So what actually is this liberal, bourgeois, deal then?

In the course of destroying Sandel's wibbling about whether market transactions are fair or not Deirdre McCloskey explains what actually is this liberal bourgeois deal on offer:

Suppose that behind a veil of ignorance of where you or I would end up in some future system of markets and creative destruction, or their communitarian opposites, we are asked to decide what constitution we would agree to. Go ahead, choose: neo-liberal markets or communitarian interventions. Suppose, as in fact happened in Holland and then Britain in the seventeenth and eighteenth centuries, we pretty much agree to the Bourgeois Deal—you let me, a bourgeoise, make a fortune inventing the coffee trade or very cheap steel or a computer operating system, and in the third act of the economic drama I'll make you (all) rich by historical and international standards: $129 a day per person in the United States in 2010 as against $6 a day in the same prices in 1800 and $1.40 a day now in Zimbabwe and less in North Korea.

The Deal is not in the first act egalitarian, which is as far as Sandel's economic and philosophical analysis reaches. Yet by the third act it has been powerfully enriching for the poor, satisfying a Buchananite-Rawlsian standard of improving the lot of the worst off. The daily incomes per person in the average country that has agreed to the Bourgeois Deal has risen, in real, inflation-corrected terms, from an appalling $3 a day in 1800 (and likewise since the caves) to $100 a day now (thus the UK)—and much higher if one properly allows for the much higher quality since 1800 of travel and medicine and economic analysis.

And that is pretty much it. If we don't allow the creative destruction and the markets then the poor don't get rich. If we do they do. So if our aim is to allow the poor to get rich then we have to allow the markets and the creative destruction.

Which is of course where modern politics goes so howlingly wrong. We're told that we must be more communitarian precisely because not to be so is unfair to the poor. But how is keeping them poor fair? Which leads to the conclusion that if you are indeed of the left and wish to make the poor rich then you should be supporting markets and that creative destruction.

This is certainly where I come from: it's also where the left of the 18th and 19th centuries came from as well. It's the inspiration for the whole classical liberal economic viewpoint. Would I like those in Zimbabwe and N Korea to enjoy the same economics possibilities, even luxuries, as you and I do? I sure would, which is why I keep shouting that we want to have more markets and more creative destruction.

By the way, it's also possible to argue that inequality itself diminishes as we all do get richer. Sure, you can point to money incomes and note that the Gini has risen. But the old inequality was between those who could not afford to eat and those who ate 5,000  calories a day. Between those dressed in silks and those in rags, between mud hovels and mansions, 16 hour workdays and lives of ineffable luxury. Barring that tiny fraction with drug and mental health problems, all today eat, are clothed and housed and the only people slaving all God's Hours are the rich. It's very difficult to say that inequality has actually increased in any meaningful manner, money incomes be damned.

The true lesson of A Christmas Carol

As I've mentioned, this is the time of year to be talking about taxation. It was Caesar Augustus who started this whole Bethlehem thing after all. And here we have Steve Landsburg telling us that the real lesson of A Christmas Carol is, well, it's this:

Great artists are sometimes unaware of the deepest meanings in their own creations. Though Dickens might not have recognized it, the primary moral of A Christmas Carol is that there should be no limit on IRA contributions.

Well quite. And this is the lesson of the Mirrlees Review as well.

As Landsburg points out. if you save then you're doing someone else a favour. If you save what you've earned and stick it in the bank then that lowers interest rates (however infinitesimally) for someone who wants to borrow, allowing them to consume. And if you save just under the bed then you have produced something in order to earn but you're not consuming. Thus leaving more goods and services to be consumed by others.

The lesson of which actually extends long beyond IRA (or pension) contributions. All savings and all earnings from savings should be tax free. It is consumption, not income or capital, that should be taxed. As indeed the Mirrlees Review goes on to point out.

What we'd really like to have is a proper consumption tax. At the end of the year your income is measured. What you have added to savings is deducted from that. What you have withdrawn from savings and spent is added to it. It is this net sum, income plus or minus changes in savings, which then pays tax. Earnings on savings which are reinvested are not taxed.

Essentially, all savings are inside a giant ISA in our system. At which point Tiny Tim would indeed be able to say, "God Bless us all. Everyone."

Eric Pickles shows us what's really wrong with local government

It is the season to be talking about taxes isn't it? After all, yesterday's historical events took place where they did as a result of the coralling of the population to work out how many could be taxed. Which gives an opportunity to highlight how Eric Pickles illuminates exactly what is wrong with local government finances.

This is a super little paper with 50 ways that councils can save the taxpayers' denarii. Hire out the town hall for weddings, don't order mineral water at meetings, use tap. Make sure meetings aren't over lunch so that no lunch need be provided. Stick a coffee shop in the library (well, why not, bookshops have cafes now!). A couple in more detail:

Share back office services: from planning to press, from HR to legal. Does the country really need 350 different business rate collection departments?

Yes, fine with that: very similar in the business world. Not every company has a payroll department for example, there are plenty of subcontracting companies to do that for you.

Close council cash offices: Instead allow residents to pay bills in local post offices.

Sure, why not? In the same way that you can pay your other bills at the post office. Who really needs a network of cash offices when someone else will do it for a small fee?

Scrap trade union posts: Get rid of unnecessary non-jobs such as taxpayer-funded, full-time trade union ‘pilgrim’ posts.

That'll please Guido no end.

Cease funding ‘sock puppets’ and ‘fake charities’: Many pressure groups - which do not deliver services or help the vulnerable - are now funded by state bodies. In turn, these nominally ‘independent’ groups lobby and call for more state regulation and more state funding.61 A 2009 survey found that £37 million a year was spent on taxpayer-funded lobbying and political campaigning across the public sector.

Chris Snowdon is already celebrating that one over on his own blog.

Across the country there are hundreds of council-run MOT test centres which are used to check council vehicles like taxis and buses for their safety and roadworthiness; these centres can also open their doors to the public to provide MOTs to the wider public: this is a far better way of making money from motorists than the lazy way of hiking parking charges.

Yes, absolutely, sweat your assets.

Now you might think that this is just wonderful, central government telling people how to save money. But that's actually what I would complain about. No, not that they're saying it, but that having it said is necessary. For what this is actually showing us is that local government doesn't currently contain the incentives for those running it to reduce costs. As opposed to what happens in for profit businesses. Half that list above is the sort of thing that every business is always monitoring. What do we have that can bring in additional revenue? Have we spare capacity somewhere? Are we wasting money on this or that?

That local government needs to be told to do these things shows that the correct incentives just aren't in place in local government. Which is, I hope we would agree, something of a problem.

Pickles signs off with this Hayeckian point:

And finally… ask your staff for more sensible savings ideas: Your staff will be the most informed and actually the most enthusiastic about cutting waste. Give a prize for best staff ideas for efficiencies. Allow staff to submit anonymous ideas too.

Yes, knowledge really is local. The people actually doing things will be the people who know how to do them best. Provided those incentives are in place of course. The thing that really provides incentives being a market structure of course.....

We'll have to reduce recycling you know. In order to save resources

I thought this was a fun little finding. And it leads to the conclusion that we'll have to stop people recycling things. In order to save those precious natural resources. Via Mike Munger comes this:

Abstract: In this study, we propose that the ability to recycle may lead to increased resource usage compared to when a recycling option is not available. Supporting this hypothesis, our first experiment shows that consumers used more paper while evaluating a pair of scissors when the option to recycle was provided (vs. not provided). In a follow-up field experiment, we find that the per person restroom paper hand towel usage increased after the introduction of a recycling bin compared to when a recycling option was not available.

Essentially, the finding is that Jevon's Paradox works in reverse as well. Jevon's is the idea that making more efficient use of a resource doesn't necessarily mean using less of that resource. Some on the wilder shores say that it never does but it's not that prescriptive.

For example, if we make more efficient use of electricity to make light, does that mean that we'll end up using less electricity to make light? Not necessarily. Making light cheaper might mean that we simply use more of it. And that might mean that we could use less electricity overall, the same amount of even more. Light being a reasonable example as per lumen artificial light has declined in price by several orders of magnitude over the centuries. Yet it appears that we're all still using 0.7% of our incomes to provide it. One of the odder straight lines that people have found in such researches.

This paper here seems to be telling us much the same thing about recycling. When people think that paper towels will not be recycled they use x amount of them. When they think they will be they use x + y amount of them. Recycling thus increases the usage of paper towels. Now, we might argue that as the paper towels are indeed recycled then of course resource usage declines. But this isn't actually so: recycling paper quite famously causes more resource use than cutting down (and of course planting) a few more trees. This is why recycled toilet paper (erm, no, that toilet paper made from recycled paper, not actual recycled toilet paper) appears to cost more than virgin.

So, an interesting thought for the lead up to the new year. Save the planet's precious resources by recycling less. For Jevon's Paradox does indeed reverse.

The Laffer Curve doesn't depend upon what you think is a fair tax rate

While scribbling elsewhere on Gerard Depardieu and his fleeing of the extortionate tax rates in France it occured to me that there's something rarely mentioned in this whole thing about where the peak of the Laffer Curve is. It's that that peak isn't determined by what you think is a fair rate of tax that they should pay is. Nor what the community in general, or democracy, politicians, think is a fair rate. It's determined by what those who have to pay the tax rate think is a fair rate.

And there's a lot of very interesting economics been done on what people do think is fair: take the ultimatum game for example. Two people, $100. One of them gets to decide how the two will split it. The other one can accept the split or reject it: on rejection neither of them get anything.

The logical policy is to accept any split at all from 1:99 on up. Hey, at least you'll get a whole dollar! But as it turns out people just don't react that way. As soon as the split starts getting worse than $40:$60 the rejection rate goes way up. The conclusion is that we're so tied up, we weird humans, about fairness that we will even punish ourselves in order to punish someone else we think is acting unfairly. There have also been experiments with both monkeys and apes (although with lovely pieces of fruit rather than useless pieces of paper) that lead to the same conclusion. All of us higher primates seem to be wired pretty much the same way: you try and rip me off and I'll take you down with me fella.

I've not seen this point explicitly made anywhere: although I assume that's to do with my lack of reading more than anything else. But if that sense of fairness is hard wired, then obviously it's also going to apply to those we're trying to tax. Which will mean that that peak of the Laffer Curve, that rate at which people bunk off, leave the country, reduce their work loads, lie or cheat the taxman, isn't determined by what we think is a fair rate to tax them. It's a result of what they think is a fair rate to tax them. Which, of course, could be a very different rate indeed from what we think is a fair rate.

Indeed, when we look at the family fortunes and incomes of those who advocate much higher tax rates we do indeed see all sorts of shenanigans going on to avoid those higher rates. The list of wills altered, trusts to hide from inheritance tax, personal service companies, dividend splitting and all the rest: even those who propose those higher taxes rates wriggle as if they think they are unfair when applied to themselves. That revealed preferences thing again: those who face those rates don't think they're fair.

And as I say, adding that unltimatum game into the mix does tell us something very interesting. It's not what we, or the left, think is a fair tax rate that matters. It's what the people paying the tax think is a fair rate that does. And as that game tells us, people start getting very unhappy with anything less than a 40:60 split. To the point where they will indeed give up income themselves in order to punish those offering such a measly share.

Why we don't want to equalise capital gains and income tax rates

This will sound a little odd, for we nromally say around here that we want to remove distortions in the tax system. One obvious such distortion being that capital gains and income are taxed at different rates, leading to everyone who can manage it shifting income over into capital gains. However, we don't want to rush off and try to equalise those rates. The reason being the following:

What we mean by "integrated" here is the combination of the corporation tax and the capital gains tax. A share goes up in value as the company makes more profits. But it's post tax profits that do this, not pre tax. So the higher the corporation tax the less the share price will rise: thus the lower the capital gain that the shareholder will receive.

We should thus look at the interplay of both taxes on the amount that the shareholder receives for putting their money at risk. Which is exactly what this "integrated" rate is. And that's with CGT at the current rate of 28%, not the income tax rate of 45% (the tippy top rate that is). So, if we moved CGT up to the marginal income tax rate then capital gains would be more heavily taxed than income because of that bite already taken by corporation tax. And that's absolutely not what we want to happen at all: for we know that capital taxation has higher deadweight costs than income tax anyway.

There is one way to do it though. If we abolish corporation tax altogether and simply tax dividends and capital gains as the income they are then we will indeed have equal rates for all types of income. Plus, what joys, all the spivs trying to dodge taxes through manipulation of the corporate tax system go out of business. And tens of thousands of our most highly paid lawyers and accountants have to do something productive with their lives.

What's not to like? Abolish corporation tax and then tax all income as income?

Hasn't that Washington Consensus done well?

Twenty and thirty years ago the general consensus was that pretty much nothing was going to help Africa. Sunk in Malthusian destitution as the various countries were, people really just couldn't see any manner in which the place could develop. Then there was this bright idea: hey, what if we told people and governments just to stop doing stupid things?

No, not some grand plan for how to develop, not earnest Fabians planning how the groundnut industry should work. But just, you know, stop doing the things that we know deter economic growth? And so was the Washington Consensus born. It's not actually a prescription, it's a series of rules of thumb. It's not even from Washington: if's from the experiences of various Latin American states. And it really is just a list of stupid things that you shouldn't so. Or perhaps the opposite of those stupid things that many had been doing. Have market determined exchange and interest rates, not purely invented ones. If you're going to have import restrictions make them general tariffs, not licenses or permits. Tax everything just a little bit, not one thing hugely. Public spending should be on those things that it does well: public health and primary school education. Protect property rights, allow foreigners to send their lovely capital in, regulate on environmental or safety grounds but not others. Essentially, just the basic Government Economics 101 stuff.

That consensus isn't anything official but it's just roughly what everyone thought the general advice should be around and about 1989. It gradually got implemented though the 90s in Africa (barring some horrors like Congo and Rwanda). So, what's the general outcome of governments not doing economically stupid things?

Hmm, that's pretty good actually:

As a starting point, Africa's economic growth sped up around 2000, and for the decade from 2000-2010, it was the second-fastest growing region of the world. If one counts a "consuming household" as a household with over $5000 per year in income, the number of African households in this category rose from about 59 million to 90 million over this decade.

In fact, given the deep despondency about even the possibility of development in Africa that's very good.

And it's an important lesson for us too. Indeed, I would argue that it contains the most important economic lesson it's necessary for us in hte rich world to understand, for our own sakes.

Yes, it's entirely possible that there are some bright ideas that government could do to make us wealthier. But much more important for our future wealth is not allowing the government to do the stupid things that will stop us ourselves making ourselves wealthier. And we can go through that list and see people already camapigning to do stupid things: exchange rates, what's the euro is not an invented and fixed rate? On interest rates we've endless fools stating that the government should just print money to "invest" at artificial rates. Capital controls are coming back into vogue: that'll stop the foreigners investing for a start,  as well as give us an artificial exchange rate. Everyone wants to tax the rich hugely, apparently crucial public spending in the UK now includes Newcastle's arts scene. And as Twain pointed out, while the legislature's in session no man's property is safe (there really are calls for the confiscation of second and empty houses for example, the forcible renting of them to social tenants through the local council is another idea out there).

Of course good ideas to make things better should be promoted. But the real battle is to stop them, as we've seen in Africa, doing the stupid things.

Ring-a-ring-a-fences

The Parliamentary Commission on Banking has reported this morning and, like most of the talk leading up to and since the Vickers Report, is pre-occupied by ring fencing.  Vickers, as you will recall, dealt with the demands for separating retail and investment banking by proposing that those banking groups involved in both should have separate subsidiaries for those sectors with no links between them.

Government discussions since then have been seen by some as, under pressure from the bankers, watering down the Vickers proposals.  The Parliamentary Commission, au contraire, claims that Vickers did not go far enough and the fences should be “electrified”, i.e. any infringement would lead immediately to full separation.  Sir John Vickers himself, in an email to the Today programme, quickly responded by saying that full separation would be an own goal.

What is weird about all this is that the financial crisis had little if anything to do with the lack of such separation.  Retail banks, like Northern Rock, and building societies created a bubble of huge unrepayable debts and, quite separately, banks packaged up those “assets” to conceal their true nature and then played pass the parcel with the packages.  Lehman Brothers was purely an investment bank.  The entities that created the crash were already separated and separating the other groups would do nothing to prevent a future crash.

What is even weirder is the failure to recognise that banking today is an international, if not fully global, market.  Financial solutions have to be found internationally.  The Basel group are doing their best to achieve that and we now have three “Accords”. They focus, quite sensibly, on ensuring banks are adequately capitalised for the businesses they run.  One can, and I have, criticised their proposals as an over-reaction which will penalise small businesses, but the point here is that the rest of world’s top regulators are not worrying at all about ring-fences.

Another part of the international dimension which the Parliamentary Commission fails to recognise is the EU involvement.  Uncertainty about that undoubtedly contributed to the Northern Rock crash as Professor Tim Congden and others, including Sir Mervyn King, have pointed out.  The UK is in course of handing financial regulation over to Brussels but what is for us to do and what for Brussels is unclear.  The only thing that is clear is that the EU’s interventions will damage the competitiveness of UK banks and increase the costs for taxpayers.

So, not unusually, British chattering classes are dancing around playing ring-a-ring-a-ring-fence when the rest of the world gets on with regulating the real financial market.  It is truly astonishing that this Commission should choose to focus its entire attention on the area that matters least.  The consequence of adopting their suggestions, as Vickers himself seems to be pointing out, can only be that we will hobble our own financial sector at great cost to the economy and the British taxpayer.

But, but, people invest in order to get their profits back in their own pockets!

The US has a high corporation tax rate. The US also doesn't charge that tax to profits made outside the US and kept outside the US. Therefore, obviously, US corporations keep the profits they make outside the US outside the US. You know, that first great secret of economics, incentives matter?

Back a few years a temporary solution was suggestedL bring back the profits and we'll charge you only a teensie rate: many did. Again, incentives matter. Now there's vast mountains of money sitting offshore and perhaps that low tax trick might be tried again. Mebbe: but a common argument against it is the following:

ABSTRACT: This paper analyzes the impact of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings and thereby reduced the cost to U.S. multinationals of accessing a source of internal capital. Lawmakers and lobbyists justified its passage by arguing that it would alleviate financial constraints. This paper’s results indicate that repatriations did not lead to an increase in domestic investment, domestic employment or R&D—even for the firms that appeared to be financially constrained or lobbied for the holiday. Instead, estimates indicate that a $1 increase in repatriations was associated with a $0.60-$0.92 increase in payouts to shareholders—despite regulations stating that such expenditures were not a permitted use of repatriations qualifying for the tax holiday. The results indicate that U.S. multinationals were not financially constrained and were reasonably well-governed. The fungibility of money appears to have undermined the effectiveness of the regulations.

Note that this is used as an argument against the tax holiday, not in favour of it. when obviously it's an argument in favour of it.

The basic error is to think that investment is something only done by companies with the money that they have internally: thus the shock at the idea that shareholders might get some of their own money back. When in fact, all the really important investment in hte economy is actually done by individuals in new businesses: not by old ones ploughing back in their profits.

No, obviously, the amount of new investment is very much smaller than the amount of reinvestment. But that's not what I mean. The things that really change economies, that bring in the new disruptive technologies, are the entry and exit from the marketplace of firms. Which by definition means the creation of new firms able to do the entering (and exit of those going bust of course). And who are the people most likely to invest in a business from the outside? Clearly, those who have already shown that they will do so by virtue of the fact that they hold equity in a business or two.

At present there's some vast amount of money offshore in those corporations. $1.2 trillion, $1.7, estimates vary. Assuming that it is a good idea that this money leaves the Bahamas or wherever and gets injected into the US economy (which I think it probably is) then this argument about dividends is piffle. The very fact that it is likely to be paid out in dividends is the very reason why it's a good idea. For putting it into the hands of investors increases the chances that it will be invested in new businesses: the long run lifeblood of economic growth.

Note to the TUC: Your own opinions? Fine: but you're not allowed your own facts

Now we all know that the past 30 years has been the triumph of neoliberlaism, where we who own capital get to trample the faces of the workers into the dust. Stealing the bread from the mouths of children and cackling gleefully as we do so. Something which the TUC would like to bring to our attention in this report. Where they use this little chart.

Which is interesting, don't you think? The profit share has risen, the wage share fallen, QED, we're screwing the workers.

Except, except, those numbers don't actually look right to me. For this is something that has been looked at repeatedly in recent months. Here's a different attempt at protraying the same information:

As you can see, the decline in the labour share is the same. But instead of a rise in the profit share being the cause we've a rise in mixed income (essentially, the self-employed and as there's more of them why not) and a rise in taxes minus subsidies: that's largely I believe the rise in VAT over the time period.

It's actually quite important for us to work this out of course. If the labour share has fallen because us capitalists are stealing it all then that's one thing. Perhaps Hurrah! and perhaps Boo! depending which side you see yourself on. If it's simply a result of a rise in self-employment then it doesn't really matter either way. And if it's as a result of a rise in taxes well, the prescription will obviously be to lower taxes. So we'd really rather like to know which of these two sets of numbers is correct.

There's definitely something hinky going on between the two sets of numbers. Both do sum to 100, as they must. My problem is that the TUC's numbers just refer to "ONS figures from the Blue Book" while the second set actually tell us which specific figures are being used (The relevant series used here are CGBZ, DTWM, CGBX, CMVL and YBHA.). And I'm afraid I'm not enough of an economist (nor statistician) to work out what hinkiness is being perpetrated here.

So I throw it open to you: what is it that the TUC has done to give us this decidedly non-standard view of how income shares have changed over the decades?