Response to John Morgan on British Academia

John Morgan of the Times Higher Education has penned a short article criticising the report I wrote for the Adam Smith Institute on the political views of British academics. His article is titled, ‘Adam Smith Institute ‘lurch to the left’ report: flimsy figures’. I should begin by noting that I did not use the phrase “lurch to the left” anywhere in my report; rather, this was the phrase that several newspapers used in their write-ups.

Morgan criticises my report on the grounds that I compared figures from a self-selecting poll that asked about vote intention to figures from a systematically conducted poll that asked about party closeness. He apparently regards this comparison as totally illegitimate. My response to his criticism is twofold. First, as Morgan himself acknowledges, I noted the caveats pertaining to the comparison between the two sets of figures several times. For example, on p. 4 I wrote:

Relatively little good evidence is available on the political views of British academics.

And on p. 5 I wrote:

It is important to be aware that Halsey sampled his respondents differently to the THE, and posed a slightly different question, which means the comparison over time should be treated with a certain amount of caution.

Second, despite the fact that the data were collected differently and a slightly different question was posed in each case, comparing the two sets of figures arguably still provides some information about possible trends within academia. Of course, a 50-year repeated cross-section of academics would provide much more reliable information, but unfortunately this sort of survey has never been conducted. (My hunch is that the THE poll understates the current left-liberal skew in British academia, though admittedly I have no data to prove this.)

It is noteworthy that, according to data analysed by Sam Abrams, the sizable left-liberal skew in American academia has increased since the 1990s. This is consistent with Duarte et al.’s earlier finding that the left-liberal skew in social psychology increased dramatically over the 20th century. (More references related to trends in American academia can be found here.)  

Nonetheless, even if the left-liberal skew in British academia hasn’t increased at all since 1990 (which seems unlikely), it would still be quite substantial today. Moreover, most of my report was dedicated to explaining why left-liberal views are overrepresented in the academy, and to exploring what consequences that overrepresentation may have had. Many academics I speak to readily acknowledge that there is a left-liberal skew. Indeed, it is an effect size of such large magnitude that it is almost too obvious to report.

Morgan also criticises my report on the grounds that I made claims about the impacts of left-liberal overrepresentation for which I provided no empirical evidence. He writes,

Using a self-selecting survey as a rough guide to possible voting patterns in a forthcoming election is one thing. It is another to conflate that survey with totally separate data and use this flimsy base to make sweeping judgements, as Carl does in suggesting that growing “ideological homogeneity” has led to “the trend towards curtailments of free speech on university campuses” or that it “has arguably led to systematic biases in scholarship”. There is no evidence in his report that this is true [emphasis added].

While reasonable people can disagree about the validity of comparing two sets of figures from different sources, on this point I would claim that Morgan is simply wrong. I discussed numerous previous papers that have investigated the impacts of the academy’s left-liberal skew. One important such paper is titled, ‘Political Diversity Will Improve Social Psychological Science’ by Duarte et al. Another is titled, ‘How Ideology Has Hindered Sociological Insight’ by Chris Martin. Yet another is titled, ‘A Social Science without Sacred Values’ by Winegard and Winegard. Yet another is titled, ‘Microagressions and Moral Cultures’ by Campbell and Manning. For other references, please see Section 5 of my report. Morgan may well disagree with these authors’ claims, but it is simply false to say that I cited no evidence.

According to Morgan, my “wafer-thin report looks like an attempt to import a US-style campus culture war into the UK.” It strikes me as odd to use the word “import” here, given that––from what I can tell––a “US-style campus culture war” already seems to be raging pretty fiercely at British universities. Just in the last few years, there have been heated controversies about: no platforming (e.g., here, here and here), trigger warnings (e.g., here, here and here), micro-aggressions (e.g., here and here), decolonising curricula (e.g., here, here), and other identity politics issues (e.g., here, here, here and here).

In summary, I would disagree with Morgan that comparing two sets of figures from different sources is futile, especially given the paucity of available data. I would reject his claim that my report provided no evidence as to the impact of left-liberal overrepresentation on scholarship and free speech. And I would note that he does not dispute that fundamental fact that British academia has a sizable left-liberal skew, which is an interesting phenomenon in need of explanation.

Good ideas take time to come to fruition

Alistair Darling tells us that perhaps the time has come for us to have proper road pricing:

Over a decade ago, as transport secretary, I backed plans for road pricing, unsuccessfully. This time, there’s a better chance, not least because the ubiquity of smartphones has solved many of the technological issues. Even so, success will depend on getting the politics right, which means gradually bringing in a scheme, over ten years or more, but laying the groundwork now.

We would not back the use of a smartphone itself as the mechanism but the ubiquity (and cheapness) of the technology does indeed make it much easier. Which is why we backed the idea back when Darling was in office, why people were identifying the idea with us as far back as 1989. A fuller exposition of the idea is here.

At heart the idea is terribly simple. Road space is a scarce resource, scarce resources must be allocated in some manner. Economics tells us that normally - although not always - the best method of allocating a scarce resource is by price. Thus let us allocate the scarce resource of road space by price.

This is of course open to the accusation that the rich will get all of the benefit, only they will be able to afford to drive their Rollers through Hyde Park. Yet this is not actually how this works. Lighter traffic volumes, constrained by that price, makes all other forms of transport in the area more efficient. Bicycles flow more freely, buses are faster, even the air breathed by pedestrians kills them more slowly.

The benefits of road pricing flow only partially to those who still drive, the majority to everyone else who isn't driving.

Madsen Pirie of this parish insists that our job is to be off there howling in the wilderness over some idea or other and then to turn up a decade later when everyone agrees with our previous lunacy as the accepted wisdom. It's obviously a pity that this has taken three decades so far (and Alan Walters was arguing for it as far back as the 50s) but perhaps we'll get there all the same.

Short-termism: steady on now

A lot of recent economic problems have been put down to short-termism. Many accounts of the financial crisis held that loan originators and mortgage investors knew they were taking on a lot of risk, but were under pressure from "quarterly capitalism"—the need to present a strong bottom line to investors every financial quarter. Many people ascribe some of "secular stagnation"—slow growth around the world since the financial crisis, and persistently low interest rates—to an unwillingness of firms to invest for the long run in their business, choosing to give the money back to their stockholders through buybacks and dividends instead.

But both of these are wrong. Far from being short-termist, US investment bankers were so convinced their own banks had good financial strategies that they invested heavily in their own firms. And they weren't alone: practically everybody—regulators, ratings agencies, government-sponsored enterprises and banks—believed that US housing was on the up. The investment turned out to be foolish, but it was ignorance and poor guesswork, not inevitable upshot of bad bets.

And there is no reason why society should always do new investment through existing firms. Would it have been better to try and invent smartphones through existing camera companies like Kodak? Would on-demand video have turned out better if Blockbuster, not Netflix, had been the first big player? There is a reason that young entrepreneurs and start-ups have grown to dominate some businesses, creatively destroying older players in the process. Young firms are nimbler and more flexible and manoeuvrable.

This is why buybacks and dividends—ways that firms return money to shareholders—are not necessarily any bad thing, or any indication of worrying short-termism among business. It doesn't necessarily mean lower investment overall; mostly that investment will just be happening in different places.

Now to some extent, this is just conjecture: it makes sense that households would switch investment from one venture to another when companies divest cash. But a new paper from Charles Wang at Harvard Business School, and Jesse Fried at Harvard Law, strongly supports my thesis with empirical data. (Hat tip to Jose Ricón's wonderful third links post for bringing the paper to my attention.)

Wang and Fried look at the capital flows data—the huge outflows from S&P 500 firms to their shareholders that worry so many commentators—and find that these are balanced by gigantic flows into investment, but in other ways and areas. As well as buying some stock back, firms issued more. They also funded investment with new borrowing. On top of that, stockholders used much of the cash coming out to invest in non-S&P 500 firms.

During the period 2005-2014, S&P 500 firms distributed to shareholders more than $3.95 trillion through stock buybacks and $2.45 trillion through dividends. But S&P 500 firms absorbed, directly or indirectly, $3.4 trillion of equity capital from shareholders through share issuances.

We show that while S&P 500 firms are net exporters of equity capital, public firms outside of the S&P 500 are net importers of equity capital. During the period 2005-2014, they absorbed $520 billion of equity capital, or about 16% of the net shareholder payouts of S&P 500 companies.

Public firms engaged in approximately $800 billion of net debt issuances, equal to 32% of the $2.50 trillion in net shareholder payouts. When a firm borrows $X and issues a dividend of $X, there is no reduction in the firm’s assets.

What's more, Wang and Fried caution that even this much smaller number likely does not represent firms missing out on investment opportunity due to a self-destructive urge to give their owners money. 

Firstly, net income, the denominator in this equation, is calculated after R&D spending—but firms spend a huge sum on that (around the size of 25-30% of net income itself) before we get to this point. Simply including R&D may balance the scales entirely. Secondly, firms do not need to spend out of cash, and can easily—and often do—issue more equity or debt. Thirdly, cash in the hands of investors does not all go into consumption—it may go into IPOs, private equity, venture capital, or crowdfunding.

The paper is devastating to the simplistic case that buybacks, driven by myopic short-termism, hurt growth, which should always have seemed silly. In 1900 should we have worried if Standard Oil gave money to its investors, because they might just consume it all, and not invest in the companies of the future? Capitalism proceeds by constant entrepreneurial rearrangement of the structure of production—big existing firms are sometimes as bad at picking winners as the government.

Why Lord Lawson's right about tax reform

Ex-Chancellor Lord Lawson appeared on Sky News yesterday and backed abolishing Corporation Tax and replacing it with a 'Trump style border-tax'. Perhaps he read the ASI's 2017 Budget Wishlist where I called for exactly the same thing.

This might all sound rather surprising. Indeed, reading Sky News' write-up, which makes reference to Trump using the tax to make Mexico pay for the wall, you might think that Lawson was advocating a tariff. Far from it. He was actually backing the House Republican corporate tax reform plan, which effectively abolishes Corporation Tax as we know it, and replaces it with a kind of sales tax like VAT (with a few caveats).

There's another nit to pick – despite it being described by some as 'Trump' style, we don't actually know if he supports it. He seems to use the term border tax interchangeably to mean either an protectionist tariff or the border adjustment that's part of Ryan's plan.

The main objective of the Ryan plan is to replace the current system of corporation tax, which discourages investment lowering long-run GDP. That’s why economists like Alan Auerbach and Larry Kotlikoff (as well us at the ASI) are backing the plan.

The Ryan plan contains three major changes to the status quo.

1. It lets you deduct the full cost of capital investment immediately. In order to calculate their taxable corporations currently have to work through a plethora of complex rules and depreciation schedules. The Ryan plan simplifies this by allowing for the immediate full expensing of capital investment.

This is why it's known as a Cash Flow Tax, instead of navigating depreciation schedules and deducting interest costs – firms simply pay tax on their cash flow (Revenues-Expenses).

Beyond saving on paperwork, this has two major benefits. First, it will increase investment, boosting productivity and ultimately workers' wages. When Estonia brought in a Cash-Flow Tax, they saw investment surge compared their neighbours. The Tax Foundation points out that "between 2000 and 2004, Investment growth in Estonia was 39 percentage points faster than neighboring Latvia and Lithuania."

Second, it fixes one of the biggest and most pernicious distortions that exists in both the UK and US tax systems – the debt equity bias. The status quo treats investments funded through debt much more favourably than investments funded by raising money from investors (equity). This is a problem because debt (and not equity) tends to attract government bailouts.

2. It's Border-Adjusted. In other words, the taxes are paid based on where the final transaction happens - in tax jargon it's 'destination based'. As I mentioned before under this system firms calculate how much tax they pay by subtracting their expenses from their revenue. But border-adjustment complicates that slightly.

Imported inputs no longer count as deductible expenses and exports no longer count as taxable revenue. This is typically the most controversial part of the proposal. Its opponents have painted it as a protectionist move that will push up costs at shops like Walmart and hit ordinary Americans hard. If they were right, the tax would be a terrible idea. But I (and many other economists) think they’re mistaken.

It's worth looking at why you'd want to make a tax border-adjustable. It's all about the base . The tax base, that is. It shifts the tax base from domestic production to domestic consumptionIf it’s implemented then companies will never be able to reduce their tax bill by moving overseas, effectively giving America the lowest corporate tax rate in the world—zero. That makes the US incredibly attractive for foreign investment.

It’s nuts to attack firms for following the rules of the current system, but where there is a problem with tax avoidance—Base Erosion and Profit Shifting—the solution is fixing the underlying rules. Dylan Matthews over at Vox has a really nice explanation:

"Right now, the US taxes companies on their profits, both those earned in the US and those earned abroad that are brought back into America. But because foreign profits aren’t taxed until they’re brought back to the US, companies have a big incentive to make US profits look like foreign profits to avoid taxes.

For example, suppose that a car company — let’s just call it, uh, General Motors — makes $1 billion in profit manufacturing cars in the US and selling them domestically and exporting them to subsidiaries abroad. That would normally subject it to about $350 million in taxes, since the US has a 35 percent corporate tax rate. But GM could instead have its foreign subsidiaries pay $1 billion less for the cars they buy from the US branch of the company. That wipes out GM’s US profits, leaving it with no US tax liability and shifting the profits to the subsidiaries abroad. If those subsidiaries are in countries with a low or nonexistent corporate income tax, that could wind up being a very good deal.

Same goes for companies that import goods. Imagine a company — call it Chiquita Banana — that has subsidiaries in Latin American countries, buys up bananas from banana farmers, and then sells them to the US branch for resale. Suppose it, too, makes a $1 billion profit doing this. It could then just have its Latin American subsidiaries charge $1 billion more for the bananas, leaving the US branch with no profits and shifting them to Latin America."

Border-adjustment makes schemes like these redundant. Why undercharge a foreign subsidiary when your exports already don't count as taxable revenue? And why overcharge for imported inputs when you can't deduct your imports as costs.

So why are people opposed?

Opponents worry this will impose a huge tax increase on importers. In essence, they object that this is a protectionist measure aimed at deterring overseas trade. Indeed, with supporters like Trump describing it as a big border tax, it's hardly surprising many people have got that idea.

But it turns out that almost all economists believe that the border-adjustment won't have any effect on the overall balance of trade.

Simultaneously taxing imports and and effectively subsidising exports by letting firms exclude export revenue from their taxable income should cause the US dollar to appreciate to the amount that'd make it trade neutral.

The import tax would raise the cost of imports and cause fewer imports to be demanded. This means that foreigners are getting fewer dollars, increasing scarcity and driving up the value of the dollar. At the same time, the export subsidy side of things would make US goods cheaper, the US would then sell more goods overseas and this would drive up the demand for the dollars you need to pay for them.

Martin Feldstein, who served as President Ronald Reagan's top economic advisor (and long overdue for a Nobel Prize), explained it an article for the Wall Street Journal:

"Since a border tax adjustment wouldn't change U.S. national saving or investment, it cannot change the size of the trade deficit. To preserve that original trade balance, the exchange rate of the dollar must adjust to bring the prices of U.S. imports and exports back to the values that would prevail without the border tax adjustment. With a 20% corporate tax rate, that means that the value of the dollar must rise by 25%.

With a 25% rise in the value of the dollar relative to foreign currencies, the $80 net price of U.S. exports would rise in the foreign currency to the equivalent of 1.25 times $80, or $100, and therefore back to the initial price. Similarly, the 25% rise in the value of the dollar would reduce the real import price to the U.S. retail customer back to $125/1.25, or $100, as it is without the border tax adjustment."

Now there are admittedly a few concerns here.

Some are worried that the currency adjustment wouldn't happen immediately and would hurt American importers in the meantime. I'm sceptical of that fear. For example, look at the Mexican Peso the morning after Trump was elected or the pound after the Brexit vote. Big currency moves can be priced in even before a policy change has been formally announced.

Others are concerned that the currency wouldn't fully adjust because of the third element of the Ryan plan.

3. It'd make wages a fully deductible expense. So far there's very little to differentiate the destination-based cash-flow tax I'm describing to a VAT. But the wage deduction is what sets it apart. It'd allow firms to fully deduct wage costs from their taxable income, which they can't under the current system. This makes the proposal more progressive than a similar VAT.

It's essentially equivalent to a big cut to payroll taxes like national insurance or social security. Indeed, economists at the (truly excellent) Tax Foundation looked at the distributional impact of the plan and found that it's more progressive than existing corporation tax set-up. This is because part (about 25% in their example, maybe more according to ASI research) of the burden of corporation tax falls upon labour and corporation tax deters new investment which depresses productivity lowering wages.

But the wage deduction is probably the biggest obstacle overall. First, some have argued that it'd make it hard to past the WTO. The WTO allows border adjustments for indirect taxes like VATs but doesn't for direct taxes like corporation tax. Without the wage deduction it'd be very straightforward to get it passed the WTO, but with it another nation might argue that it distorts trade in a way that a VAT doesn't. If the WTO were run by economists this argument would get short shrift, but sadly lawyers still run the world and this could become a hiccup. It'd hardly be the end of the world as the US could simply replace the wage deduction with a big-league cut to payroll taxes and push it through.

Second, some have argued that the wage deduction would impede the currency adjustment because wages are deductible for domestic production but not imported inputs. I'm sceptical of this argument because the wage deduction wouldn't cancel out the effect of large payroll taxes that hit domestic producers but not necessarily importers. And I doubt that those objecting to this move would object to an economy wide wage-subsidy as protectionist.

That's it, in a (rather large) nutshell. I think Lawson and the House GOP are right to back this move. It removes large impediments to investments within the corporate tax system, it'll boost GDP and wages, and effectively gives the US (and Britain if we follow) most competitive business tax system in the world.

It’s really important for us in the UK to follow this debate, for two reasons. The first is because after Brexit we need to make our tax system as efficient as possible to encourage growth. But the second is because if the US does go ahead with this reform plan then we will have little choice but to follow suit if we want to remain competitive.

Some people really don't get this housing problem, do they?

From the latest attempt to sort through Britain's housing problems:

To solve these problems, we have to recognise that land has special characteristics that make the normal rules of supply and demand inoperable – and make market exchange a poor way of handling it. Land is inherently scarce, and its control is inherently political.

Land is a scarce resource therefore we must use politics not prices and the market to allocate it? We're not certain that we've seen that particular economic stupidity before to be honest.

Economics is that study of the allocation of scarce resources and there really isn't anything in there which says that markets should not be used for scarce ones. We do agree that markets don't work, don't really exist, when a resource is not scarce - there's not much of a market in sea water for example. But that's the absence of scarcity making prices not work, not the presence of it. 

Having entirely not got it our enthusiasts then go on to miss the implication of this point that they note:

The 20th century saw the same story played out all over again. This time, the focus was not on farmland but on housing. Today Savills estimates that the UK’s housing stock is worth £6.8 trillion – compared with £190bn for all agricultural land.

Not all of that value of the housing stock is the land underneath and the permission to build upon it but most certainly a goodly chunk of it is. At which point the solution should be obvious. That housing stock sits upon some 3% of the land of the country. There's perhaps another 7% under the factories, the schools and the roads, meaning that there's another 90% to go. We could and should simply convert some more of that low value agricultural land into the higher valued use of being built upon.

This is also known as making us all richer, converting some part of a scarce resource from a lower to a higher valued use. The only reason we don't is because we've allowed politics to determine the allocation of land not markets and prices.

As is so often true the solution to our problem is not that government, or politics, must do something but that we must stop government from doing the damn fool things they already do.

Blow up the Town and Country Planning Act and successors.

Exporting: Does Whitehall Know Best?

With Brexit looming, Theresa May was right to elevate international trade to Cabinet level. The government unit responsible, UKTI, accordingly transferred from BIS to the new department.  This was the opportunity to upgrade that much criticised unit to meet the new challenge.  Formed some 25 years ago from foreign minded members of the Bored of Trade and trade minded diplomats, with top management coming and going, it has not proved a success: British exports have been sluggish relative to, say, Germany and the Netherlands.  In the competitive world of governments supporting their exports, UKTI is the British Leyland.

Seasoned sales forecasters know one should provide a target or a date by which the target will be achieved, but never both together.  In 2010, UKTI accepted, along with a hike in its funding, George Osborne’s target of doubling exports to £1tn p.a. by 2020.  They had no clue, still less a plan or quantified stages, how to achieve that but the ever less likely target officially remains.

Of course some changes have been for the better; export and inward investment successes have been achieved but, taken overall, radical reformation is needed.  None of the top management seems to have any personal experience of creating exports. The organization is top heavy with too many staff in London and too few International Trade Advisers (ITAs) around the UK.  An average of 13 UKTI staff in each of the 100 overseas posts also seems excessive but quality is more important than quantity.  The structure in China is inappropriate and wasteful. There are too many centrally driven initiatives distracting junior staff from the main business of export (and inward investment) support and trade visits. 

The current UKTI CEO, Catherine Raines, is improving IT communications with a “customer” database and performance measures aligned with the Treasury target but we should not attribute all exports to UKTI; business plays a part in achieving them too. The key measure should be UKTI net added value, i.e. the value of exports, less the value of imports included and less the share of that which the exporters would have achieved without UKTI help.

Fundamentally, UKTI (and now presumably the new Department) has the wrong model for successful exporting.  The economics/digital analysis research model (what you know) favoured by UKTI is far less useful than networking personal contacts (whom you know) model supported by experience and academic research.

In general, the quality of help provided by UKTI to British business is patchy and depends on quality of ITAs and overseas posts.  It also depends on the extent of interference, initiatives and ceaseless change imposed by UKTI HQ.

Large numbers of new exporters can only come from the ranks of the SMEs yet UKTI HQ has little or no empathy with SMEs.  They are more comfortable with government relationships and large companies who should be able to look after themselves.  Advising SMEs in the UK (but not overseas) should be handed over to the British Chambers of Commerce who are umbilically connected with SMEs.  Overseas British Chambers should support, rather than compete with, UKTI and CBBC staff.

In short, the allocation of goals, responsibilities and resources within the new International Trade Department needs focus and realignment: government should only do what only government can do.

Caffe Nero doesn't pay corporation tax. Again.

The annual harrumphing of indignation about Caffe Nero's tax affairs has arrived. Yet again:

Furious MPs last night accused Caffe Nero of gaming the system after it emerged the company did not pay a penny of corporation tax yet again last year.

Despite making a profit of £25.5million, the British-based firm avoided a £5.1million tax bill after claiming its holding company made a £24million loss.

Company filings revealed the coffee chain racked up £257.6million in sales in the year ending May 31, 2016, up almost 7 per cent on the year before. The firm, which has 613 shops in the UK and Ireland, has not paid UK corporation tax since 2007 despite generating more than £1billion in sales over that period.

That other notorious tax dodger, Google, runs an interesting little free to use service and entering "cafe nero tax" into it returns, on that first page of results, some interesting stories. In the Mail, early March 2016. June 2015. And so on back to 2012 when all was revealed:

However, Rome Pikco did not pay any corporation tax, because of the interest it is paying due to its debt structure. The accounts say it is the first year Rome Pikco has made a pre-tax profit, on which corporation tax would become payable.

Rome Pikco was created as a holding vehicle in early 2007 after Mr Ford led a buy-out of Caffe Nero for £225m. It had previously been listed on the London Stock Exchange.

In each of the previous years – from May 2007 to May 2011 – Rome Pikco has made a pre-tax loss.

The accounts show that at the end of May, Rome Pikco had £375.7m of gross debt, including a £179.1m fixed rate loan from its parent company.

In addition, the firm’s debts include bank loans of almost £100m, a mezzanine loan – part debt, part equity – of £50m and £49m of “payment in kind” (PIK) notes. These are issued by the company, usually to shareholders, and usually carry a high rate of interest.

In the accounts, the company confirms that as a result of the reduction in interest rates on shareholder loans – thought to include the PIK notes – a £62.6m credit was transferred to the May 2012 profit and loss account.

Due to the amount of debt, Rome Pikco spent £37.9m in interest and financing costs.

The current owners of the company bought it with debt. There is interest to pay upon that debt. And corporation tax is a tax upon profits. The reason Caffe Nero does not pay corporation tax is because it does not make a taxable profit.

This information is readily available, seems simple enough to us and has been that easily available for half a decade now. But this simplicity seems to escape those MPs who actually make the laws on such subjects.

Don't we deserve to be ruled by people rather better than this? Rather better informed at least?

The TUC laments that the workers' wages have fallen

The TUC tells us that wages have fallen in recent years:

Workers in the UK saw their wages fall by 1% a year in the period following the financial crisis, putting the country in 103rd place in a global ranking of pay growth compiled by the TUC.

The trade union umbrella body said wages rose in many parts of the world between 2008 and 2015, but average pay in the UK fell once the impact of inflation was taken into account.

Well, yes, no one's very happy about it but that is what happens in a recession. It's also nothing at all to do with the financial crisis - however much that might have led to the recession.

For what is really going on in a recession is that wages are ahead of productivity. It therefore doesn't make sense for people to employ workers - the value of their output is less than the cost of employing them. This is true whatever the cause of the recession. And the solution is entirely obvious, wages must fall relative to the value of the output. That is, a fall in real wages.

Again, no one likes this but it is the solution. We can do it by lowering nominal wages but as Keynes rightly pointed out people don't like this. The internal devaluation of Greece is a harsh, harsh, thing. We can also do it by a bit of inflation, nominal wages are static or even rise, real wages fall and we're less grumpy about it because we are prey to the money illusion.

But it is still true that the solution for labour being too expensive to employ is for labour to become less expensive.

And we even have managed to construct a labour system which does this with minimal pain. Back at the start of the troubles there were predictions that unemployment would rise to 4 or even 5 million. Mass unemployment being another way in which real wages get screwed down. This didn't happen - and it didn't happen because we now have a labour system flexible enough that real wages, when necessary and unfortunately, can and will fall without imposing that sort of pain.

Contrary to the bleating here from the TUC this past decade has been a massive triumph of the British system as it is. We've managed to build a system where the outcome of the largest recession in near a century is a mild decline in real wages rather than mass unemployment. This is what success looks like.

The ASI's Budget 2017 Wishlist

ASI Executive Director Sam Bowman said:

Britain’s property market is completely broken, and the tax system is part of the reason why. There are three big problems that need to be addressed:

1) Replace business rates and council tax with a land value tax that funds local government directly. Rates and council tax are taxes on property values, so they penalise businesses and homeowners who invest in their buildings, and in most parts of the country they charge massively more for commercial use than for residential use. What’s more, even though these taxes mostly end up being paid for by landlords in the form of lowered rents it doesn’t feel that way to businesses, who fiercely resist the revaluations that are necessary to make the tax fair. We should replace business rates and council tax with a tax levied on the landowners directly for the value of the land, not the buildings on top, and commit to frequent revaluations that avoid large changes like the ones that many businesses are now facing. Ultimately we should aim to eliminate the distinction between residential and commercial use, though this would take time to avoid large rises in residential property taxes.

2) Scrap stamp duty land tax altogether. Stamp duty is probably the worst tax we have, and raises comparatively little money for the Exchequer compared to the damage it causes. For many people stamp duty is the largest tax bill they’re ever faced with, and it gums up the housing market by giving people a big disincentive to moving house – keeping older people stuck in large homes that younger families need, and preventing people looking for work from moving to more prosperous parts of the country.

3) Give housing benefit recipients and council home occupants control over their lives. Housing benefit is a huge problem because it effectively forces recipients to spend large amounts of money on housing that might be better spent on food, clothes, heating or other necessities if they could move to a cheaper home and keep the difference. We need to de-hypothecate housing benefit from housing and turn it into a simple cash payment, hopefully freeing up some more valuable housing stock and giving people more control over the priorities in their own lives. Similarly, social housing should be sold off with the proceeds used to pay for more generous cash payments and targeted tax cuts for people at the bottom of society.

ASI Head of Projects Sam Dumitriu said:

The overall tax system is flawed in a similar way, riddled with exemptions and distortions that mean it imposes a much large economic burden than necessary for the amount raised.

1) Scrap complicated, irrational and wasteful VAT exemptions. Use the money to help people on low incomes by lowering the Universal Credit taper rate and cutting National Insurance Contributions. VAT Exemptions and zero ratings are designed to make essential goods affordable for people on low incomes, but they frequently defy logic and perversely reward the rich. Defining essentials and luxuries is a fool's errand and has lead to lengthy court battles about cakes and biscuits. When they work as designed they're woefully inefficient. Take kids clothes: zero-rating gives a single parent buying a £5 pair of school shoes a £1 tax cut, while those with more money than sense get a £40 tax cut on £200 Dolce and Gabbana kids shoes. Defining essentials and luxuries is a fool's errand, like the case where McVities produced a giant Jaffa Cake to prove that they were cakes, not biscuits, and indeed zero-rated.

Better to scrap them altogether. That'd raise over £30bn, we could use that money to fund a big cut in the Universal Credit taper rate (63 to 50) so that work always pays and cut taxes that hit the poorest hardest like National Insurance.

2) Abolish Corporation Tax and replace it with a Border-Adjusted Business Cashflow Tax to boost investment, growth and wages, and eliminate tax avoidance. If Britain is to thrive outside the European Union, we should aim to have the most investment-friendly tax code in the world. Our relatively low Corporate Tax rate has helped draw in investment from McDonald's, Facebook and Snapchat. But we can go further. Corporation tax deters investment, lowers wages and is frustratingly easy to avoid. Let's follow the lead of Republicans in the US and move to border-adjusted business cash flow tax that only levies taxes on sales made to the UK.

There’s three parts to this. First, it would tax all sales made in the UK just like VAT. Second, it would have an unlimited exemption for capital investment guaranteeing that future consumption wouldn’t be hit. Third, it would fully exempt all wages from tax making it progressive (counteracting Employer NICs that fall heaviest on low and middle earners).

3) Ditch complex green taxes, wasteful subsidises for renewables and costly environmental regulations. Replace them with a simple carbon price and use the extra revenue to raise the National Insurance threshold to £11,500 and cut contribution rates. Britain tries to tackle climate change with a myriad of green taxes, numerous subsidies for renewable energy and a thicket of regulations. This amounts to central government trying (and in many cases failing) to pick winners. This imposes large costs on consumers and creates an uncertain climate for business investment.

There's a better way. Impose a simple, uniform, revenue-neutral carbon tax and let free enterprise, not big government, find the best solution to reducing carbon emissions. We should use the extra revenue raised to cut the taxes that hit the poor hardest. Lifting millions out of National Insurance Contributions and cutting rates.

We told you so...

When Sadiq Khan proposed that Uber drivers should undergo formal English tests, we derided them as unneccessary arguing that they had little to do with protecting the public, and everything to do with protecting the wages of black cab drivers.

It turns out that (as usual) we were right. The Sunday Times reports:

"Minicab drivers are being asked to write or answer questions about life on Mars, the aurora borealis and snowboarding to prove they have a good enough grasp of the English language...

Alan Skelly, a 55-year-old Uber driver for the past three years who left school at 15 without qualifications, said he had been left feeling embarrassed after being asked to read a series of paragraphs about the aurora borealis and to answer questions about the passages during his test. “A lot of people are going to struggle with this,” said Skelly, who has also worked for 20 years as a freelance chauffeur driving passengers including Zara Tindall. “Just the words aurora borealis are going to catch out a lot of people.”"

This is a classic example of pointless red tape. Someone who has worked as driver for over 20 years now risks losing his minicab license. Of course, as I pointed out back in September for The Times, these £180 tests are completely unnecessary.

"Uber already has an excellent system for weeding out bad drivers. If my driver can’t understand basic instructions, I’ll give him a 1-star rating. Under Uber’s strict rules, just a few 1-star ratings lead to a driver getting kicked out. Try complaining about a sloppy cabbie and see how far it gets you."

Sadiq of course should show some common sense and scrap these pointless tests.

But let's look on the bright side. Over the years special interest groups have successfully lobbied for all number of ridicoulous rules and regulations, think how much richer we could be if we made the effort to ditch them.