Economics

Taking Stock

Published by Anonymous (not verified) on Tue, 14/11/2017 - 10:34am in

Tim Duy:

UandPi

Taking Stock, by Tim Duy: At some point every year I sense a need to reset and clarify my baseline views on the economy and monetary policy. This is that time. ...Continued here...

Did the Rise of China Help or Harm the US? Let's not forget Basic Macro

Published by Anonymous (not verified) on Tue, 14/11/2017 - 7:28am in

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Economics

Douglas Campbell:

Did the Rise of China Help or Harm the US? Let's not forget Basic Macro: This is a question which was posed to me after I presented last week at the Federal Reserve Board in DC. Presenting there was an honor for me, and I got a lot of sharp feedback. It's also getting to the point where I need to start thinking about my upcoming AEA presentation alongside David Autor and Peter Schott, two titans in this field who both deserve a lot of credit for helping to bring careful identification to empirical international trade, and for challenging dogma. After all, before 2011, as far as I know the cause of the "Surprisingly Swift" decline in US manufacturing employment had not been written about in any academic papers. This was despite the fact that the collapse was mostly complete by 2004, and was intuitive to many since it coincided with a large structural trade deficit. (Try to explain that one with your productivity boom and slow demand growth, Robert Lawrence...) 

On one hand, there is now mounting evidence that the rise of Chinese manufacturing harmed US sectors which compete with China. This probably also hurt some individual communities and people pretty badly, and might also have triggered an out-migration in those communities. On the other hand, typically the Fed offsets a shock to one set of industries with lower interest rates helping others, while consumers everywhere have benefited from cheaper Chinese goods. Which of these is larger? I can't say I'm sure, but of these shocks mentioned so far, I would probably give a slight edge to the benefit of lower prices and varieties. However, I suspect, even more importantly, Chinese firms have also been innovating, more than they would have absent trade, which means the dynamic gains in the long-run have the potential to be larger than any of these static gains/losses you might try to estimate courageously with a model.

Many (free!) trade economists use the above logic (perhaps minus the dynamic part), and conclude that no policies are needed to help US manufacturing right now.  However, I think this view misses 4 other inter-related points, and in addition does not sound to me like a winning policy strategy for the Democrats in 2020. And a losing strategy here means more Trumpian protectionism.

First...

On Econs and Humans

Published by Anonymous (not verified) on Tue, 14/11/2017 - 4:10am in

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Economics

Many years ago, Thaler was hosting dinner for some guests (other then-young economists) and put out a large bowl of cashew nuts to nibble on with the first bottle of wine. Within a few minutes it became clear that the bowl of nuts was going to be consumed in its entirety, and that the guests […]

Stamp duty cuts for first time buyers: the evidence

Published by Anonymous (not verified) on Mon, 13/11/2017 - 11:14pm in

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Economics

As I have already noted this morning, rumours are circulating that Philip Hammond is considering a stamp duty cut for first time buyers of houses to ease the pressure on this not yet on the property ladder and increase the appeal of the Conservative Party to younger voters. In my opinion such cuts do not work.

As evidence, take the cut introduced by Alistair Darling in the last Labour budget in March 2010. This reduced the stamp duty threshold for first-time buyers to stimulate demand. For first-time buyers only, the stamp duty rate was 0% for properties up to a value of £250,000 with all other bands and rates staying the same. The impact on prices can be plotted suing the government’s own house price index:

Can you spot the impact? I suspect not, because there is almost none. Except, that is, when the deadline for withdrawal of the relief in March 2012 came along, when the ONS note this:

In March 2012 there was a flurry of activity to beat the new rate, followed by a lull in April 2013 and then what looks like a return to normal. In March 2016 the introduction of a rate hike – this time for buy-to-let purchasers – also induced a volume peak followed by a lull. But then things went largely back to normal.

To be clear, the house price index in March 2010 was according to the government 88.05. And in March 2012 it was 87.04, and the month after was 88.04. In other words, the stamp duty rebate, provided at a cost of £550 million, (page 120) achieved nothing in making houses more affordable. What it may have done is kept house prices up when the market would otherwise have let them fall. And the evidence is clear. Sales volumes were hardly impacted. Price changes wobbled around a norm as they always do. And overall prices were unchanged. As interventions go it was spectacular in its wastefulness.

Could that sum be better spent when it comes to housing? Most definitely.

On Audre Lorde's Political Critique of Capitalism

Published by Anonymous (not verified) on Mon, 13/11/2017 - 11:09pm in

The principal horror of any system which defines the good in terms of profit rather than in terms of human need, or which defines human need to the exclusion of the psychic and emotional components of that need - the principal horror of such a system is that it robs our work of its erotic value, its erotic power and life appeal and fulfillment. Such a system reduces work to a travesty of necessities, a duty by which we earn bread or oblivion for ourselves and those we love. But this is tantamount to blinding a painter and then telling her to improve her work, and to enjoy the act of painting. It is not only next to impossible, it is also profoundly cruel...

The erotic functions for me in several ways, and the first is in providing the power which comes from sharing deeply any pursuit with another person. The sharing of joy, whether physical, emotional, psychic, or intellectual, forms a bridge between the sharers which can be the basis for understanding much of what is not shared between them, and lessens the threat of their difference.

Another important way in which the erotic connection functions is the open and fearless underlining of my capacity for joy, in the way my body stretches to music and opens into response, harkening to its deepest rhythms so every level upon which I sense also opens to the erotically satisfying experience whether it is dancing, building a bookcase, writing a poem, or examining an idea.

That self-connection shared is a measure of the joy which I know myself to be capable of feeling, a reminder of my capacity for feeling. And that deep and irreplaceable knowledge of my capacity for joy comes to demand from all of my life that it be lived within the knowledge that such satisfaction is possible, and does not have to be called marriage, nor god, nor an afterlife.

This is one reason why the erotic is so feared, and so often relegated to the bedroom alone, when it is recognized at all. For once we begin to feel deeply all the aspects of our lives, we begin to demand from ourselves and from our life-pursuits that they feel in accordance with that joy which we know ourselves to be capable of. Our erotic knowledge empowers us, becomes a lens through which we scrutinize all aspects of our existence, forcing us to evaluate those aspects honestly in terms of their relative meaning within our lives. And this is a grave responsibility, projected from within each of us, not to settle for the convenient, the shoddy, the conventionally expected, nor the merely safe...

This brings me to the last consideration of the erotic. To share the power of each other's feelings is different from using another's feelings as we would use a Kleenex. When we look the other way from our experience, erotic or otherwise, we use rather than share the feelings of those others who participate in the experience with us. And use without consent of the used is abuse.

In order to be utilized, our erotic feelings must be recognized. The need for sharing deep feeling is a human need. But within the european-american tradition, this need is satisfied by certain proscribed erotic comings-together. These occasions are almost always characterized by a simultaneous looking away, a pretense of calling them something else, whether a religion, a fit, mob violence, or even playing doctor. And this misnaming of the need and the deed give rise to that distortion which results in pornography and obscenity - the abuse of feeling.---Audre Lorde (1978 [1984]) The Uses of the Erotic, reprinted in Audre Lorde Your Silence Nill Not Protect You. [A recording of a version of the essay can be found here.]

One of Lorde's critiques of capitalism is that on the production side, it is joyless. This is matched, by a related critique that on the consumption side, capitalism promotes a certain kind of numbed, inauthentic, feeling -- she calls it 'sensation' -- that is soulless. To be sure these are not the only cruelties and sources of oppression Lorde diagnoses with capitalism. In fact, the more important critique (in case we had forgotten that Lorde is a poet) is centered on 'misnaming:' the abuse of words. In particular, both this joyless production and soulless consumption are accompanied by forms of rhetoric (or marketing techniques) that turn this bad reality into something cruel (on the production side) and oppressive (on the consumption side). It's cruel because we are encouraged to buy into a set of distorting fantasies that are not just impossible to live up, but self-undermining. It's oppressive because our desires are turned against ourselves (and each other) or, worse, numbed entirely, or even worse yet, abused by others.

By contrast, Lorde promotes a form of authentic, joyful feeling (she often uses the word 'deep') that can be shared; this joyful feeling is life-affirming and, when recognized by others, fruitful not just in our psychic lives, but in our political lives. Unlike inauthentic sensations, which are draining, shared joy is empowering, creative, and energizing and so (Lorde is no quietist) a source of political agency.

Mohan Mathen, in a critical engagement with Kristie Dotson, first alerted me to the significance of Lorde (1934–1992) on contemporary thought. Then, more recently, Amia Srinivasan has been developing Lorde's views on fury and anger to criticize a rejection of anger in political life (see also her article), associated with say Martha Nussbaum's political philosophy (recall also this post). So, when I encountered a collection of her essays and poems on display at one of the tables at the Waterstones at the 02 Center, a mall on the Finchley Road, while my son and I were were killing time before we would go watch Thor: Ragnarok, I did not hesitate and slipped it in the pile of children's books we bought. Yesterday, I read it through, feeling like I was listening in on a vaguely familiar, secret conversation that I have been hearing all along, but not wishing to hear. This post is the start of my overdue reckoning with Lorde.

It may seem perverse to start with Lorde's political economy, when she is such a powerful critic of patriarchy/sexism/racism/gay-bias, and at times veers close to new age spirituality, but one striking element of her writings is that she regularly reminds the reader to ask "who profits from" the unjust status quo* that the "form our creativity takes is often a class issue." For example, "of all the art forms, poetry is the most economical. It is the one which is the most secret, which requires the least physical labour, the least material, and the one which can be done between shifts, in the hospital pantry, on the subway, and on scraps of surplus paper."**

What's central to Lorde's vision of joyful feeling is that in sharing, and she does not deny this can be both gentle and painful, we do not become the same or identical (like Stoic sages), but recognize mutual difference. This connects the personal with the political; for her central political insight is that "unity implies the coming together of elements which, are to begin with, varied and diverse in their particular natures."+ In unity these natures are not effaced, but they work together in a common goal, which is the development of "a liveable future."++

Lorde is not essentializing women as feeling and men as rational; rather while men benefit from this status quo, we also end up distorting our own lives. The most savage  passage in her work is this cool reflection: "Men who are afraid to feel must keep women around to do their feeling for them while dismissing us for the same supposedly 'inferior' capacity to feel deeply. But in this way also, men deny themselves their own essential humanity."* That is she understand capitalism as a system of oppression that turns the oppressed into slaves of inauthentic desire (there are echoes of Wollstonecraft here) and the sometimes sadistic, privileged into robots. And, while the privileged are unfeeling (I couldn't help but think of Bret Easton Ellis's American Psycho), they encourage manifest forms of hatred and self-distortion among the oppressed. Before you think the previous sentence is fantasy, remember that our for-profit media encourages such inventive hatreds on a daily basis.  

Some other time I'll face the question if a future liberalism can salvage commercial life from its present (and, perhaps, domesticate Lorde's critique), destructive capitalist manifestation, but today I close with this observation. Unlike many critics of capitalism, Lorde is not naive about existing socialism nor a revolutionary. She reminds the reader, time and again, not to fetishize novelty, not to participate in historical amnesia, but to develop the right forms of historical 'continuity.'+++ In fact, what's revolutionary about her view is that she insists on the significance of continuity and memory. For, "there are no new ideas, just new ways of giving those ideas we cherish breath and power in our living."****

 

*Uses of Anger, p. 113 of Your Silence Will Not Protect You.

**"Age, Race, Class, and Sex," p. 97 in Your Silence Will Not Protect You.

+"Learning from the 1960s" p. 121 Your Silence Will Not Protect You.

++ "Eye to Eye" p. 169 of Your Silence Will Not Protect You.

*** "Man Child" 47 Your Silence Will Not Project You.

+++"Learning from the 1960s" p. 122 Your Silence Will Not Protect You.

****"Learning from the 1960s" p. 119 Your Silence Will Not Protect You.

Stamp duty cuts don’t work: they just increase house prices

Published by Anonymous (not verified) on Mon, 13/11/2017 - 8:22pm in

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Economics

According to the FT this morning:

UK chancellor Philip Hammond is drawing up plans to help first-time buyers in his Budget later this month, in an attempt to show the government is getting to grips with the housing crisis.

The chancellor is preparing a stamp duty cut for first-time buyers as a signal that the Conservative party understands the widespread resentment felt by those locked out of the housing market because of high prices, according to government aides.

It’s staggering that this trick, tried so many times before, might be tried again. When will the Treasury realise that all that happens when such a move is made is that the house price goes up by the value of the stamp duty saved, exacerbating the whole problem?

This has been tried time after time after time. And the lesson has yet to be learned that the housing problem is not that it’s overtaxed, but undertaxed, and that is why prices are too high.

The political crisis we face is of gargantuan scale

Published by Anonymous (not verified) on Mon, 13/11/2017 - 6:12pm in

I spent time over the weekend with some of my oldest friends. We’ve known each other so long our narratives are well known to each other. And maybe we’ve survived as friends for this long because our outlooks are not dissimilar. So almost inevitably, it seems, we discussed Brexit, the state of the government and the alternative options that are available. It was fun, if worrying.

Much of what we discussed is reflected in the weekend’s papers.

There is a growing consensus Theresa May is so hopeless it is hard to see how she can survive.

And that Johnson simply has to go.

There seems to be belief that there are bound to be more Tory sex scandal casualties.

Whilst almost everybody is of a single mind that the UK’s Brexit negotiators have been even more incompetent than we might have ever thought possible.

That the EU’s negotiating position may not be entirely reasonable is no surprise to anyone because the stronger party in any negotiation rarely feels obliged to be entirely fair, and this was wholly predictable since the EU is, despite Brexiteer claims, very obviously the party in control here.

What is only hinted at though is the sheer horror of no deal and what it might mean: it is apparent that this has still, as yet, to dawn on people. The country’s unpreparedness for what happens if there is no deal is staggering, but in the context of the previous comment perhaps less surprising.

And in all this the economic downsides remain almost unfathomable because they are so unpalatable.

But these were just the more obvious conclusions to draw. What is as shocking is that as yet there doesn’t seem to be anyone in a position of power who, as it was put, is ‘grown up’ enough to address both the pragmatic and existential issues that flow from these observations (and to use the words ‘grown up’ is also slightly shocking when those present had an average age in the 60s).

The pragmatic issues to be faced come in two forms. One required option is a clear statement of what hard Brexit actually means and what planning is needed for it, with a timescale and costing attached. I suppose we can hope that this is what the 58 risk assessments on Brexit might provide, but I am ready to be severely disappointed. What I do know is that in the absence of that information no informed decision other than to stay within the EU can be made. After all, rationally in that absence we are quite literally leaping into the unknown. I stress, I am saying this in the absence of any viable alternative in the situation I describe.

The second pragmatic issue is related to the first, and may well require the rational conclusion that we simply cannot do Brexit within any conceivable time scale and any conceivable cost and that it is time to own up and admit it.

Either way, pragmatically the time for costs and plans to be on the table has already long past and we do not have them for either of the only known options, which are hard Brexit and asking to stay: nothing else now looks likely. A ‘grown up’ really does need to address the options now, whichever is to be preferred, and to dare no one has.

That then leads to the existential issues. These also cannot be avoided. Some are glaringly obvious. The future of Ireland is, perhaps, highest on that list, where the consequential issues are so enormous that they hardly bear thinking about, and yet that thinking must be done. There is no easy solution to the issues that arise for Ireland, whatever happens (bar staying).

The Irish question does, of course, bring the future of the Union and the nature it might have into play. And that means that questions around Scotland also cannot be avoided. If they are, it will not be so for long and so, yet again, they require someone to address then head on.

Let’s not ignore England and Wales in all this too. In saying that I recognise Wales as a country: I also suspect it is staying in Union with England. And for the English (most of whom have very little comprehension of the fact that they even live in a Union of nations) the questions are at least as hard. The myth of ‘Great’ Britain has, I suspect, now been shattered for good. It’s not clear what Britain is in a political sense any more. And ‘great’ we are not.

For some that is going to be very hard to accept. Farage, Johnson and Gove promised them Greatness again. But, whatever happens, we are a massively diminished nation. We have no influence left almost anywhere, and it is apparent we have a political system so threadbare it can hardly deliver government, let alone competent participation in any issue of consequence. I think this is going to create enormous stress. It also requires leadership to address the issues.

And let’s be clear what those issues  are.

It will be hard to see why we keep a permanent seat at the UN Security Council.

Hard too to justify our defence policy and belief that we have a right to intervene internationally when we will have pretty much voluntarily left that stage.

And we will also have to accept that outside any obvious network of states we will lead at nothing in what is a globalised world.

These are crushing blows to many English people’s perceptions of what they are. Adjusting to failure and isolation when for centuries we have thought ourselves the epicentre of the known world is a challenge to the national psyche that will have consequences hard to predict.

In fact all of these issues have that same result: forecasting is nigh on impossible.

A grown up leader would, of course, make an open appraisal of the situation.

And they would deliver an evidence based opinion.

On the basis of that they might now be abundantly clear that we need more time for Brexit and ask for it, stating the price they will pay to secure it.

Alternatively they might be humbly apologetic. They might say Brexit is not possible. They might say to the country that the option Cameron gave to them cannot be delivered. And they might, when doing so, apologise to the EU as well, and ask to cancel Article 50, hoping that the worst that might happen will be that we have to abandon our rebates, which may very well be a a price worth paying.

But that would require a leader with the courage of Michael Collins in Ireland in 1922, knowing all the risks that they would be taking.

And it would require the support of a national government created, temporarily, in the national interest.

In exchange that leader would have to face the issues of Ireland and Scotland, nonetheless, and address the issues that arise in both, including government deadlock in Stormont and the hobbled devolution to Scotland that was designed to undermine the credibility of any Holyrood administration.

That government would also have to address the failure of the Westminster system as well, where the Commons cannot now attract people able to form competent governments; where first past the post guarantees the very stalemates it was supposed to guard against; and where the Lords has to be reformed.

Whilst doing all that the power of a hopelessly biased press has to be addressed and the BBC has to be allowed to be politically free.

At the same time the Bank of England has to be brought back under control and mechanisms to truly revive local democracy – which is the bedrock of a true democracy – have to be created to allow some degree of fiscal autonomy that has been denied them for so long.

And in between all this there will be a need to hold society together, and that cannot be guaranteed to be stress free.

Who is the ‘grown up’? I am not sure. But we need them because we are facing meltdown in the UK on so many fronts the need for coherent leadership has not been greater since 1945. And I cannot now see how that can be achieved without cross party cooperation to achieve stability and reform (and to avoid backlash against any one party that takes on the task) when the risk to the country is enormous, in the face of which the current incumbents have so very obviously failed.

We face a political crisis of a scale I have never previously imagined now. And I won’t beat about the bush: the scale of the challenge is both enormous, and a little frightening so deep are the issues requiring resolution. But first we have to recognise that. And right now our government, so incompetent is it, seems unable to appreciate the gargantuan consequences of its own failings and make way for the process of national recovery that has, if we are to get through the next few years relatively unscathed, to begin very soon.

does piketty replicate?

Published by Anonymous (not verified) on Mon, 13/11/2017 - 4:44pm in

Richard Sutch reports in Social Science History that Piketty does not replicate very well:

This exercise reproduces and assesses the historical time series on the top shares of the wealth distribution for the United States presented by Thomas Piketty in Capital in the Twenty-First Century. Piketty’s best-selling book has gained as much attention for its extensive presentation of detailed historical statistics on inequality as for its bold and provocative predictions about a continuing rise in inequality in the twenty-first century. Here I examine Piketty’s US data for the period 1810 to 2010 for the top 10 percent and the top 1 percent of the wealth distribution. I conclude that Piketty’s data for the wealth share of the top 10 percent for the period 1870 to 1970 are unreliable. The values he reported are manufactured from the observations for the top 1 percent inflated by a constant 36 percentage points. Piketty’s data for the top 1 percent of the distribution for the nineteenth century (1810–1910) are also unreliable. They are based on a single mid-century observation that provides no guidance about the antebellum trend and only tenuous information about the trend in inequality during the Gilded Age. The values Piketty reported for the twentieth century (1910–2010) are based on more solid ground, but have the disadvantage of muting the marked rise of inequality during the Roaring Twenties and the decline associated with the Great Depression. This article offers an alternative picture of the trend in inequality based on newly available data and a reanalysis of the 1870 Census of Wealth. This article does not question Piketty’s integrity.

The point isn’t that income inequality hasn’t risen. Like most social scientists, I am of the view that, for various reasons, income inequality has risen, but it is important to get the magnitudes right, which can support or undermine other hypotheses about wealth accumulation. Sutch’s article shows that Piketty made a good effort, but it depends on some questionable choices. Let there be more discussion of this issue.

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What matters about the Paradise Papers

Published by Anonymous (not verified) on Mon, 13/11/2017 - 1:29pm in

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Economics

A cursory glance at the World’s leading tax havens illustrates the hypocrisy of politicians getting wound up about the revelations in the recently released Paradise Papers and the Panama Papers before them. Many of the havens are within the direct legislative jurisdiction of nations such as the US (which is itself a tax haven) and the UK, for example. And we should not forget that Luxembourg, Switzerland are key European homes of tax avoidance. Remember that the current President of the European Commission “spent years in his previous role as Luxembourg’s prime minister secretly blocking EU efforts to tackle tax avoidance by multinational corporations” (Source) ably supported by the Netherlands, another nation engaged in the practice. If the politicians were truly worried about this issue they could do something about it directly with the stroke of a legislative pen. Britain could, for example, eliminate Jersey, the Isle of Man, and its Overseas Territories from this corporate scam. The US could do similarly. The EU could bring in new rules to stop Luxembourg. But they don’t stop it, which tells you everything. But, the problem of tax avoidance and evasion is not fiscal. Progressives get stuck on that point. It is largely irrelevant. The real issues are inequality, power and macroeconomic stability. That is what this blog is about.

I covered my view on many of these issues in these blogs (among others):

1. Progressives should move on from a reliance on ‘Robin Hood’ taxes (September 4, 2017).

2. Modern Monetary Theory and Value Capture (November 11, 2015).

3. Governments do not need the savings of the rich, nor their taxes! (August 15, 2015).

4. Off-shore tax havens – be sure we define the issues correctly (July 23, 2012).

5. Robin Hood was a thief not a saviour (April 1, 2010).

The information in the Paradise Papers is shocking – no doubt. But what shocks me and what seems to shock the average progressive (if their voices indicate their impressions) are somewhat different.

The idea that the savings and tax receipts of the rich are in some way important in order for governments to be able to provide high quality services, public infrastructure and jobs to advance the well-being of society is a very dangerous and misguided narrative for progressives to engage in.

Please read my blog – Governments do not need the savings of the rich, nor their taxes! – for more discussion on this point.

I read a report from Canada where a ‘liberal’ senator said that the Paradise Papers showed that the Canadian government was letting “potential revenue slip through tax collectors’ hands … [and] … billions of extra dollars could be put to good use … There’s lots of things the government could be doing … retiring debt, lower taxes, fund new programs … It goes on and on” (Source).

In the same CBC report, another progressive politician said that if the Canadian government closed the so-called “$6 billion a year tax gap” which is a “heck of a lot of money … That might be enough to repair our crumbling infrastructure and sewage plants in Winnipeg, and to invest in a modern transportation system.”

The report presented a table entitled “What could an extra $6 billion buy?” and listed child-care places, affordable housing, MRI machines for hospitals, new water treatment plans, and military jets as options.

The arithmetic might be impeccable but the logic is sadly erroneous when tied to so-called ‘tax gaps’.

These views is representative of the vast majority of commentators on either side of the political spectrum. The Right think, inasmuch as they comment, think that tax cuts could be forthcoming if the governments stopped tax avoidance, while the Left, rave on about better public services etc.

Neither view has any merit.

If there are child-care staff available for hire in Canadian dollars, then the Canadian government can always afford to hire them.

Similarly the rest of the wish list – better housing (presumably there are available carpenters and materials) and the rest of it.

The same logic applies to all currency-issuing governments, which have the capacity to purchase anything that is for sale in the currency they issue – at any time.

The choice is political not financial.

The revelations in the Paradise Papers do not alter that reality.

The Paradise Papers just tell us what we have known for ever. The legal profession is used by corporations and individuals to devise ways in which the rich can get richer – in this case by being able to keep a higher proportion of their incomes than those without access to such expensive legal services.

The difference between the Paradise Papers and the Panama Papers is clear. They both disclose tax avoidance but the latter really only documented how a poorly-governed nation lured corporations and individuals in countries that similarly struggle with regulative capacities (for example, Russia, Latin America).

The Paradise Papers are about the mainstream elites use tax havens that are within nations that have coherent rule of law regimes and which the Peer Review process conducted under the OECD transparency policies do not implicate as being problematic.

The Paradise Papers tell us that the rich siphon a high proportion of their income and store their wealth in these offshore tax havens, even if the haven is still under the legislative remit of the nations they are citizens of.

Many of these schemes operate through financial products, which provide no productive purpose, and which I have long advocated should be made illegal.

The fact they are not made illegal is testimony that, in this neoliberal era, nation states prefer to legislate in favour of the rich at the expense of the poor.

But that is a choice that we can all influence.

I will come back to that.

Modern Monetary Theory (MMT) and tax havens

The Modern Monetary Theory (MMT) argument is outlined in the blogs cited above.

In summary, while the concerns of organisations such as the British-based Tax Justice Network about massive tax avoidance by global companies and individuals using various cross-country schemes is noted, progressives often push the wrong message in all of this.

The loss of tax receipts to a nation via tax avoidance is not the issue that progressives should focus on.

The notion that the ‘lost taxes’ in some way prevent a currency-issuing government from spending is just an application of erroneous mainstream economics thinking, which thinks governments are financially constrained.

In terms of Modern Monetary Theory (MMT) such terminology is grossly misleading.

The tax receipts foregone (lost) to tax avoidance just represents ‘numbers on a bit of paper’. The only issue that is important is the amount of purchasing power that is embodied in the tax cuts (or the reversal of them) and how it is distributed.

The rich do not provide the funds that allow the government to provide services, jobs and public infrastructure.

If the rich do not spend their incomes (and hide them in various tax havens) that doesn’t reduce the capacity of the government to spend.

In fact, the more income the non-government sector, in general, do not circulate back into spending, the greater is the need for government deficit spending to ensure that productive capacity continues to grow and total spending continually absorbs that capacity and maintains full employment.

In 1946, Beardsley Ruml published his 4-page article – Taxes for Revenue Are Obsolete – in the journal American Affairs (January 1946, Vol VIII, No 1), which carried the sub-title “A Quarterly Journal of Free Opinion”.

At the tine Beardsley Ruml was the Chairman of the Federal Reserve Bank of New York.

His argument was straightforward:

… given (1) control of a central banking system and (2) an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore should be regarded from the point of view of social and economic consequences.

This was the same idea that Abba Lerner advanced in terms of his Functional Finance theories, which provide essential underpinnings to Modern Monetary Theory (MMT).

Please read my blog – Functional finance and modern monetary theory – for more discussion on this point.

Ruml also noted that:

The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.

The first of these changes is the gaining of vast new experience in the management of central banks.

The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.

So, where the currency issued by the central bank “is not convertible into gold or into other commodity”, then Federal government “has final freedom from the money market in meeting its financial requirements.”

For Ruml, Federal taxes … serve four principle purposes of a social and economic character”:

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;

2. To express public policy in the distribution of wealth and income …

3. To express public policy in subsidizing or in penalizing various industries and economic groups;

4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

So the government might impose taxes:

1. To control inflation.

2. To redistribute purchasing power from the rich to the poor (high income to low income).

3. To alter the allocation of resources away from undesirable ends – such as tobacco taxes.

4. To provide some hypothecated public transparency for major projects/programs.

So from a functional finance perspective, taxation must be designed to advance these purposes and the public discussion must be about the idea of public purpose and never about raising revenue.

We thus have to view the revelations in the Paradise Papers from that perspective.

The hidden income and unpaid taxes do not alter the basic remit or capacity of the national government in relation to:

1. The need to balance nominal aggregate demand growth with the capacity of the real economy to absorb it.

2. The aims of social policy to ensure that the benefits of economic activity are shared in some reasonable manner (relevant to the distribution of the tax burden).

The two issues are interrelated because different income groups have different propensities to consume which influences the impact of fiscal policy. Which brings the question of inequality to the fore.

Inequality is the issue

At the heart of my concern is that the trends to offshore tax havens coincide with the increase in income and wealth inequality that has been recorded in most nations over the last thirty years or more.

What the Paradise Papers also tells me is that what we know in terms of the macroeconomic aggregates reported by national statistics agencies is only part of the story.

For example, national accounts, which estimate the Gross Domestic Product and Income generating performance of a nation, clearly under-reports such things given that the rich can hide income received (and thus production generated) in offshore tax havens.

These facts then lead to the next conclusion: our empirical understanding of income and wealth inequality is likely to be understated. The rising inequality measures are likely to understate the true degree of inequality.

In other words, if you were concerned on the basis of the official data, then you should be really concerned now.

Inequality is bad for social well-being.

Clearly, it is bad for growth.

Even the IMF these days has admitted this after denying it under the ruse of ‘trickle down economics’ for decades.

The trickle down claims made at the outset of the neo-liberal period are lies. Please read my blogs – Trickle down economics – the evidence is damning and Inequality and growth and well-being – revolutions have occurred for less – for more discussion on this point.

Rising economic inequality undermines the capacity for individuals to invest in education, which is the most reliable source of economic development (skill development).

A redistribution of national income can increase or decrease aggregate demand and the final impact thus depends on the different consumption propensities and the number of people who are affected.

A tax cut will inject a certain amount of extra spending into the economy which then induces further spending via the
multiplier process
, which I explain in this blog – Spending multipliers.

If you put a dollar of extra disposable income into the hands of the lower paid workers the multiplier effects will be greater than if you put the extra dollar into the hands of high income earner because less will be lost to the rest of the world via imports.

Not only will the low income earners spend more of every extra dollar on consumption per se than the high income earners less income will be lost to the rest of the world because the import propensities are also different and align with their consumption propensities.

Attacking tax avoidance is one path to take in this regard – forcing the rich to declare more of their income and pay more tax. But that path is complex.

A more obvious path is to use the legislative capacity to allow workers who do not use tax havens to increase their share of ‘reported’ national income.

For example, ratios such as the wage share in national income are likely to be overestimated as a result of the off-shore activity.

Given that the distribution of income has been firmly biased in the neoliberal era towards profits (as real wages growth has fallen well behind productivity growth) this means that this redistribution towards profits has been even greater than is disclosed in the official accounts.

The more effective way to resolve that problem is not via tax law enforcement (given its complexity) but through wages policy. The state could legislate to force companies that produce within its borders to share productivity gains with workers via proportional real wages growth.

Sure enough, the vexed issue of measuring productivity growth would arise – as usual. But governments could come up with reasonable estimates that could be used for this purpose.

If the companies didn’t want to play ball then the government has the capacity to stop their productive and sales activity within its borders.

No government in this era has shown the fortitude to do that. But they can and that capacity should be promoted by progressive political forces.

Further, this principle can also extend to specific tax reporting issues.

If, for example, Nike wants to sell its shoes in Australia then it should be required to pay some reasonable proportion of its sales in tax or have its shoes removed from retail outlets under law.

Yes, on-line sales are tricky. But even those can be monitored.

The Tax Justice Network proposal is interesting in this regard (Source):

An alternative system of taxation, called “unitary taxation” instead calculates the tax liabilities of companies based on a proportion of the company’s global profits. The formula used to work out the tax is based on the real economic activities company, for example the sales it books in each country.

See their November 2017 report – Ending multinational tax avoidance through unitary taxation – for further detail.

Further, practices such as the use of intra-group debt and transfer pricing to shift liabilities, while complex are not beyond the legislative capacity of the government to reduce.

For example, tax authorities could simply reject any intra-company loans that pay interest rates that are obviously only set for tax avoidance purposes and bear no relation to reality. If a company can borrow externally at, say, 2 per cent and are creating intra-group loans at, say 10 per cent, then clearly that can be stopped by authorities.

The other obvious path to pursue is to break the link between tax and income. In order for the rich to enjoy their wealth they have to spend it. Spending tends to be localised.

If the government introduced more coherent consumption taxes – with equity parameters such as ‘luxury tax inclusions’ and exclusion of essentials – this would get at the rich more quickly than trying to tax their incomes.

No-one of meagre means buys private jets, luxury ocean-going yachts, cars that belong on race tracks but are driven on city streets, expensive golf club memberships and the like. Most of these things cannot be ‘off-shored’. Consumption is here and now.

By cutting the capacity of the rich to actually realise their hidden incomes in the consumption of goods and services, there is more non-inflationary space for the rest of us to enjoy our material lives.

And if we do not want to spend more, then the public sector has more real resource space in which to spend and provide public goods and services.

Taken together this strategy would reduce inequality and advance the well-being of the lower income groups. It would be more easily to enforce than trying to close down elaborate tax avoidance schemes.

Further, I would substantially increase the penalties for any illegal behaviour by companies and their owners – serious prison time not just fines – which would also provide disincentives to engage in nefarious behaviour.

Inequality is also bad for democracy because it further tilts the power into the hands of the wealthy, who, arguably, have little need to see general well-being advanced ahead of their own interests.

Several reforms are necessary in this regard, including the banning of political donations, breaking up of media empires etc.

I will write more about how progressives have to address power imbalances in societies in a later blog. We address that issue in some detail in our new book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017)

Conclusion

The Introduction tells us that many of these so-called tax havens are actually within the legislative remit of national governments such as the US and the UK.

These governments could close the tax avoiding capacity of their states, dominions etc whenever they wanted to. Why couldn’t Britain just close down the incentives to hide cash in Jersey for example?

They cry poor in terms of lost tax revenue but then do not do the single most obvious thing they could to stop this practice.

The reason is that the crying poor is about setting up depoliticised justifications to reduce public spending, while enjoying the massive lobbying funding that comes if they make political choices that enhance the rich..

This is the classic neoliberal strategy. Progressives should meet it head on. There are things governments can do if they are so motivated. Our task is to provide that motivation for them, ultimately, via the ballot box.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

‘Florence’ Suggests I should Compile a Book about British & American Support for Fascist Dictators

Yesterday I put up a piece commenting on a video from the Aussie left-wing blogger, Democratic Socialist. This showed the Tory media’s double standard in reviling Jeremy Corbyn as a supporter of terrorism, Iran, and an anti-Semite, when he is none of those things. But the hacks of the Telegraph definitely did not make those accusations against their Tory molten idol, Maggie Thatcher, when she by association supported all of the above through her friendship with General Pinochet.

Corbyn’s support for Iran was based on an interview he made to an Iranian group, the Mossadeq Project. Mohammed Mossadeq was the last, democratically elected prime minister of that ancient and extremely cultured nation. He was no theocrat, but a secular liberal. He was also a Baha’i, a post-Islamic, syncretistic faith which embraces human equality, including that of men and women. The Shi’a Muslim establishment have hated them since the faith first emerged in the late 19th and early 20th centuries, and there have been terrible pogroms against them. This hatred is not shared by all Iranian Muslims, and I have personally known Iranian Muslims, who are heartily sick of the way their Baha’i friends are treated.

Mossadeq’s crime was that he dared nationalise the Iranian oil industry, then dominated by the British-owned Anglo-Persian Oil, which became BP. This resulted in us and the Americans organising a coup, which toppled Mossadeq, and began the long process by which the Shah gradually assumed absolute power, ruling through terror and a secret police force, SAVAK.

‘Florence’, one of the many great commenters on this blog, commented

In the early 70s I volunteered to help type up translation transcriptions of reports from torture victims of the “Shit” of Iran, as Private eye called him. (It was as evidence for Amnesty.) Its not something you can ever forget. When the revolution happened, it was simply new bosses at the same slaughter houses. This is another lesson learned; the violence required by a state to terrorise its own people seeps into the culture, and remains for generations (maybe longer, its too early to tell in most of the cases you cover in this interesting and evocative piece). The violence of the state becomes symmetrical in the revolution in many countries, Iran, Iraq, etc. that follows such repression.

(For this reason I also worry that, for example, the almost visceral hatred of the disabled (and other poor) in the UK bred by the eugenics of neoliberalism for decades will not be so easily dislodged with a change in government. )

I see that the experience of having lived through those times is no longer part of the wider political education of the younger members of the left. In Labour the excesses of the neoliberals all but wiped out that generation and the links. I talk sometimes to our younger members in the Labour party and they are fascinated – but totally clueless. I do try to point them at this blog for this very reason. They are oblivious to who Pinochet was, why it mattered to us then and now, the refuge given to that butcher by Thatcher, the entire history of the Chicago school etc. The traditional passing in of this history, personal history too, through social groups in the Labour party has all but broken down.

As a suggestion, perhaps you could edit your blogs into a book we could use in discussion groups? You would help us be that collective memory board for the newer (not just younger) activists. It would help tease out the older members stories of their personal part in the struggles at home and abroad, but more than that your pieces on the collision of religious and political also show the rich complexities of life.

I am really honoured that my blog is so highly regarded and useful. While talking to Mike earlier today, I mentioned the idea to him. He was enthusiastic and supportive, making a few suggestions on how I should go about it. I told him I have had problems finding a mainstream publisher for some of my other books I have written. He suggested I should try Lulu again, and have the cover done by a professional artist. This would be a great help to actually selling the book, and he could put me in touch with some of the great comics artists he’s worked with.

I am therefore definitely going to look into this.

Now for the other points ‘Florence’ has raised in her comment.

As for the point about how a whole generation in the Left and the Labour party having an awareness and opposition to the various Fascist leaders run riot around the world thanks to British and American support as part of their political education, I think that’s how very many people got involved in politics. Private Eye covered these issues, as it still does, and there was the series of comedy reviews put on in support of Amnesty in the 1980s called The Secret Policeman’s Ball. These featured some of the greatest comedy talents of the day, such as the Pythons and the languid, caustic wit of Peter Cook. I don’t think you had to be particularly left-wing to be a fan, only a supporter of democracy and civil liberties. Very many of the other kids in my Sixth Form were into it, including those, who could be described as working-class Tories.

But come to think about it, we haven’t seen anything like that on our screens for many, many years. The series was becoming long and drawn out towards the end, but nevertheless there’s no reason something else like it, which could be launched. And I don’t doubt that there are young, angry, talented comedians out there, who are perfectly capable of stepping up to the mike and doing it.

And some of the absence of comment and criticism of the monsters, who ran amok across the globe thanks to British and American support does come from the victory of neoliberalism. Including its adoption by New Labour. Blair was an Atlanticist, and an alumni of the Reagan-founded British-American Project for the Successor Generation, or BAP for short. This was a group that trained up future British political leaders, sending them on free jaunts to the US, so that on return to Britain they would be enthusiastic supporters of the ‘Special Relationship’. And they did a superb job on Blair. Before he went on one jaunt, he was a supporter of unilateral disarmament. When he returned, after meeting the American nuclear lobby, he was fully on board with us supporting America’s siting of nukes in Britain, as well as our own, independent nuclear deterrent.

Much of the activism against these thugs came out, it seems to me, of the campaigns against the Vietnam War. This inspired the radical young people of the time to look more closely at what America and the West were doing in the Cold War, and the people we supported as the bulwark of ‘freedom’ – which really meant ‘capitalism’ and western big business – against the Soviets. And the brutal realities of Pinochet’s regime, and that of the Shah of Iran, and very many others, were extensively reported. Clive James in one of his TV reviews written for the Observer, acidly commented on an interview on British TV with some high level thug from the Shah’s Iran. This torturer was asked about the brutal methods of interrogation employed by SAVAK, the Shah’s secret police. There was no problem, said the thug. They were improving all the time. Oh yes, commented James, or something similar.

Incidentally, an Iranian friend of mine told me had some experience of the activities of the Shah’s secret police himself. Back in Iran, he’d been a footie fan. But he noticed that several of his mates kept disappearing. He then found out that one of his friends was a snitch for the secret police, and had been informing on them. It’s when you hear these experiences from the people, who observed what was happening, that really begin to understand why so much of the world is less than enthusiastic about western imperialism. And why so many Iranians were taken in by that other thug, Khomeini. When he returned to Iran, he promised freedom to all Iranians. That didn’t last long, as it was back to normal with the rapists and torturers in Evin prison under his regime.

I was also part of a British medieval re-enactment group. One of the great peeps I met in that was an American chap, whose ancestry was South American. He was proud of his Incan heritage, and in America he’d been part of a similar group, that recreated the warrior traditions of this Andean people. He’d also been a translator for one of the human rights organisations, translating documents on abuses from Spanish.

There is indeed a whole generation out there, with personal experience of the dictatorship supported by the West, people whose wealth of knowledge and experience should be passed on.

But part of the problem is the supposed break with dictatorship and the entry of neoliberalism into the Labour party. The Fall of Communism was meant to be the End of History, as heralded by Francis Fukuyama. From now on, Western liberal democracy and capitalism would reign unchallenged. And with the threat of Communism gone, the Americans decided to cut their losses and move against the Fascist dictators they’d been propping up. Hence their ouster of General Noriega.

This gave the impression that the world was going to be nicely democratic, with the unspoken assumption that western, Euro-American culture would remain dominant and unchallenged.

But the old culture of lies, coups and regime change when the dominated countries in the developing world get too uppity is still there. As are the Cold Warriors. We didn’t invade Saddam Hussein’s Iraq to free its peoples. We invaded because the Neocons wanted their state industries for American multinationals, and the Saudi-American oil industry wanted their oil fields. And Israel wanted to stop Hussein from aiding the Palestinians. Human rights was just a convenient pretext. And it’s been like this for the last 14 years.

Just like we’re also being told lies about the situation in Ukraine. The Maidan Revolution was not spontaneous. It was staged by the CIA, National Endowment for Democracy, George Soros, and Victoria Nuland in Obama’s state department. It was to stop Ukraine becoming too close to Putin’s Russia. Ukraine has always had strong links to its eastern neighbour. Indeed, Kiev was one of the earliest and most powerful of the Russian states to emerge in the Middle Ages. Trying to sever the links between the two is similar, as someone put it, to Canada moving away from America to side with the Communist bloc.

But we aren’t being told any of that. Nor are we told that real, unreconstructed Nazis from the Pravy Sektor are in the ruling coalition, and that there is credible evidence that human rights abuses have been visited on the Russian minority and Russian speaking Ukrainians.

We are just being told that Putin is a thug – which is true – and that he’s ready to invade the former Soviet satellites. Which probably isn’t.

There is also a further problem, in that some of the countries, whose Fascist leaders Britain and America supported, are very remote. I’d guess that many people really wouldn’t be able to find them on a map, let alone know much about their history. And so we face the same problem the Czechs faced, when Chamberlain sacrificed their country to Hitler at Munich. They are faraway countries, of which we know nothing.

And this is a problem with British imperial history generally. Salman Rushdie once said that the British don’t know their own history, because so much of it happened abroad. This is true. British capitalism was stimulated through the colonisation of the West Indies, the slave trade and the sugar industry. How much is a matter of debate. Black and West Indian scholars have suggested that it was the prime stimulus behind the emergence of capitalism and the industrial revolution in Britain. Others have argued instead that it added only 5 per cent to the economy. But that it did have an effect is undeniable, especially on its colonised peoples. In the West Indies, this meant the virtual extermination of the indigenous Amerindian peoples and their replacement with enslaved Africans.

Well, the Empire has gone, and been replaced by the Commonwealth. But western domination of these countries’ economies still remains through the various tariff barriers that the Swedish economist Gunnar Myrdal called Neocolonialism. As well as the domination of their industries by western multinationals.

There are book available on the British Empire, some of them critical. Like John Newsinger’s The Blood Never Dried, and a recent book about the internment, torture and mutilation of the indigenous Kenyans during the Mao Mao crisis, Africa’s Secret Gulags. But the people, who appear on TV to talk about imperialism tend to be those on the right, like Niall Ferguson, who will admit that the British Empire was seriously flawed, but on balance did more good. Which might be true, but still glosses over some of the horrors we perpetrated.

And many of these are still kept from us. The public documents supporting the allegations of the victims of British torture in Kenya only came to light because they fought a long and hard battle in the British courts to get them released. I honestly don’t know what other nasty little secrets are being kept from us, in case it embarrasses senior ministers or industrialists.

So if you want to see the brutal reality behinds the West’s foreign policy, you have to read specialist magazines, many of them small press. Like Robin Ramsay’s Lobster, which has been going since the 1980s, and which is now online, and Counterpunch, an American radical magazine and website, which has been digging the sordid truth up about the American Empire and the rapacity of capitalism and the global elite. I also recommend William Blum’s The Anti-Empire Report, and his books, as well as Greg Palast’s dissection of the real reasons we invaded Iraq, Armed Madhouse.

More material on the rapacity of western imperialism is coming to light through the internet, and especially the emergence of alternative news sites. And there is a growing audience for it, as young and older people from across the world are brought together through international links. This isn’t just business, but also through the foreign students coming to Britain, as well as Brits living, working and studying elsewhere in the world.

The problem is getting it out there, and moving it from the sidelines so that it becomes a major topic that can be used to challenge our leaders and hold them to account, without being written off as ‘loony radical lefties’ spouting about things no-one else wants to know about or even hear. About other ‘faraway places, of which we know nothing’.

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