cent, it has emerged, as two of her most prominent supporters criticised the agreement.

That attempt at the minimum is an international cartel determined to enforce a bad tax. Of course we should pull out of it. Even if not for ourselves then for those in the developing countries where it bites hardest.

As to why the attempt at the cartel that’s because almost no one outside the actual experts in the field of taxation understands the first 8 paragraphs of this little note. Therefore politicians see it as a convenient way of taxing them over there, those corporations, to provide nice things for voters. Instead of what it is, a method of impoverishing those same voters.

Competition between nations to lower the corporation tax rate is exactly what stops that political pillaging. Which is why the politicians are so against that competition.

If only Ms Lucas could follow her own logic

We thought this was quite remarkable for not even understanding its own internal logic:

All that profit, yet investment in our waterways is falling woefully short. Not a single new reservoir has been built in the past three decades, and our Victorian water pipes are being replaced at a rate 10 times slower than our European neighbours. So we need immediate action. The Green party is calling for an urgent enforcement order on water firms, a cut to bosses’ obscene executive pay, an end to dividends to shareholders and for the water supply to be brought back into public ownership as soon as is practicably possible.

Public ownership works, and is popular. Publicly owned Scottish Water is the most trusted public utility in the UK, while not-for-profit Welsh Water has helped 60,000 low-income customers to pay their bills. They invest more, too. Scottish Water has invested nearly 35% more per household in infrastructure since 2002 than privatised firms in England; it charges 14% less in water bills; and it doesn’t pay out costly dividends to shareholders.

There are four ownership regimes for water in the United Kingdom. None of them have produced a new reservoir in 30 years. We must assume, therefore, that it’s something other than the ownership structure that builds, or does not build, reservoirs. We might even suspect that it’s the shrieking from the likes of Ms. Lucas’ Green Party when anyone plans to build absolutely anything that could be the cause there. For there have most certainly been many applications to build new reservoirs. Which varied parties - say, the Environment Agency, or planning permissions etc - have denied.

It’s even true that the private, for profit, companies in England have a greater incentive to build reservoirs as their allowable return is set, in part, by their investment in such infrastructure. If they plough more capital into such things then OfWat is likely to allow them to make more profit. OfWat’s determination of whether they be allowed to do so or not also being a possible brake on said building.

We’re also not sure about that touting of lower prices in the Pictish lands. Wetter place charges less for water does it? That’ll have the economists headscratching all night trying to work out how that could possibly happen.

But it’s that claim that Scotland invests more that is the failure of logic. Investment is an input, a cost. So Scotland’s government owned water system spends 35% more per household and still doesn’t build any reservoirs. We’ve more input, more costs, for the same result therefore. Which is proof that the government owned structure is less efficient than the privately - money-grubbing - owned one.

We do tend to think that the country would run better if the varied politicians hoping to do that running even understood their own logic. But then that so few do is why politics should be, when running anything let alone a country, be kept to its irreducible minimum.

Well, actually, it was us

Under the Coalition Government, workers’ tax-free allowance steadily increased above inflation year after year, meaning a shrinking share of the population paid income tax to the Treasury. It was a Liberal Democrat policy, enthusiastically adopted by Conservatives as their own.

From 2010-11, the personal allowance rose from £6,475, reaching £10,600 by the end of the Coalition in 2015-16, and then £12,500 by 2019-20. 

If it had increased in line with inflation, the threshold would have been closer to £7,800 - meaning workers paying tax on an additional £4,700 of their incomes.

We even know the name of the Lib Dem activist we convinced who then took it to The Clegg. CPS also had managed to convince Osborne so indeed it did happen. Today that good work is being put into reverse:

Alongside those smaller taxes, fiscal drag is now back with a vengeance. Rishi Sunak, when he was Chancellor, decided to return not merely to the old system in which the tax-free allowance and thresholds rise with inflation, as per the Brown era, but to freeze them completely.

This effectively puts fiscal drag on steroids, particularly at a time when inflation is rampaging at levels not seen in 40 years and wages are failing to keep up.

Indeed so. Although Brown wasn’t all that innocent, as we pointed out in 2008:

Allowances in each of Mr Brown’s Budgets - except 2003, when they were frozen - have risen by “statutory indexation”, in other words, by a similar rate to the Retail Price Index.

Yea, even Brown optimised fiscal drag. Which ended with:

We now have the absurd situation that someone working 20 hours a week or so on the minimum wage is paying income tax.

And that, we’re afraid, is vile. Think on it - the justification for the minimum wage is that this is the minimum that an hour of work is worth. We don’t agree with that, but that is the justification for it. Well, OK, if that’s the minimum value then that’s the minimum value. That sum has to be tax free. If the one boss isn’t allowed to take a slice to defray expenses then neither is the other boss to pay diversity advisers.

If there is to be a minimum wage then the personal allowance has to be that full year, full time, amount. So too with national insurance. If the Chancellor wishes to change the one then he has to change the other. Raise the minimum wage then the allowance rises, by definition.

We can even prove that people bought our argument that first time around. The £12,500 allowance is what the minimum wage was in that year, 2010, that they decided upon the policy. Time for us to be making it again.

If you want the working poor to have more money then stop taxing them so damn much. Which means that the personal allowance must be the minimum wage - at the very least.

It's possible to agree with the problem but perhaps not the diagnosis

Larry Elliott tells us that:

Britain has a cost of living crisis. It also has a housing crisis and an energy crisis. Weeks without rain in southern England mean there is a looming drought crisis. The NHS is only one serious Covid-19 outbreak away from crunch point.

These crises are all distinct and special in their own way but they also have a common theme: a failure to invest stretching back decades. An obsession with efficiency has meant infrastructure has been run into the ground rather than upgraded. Cost-cutting has been given a higher priority than capacity building.

Well, yeeees, but why?

Or take water. Since 1990 the population of the UK has risen by about 10 million to 67 million but not a single new reservoir has been built in the past three decades.

But why?

Water companies say they face widespread opposition in building new reservoir facilities, despite a recognition they will be increasingly needed under drier conditions as a result of climate change.

Thames Water has spent more than a decade attempting to construct a £1 billion reservoir to serve more than eight million people in Abingdon, Oxfordshire. The plans were first rejected by the government in 2011 and have been the subject of local opposition.

There are plans for a handful of new reservoirs across the country, but only one - the £100 million Havant Thicket project, near Portsmouth - actually has planning permission.

That is, we can’t build new - and energy efficient - houses because the planning system won’t let us build houses. We can’t go fracking for cheap (er) energy because the planning system won’t allow us to. We can’t build new reservoirs because the planning system won’t allow it.

Another stab with the same point is that the planning process - even if planning is finally granted - makes building or doing anything more expensive. Humans do less of things that are more expensive. Or, more formally, the planning process changes the cost benefit analysis of squeezing more out of the extant or building anew. Thus, if we wish to have more investment, more new things built, we need to lower that cost of that planning process.

Or, as we’ve been known to remark, many things would be cured by blowing up the Town and Country Planning Act 1947 and successors. Proper blow up. Kablooie.

Cutting business rates is a terrible idea - but, sigh, politics

One more little example of why politics is such a terrible way to run the economy. We’re in an election campaign, two candidates, the electorate is the membership list of the Conservative Party. So, we get promises and pledges:

Rishi Sunak on Tuesday night vowed to slash business rates this autumn as he warned Liz Truss’s economic plans would see the Tories get “absolutely hammered” at the next election.

The former chancellor said that supporting high streets would be “top of my mind” when asked by a Conservative member whether he would cut taxes on struggling shops.

He committed to extending the current 50 per cent reduction in his first Budget as Prime Minister, saying that small retailers are the “beating hearts of all our communities”.

That’s a terrible idea even as it might indeed aid in winning that election.

For business rates are a repeated tax on real property values - or, in other language, as close to the UK tax system gets as a land value tax. This is the least bad form of taxation out there so reducing it - to presumably tax more elsewhere - is a terrible idea.

It’s also not paid by retailers but by landlords. Yes, we do know this, no, there is no argument about it. Business rates are incident upon landlords of shops, not shopkeepers or retailers.

So, why would we want to reduce the taxation of landlords and shift that taxation burden to someone else? The answer being we don’t but politics might well mean we do it anyway.

Sadly there’s not really any other way than politics of doing this running a country thing. But it does need to be acknowledged that it can lead to very bad policy.