Questions in the Guardian we can answer

The Guardian asks us:

Do we really want post-Brexit Britain to be the world’s biggest tax haven?

Yes.

Next question?

Or in more detail, yes we do want tax competition. For it is that very competition, as it is in so many other areas of life, which limits the amount that we the people can get shafted. 

We all know very well that a monopoly supplier of beer would be watering that of the workers even as they raised the price. We prosecute people who build cartels for the very same reason - such cooperation between producers means that it is the consumer that is going to get screwed.

Tax competition is exactly the same logic. It's entirely true that there does need to be government - no, we are not anarcho-capitalists around here - and that means there must be tax revenue to pay for it. It is also true that a government is going to be sovereign over its own territory. Which means that the only form of competition we can have here, to protect us against that monopolist problem, is between tax jurisdictions rather than within them.

And thus the joy with which we welcome tax competition and yes, even tax havens. Simply because their existence limits the depredations the governors may make upon the pockets of the populace.

And why shouldn't it be us that leads the world in such matters? We did, after all, rather pioneer these very ideas. Our own Adam Smith leading the way in much of it of course. Starting with that point that it is economic freedom which leads to the enrichment of said populace, competition being the thing which ensures that economic freedom.  

We insist that the bakers and then butchers compete for our custom. Why should that not be true of those who would claim to rule us, those who claim to know how our money should be spent? We might even find that leaving it to fructify in the pockets of the populace provides that optimal solution.

Which is exactly why those who would rule us don't desire the system of competition - and thus exactly why we must have it.

George has missed the point again

It will not come as a great surprise that George Monbiot has managed to miss the point again. Here he is on transport and cars:

The primary aim has become snarled up with other, implicit objectives: the sense of autonomy, the desire for self-expression through the configuration of metal and plastic you drive, and the demand for profit by car manufacturers and fossil fuel producers whose lobbying keeps us on the road rather than moving along it.

Step back from this mess and ask yourself this. If you controlled the billions that are spent every year – privately and publicly – on the transport system, and your aim was to smooth the passage of those who use it, is this what you would do? Only if your imagination had been surgically excised.

The point being that a free society does not have some rational planner determining what everyone should be doing. Rather, we allow the system to be emergent from what the people actually want to be doing. And as it turns out absolutely every society where people have been able to afford cars has had people flooding to have cars. Simply because that appears to be what people want.

Whatever the purported rational planner says about it.

There is this though:

Let’s reopen old rail lines closed in the mistaken belief that train travel was on the way out (it has grown 74% since 1995) and build new lines to bridge the gaps. Let’s bring train services under public control and use the money now spent on road-building to make tickets affordable for everyone.

Privatisation has led to a 74% increase in rail use. Therefore let's reverse privatisation in order to increase rail use.

That is better than just missing the point, isn't it? 

Why the Middle East needs more female entrepreneurs

The majority of Middle Eastern and North African Countries (MENA) have a problem with female unemployment. While male unemployment has been falling in countries such as Bahrain, Iran, Jordan and Tunisia, female unemployment is growing. The country with the largest gap is Egypt, where female unemployment is four times that of male.

For a region that is cutting unemployment rates faster than any other developing region, this may at first seem surprising. Equally, the Middle East has made a huge amount of progress enrolling more girls into primary and secondary schools as well as universities. It would seem that as more jobs are on offer overall, and more women are educated and therefore employable, female unemployment should be falling.

However, rising female unemployment can simply be explained with rising female workforce participation: more and more women want to work, but the economy is struggling to adapt to provide suitable jobs. Although there has been a surge in job creation, the type of jobs on offer are centered around construction and other manual labour, areas that are often inaccessible for women.

This is why promoting female entrepreneurship is key. Not only do more start-ups equate to more jobs for everyone, firms run and owned by women are more likely to employ other educated women then firms run by men. While there is an imbalance between men and women creating start-ups around the world, this issue is particularly acute in the Middle East and North Africa. According to The Female Entrepreneurship Index, MENA countries rank in the bottom 20%, so essentially have the worst environment for women starting up companies.

If the Middle East pushes for more companies run by women, then creating the estimated 54 million extra jobs the region will have to in order to keep up with the ever-increasing population can be realised more easily. Families would benefit from an extra source of income, and educated women would no longer face a life of dependence and unemployment ahead of them.

It is also possible that by adding more female start-ups to the economy, pre-existing companies will up their game. The Global Entrepreneurship Monitor’s Report on Women and Entrepreneurship found that “the distribution of women entrepreneurs across broad industrial sectors … is comparable to those of men”, suggesting women and men basically create the same kinds of companies and compete alongside each other.

This competition boosts productivity: big gaps between countries in terms of the number of female start-ups can explain big gaps between the same countries’ productivities. A Sheffield study found that the Middle East suffers a total income loss of 27% (higher than any other region) as a result of high levels of exclusion of women from working.

The social benefits of improving women’s statuses in the workforce are not to be underestimated either. Women being poorly represented in business feeds through to them being poorly represented in politics, as money often equals influence. Women having their own source of income – independent from any relatives – is important domestically too in enabling them to take their own risks to maximise their personal happiness. If we begin to conceptualise a world in which women are just as likely to hold the highest paid, most senior jobs as men, then perhaps we will place more significance on girls’ educations in countries where it remains undervalued.

It is evident that harnessing more female entrepreneurship makes sense for everyone; it would make the population richer, more productive and would reduce gender disparities. The question is what can we do to help women in the Middle East start up companies?

One solution would be to reduce bureaucracy and corruption. According to the World Bank, simplifying businesses processes is likely to create more first-time female owners at a 33% faster rate than men. The countries with the best environments for female entrepreneurs (The U.S, Australia, the U.K, France, Denmark) all rank highly on transparency indexes too.

Secondly, women are still considered ‘legal minors’ in certain Middle Eastern countries, so are forced to, for example, ask for a man’s permission to travel. Often only men can receive tax and employment-related benefits intended for families.

The final, biggest and most uncomfortable reason why so few women are starting up businesses is for social reasons. It’s important to distinguish between the differing challenges women face in Middle Eastern countries, as life as a secular Jewish woman in Israel is very different to life as domestic worker in Saudi Arabia. There isn’t an obvious solution to this, as there is little that the governments or the markets can do to change a mindset that often does not encourage women to work.

But perhaps the first step is for more women to recognise their own potential as entrepreneurs. Helping women become entrepreneurs and employees doesn’t improve the lives of women at the expense of men, it makes the whole economy more productive, more competitive and wealthier for everyone.

A good month for neoliberalism

It hasn’t been a great year for neoliberalism, which is a word that I am determined to appropriate (like a modern suffragette, without the violence). Donald Trump and Brexit (at least, if it was down to anti-immigrant sentiment, which I'm not sure about) both make it look as if the pendulum is swinging away from pro-market globalism. But September has been quite a good month for neoliberalism.

1. The Resolution Foundation’s examination of the famous “elephant curve”, which was thought to show that global growth had mostly passed the West’s working- and middle-classes by between 1988 and 2008. It turns out that the seeming lack of growth is an artefact of population shrinkage in Japan and post-Soviet states. If you remove them from the data, income for all groups has risen very healthily across the Western world, especially for the bottom 10% in Britain. Nice one.
2. Japanese PM Shinzo Abe’s full-throated defence of free trade and the Trans-Pacific Partnership, a massive trade deal that would bring more countries into the global liberal trading order, and be a huge boon to the poor in places like Vietnam. TPP has taken flak from both Clinton and Trump during the campaign (though Gary Johnson supports it) but it may end up being passed in the lame-duck Congressional session between the election and the inauguration – a way of passing it that won't be electorally catastrophic for those involved.
3. The news that US household income grew by 5.2 percent in 2015, after years of post-crisis sluggishness. That was the largest single-year rise since records began in the 1960s, and though we can't read too much into single year rises (or falls), many people do – and this is a sign that the Western neoliberal model of relatively low regulation, low market interventions and low taxes might not be quite as useless as some of those people think. 
4. Lots and lots of banks and other forecasters are revising their UK growth estimates upwards, as the UK economy looks more resilient than we thought. Brexit hasn’t happened yet, and we don’t know what exactly it will look like, but all the hard data we’ve seen so far has been fairly positive. If a big shock was expected we should have been seeing investment and consumption both begin drop straight after the referendum. Maybe becoming a North Sea Singapore really is on the cards for Britain.
5. Italy’s populist, anti-trade Five Star movement may be facing decline after a long period of rising support. Its candidate was elected mayor of Rome earlier this year, and she has been a disaster – garbage is piling up in the streets and she has “faced the resignations of four top officials, an ongoing scandal about the sanitation chief she chose to clean up the city, and accusations of being a hapless tool of party leaders”. Darn it – looks like electing incompetent populists has its price!

I’m not trying to be panglossian. I’ll be depressed if Donald Trump wins the US election, and only slightly less depressed if Hillary does. Much of the above could evaporate quite quickly. But it does seem as if there’s some fight left in neoliberalism yet.

Brexit: By-passing Sir Humphrey

Only one radical plan for Brexit has been made since the referendum: John Redwood, and like-minded MPs, propose the UK repeals the 1972 legislation under which we entered the Common Market in the first place.
 
There are attractions to this. For example, it would allow us to take back control of our fisheries, decide our own agriculture policies, and stop sending cheques to Brussels.
 
It also involves no negotiation, the UK would unilaterally decide what continues, leaving the other 26 member states to propose an alternative – if they could ever agree one.
 
This would be a real benefit since the UK has lost all its trade negotiators and the Foreign and Commonwealth Office are notoriously underwhelming as is. It could spare us years of uncertainty.
 
Unfortunately, the Vienna Convention on the law of treaties (1969),  does not allow us to scrap a treaty just by passing or repealing a law. But it does allow a unilateral termination if there has been a "fundamental change" in circumstances since the treaty was agreed.
 
The Common Market the UK joined in 1972 is a far cry from today's centralised Federal State with its own currency, diplomatic service and (emerging) army. And the UK population was not consulted on the 2009 Lisbon Treaty, which made truly fundamental changes.
 
Another “fundamental change” is the non-delivery of the “subsidiarity” promised by Article 5 of the Lisbon treaty, under which the great majority of new regulation would be left to member states. Brussels has successfully challenged every attempt to do that and subsidiarity never happened. When the UK signed the Lisbon treaty it could not have known the EU would behave in this way.
 
Lisbon is a multilateral treaty between 27 independent countries, not the EU, which is not yet an actual state. If the UK followed Redwood's idea it could refuse to deal with the EU, since it has not signed a treaty with the EU.
 
Probably the dispute would be kicked upstairs to the United Nations. That should provide employment for diplomats into the foreseeable future, but meanwhile, the UK would be free to act as it chooses. The agenda for discussion would be interesting, but:
 
• On contributions to the EU budget, Norway only pays because its EU exports are 50% higher than its imports. On this logic the EU should be paying the UK.
• The UK would not be bound by EU regulations domestically nor when exporting to other parts of the world.
• The free movement of people has no logical link with common market access and is purely a political bargaining chip. The UK population has already demonstrated its views on the issue.
• Post-Brexit, the UK would not be bound by the Common Fisheries Policy – and indeed, it should adopt fishing rules similar to Iceland’s, as the ASI has recommended.
 
This leaves only tariffs for discussion and civil servants would not be required for that. The UK has plenty of business people well qualified in international price negotiation. Battles are won by the unexpected.

The Finnish education system is not quite what people think it is

The Finnish education system is a pretty good one. Does the job of getting almost all to the jumping off point for further study. However, rather too many people then start to project their own prejudices onto it - and the thing is it just isn't as some would have it. This is important as we discuss that subject of grammar schools ourselves.

For example, this in The Guardian:

The success of Finland’s comprehensive school system is a story now well-told. At the turn of the century, much to the surprise of the Finns, let alone the rest of the world, it emerged as a global leader in education. Pisa tests revealed Finnish pupils produced some of the world’s highest scores in maths, science and reading. In the three subsequent reports, the last in 2012, the country’s performance dropped slightly but it remains the highest-ranked in Europe.

Its success came under a system built resolutely against the grain of prevailing education fashions adopted by developed countries, including the UK, in the 1980s and 90s. In Finland, children do not start formal academic learning until seven. Driven by a commitment to equality (on both moral and economic grounds), it outlaws school selection, formal examinations (until the age of 18) and streaming by ability. Competition, choice, privatisation and league tables do not exist. “Teaching to the test” is an alien concept. Grammar schools, the UK government’s current obsession, were abolished decades ago. Free school meals, tentatively endorsed for younger pupils only in the UK, are universally provided.

The error in there is that it's not actually a comprehensive system. Here's the actual structure of the system. Or a written description.

Upper secondary education begins at 16 or 17 and lasts three to four years (roughly corresponding to the last two years of American high school plus what in the USA would be a two-year Community or Junior College). It is not compulsory. Finnish upper secondary students may choose whether to undergo occupational training to develop vocational competence and/or to prepare them for a polytechnic institute or to enter an academic upper school focusing on preparation for university studies and post-graduate professional degrees in fields such as law, medicine, science, education, and the humanities. Admissions to academic upper schools are based on GPA, and in some cases academic tests and interviews. For example, during the year 2007, 51% of the age group were enrolled in the academic upper school.

It is comprehensive up to the age of 16, just as our primary schools are comprehensive, and then there's a very rigid division into the academic and vocational streams. To the extent that the two only meet again, and this is very much a might meet again, at the PhD level.

It's entirely possible to argue that perhaps 11 isn't the right age at which to decide upon the split. Or that 16 is or any other combination of such ages. But we can't go around pointing to what is said to be the world's best system and argue that it proves that we should not split - not when that "world's best system" does indeed split.

Effectively that world's best system splits at O Levels when we measure it against the English system. And after that split there's a vocational route up and through technical colleges and something very like City and Guilds, an academic route through A Levels and universities.

You know, that system we've spent the last few decades abolishing in the name of better education?  

The incredible efficiency of government

This rather strikes home to us:

The Department of Homeland Security granted citizenship to hundreds of people who had previously been ordered deported or removed under different names because of flaws in keeping fingerprint records, according to a report released Monday.

The report from the department’s Office of Inspector General found that nearly 900 individuals were granted citizenship because neither the agency nor the F.B.I. databases contained all of the fingerprint records of people who had previously been ordered to be deported.

Nearly 150,000 older fingerprint records were not digitized or simply were not included in the Department of Homeland Security’s databases when they were being developed, the report said. In other cases, fingerprints that were taken by immigration officials during the deportation process were not forwarded to the F.B.I.

The reason for our specific interest is that one of us, in an earlier working life, delivered the source code of the KGB's fingerprint system to the people developing that FBI one. Entirely legally we hasten to add.

But the more general point is that yes, there are things that markets don't solve. What some call market failures although they are more often simply the absence of markets. 

However, don't ever get to thinking that there's no such thing as government failure.

Hard Brexit or Soft Brexit?

A few thoughts on the current debate between hard and soft Brexit, and why I prefer soft Brexit:

1. “Hard” and “soft” Brexit are not clearly-defined positions. They are usually thought of as being the UK getting no deal with the EU at all, and relying on WTO rules to trade with the EU (“hard Brexit”) and the UK staying as a member of the Single Market, like Norway (“soft Brexit”). But the eventual outcome may be somewhere in the middle, and a “hard” Brexit could mean the UK getting a rather limited trade deal with Europe, such as one that abolishes tariffs for goods but does not safeguard services firms, while a “soft” Brexit could mean Single Market-like rules governing certain sectors (such as finance) but not others. It’s probably best to think of them as referring to how extensive the free trade deal we have with Europe is.
2. A lot of what’s going on right now is posturing. This can’t be emphasised enough. It’s tempting to try to read a lot into what different ministers say about the relative attractiveness of membership of, or access to, the Single Market, or the ease with which we could adopt WTO rules and go it alone ourselves. On the other side are European politicians like Francois Hollande who have been quite gung-ho about how quickly the UK should leave the EU, or like the European Parliament’s chief negotiator Guy Verhofstadt who has been quite hardline about the supposed all-or-nothing nature of the Single Market. In my opinion, all of these people are playing to their respective galleries and posturing before negotiations begin, and their statements are best taken with a pinch of salt.
3. Hard vs Soft are not simple proxies for Leave vs Remain. A lot of Remainers prefer the hard Brexit option – Nick Boles MP, for example, kindly cited our case for the EEA Option (a soft option) in a recent post but decided that he preferred a hard Brexit option – while a lot of Leavers are leaning towards a softer exit option, as with long-time Brexiteer Roland Smith’s case for the EEA Option or Daniel Hannan MEP, who has emphasised the need for a close economic relationship with the EU (but is opposed to full Single Market membership). 
4. Free trade is not just about tariffs. It’s easy to assume that tariff-free access to an economic bloc is all you need for firms to be able to trade freely, but regulations matter a lot too. Countries can obstruct trade with regulations intentionally – one example is France’s requirement that services like Netflix carry at least 40% French-made content – or unintentionally – different safety standards, for example, might mean that a medical device made in the UK to British safety standards cannot be sold in the US without going through a very costly testing process in the US as well. Since tariffs are already very low between developed nations, modern free trade agreements are about mutually accepting other countries’ regulations (if it’s made in Britain and passes British rules, you can sell it in America too – and vice-versa) or agreeing on a shared set of rules for firms in both countries to adhere to.
5. The Single Market is not all-or-nothing. It’s a mistake to believe EU rhetoric about the Single Market being a single, monolithic thing. We are very far from having a true Single Market in services – according to a 2013 government report “the Services Directive only covers half of the services sector, and is only partially implemented”, and other regulations overlap causing inadvertent barriers to services trade. With this in mind we can begin to see the bluster behind the EU’s supposed ‘red line’ on Freedom of Movement. I think it’s quite possible that we may end up with a deal that gets us free movement of workers (people employed by or with a job offer from a UK firm) but not free movement of all people, as well as things like an emergency brake.

And why I support a “soft Brexit” (though some at the ASI disagree):

1. Something like a Swiss-style bespoke deal might be the best option for the UK in the long run. But it took Switzerland decades to negotiate that, and we have two years. Something like the EEA Option, with modifications that kept control over things like labour laws, would be a good halfway house. 
2. The banks are in a more precarious position than most people realise, and if the economy and/or the financial sector did take a hit from a hard Brexit it may be difficult to control the damage.
3. Recession is not the only danger here. A hit to Britain’s economy via the strength of the pound is a hit to people’s real disposable income, and a few years of sub-par growth is just as bad as a short recession. Brexit has never had to mean economic harm, but a hard Brexit probably would. Nobody wants Brexit to make us poorer, and there's no reason that it should – but disrupting existing trade links and making trade harder overall might do it.
4. Europe shouldn’t dominate the next decade of politics. It’s tempting to see hard Brexit as drawing a line under the question of what our relationship is with Europe. I suspect the opposite is the case – the greater the change, the more the next ten years of British politics is polarised between triumphant Outers and bitter Inners. I’m with Dan Hannan in thinking that a compromise can avoid that.
5. Similarly, for Scotland’s sake, we should try to avoid a conclusion that pushes undecided Scottish voters towards independence. The SNP is fanatically supported and governs like the ruling party of a banana republic – an independent Scotland dominated by it could be a truly dire place to live.
6. I’d quite like to see the government's experts proved wrong. As I said at the time, it was misleading of the Treasury to exclude an EEA-style option in its forecasts. I don’t think that “gravity”-based trade modelling is bogus (indeed it’s one of the most empirically well-supported models in economics), but a model is only as good as the assumptions that go into it, and it’s very bad to only model the scenario with the worst-case assumptions – which, in the Treasury’s case, was a hard Brexit.

Paul Mason discovers Hayek was right - but fails to realise it

Watching Paul Mason grapple with a new economic idea is always going to be an amusing prospect. Perhaps a little like resistance training, vast effort being expended to get nowhere. Here his concern is the new Paul Romer paper insisting that, if we're honest about it, most macroeconomic models are a bit pants.

Well, yes, they are. Mason's solution is:

Romer’s huge mea culpa on behalf of mainstream economics is a sign that, after a decade-long hunt for trolls and gremlins as the cause of crisis, academia now has to begin the search for the cause of instablity inside the system, not outside it. My hunch is that the answer lies in large, agent-based simulations, in which millions of virtual people take random decisions driven by irrational urges – such as sex and altruism – not just the pursuit of wealth.

What the left can bring to the design of these models are the insights that still draw lines of emnity through elite campuses: that class, gender and race exist as economic facts; that the 1% always acts with more information than the 99%; that crises are unavoidable but can be mitigated by accepting they might happen.

Which is rather to miss the point that Hayek made. Which is that we simply cannot do this. The centre cannot collect enough information in anything approaching real time to be able to model something as complex as an economy. Which leaves us with the economy, that market and price system, as the only thing capable of calculating the economy.

Sure, there are some thing we can vaguely plan. The central bank determines the short term price of money (as Romer insists) and influences the longer term price so a decision must be made as to what that price will be. But at any level of detail greater than that we just don't have a system.

And there's no point in invoking "computers" to replace the phlogiston of the current models. As Cosma Shalzi pointed out in "In Soviet Union Optimisation Problem Solves You." We are at minimum a century away from having the necessary sort of computing power even if we knew what we were trying to compute. But since we don't, and cannot, know what the utility function we're trying to optimise is 100 years hence doesn't get us any closer to the goal.

Oh, and whatever modelling process we do use we've still got to start with market prices meaning that we've still got to have that market and prices in the first place.

That is, the lesson that Mason has missed is that Romer's dismissal of the current models does not mean that some others are therefore going to be correct. The failure of the current best we have models means that no such models work.

As Hayek pointed out. Nothing can model an economy to the sort of level Mason desires, so that it can be controlled.

McDonnell's Marxism makes him unfit for office

Recently, footage of the Shadow Chancellor, Labour MP John McDonnell, discussing the 2007 Financial Crisis in 2013 has surfaced. The veteran left-wing backbencher was recorded commenting:

“We’ve got to demand systemic change. Look, I’m straight, I’m honest with people: I’m a Marxist. This is a classic crisis of the economy – a classic capitalist crisis. I’ve been waiting for this for a generation! For Christ’s sake don’t waste it, you know; let’s use this to explain to people this system based on greed and profit does not work.”

McDonnell has come under fire for appearing to revel in an economic crisis that resulted in job losses, recession, and not insignificant suffering. His somewhat glib response was that he was “joking”. In fairness, he probably did not mean that he was delighted by the actual impact of the crisis. That said, his comments do still reveal that he is entirely unsuited to being anywhere near power of any kind, let alone being Chancellor of the Exchequer.

Being a Marxist entails being economically illiterate and historically ignorant. It can, and in McDonnell’s case does, also imply valuing theory over people.

The financial crisis does not require a Marxist framework for explanation. From a reasonable left-wing perspective, it was the result of excessively light-touch regulation and over-reliance on the efficient market hypothesis. A better explanation is that the wrong kind of regulation was in place, which incentivised sub-prime lending. A focus on monetary policy is also instructive, with the Federal Reserve’s ultra-low Interest Rates in the early 2000s contributing to the growth of the housing bubble.

So the crisis does not vindicate Marxism. And Marxism requires extremely good vindication, given its track record, even setting aside the tyranny and massacres that it inspired and justified. Many of its central assumptions, such as the Labour Theory of Value, have been out-dated for over a century. No convincing rebuttal of marginalism has ever been advanced. Marxism’s predictions and theories about class-conflict are, at best, one-dimensional and over-simplified.

The same is true of the demand for “systemic change” and rejection of a system “based on greed and profit”. There are absolutely no success stories (quite literally none). There are no alternatives to the price system and market exchange for organising an economy. There is, of course, plenty of room for debate about what kind of market economy you want. However, whether or not you want to have more worker-owned co-operatives or a more redistributive social democracy, this can only exist within a market-based system. The profit motive is needed as an economic incentive, and greed is a universal feature of human nature that can be harnessed but not eradicated.

Command economies have consistently failed to meet people’s basic needs and have inevitably collapsed because it is impossible to circumvent the need for price signals and giving economic actors the freedom to utilise dispersed knowledge. Fantasies about a magical ‘gift economy’ remain fantasies.

Regardless of whether or not McDonnell really had been salivating over the prospect of economic collapse, his conception of it as a necessary step towards achieving Marxist systemic change is revealing. The problems of real people in the here and now are perhaps an unfortunate inconvenience, but they remain trivial compared to the heroic narrative of the workers of the world throwing off the shackles of reality.