To mildly disagree with Tim Congdon

Not that we would vehemently disagree with Tim Congdon - he’s called far too many things correctly over the decades for us to want to do that. But to mildly disagree with this:

He argues that borrowing in order to cut taxes, as Kwarteng plans, actually risks expanding the size of the state because it will lead to higher interest payments on national debt and thereby increase public expenditure.

More of the economy flowing through the maw of the State - subject to the incentives of politics, not consumers - is not something that pleases us. We even, heresy though it is, think that some vague idea of balance between taxation and spending might be a good idea.

However, while this might only be an idea that comes to the front of the mind on bad days, we do sometimes think that paying interest is less bad than government actually doing something with the money.

Some will call us cynical at this point but we prefer realistic. The argument against large government is that government isn’t very good at things. The ultimate limitation on the size of government is how much they can wring out of the population to pay for government. If some healthy chunk of that possible exaction has to be used to pay interest then that means there’s less available for government to spend not very well on doing things badly.

That is, the more interest has to be paid then the less government we get. Given the performance of British governments in actually spending money this strikes us - those bad days again - often enough as a good thing.

Another way to make much the same point. Interest on government debt is money the government is taking in taxation - Boo! Bad! - and then returning to the population in those interest payments. The round trip is inefficient, certainly, but at least it doesn’t stick inside politics where it will get entirely wasted.

We’re not sure how entirely far we would want to take this line of thought so take this as an attempt at finding that silver lining which apparently exists inside every cloud. The more interest government has to pay the less money they’ll have to waste.

Please, stop doing this - GDP is not a measure of wealth

Yes, yes, we know, making a plea for economic good sense to Guardian writers is an isometric exercise but please, please, could people stop doing this?

It’s here that Blackstone’s investment decisions are made. Last year, the company invested $270bn, bringing the total value of the assets it manages to $881bn, slightly more than the gross domestic product of Switzerland, and more than twice that of Denmark.

GDP and wealth are simply not the same thing. Therefore using the one as a measure of the size of the other is not just wrong it’s wholly misleading.

Gross Domestic Product is the value added in that economy that year. It’s also - by definition and design - equal to all incomes in that economy that year (we’ll leave the differences with GNP aside for a moment). So, it’s a measure of income.

Capital, well, that’s a measure of wealth - especially so here when what is being discussed is the investment of wealth into assets. The two are very different.

For the UK GDP is some £2.2 trillion a year or so. Household wealth is getting on for £15 trillion. A couple of trillion in “financial” wealth, a bit in furniture and so on, then the vast bulk split between pensions and housing equity. Blackstone is investing pensions money, by and large, and the complaint is that it’s into that housing. But pensions and housing are both - each that is - about three times UK GDP and that’s just the wealth of the UK. Blackstone is of course both collecting capital and also deploying it from and to many different countries.

If we think instead of the US economy then GDP is around the $25 trillion mark, household wealth possibly $150 trillion and the nation as a whole might be anything from $200 trillion to $400 more than that - depends how we measure the value of what the government owns.

At which point - yes, of course Blackstone is investing sums that are vastly larger than the GDP of some places. Beause wealth, that thing being invested, is very much larger than the income against which it is being compared.

So, could people stop doing this please? GDP is not an appropriate comparator to wealth.

Yes, foreign government ownership is better than domestic nationalisation

One of our less strongly held but more controversial views here - foreign government ownership is more efficient than domestic government ownership or nationalisation. The point becoming important when we think of the latest cunning plan:

Currently, many British energy generators are wholly or partly owned by foreign governments or companies. In his speech, Starmer cited “the largest onshore windfarm in Wales”, adding: “Who owns it? Sweden. Energy bills in Swansea are paying for schools and hospitals in Stockholm.

“The Chinese Communist party has a stake in our nuclear industry. And 5 million people in Britain pay their bills to an energy company owned by France.”

At one level it does seem simple enough. If foreign governments can run companies in Britain efficiently then the British government can too. One answer to that is that the British government is uniquely incompetent and having met many of Westminster’s inhabitants that’s a view we have some sympathy with. But then we’ve also met a number of foreign politicians and have to report that the surmise doesn’t in fact stand up.

We think that the actual issue is that if a government owns a company that operates outside its own voting base or population then it’s possible to run it as a market and capitalist based company. It’s when the customers and the workers become part of the voting block that managing government is trying to attract that the problems really start. Because this inevitably means that electoral politics becomes part of the management system of that company.

The Swedish voters are interested in that windfarm in Wales to the extent that Welsh windpower produces profits for Swedes to enjoy. Thus the Welsh windfarm is run efficiently to maximise those profits. Also, the Swedish government has no input into what the subsidy level, output prices or wage levels are or should be in Wales. It’s a free market and capitalist operator - therefore it works.

The moment it becomes the British government running that same windfarm the operation - and staffing levels, wages, output prices and so on - become subject to those British domestic political pressures. As proof of this we’d call into evidence that (possibly mythical) five levels of middle management that British Gas fired immediately upon privatisation, the surge in investment in the privatised water companies - politics simply wouldn’t pay for maintenance, let alone upgrading the system.

Of course, to some the irruption of politics into operating decisions is the very point. But by definition decisions made for political reasons are ones not made for efficiency ones. Otherwise, why would the decisions based on the two sets of concerns differ?

So, our opinion becomes that foreign governments do better at managing economic assets than domestic ones. Precisely because a foreign government, unaffected by domestic politics, can act as a capitalist organisation in a market. A domestic government is inevitably affected by domestic politics and therefore so is the operation of assets owned by that local government - at the expense of the efficiency of the operation.

As we say, the concluding proof here is the very insistence that a domestic government owned operation would do things differently- that influence of politics, that insistence upon decisions made for political, not efficiency, reasons, is the proof that the decisions made will be less efficient.

Polly will be happy - we're more like Sweden

As we’ve been known to point out the Nordic social democracies are rather more, under the hood, capitalist and free market than the UK is. Their system depends upon being exactly that, more viciously red in tooth and claw but with a higher tax slice off the top to ameliorate matters. Not that we recommend such a system - we prefer both the red in tooth and claw and also the lighter tax burden. But we do like to point out that the system in use is why those places work. Precisely because they are more market and capitalist the economic engine can still support that higher burden placed upon it.

As Polly Toynbee has spent decades pointing out we should be more like Sweden.

At which point, something to make us both happy:

But Peel Group, owned by shopping centre billionaire John Whittaker, said on Monday that the South Yorkshire airport was no longer financially viable. The airport’s 800 staff are now facing redundancy.

Beckie Hart, CBI director for Yorkshire & Humber, said the closure was a “serious blow” to the region.

The Labour-run South Yorkshire local authority offered to bankroll the airport until October 2023 and claimed it had teed up a potential buyer.

Peel said that it had received a letter from the mayor’s office earlier this month saying that it had a bidder waiting in the wings, but had not received any further information.

It added that it would be inappropriate to use taxpayer funds to keep the airport afloat "against the backdrop of an unviable, loss-making operating business".

Oh well, nice idea, doesn’t work, close it. Red in tooth and claw. And also most Swedish:

Olofsson has called a meeting of the three sides to discuss the situation in Trollhaettan, southwestern Sweden, on Dec. 21. But she reiterated the government's position that the state cannot takeover Saab, saying it has no place owning car companies."We don't have that knowledge or the money," she said.

"I don't think GM really knows how the wind-down is going to take place but GM has to take its responsibility," Olofsson said, adding: "The most important thing right now is to take care of the employees and the future, how to make the most of their know-how."

As Sweden did do - no one wanted Saab, it couldn’t make money, close it. Ah well, mistakes are made and the issue is how quickly to we get rid of them to then concentrate upon things that work?

Yes, let us be more like Sweden. Let us be more free market and capitalist. Close things that don’t work, liquidate the assets, redeploy them to things that might, possibly, work.

We can have that argument about the tax burden and redistribution afterwards, after we’ve created a system that hums along. After all, it’s only even possible to redistribute if there’s a surplus available, right?

Government wants growth; shame it knows not how

When the Chancellor introduced his “Growth Plan” in the Commons on 23rd September, he used the word “growth” 142 times but did not mention “innovation” even once. The closest he got to it was: 

“Of course, to drive growth, we need new sources of capital investment. To that end, I can announce that we will accelerate reforms to the pension charge cap so that it will no longer apply to well-designed performance fees. That will unlock pension fund investment into UK assets and innovative, high-growth businesses. It will benefit savers and increase growth. And we will provide up to £500 million to support new, innovative funds and attract billions of additional pounds into UK science and technology scale-ups.”

Making money to support innovation is indeed helpful but not the way Business, Energy and Industrial Strategy (BEIS) does it nor stodgy pension funds, nor large companies.  Procter & Gamble discovered it had too many committees blocking new product development, so it gave up and restricted itself to buying the new products once they were already doing well in the market. Baileys Irish Cream, one of the most successful drinks brands in the last 100 years, was born because the Irish Finance Minister offered a 10 year tax moratorium on a new product’s exports if the parent company came up with one. They did, but the main board considered it dreadful. Management turned a blind eye and went ahead anyway.

Growth is driven by innovation, sometimes in the form of new, or changes to, products or how they are made, perhaps using new technology, or how the producer businesses are run. Stifling immigration and declining birth rates mean that growth has to come from increasing productivity, i.e. output per capita, and that can only come from innovation. Mathew Syed, in the Sunday Times on 25th September, wrote a misguided article claiming that growth is driven by the availability of energy: “growth in real economic systems (as opposed to abstract economic models) is ultimately determined by thermodynamics — that’s to say, energy.” Of course if we consume more (growth) we have to make and then use more energy, cars for example. But Syed is confusing correlation with causation. Innovation drives growth and that needs more energy. Professor Karl Pearson was teaching the difference between correlation and causality at UCL back in 1911. It is time Syed caught on.

At the Labour Party Conference, Sir Keir Starmer promised to “turn the UK into a growth superpower” although he did not say how and, almost certainly, does not know.  Handing more power to the unions will certainly undermine growth. Blocking change, whether by boardrooms or shop floors is the enemy of innovation, and therefore growth.

BEIS means well. It invites people to pitch for money and has middle-aged committees to sit in judgement. Sometimes they get lucky and back winners but usually not. The real-world market does not operate that way. Offering tax breaks is a far better way to go: if the innovation fails, it makes no money and therefore costs the government nothing. If it succeeds, it is a win-win.

The simple truth is that neither Truss nor Starmer have a clue how to achieve innovation, and with it increasing productivity, because they have not studied how innovation, and therefore growth, comes about.  It is time they did. Or at least tell BEIS to go find out.

Jobs are a cost, not a benefit

It seems ridiculous that it’s necessary to make such a basic and obvious economic point - jobs are a cost of doing something, not a benefit of the thing being done. But sadly it is indeed necessary to point this out:

A clean power system by 2030 will lay the foundations of the drive to net zero, but it will also unleash waves of dynamism and industry across our country with a million well-paid jobs in the renewable and nuclear industries, built on strong trade unions.

A clean power system may or may not be a good idea. Judge that as you wish. But human labour is a scarce economic resource. If we use more of it to achieve one particular goal then we have less of it to master any other problem that may face us.

Jobs are therefore a cost of doing something, not a benefit.

It could be true that the jobs building a clean power system are the best allocation of that limited labour at our disposal. Judge that as you wish. But it is still true that the human labour - those jobs - are a cost of doing this thing, not a benefit.

All of which does give us an interesting insight into what’s wrong with the modern economy, doesn’t it? A substantial portion of those who would run it are ignorant of the most basic economic precepts. They’re touting jobs, costs, as a benefit of doing a thing. Really, catching up with the most basic ideas within economics would be a useful start to building economic plans.

Jobs are a cost, not a benefit.

It's not obvious that killing the 45% rate is actually a tax cut

Eliminating the 45% income tax rate is clearly a cut in tax rates. Whether it’s actually a cut in tax is another matter. Will those high earners end up paying more actual cash in tax as a result of the cut in the rate to be paid?

This is, of course, to consider where the peak of the Laffer Curve is. What is the tax rate that maximises tax income?

The usual and standard source for considering this has been, for the past decade at least, the Diamond and Saez paper. About which we should say a couple of things. It looks not at income tax rates, but taxes incident upon incomes. So, this includes employers’ national insurance, along with any other taxes that might be incident upon incomes (for the US Social Security perhaps, Medicare taxes, state taxes and so on). It’s also directed at the US tax system which is, most importantly, a passport based system. If one is an American citizen one does not leave the American tax system by leaving the country, earning no money there (and deriving all income from outside the US) and so on - as Boris found out when he sold his house. This is entirely unlike the system everywhere else (except Eritrea) where leaving the country means leaving the tax system by and large.

Within the calculations by Diamond and Saez this would be known as “a deduction”. Or even a possible method of tax avoidance - which is, note, the entirely legal process of reducing tax bills. As they say:

“When a tax system offers tax avoidance or evasion opportunities, the tax base in hen a tax system offers tax avoidance or evasion opportunities, the tax base in a given year is quite sensitive to tax rates, so the elasticity given year is quite sensitive to tax rates, so the elasticity e is large, and the optimal is large, and the optimal top tax rate is correspondingly low.”

Given that moving those 26 miles to Calais takes one out of the British tax system the optimal (by which they mean top revenue generating) top tax rate is lower in the UK than it is in the US. In fact, they give a useful estimate of what that rate might be:

As an illustration using the end tax avoidance responses is critical for tax policy. As an illustration using the different elasticity estimates of Gruber and Saez (2002) for high-income earners mentioned above, the optimal top tax rate using the current taxable income base (and ignoring tax externalities) would be and ignoring tax externalities) would be τ * = 1/(1+ 1.5× 0.57)= 54 percent, while the optimal top tax rate using a broader income base with no deductions while the optimal top tax rate using a broader income base with no deductions would be τ * = 1/(1+ 1.5× 0.17)= 80 percent.

In simplistic - too simplistic - terms 80% if there are no dedictions, 54% if there are. And shave a bit more off again if people can simply leave the system by leaving the country.

Again, this is taxes incident upon income, not income taxes. This month (it goes down again next) employers’ national insurance is 15%. We have to add that to the income tax rate to gain the full tax upon income rate.

The top tax collecting rate in the UK is lower than that in the US because of that construction of the tax system itself. We don’t tax citizens living in foreign. With the 45% income tax rate the combined rate is 53%, with 40% it’s 49%.

We do not, not at all, insist that this cut in the tax rate moves us from over the Laffer Curve peak to at it or under it. We’re deeply uncertain that something as complex as an economy can be modelled to this level of certainty. But we do point out that the currently accepted best guess at it leaves the possibility entirely open that it does.

That is, this might in fact be a tax rate cut and an increase in tax collected - so not a tax cut at all.

To reduce rents abolish tenants' rights

This is not some Dickensian cackle about how to increase pain in society - it’s an observation about reality. In order to reduce rents we should abolish tenants’ rights:

They pay less than the market rent but the trade-off is that they have fewer rights and, often, worse living conditions.

There we have it, from The Guardian no less. Fewer tenants’ rights lead to lower rents. So, if we desire there to be lower rents we should pare back upon, abolish, tenants’ rights.

Now, it is also possible to say that those tenants’ rights are, or should be, inviolable. Which is fine, that’s a choice, a trade off. But that does - see above - mean that rents are going to be higher.

What we can’t do is insist upon those rights and then whine about the height of the rents.

Hmm, sorry, obviously that is possible because some 99% of political discussion is a combination of both of those - joint insistences that tenants should gain even more rights and also that rents should be lower. Which, given the ineluctable logic of the situation is about as useful as shouting at the Sun rising in the east each day.

Our insistence is not in favour of the - admitted and obvious - joy of being able to evict Tiny Tim. It is rather that there is indeed this trade off here and reality says that it’s there, not politics, economics, morals or anything else. It simply is. Therefore it’s something that has to be acknowledged and dealt with, not shouted at.

Want lower rents? Relax tenants’ rights. Want stronger tenants’ rights? Put up with higher rents. To think that it can be otherwise is to be shouting at the universe on the street corner.

We're afraid that the Real Living Wage people are telling an untruth here

It could be that they’re just allowing their own propaganda to run away with them, or that they’re actively trying to dissimulate, but this is an untruth:

The real Living Wage rates remain the only wage rates independently calculated based on what people need to live on.

As they’ve spent a couple of decades telling us, the calculation is based upon Adam Smith’s linen shirt example. A linen shirt is not a necessity, but. If you live in a society where not being able to afford a linen shirt is regarded as being in poverty, then, if you cannot afford a linen shirt in that society you will be regarded as poor. From which it is possible to ask representative groups what it is that you should be able to afford in order not to be regarded as poor - we seem to recall a carvery meal once a month, a couple of pints out once a week as making such a list - and back calculate to the wage necessary to be able to afford those things.

But it is not, it is not by design, the amount “people need to live on”. It is the amount to be had and to not be regarded, by this current society, as being poor. To switch that statement is to tell an untruth.

Tsk.

There is also the criticism that we have been levelling at this calculation for this past couple of decades too. Exactly the one which led to the personal allowance for income tax and national insurance to be raised to the current £12,500 or so. The Real Living Wage is a pre-tax number. Meaning that a significant reason it is so high is the appallingly high tax rates faced by those on or around that minimum wage (of whatever kind, the minimum wage, national minimum wage or this, the real living wage). Thus also why we have been arguing - these past couple of decades - that the solution is to lower the tax rates on those at around this level of income. By increasing the personal allowances, of course.

The claim is that this real living wage is now £10.90 an hour, 37.5 hours a week, full year working. £21,294 a year. On which, under the current system, £12,570 is free of income tax, the rest pays 20% - £1,744.80. National insurance starts at £242 a week at the rate of 13.25%. On £408.75 per week in earnings, that’s £22.09 a week in employees’ NI or £1,148.68 a year.

That’s £2,893.48 charged in tax to this real minimum wage income. Or, post tax, £18,400.52 in net income.

If you work on the current national minimum wage of £9.50 an hour for the same working hours then your gross income would be £18,525. This before we even think about the influence of employers’ national insurance (which, yes, is incident upon wages).

So, if the national minimum wage were tax free then it would be higher than this real living wage post-tax. The problem is not low wages, it is high taxes. So, the solution is also obvious, lower taxes.

As we’ve said - again over these past two decades, repeatedly - the only real and accurate minimum wage is £0. But assuming that there is one then that should - must, on equity and good sense grounds - be the personal allowance for both income tax and national insurance. For the only argument for a minimum wage is that this is the de Minimis amount that an hour of labour is worth. So, why should Westminster get a chunk of that minimum amount?

So, again as we’ve been saying this past couple of decades, raise the personal allowance to the level of the minimum wage and the problem is solved. All those earning it will now, by the standards of the society we live in and as constructed by the real living wage campaigners, be earning both the real living wage and not be in poverty according to the standards of this population and society.

When we’ve raised this with the campaigners - again, that couple of decades - we’ve been told “Yes, yes, but” and the but has never been very convincing.

Increase the personal allowance and the minimum wage will be higher than the real living wage. So, let’s do that then, shall we?

We also note this little line they use “This year’s Living Wage rates have been brought forward in recognition of the sharp increase in living costs over the past year.” Hmm. In previous years the real living wage was calculated in November. The recent national insurance rise will be cancelled in November. So, if we were extremely unkind, possibly even conspiracy minded, we might suggest that the calculation has been brought forward so as to not include the effect of that tax cut upon the real living wage. But who would believe something like that of the Resolution Foundation? Tsk, it’s unthinkable.

Some things in life really are simple. If you want the working poor to have more money then stop taxing the working poor so damn much.

Action This Day, as the man said.

The laughable UN rankings

This is one of those assumptions that can bring one up short:

The UN recently demoted the US to 41st, down from 32nd, in a global ranking based on its sustainable development goals.

…

And, on this measure, the US comes just behind Cuba and just above Bulgaria.

The SDGs being a series of plans about how places should develop economically. Thus, by those very standards, Cuba is a more desirable end goal for economic development than the US is.

Which is, how should we say this, odd.

The trick to this is that the SDGs are deliberately constructed in order to make places like Cuba look good and nasty, capitalist, places like the US look bad. Take, for example, poverty. We do indeed agree that the aim of having an economy, even of the existence of a society, is that the life and living standards of the poor improve.

Here are those SDGs on poverty. They’re very much more complex than the earlier Millennial Development Goals for an obvious reason. That one was just to reduce absolute - the below $1.90 a day type - poverty and that was the only MDG overachieved and early. But that would never do as it was the spread of free market capitalism to places like China that achieved it - not the point at all. So, in the SDGs there’s lots and lots about relative poverty within a country instead of about actual poverty so much. Ta Da! Communist dictatorships look better.

Which is a goodly part of what explains the US ranking. On poverty it is agreed that the US has no $1.90 a day poverty nor any $3.20 a day - just none. However, there is a poverty line (the usual 50% of median household income used in international comparisons) and this means a significant downgrading of the US position on poverty. Despite the fact that by any measurement of absolute poverty the US doesn’t have any. They’re mixing inequality of income with poverty that is.

Cuba is of course entirely different. There we have no information - none on $1.90 a day poverty, none on $3.20 a day and none on inequality. But Cuba ranks better than the US becausesomethingmutter.

We can attempt to divine those numbers in a different manner. GDP per capita at PPP (so, accounting already for differences in costs) is a shade under $10,000 for Cuba. So, if we assume that all income is entirely and wholly equally distributed (it isn’t) and also that incomes to people are the only thing in an economy (by one GDP calculation of course they are, but here we mean for consumption, and they’re not) then that puts the entire population of Cuba below the American poverty line (around $13,000 or so these days).

But the UN seems to think that Cuba does better on poverty than does the US.

Well, yes. At which point we’re not going to take the UN rankings by SDGs seriously now, are we? Unless, of course we were a Guardian columnist.