Taxation and Growth

The proposition that taxation stifles growth feels like it should be true. A business that is being heavily taxed won’t have as much to invest in its future growth. For the past forty years at least, the idea has been generally accepted, and successive governments have acted accordingly. However, at the macro level, the evidence suggests something quite different. There have been several studies of the long term effects of different levels of taxation. Data from the UK, the United States, Europe and OECD have all shown similar counter-intuitive correlations. The latest, an American Congressional Report, reviews American taxation and growth over the sixty years from 1950.

Between 1950 and 1970 the average top marginal income tax rate was just under 85% and annual GDP growth just shy of 4%. From 1971 to 1986 average top tax rate was 52% and GDP growth just under 3%. From 1987 to 2010 average top tax rate was 36.4% and GDP growth 2.85% [Source: Bureau of Economic Analysis (BEA) and the Urban-Brookings Tax Policy Center.]
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Capitalism to the Rescue

There are an increasing number of live initiatives for making the capitalist system more sustainable and equitable. Improving environmental, social and governance performance would be steps in that direction. Transparency in terms of measuring and reporting progress would also be important. Including content on sustainability and equitable governance in the mandatory curriculum for all secondary, further and higher education students might start to change the general understanding of these critical issues. Creating an alternative system of ethically focused capital markets and enlightened financial institutions might challenge the financial sector to a more enlightened capitalism role.

These initiatives are all positive and worthwhile. But if the generally held core belief persists, that a successful economy depends on people all seeking to maximise their own material self-interest, such innovations will remain niche, if they remain at all. Their impact could be both limited and short-lived.
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The Real Worth of Co-operation

When all the dust has settled, it will be seen that the Co-operative Bank fiasco will have only added strength to co-operative governance and the co-operative ideal.

The origins of the co-operative movement go back to the industrial revolution and Robert Owen’s mill village at New Lanark. It was common practice then for mill owners to pay employees in funny money which was only exchangeable at the company shop where prices were fixed for the benefit of the owner. Owen’s employees at New Lanark were paid in real money and the company shop sold goods to employees at their cost price. That was the forerunner of the 1844 Rochdale Pioneers, the basic idea being to offer an alternative to being fleeced by the mill owners.

Since then we seem to have come full circle. The Duke of York has just hosted JPMorgan and clients for dinner and entertainments at Buckingham Palace. That is only days after Morgan’s agreed settlement of their $13bn fine for the fraud and criminality, now customary in the banking world, which caused the current crisis. Morgan’s CEO Jamie Dimon and colleagues may be under criminal investigation, but the Duke of York is clearly advised that these are only formalities and won’t lead anywhere. Morgan’s settlements, now totalling around $19bn, as with the other banks’ fines, are simply the fees that have to be paid for participation in fleecing the general population
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The Next Crash and the Greens

The Chancellor of the Exchequer is generally pictured as commander of the economy, driving it through a dangerous jungle at the edge of Armageddon, threatened by mortal danger on all sides. Whether he is conceived of as a hugely intelligent and skilful driver, or an ill-informed purveyor of omnishambolic damage, is a matter of political opinion. The fundamental error is in the estimation of his power to control the economy. What makes economies robust is not the wisdom of chancellors, but the industry of people, their creativity, their desire for progress and their need to eat. Their co-operative inputs to the many enterprises, private and public, which make up the economy, are what drives it forward.

At most, the Chancellor’s power extends to steering round relatively gentle corners and having some slight influence over speed in order to achieve some counter to the effects of the terrain it has to cover. More decisive action is almost invariably based on false assumption and riven with unforeseen consequences. The effectiveness of the Chancellor’s limited powers depends on the ability to see dangers far ahead and to make adjustments accordingly. But the economic ideology which drives this coalition government is a particular handicap to achieving such foresight. As Chicago Nobel laureate Professor Robert Lucas, devout Friedmanite and star of neoclassical orthodoxy, told the Queen, the best economic theory can do is predict that such events as the 2007-8 crash are unpredictable.
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Why the ‘big six’ energy suppliers are “ripping off” consumers

David Cameron has recently claimed to know a thing or two about economics. So why is he surprised the privately owned ‘big six’ energy providers appear, as Ed Milliband put it, to be “ripping off” consumers? It’s not that they are particularly evil, unethical or exploitative, but that they are dominated by the same economic ideology which led the Thatcher government to privatise gas and electricity in the first place and which Cameron claims to understand. And that same ideology dictates that it is the legal duty of those private companies to maximise shareholder wealth. Such maximisation necessarily involves them in taking decisions which result in the disadvantage of parties other than shareholders, including, as far as they feel is judicious, their customers. So why is Cameron ‘disappointed’?

It is the ideology of Milton Friedman, simplistic populariser of the neoliberal belief. A cornerstone of the ideology is Friedman’s “empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.” The message was often stated. That particular quote is from a lecture Friedman gave to the Institute of Economic Affairs, free market think tank lobbyists, much loved by Margaret Thatcher, some 18 months after she had become leader of the Conservatives. The only supporting evidence offered by Friedman was that his son had pointed it out to him. If it turned out not to be true the basic justification for privatisation would be shown as quite spurious.
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Lehman Brothers’ Bankruptcy Celebrations

Though celebrations have been a little muted, the fifth anniversary of Lehman’s demise should not be allowed to pass without remark. The imponderables of Armageddon, financial melt-down and economic catastrophe seem to have been avoided for the time being at least. The masses may continue in poverty, with huge numbers unemployed, but the Bob Diamonds are OK, and some valuable lessons have been learned.

The banks should obviously not be allowed to sell sub-prime mortgages or other derivative securities whose risk is deliberately obscured. Government agencies should not be allowed to support the loans for such purchases. Banks should clearly be reduced in size to less than too big to fail and be required to carry sufficient capital to make them safe to carry the risks they incur. They should not be allowed to trade on their own behalf with other people’s money. The fundamental ingredients of financial derivative assets must be clearly stated so their riskiness can be assessed, or their sale made illegal. Financial transactions should be subject at least to a nominal tax to reduce automated ultra-fast transactions, and help rebalance the economy from the derivative to the real. Ratings agencies, auditors and regulators must be legally liable for the reasonable truth of their various statements of approval.
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Trust and Integrity in the Global Economy

TIGERoadshow at Sheffield Business School, Lecture Theatre, City Campus, Howard Street, Sheffield S1 1WB
12th September, 2013, 9.30am to 5.00m
TIGERoadshows offer participants insights, and stories grounded in a moral and ethical framework for you to apply immediately in your organisation or through your work. The Roadshow will emphasise that the best businesses exist to meet the needs of all stakeholders.

Syria and the Madmen in Authority

Suppose the Intelligence version of events is correct and the Assad regime is responsible for the gassing of hundreds or thousands of their fellow citizens. Assad must therefore be assumed to be utterly desperate and without moral constraint of any kind. So the US and allies bomb key installations as a lesson to the Assad regime not to do it again. What would Assad do? Would he realise the Americans don’t approve and therefore make sure not to do it again? Or would he be persuaded he must do it again if only to demonstrate his continuing power and independence? So what would the Americans and allies then do? They would have been shown to be utterly powerless to stop the red line being crossed; their word is worthless. They can’t allow that to stand. They must take further action. And so on, in what the military have warned are a succession of unforeseen consequences. Not unforeseeable, but unforeseen by our madmen in authority, our pathetic political leaders.

There’s been little human understanding amid all the discussion about the parliamentary vote on Syria. Reference to the Bush-Blair lies to justify action on Iraq is barely relevant. In UK’s distant past capital punishment was only administered after it was believed the whole truth about a wrongdoing was known with absolute certainty. In Syria’s case, the whole truth is not known and hard facts seem hard to come by; Intelligence has previously shown itself to be of dubious reliability. Talk of red lines is nonsense. America may be the world’s greatest military power, but it does not rule the world. Legal process must prevail. And if that means the UN’s role in legal process is tested to breaking point then better to do that over something like Syria, than a more world threatening issue. A more robust UN might then be recognised as necessary by all members of the Security Council.

Saving the Friedman Legacy

Just when all the financial excitement was beginning, Paul Krugman wrote an article for the New York Review of Books entitled ‘Who was Milton Friedman?’ Was he the economists’ economist, profound theorist, universally admired by professional economists? Or was he the simplistic ideologue, populariser and propagandist of monetarism and the free market doctrine, whose ideas proved unworkable in practice and whose intellectual honesty was at least questionable? Krugman’s answer was that Friedman was both of these.

The problem with this dichotomy was that Friedman, the simplistic populariser, gained huge credibility from Friedman, the profound theorist. And his intellectual dishonesty was evident in his populist exploitation of that credibility. For example, on 1st September, 1976, Friedman, addressed the Institute of Economic Affairs in London. The title of his talk was ‘The Road to Economic Freedom: The Steps from Here to There’. His prescription for Britain was the ‘shock treatment’ of low flat rate taxes and wholesale privatisation, both of which a few years later the Thatcher government implemented.

His justification for privatising the provision of education and healthcare was simplistic in the extreme:

‘There is a sort of empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.’

Friedman didn’t actually have any data to support this contention, but added that,

‘My son once called my attention to this generalisation, and it is amazing how accurate it is.’

His argument for flat rate taxation was similarly limited.
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Banking Standards Apple Pie

The Parliamentary Commission on Banking Standards published its 571 pages and its chairman, Tory MP Andrew Tyrie, hopes ‘the higher standards it advocates will help revive the banking sector and the UK generally’. ‘This is not,’ he assures us, ‘a bank bashing report.’ Indeed so. It is as supportive of banking, the City and its financial activities as such a report could be, while talking the language of reproof and proper correction. Its disapproval of massive bonuses, especially those being paid for failure, is given full voice. But proposed substantive action is limited. The extension of deferred bonus payments with easier “clawback”, seems unlikely to make much difference.

A much repeated complaint in the report, especially of people at the top, is the lack of personal responsibility and accountability. Those responsible for the decisions and behaviour which led to the sector’s failure have continued to be rewarded with massive bonuses and pensions. To address this the report recommends top appointments having to be authorised by the regulator who will identify specific responsibilities. Would that make any difference? Would the regulator have rejected the appointment of Fred Goodwin or Bob Diamond. Or any other likely incompetent?
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