Economic Nonsense: 21. Inheritance tax is needed to prevent some having an unfair start in life


This question carries the assumption that life is some sort of race in which we are all struggling to outdo everyone else. Life is not like that. We are not racing against others because we all have different characters and different goals. There is a different finish line for each of us. Even the pace at which we choose to pursue our goals varies with the character of individuals. One widely-held aim of parents is to give their children a decent life, even a better life than they had themselves. Many put effort into achieving this; it seems to be a natural and widespread aim. When society prevents them from passing on their assets to their children after death, they often find other ways of achieving that aim. This can take the form of using influence to place their children in comfortable jobs. It can be done by transferring the assets while they are still alive. It can lead people to set up complex trust schemes beyond the reach of the taxman.

Inheritance Tax is taxing money that has already been taxed when it was earned. The provision parents worked to make for their children, paying tax as they did so, is now taxed again, removing part of their incentive to create wealth in the process. For many recipients, the bequest comes as a lump sum when they are already established and probably own their home. It is thus available for investment or to start a business. Taxing it greatly reduces these possibilities. The capital pools built up by a family business such as a shop, for example, can be dissipated on death by Inheritance Tax, with a consequent economic loss to society, a loss that impacts employees and customers.

People are not equal and cannot be made so. They are differently talented. Some are genetically equipped to develop athletic prowess if they work at it. For others it might be music or mathematics. The notion that 'fairness' requires they should all have equal chances sits ill with what life is actually like. We should not be trying to impose an equality that does not fit, but on extending to everyone the opportunity to better their lives.

Economic Nonsense: 20. Only government intervention can address the gender pay gap


There was a gender pay gap when the work required physical strength. This is because men are, on average, physically stronger than women. They are more capable of hauling a plough or heaving a sack of coal. When work meant physical labour for the most part, men were economically worth more. They were not intrinsically worth more, it was just that, on average, their labour could add more value than that of a woman. They were paid higher wages because of this. As physical labour has been made easier by machines, and desk jobs and service industries have become more significant employers than heavy industry, the labour of women has been more equal to that of men, and their pay has risen accordingly. In Britain today there is no significant gender pay gap. Women in their 20s earn a little more than their male counterparts.

There is a pay gap as they grow older, but this is a maternity pay gap, not a gender pay gap. Women who take time out of their careers to have and raise children earn less over the years than those who do not. This is for most of them an option they have chosen to exercise. Most do it because they want to, trading the higher salary that might otherwise result for the greater satisfaction and happiness engendered by starting a family. As they take time out of work, they mount the promotion ladder more slowly than their counterparts who make uninterrupted progress.

It is very important when looking at the statistics on this to compare like with like, that is to compare full-time employment with full-time employment. Some women prefer part time jobs because they offer better opportunities to achieve the balance between work and family that they seek. Part time jobs tend to pay less than full time employment, creating the erroneous impression that women are being paid less for the same type of work and the same amount of it. They have chosen a lifestyle that pays less because they prefer to have children be a part of it.

Economic Nonsense: 19. Corporation tax is paid by businesses


It is always attractive to the political classes to impose taxes on business so that people can benefit from the spending this makes possible. Corporation Tax is one of these whose name suggests that it is paid by corporations. Many people suppose that this involves taking money from companies and transferring it via government into services for ordinary people. They suppose that corporations just shrug and accept the loss in profits this involves. This is a naïve myth. The tax levied by government is part of the price that people, not companies, pay. When you buy beer the price of your pint includes the tax the brewer has to pay to government. When you buy whisky it is even more, about 80% of the nominal price. The same is true for petrol and other fuels. VAT is included in what you are charged for goods and services.

The point is that Corporation Tax is paid by people, not by corporations. The tax that companies are charged forms part of their costs, and is reflected in the costs of producing their goods and services. Studies show that about three-fifths of the impact of Corporation Tax falls on the workers, reducing the wages they could otherwise be paid. Of the remainder, some falls on shareholders by way of reduced dividends, making it harder for the firm to attract capital to create more jobs. Some falls on customers, passed on to them in the form of higher prices, which lower demand for the firm's products.

Corporation tax thus acts to curb economic activity, hits growth, and makes people poorer than they would otherwise have been.

If firms tried to absorb the tax without passing it on in lower wages and increased prices, as some critics suggest they could, they would become less profitable and less attractive to investors, who would in turn respond by investing somewhere else instead.

Economic Nonsense: 16. Government should own and run vital industries such as transport and energy


This is laughably untrue.  Where governments own and run industries, whether 'vital' or not, they pursue political rather than economic objectives.  In the case of things such as transport and energy, they will be tempted to keep prices below economic levels to gain electoral popularity, or at least to avoid unpopularity. Such industries will tend to be under-capitalized, since capital expenditure is less visible to the public than are transfer payments such as pensions and welfare.  Governments cannot spend the same money on both, and the former attracts less support than the latter.  This under-capitalization threatens future supplies.  In the case of transport it means that there will probably not be enough infrastructure built to meet future demand.  In the case of energy it poses the threat of future power cuts.

If the state owns and runs transport and energy, those industries will be more prone to strike action.  Unions behave more cautiously with private firms because they do not want to risk the firms closing or going bankrupt.  This does not happen in the public sector, so the unions have more clout.  For the same reason state industries will also tend to be over-manned.  This is not mere theory.  All of these things actually happened in state-owned industries in Britain, including transport and energy.  Train services were unreliable and equipment was shoddy and outdated.  In the energy sector there were blackouts.

Although we use the term "public ownership," the public cannot exercise any of the rights of ownership as they do when things are privately owned.  Instead it is politicians and bureaucrats who decide priorities, rather than businesses trying to anticipate and cater for public demand.  When people talk of the need for the state to run 'vital' industries, we do well to remember that few are more vital than the food industry.  One can imagine what it might be like if the state controlled the supplies, determined what should be produced, and only sold through state-owned outlets.  We don't have to imagine this.  It happened in Soviet Russia and was characterized by shortages, low quality produce, and interminable queues at state shops.

Economic Nonsense: 15. Protection of domestic industries will safeguard jobs


Sometimes when jobs are threatened by cheap imports there are calls for government to step in and safeguard those jobs by subsidies, tariffs or import quotas.  The aim is to make the domestic goods artificially cheaper by subsidy, or to make the imported goods more expensive by taxing them. Some domestic jobs can be retained, at least temporarily, by this tactic.  But the more expensive domestic goods will not be able to compete on world markets outside the country.  They will find their foreign market share diminishes as people opt for the cheaper ones. Where subsidies are used, domestic taxpayers are made poorer; where tariffs are used domestic customers lose access to cheaper goods.  In both cases they are paying to support the industry concerned.

Some years ago in the UK the Lancashire textile industry was protected in this way.  It might have prolonged its decline, but it did not stop it.  Mass-produced low-cost textiles were being made more cheaply by foreign competitors.  Eventually the UK textile industry moved to high added value luxury and designer products that sold at a premium in both domestic and foreign markets.  Some UK textile products have become world-beaters, without the need for subsidies or tariffs to protect the jobs they sustain.

The advent of the World Trade Organisation (WTO), which succeeded the General Agreement on Tariffs and Trade (GATT), outlaws most of this kind of protection by multilateral agreement.  This means that calls to protect domestic jobs by such means now fall upon deaf ears.  The government has signed pledges not to engage in such practices, in return for the agreement of its trading partners to refrain similarly.

There are still grey areas, though, with Boeing and Airbus each alleging that the other receives indirect government support.  It is generally true that when governments all try to protect domestic jobs at the expense of foreign ones, everybody loses.  The world found this to its cost in the era of the Great Depression.

Economic Nonsense: 14. Government can create jobs by spending


Government can certainly create the appearance of new jobs by spending.  The minister can be televised proudly cutting the tape to open a government-funded business employing 100 people.  The problem is that government has to take that money from the private sector in order to do so.  It can do so by taxation, inflation or borrowing, and the effect is to give the private sector less money to spend.  That, in turn, means lower demand for its goods and services, less economic activity and fewer transactions.  The net result is that jobs are lost in the private sector as a result. Part of the political problem is that the government-funded jobs can be seen, with ministers taking credit.  The private job losses take place quietly, without people realizing that they are the result of government activity.

There has been much discussion in academic circles as to whether the publicly-funded jobs gained are more or fewer than the private sector jobs lost, but there is a respectable literature to suggest that they are fewer, and that 100 jobs created with public money will result in more than 100 jobs disappearing or not happening in the private sector.

Another part of the problem is that government-funded jobs are created in accord with political rather than economic priorities.  The projects sanctioned are those that find favour with ministers, rather than those created to meet demand.  They can be done to court electoral popularity rather than to satisfy economic needs.  Jobs funded by public money often need public money to sustain them afterwards, and risk disappearing if public subsidy is withdrawn at some stage in the future.  Governments are notoriously bad at "picking winners" to support with public funds; it is not their own money they are putting at risk, so they are less likely to do cautious and full accounting.  Private investors tend to be more hard-headed since they stand to incur any losses that come about.

Economic Nonsense: 13. Development and growth harm the environment and cause pollution


This is misleading.  The early stages of economic development can certainly adversely affect the environment and cause pollution.  When a nation is lifting itself out of abject poverty and subsistence-level life for its citizens, it values the wealth being generated more than it minds the environmental degradation that accompanies it. The early stages of Britain's Industrial Revolution saw factories going up, chimneys belching smoke, and land degraded by mining.  For people at the time these factors were less important than the improved standard of living it brought, a standard that lifted most of them out of precarious subsistence and the ever-present threat of starvation.

When Britain grew rich enough, they were able to afford a cleaner environment.  Money was available to spend on adequate sanitation and sewage treatment, on cleaning up land damaged by development, and by controlling emissions with legislation such as the Clear Air Act.  Other developing economies went through similar stages.  Today it is the rich countries that can afford to produce more cleanly.

Newly developing countries pollute more because clean production is more expensive.  Wood burning and coal burning pollute heavily; gas burning and electricity production can be done more cleanly.  Today China, which depends heavily on coal as an energy source, faces major air pollution problems in its cities and contamination of its rivers.  But development has lifted most Chinese out of malnourishment, and now they are at the stage where they have enough wealth to start redressing their environmental problems.

Development and growth need not cause pollution and environmental damage once countries become wealthy enough to use cleaner technology.  Wealth and technological progress can solve this problem; living more simply cannot.

Economic Nonsense: 12. Minimum wage rates raise living standards for the low paid


When minimum wage rates per hour are set by law, it can raise the wages of those already in jobs and who manage to stay in those jobs.  It has a negative effect on those who lose their jobs because firms no longer find them worth employing at the new rates.  It has negative effects, too, on those trying to enter the labour market who do not yet have enough skills to be worth the minimum wage to potential employers. Firms employ people because they are worth more to the firm than the wages they cost it.  For low-skilled people their value to the firm might be quite low.  Very often it is by starting on low wages and acquiring on-the-job skills that people move up the employment ladder.  Someone who has worked has learned the importance of good time-keeping and following instructions.  They have learned how the firm likes to do things, and are more valuable than an unknown potential employee.  If the minimum wage is set at a level above that of their value to the firm, they find it difficult to secure those starter jobs.

In many countries those with low skills tend to be young people and sometimes those from ethnic minorities, especially if they have not had an adequate education.  When minimum wage rates are increased, there often tends to be increased unemployment among these categories.

When minimum wages were introduced in the UK, the level was initially set sufficiently low that it had a minimal impact on employment.  Subsequent increases are believed to have increased its impact, leading some economists to suggest that a better way of raising the take-home pay of low earners is to stop taking tax off them.  Raising thresholds for income tax and National Insurance increases their wage without it costing employers money and pricing their services out of the market.

Economic Nonsense: 11. Inflation is a price worth paying to boost employment


It used to be thought there was a trade-off between inflation and employment.  The economist William Phillips published a 1958 paper in which he found an inverse relationship between money wage changes and unemployment over nearly a century.  The relationship was called the Phillips Curve, and was used by legislators to stimulate the economy by inflation to boost employment rates. Unfortunately the Phillips Curve went vertical in the 1970s as countries were beset by high inflation and high unemployment occurring simultaneously.  People were building expectation of inflation into their calculations and their economic decisions.  Inflation rewards debtors at the expense of creditors and makes people less ready to lend.  Investment in productive activity diminishes.

No less seriously, the assumption of future inflation makes forward planning difficult.  People do not know what money will be worth by the time their goods reach the market.  What inflation does do is cause misallocation of resources.  People see the new money created by government and make false assumptions about what they should invest in.  When they find that the demand was unreal, goods go unsold and there is an economic downturn with increased unemployment.  This brings about the 'stagflation,' in which high inflation and high unemployment happen together.

Inflation can reduce unemployment in the very short term, but only at the expense of more unemployment following afterwards.  This is why some governments have boosted inflation in an election year to take advantage of the apparent stimulus, then face the recessionary consequences after the election is safely out of the way.  The strategy is now called boom and bust because an inflationary boom is followed by a real-world bust.

Economic Nonsense: 10. Government spends more efficiently than private individuals


This is not only untrue; it is laughably untrue.  Sometimes supporters of big government spending claim that government is more efficient because it doesn't need to make profits.  Sometimes they say it doesn't need to spend on advertising.  Sometimes they say it can borrow more cheaply than private businesses because it has taxpayer backing.  The facts show that even with profits, advertising and higher borrowing costs, the private sector is vastly more efficient.  The UK's nationalized industries were ailing giants that gobbled subsidies when they were state-owned.  When they were privatized they became profitable private companies that paid taxes instead of collecting subsidies. Private investors are more careful because it is their own money at risk.  The public sector corresponds to the fourth quarter of Milton Friedman's quadrant:  they spend other people's money on somebody else.  The private sector is competitive; it has to attract funds competitively.  It has to anticipate future demand to avoid investing unproductively.  Private projects seek ways to curb costs, to employ people efficiently, and to keep as close as they can to a timetable.

Public projects are notorious for cost overruns, for over-manning, and for being completed years behind schedule.  Private projects are undertaken in response to market signals; they are subject to commercial pressures.  The aim is to produce items that will meet future demand and generate profits.  Public projects, by contrast, are subject to political pressures.  They are often undertaken with a view to electoral popularity.  The projects chosen, their scope and their location are often undertaken to secure the backing of various interest groups and localities, in the hope that this will translate into electoral support.  None of this makes for efficient spending by governments.