Economics

There is no room for the purveyors of tax avoidance in UK public life

Published by Anonymous (not verified) on Sun, 02/09/2018 - 6:40pm in

I was meant to start yesterday on the Today programme, discussing whether or not HMRC should have an input into the honours system on a traffic light basis to indicate whether or not a supposed recipient’s tax affairs had green, amber or red reputational risk. And then they got Vince Cable instead. Which meant I had a little more time in bed before a long day dedicated to other issues. But I’ll explain here what I had outlined I’d say, which was more complex than Vince’s message.

He said HMRC was right to do this. And I agree, they are right to assist. But I made additional points.

The first was that we don’t give most awards for paying tax. We give them for sporting, artistic and charitable achievements. Personally, I have little interest In the system as it smacks of old-fashioned patronage, let alone Empire, but we have it. And let’s recognise that in these sectors it may have some use (but the awards need to be renamed, and have done for a very long time).

Second, awards come in two sorts. One is just the gong. The other has influence. Most awards are just of the first type. Sir Rod Stewart did not get influence over the UK government for 45 years of singing Maggie May. The title is an honour, and no more. The vast majority of awards are.

For these people I suggest the criteria should be very diffferent to that which should be used to those who might have influence recognised or enhanced by an award. These are those who have power in industry. Or those who secure power in government as a result of the rewards, whether as senior civil servants, or as appointees to public bodies (many of whom get awards for doing so, which suggests prior vetting before the appointment using the same traffic light system would be wise). And then there are those who can legislate as members of the House of Lords as a result of appointment.

I think the criteria should be different. In the former category of simple awards for excellence evidence of tax fraud, or use of offshore as a part of their arrangements, over either of which they would clearly have been required to make a personal choice over which they could not claim to have lacked awareness, should preclude an honour.

But for this group - many of whom will have little knowledge of finance or even in some cases their own financial affairs, which may well be run by an agent for them - participation in a packaged tax avoidance scheme that was sold to them and which they were advised to take, quite probably with little understanding of the risks , seems to  me to be a wholly inappropriate basis for excluding a person from an honour. They may have chosen their advisers unwisely in this case - but vast numbers of advisers were engaged in such sales and I think it simply wrong to penalise a person who acted on professional advice. You might as well penalise the victims of pension mis-selling for having been daft enough to put their money into Equitable Life, which was once so many pension professional’s favourite company. The fact is that this group engaged others to do their due diligence for them, and were failed by those who did that due diligence. I am not sure they should suffer a second time as a result. For this group then only a red warning - for fraud or tax haven abuse - should be a block.

But that brings me to the second group - which is those who should know better. No one getting a reward for business activity can claim they cannot do their own due diligence. Or that they are not responsible for the tax affairs of their companies. Or its offshore subsidiaries. Or the pre-packaged tax avoidance that they buy.

And no one who goes to the Lords can have any excuse for undermining the state of which they are to be a part.

These people have to be held accountable for what they do. An amber award does, in that case, mean a block in my opinion. And that should include those appointed to regulatory positions and high civil service appointments as well as advisory committees.

But does this mean anyone should be blocked automatically even if their own affairs get a green? My answer to that is that those who have been associated with selling tax avoidance should be blocked, altogether. This was the key message that I wanted to get across on the Today programme. It is not the users of tax avoidance who were in most cases the people at fault. Most were ill-advised, although I accept some were gullible and maybe greedy. But they could not have been so without the aid of those who created the schemes. And it is those schemes creators and vendors - the tax avoidance dealers - who should be barred now.

Who are they? The partners, past and present, of most large firms of lawyers and accountants, in the main. And a partner in any professional firm engaged in a tax haven where it cannot be shown that the vast majority of their practice is to serve a local community's needs should also meet this criterion. These are the people who really should be sanctioned now, and barred from holding office, including (most especially) on the Board of HMRC. There is no room for the purveyors of tax abuse in UK public life. And they are the people who really need to be sanctioned for their activities.

How to cope with the behavioural challenge

Published by Anonymous (not verified) on Sun, 02/09/2018 - 12:10am in

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Economics

How would you react if a renowned physicist, say, ​Richard Feynman, was telling you that sometimes force is proportional to acceleration and at other times it is proportional to acceleration squared? I guess you would be unimpressed. But actually, what most mainstream economists do amounts to the same strange thing when it comes to theory […]

Ten years on we need to be worried

Published by Anonymous (not verified) on Sat, 01/09/2018 - 7:06pm in

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Economics

There is a theme to all the discussions of the tenth anniversary of Lehman that are now beginning. It is that we have not really learned anything from the crisis.

What’s the evidence? I hope to reduce things to basics, but I would suggest just three issues make that clear.

The first is that there has been no real reform of banking and related financial services. The strongest evidence of that is the fact that the rating agencies, who played such a vital role in creating the crisis, continue as if unaffected by it, with the same models, and maybe the same people, doing the same job in the same way for the same people. Nothing has changed there.

The same could be said of accountancy, of course. It's taken ten years for there to now be a hint that they may pay some price for the massive role that they too played in creating the banking meltdown.

But the strongest evidence is in banking itself. The models have not really changed. It is true that they are undoubtedly better capitalised, but the incentives appear the same, the excessive lending appears similar, the ability to exploit risk that they can pass to others is identical, and the rewards for doing so remain enormous. I am not saying it would be impossible to spot the changes from 2008: they exist. For example, the ability to use almost entirely risk free money provided by the state is something that looks very different from 2008. But that said, it is the similarities, and the fact that around the globe bankers, and those who share their mentality, still think that they are the rulers of the universe is the really big issue, and nothing has been done to challenge it.

Which brings me to my second point. This is debt, and private debt in particular. There are places where public debt is an issue, particularly where it is not denominated in the currency in which the government raises its tax, but this is not the major concern in most of the markets at that had much to learn as a result of the crisis, which was not caused by public debt, but by private debt. And as is now widely reported, private debt is now back at 2008 levels. In the UK net saving actually disappeared in 2017. UK house prices may have stabilised, at present, but they are still at record levels. And car finances are heading to be the new sub-prime, both in the UK and the USA. Whilst household incomes have stagnated debt has accumulated as a result of the deliberate policy of the government, in the UK at least, which has been forecasting this trend ever since the financial crisis first eased. It is as if we have learnt nothing at all.

That point is at the core of my third point. In 2008 global capitalism nearly failed. It should have done. It was time expired: the model of Hayek and Friedman had ceased to be of value, as it still is. Very briefly those on the left thought that 'we are all Keynesians now'. But if we were, it turned out most were profoundly neo-Keynesian, with the belief in the power of central bankers, monetary policy, and the paranoia about fiscal intervention of any form. And that meant that bankers stayed in charge. There was, then, no alternative to the failed model that won popular support. Only tax justice made a lot of progress, to be honest. As for the green movement, there has been little progress of consequence. And in terms of coherent economic thinking on alternatives, apart from MMT, little at all.

This is worrying. Few now doubt that we will have another global downturn. It is not a matter of if; it is only a matter of when. But the real crisis is that we have no new weapons left to address it. Ten years on we are little better prepared for what is going to happen than last time. And if you're in doubt note this from Gillian Tett in the FT this morning, writing about this same issue, where she says:

For centuries, the craft of banking has revolved around the relatively simple business of collecting deposits from companies, governments or consumers, and then lending the money out.

When one of the FT's leading commentators does not even know what banking is, how it works, and what it does in the macroeconomy we need to be worried. In ten years it seems we have learned almost nothing at all.

Alan Kirman on why modern economics is of so little use

Published by Anonymous (not verified) on Sat, 01/09/2018 - 5:43pm in

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Economics

  Almost a century and a half after Léon Walras founded general equilibrium theory, economists still have not been able to show that markets lead economies to equilibria. We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient. But what good does that do? As long as we cannot […]

When Will the US Lose Control of the World Payments System?

Published by Anonymous (not verified) on Fri, 31/08/2018 - 10:57pm in

One of the greatest powers of the United States, one which was hardly used before Clinton, is the ability to freeze people out of the payments system. When Argentina had its previous debt crisis, it cut a deal with investors: They took a haircut, and the government agreed to pay them the haircut. Some investors refused.

Later, that deal was effectively destroyed, because Argentina lost in a US court. As a result, they could not pay the investors who had taken the haircut–a US judge was able to cut a sovereign state off from paying its debtors. Argentina could only have access if it paid both those who took the haircut and those who didn’t.

Over the last 20 years, in particular, the US has enforced financial sanctions against a bewildering number of people and states. Right now, it is disallowing Venezuela from buying many foreign goods. (When “socialism” doesn’t collapse fast enough, the US is always on hand to give it a shove.)

During the Iran sanctions period, before the Iran nuclear deal, the US and the EU cut Iran off from the payments system, virtually wholesale. SWIFT, the electronic payments system headquartered in Brussels refused to cooperate, saying that it should not be used as a tool of politics.

But the EU threatened the board and senior SWIFT executives with criminal charges, and SWIFT folded.

Lots of Iranians died and suffered under those sanctions, just like Iraqis did under the sanctions in the 90s.

When the Iran deal was cut, the sanctions were eased.

But Trump, when he tore up the Iran deal, re-imposed sanctions. The EU disagreed, but many EU companies are obeying the American order because America has said that it will sanction both companies and individuals who disobey.

And even if SWIFT doesn’t cooperate as a body, the problem is that most payments at some point touch American banks. The moment they do, America jurisdiction cuts in. (This is how FIFA got hit for corruption by US law enforcement. None of the bribes had anything to do with the US, but payments went thru US banks.)

So Europe is considering creating a payments system which does not ever touch US jurisdiction:

Germany’s foreign minister has called for the creation of a new payments system independent of the US as a means of rescuing the nuclear deal between Iran and the west that Donald Trump withdrew from in May…

…“For that reason it’s essential that we strengthen European autonomy by establishing payment channels that are independent of the US, creating a European Monetary Fund and building up an independent Swift system,” he wrote.

This adds Europe to a group which includes Russia and China, along with virtually every nation who has been subject to US sanctions.

The thing is that such sanctions used to be fairly rare. But Clinton weaponized them against Iraq and every President since them has used them as a bludgeon. They are a way, like drones to punish countries and individuals and to ignore sovereign rights.

The MMT types go on and on about being sovereign in one’s currency, but the fact is that you aren’t sovereign if another country can cut you out of the payments system. And right now the only countries in the world that are sovereign in that sense are America, the EU and China. And the EU and China are only somewhat sovereign.

These punishments are extra-territorial, they are an imposition of US law on non US countries and citizens. They are possible only because the US is the world hegemonic power, and sits at the center of the world payments system. Venezuela can sanction, but no one cares unless they have assets actually in Venezuela.

This power has been abused, repeatedly, to interfere in business that is none of America’s business. One can say that it might have been used acceptably when the entire UN security council agreed (I disagree), but when it doesn’t, the US has acted anyway.

And so, now, every great power in the world, with the possible exception of Japan, wants to take that power away from the US.

About time, but it will take time. It isn’t just about virtual links, it is about physical links: it must be done over continental cables and thru satellites which are not American. The way current software acts doesn’t take that in account, and physical infrastructure as well as software needs to be built.

But I hope that Europe is serious, because combined with China and Russia this is something which can be done, and done fairly fast (within a decade, I’d guess.) The only problem is that the EU, too, likes having this power. Are they really willing to give it up? Because the best way to do this would be to create a system which cannot be sanctioned without the agreement of all the powers who create: a system which cannot be sanctioned unilaterally. Everyone involved should have a veto.

Time will tell if Europe and, indeed, other nations, truly want a system that none of them can use to punish others.

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After the crisis — business as usual

Published by Anonymous (not verified) on Fri, 31/08/2018 - 6:15pm in

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Economics

In contrast to the experience of the Great Depression, which led to the emergence and acceptance of novel theoretical concepts on a large scale, the financial crisis and its consequences have, by and large, been rationalized with reference to existing theoretical concepts. Although we do observe a slight shift away from the idea that financial […]

The transient enterprise

Published by Anonymous (not verified) on Fri, 31/08/2018 - 4:49pm in

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Economics

When I went to university in Southampton in 1976 Whitbread became an important part of my life. They were the dominant local brewer.

Whitbread has not brewed beer for many years now. But I have drunk a lot of its Costa Coffe, which was still a brew, of sorts.

And now that’s to be sold to Coca Cola. And Whitbread will just run Premier Inn.

It’s fair to say I have come a long way since 1976, but I am still recognisably me.

Whitbread is not. It has instead became the typical modern corporation: it follows the money. What it does and how it does it is not really what matters. The return rules.

I’ve never felt that a basis for a business. Return matters, of course, when running a company. It is what ultimately drives cash flow, and that is the core of all business activity, like it or not. But it is never enough for me.

There is value in knowing who you are, what you do, who you serve and why. The Whitbread of 1976 would not know the Whitbread of today and I very much doubt it is really a better company as a result.

Doing what you do well matters. And making money is always a consequence of that. The transient enterprise - in an activity today and gone from it tomorrow as the whim of finance dictates - seems to have forgotten that critical fact.

When did you last hear an economist​ say something like this?

Published by Anonymous (not verified) on Fri, 31/08/2018 - 6:22am in

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Economics

If the observations of the red shift in the spectra of massive stars don’t come out quantitatively​ in accordance with the principles of general relativity, then my theory will be dust and ashes. Albert Einstein (1920)

The calibration hoax

Published by Anonymous (not verified) on Wed, 29/08/2018 - 4:34pm in

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Economics

There are many kinds of useless economics held in high regard within mainstream economics establishment today. Few — if any — are less deserved than the macroeconomic theory/method — mostly connected with Nobel laureates Finn Kydland, Robert Lucas, Edward Prescott and Thomas Sargent — called calibration. In physics, it may possibly not be straining credulity too […]

RBA Deputy Governor Guy Debelle’s low inflation address to ESA Qld at the Brisbane Hilton

Published by Anonymous (not verified) on Wed, 29/08/2018 - 7:26am in

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Economics

The RBA should consider alternative approaches, such as nominal GDP targeting or an approach which augments inflation targeting with a mandate to promote financial stability.

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