Economics

The UK can change the law in its tax havens to meet EU requirements. So why isn’t it doing so?

Published by Anonymous (not verified) on Fri, 09/02/2018 - 6:42pm in

As the Guardian reports this morning:

The government has come under cross-party pressure to explain why it gave permission for Bermuda to repeal same-sex marriage rights, after the British territory became the first place in the world to make such a move.

The legislation, decided by the island’s elected government, was signed into law on Wednesday by its governor, the British diplomat John Rankin. It replaces the right of same-sex couples to marry, introduced after a supreme court ruling last year along with domestic partnerships, available for all couples.

I would hope most readers would presume that I am appalled by this decision, having said which I hope I will be forgiven for considering its non-LGBQT consequences.

As the Guardian also notes:

Labour MP Chris Bryant secured an urgent question in the House of Commons to ask why the foreign secretary, Boris Johnson, approved the move.

Harriet Baldwin, the junior foreign office minister sent to deal with the question, said the government was “obviously disappointed” with the repeal of the law but felt it had no choice.

She said: “After full and careful consideration in regard to Bermuda’s constitutional and international obligations, the secretary of state decided that in these circumstances it would not be appropriate to use this power to block legislation, which can only be used where there is a legal or constitutional basis for doing so, and even only in exceptional circumstances.”

Perhaps as importantly they noted that the minister added:

The new civil partnership law met European human rights standards, Baldwin said, telling MPs that ministers had limited powers over Britishoverseas territories, which were “separate, self-governing jurisdictions with their own democratically elected representatives that have the right to self-government”.

Unpacking that reveals a number of very obvious and sometimes contradictory statements.

The first is that these places are independent but their law requires U.K. approval.

The second  is that we do not legislate for them unless we think we should, which is when we consider the situation exceptional.

Third, non-compliance with EU standards would be considered exceptional.

I think that a fair summary. The basic rule is self government subject to the U.K. having the right to intervene if good order, the break down of good governance or issues of foreign affairs requires it.

I would argue that in the matter being considered good order required intervention, but that is not my main point, which is that the EU has now either black listed, or is threatening to black list, many of these jurisdictions for failing to comply with its tax requirements, which failure does in every case relate to international tax, and so foreign affairs. The EU Parliament is now going to investigate the matter. And what the minister’s comments make abundantly clear is that the U.K. has the right to intervene in such situations. Indeed, it appears duty bound to do so.

In which case it has to be asked why the U.K. is not intervening to require a change in the tax law of these places, whether voluntarily or by imposition.

The EU may wish to ask U.K. ministers to explain themselves.

winter 2018 book forum: bryan caplan’s the case against education

Published by Anonymous (not verified) on Fri, 09/02/2018 - 6:15pm in

This month, I will write a series of blog posts about Bryan Caplan’s The Case Against Education: Why the Education System is a Waste of Time and Money. Normally, I will summarize a book, then praise it and then offer some criticism. In this case, I will deviate slightly. A lot of people will criticize the book, so I will focus on describing the core argument and explain why sociologists should care about it. If Caplan’s main point is even partially correct, it has big implications that any educational researcher should care about. In this first installment, I’ll provide a little background and then lay out the main argument. Later this month, I’ll describe the nuts and bolts of the argument in more depth.

I’ve known Bryan for many, many years and I’ve grown a deep appreciation his style of thought. The way he approaches an academic topic is to first boil down the main claim. Then, he will massively research the claim to find out how much of it is true. When I say “massive,” I mean massive. He’ll read across disciplines. He’ll read flagship journals and obscure edited volumes. He’ll even email the authors of papers to make sure that he got their main point correct. Once he is done this obsessive review, he’ll summarize the main points and the then re-assess and redevelop the original claim. He re-estimates models and the draws out the conclusions, which often cut against common opinion.

The Case Against Education proceeds in this same way. Caplan starts with a simple idea that a lot of people believe in: education improves you and that is why it should be subsidized and supported. This basic idea comes in a few flavors. For example, in academia, economists believe in human capital theory – education gives you valuable labor market skills. Other people may believe that education improves you because it makes you a better citizen or it otherwise improves your critical thinking skills. Caplan then contrasts this with another popular theory called “signalling theory” – education doesn’t make you better, but it works as an IQ/conformity test. In other words, people who do well after getting an education aren’t better in any concrete sense. Rather, the college degree is a signal that you are smart to begin with.

Why the emphasis on the human capital/signalling distinction? The theory that you believe in has huge policy implications. If you believe that education gives you a lot of skills and benefits, then it may make sense to pay for a lot of education or to subsidize it. In contrast, you believe it is mostly signalling, it is a sign that you should scale back education.

Then, Caplan delves into hundreds of studies in education, economics, sociology, psychology and other fields to actually see if education actually makes you better, or if it is merely a hoop you have to jump through. For example, is it true that education makes you a better “critical thinker?” It turns out that there is psychological research on “transfer learning,” which means that learning a skill in field A helps you in field B. Answer? Nope, not much transfer learning. Is it true that college graduates learn alot? he reviews work like Richard Arum and Josipina Roska’s Academically Adrift, which shows that people don’t learn a lot in college. The list of debunked effects of education goes on and on.

As you can sense from my thumbnail sketch, Caplan (correctly, in my view) arrives at the conclusion that education doesn’t really make you better in any direct sense. If that is true, then much of education might be a costly and inefficient signalling game and maybe we should seriously consider cutting back on it and that entails a massive change in policy.

Next week: What education does and does not do to a person.

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Modern monetary theory in a nutshell

Published by Anonymous (not verified) on Fri, 09/02/2018 - 5:53pm in

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Economics

It would appear that the anti-modern monetary theory brigade are keen to appear in the comments section of this blog at present. In that case I think I need to be clear what MMT says, as I understand it. What follows is an interpretation, in a nutshell.

First it says governments can make money out of thin air, at will. This is now an acknowledged fact. The Bank of England agrees now. QE proves it.

MMT then says all government spending is in fact funded by money created in this way, created by central banks on the government’s behalf. As MMT, correctly in my opinion,  points out, if this was not the case then government created money required to make payment of tax could not exist.

MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.

What this also means is that the capacity to tax, and indeed to borrow, cannot constrain government spending. Tautologically this has to be true: since neither payment of tax  or lending to the government would be possible unless government created money was put into circulation as a result of government spending that spending cannot be constrained by either of them.

But what this means is that there is no requirement per se to balance the government’s books. Indeed it is not just illogical but completely economically perverse to seek to do. A government with a balanced budget necessarily denies an economy the funds it needs to function. That is hardly a measure of economic responsibility.

In that case more responsible measures have to be adopted as the goals for economic policy. MMT suggests that full employment is the alternative goal.

As a result it is seen that MMT is located firmly within the constraints of the real economy, and not those of the finance sector. What is possible in the MMT view of the world depends upon available resources, and most especially on labour and its productivity. Since the goal is to maximise use of available labour at the highest level of productivity possible this is a policy that inevitably, and unavoidably, seeks to increase median pay.

There are, of course, constraints on available labour and the supply of investment capacity to consider. However it is important to note that given that MMT will always seek to increase labour productivity it must at the same time seek to minimise the cost of capital i.e. the real interest rate. Low rates are not an accident within MMT. They are there by design. That goal is achieved by balancing the mix of government deficit funding covered by bonds (which are issued as a favour to financial markets and depositors) and money creation, currently mainly through QE. We know that this process can now deliver the desired outcome.

But of course low real interest rates are vulnerable to inflation so MMT has a quite clear interest in constraining (but not eliminating) inflation. Elimination would  constrain investment unnecessarily by encouraging its deferral so a low and moderate interest rate is required, which is achieved by taxing sufficient government created money out of existence in a period to secure this goal.

How much tax does this require? Broadly speaking experience in recent years has suggested that total tax revenues should be less than total government spending or additional money supplies required to ensure the liquidity to permit growth is not present in the economy. The differential expressed as a percentage of GDP might well be close to the desired inflation rate but overshoots and undershorts (and both will inevitably happen) might alter this.

The differential is not the same as the total tax bill though. The total tax bill is determined by the amount that must be spent to deliver full employment. This will permit ample capacity for the private sector, to the limit of its animal spirits.

The capital expenditure to deliver growth in earnings resulting from increasing capacity can be funded either by borrowing or money creation. The goal of low real interest rates will determine the mix.

The only tool not available for  the purpose of economic management in MMT is the interest rate. This cannot be used because to do so might result in less than full employment, lower than optimal investment, a loss of international competitiveness and a long term loss of median wages growth due to an above optimal rate of interest being used to constrain inflation in an economy where it is presumed that all government deficits must be funded by borrowing, which we now know to not be true.

This in a nutshell is what MMT is, says and does. It is a complete, coherent economic logic that ensures liquidity, employment, growth that benefits the majority, financial stability, modest inflation, always affordable tax because the money to pay it has always been created by government in advance of settlement, and the availability of sufficient government debt to meet market needs at the low rates of interest the economy requires to prosper.

What is there not to like?

Why New Economics Needs a New Invisible Hand

Published by Anonymous (not verified) on Fri, 09/02/2018 - 1:09pm in

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Economics

By David Sloan Wilson

In olden days, the death of one Monarch and coronation of the next was sometimes announced with the words “The King is Dead! Long Live the King!” In this spirit, I’m happy to herald the death of one version of the invisible hand concept and its replacement by another.

The old concept pretends that the pursuit of individual or corporate self-interest robustly benefits the common good, as if “led by an invisible hand” in the words of Adam Smith. This is also the essence of the term “laissez-faire”, which is French for “leave it alone”. Nobody believes that an economy can truly be a free for all—certainly not Adam Smith, who invoked his metaphor only three times in the entire corpus of his work. A fuller reading reveals that he was amply aware of the need to regulate economies. Nevertheless, those who have made the invisible hand their central metaphor regard laissez faire as by far the better path to take than its alternative—centralized planning.

I am not the first person to declare this notion of the invisible hand dead, but my grounds for doing so are somewhat novel. Evolutionary theory makes it crystal clear that the unregulated pursuit of self-interest is often toxic for the common good. This conclusion becomes especially strong when we conceptualize self-interest in relative rather than absolute terms, a distinction that separates much evolutionary thinking from much economic thinking. When we absorb the fact that “life is graded on a curve” as the evolutionary economist Robert Frank puts it[1], then we can see that nearly all cooperative efforts require time, energy, and risk on the part of the cooperative individuals that place them at a relative disadvantage compared to less cooperative individuals within the same group.

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The same theory that delivers the death stroke to the old concept of the invisible hand also provides a strong foundation for the new one. The two elements of the invisible hand metaphor are: 1) A social system works well; 2) without its members having the welfare of the system in mind. Nature is replete with examples, such as eusocial insect colonies and multicellular organisms as societies of cells. The members of these societies work harmoniously for the common good without even having minds in the human sense of the word. In each case, the first element of the invisible hand metaphor is satisfied because the society is the primary unit of selection—colony-level selection in the case of eusocial insects and organism-level selection in the case of multicellular organisms. The second element is satisfied because higher-level selection winnowed a small set of lower-level behaviors that contribute to the common good from the much larger set of lower-level behaviors that would disrupt the common good. In short, higher-level selection is the invisible hand. When it doesn’t occur, then disruptive forms of selection among individuals within groups take over, such as cancers in multicellular organisms and varying forms of cheating behaviors in eusocial insect colonies.

One of the great discoveries of evolutionary science during the last few decades is that this theoretical framework, called multilevel selection theory, can be applied to the evolution of our own species–including our genetic evolution primarily at the scale of small groups, our cultural evolution at successively larger scales during the last 10,000 years, and the rapid changes swirling all around us today that we are trying to influence with our policy decisions. If ever there was a need for a new King to replace an old King, it is now.

A detailed brief for the New Invisible Hand is provided in an academic article titled “Human Ultrasociality and the Invisible Hand: Foundational Developments in Evolutionary Science Alter a Foundational Concept in Economics”, which I wrote with the economist John Gowdy[2]. The main take-home message is easy for anyone to understand. We must learn to function in two capacities: As designers of large-scale social systems and as participants in the social systems that we design. As participants, we don’t need to have the welfare of the whole system in mind, but as designers we do. There is no way around it. Anything short will result in social dysfunction.

This is a definitive refutation of laissez-faire as a perspective for formulating policy, but it is not an endorsement of centralized planning. Indeed, the main import of the New Invisible Hand is to suggest the existence of a middle path, a way to design social systems that is itself evolutionary and iterative, resulting in regulatory processes that look like laissez-faire, even though they never would have come into existence on their own.

Just as I am not the first to declare the old concept of the invisible hand dead, I am not the first to “discover” the existence of a middle path. It emerges from numerous theoretical perspectives and there are outstanding case studies to draw upon. Important books include Complexity and the Art of Public Policy by David Colander Roland Kupers[3]; Big Mind by Geoff Mulgan[4], The Gardens of Democracy by Eric Liu and Nick Hanauer[5], and The Origin of Wealth by Eric Beinhocker[6].

In short, the middle path between laissez-faire and centralized planning has been discovered many times, as might be expected from a cultural evolutionary perspective—but that isn’t good enough. Each discovery originates as a cultural “mutation’, often by happenstance, and spreads on the basis of its success to a degree, but then remains confined within certain cultural boundaries and is largely unknown outside its borders—somewhat like the geographical distribution of a biological species. What’s needed is a way to transcend these cultural boundaries so that all of the examples can be related to each other and understood from a unified theoretical perspective provided by a combination of evolutionary theory and complex systems theory[7].

I have learned much from the pioneers listed above (see the endnotes for links to interviews, reviews, and excerpts of their books) and look forward to featuring others in an effort to turn the middle path into a broad highway that everyone can travel to solve the problems of our age.

2018 February 8

[1] Frank, R. (2011). The Darwin Economy: Liberty, Competition, and the Common Good. Princeton: Princeton University Press. Go here for my interview with Frank.

[2] Wilson, D. S., & Gowdy, J. (2015). Human Ultrasociality and the Invisible Hand: Foundational Developments in Evolutionary Science Alter a Foundational Concept in Economics. Journal of Bioeconomics 17(1), 37–52. https://doi.org/10.1007/s10818-014-9192-x

[3] Colander, D., & Kupers, R. (2014). Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up. Princeton NJ: Princeton Univesity Press. Go here for my review and here for an excerpt of the book.

[4] Mulgan, G. (2017). Big Mind: How Collective Intelligence Can Change Our World. Princeton: Princeton University Press. Go here for my interview with Mulgan and here for an excerpt of the book.

[5] Liu, E., & Hanauer, N. (2011). The Gardens of Democracy: A New American Story of Citizenship, the Economy, and the Role of Government. Seattle: Sasquatch. Go here for an excerpt of the book.

[6] Beinhocker, E. D. (2006). Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Cambridge, MA: Harvard Business School Press. Go here for my interview with Beinhocker.

[7] Wilson, D. S., & Kirman, A. (2016). Complexity and Evolution: Toward a New Synthesis for Economics. (D. S. Wilson & A. Kirman, Eds.). Cambridge Mass.: MIT Press. Go here for my interview with Kirman.

The post Why New Economics Needs a New Invisible Hand appeared first on Evonomics.

Confronting energy realities

Published by Anonymous (not verified) on Fri, 09/02/2018 - 8:53am in

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Economics

In tackling Australia’s energy crisis, politicians and policy makers need to find the courage and conviction to confront key energy realities and develop real policy.

Oil prices ravaged by financial turmoil

Published by Anonymous (not verified) on Fri, 09/02/2018 - 8:53am in

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Economics

The steady decline of the U.S. dollar has helped drive up crude prices for weeks, but that came to an abrupt halt last week.

We don’t need an interest rate rise. We need an increase in the inflation target

Published by Anonymous (not verified) on Fri, 09/02/2018 - 3:44am in

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Economics

I wrote what follows last September, but I think it just as relevant today in the light of the Bank of England's announcement that it is anticipating interest rate rises:

Mark Carney appears to want an interest rate rise. I think this is economic madness. I have a different policy proposal to make in its place. I believe that now is the time for the Bank of England to set out a case for an increase in the inflation target.

As the Bank of England says of the inflation target:

The inflation target of 2% is expressed in terms of an annual rate of inflation based on the Consumer Prices Index (CPI). The remit is not to achieve the lowest possible inflation rate. Inflation below the target of 2% is judged to be just as bad as inflation above the target. The inflation target is therefore symmetrical.

But why it is 2%? It is harder to find justification for that. It 'just is'. And why is that so? Because, I suggest that sometime, somewhere, someone thought 'that's about enough'. And what does enough mean? It's the figure that does not debase wealth too much (which is terribly important around Threadneedle Street and some parts of SW1)  whilst keeping the economy about of deflation, which most informed people think delivers recession pretty quickly.

The second half of their argument I have a lot of time for: deflation is a danger to be avoided at just about all costs, in my opinion. That a fall in the value of the currency might destroy real opportunity in the economy is unforgivable in my opinion, and it's right that the Bank should steer clear of it.

But what of the first half of the argument? I'm entirely opposed to the suggestion that significant inflation is good for an economy, although I do not recall things as being as bad as popular legend says it was in the 70s when inflation at rates we can now hardly comprehend did not create anything like the disruption claimed of it. But equally, I see no reason at all why we should keep inflation to 2% so that the owners of debt (and debt ownership is the basis of wealth) should have their asset values preserved, which is the only reason why I can see the current target is so low.

Would the world end if the target was 3%? Or 4%? Or even 5%? I'm not suggesting any more than that, and might only go for doubling to 4% to be honest. The obvious answer is it would not.

It's true that those owing money would have that written off faster by inflation. But that would diffuse the debt crisis. And it would reduce inequality. Both of those should be key economic targets for any government.

And that rate of inflation would allow for wage growth in proportion to asset prices - and most specifically house prices - which is vital.

Such a rate may also allow real wage rises - which has to be good.

Critically, this inflation target  would also mean that interest rates need not rise - rate rises that will tip millions into unmanageable debt scenarios and which might precipitate a new banking crisis as a result.

I'm going to be blunt. The only reason I can see for an interest rate rise at present is to preserve the interests of those with wealth. And their interests have already been extraordinarily well served by our economy.

Increasing the inflation target would be in the interests of everyone else in the UK at present.

There is a real choice to be made on this, and right now the Bank of England is most definitely backing the wrong policy.

The Fat Lady has not sung yet

Published by Anonymous (not verified) on Thu, 08/02/2018 - 6:30pm in

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Economics

So the FTSE decided to bounce back a bit:

But the Dow Jones was not so sure:

I'm not sure the Fat Lady has sung as yet.

Many commentators now seem to agree stock markets are heavily over valued. If the correction is not now it is coming.

But still people buy. If ever proof of irrationality was required, or alternatively that there persists a belief amongst many that they can beat the market, this looks like it.

The world’s balance sheets pose questions demanding answers

Published by Anonymous (not verified) on Thu, 08/02/2018 - 6:22pm in

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Economics

The World Bank has been looking afresh at the issue of growth and has been seeking alternative ways to appraise why this situation exists and how it is changing:

I admit the FT show the results better than  the FT do. This is their summary:

Remember, this is a measure of change. But, importantly it's a measure of changing capital rather than a measure of income. That is the difference in approach. And it's important.

Long ago accounting realised that three statements were need to offer a true and fair view of the state of affairs of an entity. These are the income statement (or profit and loss as some still think of it), the cash flow statement and the balance sheet. Each is necessary, with the cash flow reconciling movement in income with movement in balance sheet reserves.. Macroeconomics has for too long looked at just an income statement, and too little at balance sheets. When it has looked at the latter it's also usually only looked at finances.

This new work breaks ground by emphasising more than financial capital, and that is important because many forms of capital drive growth. In the process it also emphasises vulnerabilities: mineral resources don't last forever for example, whereas high human capital is associated with high growth:

That clearly indicates the requirement for progress.

Measures are useful for three reasons. The first is comparison. The second is comprehension. The third is as the basis for decision making. What this says is that the best investment in the world is in people. And questions immediately follow, not least as to why so many barriers to education now exist in the UK in the form of student debt, and why have we been so opposed to student migration?

I suspect the report will reward more study. I will be giving it some.

More Workers’ Rights: Another Set of Promises May Has No Intention of Keeping

Published by Anonymous (not verified) on Thu, 08/02/2018 - 4:34am in

It was reported in the I today that May has promised to increased workers’ rights, and give them greater protection at work in order to combat the harm done by the ‘gig economy’.

Well, I’ll believe that when I see it. Tweezer has form when it comes to making vaguely left-wing or pro-worker promises, only to go back on them once she’s safely installed. The one that particularly springs to mind was when she promised that she would put workers on the management boards in industry. That was one of her election promises last year. And lo and behold, after she won the election, it was quietly shelved, with Tweezer making excuses like ‘the time wasn’t right’ or some other such nonsense. And she’s carried on making promises like this, only to break them.

The Tories are inveterate liars, and so I guess we shouldn’t expect anything less from May. She’s coming under attack from her own party, and particularly from a group of rebels that have gathered around Young Master Jacob Rees-Mogg. Despite all her protests to the contrary, her negotiations with the EU over Brexit are an appalling mess, that has done precious little for this country and its economic future. And she, and the rest of the country, knows it.

It also shows how terrified she is of Jeremy Corbyn. For all the sneers about him, and the loud smears against Corbyn and his supporters in Momentum as Communists, Trotskyites and anti-Semites, this shows that the Tories and the corporate masters are really frightened by the fact that Corbyn is gaining in popularity. I think he now may be even more popular than the formerly ‘strong and stable’ May. Hence the lies and smears against him and his supporters.

This latest promise to protect workers from job insecurity is another pack of lies, designed to deceive working people into voting for a party that has been instrumental in setting up the ‘gig economy’ and destroying any kind of job security. Once May is secure in her position once more, you can bet that she’ll go back on it, arguing for the importance of having a flexible workforce and fluid labour market. And all the other neoliberal rubbish we’ve heard since Maggie Thatcher, John Major, Blair and Cameron.

The only guarantee of getting real rights for workers is to vote for Corbyn.

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