Fiscal Phil's mish-mash means a botched budget

Today the Chancellor suggested his budget would help ordinary Britons, but with a Google Tax, a hidden hit on capital losses, and bad economics in a business rate cut, Philip Hammond looks out of touch with how the many millions on these islands live our lives.

Matt Kilcoyne from free market think tank the Adam Smith Institute said that what the Chancellor gave with one hand, he took with the other:

“Quintupling the investment allowance from £200k to £1m will mean businesses invest in equipment and machinery, it’s a promise to kickstart the British economy’s makers and doers. But if Mrs May and Mr Hammond want to see American levels of GDP and wage growth then they should move to have all investment be deducted from profits before tax.”

“What the Chancellor gave with one hand though, he took with the other as he hit firms large and small that make capital losses by restricting their exemptions—meaning less risk taking, less profit and fewer economic dividends.”

“It was a similar story in personal allowances. While the taxman will let us keep more of what we earn from April next year, the Treasury won’t link this with inflation for another two, so millions more will be dragged into higher brackets. The Chancellor’s penny pinching in the here and now will hit us all in the pocket later.”

The Adam Smith Institute’s Daniel Pryor, rebuked the Chancellor’s decision to bring in a digital revenue tax:

“A digital revenue tax—lifted straight from the Corbynite playbook—will punish the millions of people who shop online and use online services every day. The Chancellor should embrace tech firms that find innovative ways of giving consumers what they want at lower prices: not penalise them for having the temerity to scale-up or move beyond the traditional high street business model. He might not intend for the tax to be passed onto ordinary Brits, but economic facts don’t care about fiscal Phil’s feelings.”

Sophie Jarvis, from neoliberal think tank the Adam Smith Institute said the Chancellor’s cuts in business rates would mean a windfall for rent-seekers:

“The Chancellor thinks that businesses are like babies: he likes them when they’re small and cute, but rapidly loses interest and affection as they grow up (particularly if they’re tech focused). Hammond’s small business rates cut of ⅓ is good politics but bad economics. Cuts to business rates will lead mostly to a windfall for landlords rather than small business owners as they’re able to charge more rent on the properties these businesses use.

“The £675m future high street fund to help transform high streets back into places people live, work and socialise is welcome. In particular we welcome the policy transform unused commercial property to residential.”

Perhaps cannabis legalisation should be just a reverse nationalisation

We are firm supporters of the legalisation of cannabis supply around here. As all know of course. But perhaps the Canadians need to think a little more about exactly how this is done. They’ve just legalised and there are significant supply shortages around the country.

The reason being that they’ve tried to design a marketplace according to the manner in which bureaucrats think a market should operate. This may or may not have an intersection with reality.

For example, a grower might have a licence to grow. But they then need another, separate, licence to market. Which can take 341 days to arrive according to one estimate. Other such problems abound.

At which point some sense:

The only near-term solution to the supply shortage, according to Durkacz at FSD Pharma, is to allow retailers to sell product sourced from the black market.

“You would instantaneously have a supply-demand balance and then you could try to convert people from the black market to the legalized market,” he said. “That’s probably the only way to solve this in the short term.”

Our only problem is about that “short term” qualification.

Consider nationalisations. When the NHS was created what actually happened was the nationalisation of all of the extant medical facilities in the country. On the useful basis that this is where we’d find all the people who could do medical treatment and the equipment with which to do it. The NHS built its first hospital in 1963, fully 15 years after its creation.

Perhaps the same should apply in a legalisation? We know where the people who know how to grow pot are. How to distribute it, get it to market and so on. They’re over in that black market. Thus legalisation could be, probably should be, simply a matter of allowing them to continue without being jailed for their activities.

Well, perhaps should if our intention is to supply what people desire at a price they’d like to pay and at the time they’d like to do so. If the intention is to prove that bureaucrats can’t design market mechanisms then obviously, carry on as right now.

Venezuela Campaign: the amazing corruption machine

In 2003 Hugo Chavez implemented a currency control system in Venezuela, which in turn created a black market for foreign currency and the means for corrupt insiders to manipulate these controls to earn huge sums of money.

PDVSA, the state oil company and the source of almost all of the nation’s export earnings, was required to transfer dollars to a new agency, the Commission for the Administration of Foreign Currency (CADIVI), which then sold those dollars at an overvalued artificial official rate, but only to a selected few. Those who do not have access to this official rate must turn to the black market to obtain foreign currency.

The rigged central exchange rate through the state-controlled DICOM auction system as of 22 October 2018 was 63.81 Sovereign Bolivars (VES) to 1 USD. The black-market exchange rate was 171.34 VES to 1 USD. Without access to the preferential rate, dollars are almost triple the price. Since Venezuela is heavily dependent on imports paid for in dollars, life is nearly three times more expensive without access to the official exchange rate.

Who accesses the official rate? The most recent auction data showed only 9 companies and 975 individuals as successful bidders, from a total of 40,045 companies and 563,777 individuals registered to participate. With a population of 32 million, the vast majority of Venezuelans’ demand for foreign currency is being satisfied by the black market. Even among those who are the registered participants, 99.98% of companies and 99.83% of individuals needed to seek dollars on the black-market. Only a selected few are allowed to buy at the official rate, enabling those insiders to cash in to an extraordinary extent.

This corruption machine enables 1,000 dollars to be turned into 1 million in a matter of days. Anyone with privileged access to the system can earn a fortune by purchasing US dollars at the official price and then selling these dollars on the black-market. The process can be repeated time and time again. The corrupt officials who run the system earn a fortune in kick-backs from those to whom they grant access to the preferential rates.

The US Department of Justice has indicted a sizeable number of Venezuelans on money laundering charges related to funds obtained through the corrupt foreign exchange scheme. The DOJ alleges that the defendants exploited the disparity between official exchange rates and market values to defraud PDVSA and, by extension, the people. Court documents state that in 2014 the open market rate was 60 bolivars to $1, while the official rate was just 6 bolivars to $1. The defendants are accused of acquiring bolivars on the open market and selling them for 10 times that value on the official exchange and then seeking to launder the proceeds of their corruption through South Florida real estate and other investments in the USA. Venezuelan officials are accused of taking bribes for giving access to the favourable official exchange rate.

The $1.2 billion in this case is just a drop in the ocean. Hundreds of billions of dollars have been stolen through Chavez’s currency control system. It represents the largest theft in Venezuelan (and possibly South American) history.

The robbery continues even today. That the government is committed to allowing regime elites to enrich themselves during a massive humanitarian crisis is deeply reprehensible.

More information on the Venezuela Campaign can be found on their website. 

Doing something sensible about the High Street

Some 15% or so of retail sales now take place over the internet, with delivery vans not High Street shops involved. Some 15% of the country’s retail space is empty, This is not a coincidence.

We finally have something sensible being done and said about this:

Philip Hammond will use next week’s Budget to deliver a package of relief measures for the UK's battered high streets, including cutting business rates by a third for half a million companies.

The Chancellor is expected to say on Monday that he has listened to cries for help from the nation’s embattled shopkeepers by unveiling £900m in immediate business rates relief for 496,000 small retailers.

Mr Hammond will also launch a £650m fund to transform high streets by improving infrastructure and transport access. The “Future High Streets Fund” will help local areas switch under-used retail space into homes or offices, alongside a move to relax town planning laws that will make it easier to change...

The business rates stuff is blather, driven by a fundamental misunderstanding. Rates are incident upon landlords, not tenants.

However, easing change of use is indeed sensible (wonder where Mr Hammond got the idea from…). We tend to think that we’re short of homes at present. We tend to think we’re oversupplied with shops. Conversion from one to the other seems a sensible enough solution to both problems. No point in actually wasting the built estate.

The one puzzle is why this will cost money. If we free change of use, have market prices, then it shouldn’t cost anything at all. As relative prices change then so will uses, nothing else needs to be done, does it?

Our regular proof that Keynesianism doesn't work because politics

John McDonnell is doing us all a favour here as he’s proving why Keynesianism doesn’t in fact work as a method of managing the public finances. Not for any reason that the equations don’t work but because politics doesn’t work that way:

The shadow chancellor, John McDonnell, has said Labour would reverse cuts made by the government since 2010 as Labour highlighted more than £108bn needed to “end austerity”.

Labour’s pre-budget review said it would take £42bn to reverse departmental spending cuts. The Institute for Fiscal Studies (IFS) had already highlighted another £19bn needed to stop further cuts to government.

Some £33.5bn would be required to reverse cuts to social security and social care, Labour said.

Recall what the basic theory is. Prices and quantities do not automatically - and certainly not immediately - respond, therefore it’s possible to the economy to be too long in a recession, even to permanently be below productive capacity. Therefore, in such recessions, government spending - hopefully debt financed not monetary expansion but if needs must - should rise in order to jolt the economy back to full output and employment.

Once this has happened spending, the deficit, should return to normality. Even, perhaps, shrink a little in order to take some of that induced heat out of the economy.

True, that description’s not going to get an A* in an exam but it’s a useful enough pencil sketch.

So, why won’t it work? Because politics doesn’t work that way. Look at what McDonnell is arguing. He’s starting from the peak of that deficit and spending blowout in the last recession and claiming that any reduction in either is cuts, austerity, that must be reversed. Rather than the entirely normal second half of that Keynesian theory. That is, the theory doesn’t work as no one is willing to implement it all, only the spending and fun half of it.

Now it’s true that we shouldn’t blame McDonnell for this, he’s just doing his job. Arguing that all freedom, liberty and all effort by everyone should be absorbed into the state. That being the long term effect of this Keynesian ratchet. But there’s no reason why the rest of us should agree with him either, blame or not.

Given Uber why repeat the mistake with Airbnb?

We do need to learn the lessons of previous arrangements in order to prevent ourselves making the same mistakes again. So it is with this sharing economy lark.

What Uber revealed to us was who was really benefiting from the previous taxi licencing regime. In New York the licence to run a cab could be rented out for some $80,000 a year. That gave such a licence a capital value of some $1 million. This is pure rentierism, the extraction of an economic rent simply for owning the right government issued piece of paper.

The irruption of Uber into the market has brought down that rent, the licences are now worth perhaps some one tenth of that peak sum. Good.

Now, consider that lesson as we look at Airbnb:

In extreme cases such as Barcelona, the only answer might be a clampdown. (It would certainly help if Airbnb could be bothered to pay the €600,000 finethe city levied on it in 2016.) In other places, a more nuanced approach might be appropriate. Many cities now put a cap on how many nights per year a property can be rented short-term and it may be a good idea, too, to cap the number of properties a single owner can list, or limit the number of permits enabling owners to list property in a particular area. The lesson should be that no company is above the law.

We must, as previously with the cabs, limit the number of suppliers to the market. By law, with licences. The effect of this?

In Barcelona, it used to cost €250 (£221) for a short-term rental permit. Now that such permits are no longer being issued, they change hands for up to €80,000. It’s “sharing” for the rich, maybe, but not for the rest of us.

Our correspondent (in The Guardian, of course) complains about the creation of pure economic rents then demands that more be created? Do these people even read their own articles?

Why would we want to create capital value, incomes, for those who just happened to be in the right place when the pieces of paper were handed out? It’s an absurd ignorance of the market effects of restrictive regulation, isn’t it.

The latest gender pay gap misunderstanding

We entirely agree that we should look at the numbers for the gender pay gap. For only by doing so can we possibly uncover whatever reasons might be behind any gap that does exist. Which is an essential prerequisite for reaching a decision as to whether there’s anything which need be done about it or not. This making this problem exactly the same as all other ones of course. Unless we know what and why we cannot decide upon whether let alone what action, can we?

The following really not being all that helpful:

Women earn less than men and their wages grow more slowly even among the youngest cohort of workers, putting paid to the idea that having children is solely to blame for harming women's career progression.

Across the UK, women earn on average 9.8pc less than men per hour worked. Much of this difference is often ascribed to career choices after the birth of children.

But the latest Office for National Statistics data show that even the youngest workers aged between 16 and 29 earn different amounts, before many have children. The average first-time mother in England and Wales was 28 years and 10 months old in 2016, with men waiting until they are 33 and four months before having a baby.

Yeeees…this is how numbers work.

That 9.8% is the median. That 28 and 10 months is also the median age at primagravidae. This means that half of women will have their first child before this age, half after. If it is indeed children which produce the gender pay gap then that effect will strike half of women before that 28 and 10 months. Meaning that the effect of children in producing a gender pay gap - again, assuming this is the cause of it - will be there in the measures of pay at ages before the median women has given birth.

The figures being used are here by the way. It’s an odd data set to use, not really set or laid out for this purpose. This is a better one. You know, the one that shows as very small gender pay gap, one rising as we approach that age at which the median woman has given birth? Exactly as we would expect if it is children producing it?

If you're going to change the world it pays to understand it first

We’ve all noted the modern mantra. The tech companies have lots of money, we want it. We being those who would tax or regulate it off them - those who insist they know better how to create and dispose of human wealth than those who are actually successful at doing both. We should all also note the problems with the mantra:

And finally, we need to tax corporations more aggressively so we can all share the benefits. According to the European commission, global technology companies pay just 9.5% tax, compared with 23.2% for other companies. The irony is that they could easily afford to pay more. Most use their vast profits in share buyback schemes that inflate their share price. Buying your own shares is pure financial laziness.

Technical details first. The low tax rate is rather driven by the manner in which profits made and kept offshore were not taxable events for US companies. Now they are - that tax rate is going to rise as we see the next wave of published results. That is, that loophole is already closed.

It’s also laziness - or financial ignorance - to insist that those share buybacks are to inflate share prices. The idea of rewarding shareholders is what companies are for of course so it wouldn’t be a problem if that were all that was there. But as even casual observers will note tech companies tend to pay the staff in stock. Which must come from somewhere. That being the use of some of the profits made to buy in stock to then hand on to the staff.

Stock buybacks are, in part at least, the wages bill.

And to the conceptual error. We must tax so we share the benefits? Seriously, the only value to economic activity is the amount that can be extracted from it to pay for diversity advisers?

This is drivel, isn’t it. Sure, Zuckerberg’s got billions. And 2 billion people get to use Facebook. Larry and Sergey could climb to the Moon on their piles of money - and the rest of us gain a search engine of all of human knowledge. One recent estimate putting that consumer value of that engine at $18,000 per user per year. As opposed to the perhaps $50 or $100 in revenue it channels to its producers. Revenue note, not profit.

By far the greatest value of any organisation is that we get to enjoy the output of it. If you’re off to change the world and you don’t get that point then you’re not going to be able to reform very well are you? Even, not be able to reform coherently.

They're rather missing the point of having a market at all here

Some people - many more than we should be comfortable with - will complain bitterly about markets. They allow people to do what those complaining think they shouldn’t be, d’ye see? This being rather the point of having a market, so that people are free to do what others think they shouldn’t be. Subject to those usual Millian constraints about fists and noses of course.

This complaint is therefore rather missing the point:

Urgent action is needed to tackle discrimination against benefit claimants by mortgage providers, according to the Residential Landlords Association (RLA), which has found lenders representing 90% of the buy-to-let market refuse a loan where a tenant is on housing benefit.

On Saturday, the Guardian revealed how NatWest told one landlord that she would either have to evict her tenant of two years, or take her mortgage business elsewhere, after a blanket ban by the bank on benefit claimants.

The bank’s stance came to light after Helena McAleer, who lets out a home in Northern Ireland, approached NatWest to remortgage her loan.

She refused to evict her tenant, a vulnerable older woman who always paid the £400-a-month rent on time for more than two years, and instead moved her loan to another provider.

NatWest is lending out depositor's’ money - for those of an MMT persuasion, funding the creation of new money - with shareholders on the hook if it isn’t repaid. How it decides to do that is up to NatWest, that’s what the shareholders have hired that management to do after all.

It’s possible that there are some risks, costs, to lending to buy to let landlords who rent to benefits recipients. At which point that discrimination makes sense. Or perhaps there are no such costs, in which case NatWest shareholders are losing that business and thus money. Which is their cost and their fault for hiring that management which made that bad decision. This being the point of this capitalist idea, that you lose if you get your investment decisions wrong, win if you don’t.

The point of the market part being that everyone gets to make different decisions and that’s how we zero in on what actually does work, being able to thereby discard all those myriad options which don’t. This being the point, the market is our discovery process.

So, capitalism and markets working just as they should. For do note the final part, someone else has a different opinion and the loan was financed. So, it’s all working. What the heck is anyone supposed to do about it?

Madsen Moment - Public Health England

Dr Pirie takes on our state nutritionist in this week’s Madsen Moment. Bad enough that we have a publicly paid body to tell us what we can and can’t eat, but even worse that they fail to issue advice that actually works. Instead they offer pseudo-science, with one-size-fits-none recommendations and proposing bans on perfectly fine foods. Give it a watch below.