How we end up with absurdities like the sugar tax

Quite how we end up with absurdities like the sugar tax is an odd one. From Osborne's point of view it is of course just pandering to whatever he thinks the chatterati are wibbling about this week. Rather than considering the economics of his action it's a bone thrown to the political dogs. Not really how we do want our economic policy to be determined. On the other side, from those pushing the policy in the first place, it seems to be simple and pure ignorance of the subject under discussion. Here is the leader of the campaign itself, Dr. Aseem Malhotra on the subject of sugar:

Sugar is NOT a “nutrient” so let’s not pretend it is

That's rather news to any- and every- one who has ever studied the subject of diet and what it is necessary for human beings to ingest.

For years spokespeople for the food and soft drinks companies have defended arguments calling for the regulation of sugar by saying we shouldn’t be singling out one “nutrient” when it comes to tackling Obesity. This was again repeated by the corporate affairs director of the Food and Drinks Federation in a debate I had with him on Channel 4 News last week. I pointed out that sugar has no nutritional value, has no biological requirement and therefore cannot be a “nutrient.”

No nutritional value? What?

Just to be clear the definition of nutrient is “a substance that provides nourishment essential for the maintenance of life and for growth”

Sugar contains calories. That's rather the point of the campaign that Dr. Malhotra is leading: the consumption of sugar leads to many calories being ingested. And we are really rather sure that it is necessary for human beings to ingest calories, they are indeed nourishment essential for the maintenance of life and for growth.

A crowd pleasing Chancellor listening to the gibberings of the grossly ill-informed. Now you know how we end up with absurdities like the sugar tax.

Doing a Harold Wilson

Just over three years ago coalition Prime Minister David Cameron promised there would be a referendum in the UK to remain in the EU or to leave it. He told colleagues that he was determined not to "do a Harold Wilson," referring to the previous 1975 referendum. On that occasion the Labour Prime Minister had negotiated meaningless and trivial "concessions" from what as then the EEC, but had claimed they represented a substantial change in the relationship the UK would enjoy with the rest of the EEC if it voted to stay. The UK voted heavily to remain, and the "concessions" were revealed to be inconsequential as the drive to concentrate more powers to the centre of the European project continued. UK voters thought they were voting to remain in an economic community, but they found themselves bound to what was increasingly a political union, indeed, one that changed its name to the European Union.

Despite his awareness of Wilson's action, and his determination not to repeat it, David Cameron appears to have done so. The renegotiation was not supposed to be about benefits and immigration, but about the fundamentals of the UK's relationship with the EU. It was supposed to be about the UK regaining ability to decide its own laws instead of having to accept ones decreed by the EU as a whole.

It is noticeable that the 'deal' - hailed at the time as an historic breakthrough - has scarcely been heard of since. Those campaigning to remain in the EU have hardly mentioned it, and the debate has simply been about whether the UK should remain within the EU as it is presently, or should leave. There is no status quo option. A vote to leave would engender some uncertainty, but so would a vote to remain. It would be a vote to remain within an EU committed to "ever closer union, with all the future uncertainties that this implies. The issue this time is not a vote about trivial "concessions." It is about UK sovereignty.

A fascinating question in The Guardian

A fascinating question in The Guardian to which we have the answer.

Where now are the earthly paradises from which an idealist can take hope?

Well, yes, where?

With Barack Obama on his way to a changing Cuba, the left is fast running out of countries to revere

In our lifetimes the answer, which country should the British left look to as the example of the good society, has changed. From the various Soviet abominations, through Nicaragua, some have more lately looked to Greece, to Argentina under the Kirchners, possibly to Brazil and Venezuela. There was a brief moment when Pol Pot was the man although that little embarrassment is generally smoothed over now. And of course Cuba's totalitarian poverty has always been there as a goal.

Yet if we were to rerun matters from when socialism was first thought of as a reasonable method of organising society, say the 1870s or 1880s, we'd have to admit that none of those places have done as well as the North Atlantic countries that almost all of us reading here inhabit. The largely capitalist, largely free market, economies are those that have delivered that list of wants and desires. Free at the point of use education, health care. Cheap food for all, the UK is currently falling down a bit on decent and cheap housing but most of Europe manages it. It is possible in our current day and age for a human to flourish as no other groups of societies have ever managed to permit, let alone allow or encourage.

That is, if we think of the stated goals then the road to that socialist paradise is some version of the capitalist free marketism. And we're really not all that sure how important the capitalist part is, even though we're entirely adamant that the free market part is vital. Because almost all of the disasters of those socialist attempts have come from the attempts to destroy markets rather than the simple nationalisation of the means of production.

There are of course possible variations within this system. The Nordics do rather more taxing and redistributing than we do for example. They are also notably more free market, robustly so, than the US or UK. But the end result of our 150 years or so of experimentation seems to be that if you want to make the common man better off then you're restricted to that narrow band of policy choices somewhere between classical liberalism and social democracy. We've tried almost all of the other schemes out there in one place or another and none of them have worked. Corporatist fascism doesn't, anti-marketism doesn't, the various flavours of socialism lite don't and the attempt to get to communism was a disaster everywhere.

That is, if you want to create utopia you really ought to have the gumption to note that by any historical or global standard, you are standing in it. Nope, it's not perfect, we too can find things that we think can be done better. We can even think of radical policies that we would hope to see enacted: but the basic underlying structure of a society that works seems to have been proven. Let the market rip and tidy up around the edges as much as you desire. Tax it more or less heavily as you wish to redistribute. We would tax less than others, they would redistribute more than we. But if anyone really does want to lay claim to the title of "scientific socialism" then it really is necessary that they take account of the evidence.

What actually can we prove works? A largely market, even free market, society with some level of taxation and redistribution on top of it. Nothing else does seem to.

So we don't need the BBC any more then?

We're being told that the BBC is really on a roll with their drama productions:

Whether it is down to Tom Hiddleston’s clean-cut good looks, John Le Carre’s scintillating plot, or the cinematic qualities afforded by its blockbuster £20 million budget, the show is a bona fide hit, to the delight of executives at Broadcasting House, the BBC’s central London headquarters.

Following hot on the heels of War and Peace, another lavishly-funded Sunday night epic, the corporation is currently enjoying a purple patch in drama, which insiders credit to a decision by Lord Hall of Birkenhead, the director-general, to raid tens of millions of pounds from the budgets of other departments, funnelling licence fee cash into the genre.

Super, isn't it lovely that the taxpayer is getting something for their scalping? However, not that this is what they think they're saying, even the BBC agrees that this is no longer necessary:

Lord Hall describes it as a “flight to quality”, and says that the corporation cannot hope to match the spending of an organisation such as Netflix, which plans to spend $5 billion (£3.5 billion) on original commissions this year.

“We can’t win against a Netflix or an Amazon, because their budgets are just so much bigger,” he says.

The argument in favour of the, or even a, BBC is that it provides something the market unadorned cannot or will not. Might be the scale, might be the type, but something that competition will just not produce. And here we have the BBC stating that not only can that market produce those goods, they produce them better than the BBC does.

At which point there is no argument for the BBC to be doing these things, is there? Or, perhaps, any things?

It's not obvious that the new Libor will be better than the old Libor

In a political sense it is obvious that the old way of calculating Libor had to change. But in the more economic, or even financial, sense it's not wholly obvious that this new method is going to be better. We've made this point before but there were actually two manipulations of that benchmark interest rate. One was varied traders trying to get their own bank to shade it one way or another in order to benefit their own trading books. This produced minor swings one way and another and the major losers were the trading books of other traders. Further, given that quite a lot of people were doing it the manipulations cancelled out to some extent (and if all had been doing it then there would have been no effect). The second was perhaps more serious although isn't what has been prosecuted. In the depths of the crash, when there wasn't in fact any interbank activity, Libor was still being reported as being reasonable. When, in fact, in the absence of there being any such lending, and no one would offer it even if someone asked (that being our entire problem, that the interbank market froze), the true Libor was somewhere up around infinity.

We're actually rather glad that second manipulation took place.

Still, politics being what it is the calculation method has to change:

Each day a group of banks publish the average cost at which they can borrow money from other banks. The measure was founded in the 1980s and grew in importance in the following decades.

But in 2012 it emerged that a series of banks’ traders had lied in their submissions, either to improve their own trading positions or to flatter the banks’ own financial position.

As a result the British Bankers’ Association surrendered its administration of the index, and the IBA took over.

The new system means the IBA’s computers are plugged directly into banks’ trading systems, and will record their transactions and so calculate Libor from actual market data.

The problem here is that not all of the banks on the reporting panel transact in all the Libor currencies and maturities on any particular day. They might well trade instruments, sure, but they don't all borrow across all those variants each day. There's thus something of a paucity of market information to be calculated. And if that interbank system freezes again, as it might well do in the next (yes, there will be another one someday) financial crisis then are we happier with the idea that reported rates will be soaring to infinity?

It's an interesting problem to which we have no ready answer. Is it better to rely upon the professional judgement of possibly corruptible experts or upon incomplete market information? If we had complete market information then it's obvious, but incomplete?

No to council housing, yes to housing benefit

That we have something of a housing problem in the UK is obvious. That we should be doing something about it equally so. However, those who tell us that we should be building more council houses are wrong. Yes, obviously, build more housing to bring the price down (by releasing more land to build upon) but housing on council tenancies is just the wrong way to go:

This paper provides new evidence on the effects of moving out of disadvantaged neighborhoods on the long-run economic outcomes of children. My empirical strategy is based on public housing demolitions in Chicago which forced households to relocate to private market housing using vouchers. Specifically, I compare adult outcomes of children displaced by demolition to their peers who lived in nearby public housing that was not demolished. Displaced children are 9 percent more likely to be employed and earn 16 percent more as adults. These results contrast with the Moving-to-Opportunity (MTO) relocation study, which detected effects only for children who were young when their families moved. To explore this discrepancy, this paper also examines a housing voucher lottery program (similar to MTO) conducted in Chicago. I find no measurable impact on labor market outcomes for children in households that won vouchers. The contrast between the lottery and demolition estimates remains even after re-weighting the demolition sample to adjust for differences in observed characteristics. Overall, this evidence suggests lottery volunteers are negatively selected on the magnitude of their children’s gains from relocation. This implies that moving from disadvantaged neighborhoods may have substantially larger impact on children than what is suggested by results from voucher experiments where parents elect to participate.

This is over and above the well known finding that labour immobility reduces employment levels. And in the British housing market there's nothing so immobile as a council tenancy.

We're always going to have some form of housing subsidy for those who simply cannot manage themselves. But it should be a subsidy simply paid out, not the creation of estates of immobile people.

Osborne's disastrous sugar tax decision in the Budget

George Osborne made a truly horrible decision in the Budget yesterday: the one about a sugar tax.

So today I can announce that we will introduce a new sugar levy on the soft drinks industry.

Let me explain how it will work. It will be levied on the companies. It will be introduced in two years’ time to give companies plenty of space to change their product mix.

It will be assessed on the volume of the sugar-sweetened drinks they produce or import.

There will be two bands – one for total sugar content above 5 grams per 100 millilitres; a second, higher band for the most sugary drinks with more than 8 grams per 100 millilitres.

Pure fruit juices and milk-based drinks will be excluded, and we’ll ensure the smallest producers are kept out of scope.

We will of course consult on implementation.

We’re introducing the levy on the industry which means they can reduce the sugar content of their products – as many already do.

It means they can promote low-sugar or no sugar brands – as many already are.

They can take these perfectly reasonable steps to help with children’s health

Of course, some may choose to pass the price onto consumers and that will be their decision, and this would have an impact on consumption too.

We understand that tax affects behaviour. So let’s tax the things we want to reduce, not the things we want to encourage.

It's not that taxing sugar is a particularly bad thing to do. There's other nice and desirable things that we tax like booze and insurance. Hey, got to get the revenue where you can.

Rather, what worries us is the monumental mountain of lies that the campaign for this tax has been built upon. Sugar consumption has been falling in recent decades even as the country gets ever porkier. It is therefore not sugar consumption driving the fact that we're all becoming lardbuckets. If that is so the tax won't achieve the stated goal.

However, what will happen as a result of giving in to the misinformation being shouted from the rooftops is that every Single Issue Fanatic will now be concocting plans to bombard us, and more crucially the government, with demands for whatever absurdities they can conceive of imposing upon us. Whatever the actual merits of a sugar tax (none, but that's by the by) the caving in to the fanatics has just made future public policy worse.

Just not a good idea.

The Adam Smith Institute's reaction to the 2016 Budget

Commenting on today's Budget, spokesmen for the Adam Smith Institute said:

Today’s budget was disappointing. Growth forecasts have been lowered, and the Chancellor’s failure to deliver any kind of growth agenda in the last Parliament has left the British economy vulnerable to a global economic slowdown. Even more worryingly, he doesn’t seem to care. There was nothing major in this budget to boost investment, and far from simplifying the tax system the Chancellor announced a raft of new levies that will make it even more complicated and wasteful.

Mr Osborne seems so firmly focused on the politics of the budget that he seems to have ignored the economics of it altogether.

– Sam Bowman, Executive Director

 Mr Osborne sounded a lot like Gordon Brown today

 Nigel Lawson's budgets were models of clear-sighted vision.  In every budget he cut taxes, simplified them, and abolished at least one altogether.  A George Osborne budget seems more like one of Gordon Brown's, a patchwork quilt of little measures with no clear pattern to it.

– Madsen Pirie, President

The Chancellor’s deficit plan is in tatters

Mr Osborne’s deficit reduction plans for this Parliament always seemed improbable but lowered growth forecasts make this plain to see. At the current rate of cuts, he will now need to find £31bn of cuts or tax rises in the year 2019 alone to deliver his surplus. This is highly unlikely and it seems almost certain that he will end up breaking all three of his own fiscal rules. In all likelihood he does not expect to be in the job by then and doesn’t mind handing the problem to someone else.

– Sam Bowman, Executive Director

Cutting business rates for small businesses is a bad idea – and could Italify British businesses

Business rates are mostly a tax on landowners, not on firms. Even though firms write the cheques, when business rates are cut, rents rise in proportion, so firms are no better off, but landowners are. Reducing rates for small businesses only makes this problem even worse. Not only will rents rise across the board for all firms, big and small, there now is a large distortion in favour of smaller firms present in the rates system, akin to rules in slow-growing Eurozone states like France and Italy. Smaller firms are generally less productive than large firms, and by creating a large distortion in favour of inefficient small businesses the Chancellor is risking the "Italification" of British business.

– Sam Bowman, Executive Director

Corporation tax cuts are modest good news

Corporation tax is—as George Osborne said—one of our least efficient taxes, destroying huge amounts of economic activity for each pound it raises in revenue. Cutting it from its current rate to 17% by the end of the parliament will put upwards pressure on productive investment and on workers wages, though the move is small. Devolving the tax to Northern Ireland is also very welcome—currently there is a very strong incentive for firms to site themselves just across the border in the Republic of Ireland, purely in order to pay lower corporation tax. Equal corporation tax on either sides of the border would bring the UK more revenue, and increase efficiency by reducing arbitrary distortions on where businesses should locate.

– Ben Southwood, Head of Research

The soft drinks tax is the thin end of the wedge 

A tax on sugary soft drinks is the first step on the road to fat taxes and sugar taxes more generally. It makes little sense to tax sugary drinks on their own, rather than sugar more generally – a couple of Mars bars are just as bad as a bottle of Coke – but the Chancellor probably reckons that the public won’t care if he only targets soft drinks. Once the tax is in place, he will follow the lead of other ‘sin taxes’ and raise it higher and higher, and impose it on more and more things. The costs of this tax will likely be passed on to consumers in the form of higher prices, so it will be regressive.

– Sam Bowman, Executive Director

Capital gains tax cuts are a return to normal

We should not exaggerate the chancellor's achievement with his capital gains tax cut, as he has only returned the main rate to the level enjoyed under New Labour, but it is nevertheless a step in the right direction. Reducing the returns to investment reduces investment, it's as simple as that, and most economists therefore oppose capital taxation. However, though the overall move is a step in the right direction, it also adds layers of complexity: lower rate taxpayers and entrepreneurs continue to pay lower rates, while housing and carried interest remains taxed at the old rate. Tax preferences for certain sorts of investment work against market signals, pushing cash towards areas it can do less good in.

– Ben Southwood, Head of Research

Raising the personal allowance is a good thing, but National Insurance thresholds have been left alone again

The Adam Smith Institute has campaigned for years to take the lowest-paid workers out of tax, and progress in raising the personal allowance is to be welcomed. But there has been no movement in National Insurance contributions, which are an income tax in all but name and kick in at much lower income levels than income tax now does – at just £8,060 per year. The Chancellor should target his income tax cuts on the poor and focus on raising National Insurance thresholds.

– Sam Bowman, Executive Director

The education changes will waste children's time and taxpayers' money

Announcing large, headline-grabbing education policy changes that were largely unrelated to funding in the budget would have been forgivable if there was evidence suggesting these moves would actually help much. But forcing kids to learn maths until 18, and stay in school until nearly 5pm, is going to cause lots of pain for little gain—Danish and Chinese evidence suggests that we'll see few if any benefits. Switching to an all-academy system, on the other hand, is probably a good move.

– Ben Southwood, Head of Research