Posts Tagged ‘Credit Crunch’

Why wealth matters

July 3, 2009

Over the past 12 years Labour has generally shied away from expounding on the subject of wealth, preferring instead to be seen to wish to “reward success” and focus efforts on giving aid to the worst off, rather than taking pops at the rich.

This wasn’t such a bad political strategy – especially in the 1990s, when, for good or for ill, we needed to do everything we could to convince the British public that we were able to accept the status quo in a society which fetishized great wealth.

But the way things are now, we need to focus on the issues that wealth and its present distribution present; both in terms of the way our political discouse takes place, and in the nuts and bolts of policy.

The first point is on the very different ways in which moral judgements are made about the rich and the poor. Consider the 50% tax rate. This comes via a particularly daft unreconstructed Thatcherite:

Economic think-tanks have already readily condemned the tax rise as pointless with the Institute of Fiscal Studies warning that the treasury’s predictions regarding the tax have a “very high degree of uncertainty” and many predicting that this could lead to an overall loss in government revenue rather than a gain with businesses simply moving abroad and many using loopholes to declare their income as Capital Gains.

Forget for a second that he’s simply wrong. Forget that there is no evidence to suggest that the 50% rate will have a negative tax yield (no matter what the Laffer-curve believing monetarist flat earthers think), and that very few of the extremely rich will actually leave the UK (most of them seem to like London, for some reason).

What’s significant here is a complete moral absolution of people who choose to arrange their affairs such that they avoid paying UK tax, and so drive up the tax that must be found from you and me. The wealthy are never – never, ever, ever – condemned for this sort of behaviour.

But the wealthy are not the only group in society against whom it is levelled that they arrange their work affairs so that they can maximize their own income – the unemployed are, if you believe the tabloids, very assidious about avoiding work and maximizing the benefits that they receive as a result.

The outcome here? Widespread and loud moral condemnation, of a sort that drowns out the calmer voices in debates about economc inactivity and work.

It’s clear to me, then, that – despite the fact that “economic rationality” is acting in the same way in each instance – the “public debate” holds that the poor have very strong moral duties to the rest of us which trump their economic self interest. The wealthy, on the other hand, have no moral obligations of any kind: they must simply carry on being splendid.

That this is the case has led to a deterioration in the way we think about wealth, poverty, inequality and social cohesion.

The second point about wealth is that growth benefits the general public in different ways, depending on where it is generated. I’ll take just one small example of what I mean.

An important, and oft-overlooked, component of the benefits of economic growth is the externalities that arise from increasing demand for certain goods and services – usually, in the form of product improvements and market enhancement.

What this means is that broad based growth, which raises the disposable income of a relatively large number of people, has the potential to be extremely beneficial to future consumers.

The economic good years of the 1950s, for example, were broad based, and resulted, famously, in a huge expansion in the ownership of consumer durables – fridges, TVs, washing machines and vacuum cleaners.

But the best bit is that this becomes a virtuous circle, because the demand in these sector drives innovation and competition. So, a family which bought a fridge for £75 in 1952 were benefiting families who bought a better fridge for £40 in 1957.

Growth in the last 25 or so years, though, has been based on a very small number of very wealthy people – and this is where the mass benefit breaks down.

The improvements to the quality of yachts, or the redesign of the Bentley Continental, have far less application to our own lives than would improvements to products that we actually buy – and in a world where the wealthy are increasingly cut-off from the rest of us in lifestyle, this is increasingly the case. The growth and its benefits we have seen in positive GDP growth figures up to before the recession has, in actuality, been concentrated in a very few hands.

Before we can be honest with ourselves about the limitations of Britain’s wealth fetish, we will have a blinkered view of what can be done to make our economy one that is broad based, and so able to benefit more people more of the time.

Speeches I wish Gordon Brown had made (number 94)

June 29, 2009

I’ve been thinking recently about the comparisions between the Credit Crunch and the post-9/11 crisis in foreign policy, mostly in terms of how leaders have chosen to respond to the emergent situation.

In 2001, the US/UK consensus on foreign policy came to an abrupt end, and leaders – foremost among them Tony Blair – were keen to expound new doctrines to guide the formation of the post-9/11 policy on diplomacy, allies and security.

Surveying the scene less than a month after 9/11, Tony told the Labour Party conference on 2nd October 2001:

This is a moment to seize. The Kaleidoscope has been shaken. The pieces are in flux. Soon they will settle again. Before they do, let us re-order this world around us.

Today, humankind has the science and technology to destroy itself or to provide prosperity to all. Yet science can’t make that choice for us. Only the moral power of a world acting as a community, can.

“By the strength of our common endeavour we achieve more together than we can alone”.

For those people who lost their lives on September 11 and those that mourn them; now is the time for the strength to build that community. Let that be their memorial.

Whatever his faults and whatever the flaws in this “re-ordering” process, this is Tony’s raw leadership quality shining through.

The world needed a new foreign policy for a new age: Tony sought, within a month, to establish its case, to demonstrate that this posed an opportunity and not just a threat, and to establish some clear moral principles around which the new way would be ordered.

So how does Gordon compare?

Personally, I think Gordon has handled the technical detail of holding back the worst of the recession well. I also think that a lot of the blame being laid at his door for the recession happening is unfair.

But all of this assesses Gordon as if he were a mechanic, called in to fix a broken machine. He’s not: he’s a leader. What is really lacking – and is is particularly lacking in comparison to Blair’s approach post-9/11 – is the vision for what is to come next. Indeed, it’s the analysis of what got us here in the first place too.

I’m no speechwriter, but I’d like to have heard something along these lines: (more…)

*sigh* defending Gordon. Again.

June 24, 2009

As a self-confessed Gordon-sceptic this may seem odd, but I am still occasionally able – nay, willing – to defend Gordon’s handling of the economic crisis, and his general record of Chancellor.

My view, for the record, is simply that Gordon – for all that he has done for Labour over the past 25 years – simply isn’t the right leader to take us forward once the recession is over.

This all becomes particularly embarassing when even members of my own family start to put the boot in to the ol’ Gord. I worry sometimes that I’ll beginning to sympathize with the poor man.

Obviously thinking that his poor Labour activist son needed cheering up, poppa VoteRedGoGreen – a Labour man, but no fan of the Gord – sent me this list of Gordon’s “10 greatest financial gaffes” via email today, with the subject line “Another nail in the coffin…”

Cheers Dad. I notice you waited till after Father’s Day before deciding to send this particular piece of political cheer to your first born.

Anyway, feeling in a contrary mood, and being 200 miles away and thus robbed of the opportunity of skulking off to my bedroom and slamming shut the door, I formulated the following list of responses to the 10 “gaffes”.

1. Taxing dividend payments

Pensions aren’t really my strong suit, to be honest, and I’m sure that pops knows a bit more than I do – nevertheless, I’m happy to stand up for Labour’s record for pensioners. Minimum Income Guarantee anyone? Or the Winter Fuel Allowance? Pensioners, especially the poorest, are a lot better off, and pensions are set to be index linked once again.

2. Selling our gold

Duncan has said it far better than I have. Selling the gold was a move to diversify Britain’s reserve stocks, and (as Duncan rightly points out) pales into insignificance when set against Thatcher’s £450bn oil revenue spree in the 1980s.

3. Tripartite financial regulation

I’ve expounded on this myself. The tripartite system was sensible, given that the Bank of England was taking over control of Monetary Policy, and was far more stringent than any previous system. It’s also unarguable that every regulartory system in Europe failed – begging the question, was it possible to construct a regulatory system that would withstand the recession?

4. Tax credits

The Times seems to suggest that the overpayment problem means that tax credits have simply been a complete failure. Nonsense. The OECD says that inequality and poverty have dropped quicker in the UK than in any other country, and tax credits have been a big part of Labour’s determined strategy to make this the case.

5. The £10,000 corporation tax threshold

The Times seems to be complaining that Brown made taxes lower, and then put right his error as soon as it became clear. Curious. The new sliding scale is working well, though. It’s certainly no “smoking gun” on a Brown Chancellorship or Premiership.

6. Abolition of the 10p tax rate

OK, I’ll give you that one. Next!

7. Failing to spot the housing bubble

Well, yeah but no but – what? It’s not that the housing bubble wasn’t spotted that is the problem, it’s that there was precious little the government could actually do about it. Fundamentally, it’s lack of supply that has caused massive inflation in house prices in the past decade, and only huge numbers of new housing units could hope to have even a slight impact.

Of course, I’d support this, but Middle England (Peace Be Upon It) just loves forming groups of Nimby residents to oppose new housing developments – mostly, I suspect, because they think that poor people might live in them. They can use current planning law to impose costly holdups on developments. When the government tries to change planning law, there’s an outcry. Nobody said it was easy, did they?

8. 50 per cent tax rate

This one is based on a quote from one Robert Chote, Director of the Institute for Fiscal Studies and, it would appear, a complete muppet:

“If you look at what happened when higher rates were last changed in the 1980s, that might lead you to suggest that such a move might actually lose you revenue, rather than gain it.”

This is Laffer Curve theory at its daftest. Once again, a slam dunk for our favourite blogging leftie economist – empirical evidence strongly suggests that, among OECD countries, all but Sweden have marginal tax rates below the point at which maximum revenue can be collected. There’s also no evidence to speak of that the 50% rate will lose Britain any significant output or business – Denmark’s tax regime is far harder, and yet it is apparently the best country in which to do business.

9. Cutting VAT

They’re really scraping the barrel here. All this item quotes is an unnamed “tax accountant”.

And there’s no actual evidence in the item to back up its assertion that “shopkeepers, not shoppers, felt the benefit”. The retail output figures for the last 6 months saw a considerable increase, AND it’s one of the reasons why Tesco has a 7% supermarket market share in Ireland when it doesn’t have any stores in the Republic – Irish shoppers crossed the border into the North to shop.

It was the only way that a tax cut could be guaranteed to go straight where it needed, into the consumption side of the economy, and as far as it goes, it worked.

10. Public-sector borrowing

UK net borrowing is still a lot lower than in the USA, Japan, France and Germany. Duncan’s not worried, and nor is Chris Dillow. An aggressive pursuit of government budget balance during the recession, as in Ireland, would be disastrous.

So all in, I’m not convinced. Poor old Dad’s going to have to try harder.

Note to Dad: don’t worry, I love you really. And your card really is in the post.

Banking: it’ll make you go blind, you know

June 19, 2009

In my quest to bring the Paintbrush reading public their favourite type of non-Lily Allen related post (srsly, guys, she really isn’t here), I’ve been considering Banking reform.

The beeb is reporting that Mervyn King and Alistair Darling are clashing over what needs to be done. The Governor’s view is that there needs to be more done to allow intervention in banks that are “seen to be behaving riskily”; The Chancellor, on the other hand, favours leaving the tripartite system as is.

So far so predictable. I have some sympathy for King’s view, in honesty: but the important question is, how do you tell when banks are behaving riskily?

So here’s my two penn’orth for banking reform: Nationalize banking audit.

At present, banks (like other large businesses and financial institutions) must have their accounts audited, and spend large sums of money on getting the large auditors like PwC, Accenture and KPMG to come in, sift through everyone’s desk, and sign off on the accounts.

However, there have clearly been problems. There’s not a suggestion that any of the banks or mortgage lenders that have run into difficulties in the last two years came close to failing an audit; surely that’s a damning indictment of the present audit system?

There’s clearly a peverse incentive operating here. If a bank is paying an auditor hundreds of thousands of pounds to perform a service, there’s little incentive for the auditor to give their client bad news.

They are, after all, keen to get the contract again next year. In fact, the sort of personal relationships that can build up at a management level between banks and auditors that work with one another for a long period of time could work to make this worse.

That’s why, I think, the state should get involved. I think that a new consensus emerging from the financial crisis is that the public interest stake in the stability of the banking sector should be acknowledged more, and that there is a legitimate role for the state.

So, once the state relinquishes the stakes it has bought in the banks which required bailing out, we need to look at how that role is to be maintained.

Having a nationalized Office of Banking Audit – financed by an Audit Tax on banks, which would more or less replace the fees banks currently pay to their private auditors – would ensure that a stringent watch could be taken on risk taking, and that banking balance sheets can be kept in check.

Nationalizing bank audit is a neat “third way”, if you like, between returning to the light and limited touch of the past, and all-out state intervention in banking through ownership of stakes in large banks.

Can it happen? I’m not sure the government is feeling bold enough. But it should do. The time for being squeamish about nationalization is past: I think we’re all past the days when it meant going for the “commanding heights” of the economy.

The honourable exception

May 12, 2009

I too will break the self-imposed blogging ban to draw attention to an excellent letter sent to the Financial Times. Hat tip to that fine organisation The Other Taxpayers’ Alliance which described this letter as the “honourable exception” to all the greedy City types wallowing in self-pity at having to contribute a bit more to the national coffers: 

From Mr Simon Hallett.

Sir, Like Tim Elster (Letters, April 28), I am in line to pay the new 50 per cent rate of tax. I read that high earners are apparently depressed, demotivated and planning to leave the country. Public spending on health and education has apparently been worthless, while public sector workers are self-evidently overpaid by comparison with your earlier correspondent.

Then I think of the exhausted, heavily pregnant hospital doctor who saved my son’s life at 3am after 19 hours on duty. I also think of the nursery teacher at our village primary school who spends Sunday evening at school, unasked, lovingly preparing activities for the children.

I have been in the investment business for some 20 years, during which time I have seen just how many lunches, clay pigeon shoots, tickets to the rugby and nights at the opera come between the average pensioner and his pension, or between a charity and its investment income. Don’t tell me the private sector hasn’t been wasting my money like it grew on trees.

Let’s get real about this: £150,000 is not a small amount of money. I would like to see the complainers explain exactly what items they will have to give up as the result of the 50 per cent tax band. Let’s put them on the table and we can all have a good laugh.

Surely it’s time for a more grown-up attitude to this. Possession of large amounts of money doesn’t allow people to cut themselves off from the rest of society. Society has a habit of paying you a call in one way or another, taxation being one of the more innocuous.

I will be interested to know where the emigrants are planning to end up, and whether they plan to remain perpetual outsiders in their host country.

Simon Hallett,
Peaslake, Surrey, UK

Simon Hallett sounds like a good bloke, though I do wonder how popular he is in the office.

A Budget Pick’n’Mix

April 23, 2009

Duncan has a piece on the 50% tax rate on his much-admired economics blog.

David Semple thinks the Budget was a missed opportunity.

Don Paskini’s thoughts are similar.

More left analysis at A Very Public Sociologist.

The TUC blog includes some articles which argue it did ok as a progressive Budget.

Hopi Sen points out the ridiculous attitude of the right-wing press.

As does Dave Osler.

Tom Harris draws attention to the unconvincing Tory response.

And if you’ll excuse me I won’t link to any right-wing/Tory reactions as they all make me feel quite nauseous.

Oxfam: solutions, but not (quite) the right ones

April 8, 2009

I’ve just been reading about Oxfam’s latest campaign, which seems to hit the nail on the head in terms of where the new frontier of domestic poverty relief is.

They’ve come up with “FREDs” to describe the people being hit by the credit crunch – people who are Forgotten, Ripped off, Excluded and Debt-ridden (see?)

What’s also great to see is that, after defining their problem very well, they’re advancing some very practical, nuts-and-bolts ideas about the tax and welfare systems to alleviate poverty amongst FREDs.

Still, I wouldn’t be an aspirant blogger unless I had it in me to nit-pick a set of well thought out, excellently researched proposals from an exceedingly worthy cause.

I’ve got to sound a word of warning about one of their proposals – that of raising the threshold on income tax.

This sounds like a great idea – taking poor people out of tax, or at least, giving them more breathing space before their incomes are eaten into by the revenue. However, it’s actually highly regressive: because raising the threshold on the lowest band of income tax affects everyone paying tax, the vast bulk of the benefit accrues to the wealthy majority.

A large chunk of government revenue would be surrendered, with only a small portion going to saving a section of the genuinely needy a few quid per week; the rest goes to the middle classes.

This is an extremely inefficient distribution of the benefits of a tax cut, even leaving aside what would actually happen to that revenue were the government to spend it instead (i.e. on services benefiting working class communities, or schemes to aid the unemployed in reskilling or getting back into work).

I’m not against giving the worse off a break on taxation – I wouldn’t be in the Labour Party if I was, would I? – but there’s better ways to do it. Oxfam have also called for more tax credits: leaving the lower threshold on income tax where it is, but raising higher levels as they call for, will produce extra revenue which can be pumped directly into the hands of FREDs without any of the middle classes getting their hands on the lucre.

G20 battle lines

April 1, 2009
No really, I thought the DVDs were great.

"No really, I thought the DVDs were great."

To be honest, I’m almost glad that there’s a row brewing at the G20 – at least, one in which Merkel and Sark0 are lining up against Obama and the Gord.

After several months in which the media have used every disagreement between Western European leaders as a stick with which to beat Gordo, it’s refreshing to see the dispute cast differently.

Previously, the debate was cast as a clash of personalities: poor, dishevelled, unpopular-kid-in-the-class Gord, trying to make the other members of the European club play with him. Merkel and Sarko take their toys and play elsewhere.

This has very much been the narrative, both foreign and domestic: that policy doesn’t matter, and that the response to the recession that Gord is offering is poor, because nobody likes poor Gordon. Other, more eminent, political bloggers – among them, comrade Hopi Sen – have blogged in the past about the paucity of policy analysis coming out of the recession, relative to the amount of tired old “who’s up, who’s down” copy.

Well, Obama to the rescue. The Prime Minister may not be the media’s favourite uncle, but they sure like Barry – and now that Brown and Obama seem to be forming (broadly speaking) a coalition in favour of a further stimulus against the Sarkozy-Merkel axis, the media are forced (I would hope) to consider this in policy terms, at long last.

This is good for two reasons. First, because I genuinely believe a further fiscal stimulus to be necessary: although the crisis was caused by credit market failures rather than a large shock to aggregate demand, confidence (and thus demand) has undoubtedly been knocked.

Without government, output will fall and unemployment will grow: with hysteresis effects – that is, that expensive-to-replace capital is scrapped, and workers fall out of the labour market, unlikely to be fit to return to work when the recession ends – an output fall is extremely costly, in the long as well as the short term. I have blogged about this before, as have Duncan and Hopi, amongst others.

For all of their words on regulation – and, by the way, we ought not to forget that every regulatory system in the world has failed, not just our own, casting doubt on the argument that “better regulation” would have helped – and clamping down on tax havens and the rest of it, Merkel and Sarkozy must be made to justify why they want to restrict government fiscal action and pursue an essentially deflationary policy.

The second reason why I think this is good is that it forces the Tories into yet more contortions about their position on the recession: they were anti-regulation to begin with, but are pro-regulation now; they’re anti-state interference, apart from in the regulation of financial markets; and they’re euro-sceptic and pro-US, apart from when the French and German leaders (whose European Parliamentary grouping Cameron has just left) are looking uncomfortably close to their own positions.

“How Austrian are you?”

March 20, 2009

If you ever wanted to see what life would be like if you lived in a parallel universe, you need look no further than the Mises Institute – a bunch of headbanging, anarcho-capitalist libertarian types whose worship of Hayek, Mises and the rest are allowed to pass for a “research institute” in East Alabama (their rather inconguous base).

Their online quiz – entitled “how Austrian are you?” – invites you to test how far your own views stray into their particular brand of mentalism. It’s extremely long-winded and over-laden with technical economic jargon, but it has a certain appeal over all of those tedious “political compass” sites.

I scored a paltry 23/100. I’d be worried if it were any higher. Most of my answers were either “Keynesian” or “Socialist” (I’ll admit to choosing the socialist-sounding option when I disputed the premise of the question, or the validity of the answers on display).

It seems that, to score any Austrian-school points, you have to believe that the present crisis – and all previous recessions, including the Great Depression in the 30s – were solely caused by poor monetary policy.

Does anybody actually think this in the real world? Answers on a postcard, or in the comments.

Ever wanted to be a Central Banker?

March 16, 2009

Well now you can be!

The US Federal Reserve have released a simulator allowing you to make that dream a reality.

And if you’re not quite clear on the importance of controlling inflation, you can take a look at this priceless educational video from the European Central Bank:

Hat tip for the simulator to the excellent new Duncan’s Economics Blog, which has earned a place in the sidebar.