Aren't these free market things just great?

Two little stories that caught our eye:

Morrisons is trialling a halal pick and mix counter at 10 stores, offering gelatine-free sweets to Muslim customers.

The selection of 36 sweets includes liquorice sticks, cola bottles, jelly beans, gummy bears and sugared lips - all guaranteed to be free of non-halal animal products or alcohol-based colourings and flavourings.

The lust for profits to be made by satisfying consumer desires leads to ever more product differentiation, even to sweeties that those who take their religion seriously can have.

And:

On May 12 it will be 10 years since Malcolm Glazer completed his hostile takeover of Manchester United, loading the business as he did so with the biggest debt in football history. At that moment, a group of United supporters turned their backs on the club they had long followed and decided to establish one of their own. FC United of Manchester they called it, a name now written large across the front of the main stand at Broadhurst Park, the club’s new home. As gestures go, this could not be more substantive.

When the new stadium opens officially on May 29 with a friendly game against Benfica, the 5,000‑capacity stadium, with its enormous terrace, its myriad community spaces and the area earmarked for a microbrewery to produce the club’s own ale, will surely be directing a belligerent architectural two fingers at the Glazer regime.

Don't like the capitalist plutocrats taking over "your" club? Great, start a new one, why not?

All without the intervention of a single bureaucrat.

We do not, by the way, insist that free markets solve each and every problem to perfection. Only that they work remarkably well across wide swathes of life. Which is why were so attached to them really, just because they do produce what people seem to want for the least effort.

Economic Nonsense: 50. Capitalism is unstable, subject to periodic crises, and should be replaced

Capitalism is not a fixed thing, but rather a process which develops and changes in response to changing conditions, and especially changing technology.  To say it is unstable is basically to say that it changes.  It is not by its nature stable.  The capitalism of the 21st century is very different from that which prevailed at the beginning of the 19th century.  It evolves as circumstances change, adapting itself to cope with the new realities that present themselves.

It is certainly subject to periodic crises.  The business cycle has long characterized it, with economists divided as to its ultimate causes.  Periods of growth are followed by periods of a sluggish or even contracting economy, with some observers suggesting that this is a good thing, helping to weed out underperforming businesses and redirect their capital to newer and more successful ones.

Over and above this cyclical behaviour, there are occasional crises that seem to threaten the whole basis of the capitalist economy.  The Great Depression was one such period, and the 2008 recession was another.  Critics look for some alternative that lacks these wild and damaging fluctuations.  No-one has yet produced a better system.  For all its flaws, capitalism is the best way humans have found to generate wealth and to allocate resources.  Even including its great crises, it has still produced steady average growth in developed economies for the best part of two centuries.  In less developed economies it has recently produced growth and wealth on an unprecedented scale.

Capitalism learns from these crises.  It adjusts itself.  Governments learn from the mistakes that led to them, and devise new rules to prevent the same happening again.  Capitalism develops and adjusts, renewing itself each time.

When the 2008 crisis came, critics prematurely celebrated capitalism's decline and wondered what might follow it.  The answer was capitalism, modified to prevent countries repeating the mistakes of the past.  It is certainly imperfect.  Most institutions made by humans are subject to the frailty and imperfection of humanity.  But they can improve by learning from their mistakes and adapting, and this is what capitalism does and why it endures.

Multinational taxes: what do politicians know?

This election has ratcheted up the calls for Starbucks and other multinationals to pay more taxes on their British revenues.  Politicians give no indication of how they will achieve that; one suspects their silence is based on ignorance. This blog is a brief explanation of why multinationals are fully entitled, under present laws, to push profits into lower tax regimes.  If the UK wants to change, it may need multinational legislation.

If a brand owner in one country sells to a distributor in another, they split the total profit between them.  If the companies are independent, the presumption is that the split is “arm’s length” and that is accepted by the tax authorities in both countries.  The game gets tricky when both companies are owned by the same group and the brand ownership is switched from one country to another.

The practice began with Bailey’s Irish Cream which was launched in 1972 to accept the Irish Finance Minister’s offer that any export profits for a new Irish agriculture-based brand would be free of tax for 10 years.  The brand became a huge global success and, come 1982, the ultimate brand owner, Grand Metropolitan, was about to be hit by a sharp jump in taxes.

By coincidence, the concept of “brand equity” as a marketing asset which could go on a balance sheet was also being developed in the 1980s.  Why not move the brand equity from Dublin to the Netherlands which was, then anyway, offering low taxes on Dutch earnings by foreign-owned assets? Why not indeed?

As you can imagine, the British and Irish tax authorities were less that thrilled with that and Grand Metropolitan had to justify that the Netherlands company really was marketing the brand globally.  In effect, the distributor company is renting the use of the brand equity asset from the brand owner and has to pay for that.  If the transfer price is “arm’s length” it is all perfectly legitimate so, for two companies both parts of the same group, what exactly is “arm’s length”?

The multinational can count on the support of the tax authorities in the brand owning country.  Their take decreases by the amount of profits switched to the distributor (or franchisee) country.  And if the brand owning company can show it sells, on the same terms, to (or franchises) companies which are not part of the same group, the case for “arm’s length” is strengthened.

HMRC has spent a huge amount of time and money on this issue.  Whilst it is possible they have not been tough enough, it is much more likely that the law is not on their side.  It is also likely that any unilateral action by the British government would lead to even more expensive legal costs on appeal.

With corporation tax down to 20% the UK is closing the low tax gap, but unless politicians can show they understand the game, and come up with a credible big stick, HMRC is going to have to settle for goodwill payments by the multinationals.

Some really bad ideas just keep staggering on, don't they?

One of those really bad ideas being the financial transactions tax. Never mind that it's a very bad tax, that transactions taxes themselves are a bad idea, and concentrate on the most important point of it all:

Think what Labour could do, if it chose, to revitalise public services. A 0.01% financial transaction tax would raise £25bn a year.

That's George Monbiot missing that important point. And he's quoting the IPPR who also miss that major point. That major point being that an FTT won't in fact raise any tax revenue. In fact, it will decrease the amount of tax revenue raised. At which point there's no point in thinking about all the lovely things you can go and spend the money on, it's necessary to start thinking about what of current spending you're going to cut. Which would rather temper peoples' enthusiasm for this tax one would have thought.

The mechanism is that transactions taxes are really, really, bad taxes. Their deadweight costs soar above those of other methods of taxation: that is, for each unit of revenue raised they kill off more economic activity than other taxes. And an FTT could, in theory, be so bad in this manner that it would shrink the entire economy. Shrink it so much that total tax revenues would fall, despite our being able to see this new money coming in from the FTT.

That is of course an empirical question: would those deadweight costs be sufficiently large so as to reduce the total tax take? And fortunately someone has gone and done this work for us. It was the European Union itself, reporting on the idea of an FTT implementation. And the answer is yes. The economy would shrink so much purely from the effects of the FTT that overall tax revenues would fall.

This does, of course, still leave room to argue in favour of an FTT. Maybe you want to screw the banksters, perhaps you just hate everyone and want to make them poorer, possibly even you could make a tortured argument that this will shrink the state. But you can't go around talking about all the lovely stuff you can do by spending the FTT revenues: for there won't be any.

Which isn't, when you come to think of it, all that much of a recommendation for a tax.

Economic Nonsense: 49. Government was wrong to use austerity to deal with the 2008 financial crisis

Gordon Brown as Chancellor and Prime Minister spent money profusely, believing that he could spend the British people's money more appropriately than they could spend it themselves, and by a political desire to have a large section of the populace on state largesse and thus supportive of a party that promised big spending.  The result was to make the UK hugely indebted, with an annual deficit that required borrowing to sustain that spending and increase the debt year by year.

The coalition government that followed him took action to reduce the deficit by a reduction in government spending.  This was the so-called 'austerity' package, although some critics claimed it was more talk than substance, with reductions in the increase in the debt, rather than in the debt itself.

Crucially, though, the policy was not only one of austerity.  It was accompanied by quantitative easing (QE), or increasing the money supply to reduce the more baneful effects of austerity.  Latterday Keynesians claim that government should have increased its spending to stimulate demand instead of decreasing it to tackle the deficit.  Their critics in turn suggest that it is not demand by government that sustains real economic growth, but investment by businesses in anticipation of future private demand.

The United States followed a similar policy of reduced spending combined with QE, whereas the eurozone countries led by a cautious Germany did not.  They imposed austerity on the over-extended countries of Southern Europe, but without the QE used in the UK and the US.

Britain and America experienced significant economic growth after a few flat years, whereas the eurozone countries did not.  Anti-austerity campaigners have suggested that the recovery is weak, perhaps "not even real," but the evidence does not support this.  The empirical result suggests that the combination of austerity and quantitative easing has worked, but that the eurozone policy did not.  Significantly, the QE countries did not suffer the big rise in inflation which some critics predicted.  In 2015, the eurozone countries announced their own quantitative easing, some 7 years after the UK and US did so.

The conclusion has to be that government was right to use austerity and quantitative easing to deal with the crisis.  They did not repeat the mistakes that turned a recession into the Great Depression of the 1930s.

We think we'll chalk this up as a win

We here at the ASI are of course politically partisan: you can't work in the think tank world without meeting many politicians and making decisions about who is worthwhile and who isn't. However, we here at the ASI are not politically partisan when we're here at the ASI. Because, as Madsen has said, our job is to be the loons howling out in the wilderness over some policy that is seemingly ridiculous and to keep arguing for it until it becomes simply the accepted wisdom of the day. It is much easier to do this without being in the pocket, or being seen to be in the pocket, of one party or another. At which point we think we'll claim a victory over one such policy for it's now in three of the four major manifestos for this coming election. That's as close to being the received wisdom as anyone is likely to get. We refer to this:

Under a Conservative government the minimum wage will be linked to the personal allowance, which the Tories want to increase to £12,500 by the end of the next Parliament.

It means that if the minimum wage increases faster than expected, workers will always be exempt from paying income tax.

We know how this got into the UKIP manifesto for when away from the ASI one of us is so politically partisan. We also know how it got into the Lib Dem one, we can track the activist who read about it here and marched it through the party's policy making process. And of course that's also how it arrived in the Tory one. We can even identify it as absolutely coming from us because of the figure being used. £12,500 was the full year minimum wage in the year that we wrote about it: it's a little bit higher now.

Our basic analysis has always been that we do not in fact have "low wage" poverty in the UK. Rather, the State makes depredations into the incomes of the lowly paid and thus causes them to fall into tax poverty. The solution to such poverty is thus to tax those lowly paid less: after all, if you want the poor to have more money then the answer is to stop taking bloody money from them.

We can also check this with the Living Wage. This is, by construction, the amount that one needs to be able to live not in poverty, that poverty level being calculated as in Adam Smith's example of the linen shirt. The difference between that Living Wage once it is taxed and what an untaxed minimum wage would bring in is roughly zero, perhaps a few pence an hour. We thus don't have low wage poverty, we have tax poverty. It is the tax taken from the lowly paid that puts them into poverty.

So, obviously, simply stop taxing those lowly paid and they won't be poor. We thus welcome this move.

At which point there are three things to note. The first is that this needs to apply to national insurance as well, raise the allowance for that to the same as the income tax allowance (while, as with the very low paid already, crediting them with amounts deemed to have been paid so that pensions accrue). Secondly, those advocating this might want to point out that this does indeed produce the Living Wage for all minimum wage workers. And thirdly, of course, we need to find something else to go and howl about in the forests in time to make it the received wisdom for the next election.

Economic Nonsense: 48. Labour Unions are essential to improve wages and conditions for workers

It is actually improved productivity, not labour unions, that has improved the rewards of labour.  People earned less money in former times because productivity was low.  People were paid according to the worth of their input into the production process.  When each worker contributed little, they were low paid.  As technology and production methods improved, so did the worth of each worker's input, and wages increased accordingly.

Employers compete for labour to produce goods and services and to make profits.  They have to pay wages that attract enough workers, and compete with other employers to do so.  It is true that unions can use coercive methods to impose higher costs on employers, but this limits total employment in those sectors, and thus opportunities for employment to non-unionized labour.  The US auto industry features somewhat higher wages in unionized car plants, but there are far fewer of them than there are non-union plants.

Although it is improved productivity that brings higher wages, the effect of unions is often to lower productivity through restrictive work agreements that spread work out among more employees.  More employees equals more members paying union dues.

In post war Britain, one group that received among the highest reward increases was the completely non-unionized sector of people who clean homes – the ones who used to be called char-ladies.  The demand for their services from businessmen and women who did not have the time to do it themselves, coupled with declining numbers available to do it, led to huge pay increases.

The fundamental truth is that unions do not increase pay for workers generally.  They can increase pay for their own members, but at the expense of non-members rather than at the expense of employers.  Declining union membership in both the UK and the US has been the result in changes in the type of work being done.  Mass manufacturing has become more automated, meaning higher wages for fewer workers, leaving others to seek non-unionized work elsewhere.  Some goods once produced domestically are now bought more cheaply from countries with non-unionized workforces.  The result is fewer union jobs.  In the UK unionization has increasingly become a feature of public sector workers rather than private industry.

Lies, damned lies, and electioneering statistics: wealth is just accumulating at the top

In my last blog, I lamented the rise of questionable facts in the election campaign, as politicians bid for votes. I used the claim that there is a “tide of privatisation in our NHS” as case study. I now examine the claim that “The last four decades have seen wealth accumulate at the top of society while those at the bottom struggle to get by." The rich are getting richer, but so are the poor

The world is getting better. Just look at three of the key UN measures of poverty and living standards.

• Since 1990 extreme poverty (measured as living on less than $1.25) has more than halved.
• Since 1990 the proportion of people without drinking water has also more than halved.
• Since 1990 child mortality (deaths under the age of 5 per 1000 live births) has – you guessed it - more than halved.

For more on our better world, read Matt Ridley’s classic The Rational Optimist.

What about poverty in Britain? It’s getting better too.

Since 1977 disposable income for the poorest fifth of households in Britain has nearly doubled (even after taking account of inflation and changes in household structures). With the recent turnaround in the economy, and greater incentives to work from welfare reform, the employment rate and average income of the bottom fifth should continue to rise.

Even measures of inequality have been relatively stable since the late 80s.

Income stats hide services the poor can consume from the state

Income statistics only tell some of the story though. The poor are better off than is initially claimed. Firstly, these income statistics and most others, focus on disposable income. They don’t take into account the wide range of services that the poor consume from the state, free at the point of use.

Income statistics are a static snapshot, they don’t capture generational gains

Secondly, income statistics don’t capture individual progress across generations. The young are poor, indebted and have no assets. The middle aged at the peak of their careers are richer, have paid debts off, own property and have made some savings towards retirement. The young will all one day become old and with time, have opportunities to better their lot.

Income statistics don’t reflect the benefits of innovation

Finally, income and wealth don’t reflect the great technological advances of the last four decades. People in Britain are vastly better off today thanks to innovation, particularly driven by the private sector. The poor consume more services as the costs of the basics has fallen as a proportion of income, and have access to new services altogether.

Take computing, which has gone from a luxury good restricted to the super rich and big companies, to being accessible to all. A gigabyte of data storage cost around £200,000 in 1980. Today I was able to find storage on amazon at just 3 pence per gigabyte - cloud services will even give you a load for free. In 1980 we didn’t have mobile phones, today there are 1.3 per person in the UK and 86% of people use the internet. The pace of technology adoption is speeding up too.

An honest debate would reflect on our success and focus on creating more opportunities

The problem with inheritance tax

Now that inheritance tax is back in play in this election season perhaps time to think about the basic problem with it:

The Tories suffered a blow on Sunday when the Institute for Fiscal Studies warned that a pledge to raise the inheritance tax threshold on family homes to £1m would disproportionately benefit richer people.

As David Cameron tried to reset the faltering Tory campaign by declaring that he was championing the “Conservative dream”, the IFS described the inheritance tax pledge as “rather odd” special treatment for homeowners.

Leave aside the specific details of this or that pledge and consider the very basics.

We're told, as with Rawls and the veil of ignorance, that it's simply wrong for the members of the lucky sperm club to inherit gazillions. Further, that inheritance tax doesn't actually have any effects upon incentives: it cannot, as the people who face the incentives are by definition dead at this point. The argument then becomes, in some quarters, only about how much to tax inheritances. Should it be at 100% or should the kiddies get some pocket money perhaps?

We exaggerate, but only a little. There really is a consensus that inheritance taxes are not distorting and thus are "good taxes" in a manner that income and or capital taxes are not.

And we're really not sure about that. For we do think that while logic is all very well it is necessary sometimes to look at what people actually do. This idea of revealed preferences: forget what people should do, what we want them to do, what they say the will do or that they believe and look at what they actually do to divine their thought processes. And the truth there is that just about everyone will do their utmost to avoid (and many to evade) paying inheritance taxes upon their estate, even when they really are dead and gone. We must therefore conclude that this is, despite the logic and the ideas of fairness, something that really does motivate people. And if that is true then such taxation cannot in fact be non-distorting.

This is something that was rather missed by Thomas Piketty. He talks, extensively, of the bourgeois historical novels and their tangled tales of who gets what from which estate. To bemoan the manner in which this stratifies society which might be fair enough. But he misses the point that these were the best sellers of their day and the attention paid by the bourgeois writers and readers back in history shows that who gets what from which estate was important to them. As the stampede to keep today's inheritances out of the taxman's hands show it all is today.

Economic Nonsense: 47. The state should pay for university education because it benefits society

University education benefits society in several ways.  A skilled, university-educated workforce can boost economic growth and make society richer than it would have been without them.  Less well-off and less well-educated people benefit from this, just as a rising tide lifts all boats.

The experience of going through university generally produces people who are not only educated in their chosen subjects, but who have been exposed to more cultural influences in the process.  Many people would think a society to be a better one if it contained significant numbers of educated and cultured people.  It provides more opportunities for intellectual stimulation and self-development.

All of this is true to some degree, and benefits society as a whole, but there is little doubt that by far the greatest value of a university education accrues to the person who undertakes it.  There is firstly the personal fulfilment that comes from attaining more of one's potential, but there are more material rewards as well.

Possession of a university degree in the UK increases one's employability.  For those in the workforce, aged 18-65, employment among graduates is 87%, as opposed to 70% for non-graduates.  Median salary is higher, too, with graduates on average earning £9,000 more per year than their non-graduate counterparts.  Over a working life this could top £400,000 of extra salary attributable to the degree.  

This constitutes an overwhelming advantage accruing to the individual who undertakes a university degree.  While there are undoubted benefits to society, those gained by the individual are high and measurable.  They make the loans undertaken to finance university, perhaps £36,000 for a 3-year degree, a very good investment indeed.

When people suggest the state should pay for this, they mean taxpayers should.  It seems strange that a person not equipped to benefit from university, someone who leaves school at 16 to become a bricklayer, for example, should be called upon to pay higher taxes so that someone else, already endowed with more academic and intellectual ability, should benefit from what amounts to a ticket to a higher salary for life.  

Some would call this unfair, and suggest that those who gain the most from university education should finance most of its costs.