How we can create a Capitalist society, and make it popular

Marcus was awarded joint third place in the Adam Smith Institute’s 'Young Writer on Liberty' competition. The subject for this competition was '3 Policy Choices to make the UK a Freer Country', and the following is one of Marcus' suggestions. 

The welfare state combines a seemingly improbable dichotomy: that it is both too expensive, and too mean in its provision. Across Europe, the social state began with the creation of state pensions, and in order to break the hold of welfare collectivism, the state pension must be the first area to face radical reform.

Instinctively, even many liberals will be suspicious of the ideas of private provision and unregulated society. The inculcation of collectivism and a suspicion of human nature drives many people to oppose the development of natural remedies to social ills. We imagine all too easily that without the abstract of society to impose solutions on us, the problems of disease, want and idleness will go unabated.  In order to reverse this perception, the market must be seen to work for all people, and at all levels of income. In a liberal society, the refrain must be ‘Everyone a capitalist’. I believe that the prospect of a property owning democracy and a comfortable old age is only possible if private pensions become available for all.

Instead of hand to mouth, pension income would be derived from years of saving and investment. The tax of national insurance would be abolished in favour of routine contributions to a savings scheme for old age. This would be tax free, and could be managed by any number of approved mutuals, trades unions, and investment houses. In the spirit of bleeding heart libertarianism, I would not even be opposed to state supported additional contributions to help those on low incomes; who, for the first time, would have genuine cause to cheer the advances of business.

 If the success of similar schemes in Chile is any indication, then we can suppose this policy not only to reduce the burden on the exchequer and to provide additional funds for investment in new industry, but to even increase the retirement income of pensioners above their previous work income.  This would be true not only for the professional class but for ordinary workers who might be spared the inevitable trap of the endless years of work that is necessitated by collective provision. Cradle to grave socialism has failed; it is time that the inventive cooperation of the many ran welfare, instead of the directives of the political elite.

The Equality Trust is wingeing on again

The Equality Trust has decided to favour us with another whinge about just how appalling we are in our inequality and the treatment of the poor. The release comes in the house magazine for the worriers, The Guardian:

"The public are misled about this country's tax system. They think households with the highest incomes pay more than those with the lowest, whereas the opposite is the case. Even more concerning is how little our current system matches people's preferences on tax. There is clearly strong support for a system that places far less burden on low-income households," he said ahead of the "Unfair and Unclear" report. "We're calling on all parties seeking to form the government from 2015 to commit to the principle that any changes in tax policy are progressive." Not a single respondent in the poll knew how much the richest and poorest paid in tax. On average the public underestimates what the poorest 10% pays in tax by 19 percentage points, believing they pay just 24% of their income in taxes, the Equality Trust said. When asked about how to make the tax system fairer, on average, people said the poorest 10% should be taxed just 15% of their income, or 28% percentage points less than they currently are. They believe the richest 10% should be taxed 39%, or 4 percentage points more than now.

Hmm. Those figures at the top are from here. Agreed, it's quintiles not deciles and total income there means including benefits in kind (health care and education). But those poor households appear to make £5,000 a year by their own effforts and then get to command resources of £15,000 a year. And if your total income, after the influence of the tax and benefits system, is three times your market income then I would describe you as having a tax rate of minus 200%. Meaning that looking just at the nominal tax rate is extremely misleading.

Well done to the Equality Trust there.

But let us take the specific issue they attempt to highlight seriously for a moment. It's actually what people think the various groups ought to be paying. And at the top end we're pretty close to what people think "the rich" should be paying. I'd certainly, given how appallingly out of control most state projects (think Olympics for a moment) get, accept a 4% error as being pretty good for government work.

So the Great British Public don't think that the rich are paying too little. But they do think that the poor are paying too much. At which point we here at the ASI would be delighted to support the plan to create a more progressive taxation system. We could start by lifting the income tax and NI limits to perhaps £12,500 a year. The level of the minimum wage. This would reduce the tax burden on the poor, most certainly. It would also have the handy attribute of converting the minimum wage into the living wage (the difference between the two being only that vast amount of tax we charge to low incomes).

But we would insist on noting that thought that the rich shouldn't be paying more. It is, rather, that everyone should be paying less. This means that we get to have the most lovely fun deciding which tens of billions of pounds we should be cutting out of government spending in order to make the tax side of the P&L match up with the public's democratic desire for a reduced tax burden on the poor.

So, remarkable as it may seem, we're fully behind the Equality Trust on this one. The public are demanding tax cuts and smaller government and what's not to like about that?

Liberalism day

Today is Liberalism Day. It's the day when we snatch the word 'liberalism' back from the American left, who on most economic matters at least are anything but liberal.

Genuine 'liberalism' developed in the seventeenth and eighteenth centuries, under the guidance of philosophers like John Locke and Adam Smith, and flourished in the nineteenth century, guided by yet other philosophers like John Stuart Mill, not to mention a clutch of enlightened politicians.

The early liberals – the Old Liberals or Classical Liberals as they are called – thought that economic activity in free competitive markets was an important part of freedom in general. The key feature of liberalism is the presumption of liberty: there may well be good reasons for curbing people's freedom in various cases, but the onus is on those advocating the curb to justify it.

If only our politicians today would begin with such a presumption – instead of presuming that they have the solution to everything.

Take More Syrian Refugees

James was awarded joint third place in the Adam Smith Institute's 'Young Writer on Liberty' competition - the theme of which was '3 Policy Choices to make the UK a Freer Country'. The following is one of James' entries. The government's decision to accept a number of Syrian refugees is a welcome measure but it does not go far enough. The Civil War has reportedly created 2.4 million refugees and 6.5 million internally displaced people, figures which mean an effective humanitarian response would have to be in the many thousands rather than the proposed hundreds. Without sanctuary, many will perish either in conflict or through disease, squalor and lack of basic necessities. Allowing them entry to Britain would undoubtedly be the moral thing to do. Yet it would be incorrect to view this act as a gesture of self-sacrifice. By helping the Syrians, we would be helping ourselves.

The economic case for more immigration is well-established. By increasing the size and variety of the workforce, immigrants allow a greater division of labour, ensuring specialisation, efficiency and ultimately per capita productivity. Evidence suggests that immigrants boost rather than consume government resources, paying more tax than the average Briton and being 45% less likely to receive handouts than those born in the UK. Both the OECD and the OBR have demonstrated that without migrants the government would have to make further cuts to public services or pay higher taxes or both. At a time of austerity, it would be wrong to reject a potential source of wealth creation.

Past instances of refugees illustrate there is a positive social case for taking more Syrians. Many of the 17th century Protestant Huguenots went on to become successful silk weavers, financiers, soldiers and artists, becoming an integral part of British life. In the inter-war period, Britain's comparatively liberal immigration policy produced great dividends. Designer Alec Issigonis left Greece and created the iconic Mini, novelist Judith Kerr escaped Germany and wrote the quintessential children's book "The Tiger who came to Tea" whilst Ludwig Guttmann founded the Paralympic Games. These are just a few examples of the many generations of immigrants that have enhanced rather than diminished Britain's cultural and economic fabric.

Furthermore, by providing sanctuary, we would expose a number of Syrians to the values of a liberal democracy. When the conflict ends and refugees return, their first-hand experience of life in a free country make it less likely that they will tolerate a regime which practices tyranny. If the government wants to help both the people of Syria and Britain, it should welcome more refugees with open arms.

Will Hutton's free to comment but facts are indeed sacred

Will Hutton is, in our liberal society, entirely free to comment upon passing affairs as he sees fit. Just as we are free to catcall and lob peanuts from the gallery at him for those comments. But one of the rules of the game is that you're not allowed to make up your own facts in these matters. Which is what Hutton is doing here. Concerning the housing market he insists that the following must be done:

I have argued for 25 years that the conventional free-market wisdom on finance – embraced by the Bank of England, Treasury, IMF, chancellor Lawson and chancellor Brown – has been wholly wrong. Interest-rate increases alone are not enough to manage the systemic proclivities of modern finance. Governments have to direct the amount of capital banks hold, regulate how much is lent to which category of borrower, cap the multiples of a homebuyer's income that can be lent against and what proportion loans should represent of a home's value.

In short, the country would be a better place if we would all just buck up and do what Hutton thinks we should be allowed to do. The reason why this is necessary is, as he says:

To tackle the bubble, there are two more Thatcherite follies that Osborne will have to abandon. Britain needs to build 250,000 homes a year to accommodate the new households that are being formed. Since 1918, the private sector has only for a few years in the 1960s ever built more than 150,000 homes in a year. It is fine to set aside brownfield sites and all the rest, but ultimately the state will have to build homes on a serious scale. No council house sale should now be allowed without a commitment to build a replacement.

The problem with this argument being that it's ordure, stinking, smelly, ordure of the worst kind, the product of cows on curry. From his own newspaper:

How did the cheap-money policy stimulate the real economy? A very important channel was through development of new housing. The number of houses built by the private sector rose from 133,000 in 1931-32 to 293,000 in 1934-35 and 279,000 in 1935-36. Many of these dwellings are the famous 1930s semi-detacheds which proliferated around London and more generally across southern England. These figures are way ahead of any other year since the second world war.

Or again:

Vince Cable, the business secretary, has been pressing cabinet colleagues to adopt the 1930s approach. He thinks house building is the way to get real demand into the economy quickly, and has championed the idea of government guarantees for housing associations. He said in a speech last year that there was a virtuous circle in the 1930s in which higher mortgage demand led to an increase in house building, which in turn led to lower prices and greater affordability, leading to still higher demand. "Houses built by the private sector rocketed from around 130,000 in 1931 to almost 300,000 in 1934 and it is estimated that house building contributed almost a third of all employment increases in this period."

The apparatchiki controlling the financial system and the planning process is not necessary in order to provide the housing that the British desire. Rather, the liberation of both from said apparatchiki has worked in our past and would obviously work again. The way to build houses in places that people wish to live and at prices they wish to pay is to, as was true before the 1947 Town and Country Planning Act, allow people to purchase land and then build upon it. We have the evidence that this works.

And Hutton can only bolster his own argument by entirely wiping that fact from the collective memory.

Hutton's entirely free to produce any argument that he wishes in futherance of anything at all, just as we are free to jeer at him as he does so. But when he starts inventing his own facts to mislead us all we really should be condemning him. Comment is free but facts are sacred.

So this policy didn't work out all that well then

This particular policy came about as a result of the analysis we did here on this very blog:

Just 1 per cent of new fathers are using a new right to take extra paid paternity leave while their partners go back to work, figures reveal. Additional Paternity Leave was introduced in 2011 as part of ‘shared parenting’ plans promoted by the Liberal Democrats, which they claimed would revolutionise family life. But in a humiliating blow to Nick Clegg, just 1.4 per cent of new fathers currently make use of the scheme.

The genesis was our making the obvious point that we don't really have a gender pay gap in the UK any more. We have a motherhood pay gap. This was picked up by a Lib Dem activist (yes, we do know the name) and then went through the party's policy making process and became law. That it doesn't seem to have made much difference could be described as a failure of either the policy or the original analysis.

However, that's not quite the way to think about it. The better way is to consider that if we've a perceived inequity that is a result of things being done to people then we might want to work to stop those things being done. However, if that perceived inequity comes from people making free choices (and obviously ones that do not impinge upon the rights of others) then that final result isn't actually an inequity. It's just an outcome of the deecisions that people have been free to make.

So it is with shared parental leave. If the option is there, but people don't take it, then the continuation of that motherhood pay gap is not because of restrictions upon what people may or may not do. It's there because that's just how the majority of people desire to organise their lives.

And if you don't understand this sort of difference then you're going to be led into this sort of error:

Labour shadow childcare minister Lucy Powell, who uncovered the figures, claimed workplace culture still discourages men from saying at home. She said her own husband had refused to take more than two weeks’ paternity leave, fearing the reaction from his colleagues in the NHS. In an interview with MailOnline, Miss Powell suggested paternity pay may have to rise to encourage fathers to take more time off – unless there is a culture change for it to become more acceptable to men and their employers to equally share the childcare burden.

No, we don't want to force people into some set of approved behaviours. We want to offer the freedom and liberty for people to express their own preferences.

And as to raising the rate of paternity pay: this really isn't going to work at all. For along with that motherhood pay gap we see as many mothers cut back on their commitment to a career as they raise their children we also see a fathers' pay premium. Men with children do, after correcting for age and qualifications, earn more than men without children. There's obviously something innate in human behaviour going on here. Mothers staying near the cave to look after the young ones, fathers going off hunting mammoth to keep them all fed sort of thing.

Perhaps some people don't like this arrangement, it's even possible that we shouldn't like this arrangement but if that's what free people decide to do with their liberty then who are we to try and change what they're doing?

High taxes redistribute people, not wealth

A truly great line from Fraser Nelson* here:

high taxes redistribute people, not wealth,

Such a great line that it's worth making sure you all see it and remember it.

The background is of course the way in which every generation seems to need to learn the same lesson all over again. That if you raise taxes too high then people and companies are going to high tail it over the horizon in order to avoid those high taxes. Currently the exemplar is France with their 75% top rate leading to the French language schools in London being beseiged by parents who have fled the impost. Decades ago it was people leaving the UK as the 83% income tax and the 98% investment income tax rates made actually being successful at anything in this country a mug's game. Ang further back through history we can see all sorts of similar reminders.

We see much the same with companies as well: at least one advertising company has left the UK and come back again as the tax rates changed across Europe. And it's really not a surprise that Ireland has the European HQs of so many tech companies given the attractiveness of the tax regime.

High taxes redistribute people, not wealth. Yes, good one Fraser and we'll appropriate that for future use, thank you.

*No, this isn't a freelance writer sucking up to the editor of a magazine. They've already fired me once so I don't need to do that.

The joy of the EU's tax investigation into Starbucks

There's a definite joy to this recent EU announcement that they're going to look into the tax affairs of the coffee shop chain, Starbucks. For as we all recall there was something of a vociferous campaign in the UK about this very matter. All sorts of things were said about the company. That it was appalling that it had been here for years, paid almost no corporation tax. That it paid royalties off to a Dutch company, that it paid a premium on the coffee beans that it bought from Switzerland. The campaign was actually so vociferous that the company voluntarily offered to pay tax that it didn't actually owe to make the howling mob go away.

So it might be thought a little odd to welcome this investigation: au contraire.

For what is it that the EU has found that can be investigated?

the individual ruling issued by the Dutch tax authorities on the calculation of the taxable basis in the Netherlands for manufacturing activities of Starbucks Manufacturing EMEA BV

That is, having looked at all of those allegations, all of those accusations, the EU has found absolutely nothing at all about the tax affairs of Starbucks UK that is even slightly out of the ordinary. There's not even anything for them to investigate!

There's more detail here too: it's actually illegal for the UK to try and tax those royalties flowing to Holland. Yes, under EU law that would be illegal. And under standard transfer pricing rules it would also be illegal for Starbucks not to pay a margin on those coffee beans it buys from Switzerland. Because that would be sucking taxable profit (if there is any profit!) out of Switzerland and you're just not supposed to do that, are you?

We'll obviously get all of the usual suspects crowing about how they were right. But do recall, point out to them even, this basic point. The EU has looked at the European tax affairs of Starbucks and they've found nothing about the UK part of it to even investigate. That is, all of the allegations that were made here in the UK have turned out to be entirely wrong.

Given the source of those allegations this isn't all that much of a surprise but we should keep pointing it out.

It doesn't seem to be true that inequality damages the economy

We're all aware of the mobs of screaming harpies telling us that inequality is damaging to the economy, nay to the very life of the nation. We even had a whole book about it, The Spirit Level, which manipulated (and badly) every statistic it could to try and convince us of this point. The problem for the thesis is that if this were true, if inequality were bad for the economy, then we would see the economies of places which are more unequal doing worse than the economies of places which were more equal. And, to be frank about it, this isn't what we see:

When we talk about competitiveness, we don’t talk much about fairness. Fairness is more a moral issue. If you look at the top countries on our list, they are not the equal countries, with the exception of Sweden. The U.S., Switzerland, Hong Kong and Singapore are countries where income inequality tends to be high. If you look at our data, there is a U-shaped relationship when it comes to income inequality. Countries that are very competitive or not competitive at all tend to be very unequal. The two extremes are the U.S. and Venezuela. Both countries are quite unequal. The countries where economic inequality is quite low, rank high but they are certainly not on the top. There is a price to pay in order to promote or guarantee a certain level of equality and that comes at the expense of competitiveness.

As we've noted around here before, Venezuela's problems do not stem from the inequality in that country, rather from the silly, even pig ignorant, methods they've tried to use to reduce that inequality. Similarly Sweden is both more equal and competitive because they do two things right. Firstly, underneath the tax burden, they run an intensely classically liberal economy and secondly, they raise that monstrous amount of tax revenues by taxing consumption, not capital or corporations.

Which leads us to two observations: the first being that we don't actually have any evidence that inequality harms the growth prospects of the economy. The second is that even if it does whether reducing that inequality will reduce the performance of the economy depends upon precisely how we reduce the inequality. We might try price controls, rationing, import substitution, nationalisation, the Venezuelan route, or we might try a properly free market economy with a high VAT to give us the money to redistribute, the Swedish way. That latter works, in that the country is more equal (if that's something you want to worry about and we don't) and also remains competitive. The former doesn't work in either sense: but sadly if we look around UK politics we see those concerned with inequality arguing for those Venezuelan policies rather than those Swedish ones.

Which end of the political spectrum is said to be the evidence based one again?

Is Uber worth $18bn?

James Ball, at The Guardian, thinks that Uber's implicit $18bn valuation is "a nadir in tech insanity". His case is that tech firms are overvalued because although investors know this, they always assume there are other "suckers" they can palm their securities off on. That is, they think the other guys are "behavioural" (falling prey to the sorts of biases detailed in behavioural economics and behavioural finance) but they themselves are rational. Ball is responsible for some very good and important work, but I think this particular piece would benefit from the application of some financial economics.

It's always possible that prices are irrational. And because we can never test investors risk preference separately from the efficient markets hypothesis (the idea that markets accurately reflect preferences and expected outcomes) it's very hard to work out if prices are off, or just incorporating some other factor (usually risk). This is called the joint hypothesis problem. But when there are two alternatives, there is a reason economists put rational expectations in their models—it's a simpler, better explanation. Finding truly suggestive evidence of irrational price bubbles is the sort of thing that wins you a Nobel Prize not something that a casual onlooker could easily and confidently observe.

Ball might say that even if irrational pricing is rare because of the strong incentives against it in a normal market, there have certainly been episodes of it in the past. Quoting J.M. Keynes, he might say "markets can remain irrational much longer than you or I can remain liquid". He might point to the 1999-2000 peak of what's commonly described as the "dot com bubble". But I urge Ball to consider a point raised in this email exchange between Ivo Welch and Eugene Fama:

How many Microsofts among Internet firms would it have taken to justify the high prices of 1999-2000?  I think there were reasonable beliefs at the time that the internet would revolutionize business and there would be many Microsoft-like success stories based on first-mover advantages in different industries.

Loughran and Ritter (2002, Why has IPO pricing changed over time) report that during 1999-2000 there are 803 IPOs with an average market cap of $1.46bn (Table 1).  576 of the IPOs are tech and internet-related (Table 2). I infer that their total market cap is about $840 billion, or about twice Microsoft's valuation at that time.  Given expectations at that time about high tech and the business revolution to be generated by the internet, is it unreasonable that the equivalent of two Microsofts would eventually emerge from the tech and internet-related IPOs?

Has not the second wave of cyber firm success (Facebook, Google, arguably Apple) been even more impressive than the first wave? It may well be only 25% or 10% likely that Uber turns out to be one of these behemoth firms, through network effects, first mover advantages, name-recognition or whatever—but even if the chance is small the potential rewards are huge.

But Ball may point out that even if this is true, in the (putatively) 90% likely scenario, of Uber being a failure, then all this capital is being wasted. It could be put in the projects he prefers: "green energy, modern manufacturing, or even staid-but-solid sectors like retail". Even if rational expectations—the idea outcomes do not differ systematically (i.e. predictably) from predictions—and the efficient markets hypothesis are not violated, and risk-adjusted expected (private) returns are equal across industries, it might be that social returns from these staid-but-solid sectors are higher—after all, lots of capital is being apparently wasted when so much goes to Uber.

This does not obtain—from the prospects of society, Uber could deliver huge welfare gains. If it does turn out that Uber has enough in the way of network effects to generate returns justifying its price tag (or more) then it would have to create lots of value, by saving taxi-consumers serious money. If they are using less resources to create the same amount of goods, then they are making society better off. Since society is big and diversified, it can afford to be relatively risk neutral (at least compared to an individual), and take even 9-1 punts on the chance that one memorable, semi-established network might be a particularly good way of running a taxi market.