The IMF's Misdiagnosis

The International Monetary Fund has downgraded its world growth forecast for this year by 0.2 percentage points to 3.2%. That is the fourth cut in a year, and not much more than the 3% rate that the IMF has previously regarded as a ‘technical recession’.

So why the downgrade – particularly when the IMF is predicting slightly higher than forecast grown in China, of 6.%? They cite many factors. Chinese growth is still a lot slower than it was a few years ago. Europe and Japan seem stuck in low growth despite their central banks' expansionary policies. A strong dollar has caused America to make less and import more. Then there is Greece and doubts about the Eurozone.

And the IMF solution? The world has been growing too slow for too long. It needs a boost. Central banks should keep down interest rates, print money and spend taxpayers’ money on infrastructure improvements.

Wrong diagnosis, wrong. Things always change: economies go up and down, exchange rates fluctuate, markets rise and fall. And easy money, cheap credit and government overspending is what got us into this boom-bust cycle in the first place.

What’s happening is perfectly simple. The eclipse of communism saw countries – like China – joining the world trade system and developing their production markets. Technology helped the globalisation of world trade. So stuff got a lot cheaper. But Western governments still stuck to their generous inflation targets, their central banks pumping out money and keeping down interest rates. It was a huge boom – some of it down to trade making things cheaper, right enough: but more of it down to the continuing, misguided expansionism.

So consumers bought luxuries like crazy, government built new motorways, bridges, schools and hospitals, and people invested in the land, plant, equipment and workers needed to produce these things. When the music eventually stopped, our productive assets were in the wrong places, producing the wrong things for our post-crash economies.

It might have been right to palliate that with an immediate monetary expansion. But should interest rates have stayed at ‘emergency’ levels for the past five and more years? That just perpetuates the artificial boom and means we get by, without doing much. If you want to know why productivity is falling, look no further. If we want to return to economic growth, we have to recognise that the 2000s boom made us malinvest on a huge scale. And we need to grit our teeth and write off those malinvestments. Not perpetuate them with further expansions.

New paper: Stuck in the middle with EU

Why it’s time we cut out the middle man and become global citizens.

EU membership has been made redundant by global regulators, according to a new paper from the Adam Smith Institute released today. Published independently of both the major campaigns, the report reveals that the UK often has little say over EU regulation, as in reality so much of it originates at the global level. 

Rather than the expected ‘bonfire of regulations’ upon exit, or a situation where the UK is at the mercy of Single Market regulations without having any influence on them, the free-market think tank has highlighted that 80% of Single Market legislation falls within the ambit of existing international organisations and is consequently open to global regulation. The EU itself originates very few market standards and rules, the study shows, despite its sprawling size, and it frequently outsources and copies global agreements verbatim.
The new paper Global Regulators: Stuck in the middle with EU, written by European Union expert and ASI fellow Roland Smith, lays out how the UK’s ability to influence global legislation would change for the better following an exit from the EU.
The author notes that whilst we are told EU membership is necessary so that we “have a say” in the rules affecting our industries, the fact is that everything from fishing to food packaging and car standards to disability rights are now driven by a myriad of global organisations – even the infamous rule on straight cucumbers is now in the hands of a global body.
Contrary to popular belief, the adoption of standards by the EU from bodies such as Codex is not voluntary, and is enforceable by the World Trade Organisation’s Technical Barriers to Trade Agreement. The TBT Agreement makes global bodies the ‘manufacturers’ of the law, whilst the EU is often merely the ‘wholesaler’.
The paper goes on to argue that rather than stay in the EU, the UK should focus on formalising and democratising the UK’s global governance involvement, bringing the UK’s full voice to it as an open, global trading nation. In the context of Brexit, ‘isolation’ is near impossible in the globalised world, in which Britain could operate at the new global top table as opposed to the EU’s shrinking one.
Author of the report Roland Smith said:

“The rhetoric about the UK being isolated is out of place when you consider the global landscape. If the EU didn’t exist, we wouldn’t be in a rush to invent it. The global single market is overtaking the EU, and since we are not in the Euro and have no need for political integration, it is time to leave and take our place as a truly global citizen.”

Sam Bowman, Executive Director of the Adam Smith Institute said:

This report shows that the strongest argument for staying in the EU is actually rather weak. The EU is increasingly best understood as a regulatory intermediary, codifying for member states rules that have been agreed at an international level. If so, it is not clear at all that the UK would have less influence on global regulation if it left the EU – indeed, paradoxically, Britain may have a louder voice at the top tables if it was outside the EU rather than in.

Read the whole paper here.

The Morality of Tax Avoidance

In the wake of the Panama Papers leak debates about the morality of taxation are back in vogue. Unlike tax evasion, tax avoidance is, by definition, legal. This is not the same thing as saying it’s acceptable. No one wants to live in a society where everything questionable is banned or where you cannot criticise someone for doing something legal.

There is certainly scope for closing the tax loopholes that create the biggest avoidance schemes. There is something fundamentally unfair about the very rich avoiding the punitive rates paid by ordinary people. But this is a policy question that can only be answered by serious proposals for reform, not self-righteous pontificating about tax dodgers being ‘disgusting’. And, in any case, the biggest problem with the UK’s convoluted and twisted tax code is that ordinary people are overtaxed due to, for instance, the insidious creep of fiscal drag. 

But given that, picking an example at random, having a beneficial interest in an offshore investment trust that does not pay UK tax (even if you do later pay UK tax on your dividends) is completely legal, is it ethical? The idea that people are obligated to enthusiastically pay as much tax as they can is perverse and absurd (it’s also usually hypocritical, but I’ll set that aside). The view that all taxation is theft may not have much currency outside of hardcore libertarian circles. The opposite view, that there’s no such thing as ‘your money’ and you have an absolute obligation to give up whatever the government thinks is fit, sadly seems to be gaining currency. 

The perspective that avoiding tax is inherently theft rests on some very peculiar assumptions. It needs to be accepted that current tax rates are either just, or not high enough, that the right things are being taxed in the right way, and that taking advantage of any loopholes is wrong. 

For instance, in order to think that setting up a company to avoid income tax is immoral, you need to assume that: (i) income should be taxed at a higher rate than corporate profits; (ii) there is an obvious and absolute moral distinction between income and profit; and (iii) there are objective grounds to determine when it is legitimate to register a company. 

And what about government encouraged avoidance schemes, such as ISAs and tax relief for risky investments? Is it wrong to take advantage of these?

It also needs to be assumed that providing the government with all the funds it demands is moral. It’s easy to talk about hospitals, schools, the roads, defence, and welfare. But that skirts over the real question of whether government should be funding these things at all and, if so, whether they should cost what they do. 

It also ignores less palatable areas of expense, such as spending on foreign wars, nuclear weapons, a quixotic and destructive drug war, nonsensical vanity projects, bloated and pointless government departments, and corporate welfare. The same people who attack tax avoidance also (I think correctly) decry much of this, yet remain absolutely committed to the ‘obligation’ to fund the state’s largesse above and beyond what the law requires. 

These issues may not have an obvious answer. But that’s exactly why tax dodging cannot just be lazily and self-righteously vilified as ‘disgusting’ by definition.

Nostalgia Must Not Distort British Industrial Policy

The collapse of the British steel industry is not an easy process. The job losses from the closure of Port Talbot could cause serious social and economic problems for the local community, much as the loss of manufacturing industries around the UK has. 

There is an important debate to be had about how to compensate the losers from trade. Perhaps deregulation and other market promoting policies will stimulate growth of new businesses and jobs. Perhaps the government should do more to fund and promote retraining programmes. Perhaps a basic income is the answer for easing transitional periods of structural unemployment that can result from creative destruction. 

However, the notion that the government should step in and subsidise a private buyer or even nationalise Tata steel is absurd. The Port Talbot plant is out-dated and not profitable. Even without the present supply glut, British steel faces an uphill battle to be competitive. The money required to sustain the industry would astronomical. Imposing tariffs can and will cause a trade war and will harm industries that use steel. And, in the long run, the industry will collapse and the jobs will be lost anyway.

So why is there widespread enthusiasm for terrible industrial policy? At root, I suspect, it comes down to nostalgia. There’s an odd romanticism that surrounds heavy industry, which comes from several, equally ill-conceived, notions.

There’s the nationalist sentiment that bemoans the loss of Britain’s former glory as a manufacturing powerhouse. There’s the fetishisation of industries dominated by organised labour. And then there’s the eternal pull of strategic trade policy hubris and the vanity of thinking that economic policy can be strategised and directed.

Most of all, though, I think that manufacturing nostalgia stems from the belief that manual labour is inherently morally superior to the service industry and, especially, finance. This may represent a hangover from the labour theory of value, and an emotive mistrust of capital and exchange. ‘Real work’ is obviously more important, more honest, and more inherently valuable, than facilitating, administrating, and furthering networks of production and exchange. The idea that prices are determined by supply and demand, and that value cannot be measured by effort and exertion alone, is either an alien concept or offensive. 

People losing their jobs and communities being faced with turbulence cannot be waved away. However, mythologizing manufacturing and propping up unviable plants is not only economically nonsensical but it creates and perpetuates a false and dangerous cultural narrative.

Panama, ethics and the law

Discussing the Panama Papers with the BBC's Moneybox presenter Paul Lewis, I said I thought it odious that politicians were deliberately conflating (illegal) tax evasion with (legal) tax avoidance – such that innocent people who simply park their money offshore because it would be taxed to death at home are lumped in with Russian mafia bosses and scumbag dictators concealing the proceeds of their thefts. Lewis was having none of it: there is a big difference, he claimed, between simple folk putting a few bob in an ISA, as Parliament fully intended they should, and smart advisers setting up short-lived paper companies in Panama just to get round the tax rules.

For some years, UK Chancellor George Osborne have been on the same bandwagon, criticising "aggressive tax avoidance" – such as companies shifting cash round subsidiaries in other jurisdictions in order to get the best tax treatment, celebrities billing the BBC from purpose-made companies so that they don't pay 40% income tax, people paying themselves in ways that are not liable to national insurance contributions, wheezes to avoid capital gains tax – and all that sort of thing. And Prime Minister David Cameron has fully signed up to that line.

Now he is being hoist by his own petard. As his father, a financial adviser, put clients' funds in Panama, people naturally wondered whether the Prime Minister benefited from Panamanian tax avoidance. He yielded to pressure to publish his tax returns. These showed that (among other things that will be pored over by the papers) he stood to save £80,000 in inheritance tax by using the 'lifetime gift' mechanism. 

Millions of middle-class families do the same, of course. But when you have been so strident in denouncing 'tax avoidance', it looks – and is – hypocritical. The Prime Minister could, of course, do the Paul Lewis thing and say that 'lifetime gift' tax-avoidance is allowed by Parliament and is OK, but 'aggressive' tax-avoidance is shady and unpatriotic. But the distinction is lost on most people – who don't know what a 'lifetime gift' is and certainly would not have enough money to benefit from it.

The pressure is now on all politicians to reveal their tax affairs. The claim, by critics such as the Shadow Chancellor John McDonnell, is that this will expose tax-avoidance, self-interest and corruption. Some chance: smart accountants would have no problem concealing the affairs of their career-politician clients. What it would do, however, is to discourage talented people, such as those who have had a successful career in some other sector, from going into politics in the first place. You might be a model citizen, but would you want your finances, and those of your family, exposed in the national newspapers?

As the journalist Janet Daley says, this is the sort of mess you get into when politicians wander away from legislating and start moralising instead. The trouble with morals is that everyone has a different view on them. If you break the law, it is a matter of fact; whether your actions are moral or not is a matter of debate. Moralisers open themselves up to constant criticism.

The solution to this mess is quite obvious. Taxes on businesses and individuals should be so low that it is not worth evading (or even avoiding) them. And much simpler – the more complicated your tax code is, the more places there are to hide in it: and the UK tax code is one of the most complicated in the world. Indeed, George Osborne has made it even more complicated with all kinds of new reliefs, subsidies, schemes, limits and whatever else. If you are worried about money drifting off to Panama, you really need to start at home.