Yeah, right.

From The Register:

As many as 20 per cent of UK businesses are axing contractors completely in order to ensure they are fully tax compliant ahead of IR35 changes next year, according to a survey.

Recruitment consultancy and IT outsourcer Harvey Nash interviewed 350 businesses employing a significant number of IT contractors. It also found that 83 per cent said IR35 will negatively affect their industry.

From 6 April 2020, it will be the contracting body's responsibility to determine whether the contractor should fall within the scope of the "off-payroll working" rules, IR35.

The point is that the self-employed pay much less in National Insurance contributions (basic rate 9% and higher rate 2%) and employees pay much more (basic rate 25.8% and higher rate 15.8%). The actual income tax is much the same. So businesses and workers can save themselves a lot of money by treating people as self-employed rather than as employees.

In its infinite wisdom, instead of HRMC aligning the NIC rates (and preferably phasing out NIC entirely), they are obsessed with finding employees who are being treated as self-employed, reclassifying them as employees and collecting three year's worth of PAYE, plus penalties, plus interest. All very unpleasant and messy.

Do we really expect businesses to sack all their supposedly self-employed workers and leave everything undone? Do we really expect all the contractors to become unemployed? Or do we expect that most businesses will bite the bullet and only treat people as self-employed if they really are, and if in doubt, put contractors on the payroll and pay the extra NIC..?

Major employers including Barclays and GlaxoSmithKline have reportedly already told contractors that they will only employ them as on-payroll workers.

Which is what exactly what we expect. For sure, businesses and former contractors will have to share the extra NIC, that's an absolute cost to them.

The employer will also deduct the expected cost of certain statutory rights (holiday pay, pensions, sick pay, redundancy pay and rights, as well as less measurable things like employees having a better credit rating than contractors); all these things are of approximate equal and opposite value to the contractor/employee, so in the grander scheme of things, former contractors who are now employees won't really end up much worse off (apart from the extra NIC).

The people who run our country don't know what "investment" means.

It's very simple. Businesses 'invest' (in productive assets, tangible or intangible) and individuals (or pension funds on their behalf) 'save' (defer consumption), by either accumulating money in the bank or buying shares (directly or a pension fund does it on their behalf).

Individuals dissave (accelerate consumption) by cashing in a pension; withdrawing money from the bank and spending it; or selling shares and spending the proceeds. When one individual buys shares, another must have sold them, so the two sides cancel out and it's not even net saving, let alone net investment.

The actual businesses whose shares are bought and sold couldn't care less who buys and sells their shares and are unaffected. They make profits (hopefully), reinvest what is needed to make more profits in future and dish out the rest as dividends to whoever own the shares.

The people who run our country (from MPs to the Governor of the Bank of England) are too stupid to understand this not particularly subtle or difficult point. From City AM:

Three hundred MPs are calling on the trustees of the £700m Parliamentary Pension Fund to end their investments in fossil fuel companies...

The pledge, supporters of which include Labour leader Jeremy Corbyn, Lib Dem leader Jo Swinson, SNP Westminster leader Ian Blackford, and mayor of London Sadiq Khan, stated: “We believe members of parliament have a responsibility to act on climate change, and a unique opportunity to show leadership on climate action, responsible investment and the management of climate risk through addressing the practices of our own pension fund.”

Caroline Lucas MP, the leader of the Green Party, said: “I am encouraged by the huge number of MPs who now agree that we must move our investments away from the polluting industries of the past, and instead support policies that will bring about a clean energy future.”

Bank of England governor Mark Carney and the Environmental Audit Committee have warned that people’s pensions are exposed to overvalued carbon assets as the world moves quickly towards cheaper, greener renewables, and governments legislate for net-zero emissions.

OK, so all "ethical" pension funds simultaneously try to dump their shares in oil or mining companies, what happens? The price falls and they've lost a lot of money anyway - and the yield to future investors goes up. Other pension funds, whose very statutory duty is "getting the best return you  can for your pension savers" would be acting entirely unethically if they didn't snap up those cheap, high yielding oil and mining company shares on behalf of their pension savers. Oil companies won't care less either way.

And anybody who drives a car is contributing to oil companies' profits and encouraging them to continue extracting oil; there's no point them being squeamish about owning shares in oil companies and thereby getting a bit of their own money back.

"Taxing Robots Is a Great Way to Make People Poor"

Excellent article by Noah Smith at Bloomberg, h/t the Resolution Foundation email round up.

No point in paraphrasing or summarising, the article is fairly short and to the point.

Gloriously missing the point about housing supply and demand in London

Shaun Bailey in City AM:

We need a bold new approach to tackle London’s housing crisis...

Since 2000, London has added over two million people, but has built fewer than 400,000 properties. Add in the surge of foreign money into our housing stock, plus more people living on their own, and you have an expensive – and exclusionary – mix.

The only way out of our current mess is to build, but politicians have promised to do that for years. While some have done better than others, every single one of them has failed to meet London’s actual needs.

The lack of self-awareness is staggering.

Those two million extra people moved to London from somewhere else, quite voluntarily, mainly attracted by the higher wages. For a given supply of housing, people will continue to move there until rents have risen to a level where the higher wages are cancelled out by higher rents.

If housing supply increases, rents might fall, very briefly. People who were previously deterred by the higher rents will move to London. Rents will increase to their previous level, probably within days or weeks.

Fair play to the lad, he seems to be recommending that London builds a lot more council housing for fixed rents. Let's assume they give priority to people who already live in London, this frees up private rented accommodation and people from elsewhere will move in to them, it makes no difference to the new arrivals.

Economic Myths: Miller & Modigliani Theorem

The first part of the original M&M Theorem makes perfect sense:

The Modigliani-Miller theorem (M&M) states that the market value of a company is calculated using its earning power and the risk of its underlying assets and is independent of the way it finances investments or distributes dividends.

There are three methods a firm can choose to finance: borrowing, spending profits (versus handing them out to shareholders in the form of dividends), and straight issuance of shares. While complicated, the theorem in its simplest form is based on the idea that with certain assumptions in place, there is no difference between a firm financing itself with debt or equity.

So far so good. If the value of the business is more than the outstanding debts, then the shares have value; if the debts exceed the value, then the shares are nigh worthless. The total value of debts + shares remains roughly the same. The value of the bonds can't exceed value of the business and the value of the shares can't go lower than zero.

If you aren't sure whether to buy shares or bonds in a company, the best strategy is to have a mix. For example Mike Ashley/Sports Direct spent £150 million on acquiring 30% of the shares in Debenhams. Unfortunately for him, the debts ballooned to far more than the value of the business, so the lenders took over the business and his shares were wiped out (a kind of debt for equity swap).

His better strategy would have been to spend less on shares and more on acquiring Debenhams debts pro rata (say 15% of each). If the business had done well, his shares go up in value and if it does badly, his shares are wiped out but he still ends up with 15% of the business in his capacity as lender.
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What's nonsense is the related claim that the tax system encourages businesses to borrow money instead of issuing shares:

Third, the use of debt is less expensive than the use of equity because debt is generally subsidized by the state through the tax system –since debtors can deduct the interest payment associated with the use of debt. Therefore, the use of debt may reduce the firm´s cost of capital.

That's a generalisation across many countries' corporation tax systems, but whether it is true or not depends on the rates of tax applied to corporate profits (at corporate level) and dividend and interest income at shareholder/lender level.

(I started as a tax adviser in 1989 and had to advise clients on 'what is better for tax', the answer depended on the circumstances. I later did an accounting and finance degree, and the lecturer trotted out the M&M tax drivel and would simply not listen to reason and logic.)

IIRC and generalising a bit, Singapore and Hong Kong governments get so much money from land rent, land auctions, stamp duty and capital gains on land that they barely need to bother with taxing incomes. So companies pay 15% corporation tax and individuals pay 15% income tax. If an individual gets a dividend, it is treated as tax paid, so no further income tax due. If an individual receives interest income, it is taxed at 15% so it is as broad as it is long.
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In the UK, we had a brief period in 2012 or thereabouts (before Osborne started messing things up again), when it simply did not make a difference for corporation tax/income tax (ignoring National Insurance, which clearly distorts things, the 45% additional rate and overseas stuff).

The rates were:
Corporation tax - 20%
Basic rate income tax - 20%
Higher rate income tax - 40%
Withholding tax on interest - 20%.

* If a basic rate taxpayer received a dividend, there was simply no more tax to pay (same as Singapore or HK) because the company had already paid 20%. (Ignore the bullshit with the 10% tax credit and the 10% nominal rate, it worked out at nil, unsurprisingly).
* If a basic rate taxpayer took a salary bonus, the employer took 20% income tax via PAYE and the employee had no more income tax to pay.
* If a basic rate taxpayer received an interest payment, the company paid over 20% withholding tax/income tax on a CT61 and the individual had no more tax to pay.

* If a higher rate taxpayer received a dividend, he had to pay 25% income tax on the dividend, so the overall rate was 40%. Remember - company earns £100, pays £20 corporation tax, pays £80 dividend, individual pays £20 income tax and nets £60. (Ignore the bullshit with the nominal 10% tax credit and the 32.5% nominal rate, it worked out at 25%).
* If a higher rate taxpayer took a salary bonus, the employer took 40% income tax via PAYE and the employee had no more tax to pay, net pay £60.
* If a higher rate taxpayer received an interest payment, the company paid over 20% withholding tax/income tax on a CT61 and the individual declared the gross amount and paid a further 20% of the gross amount, net interest £60.

Osborne and Hammond then busily messed up this state of affairs and now you have to do the three calculations each time to see 'what's best for tax'.
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There are lots of other wrinkles...

* Pension funds can receive interest or rent truly tax-free, but receive dividend payments out of after-tax income. It would make more sense to tax all sources at a flat, lower rate, so that they get some refund of the corporation tax on dividends but pay some tax on interest and rental income.

* Some companies have large tax losses (R&D tax credits, Film Tax Credits etc) but have distributable commercial profits, so are advised to pay dividends so that shareholders get the (slightly) lower income tax rate that applies to dividends.

* Some companies don't have distributable commercial profits, so aren't allowed to pay dividends, but can still pay salary bonuses or interest.

In a perfect world, therefore, dividends, interest, rent and wages would be taxed exactly the same way i.e. there would simply be a flat withholding tax at the same rate on each when the company pays them out.

We used to do this for dividends (Advance Corporation Tax);
Banks used to withhold 20% income tax from deposit interest;
Non-banks still have to do it for interest payments (CT61s);
PAYE applies to wages;
CIS deductions apply to sub-contractors in the construction industry;
and tenants with non-resident landlords are supposed to, by default, pay 20% of the rent to HMRC and pay the landlord the balance of 80% (though most wriggle out of this).

You wouldn't even need to bother having special rules for foreigners and there would be no need to distinguish whether it's wages, rent, dividends, interest, sub-contractor payments etc. It could all be included on one return/reporting system and paid to HMRC in one payment. As a final flourish, dividends paid net of tax would be an allowable expense for corporation tax purposes.

Individuals who have to submit income tax returns (i.e. higher rate taxpayers) can then just enter all 'net of tax' payments in one box and pay the same tax rate on the lot, minus the credit for income tax withheld at source.

Here endeth.

Gloriously muddled thinking on corporation tax.

Article in City AM this morning by John Penrose MP who "is Jeremy Hunt's policy guru".

After some fawning drivel about the German Mittelstand and dissing of UK businesses...

The OECD says that corporation tax is the most damaging and distortive, stopping investment flowing to wherever in the economy it is needed most.

This is clearly nonsense. Tariffs and turnover taxes (VAT) are the most distortionary and damaging taxes. Things like currency controls and foreign ownership restrictions (which the UK doesn't have, by and large) are awful non-tax distortions.

The distortionary effects of corporation tax are minimal:

Our businessman has some money to invest in starting or expanding his business. He ignores tax, and identifies Project A with an expected 20% return on investment and Project B with an expected 10% return on investment. He chooses Project A.

His accountant reminds him that he'll have to pay corporation tax on his profits, so actual expected returns are only 16% for Project A and 8% for Project B. The businessman will still choose Project A; corporation tax makes no difference for decision making purposes.

Also, UK plc pays twice as much in cash dividends to shareholders as it pays in corporation tax. If they really needed to retain cash for re-investment, they'd pay lower dividends.

At the moment, we've only got ourselves to blame, because our company tax system rewards firms which borrow much more than ones that invest... So why not reverse the incentives? Stop rewarding borrowers so lavishly and encourage investment instead? It would be fairly simple to do; we could make capital expenditure fully tax deductible as soon as it is spent, and stop company debt interest being tax deductible.

How thick is he? "Borrowing" is money coming in to the business and "investing" is money leaving it. These are completely separate things and have nothing to do with each other.

For example, a company could borrow from a bank and spend it on expanding the business. Does he count this as borrowing or investing? Similarly, it could borrow money without investing it (paying the cash out as dividends or a share buy back); or it could expand the business out of retained profits without borrowing.

The UK corporation tax system is pretty neutral on all this. If a company borrows from a UK bank, it gets a tax deduction for the interest paid and the bank pays an equal and opposite amount of tax on the interest it receives. If one company invests in shares of another, dividends paid on those shares are not an allowable expense of the paying company but are exempt from tax for the investing company. Both of these are completely tax neutral overall.
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UPDATE - to illustrate
Co A lends to Co B, receives £10 interest
Co B saves £2 tax (tax relief on interest paid)
Co A pays £2 corp tax on interest income
Co A ends up with £8 after tax.

Co A invests in Co B, receives £8 dividend
Co B makes £10 profit that 'belongs' to Co A, pays £2 corporation tax
Co B pays £8 dividend out of post-tax profits
Co A receives £8 dividend, on which it does not have to pay tax.
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He also has a very old fashioned view of modern business. Sure, some businesses make massive investments into physical plant and machinery. But by and large, businesses spend a lot more money on other things which help them grow - market research, R&D, staff training, advertising, renting larger premises and taking on more staff etc.

Such expenditure is fully allowable as a tax deduction when incurred; small businesses can claim 100% first year capital allowances but larger businesses are stuck with laughable 8% or 18% reducing balance capital allowances on qualifying items. So for this and many other reasons, 100% first year capital allowances for all businesses large or small are a good idea as it levels the playing field. So he's right for the wrong reasons - there is no particular reason to assume that the overall amount spent on plant and machinery would go up much.

Treating interest payment as a distribution of profits rather than as an expense is also a good idea, but not for the reasons he gives. The flip side would have to be that lenders don't pay tax on the interest they receive, so overall, the effect would be minimal; interest rates would just fall to the net of tax amount.

Economic myths: "It's all about lack of supply"

I was involved in another Twitter spat recently with a Faux Lib who insisted that high house prices are all about lack of supply.

Despite our best efforts, he was ignoring logic and facts, so I'll try to explain again why it is nonsense (for my own sanity and for future reference).

OK, first you have to understand the rent-setting process, which I covered here in a separate context (why a Universal Basic Income would not change rents).

It is easily observable that differences in average rents between different areas are pretty much equal to the difference in average wages between areas (plus or minus lots of other things, like nice/poor views, good/bad state schools, ease of commute, but average wages are easiest to quantify so let's stick with that).

To simplify the example, a country has a low wage Area A and a high wage Area B. Averages wages in Area B are £10,000 higher than in Area A, so average rents in Area B end up £10,000 higher than in Area A. This is because people will move from Area A to Area B to earn the extra £10,000, provided the extra rent they have to pay is no more than the extra wages of £10,000. If the difference were greater, people would move from Area B back to Area A, so there is an equilibrium where the higher rent soaks up the higher wages.

The location rent in Area A is zero; the rent you pay in Area A is just enough to justify maintaining existing stock with no surplus. Even in the wealthiest countries in the world (excl. city-states) you will find areas where the location rent is zero and you can buy homes for less than they cost to build, that's just a fact.
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Let's assume they build more homes in Area B. So people will move from Area A to Area B for the same reasons as before. Let's assume that this migration has no effect on average wages (agglomeration benefits mean that average wages will go up in the medium term; it could be argued that new comers will be slightly less skilled than current residents, so overall let's assume no effect).

The average location rent in Area A can't fall below zero and the equilibrium difference in rents is still £10,000, and there is no change in rents in Area B, despite the additional supply.

You can build as many new homes in Area B as you like. Even at peak capacity, new construction will only add a couple of per cent to existing housing stock and people can move just as fast as new homes can be built (at least ten per cent of the population move home each year, against a three per cent increase in housing stock, let's say) and the equilibrium will always re-establish itself.
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Circling back to real life, the Faux Libs claim that rents in London are only so high because of lack of supply. What they are saying is that people in London pay £15,000 extra in rent to be in an area where wages are only £10,000 higher. That is clearly nonsense - most people who move to London are in their twenties and they move there because they want to be better off. It is madness to say that people move to London to be worse off (they might take it on the chin short term, i.e. do an unpaid 'internship' but not medium or long term).

UPDATE, James Skillen posted this chart, saying it supports the idea that there is a need for more housing in London:


Maybe there is, maybe there isn't, that's not the issue here. If you do the maths, you will find that net incomes after paying rent are pretty much flat in absolute £ terms across the UK, which is a basic law of rent and the basis of the whole thing. For example, London wage £30,000 minus rent £15,000 (50% of wage) leaves £15,000 disposable. North East wage £20,000 minus rent £5,000 (25%) leaves £15,000 disposable.
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What is slightly more interesting is to look at Area A once some people have moved away. There are now more households than homes.

Two things can (and do) happen:

a. People spread out a bit; people leave home at a younger age; unhappy couples are more likely to split up etc. So the average number of people per home goes down a bit, and you can now rent more home for the same money - which discourages people from moving to Area B, so the effect is weak.

b. Less desirable homes in less desirable parts of Area A are simply abandoned. Once a couple of homes on a street are left empty for long enough, there is a domino effect and after a few years the whole street or whole estate is almost empty. For every new home built in Area B, one home is abandoned in Area, so the process is only gradual.

These abandoned homes simply fall out of the equation; they are no longer homes and can be ignored - it would be like including the selling price of beat-up MOT failures in a scrap yard when calculating the average price paid for second hand cars. The remaining people in Area A all end up occupying the same amount of housing and paying the same rent as before in the parts which have not been abandoned. The equilibrium rent difference between Area A and Area B is maintained.
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Whichever way you twist it, either you accept the simple logic of the rent-setting process which is easily observable in real life (comparison of average wages and average rents) - or you believe that people will move to a high rent area, knowing full well they will be permanently worse off; or will not be tempted to move to a low rent area if it made them permanently better off.

Value Added Tax is quite literally a tax on "value added". Why do people not think about what "value added" means?

The Tory wannabes are trotting out their tax plans, and a couple have mentioned looking at VAT (Michael Gove, article by Sam Dumitriu, and Rory Stewart, via @Sam_Dumitriu).

(Wow, Rory Stewart has "land value tax, at least for business and agricultural land" in his 'good' column and "business rates and no land value tax" in his 'current taxes' column. That's his leadership chances flushed down the toilet).

Gove and Stewart are politicians and don't know or care about economics. Dimutriu ought to know better and is the bigger fool for it. He goes along with the Big Fat Lie that VAT is some sort of harmless tax on 'consumption' or 'indirect tax' which does not affect production.

Let's take a step back and agree that income tax/NIC are taxes on wages or earnings and corporation tax is a tax on corporate profits. Their effect is pretty much the same, the percentage rates and administration is just different.

I trust we can also agree that workers and businesses 'add value', and the more value they add, the more tax they pay. So income tax, NIC and corporation tax are literally taxes on added value.

Value Added Tax  is just more of the same!

We reach an equilibrium point between gross selling prices, net wages after tax and net profits after tax, that point is fixed by the overall tax wedge. Shuffling between these four taxes makes no difference to VAT-registered businesses.

It would make no difference to gross selling prices, output, net wages or net profits (of VAT registered businesses) if we:

a) went to one extreme and scrapped VAT and increased taxes on wages and profits; or

b) went to the other extreme and scrapped income tax, NIC and corporation tax and increased VAT to a very high rate.

Here's a worked example for a typical sort of VAT registered company, which sells output for £120 gross; pays £36 to VAT registered suppliers, pays gross wages (incl. employer's NIC) of £50; employees receive net wages of £30; and has profits before corporation tax of £20.

Current system, with VAT

Gross sales.......................£120
Paid to HMRC as VAT.....(£14)
Net sales............................£106
Paid to suppliers, net.....(£30)
VAT paid to suppliers
and passed on to HMRC...(£6)
Gross wages......................(£50)
Net profit before tax..........£20
Corporation tax @ 19%.....(£4)
Profit after tax.....................£16

No VAT, 17% extra Employer's NIC and 38% corporation tax

Gross sales.........................£120
Paid to suppliers...............(£36)
Gross wages.......................(£50)
Extra Employer's NIC
£50 @ 17%...........................(£8).
Net profit before tax.........£26
Corporation tax @ 38%...(£10)
Profit after tax....................£16

No income tax, NIC or corporation tax, VAT at 46%

For the non-mathematically minded, net sales £82 x 46% = £38; £82 + £38 = £120, so gross sales £120 as before.

Gross sales........................£120
Paid to HMRC as VAT......(£38)
Net sales..............................£82
Paid to suppliers..............(£36)
Tax-free wages.................(£30)
Tax-free profit....................£16
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The idiots out there think that because sellers can split the total selling price up into 'net' and 'VAT' that magically, consumers pay it.

If that were true, businesses could simply split the selling price into 'net', 'corporation tax' and 'VAT'. Would the idiots then believe that businesses don't pay corporation tax?

Do we benefit from low wages in other countries? Discuss!

TBH had a discussion with X (name escapes me) recently, which raises some interesting topics which we thought might be of interest. It went along the following lines:

X: "It is wrong for developing countries to subsidise their exports and dump cheap goods in developed countries. That hurts the non-subsidised businesses and their workers, as they are paying extra taxes to fund the subsidies which benefit exporters and overseas importers"

Non-contentious so far.

"This also unfair competition for businesses in developed countries, and business failures lead to unemployment. Therefore it is OK for developed countries to impose tariffs on such goods to cancel out the subsidies."

TBH, disagreeing: "Trade is always good, tariffs on trade are always bad. If we can buy cheap steel, cheap cars, short-term that is bad for our domestic steel or car makers and their workers; medium term it means we can move to producing higher value-added things instead, so overall is a win for us. Imposing tariffs does not help the people being oppressed in other countries, it just means that the benefit of the overseas subsidies goes to our government instead of to us as consumers."

In which I would agree with TBH. You can extend X's logic to any cheap imports from low wage countries, so it is clearly wrong. Who's going to make the decision whether
a) goods from a certain country are cheaper because workers are being exploited; or
b) goods from a certain country are cheaper because they are more efficient?
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But something else I have been mulling over is the widely held assumption that we benefit from low wages in developing countries because we can buy cheap stuff. The price of clothing or bog standard new cars has not increased in nominal terms for decades.

Which looks like a very good thing to me. Some go further and 'worry' about the day a few decades hence when wages and prices in e.g. the Far East have risen to Western levels.

Why is that a bad thing? When that day arrives it will be because business and workers in those countries are producing more stuff, either more of the same stuff or more value-added stuff.

So there's more stuff to go round; Westerners will be getting a smaller share of a much larger pie. Overall, people in the new developed countries will be better off (clearly) and people in the old developed countries will also be better off (however marginally).

Therefore, the conclusion must be that while we benefit from low wages in developing countries (first discussion) and shouldn't impede that with tariffs and quotas, we'll benefit even more once their wages have risen to our levels (second train of thought).

Allowing free trade* with developing countries is the main thing we can do to help them develop; once they have developed, even X's weak argument for tariffs and quotas falls away, so it's game set and match for free trade, as far as I can see.
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* "Free trade" does not mean developing countries should be forced to allow Western imperialist capitalists (mainly banks and miners), to steal assets, generally rent seek and wreck developing countries of course, quite the opposite.

"How to View the World like an Economist"

Something in an article that was in City AM a year ago has been bugging me ever since.

Most of it is good stuff...

When a politician blithely commits to “making childcare higher quality”, you wonder how much any new regulation of the sector will push up prices, and hence make formal care less affordable...

When Jeremy Corbyn states that the existence of profits in certain industries means lower prices could be delivered under nationalisation, you consider whether public ownership is more likely to become captured by producer interests or suffer from worse profitability.

When governments continually tell us that HS2 will be “good for the economy” because the economic benefits exceed the costs, you consider whether other investments, such as road schemes in areas with bottlenecks, would generate even higher returns.

When someone calls for banning plastic bags for environmental reasons, you think about what the effects of paper bags are for the scale of landfill sites, or the health impact of repeat use of linen bags given hygiene risks.

Agreed to all that. But his first real life example is a very bad one:

Remember when the coalition government’s policy of “free” school meals for five to seven year-olds was announced in 2013?

Campaign groups rallied to praise the £600m commitment, claiming it would enhance educational attainment, based upon results from narrow pilot schemes. It was only economists who seemed to question whether this spending really obtained the best bang for the buck to increase attainment, or whether the money could be better used in other departments — or even, heaven forfend, be left with taxpayers.

Of course those lunches aren't "free", that's a nonsense. But the alternative is not 'leaving the money with taxpayers', it's making the self-same taxpayers make their kids a packed lunch or give them some lunch money for the school canteen.

In the grander scheme of things, funding basic* school lunches for all kids out of progressive taxes (income tax or LVT) ticks all my boxes:

1. It's like a Citizen's Income, non-means tested and mildly redistributive downwards. Vastly better than means-tested "free school meals" for a minority with all the stigma, cheating and administrative hassle.

2. Saves parents the hassle of sorting out a packed lunch or remembering to give their kids some lunch money, which they might or might not spend as intended (or have taken off them by school bullies).

3. It must work out much cheaper per meal if the school bulk-buys and everybody gets the same.

4. ... so it's not necessarily worse value for a better-off parent. They pay £5 extra tax and their kid gets a school dinner costing £2.50., but in the absence of school-lunches-for-all, they might end up paying £5 anyway (or spending a bit less than that but wasting ten or twenty minutes a day sorting it out). They've lost nothing and low-income parent is up £2.50.

5. It is good for solidarity between pupils, they all get the same. School lunches a bit crap? Every kid can moan about it equally, same as moaning about having to wear a school uniform. Best kind of quality control is, teachers sit in the same canteen and eat the same meals as the kids (they did that at my school).

6. It protects kids with low-income or lazy/forgetful parents from being humiliated by the lucky kids with posh lunch boxes/lots of lunch money.

7. At the margin, it helps educational attainment of kids with low-income or lazy/forgetful parents. It's difficult to concentrate when you are hungry, as the advert says. And has similar health benefits.

* The word "basic" is important here. Funding fancy school trips abroad for all would clearly be a total waste of money.

"Trust me, we’ve been thinking about market power and competition all wrong"

... says Ryan Bourne in City AM.

Well, no we haven't, but he makes a good point about one specific topic - that there is a difference between national and local market power/concentration:

Back in the 1950s, many UK villages and towns were served by a single grocer, butcher, and baker. These independent local stores would, in effect, be local monopolies, but had tiny share of the market for the whole country.

Today, major supermarket chains have gone from strength to strength, exploiting economies of scale and creating cost-effective distribution systems. Tesco, Sainsbury’s and others serve hundreds and thousands of locations, while engaging in cut-throat competition with each other.

As a result, at a national level the supermarket industry looks highly concentrated. The biggest four firms had 72.3 per cent of the market in 2016. But at a local level, many areas have seen huge increases in competition. They are now served by at least two supermarkets, as well as other stores, instead of the local monopolies of the past.

Or to put it another way, let's assume each town/area is served by two of the big supermarket chains. They are in competition and the consumer benefits. If the government were to force the big supermarket chains to close half their outlets, this would clearly reduce their national market share, but their remaining outlets would face less competition in all the towns/areas which are now only served by one large supermarket, and the consumer loses out.

"Lies, damned lies and rent statistics"

Fine article by Ian Mulheirn, who is one the heroic few pointing out that the "lack of housing supply" explanation for high prices is a bit of a myth. Sure, selling prices have rocketed, but that's largely due to easy credit availability/low interest rates. The true measure of housing costs is of course rents. They have shot up in London/south east over the last twenty years, but that's due to higher wage differentials and not lack of supply. Overall, they'd been pretty flat.

The housing supply numbers commonly used and, until recently, the housing need numbers bandied about, have long been wrong or misleading. Given the importance of rent — the ‘price’ that tells us whether demand for housing services is outstripping the supply — using the right measure of that is particularly vital...

Unfortunately [the ONS Index of Private Housing Rental Prices] only goes back to 2005. However, combining it with the prototype index for the UK prior to 2005— albeit based on a much smaller sample —suggests that real like-for-like rents have been pretty benign since 1996, and comfortably below average household income growth.

The Disappearing Homes Conundrum

I commend a fine article, backed up with logic and hard numbers by Generation Rent.

What happens to rents if landlords exit the market? Nothing.

Unsurprisingly, their research shows that average rents paid fall slightly, because it is higher earning tenants who are most likely to become owner-occupiers, and they were the ones paying the higher rents.

Either the observations are wrong or the theory is nonsense.

The observations

1. The larger the conurbation-the denser the population-the better the links to other places, the higher the average productivity-wages-profits. This is partly because of synergies-specialisation-agglomeration benefits; and partly because higher wages at the top of a pyramid depend on how wide the base of the pyramid is. This pulls up the overall average while widening the difference between top and bottom. The fag packet calculation is double the size of a conurbation and average wages go up by 5%.

2. Within any country, there is free movement of people and workers. Between leaving home and 'settling down', plenty of people are willing move from lower wage to higher wage areas. Once all housing in the higher wage area is occupied, this pushes rents up to the point where a new equilibrium is reached and the rent differential is equal to the wage differential. At this stage, there is little financial advantage in moving and net internal migration falls to a trickle.

3. This is easily measured by looking at average wages minus average rents in different regions of any country, this 'basic minimum' is much the same anywhere.

See for example here

(Clearly, rent and wage differentials between countries if there is no free movement of people and workers between them can be sustained almost indefinitely.)

Anybody who disputes this can leave the conversation right now.

The theory

1. Supply of housing is kept below its optimum level by one or more of the following:
i.  Councils' planning departments (for reasons unspecified) not handing out enough planning permissions.
ii. NIMBYs putting political pressure on councils not to hand out planning permissions.
iii. Land owners holding on to land as long as possible to bank the biggest gains.
iv. Home builders restricting new supply to keep prices up.

Choose your favourite according to political bias!

2. Housing is a perfectly ordinary good, like coffee beans, cars or carpets. If there is an increase in supply, prices will fall, and vice versa. This is easily observable in the short term, like if there is a coffee glut, or in Germany post-unification when East Germans sick and tired of Trabis, were itching to buy decent second hand VWs and second hand car prices doubled for a year or two. This levels off very quickly, as manufacturers make a certain minimum profit margin. Any less than that and some go out of business, any more than that and they manufacture more, or new players enter the market.

3. Therefore, if somehow home builders/land bankers could be persuaded to increase output (despite it being against their interest to do so), prices and rents would fall. Simple, 'housing crisis' solved! Duh, why did nobody think of that before?

(I always ask these people, OK, if it's all about supply, and there are more homes within the M25 than in the whole of Scotland, why are prices so much higher within the M25? None has ever answered that, the closest they ever get is 'it's different this time'.)

Either the observations are wrong or the theory is nonsense

OK, let's measure 'affordability' in terms of how much disposable income working tenants (actual or potential internal migrants) have left over after paying rent ('the basic minimum'). We know from observation that within any country or area with freedom of movement, this is pretty much the same everywhere and however many homes there are in any area, the basic minimum will still be the same all over the country.

(This is why people at the bottom of the wage pyramid in a wealthy country are negatively impacted by freedom of movement - they are competing for jobs with people with a much lower basic minimum expectation, who are happy to accept lower wages or pay higher rents).

This is where is becomes nigh impossible to reconcile the theory to the observed facts:

Probability A. We increase supply of homes in high wage-immigration areas, there will be more agglomeration benefits = higher average wages, so the trajectory is that rents there will increase rather than fall. Assuming that in emigration areas there is the opposite effect and wages fall, then the basic minimum must fall. This actually exacerbates the whole thing.

Possibility B.We increase supply of homes in high wage-immigration areas, people move there but there are no agglomeration benefits. Wages, and hence rents, and hence affordability stay the same.

Possibility C. A greater mind than mine can actually reconcile the theory with the observations.

Economic Myths: Supply and demand - planning permission vs Premiership football players

The usual suspects keep insisting that if we abandoned all planning restrictions, then the value of land would fall. "It's simple supply and demand, innit?", they sneer.

Clearly not true, but I can't be bothered explaining how land prices arise in real-life for the umpteenth time, so let's use an analogy:

1. 'Demand' for footballers (as measured in £££) is mainly all the people who subscribe to Sky Sports, so Sky Sports is prepared to bid a lot of money for Premiership TV rights; it needs that content to get the subscriptions.

2. Premiership clubs can hold out for huge sums of money (or else they sell to the BBC or ITV or whoever).

3. Premiership clubs in turn need the best 200-300 football players they can afford (to stay in the Premiership). There can be - by definition - only 200-300 of such players, so the best 200-300 players can in turn hold out for huge sums of money i.e. all the club's receipts minus the actual costs of maintaining the stadium, selling tickets and so on.

4. It would be fatuous to say that Premiership player wages are so high because there is a lack of supply of footballers. Tens of thousand of people play football regularly with a reasonable degree of skill and proficiency. Premiership players aren't actually much better than the average, they just have to be in the top 200-300.

5. It is not the skills of the players (in absolute terms) which dictates their salaries (they are not ten or a hundred times better than First Division players in the 1970s or 1980s), is is the fact that Sky Sports can monetise what you used to be able to watch for 'free' on the BBC/ITV.

6. Thought experiment: all Premiership players are in the same aeroplane crash and die. So Premiership clubs quickly go out and recruit the best 200-300 players who are left. By definition, these players aren't quite as good as the recently deceased but they can still hold out for the same salaries.

In case people don't get the analogy:

* Contracts with a Premiership team = the best locations
* Contracts with a Championship team = the next best locations
* All the way down playing for your local pub team = zero location value (in £££)
* Premiership players = people who 'own' the best locations = rent collectors/landlords (If a landlord dies or sells, the next owner collects the same amount of rent.)
* Increasing supply of footballers/number of teams in lower divisions has no impact on wages further up the chain = liberalising planning laws increases value of the land now unburdened, but has no impact on value of more favourable locations (which were developed first).

Economic myths: The impact of increasing government spending on economic growth

A sane person can tell the difference between government spending/activities which help the economy; which harm the economy; and which are just transfer payments (welfare, which in turn can either help, harm or be neutral). The avowedly non-partisan economics help gives some examples in each category and attempts to explain why.

As per usual, the lefties want more government spending/bigger government and claim that nonsense like the 'multiplier effect' will help grow the economy; and the right wingers (claim to) want lower government spending/smaller government and claim that this will help the economy.

Neither side distinguishes properly between good, bad and neutral government spending/activity, and both sides put forward their supposedly empirical studies showing whatever it is they want them to show.

What strikes me is that these studies, however scrupulously done, are missing the point - they are confusing cause and effect i.e. countries have generous welfare systems because they are wealthy; countries are not wealthy because they have generous welfare systems. With infrastructure, it is a a feedback thing, the government has to push through roads, sewage systems, national grid to get things kick-started, which then creates more wealth that can be spent on improving them.

So the overall tendency in democratic countries is for government spending to increase as a proportion of GDP when the economy grows. Whether you think this is a good thing or a bad thing is an entirely different topic, but I suppose it's just human nature. Voters want stuff and politicians love bribing them with their own money. The more surplus there is above the subsistence minimum, the more can be collected in tax without triggering a revolution.

Economic Myths: "Government loses £2.1bn on RBS stake sale"

From the BBC:

The government has incurred a loss of £2.1bn after selling another tranche of shares in Royal Bank of Scotland. The shares were sold at 271p each, almost half* the 502p a share paid in the government's bailout of RBS a decade ago when it rescued the bank at the height of the financial crisis.

Clearly, the government did lose money, but that money was lost/wasted ten years ago when the government bailed out RBS. The government did not lose a penny on the sale itself, it merely converted shares worth £2.71 into cash of £2.71.

* The phrase "almost half" is totally misleading as the government sold the shares for more than half of what it paid for them. It would, however, be correct to say "The shares fell in value by almost half".

This leads me on to something else which annoys me. Let's say Object A weighs/has mass 1 kg and Object B weighs/has mass 2 kg. It is fine to say that B is twice as heavy as A, or that A is half as heavy as B. It is also OK to say that A is lighter than B. But for some reason, a lot of people say that A is "twice as light as B", which is nonsense. You can't use a comparative with an adjective meaning light, small, short, near etc, only with adjectives meaning heavy, large, long, far away etc.

Economic Myths: "Younger generations to pocket £1trn of inheritance in next decade"

Prompted by @henrypryor, commenting on the headline that "Bank of Mum and Dad is ninth-biggest lender with £6.5bn loans":

The madness continues - mum & dad are lending money to their kids so their kids can afford to pay the prices demanded by mum & dad & their friends. It’s like a giant Ponzi scheme but but where the victims are your children.

The flip-side is nonsense like this:

Rising wealth and higher mortality rates will help raise the total value of inheritances to £1 trn over the next decade, according to a leading think tank...

A report by the think tank and estate administrators Kings Court Trust found that the 66% increase in intergeneration wealth transfers will be heavily driven by the rise in property prices over the next decade. Over the past 20 years, house prices have risen by 273%.

The next generation, will collectively, inherit pretty much nothing overall.

The point is that rising house prices make home-owners appear/feel wealthier but also make today's would be owner-occupiers actually a lot poorer.

Think about it.

If house prices halved to something sensible, like their long run range of between three and four times earnings, every would-be owner-occupier couple would be £150,000 - £200,000 better off as a result, today, right now, whether their parents are poor or wealthy, owner-occupiers or tenants. And parents wouldn't need to worry about 'helping their children onto the property ladder'.

For sure, there will be a few lucky people who inherit a Buy-to-let portfolio and no longer need to contribute to wealth creation (i.e. go to work), but on average, people will inherit a fraction of a house when they are in their forties, enough for a decent deposit, but still leaving them hugely out of pocket overall. They will have been paying rent for decades and they will still need to take out a large mortgage that will take them until retirement to pay off.

Ergo, if something makes the next generation worse off overall, how can they be said to be 'inheriting' such colossal sums every year? The net result is that a minority will become ever wealthier and the majority will be poorer.
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In case anybody is wondering why I hadn't posted anything for a week, it is because I was embroiled in 'GDPR compliance' most of last week, which means basically 'tidying up and filing every single bit of paper on your desk'. I had a bit of a backlog and there were about three-thousand of them, not that I counted but the pile was about ten inches high. This turned my brain to mush and the lovely weather doesn't help :-)

Economic Myths - imposing a minimum wage will always lead to falls in employment and output

Opponents (broadly, "right wingers") say that wage levels are set in a competitive market, so if the minimum wage is higher than this, this will cost jobs and reduce output. Defenders of minimum wages (broadly, "left wingers") say that it levels the playing field between exploitative employers and exploited workers and insist that any small fall in employment is a price worth paying.

Each side puts out their studies which purport to prove their theory. I'm not really convinced by either set of 'facts' as people are highly selective and tend to find what they are looking for.

(I personally am heartily indifferent about the National Minimum Wage, my view being that the best guarantee of workers' rights is a growing economy and full employment - i.e. get rid of VAT and supertaxes on employment income such as National Insurance Contributions. We can back this up with a Citizen's Income, which strengthens the bargaining position of potential workers slightly, especially when it comes to low-wage jobs.)

I have recently stumbled across a theory that says, evidence shows that the negative impact on employment and output was not only nowhere as bad as the doom-sayers predicted, but that in some situations, imposing a minimum wage can actually increase employment and output.

Sounds very counter-intuitive, but actually it makes sense. This is because most businesses have some monopoly/monopsony power (they are two sides of the same coin).

Let's start at the very beginning with a business in a perfectly competitive market where labour is the only variable cost with a given supply curve and a given demand curve. The level of output of the business in question would be 9 units, wages £10.40 and selling price £11, being the highest level of output before the business tips into losses:



The columns for marginal cost and revenue are the total cost/revenue at that level of output, minus the total cost/revenue if one unit less were produced and sold. The relevance of this will be explained further down.

(I am perfectly aware that no business knows exactly what its marginal costs per unit are, let alone what its marginal revenue per unit it, and that most businesses do some sales at a loss, whether by accident (budget overrun or customer doesn't pay) or by design (loss leaders). Nonetheless, businesses must have some collective intuitive grasp of this or they'd all be bankrupt. 'Home builders' are the crassest example of this, in the short term, more supply depresses prices and costs would increase rapidly).

So if a minimum wage of £12 is imposed, the business in a perfectly competitive market has to reduce output to 8 units, wages £12 and selling price £13, being the highest level of output before the business tips into losses. This is bad, and what the opponents predict:



As we well know, most businesses have some monopoly power (can restrict supply) and, especially if there is permanent un- or under-employment, a stronger bargaining position than potential employees, which we shall consider monopsony power for the purposes of this debate.

Such businesses (or industries) do not end up setting prices at just above costs, which is the optimum position for the economy as a whole. They choose the level of output which maximises profits, and you can't fault them for that. Some interpret this to mean that businesses (should) set output at the level at which any further increase in output means that marginal costs would exceed marginal revenue.



So this business restricts output and employment to 5 units sold for £16 each, total profits £44, wages of £7.20 per hour. There's no point going to 6 units - marginal costs £12 exceed marginal revenue £10 and profits would fall.

What happens if the minimum wage is set at £8 per hour? While average wages go up, the marginal cost goes down to a flat £8 for the first six units of labour. The new profit-maximising level of output is now 6 units sold for £15 each, total profits £42, wages of £8 per hour.

Higher wages, more jobs, more output, lower prices and monopoly profits (rent) shaved back a bit. What's not to like?



Yes, I know this is all hypothetical, but there are simply too many studies showing that there is no measurable negative impact of minimum wages on employment levels to simply be dismissed out of hand, however biased the authors. So I think that there is something in it, however difficult it is to explain.

Or maybe both sides (left wingers and right ringers) are half-right and the extra jobs in monopoly businesses cancel out (or outweigh) job losses in competitive businesses. This would still be a good thing, if those competitive businesses are only competitive because wages are depressed.

Economic Myths: The costs of moving home are a benefit to the economy.

Estate agents and other assorted Home-Owner-Ists have an irritating argument against Stamp Duty Land Tax. Here's a random example from bdaily.co.uk:

“Current stamp duty levels are a tax on free movement in London and it is massively disappointing that the Chancellor has chosen to ignore this. Families who want to buy a family home in London, perhaps moving from one area to another to buy a larger home for a growing family or to be closer to schools or work, are being penalised and many are opting to stay put to avoid paying punitive stamp duty in the £1.5m to £3m price bracket. 

"The upper price brackets of a family home in central London, between £5m and £10m, are being hit with an aggregate of 15 per cent. This has reduced transactions substantially, impacting on the level of tax collected by the Government and is therefore damaging the economy.

"In addition, there is an entire eco-system built around moving house, from removals companies to furniture suppliers, from interior designers to painters and decorators. All these businesses are being hit by the Government’s refusal to reform stamp duty.”

Putting aside the London-centric wailing about people 'trapped' in £1.5 to £3 million homes and the notion that you need interior designers, it is the last bit that rankles.

If those things happen because people are moving home, they are a straightforward cost, they are a loss to the economy. Family A likes plain white walls and Family B likes dark wallpaper. If they swap homes, Family A has to strip the dark wallpaper and paint the walls white; family B has to buy a load of dark wallpaper and stick it up, merely to reinstate the status quo. Net gain to the economy, zero.

It's the broken window fallacy. If the estate agents' argument stacks up, it would benefit the economy if you weren't allowed to take any furniture with you when you move, you'd have to chuck it in a skip and replace it all. More money for the furniture industry! Must be good?!

The real benefit of people moving home is that they are putting land/location value to more efficient use/squeezing more value out of it each time they move.

Let's assume that the two families swap places because Family A lives in town/suburb 1, but most of them have a job/go to school/like to go shopping in town/suburb 2; Family B live in town/suburb 2, but a majority have a job/go to school/like to go shopping in town/suburb 1.

If they swap places, then the two families save in total several hours a day on commuting. They save time, save money, reduce congestion, reduce pollution, have a few more minutes in bed/at home in the evening; are more likely to be at work/school on time etc. Commuting costs ten or twenty per cent of GDP (if you just compare time spent commuting vs time spent at work.school), so hacking it down must be good.

Those are the benefits of moving home, which - we have to assume - by and large outweigh the cost and hassle, or else people wouldn't do it.
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All of which is an argument for replacing Stamp Duty Land Tax with Land Value Tax. Instead of discouraging people from putting land (i.e. roads, amenities etc) to more efficient use, it encourages people to constantly weigh the benefits and costs of moving to somewhere more convenient; it increases the benefits of moving and reduces the up front (tax) cost. Whereby an arbitrary tax like that is in itself not a cost - it is the dead weight cost of staying put instead of moving that is a true cost/loss.

The Homeys of course then flip the logic, and wail that Land Value Tax would 'force' people to move home who don't want to. Well duh, it's market forces at work - LVT is only ever as high as it is because some other household is prepared to pay the extra LVT to live there and make the better use of the available amenities.