November 2010

The static world of Richard Murphy

And – most important – although household growth is modest at best whilst trade growth is negligible and businesses biggest customer is slashing spending – especially on investment which it always buys from the private sector – business is going to be investing enormously.

It’s just not going to happen. What it it going to be spending on? And why should it spend? What’s the rationale for doing so without any government stimulus for doing so?

The problem with this view is that it is assuming technological stasis. That business investment is only driven by the level of aggregate demand in an economy.

Something which we know is simply not true: this odd mixture of markets and capitalism is, as we\’ve found to our long term good fortune, actually the great innovation machine, the greatest we\’ve as yet been able to devise.

Part of my work over the past week has been to go and knock on some City doors. \”Oi, mate, wanna buy an idea?\” sort of stuff.

Project one is to prove the technology to clear up a billion tonnes odd of pollution while extracting the stuff to make fuel cells work. Project two is simpler and cheaper: a new method of separating the lanthanides. Something which would make, assuming success of course, each 1MW of windmill installed about $3,000 cheaper.

No, these aren\’t in fact huge worldchanging projects. Rather to my surprise though it looks like we can get both ideas funded (and a big shout out to those several readers of this blog who passed along contacts to get me in front of those City guys).

Which brings me to the real point. Knowledge of these sorts of things is local: they aren\’t the sort of things which would occur to a retired accountant from Wandsworth. Which is why said retired accountant is sitting in Norfolk puzzling over what business might invest in. We\’re going to go off and spend money on making his beloved Green New Deal a reality: which is why we use markets to allocate capital rather than retired accountants from Wandsworth actually.

Philosophers doing economics

Umm:

This is all the sadder because it is so short sighted about longer term social and ecological needs. The vocational turn in higher education is driven by a growth model of the economy that puts profits before human welfare and is ultimately unsustainable. If affluent societies are successfully to meet the environmental and social challenges of the future, they need to begin now to plan for a shift to a more materially reproductive way of living, to a low- or no-growth economic model rooted in an expansion of leisure time and rather different conceptions of social flourishing and human wellbeing.

No love, that\’s something you have to prove, not assert.

And there I was thinking that philosophers dealth with logic…..

Richard Brooks

Oh dearie me. My comment left there:

Oh dear me, a total logical and economic fail here.

Corporations do not pay tax: they might hand over the cheque but the economic burden must be carried by some group of people.

As both Larry Elliott and Vince Cable have pointed out in the pages of this very newspaper, those groups are, shareholders in the form of lower capital returns, customers in htye form of higher prices or workers in the form of lower wages.

This is not arguable, is not in dispute, it\’s a simple fact of the world we live in. Absolutely standard part of the economics of taxation.

Where we do start to argue is which group carries what amount of that corporation tax? The general rule of thumb is that the smaller and more open the economy the more it is the workers who carry it, not capital (customers don\’t normally come into this).

Reasonable estimates are that 70% of the US corporate income tax is paid by the workers in those lower wages. Other estimates say that for the UK it\’s over 100% (we are a much more open economy than the US)….yes, that workers\’ wages fall by more than the amount raised in corporation tax.

When you get to a small open economy like Ghana this will be even more extreme. It\’s entirely possible that the workers lose more in lower wages than the government gains in revenues.

Which is why all this \”make the bastard companies pay tax\” nonsense is indeed nonsense. Absolutely none of you seem to know the absolute basics of tax incidence or the economics of taxation.

It would be vastly better for the poor countries to have no corporation tax at all (although there certainly should be royalties on minerals etc).

Why is it that these campaigners to change the world don\’t bother to find out how the world works before trying to change it?

Richard Brooks is the bloke at Private Eye who has cooked up the codbollocks estimate that Vodafone avoided £6 billion in tax. He is, I believe, an ex-tax inspector. But one who doesn\’t seem to understand either the economics of tax incidence (as above) or even how to calculate a tax bill. Vodafone will have had to pay German dividend tax on profits going into the Luxembourg company: and Luxembourg tax on the iinterest received. Tax lawyers and accountants who do know what they\’re talking about have said that the likely full tax bill was, umm, around £1.25 billion, the amount actually paid.

You\’ll note that neither Brooks (nor Ritchie!) have deigned to give us a calculation of how much tax Vodafone should have actually paid. Even though we know the sum going in, the tax rates in hte different countries and…..well, should be simple enough, so whay haven\’t they?

Me, I think it\’s because they\’re lying through their teeth but opinion can of course differ.

Nobel Laureate wrong on matters economic!

Blimey.

Much as I don\’t like Paul Krugman\’s political views (most especially on the viability of the votestealers doing anything useful with our money) I certainly respect him as an economist (and as an intellect and much, much, more so as a writer).

But this is sad:

Jargon has its uses, in economics as in many other fields. It’s hard work, and also time- and space-consuming, to translate everything into plain English, all of the time.

But that said, sometimes jargon gets in the way of understanding, especially if the term of art sounds like something else. And that’s clearly the case with “structural unemployment.”

Here’s what economists mean by “a rise in structural unemployment”: a rise in the minimum unemployment rate you can get to before you start having inflation problems.

There’s a story behind why that might happen — it might happen because unemployed workers have the wrong skills, or they’re in the wrong places, or they can live so well off the dole that they don’t really want to work, or whatever. But the measure of structural unemployment is that worsening of the inflation-unemployment tradeoff. So, for example, the demonstration that Britain suffered a large rise in structural unemployment in the late 70s through the 80s was the way inflation took off in the late 80s, even though the unemployment rate was quite high by historical standards.

No, what he\’s just described is NAIRU (the non accelerating inflation rate of unemployment), not structural unemployment.

We can indeed say that structural unemployment is that bit that\’s left over after cyclical unemployment has been soaked up: and that thus NAIRU is a reasonable enough guide to it. But that isn\’t the definition by any means.

Wrong skills, wrong places, sure, that\’s structural unemployment: dole, benefits, that\’s NAIRU. The importance of the difference being that, well, if you\’ve got a high NAIRU it really is rather important to work out why: what do we change to lower it?

Like, just as one example, time limiting benefits. Or in the US example, not extending unemployment benefits from 26 weeks to 99: that\’s NAIRU. Having squidellymillions of carpenters and roofers out of work as a result of the collapse in construction: that\’s structural unemployment. They need to retrain for other industries.

Nonsense

Iris people, crippled by mortgage burdens they will never be personally be able to repay because even bankruptcy does not wise such debt in Ireland

Please Ritchie, wipe the drool off your chin.

Mortgage debt in Eire is recourse, just like it is here in the UK. So even if you give the house back you still owe the money.

But of course such debts are wiped out in bankruptcy.

Really, don\’t be absurd: and yes, this is something an accountant should know.

The book: Mr. Dillow does like it

Well, mostly.

In doing so, he demonstrates both the strengths and weaknesses we see in his blog.
One of these is a clarity of exposition. By economists’ standards – a low bar, admittedly – Tim writes very well, although some readers might find his snarkiness a little wearing. And there are some brilliant flourishes. His idiot cousin metaphor for comparative advantage verges on the genius.

And this is really rather what I hoped would be the reaction:

If I were an economics teacher, I’d recommend it as holiday reading for my students, in the hope that they’d see how textbook concepts can be used – and that my greener students will be stimulated to think more clearly.

Danny Dorling: stop listening to this man.

At close to £21 an hour, which translates to an annual salary of just over £40,000, you are bang in the middle of the best rewarded fifth of all employees. You earn getting on to twice the national average. In short, you are, in relative terms, rich.

No, you\’re not.

You have a relatively high income, yes. But that is not the same as rich. For rich refers to wealth, a stock, not to income, which is a flow. And that sort of intellectual sloppiness does not bode well for someone trying to give an analysis of how this all happened.

For much of the 20th century, the income gap in Britain narrowed steadily as we gradually became a more equal society. In 1918 the richest 1% of earners was rewarded with 19% of all income, receiving about 19 times more than the average earner. By 1935 the top 1%\’s share of income had fallen to 14%; by 1950, 12%; by 1960, 9%; by 1970, 7%; and by 1980, 6% (and only 4% after taxes).

This was all achieved without stipulating a ratio from top to bottom – but it was much lower than 20:1. And, in fact this process towards a more equal society seemed inexorable, an almost natural consequence of an advanced democracy. During these years – the three decades or so after the end of the second world war – this trend was part of the political consensus.

However, in the late 1970s a few of us got greedy; the rest of us failed to stop the greedy, and they spread their ideas around (if not their money).

You what? We\’re to take seriously the argument that there was some outbreak of greed? What is this man smoking? It\’s all come about as a result of the destruction of self restaint or something?

It\’s not unusual to look for economic causes for economic changes. Rather than, you know, moral ones.

That the turning point in inequality came as globalisation returned – almost to the moment in fact -and that this rise in inequality happened in all of the industrialised nations at the same time might give some people pause for thought.

Although not, apparently, Danny Dorling. Which is probably why we shouldn\’t be listening to him on the subject.

Oh, and he elides between CEO salaries and CEO total income after bonuses and share vestments. Man\’s just not being honest.

Woo Hoo! Great paper here

Worldwide burden of disease from exposure to second-hand smoke: a retrospective analysis of data from 192 countries

OK….

The calculations were based on disease-specific relative risk estimates and area-specific estimates of the proportion of people exposed to second-hand smoke, by comparative risk assessment methods, with data from 192 countries during 2004.

Oh, right.

So, they\’ve assumed how much death is caused by second hand smoke, estimated how many people are affected by second hand smoke and then tell us the final number?

This is without, you know, actually counting or investigating the effects of second hand smoke at all?

Baedekker Raids

The parentals are fixing up the house: and I\’ve just been looking (a few days back) at the results of the Baedekker Raids on Bath.

One stick of bombs went across the avenue where the ancestral spires are: haveing looked at where the bombs fell, you can now see it, if you see what I mean. There are two post war houses in an avenue of Edwardian ones: the two new ones on opposite sides of said avenue. And the third of the stick landed on the tennis court in the middle, destroying the pavilion.

Hmm, OK, so the connection? In the fixing up of the house the builders have found that the window frames facing that tennis court have all been pushed in: in essence, we\’ve had draughts coming through since 1942 as a result of the bomb blast.

Not a big or major problem, fixed with a bit of sealant. But the idea that I am sitting here listening to a builder repairing war damage from 58 68 (see comments) years ago (or, actually, listening to him drinking tea in between repairing such damage) is, umm, a little odd.

Ritchie Roundup

Most interesting today.

This for example. Not collecting tax which isn\’t due is treason now.

Or:

And why did he say this:

B[ecasue] higher business taxes will ultimately be paid by a combination of employees (with lower wages and salaries), consumers (through higher prices), or shareholders (with lower dividends). And in an open economy, such as ours, it will probably be the employee who loses out.

This is nonsense.

No, not nonsense, it\’s the standard economics of taxation.

And finally, the Exchequer Secretary to the Treasury says:

First, people’s rhetoric seeks to gloss over the relative proportion of the tax gap that is attributable to large business.

Second, their own estimates have looked at the statutory rate of Corporation Tax, and the effective rate, and classed the difference as avoidance. They’ve chosen to ignore the fact that much of the difference can be explained by double taxation relief, capital allowances, R&D tax credits, and other legitimate reliefs.

Yup, the basic criticism of Ritchie\’s calculation method that first appeared right here on this blog.

What you desire may not be what you get

German Chancellor Angela Merkel admitted on Tuesday that the eurozone was \”facing an exceptionally serious situation\”. She brushed aside criticism that German insistence on bondholder \”haircuts\” from 2013 was fuelling the crisis. \”I will not let up on this because the primacy of politics over markets must be enforced,\” she said.

Interesting thought really.

That someone might desire that politics and politicians beats markets is not unusual. That the desires of some few should beat the desires of all, as aggregated through their actions in a marketplace, is a little more difficult to justify.

But the really important point is that while politics can influence markets, when it comes right down to it markets do have primacy over politics.

No, not because of some lack of will, not because of some lack in the political regulation of markets: simply because all of the people acting as they wish is more powerful than telling people how they should act is. If 500 million of us, the population of the EU, decide that something is so, there\’s pretty much nothing that politics or politicians can do about it.

Gosh, this is amazing!

Second, there’s much debate on Ireland’s 12.5% tax rate, and rightly so, but the bigger issue concerning this rate was highlighted by me based in my report on the Irish Congress of Trade Unions and for the TUC entitled “Pot of Gold or Fool’s Gold?” . The reality is that due to lax rules on transfer pricing, the taxing of dividends and controlled foreign companies it does not really matter what the tax rate is in the Republic – the tax base is or will always be close to zero and as such the rate becomes almost irrelevant.

The tax base is close to zero? So they can\’t be raising any money from it then, right?

By EU standards, Ireland is a low tax jurisdiction overall, and because of the Exchequer deficit and the cost of the bank bail-out, that will have to change.  But we are not a low Corporation Tax jurisdiction.  Ireland’s Corporation Tax take as a percentage of GDP was 2.9% in 2008.  By comparison, Germany’s Corporation Tax take for the same year was only 1.1% of GDP.

So what\’s Germany\’s excuse then? What with them having a higher rate of corporation tax and all that?

Now Richard Murphy branches out into trade economics

And, as you might imagine, manages to get it really rather wrong.

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He then says:

Productivity has risen because capital has sought out the cheapest labour possible to substitute for that bought in the US. That cheap labour – mainly Chinese in the US case – has forced down US labour rates. But the return to capital has grown enormously – reflected in the supposed productivity curve, which does actually reflect substitution of labour.

So, labour is much worse off as a result of free trade where capital can move and labour cannot.

Well, no, his chart does not show that labour is much worse off. It shows that of the gains which that capital mobility seems to have encouraged, much of the gains have gone to capital.  Not all of them, but much of them.

And, if we sidestep the known problems with US income statistics (household size has declined substantially over those decades, something not accounted for, meaning that income per person in the household has risen much more strongly than shown. Further, that the real hourly wages are cash compensation, not total compensation. Leaving out, crucially, medical insurance which is a substantial and major (and rising!) portion of total US labour compensation) we might leave it at that.

Mobility of capital is a bad thing for the labour in the places where the capital mobilises from.

But should we leave it like that? No, actually, we shouldn\’t.

What else has happened over that same time period?

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Hmm:

World poverty is falling. Between 1970 and 2006, the global poverty rate has been cut by nearly three quarters. The percentage of the world population living on less than $1 a day (in PPP-adjusted 2000 dollars) went from 26.8% in 1970 to 5.4% in 2006 (Figure 1).

The mobility of capital seems to be hugely beneficial to those people in places where the capital moves to.

So, which should we be rooting for? That globalisation means that the hard working labourers in our own country/ies don\’t get much of the benefit but that the poorest of the poor are brought up out of destitution in the greatest reduction of poverty in the history of our species?

Me, I\’ll go for the latter really.

But, there\’s one more thing!

A really rather important thing. Ritchie is assuming that capital has in fact left the US over this time period. Which is an interesting question: has it in fact done so?

Recall our basic stuff about trade economics. The balance of payments. If you run a trade deficit you must, by definition, be running a capital surplus. That is, that the balance must balance.Conversely, still in order to balance, if you are exporting capital, in aggregate, you must also be running a trade surplus.

So, what has the US trade balance been over this period? For that will be  the inverse of the capital account.

Hmm. What\’s that? The US trade balance has been in deficit since 1976 you say? That thus the US has been importing capital since 1976, definitionally?

That capital hasn\’t in fact left the US? Has, in fact, entered the US?

All of which really rather leaves Ritchie\’s argument in something of a mess. There hasn\’t been the capital flight which he assumes has led to the reduction in labour wages, he\’s grossly overstating said reduction (apologies, failure to rise) of such wages and finally, even if everything he said were in fact true it does seem a really rather national form of socialism to insist that the poorest of the poor foreigners getting richer is a bad idea if the incomes of the richest, but \”our\”, \”national\”, working class on the planet only rise slowly as a result.

My favouritest part of the whole thing though?

But they also have no innovation of investment base left either. Free riding the system has left them financially, intellectually, and socially bankrupt. France and especially Germany took a different route. And it’s paying dividends.

Germany has been running trade surpluses over these decades, meaning that Germany really has been exporting capital over these decades. And yet, Germany is used as the example of how much better things would be if the US hadn\’t been exporting capital (which it wasn\’t anyway).

Me, I put all this confusion down to the fact that Ritchie doesn\’t in fact know enough economics to realise that the balance of payments must balance.