Ragging on Ritchie

The new guide to economics

It’s going to be fascinating seeing the answers here, isn’t it?

In reply to Richard’s question to Vinnie about an MMT/economics primer, I’d love to have a small book (or perhaps some online format) with the following chapters/questions, that I can give/send to people I know:

– Why everything you thought you knew about economics is wrong
– Why we don’t need austerity
– Why the government does not need to balance the budget
– Why we can’t afford the rich
– How we save money by not destroying the planet
– Why the government can never be short of money
– Why most economists are wrong
– Why most newspapers and news programmes are wrong about economics
– Why we need not fear hyperinflation
– Why we can and should have zero unemployment
– Why there is no National Debt
– Who stands to gain from the way economics is presented today?
– Why nobody tells you any of this
– Why the market is rarely right
– Why privatization often puts prices up

Other things I’m not sure about:
– Why we don’t need the stock market
– Why we don’t need private banks

Anyone think that any of the Tre Professori would get even one of those right?

Nope

And yet it can still be argued that in some cases the original purpose of the company – which was the aggregation of capital for a worthwhile cause – still makes sense. But it contrasts heavily with the fact that the vast majority of companies have almost no capital at all now.

It’s not about capital. The limited liability company allows large scale economic organisations. Without the limit to liability it is not possible for the individual to diversify, nor for an organisation to agglomerate such diversification.

Forget the capital part and think of participation. How can you have 10,000 people each part owning something without that limited liability?

No

Question of the day: should we have an investment income surcharge

Theory – optimal tax theory says that income from investment shouldn’t be taxed at all. Consumption financed from investment income, go for it, but not income from investment itself. Which is why hte progressive consumption tax is the desired structure.

Empirical – social security taxation pays for social security. There is no social security benefit that covers any income from investment. Therefore taxing the investment income to provide no benefit – well, tad unfair, no?

One of the three professors speaks out

Falling dividends make clear the folly of saving in the stock market to fund pensions

Shell’s current equity dividend yield is a bit above 3%.

Shell’s current MTB bond yield is apparently 0.25%. Or maybe that’s just Markets Insider being stupid and it is in fact around the coupon of 1.25%.

That much greater return from bonds, rather than equities, shows why people should not save in equities for their pensions. Sop dies indeed say one of the tre professori.

How can this be?

Profits at Lloyds Banking Group collapsed in the first quarter, crashing 95% after the bank was forced to take a £1.4bn charge to cover a surge in bad debts linked to the Covid-19 outbreak.

The first-quarter provision is meant to cover potential defaults by customers over the coming months, as they struggle to keep up with payments due to the UK’s nationwide lockdown.

The losses haven’t happened yet, they are expected and so provisions are being made.

But only days ago we were told that this isn’t possible:

The FT has two articles this morning highlighting the failure of accounting rules to handle the impact of the coronavirus crisis, most especially in banking.

The problem that is being faced has persisted since 2005 when International Financial Reporting Standards were introduced as the de facto accounting standard system for the UK, the EU and over 100 other countries.

This is not the moment to critique the multitudinous failings of IFRS accounting, although they exist. It is instead the moment to note that they are the very opposite of the reasonably objective standards for reporting that any user of accounts might require, most especially at times like this.

The current problem relates to loss reporting. As Jonathan Ford notes in the FT, when IFRS reporting was introduced the rules on loss reporting were absurdly relaxed:

You may remember the issue that emerged in 2008. Banks hung back from revealing their losses on loans because they claimed the standards then in force required them only to provide for losses when a loan was actually at, or on the threshold of, default.

Sure, in a collision between Spud and reality we know which way to bet but still…..

The Curajus State goes out of copyright next year!

Don’t fight there as you line up to produce the generic versions:

Second, reform patent and copyright law. Anything much beyond ten years is unnecessary, I think: ideas cannot be owned in perpetuity. And yes, some rock stars will protest. Tough luck: just keep touring.

We should also abolish supply and demand, of course we should:

Fourth, rent controls have to be considered when it is rent that has, for example, hollowed out our High Streets. This sector enjoys far too many rights, many of which need to be challenged.

Just what will the Jersey Royal come up with next?

If only the Maris Piper could think

If a government is to address the apparent under taxation of wealth then it is apparent that the rates of tax due on income and capital gains must be equalised.

Nope. Inflation exists – therefore there must be an inflation allowance for capital gains on things held over time.

The returns to capital – say, stocks – also pay other taxes. Like corporation tax. This must also be accounted for. The simplest is to abolish corporation tax and then think about equalising the CGT rate on shares with that on income – still after that inflation allowance of course.

This is even before we get to actual economics, which says that we don’t want to tax the returns to capital at all, even while we do tax any income used for consumption. That leads to a progressive consumption tax, which does in fact equally tax consumption financed from any source. But, you know that would require background knowledge.

Third, this disparity in rates will continue to encourage perverse behaviour in the economy, including the encouragement of the recognition of capital gains rather than dividends in the returns from companies.

What’s the dividend tax rate? It’s lower than CGT, isn’t it.

Why? Because we account for the corporation tax already paid on the dividend distribution. See above.

The recommendation is easy to implement: capital gains would simply be treated as the top part of income for assessment purposes.

He has, in the past at least, suggested 80% income tax rates. Now he’s suggesting an 80% CGT rate? That’ll aid in investment, won’t it?

And what fresh hell is this?

Richard Murphy says:
April 28 2020 at 1:39 pm
In the current environment I am reluctant to accept an inflation allowance.

Why is it necessary? To date inflation has only distorted economic well-being by increasing inequality. In that case why not tax it?

It’s not a ruse it was the declared damn aim

There are some staggering ideas in those selected quotes, not least the revelation that the threat of international tax competition was knowingly a ruse to support low taxation of wealth.

At least it was the claim from me these past two decades. The point of tax competition is to limit the amount government can extract from our hides.

If only Ritchie told us this

The FT has two articles this morning highlighting the failure of accounting rules to handle the impact of the coronavirus crisis, most especially in banking.

The problem that is being faced has persisted since 2005 when International Financial Reporting Standards were introduced as the de facto accounting standard system for the UK, the EU and over 100 other countries.

This is not the moment to critique the multitudinous failings of IFRS accounting, although they exist. It is instead the moment to note that they are the very opposite of the reasonably objective standards for reporting that any user of accounts might require, most especially at times like this.

The current problem relates to loss reporting.

OK, blah, blah. Effectively, current rules say you only recognise a loss on a loan when that loss has occurred. As opposed to what should, possibly, be done which is to recognise a loss when you think that a loss is going to occur.

For example, today, if you held the debt of a fracking firm you might reasonably think that it’s not going to pay you back all that cash. But it has done so far. Yes, probably better to be recognising that future loss right now. Perhaps with some probability weighting, net present value etc or summat.

So, Ritchie does actually have a point.

But there’s some fun to be had all the same:

The Financial Accounting Standards Board (FASB) issued the final current expected credit loss (CECL) standard on June 16, 2016. After the financial crisis in 2007-2008, the FASB decided to revisit how banks estimate losses in the allowance for loan and lease losses (ALLL) calculation. Currently, the impairment model is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the new CECL model.

Under the new current expected credit loss model, financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters.

The American system already works this way. Cool, so Ritchie is saying that we should adopt American accounting standards as they’ve already solved this problem. Except, of course Ritchie says no such thing. Either because he can’t bring himself to applaud the US method or because he doesn’t know about it.

Let’s now scrap this neoliberal form of accounting

Tchah, silly me, we can’t copy the Americans because they’re neoliberals, aren’t they?

Erm, yeah

The fact is that anyone over a certain age now realises that the government’s ongoing herd immunity policy, that is already unnecessarily killing tens of thousands of older people, shows that the government really does not care about those it considers elderly. This policy already makes it clear that those of about retirement age and above are now very obviously considered expendable. And this is unsurprising. Given that neoliberal politics in the UK long ago gave up worrying about how a government might provide for those enjoying ever longer lives I suspect that neoliberal politicians’ delight that this problem is apparently being solved for them knows no limits: they will only see economic gain in this. They will simply be imagining the financial returns as all those pensions go unpaid.

Isn’t that a weird statement? Given that these last few decades of neoliberalism have been the first time since Ur of the Chaldees that poverty among pensioners has been lower than that among the general population? These few decade s when – ending with that triple lock – we’ve deliberately and with aforethought, directed more economic resources to pensioners than anyone ever has done before?

So that’s the modern economy analysed then

The problem with the economy we have had is that it has been based on the single idea of individual hedonism that is indifferent to consequences underpinned by rentier exploitation of many for the gratification of a few.

Erm, if we’re all into individual hedonism then aren’t we rather running on the gratification of the many, not the few?

The latest excuse for socialism

But there’s a curious fact in play here. Domino’s is offering a vastly smaller than normal menu at present, and it’s not impacting demand. Now that could just be because they’re still open and people are desperate. But they are not the only takeaway functioning around here: I can assure you of that. And still they are seeing demand. Indeed, it’s so big that they apparently need a smaller menu.

Now, here’s the question: did they ever need the bigger menu in that case? And will they restore it after this is all over? Or have they discovered that people actually don’t like that much choice and really don’t want to wade through multitudinous, and often quite similar, choices?

As a justification for socialism it’s pretty good, as under socialism there will only be that government pizza. And you’ll like that one variant too!

People do not like too much choice. It’s why I like restaurants where I do not have to spend hours reading before the evening can begin. Just do something well please, and give me a few options, and I’m happy.

Domino’s and others, please take note. This is the way the world may be going.

And to be ever so slightly serious. Why did people come up with large menus in the first place? What was the incentive for them to do so? And the rather more major point, utility is always personal. So, what please Snippa might well not be what pleases all. As, to return to the original meaning, what pleases one Snippa does not please all.

A media response

I indicated, vaguely you understand, that the latest tuberous tax plan might not be quite, exactly, what we desired as a society.

The senior bod at the newspaper I contacted said:

“…why don’t you contact him with your calculations? As an academic he ought to be interested in reasoned critiques of his work.”

That English humour can be so, so, dry at times.

Calculate the marginal tax rate here

Let us take the Tuber seriously for a moment.

Increases in pension pot value are taxed the same as income. At the same rate – for that’s his starting point for his comparisons.

A civil servant on £100k increases the value of his pension pot – using private sector pension valuations please – by what capital value each year of work?

What is are his marginal and average tax rates?

And now for an interesting example of economic analysis

The first is that in the period 2011 – 18 the national income of the UK was £13.1
trillion, and in that same period the increase in net wealth was £5.1 trillion. It is
stressed, that this figure is not for total wealth, but the increase in the value of that
net wealth in that period.
Second, the overall effective tax rates on income during this period were unlikely to
have averaged more than 29.4% in this period, but those on wealth increases did not
exceed 3.4%.
Third, if these rates had been equalised it would, at least in principle, have been
possible to raise an additional £174 billion in tax revenue per annum from the owners
of wealth.

So, our starting point is that we could get lots of munnies by taxing the increase in wealth.

Cool.

Then we’re told this:

OK.

Now do you see what is wrong with his starting point? He’s claiming that its viable to even think about imposing income tax rates on increases in house prices and the capital value of pensions funds.

For that is what he’s suggesting if those tax rates should be equal – which is what he is suggesting for he’s directly comparing that 3% or so with the 29% or so.

So, yes, he is suggesting that his nul hypothesis is that if your pension pot rises in value then you should be paying income tax upon that rise in value.

Insane.

This before we even get to the point that we’ve tried this with doctors and they’re all retiring instead of being willing to pay marginal income tax rates of over 100%.

In addition, the fact that increases in the value of homes and pensions may not result
in immediate cash benefits to those who own them does not mean that such increases
do not contribute to the overall increase in the financial wellbeing of those who gain:
both the sense of security that such increases in wealth provide, and the means that
they afford to live in greater comfort at some time in the future have direct impact on
the manner in which those enjoying them both feel in the present, and on their actual
behaviour with regard to consumption and lifestyle choices. As such they cannot be
discounted in any discussion on current taxation, not least because they do provide
greater capacity tax at present in the vast majority of cases

Nutter