Economics: a two-sided equation

But everybody just looks one half, either the costs or the benefits, without ever trying to match them up.

Exhibit one, from CityAM:

LONDON Mayor Boris Johnson yesterday secured the support of business organisation London First as he continued to insist investing in Crossrail and London’s transport network was essential for the Capital’s economic prosperity.

Attending the launch of a report published by London First into the benefits of maintaining investment in transport, Johnson said his commitment to Tube upgrades and the £16bn Crossrail scheme was “fundamental and unwavering”. He added: “Over the coming months and years we need to make sure the government maintains its side of the investment needed to ensure that London, the powerhouse of the UK economy, retains its position at the summit of world cities.”

Boris looks at the benefits to London (which his job). It appears to be beyond dispute that the £16 billion cost of the Crossrail scheme will benefit the London economy by a vastly greater figure (difficult to prove, but by reverse logic, imagine the whole London rail network disappeared overnight - what would happen to the London economy then?). That's the benefit.

But what about the cost? Why on earth should "the government" (i.e. the UK taxpayer generally) bear the cost, when the benefit accrues to only a small part of the country?

Exhibit Two: The Evening Standard:

Small firms face being driven to the wall by a "triple whammy" of business rate increases, MPs were warned today.

Mark Field, Conservative member for Cities of London and Westminster, accused Chancellor Alistair Darling of seeking to "plunder" businesses and treating them like "cash cows". In a Commons debate, Mr Field highlighted the impact of three tax moves:
* The five per cent increase in business rates this year.
* The business rate revaluation, which will come into effect in April next year.
* The levy being imposed to raise £3.5 billion for Crossrail...

The move would rake in an extra £456 million for the Treasury... Meanwhile, companies with a rateable value of more than £50,000 have to pay the Crossrail levy.

I agree, now is not exactly the time for a large hike in anybody's tax bill - annual revaluations would be far better - but if Boris is asking for £16 billion to benefit London's economy, is it so terrible that the London economy stumps up a quarter of that cost (i.e. £3.5 billion plus £456 million)? Wouldn't it be even better if the London economy were asked to pay the entire cost? If the London economy doesn't want to pay it, why on earth should anybody else be expected to pay it?

Particularly pathetic are the crocodile tears that politicians shed over "small firms", while merrily f***ing them over with thousands of new regulations every year (that weigh relatively far less heavily on larger firms). That is yet another two-sided equation. But I digress.
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I could arrive at the same conclusion by more circuitous route...

The fact is that railway companies seldom make money for themselves (all over the world they either hover on the brink of bankruptcy or are nationalised or subsidised) but they make vast amounts of money for other people (so there's absolutely no point in sitting round waiting for the free market to sort it out, this is one of the few things that needs a push by the government). That is why the cold-hearted and calculating property developers at Canary Wharf offered to pay for the entire Jubilee Line extension themselves. They did their figures and worked out that £400 million spent on the extension would have boosted the value of their office blocks by over £1,000 million.

So, the best way of funding Crossrail must be by a tax on land or property values, which we have in the form of Business Rates. Fairly dumb people, like Tory politicians for example, will say that Business Rates are paid by the occupying business and not the land owner (even if you could get a Tory politician to admit that public transport infrastructure benefits the landowner more than the businesses themselves).

Well, even if that were true, so what? but it isn't true anyway. No 'small businesses' will be driven to the wall...

Exhibit Three: a real life example from the Financial Times:

Ms Muir, manager and part-owner of Misyl Investments, which owns a 9,000 sq ft commercial and residential building near Portland Place, says she has been discounting rents to compensate for rising rates for the past five years.

Many of her 10 tenants are small graphic designers and publishers, and she fears some will not be able to afford to remain. "The rates are all virtually doubling but [the tenants] just can't pay any more. Increasing business rates have been eroding our rents and this might well knock the whole thing down."

Y'see, that's a proper landlady that is. She knows perfectly well that to make money, she has to keep her building occupied, but she can't expect her tenants to pay more than a certain amount in rent-plus-Business Rates. If the amount they have to pay in Business Rates goes up, she has to reduce her rents. As to her veiled threat to 'knock the whole thing down', well that ain't going to happen either (probably a criminal offence) and in any event, the temptation to do so would be avoided if Business Rates related to site-only values regardless of what was built on them.

Sure, some "small businesses" aren't tenants, they are owner-occupiers, but if such a business can't even generate enough profit to pay the Business Rates, then it is better for all concerned if they shut the business down and rent out the premises to somebody else. I covered this in my earlier post on Creative Destruction.

Maybe I'm a bit ideallistic, but shouldn't the system work like this:

1. You decide whether something is best left to free enterprise (like the Heathrow expansion, Kingsnorth Power station, both of which the Tories oppose, of course).

2. If it's something that the only the government can push through, you look are benefits and costs (and proceed if benefits clearly exceed costs).

3. You then work out who benefits and hence who should pay the cost.

4. If part of the cost is to be paid out of taxation (half will come from ticket sales, of course), you choose the tax on that which will benefit most from the expenditure.

5. You then explain it properly to the potential taxpayers (it would be enormously helpful if the cost were shared between Council Tax payers and Business Rates payers, different topic) and put it to a democratic vote. If they approve, then you go ahead. If not, then, shelve plans and shake your head at people's stupidity and selfishness.

6. And most importantly, don't listen to special pleading, ostensibly on behalf of 'small businesses' but actually on behalf of landowners. And so on.