The longest review of my new book, The Courageous State, to date has been published by Left Foot Forward.
I am grateful to Carl Packman for the care he has put into writing it.
I could quote it at length, but I seriously suggest a visit to Left Foot Forward to read it there. I certainly found it useful, and I wrote the book!
Cameron made his choice yesterday.
I make clear, the direction of travel in Europe is not one I like. But he simply chose to leave. And he did so for all the worst reasons.
He chose to support the City.
He demanded the right to exploit the working people of the UK on behalf o the City.
He demanded the right to undermine the economies of Europe and the regulation it wishes to establish over errant banks.
Cameron’s choice was a simple one: he declared the UK a tax haven. A land for the very rich. A land where abuse is not just tolerated but encouraged. A land where the ordinary people are treated with contempt.
It was the wrong choice. It was made for the wrong reason. It’s a choice we will bitterly regret.
Some things are simply designed to induce anger. The Guardian’s report this morning that H M Revenue & Customs are seeking to sack Osita Mba, the lawyer who whistle blew on the Goldman Sachs deal that has torn the credibility of Dave Hartnett and the senior management of our tax authority apart is one such thing.
Osita Mba has stood up for the rule of law, for accountability, for consistency, for competence and for the duty of the civil service.
Parliament has applauded his courage in doing so.
And HMRC want to sack him.
The wrong man’s under threat.
Martin Wolf has become the commentator amongst commentators during this recession. An FT subscription is almost worth it for his column alone. As he says this morning (and I quote very selectively):
In the OBR’s November forecasts it further lowered potential output at the start of 2016 by 3.5 per cent. As a result, my colleague Chris Giles has estimated that the level of potential output forecast for 2017 is 18 per cent below that implied by the 1997-2008 trend. This is a huge fall.
That means we’re likely to be more than one pound in six poorer than expected in 2017.
Now, somewhere, deep down, I have a sneaking suspicion I welcome some aspect of that. After all, in the Courageous State I call for finance to be curtailed, and no doubt that would for a period reduce GDP – as it is clear it contributed far too much to our national income in 2008. So, let’s not take numbers at face value alone, there’s always more to them than that.
And there is, as Wolf notes:
[I]t is unclear what economic forces are causing the reductions in potential output that the OBR and other forecasters believe in. In explaining the collapse, the prime piece of evidence is the declining level of productivity. This is startling: output per hour in the whole economy was 1.7 per cent lower in the second quarter of 2011 than in the fourth quarter of 2007.
Again, this needs interpretation: the reality is that if productivity had been maintained we would now have hundreds of thousands more people unemployed. And you never know, what we may be seeing is a real shift in attitudes that says people are more important than machines. We may also be seeing a shift to services, and Baumol’s law virtually guarantees reduced productivity when that happens. So again, this may not all be bad.
But as Wolf also notes:
Yet these persistent losses may not be inevitable, but rather be the fruit of policy choices.
He’s right, of course. The fact is that policy is constraining demand, and threatening profit. The almost inveitable consequence is a decline in productivity. And as Wolf puts it:
The priority, then, should be policies that raise investment, in both corporate and public sectors. It remains difficult to understand why the government cannot take advantage of today’s low interest rates to expand investment in income-generating assets. Again tax cuts that would directly add to employment must make sense.
The conclusion I draw is that we do not understand the causes of the UK’s falling productivity and should not assume lost output is permanent. Above all, the aim of policy is to ensure it is not. The country should accept such radically reduced circumstances only if sure they are inescapable. It cannot now be.
I agree. It’s perplexing to be in a situation like this, where the glaringly obvious is not being done.
Mind you, I’d add a rider to Wolf: the incidence of the investment - ensuring that the impact is for employment and with greatest rewards to those lower in the income distribution, is vital. And that is possible too.
So why aren’t we doing that? Could it be that it’s because Cameron is only intent on saving the City?
I am in one sense I am pleased the UK is holding out against some aspects of the EU deal proposed by Merkel and Sarkozy. As I have argued, that deal is dire for democracy.
At the same time I loathe his reasoning – that puts the City of London at the core of concerns.
It leaves me strangely conflicted.
What is so obviously true is that with low interest rates, mass unemployment and a crisis of hopelessness sweeping Europe, whilst we know that at the same the environment is being trashed, the we need a Green New Deal for Europe.
And that such a Green New Deal for Europe has to reflect, respect and even encourage diversity within a framework of mutual respect on which we can all agree.
That’s so far from what’s on offer. No wonder the politicians in Brussels are failing.
The Guardian blog ran commentary on the supposed attack on the City by the EU today. They quoted me saying:
It’s an extraordinary statement of priorities at the moment in itself the fact that the city is at the top of the agenda when there is so much concern about the impact of bankers. The very cause of the problems addressed by Europe is to some degree being defended by David Cameron as his number one priority. We might agree that the City has a role, to make it your priority is extremely odd.
But purely economically he is also wrong. The problems in Europe there is a balance of payments crisis. As Martin Wolf argued in the FT yesterday [£] the value of payments is wrong and we need to put that right. One of the major reasons that’s happened is because of the free movement of capital which is the basis of the City of London. We need to slow it down. A financial transaction tax would help do that. It’s one of the essential measures to bring capital back under control. We do need capital controls.
On the wider proposals, he added:
This is about accountability and transparency and making sure that people pay their taxes. It’s about effective markets. Why are they trying to maintain the status quote which is so flawed? Demanding a hedge fund is run, regulated and taxed in the same place is right. This is not being anti-market; it’s arguing for a good market.
Quite so.
I was asked yesterday if it was true there was such a thing as the Laffer effect – that if taxes in the UK are increased then tax revenues would fall.
I replied that of course there is, very crudely a Laffer effect – if taxes ar 0% or 100% on all income then there’s no tax revenue. In between there are revenues, so in a sense there’s a Laffer curve. But that’s not the argument. The argument is whether or not we’re at the point where cutting taxes would raise revenues. Kevin Drum raised this on Mather Jones a week or two back, and in reply to my questioner I offer some of his commentary as explanation as to why the argument that cutting taxes would help raise revenue now is wrong:
Okay, this isn’t actually raw data. In fact, it’s very, very cooked and calculated data. But just so you know, Peter Diamond and Emmanuel Saez have tried to calculate the tax rate on the rich that would maximize revenue to the government. Paul Krugman summarises:
In the first part of the paper, D&S analyze the optimal tax rate on top earners. And they argue that this should be the rate that maximizes the revenue collected from these top earners—full stop. Why? Because if you’re trying to maximize any sort of aggregate welfare measure, it’s clear that a marginal dollar of income makes very little difference to the welfare of the wealthy, as compared with the difference it makes to the welfare of the poor and middle class. So to a first approximation policy should soak the rich for the maximum amount—not out of envy or a desire to punish, but simply to raise as much money as possible for other purposes.
Now, this doesn’t imply a 100% tax rate, because there are going to be behavioral responses—high earners will generate at least somewhat less taxable income in the face of a high tax rate, either by actually working less or by pushing their earnings
underground. Using parameters based on the literature, D&S suggest that the optimal tax rate on the highest earners is in the vicinity of 70%.
Actually, Krugman is being conservative here. If you assume a broad base and no deductions, Diamond and Saez peg the revenue maximizing rate for top earners at 76 percent. That’s for federal income tax only. (See page 173 here.)
You can decide for yourself if you think top marginal rates should be that high. After all, revenue maximization isn’t our only social goal. Roughly speaking, though, this is a calculation of the peak of the famous Laffer Curve. (For top earners, anyway.) Above 76 percent, you really can generate higher revenues by lowering tax rates. Below that, higher rates generate higher revenue, just like you’d think.
I but that: it accords with the world as I observe it.
So for all practical purposes the answer to the Laffer question of ‘will we increase taxes by cutting rates?’ is a simply and responding ’No’.
NB Can’t remember who sent me the link – but thanks
Cameron’s drawn up his arguments on Europe.
They are all the wrong arguments, of course.
Cameron’s line is a a simple one – let the bankers carry on. The bottom line for Cameron is that the City of London has to be allowed to continue its abuse of the world economy. Becasue that’s what it does. By handling the world’s hot money – much of it in turn flowing in and out of London through tax havens (something Osborne is now actively encouraging through his corporation tax reforms) the City is the launch pad for the attacks on the Euro and sovereign debt and is therefore the prime creator of the instability that we’re now seeing. And Cameron says that must continue, unabated.
It shows he really does not understand the need for real reform in the Euro area. The first real reform needed is that the free flow of capital has to end. The extraordinarily negative impact of the free flow of capital combined with the creation of the Euro, and the resulting imbalances, was explained by Kevin Drum in Mother Jones, yesterday, rather well.
Martin Wolf was on the same theme. As he put it in the FT:
I am not sorry that Germany failed to obtain yet more automatic and harsher fiscal disciplines, since that demand is built on a failure to recognise what actually went wrong. This is, at its bottom, a balance of payments crisis. Resolving payments crises inside a large, closed economy requires huge adjustments, on both sides. That is truth. All else is commentary.
He’s right, and for much the same reason.
Three things follow. First, we need a financial transaction tax. The activities fo the City need to be curtailed in the interests of the world. And FTT would be a start in achieving that.
Second, the City also needs to be curtailed in the interests of the UK. As I argue in the Courageous State, because the City has squeezed out all other private sector activity in the UK our GDP would rise if its dominance were reduced: it is reducing the overall return in the UK economy by its over-expansion.
Third, there is an obvious need for EU reform – but the need is for a removal of the assumption that the free flow of capital is paramount. It is very obviously at the root cause of this crisis.
So why won’t anyone say so?
Many thanks to all I met in Norwich yesterday.
Four events, all very different, all masterfully organised by Lesley Grahame (to whom special thanks), and an empty bag of books on the way home, thanks to Norwich Greens.
It was good day – and especially good to take part with 50 or so others in the (very cold) march to Norwich Castle to remember the life of Robert Kett, hanged there in 1549.
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