An uninspiring election

I’ve said almost nothing about the election that’s currently taking place in the UK. The parties have not been sufficiently interested to want to engage in debate on any of the issues I happen to think, however eccentrically, are important: issues like primary care, social security, housing, access to law or schooling.

Two things are getting in the way.  The first is the contention that everything in a manifesto has to be fully costed.  I find it baffling that everything has to be costed: none of the parties seems ready to say directly, ‘these are our values’, giving a sense of purpose or direction for the period they propose to be in office. Specific costings may be good for two or three months, but then an incoming government will need to look at conflicting claims about priorities and their objectives will have to be revised, manged and reconsidered.  The convention on manifestos is mainly important because they lead to an effective veto on revision by the Lords, and the more limited the commitments, the less will be certain of passing.

The second problem is the obsession with personalities – the delusion that we are voting for a Prime Minister.  Wake up: this is not the way our system works.  If you voted for Cameron in 2015, you got May.  If you voted for May in 2017, you got Johnson. If you voted for Johnson in 2019, you got Truss and Sunak. There’s an obvious defence for Starmer against the criticism that he was campaigning  for Corbyn to be Prime Minister: no-one in our country should ever assume that they’re campaigning for a leader.  You vote for a party, and a party is a team.

I part company with most parties when it comes to  priorities.  The Labour Party has adopted a slogan long associated with the political right-wing, that security is “the first duty of any government.” That formula runs back to Thomas Hobbes and Adam Smith. It’s a common rhetorical ploy to claim that one thing is so essential that it comes before everything else – the Greens make equally strong claims about climate change, the Club of Rome used to do it about finite resources – and they’re just as invalid, for the same reason – no government in the world does just one thing.  There are lots of other preconditions for the continued existence of a society which could just as plausibly be claimed – health, education, family life, international cooperation, economic growth, action against poverty, and so on. Defence is only one duty of many. I don’t think there’s any government in the world that doesn’t think it is also responsible for economic policy, and nowadays the vast majority of governments around the world have social policies extending to health care, education and cash assistance. Are these really less important than defence? Let me offer an older principle, which is also to be found in Hobbes:  Salus populi suprema lex – the welfare of the people is the highest law.

I’m not going to try to write a manifesto here, but if you look at the previous entry on my blog, you’ll find a plausible substitute. Policies for health, education, housing and social security are all discussed in my book, How to fix the welfare state.


In praise of the triple lock

The ‘triple lock’ is the name given to a commitment to maintain and improve the value of state pensions.  The table comes from a recent report by the Institute for Fiscal Studies.

Table 1. Triple lock indexation since its introduction

In the course of the last twelve years, this has meant that pensions have increased by a nominal 60%, while if they had only increased by inflation, they would be up 42%. Putting that  another way, pensions have risen by 12.7% over inflation (that is, 160/142), which in real terms is 1% a year.

One might suppose that ratcheting pensions up, however slowly, was a praiseworthy thing to do, but the principle has come under fire from those who claim that it represents an unsustainable commitment. The criticism has been fed by the IFS report, which argues that it creates ‘uncertainty’ about the future value of state pensions, and that if it is left in place till 2050, it will increase the value of the state Pension from about 25% of median earnings to something between 26% and 32%.

The first of these arguments is, frankly, codswallop.  The benefits  system is in a parlous state: the main ‘uncertainty’ it is creating is whether or not people will be able to eat.  Improving the value of the pension does not increase uncertainty; it reduces it.   If we are genuinely concerned about the narrower problem of how people plan their pensions for the future, the main ‘uncertainties’ come from the govenment’s eccentric reliance on means-testing and the desperate problem of paying for social care.

The second argument invites the obvious retort – so what?  A modest increase in the value of pensions, relative to the median wage, is surely a good thing.  The UK’s treatment of pensioners is, by international statndards, parsimonious.  Consider this graph from the OECD.  It puts the percentage of GDP spent on pensions in the UK at 5.1%.  The Office for Budget Responsibility, which works on a slightly different set of definitions and takes into account a few extra benefits,  estimates that this year, the percentage will be – try not to be too shocked – 5.3%.

The  State Pension provides, at best, a modest basic income.  The (somewhat limited) success of the triple lock is something to applaud, not to denigrate.  One might wish that the the same approach could be taken for the painfully inadequate benefits offered to people of working age.

Misunderstanding socialism (again)

An article in the Daily Telegraph by Priti Patel, a former Home Secretary, has been given a preposterous headline: Britain can still escape the OECD’s radical plan for permanent worldwide socialism.  What she’s actually writing about is a proposal for to level the playing field in relation to Corporation Tax.  I think it’s likely that the identification of this proposal with ‘socialism’ has been made by a Telegraph sub-editor – I’m sure that Patel would be more eager to get us to engage with her argument. I’m not going to do that, but I am concerned about the lazy insult, and I want to clarify two things about the terminology.

The first is the supposition that state regulation or ‘intervention’ is a form of socialism, implicitly opposed to the operation of free markets.  By this test, just about every country in the world would be ‘socialist’.  There isn’t a government anywhere that doesn’t have some form of expenditure on health education.  Nearly all (just not quite all) spend on education.  Something like three quarters of all countries now have some kind of national scheme for cash benefits.  This isn’t  worldwide socialism – it’s just what contemporary states do.  Grown-up politics needs to be concerned with how policies like this work.

The second misconception concerns the nature of socialism.   Wikipedia  reflects a common confusion when it writes that ‘socialism refers to economic and social systems which are characterised by social ownership of the means of production … social ownership is the one common element’.  This is plainly wrong. Social ownership is not necessarily socialist (roads? parks?) and many socialists are concerned less with ownership than with public welfare.

The terminology used in the Wikpedia article is marxist, once dominant but now at best a minor branch of socialism. Marxists  like to claim that their beliefs are the only real and true form of socialism, ignoring the simple fact that socialism developed some time before marxism and the political movements parted company about a hundred years ago.  Right-wingers (such as Kristian Niemitz, writing for the IEA) also like to think that ‘socialism’ means the same thing as ‘communism’.   It doesn’t: that’s why we have different words for the two.

Socialism is complicated, but here is a short summary from my website:

There are many forms of socialism. The main models, which can be found in various permutations, include representations of socialism as

  • a movement for the improvement of society by collective action (for example, in Fabianism)
  • a set of methods and approaches linked with collective action, such as cooperatives, mutual aid, planning and social welfare services (e.g. the co-operative movement);
  • a set of arguments for social and economic organisation based on ownership and control by the community (e.g. in syndicalism, guild socialism and anarchism)
  • an ideal model of society based on cooperation and equality (e.g. Owenism and utopian socialism);
  • a critique of industrial society, opposing selfish individualism (e.g. Christian socialism), and
  • a range of values, rather than a particular view of how society works (e.g. the position of the Parti Socialiste Européen in the European Union).


A just society? Rawls is not the way

An article in today’s Guardian argues that the philosophy of John Rawls offers “a “realistic utopia” that provides the basis for a broad-based and genuinely transformative progressive politics.”  I don’t share that view.  Rawls makes a case for some of the key values dominant in American liberal politics, but falls far short of encapsulating progressive values.

The first weak point in Rawls’ approach rests in his appeal to the idea of a social contract – that what reasonable, moral people will agree to offers us a model of fairness and justice.  Reasonable people may well agree to lots of things.  Sometimes they will opt for things that have good consequences – what is good.  Sometimes they will choose what is right. He thinks they will agree to principles of individual freedom and a degree of useful inequality. Perhaps they will, perhaps they won’t; but whatever they do agree to, ‘justice’ is not the same thing.

This might come over as a quibble about language, but it’s been fatal to most attempts to form a picture of a ‘just’ society.  Consider, for example, the fate of the Commission on Social Justice in the 1990s.  They ended up with a political manifesto covering everything they could.  If justice means everything, it means nothing.

The second weak point concerns Rawls’ ‘difference principle’: that people should accept a degree of inequality on the basis that it leads to more for everyone.  This reflects the influence of the ‘Pareto principle’ adopted by many economists.  That approach fails to understand that inequality is intrinsically exclusive: that where inequalities occur, people with resources are able to outbid and so to exclude others from the benefits that they claim with those resources.

The third weakness lies in the construction of ‘justice’ and ‘fairness’.  These are not end-states, and cannot be understood in those terms: they are principles, and the pursuit of either is a continuing process.   The point, I have argued in other work, is ‘not to eliminate every conceivable injustice at one blow, but to ensure that each step makes the situation more just than it was before.’

That leads me to one of the strongest objections to Rawls’ vision: that there is no route from where we are to where he wants us to be.  The plea for a ‘realistic utopia’ is not just an oxymoron: it is an impossibility.  In The future of socialism, Tony Crosland made a devastating critique of utopian politics.  Every change we make alters the picture; it means, it must mean, that the conditions which have to be addressed will no longer be the same as they were before.

Nigeria needs to spend more on social support

I was alarmed to read a report in the Nigerian Observer, which told me that the World Bank was pressing Nigeria to ‘reduce the poverty net’.

If structural reforms are not implemented, Nigeria’s future looks bleak, per capita income will plateau, Nigerians will not have a full-time job by 2030 and if the employment rate does not improve, 23 million more Nigerians will live in extreme poverty by 2030,” according to the [World Bank’s] chief economist.

The report goes on to list the kinds of reforms that are being looked for: support for the private sector, ‘unlocking’ private investment, introducing ‘critical’ macroeconomic and structural reforms.  That, on the face of the matter, looks like a call for ‘structural adjustment’ and a return to the ‘Washington Consensus’, which emphasised liberalisation, privatisation and fiscal discipline.  Structural adjustment was not an unmitigated disaster – its effects were mixed – but it did lead to substantial hardship  and in some cases created positive obstacles to development.  One might have hoped it had been left behind in the 1990s.

As it turns out, however, this is not what the World Bank has been saying at all.  The Bank’s Nigeria Public Finance Review bemoans the chaotic arrangements that characterise many of Nigeria’s current policies, but the central theme is very different: Nigeria needs to devote far more of its resources to  public expenditure, and it needs particularly to expand its systems of social support.  Yes, it calls for ‘fiscal adjustment for better and sustainable results’, but it also argues that ‘Nigeria’s social spending is too low, both in levels and as a share of budget resources’; that education and health provision is not enough to raise human capital; and that government and the states need to raise revenue substantially to pay for it.  Nigeria has been shaping up to become one of the world’s largest poor countries – ‘the world’s second-largest poor population after India’. The World Bank’s policies have been misjudged at times, but this is not one of those times.

How much should income be cut by?

The government claims to be concerned about ‘inflation-busting’ settlements.  Public sector wages have generally ‘risen’ by 2.7%; private sector wages by 6.9%.  Many benefits (not all) have ‘risen’ in line with inflation.

I have put ‘risen’ in inverted commas because incomes have not risen at all.  As a simple matter of maths, a rise ‘in line with’ inflation is not an increase in income; it is a reduction.

Initial income 100
Inflation 10.7%
Value of income after inflation 89.30
Increase of:
2.7% (recent public sector awards) 91.71
6.9% (recent private sector awards) 95.46
7% (NHS in Scotland) 95.55
10.7% (‘in line with’ inflation)
12.32% (break even) 100
19% (the claim made by the RCN) 106.27

Increasing benefits ‘in line with inflation’ implies a cut in real income. It would take an increase of 12.32% before that did not happen.  And the supposedly unaffordable claim by the RCN for 19% is actually a request for an increase in real terms of 6.27%.  Since 2010, the real wages of nurses have fallen by 8%.  The RCN claim would not restore that level of income.

A case for higher taxes

Professor Richard Murphy argued yesterday in a tweet that the government should be aiming to cut taxes in a recession.  He duplicated that tweet in his  blog, but the core point he makes is this:

When facing a recession a government should
– cut interest rates
– cut taxes
– increase its spending.

In a recession, a government needs to stimulate the economy, and that can be done by injecting resources.  I’d question, however, whether either of the first two would actually stimulate the economy as things stand.  Interest rates have been close to zero for some time, and while lowering them further (perhaps into negative rates) would have some effect on economic activity – primarily, dis-saving, converting holdings from money to goods (such as houses) and diverting money to activities or locations which offer higher interest rates  elsewhere – most of those effects have already been realised. Cutting taxes – the policy of the catastrophically inept Truss government – would primarily release money to those who pay more in taxes, and the resources released will go in large part to rentiers.

The simple case for higher spending is made by Keynes:

Pyramid building, earthquakes, even wars may serve to increase wealth …. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

Higher spending doesn’t have to be financed point for point, and it doesn’t have to be financed by tax – there are lots of other options.  However, it can be inflationary if it means that ‘too much money is chasing too few goods’.

A large tranche of what we call ‘public spending’, however, is something different.  Benefits and pensions are transfer payments, a point I’ve made in previous blogs.   Government doesn’t spend the money it allocates to pensioners; it passes them the money so that they can spend it.  Taxation to fund cash transfers doesn’t withdraw money from the economy.  When transfer payments are directly financed – that is, being transferred from someone else – they are presumptively neutral in economic terms. This is not inflationary, because the amount of money in the economy remains the same after the transfer.  Any differences will depend on whether the recipients spend money differently from those who pay. That will be true to some degree, but it’s marginal: people on lower incomes spend proportionately more on food and energy, and save less.

Taxation is not the only way to finance public spending, but there are particular advantages in funding cash benefits this way.  If transfer payments are funded by ‘helicopter money’ – like the extra £20 pw for Universal Credit during the pandemic – they’re politically vulnerable and implicitly temporary.  Transfer payments financed by taxation, or by an equivalent mechanism such as national insurance, imply a more equal distribution of income than the same payments financed indirectly through creating credit.  They will fund markets that function better for people on lower incomes. They do it without risking inflation. And they offer a better prospect of growth. The IMF have argued that a 1% increase in the income share of the lowest paid 20% produces growth of 0.38%, four and a half times the growth that comes from increasing the income share of the top 20%.


Low-tax investment zones: three things to watch out for

It’s been suggested that the government is on the point of announcing 12 ‘low tax investment zones’, where businesses and perhaps employees will benefit from deregulation and reduced taxes.  Much of the response to this, predictably enough, will be about fairness, and the suspicion that the government is offering special favours to its mates.

Let me offer a different perspective.  I’m going to assume, although there are grounds for scepticism, that the government’s basic claim is justifiable: that these programmes will have an effect in stimulating economic growth.  The question is: what sort of effect?

There are three things that governments should always be aware of in judging value for money in special programmes and initiatives. They are deadweight, spillovers and externalities. Deadweight happens when those who are benefitting do not actually change their behaviour.  If a firm that is already trading successfully moves from one area into another, simply to get the benefit of the programme, it’s a dead loss.

Spillovers occur when people do benefit  and change their behaviour, but carry on reaping the benefits of the programme after the case for stimulation has ceased to apply.

The term ‘spillovers’ is now increasingly being used in development economics to refer to externalities, but externalities are something different.  Externalities, or external effects, can be positive or negative.  The stimulation of the economy would be a positive externality.  An increase in crime, for example, is a negative externality, and crime in freeports, such as smuggling, drug dealing and money laundering, has been a major concern.

There is no certainty that the deregulation and low tax will have any benefit to the economy.  They may be detrimental.  Let’s have fewer assumptions, please, and more evidence.

We need to talk about Corporation Tax

The contenders in the Conservative Party election are mustard keen on the idea that Corporation Tax should be reduced.  Liz Truss, in particular, seems to think that it will encourage firms to expand and be more productive.  The evidence does not support her.

Corporation Tax is levied, not on activity, but on profit.  It’s possible, at one and the same time, to reduce profits while increasing the rate of return.  It’s done primarily through ‘leverage’ – taking on debts.  Reducing the apparent profit is done by  making the firm pay the costs of takeover.  If the firm pays, the purchaser doesn’t have to.  This is done by loading the debt onto the firm, rather than the purchaser.  This also has a tax advantage: the firm’s profits will be less because servicing the debt repayments is part of its costs.

Debt also increases the rate of return on the initial stake.  Let’s say, for the sake of argument, that a firm is worth £50m in assets and has a return of £5m per annum.  If it’s bought outright, the return is 10%.  If it’s bought with £10m in equity and £40m debt, the return depends on the debt repayment, but a debt repayment set at anything less than £4m – 10% – will increase the effective rate of return on equity.

There are three other factors that help to generate greater returns.  First,  inflation reduces the value of debt – effectively transferring money from creditor to debtor.  Second, the debt is often repaid abroad, so that this part of the return avoids  taxation.  Third, more parent firms are able to bump up costs to offset against profits, for example by the pretence of outsourcing functions such as management, payroll or IT to subsidiaries.

There are two egregious examples of this kind of financial chicanery at the moment: the conduct of residential care providers, and the water companies.   I’m always wary of economic analyses that claim to demonstrate an ‘incentive’ effect, because economic behaviour is far less rational than the textbooks like to claim, but it seems plausible to say, at least, that the effect of Corporation Tax as it is currently constituted is to reward some pretty undesirable behaviour.  In particular, Corporation Tax rewards firms  for financing themselves on debt. It creates opportunities for fly-by-night purchasers who contrive to buy firms with other people’s money.  It offers a bonus for outsourcing economic activities elsewhere in the world, removing them from the British economy.  I’m not going to claim that I have the answer to all this; the people who put together this kind of financial engineering are quick on their feet, and cleverer than I am.  But surely, there must be a better way?

A Charter for Tax Cuts

The contest for the leadership of the Conservative Party has been focusing on the issue of tax cuts.  The case for these cuts has been made by economist Julian Jessop, in a pamphlet for Conservative Way Forward.   (The format of the online version makes it exceedingly difficult to read, but the author has sent me a clean copy I can work from, for which thanks are due.)

The first step is to consider whether or not we need to take measures, at this point, to stimulate the economy through an injection of resources.  I was uncertain about this a year ago.  We’ve moved on from then. We were facing a clear threat of an economic recession at that time, which argues for some kind of stimulus, but now we also have the immediate prospect of rampant inflation.  Injecting money into the economy would fuel inflation – simply put, too much money chasing too few goods. This paper talks about a ‘dash for growth’.  That would be risky, and previous experience argues against it.  The ‘Barber Boom’ (1971-73) destabilised the economy and left us in a parlous position when further problems arose.  The Conservative government of the time had believed that the obstacles to sudden growth were self-imposed, and that if they rushed at the barriers hard enough, the economy would break through those barriers. The conventional economic analysis of the time suggested, on the contrary, that the effect would lead to ‘overheating’ – generating a demand that couldn’t be satisfied, fuelling inflation and forcing money abroad because the domestic economy couldn’t meet the demand.  That is exactly what happened.  By the end of 1973, we had the three-day week; and then there were the deflationary terms dictated by the IMF, which made a bad situation worse.  The problems of the 1970s weren’t caused by the unions, who only responded to the situation, or even by the oil crisis, which only took hold when we we already facing a slump.  They were created by economic mismanagement. There’s every reason to think that pumping money into the economy will have the same effects as it did in the 1970s: fuelling inflation and diverting money abroad.

The second part is the question of what tax cuts will do.  The idea that a modest tax cut of one or two pence from income tax will shield people from rising prices in any meaningful sense is, frankly, preposterous.  There’s a good argument for reforming much that goes on in our tax system – it’s too complex, and there are too many anomalies, and in so far as it creates perverse incentives, the most destructive is the incentive to load companies with debt (because that is tax-deductible) rather than building  viable structures for the long term.  Fiddling with corporation tax or VAT won’t address these problems; both measures are indiscriminate.

Third, there’s the question of values.  The demand for tax cuts is linked here with a set of familiar claims:  that the frontiers of the state should be rolled back, that people should keep more of their ‘own money’,  and that the ‘formula for success’ is (in a short appreciation by Lord Frost) ‘free markets, low taxes and personal freedom’.   The idea that people’s income before tax is ‘their own money’ is spurious (salaries and wages are largely  based on social conventions, including tax rates) and there is no evidence to support the contention that low taxes promote more successful economies.

There are points in the argument which I’d agree with.  The tax system is too complex, there’s been far too much of an obsession with debt, and we should be looking for ways to support effective demand.  However, if we are talking about government using national resources differently, tax cuts are just about the worst possible choice -ill-directed and primarily beneficial only to those who don’t need it.  If we really wanted to inject money into the economy, we should do it at the other end of the income distribution. Let’s get the money to people who can’t afford food or heat.

Further thoughts, 31st July

Since this initial blog, the arguments have been gathering pace.  Some of them seem to me, frankly, half-witted.  One really stupid argument is based on the ‘Laffer Curve’, which claims to demonstrate (as a matter of theory, not practice) that there are circumstances in which lowering the rate of tax will increase the amount of revenue a government receives from tax.  There are two problems with that.  One is saying that there are circumstances where this could happen is not the same as saying that it happens in every case: clearly, it doesn’t.  The other relates specifically to its application to Corporation Tax.  It seems abundantly clear that offering people the option to pay one kind of tax rather than another will lead to those people, especially if they have a competent tax advisor, to choose to pay the lower rate of tax available to them.  That is done, of course, at the expense of revenue from the higher tax.  Corporation Tax is already set at a rate which is lower than the upper rates of income tax, and accordingly those who have a choice will put the money through the Corporation’s books rather than their personal income.  That is not evidence of getting higher revenue – the opposite is the case.

The other daft argument is that tax cuts don’t alter the money supply, and so aren’t inflationary.  That is daft partly because tax cuts (as opposed to cancelling proposed changes in taxation) clearly would inject money into the economy – unless they are paid for by reduced government spending, which would be disastrous for millions of people – and partly because it’s a misunderstanding of inflation.  Inflation depends not just on how much money is going round, but on what that money can buy – it’s a matter of balance.  In current conditions of high inflation, which are already leading to higher production costs and higher wage demands, that balance is at best precarious.  I see no good reason for the current optimism that inflation will fall of its own accord.