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.

Why is it called a "clutch" pedal?

I inadvertently ended up watching YouTube videos of people teaching a partner or relative how to drive a manual car, and it reminded me how stupid it was to name it a clutch pedal.

You want to accelerate? Press the accelerator. You want to brake? Press the brake. That's easy.

The instructor doesn't need to say "Press the brake!", they just say "Brake!", ditto "Accelerate!".

But what on earth is "clutching"? If anything, the pedal does the exact opposite of that. What it does is "temporarily disconnect the engine from the gearbox so that you can change gears", which is unfortunately a bit of a mouthful and not something the instructor can bark at their student when the car is about to stall.

Any ideas for a better name? Preferable a verb that is also a noun (like 'brake') or a verb that can be turned into a noun by adding an -r at the end (like 'accelerate/r'). It would make teaching/learning to drive so much easier.

Update. The best I can come up with us "release", can be a verb or a noun, when the instructor shouts "Release!" you hit the release (pedal) and it releases the gear box from the engine.

"It was those pesky Victorians!"

From The Metro:

"Everything is late at Waterloo because they slowed trains down to as little as 20mph to avoid buckling the rails," said travel expert Simon Calder.

"Thirty degrees is not something that should trouble infrastructure, but it’s very frail. The Victorians built it and we are doing what we can."

Most of the planning and layout is from the 19th century, but the actual rails are replaced every ten years or so, so this is a pretty pathetic excuse.

"Bulls escape field and cause havoc in Godinton Park, Ashford"

From Kent Online:

One resident said: "The bulls came from the field behind me, I don’t know how they got out. They walked up the road, stopping traffic and damaged one resident's car and ate the flowers in his garden."

The bastards! You can polish a dent out of a car but they'll never get the flowers back.

Unintended but inevitable consequences

From the BBC:

Donald Trump has criticised the Harley-Davidson motorcycle firm over its plans to shift production away from the US in order to avoid European Union tariffs.

Ahem, the actual sequence of events was:
1. Trump imposes tariffs on imports to the USA, including from Europe
2. The EU imposed similar tariffs on imports from the USA
3. Harley-Davidson did the sensible thing.

From City AM:

BMW has indicated it could be forced to close its plants in the UK if it is unable to import components rapidly enough from the continent after Britain leaves the EU...

The warning from the car manufacturing giant comes hot on the heels of similar expressions of concern by Airbus and Siemens over the slow progress of the Brexit negotiations.

Last week, Airbus warned it could leave the UK in the event of a hard Brexit, putting around 14,000 jobs at risk. The firm said it would consider moving out of the UK if there is no transition deal involving ongoing membership of the single market and customs union*.

Siemens also issued stark warnings, with chief executive Jügen Maier criticising the government for thinking the negotiations were going to be easy and for using "unhelpful" slogans.

This cuts both ways, and is down to pig-headedness on the part of the UK government as much as the EU. Pan-European manufacturers worry they won't be able to get non-UK manufactures into the UK and won't be able to get UK manufactures into other EU Member States, or at least, nowhere near as smoothly as before, thus buggering up their highly organised and choreographed international 'just in time' assembly systems.

Overall, it's a loss to mankind.

If it made economic sense for each manufacturer to have a small, self-contained assembly system within each country (or trade bloc), they would do it anyway. For example, there are Coca Cola bottling plants dotted all over the world because it is not a particularly sophisticated technique so any economies of scale from centralising would be wiped out by transport costs. Car and aircraft manufacturing is pretty much the opposite of that, they source parts from all over the world, assemble in one giant assembly centre and then re-export the finished product all over the world.

* In this context, I am not sure why the 'customs union' is particularly important, it's harmonisation of standards and import/export procedures (the main elements of the 'single market') which are the more important.

Bullshit Jobs - David Graeber nails it

From City AM:

Often I talk to people who are efficiency experts for banks who will say they think there’s as many as 80 per cent of the people who work in a given bank probably don’t need to be there.

I think it’s partly because the system we have actually isn’t really capitalism. I would go that far. Capitalism is a system where you are hiring people to make stuff to sell people, or you’re just selling stuff and therefore obviously you want to spend as little as possible and make the most profit.

But increasingly the profits of large corporations are coming from finance, so basically moving money around, creating debt, seeking rents of one kind or another. That’s a whole different thing that’s much more like feudalism where you’re extracting money then redistributing it.

The (moral) case for funding public services with taxes on land values.

Like most LVT-ers, I have got bogged down in fairly nuanced economic and philosophical arguments for LVT, which the Homeys always counter with "I paid for my house out of taxed income, why should I pay a bit more every year just to keep it?" and so on. Like most LVTers, I leave it vague what the proceeds should be spent on, short of reducing other taxes and/or dishing it out as a Citizen's Dividend. And we all get bogged down in trying to explain the interaction between LVT and the planning system.

Somebody invited/challenged me to put the 'populist' case for funding public services out of taxes on land values (put farmland to one side, the value of farmland, excluding farm subsidies is negligible so not worth taxing), so here goes...

The short, non-intellectual, non-economic answer is "Because to a large extent, it is government spending (of taxpayers' money) which creates land values in the first place.". What's wrong with apportioning the cost of public services proportional to the actual value of the benefit that people receive?

So the reply to the Homeys is: you are not being asked to pay for land you already 'own', you are being asked to contribute towards the cost of all those things that maintain the value of your 'property', the same as paying a roofer to fix your roof or an electrician to fix your electrics.

Let's start with the core functions of the state, the most public of 'public goods' - defence, law and order and the fire brigade.

What would UK land have been worth in 1939 if we hadn't had an army, air force and navy? Everybody who could would have emigrated, and people would have waited for the Germans to redistribute the land to themselves before buying any from the new overlords. Or put it this way, who had more to lose - a tenant worker or the various Dukes? And who benefited most from the 1945 outcome, tenant workers or the various Dukes?

The same goes for law and order and fire brigade. We know that house prices and rents are higher in areas with lower crime rates; and lower in areas with higher crime rates. Let's take that to the extreme and ask what would the house you live in be worth if they released everybody from prison and sacked all the police officers? Not much. How much would home and contents insurance or car theft insurance cost? How much extra would you have to pay on your home and contents insurance if there were no fire brigade to put out a fire in your neighbour's house?

The total budget for all these is about £67 bn a year, which is coincidentally about the same as total revenues from Council Tax (less discounts and allowances), Business Rates and Stamp Duty Land Tax. Would it not seem reasonable to replace these three taxes with a new tax specifically earmarked for defence, law and order and fire brigade, calculated as a certain low percentage of the value of land (or of land and buildings)*?

Next, what about the education budget?

Education is not really a core function of the state, it is more of a 'merit good', but seeing as just about every developed country has a taxpayer funded system of universal 'free' education, we can safely assume there are good reasons for this, and that it leads to better outcomes overall than simply 'leaving it to the markets'. I accept that the UK state school system performs badly in international comparisons - and not for lack of cash - but the basic principles are sound.

At present, most of UK tax revenues are taken from the productive sector (in income tax, corporation tax, VAT and National Insurance), so it is businesses and workers who are paying for education. On the whole, people get their money back, but there is one group who benefits particularly - landowners.

We know that homes in the catchment area of a good state school sell (or rent) for a huge premium. So somebody who sells (or rents out) a home in such an area is cashing in on expenditure that 'somebody else' is financing; and people who buy or rent a home in that area have to pay twice over for their children's education - once via the tax system and again in higher purchase price or rent.

The situation is even clearer with universities, which are all taxpayer subsidised (tuition fees notwithstanding). Universities and university education benefits landowners directly and indirectly.

Rents - paid by students - are much higher in Oxford, Cambridge and London because there are thousands of students who need to live there. Those universities act as a magnet for high tech and research based businesses, who have to pay higher rent to be able to tap in to all the qualified people in the area. Half of all graduates from any UK university end up moving to one of these three towns (because of the job opportunities), meaning higher incomes and more demand for housing, pushing up prices and rents further still.

Seeing as higher earners are currently expected to pay considerably more than the cost/value of their children's state school and university places (and are more likely to send them to private schools), would it not make sense for the education budget to be funded out of a tax on land values, like school districts in the USA?

The total budget for education is about £87 bn a year. If there were an earmarked 'education tax' based on land values, we could just about get rid of the most economically damaging and regressive tax on the value created - or 'value added' - by private enterprise - Value Added Tax.

The National Health Service

The UK's health system is almost fully nationalised and funded out of general taxation, but this is not completely different to the system in all other European countries, where there is heavy state regulation of the medical system and the prices they can charge; these are all funded out of 'compulsory insurance', which is another word for 'taxes on earnings', as the contributions are usually set as a certain percentage of people's earnings up to a set amount.

While the NHS does not do well in terms of outcomes, it does perform well in terms of universal coverage and - administrative waste notwithstanding - is actually good value for money.

There is a premium for homes in the catchment area of good state schools or universities. The NHS has little such effect, either because standards are much the same everywhere or because statistics on the relative performance of local NHS trusts is simply not made public. But all things being equal, being near a GP surgery or a hospital with short waiting times must push up land values in that area.

Think about the opposite extreme, what if they shut down all GP surgeries and hospitals in the entire county of Kent - what would happen to selling prices and rents if people who lived in Kent had to shell out for private health insurance, which is always works out more expensive than the NHS because insurers have to make a profit and involve extra layers of admin. And payers would always have the realistic worry that private insurers find some loophole or other and simply never pay up.

This ties in neatly with another traditional argument advanced by the Homeys - what about a Poor Widow who still lives in the family home which for reasons beyond her control has rocketed in value? How will she be able to afford to pay the tax?

The commonsense solution is a roll up and defer-until-death option, but the logical rebuttal is, the average cost of NHS and social care is about £5,000 - £6,000 per pensioner; private health or social care insurance would cost twice that, so most Poor Widows In Mansions would still be getting reasonable value for money.

This is considerably more than today's Poor Widows were paying for the care of the generations before them, so there is no particular moral entitlement to it (unlike the state pension, which they were always promised in return for paying National Insurance contributions while they were working).

The total health and social care budget is £144 bn a year, if that were funded out of an earmarked tax on land values, this means we could scrap the second most economically damaging and regressive tax on earnings/private enterprise - namely National Insurance contributions and reduce the basic rate of income tax. State pensions could just be paid out of income tax in future.

Environment, housing, utilities such as street lighting, roads and transport

The list goes on, quite what kind of expenditure the government includes in these minor categories - and how much of it is actually worth doing - I do not know. But they are the type of expenditure that maintain land values, and benefit landowners in some areas more than others, total cost £52 bn a year.

Again, best funded by a tax on land values.

What does this mean for an actual household or business?

The total cost of all the above categories is about £350 bn a year, we can earmark duties on fuel towards the cost of 'environment' and transport; earmark duties on tobacco to the health budget: and split duties on alcohol between the budgets for health, transport (drink drivers!) and law and order, meaning that the total combined cost to be allocated between landowners would be about £300 bn a year.

A quarter of that would be paid on the most valuable land in city centres, which is largely commercial premises (shops, offices, restaurants etc), leaving £225 bn a year to be collected from the value of housing. As a rough estimate, this would average out at about 3.2% of the current value of each home.

So the tax on a median home would be about £6,000 a year. That's clearly a fair chunk of change, but that is just what public services cost - and is good value if you get defence, police, education and healthcare in return.

If that home is owned by a working-age household, then they will also be saving twice as much as that in lower VAT, National Insurance and basic rate income tax, so end up a lot better off.

These savings apply all the way up the scale - the tax on an average home in London would be about £15,000 a year, but so what? Wages in London are a lot higher as well, so most working-age owner-occupiers would be saving a lot than that in lower VAT, National Insurance and basic rate income tax.

So apart from taxes on land values to pay for basic services, the only other significant tax would be income tax, most of which would be paid by the top ten percent of taxpayers who earn more than £54,000.

Tenants and first time buyers would also be treated fairly - they would only have to pay for public services once over (their rent would include the tax on that home) instead of having to pay for the cost of public services once through their taxes and then being forced to pay for the value of those public services in rent or mortgage payments.

The banking system

I shall bore you with one final supposed argument against taxes on land values - it would push down selling prices, which would lead to negative equity and endanger the whole financial system. Well, we are where we are and we can't magic away these huge mortgages - which make up 80% - 90% of total bank lending in the UK. Recent purchasers have the most to gain from future net tax savings, so it all evens out.

But is this not madness? An average UK home was built decades ago for £100,000 in today's prices. The bricklayers, carpenters and electricians were paid what they earned and the property developer made a mark-up to reflect risk and finance costs; that house was paid for long ago.

If that average home is sold again today for £300,000, with a £240,000 mortgage, then the lending bank and its depositors will collect as much again in mortgage interest (£100,000) over the next twenty-five years as the house originally cost to build; and the seller has made a capital gain of £100,000.

I have hopefully shown that it is taxpayers' money which underpins land values in the first place, so when we say that mortgages are 'secured on land and buildings', what we really mean is, 'mortgages are secured on the value generated by spending taxpayers' money'. Is that not an insane way to run a financial system or economy?

Here endeth.

* Let's not get bogged down in the subtle difference between basing the tax on the current value of land (or land and buildings) and basing it on 'site premiums', i.e. the total rental value minus the capital cost of teh building and other improvements.

Car hits house

From the BBC:

The silver Ford Focus was driven into the house on York Road in Eastleigh, Hampshire, at about 04:30 BST on Friday.

Police said the front of the vehicle ended up in the lounge and that the road was closed while surveyors assessed how to move the car safely.

The driver, 21, ran off on foot and was arrested on suspicion of drink-driving.

Yup, the perils of living in an end terrace.

I would assume the driver was heading south on Southampton Road and tried to turn right into York Road.

This pic from Google Maps shows the layout, Southampton Road runs left to right, the car hit the house to the left of the side door.

Glorious bit of landlord squealing

From the BBC, a few highlights:

Six thousand jobs are at risk in a drastic attempt to save [House of Fraser] from collapse. If the rescue plan fails, administration is likely. But High Street landlords are furious about the way they're being treated. They are the creditors who have to shoulder the burden of financial losses.

Many properties are owned by institutional investors who rely on store leases to provide a steady income stream for pension funds and insurers. Take the House of Fraser store in Milton Keynes. It's part of a shopping centre co-owned by Hermes Investment Management. Its rent generates long-term funding for two big pension schemes.

"Landlords are in an invidious position. We enter into these long-term contracts in good faith, with pensioners' income and security often at stake," says Chris Taylor, head of private markets at Hermes Investment Management.

House of Fraser is using what's called a company voluntary arrangement (CVA), a form of insolvency proceedings, to overhaul its business...

The plan requires approval from 75% of its unsecured creditors. All creditors get a vote, but the value of the vote depends on how much they are owed.

Under insolvency rules, landlords' claims are already heavily discounted because of how accountants judge their losses. The issue for landlords is that their "say" or voting rights in the CVA process is discounted by a further 75%, which they believe is grossly unfair.

The BBC understands that even if most landlords vote against the plan, they won't have enough clout to win the day.

"With landlords' voting power reduced by 75% of the value of their claims, the dice are clearly loaded against them in the CVA process," says Mark Fry, from the restructuring firm Begbies Traynor... "Even if the majority of landlords were to vote against the CVA, that would not be enough to stop it being approved in its current form, leaving landlords taking all the pain of the CVA process whilst House of Fraser's shareholder takes out £70m."

I'd never heard of that reduced-votes-for-landlords rule, but it sounds eminently sensible to me.

Daily Mail on top form

Emailed in by MBK:

Love Island pays tribute to Sophie Gradon: Reality show airs 'in loving memory of' message ahead of new episode after ex-contestant, 32, was found dead at her parents' home following depression battle

* Sophie Gradon, 32, found dead at her parents' £960,000 home near Newcastle
* The model and former beauty queen appeared on the 2016 series of Love Island
* She was tweeting hours before death including loving message to her boyfriend
* The show has aired tribute to the star which was shown during tonight's episode

Exquisitely fucked up logic for keeping cannabis illegal

From this morning's Metro:

Legalisation of cannabis will not eliminate illegal dealing. There will still be a criminal element ready to supply it for a price undercutting the legitimate market.

HG, Kent.

That is just wrong on so many levels that it is impossible to know where to start.

MG TF remodel (blue)

Second attempt:

MG TF remodel

The MG TF (2002 version) looks good from some angles, but the boot is just too clumpy, the whole shape always reminds me of a giant, old fashioned slipper.

I have (literally) cut and pasted together how I think it should look, if it were:
- front engined/rear wheel drive front wheel drive (by shifting the cabin back and the wheels forward),
- same length but 3.3" lower:
- the front end will be somewhere between a BMW Z8 and a Toyota MR2 roadster, and the boot will have a rounded integrated spoiler (like a Mazda MX-5), but that's difficult to show in profile:

The same old tired template

A retired politican, who toed the party line and dutifully trotted out the "illegal drugs cause harm so must remain illegal" mantra while in office/in power, now comes out and admits it's all stupid and that some things - like cannabis - should simply be legalised, regulated and - presumably - taxed.

Those still in office/in power, toe the party line and come out with the usual crap:

Prime Minister Theresa May remains firmly opposed to legalisation or decriminalisation of the drug because of the harm she says it does to individual users and communities.

See also, George Schultz (Secretary of State under Reagan);
Bob Ainsworth (former Home Office minister);
Paul Whitehouse (former chief constable, Sussex);
Tom Lloyd (former chief constable, Cambridgeshire);
Francis Wilkinson (former chief constable, Gwent);
Brian Paddick, (former Deputy Assistant Commissioner, Metropolitan Police);
and so on ad infinitum.

Give it five or ten years, and former PM Lady May will no doubt admit that the whole thing is for shit and maybe we should legalise it.

Rinse and repeat.

Yeah! Go bear!

From The Daily Mail:

This is the terrifying moment an angry performing bear attacked its handlers after being forced to ride a skateboard and beaten with a stick at a circus in Russia.

Children in the audience screamed as the animal turned on its keepers moments after riding down a ramp during a performance at a village in Russia's Volgograd region.

Desperate members of staff tried to beat the brown bear with sticks as it pinned a colleague to the ground.

Pop over there to watch the action in all its g(l)ory.

And they should know...

From the print version of the DT Business Section:-

Bitcoin an environmental disaster with no real worth, warns 'bank of central bankers'.

Quote:

Crypto currencies "are not backed by the assets and revenues stream of an established state.  Most can be rendered worthless by fraud or digital manipulation. They are essentially Ponzi schemes that masquerade as citizen currencies beyond government control."

Oh. Right. And just how well are those government controlled currencies doing then? £100 in 1945 buys what £4101 does in 2017 (https://www.officialdata.org/1945-GBP-in-2017).

Your taxpayers' money, hard at work.

From the BBC:

The NHS in England is to get an extra £20bn a year by 2023 as a 70th "birthday present", Theresa May says. It means the £114bn budget will rise by an average of 3.4% annually - but that is still less than the 3.7% average rise the NHS has had since 1948...

The five-year funding settlement covers just front-line budgets overseen by NHS England. About a 10th of the overall health budget is held by other bodies for things such as training and healthy lifestyle programmes, including stop smoking services and obesity prevention programmes. The BBC understands these will be protected, but beyond that it is unclear what will happen to them.

?!? One-tenth of £114 bn is £11.4 bn, which is approx equal to our net contributions to the EU budget.

Would anybody like to chip in for a battle bus, with "We spend £220 million a week on stop smoking services and obesity prevention programmes. Let's fund the NHS instead." written on the sides?

"The Missing Profits of Nations"

Via a Resolution Foundation email newsletter, this fine study which confirms what we knew all along:

By combining new macroeconomic statistics on the activities of multinational companies with the national accounts of tax havens and the world’s other countries, we estimate that close to 40% of multinational profits are shifted to low-tax countries each year. Profit shifting is highest among U.S. multinationals; the tax revenue losses are largest for the European Union and developing countries...

Our findings have implications for policy. First, they suggest that cutting corporate tax rates, as the United States did at the end of 2017, is less likely to generate quick positive effects on wages than textbook economic models suggest. For wages to rise, productive capital needs to increase, which can happen fast if capital flows from abroad, much less so if paper profits—not productive capital—is what moves across countries.

'Rents' get an honourable mention:

Second, profit shifting raises new challenges for tax policy. It reduces the effective rates paid by multinationals corporations compared to what local firms pays. Whatever one’s view about the efficiency cost of capital taxes, this seems difficult to justify—especially if part of the profits of multinationals derive form rents, which standard models suggest should be taxed.

Having examined the evidence, the authors make a surprising claim:

We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places—in effect stealing revenue from each other. This policy failure can explain the persistence of profit shifting to low-tax countries despite the sizable costs involved for high-tax countries.

Their explanation is on page 23:

To ensure profits are taxed where they have been made (i.e., the prevailing internationally agreed rules), tax authorities in high-tax countries routinely audit large companies. They check that intra-group transactions are conducted at arm’s length (i.e., as if the subsidiaries of a given multinational group were independent entities). When they find it is not the case, they can attempt to ask multinationals to correct their transfer prices, which results in a relocation of taxable income across countries.

In the current international tax system, tax authorities have incentives to relocate profits booked in other high-tax countries—not profits shifted to havens. Take the case of France. e1 relocated to France is worth the same to France whether it comes from Germany or from Bermuda. But it is easier for the French tax authority to relocate e1 booked in Germany, for three reasons.

First, it is feasible, because information exists on the profits booked in Germany (from Orbis), while no or little information typically exists on the profits booked in Bermuda. Second, it is more likely to succeed, because firms are unlikely to spend much resources opposing this transfer price correction: for them, whether profits are booked in France or Germany makes little difference to their global tax bill, since the tax rates in France and Germany are similar. Third, if there is a dispute between France and Germany, it is likely to be settled relatively quickly.

Seems plausible to me.

The answer is to simply disallow all expenses paid to businesses abroad unless the company claiming the deduction can:
a) prove that they have no connection with the other company,
b) explain exactly what the payment was for, and
c) show that this is an arm's length, market price.

No pun intended?

From the BBC:

Mrs Cilliers, a highly-experienced parachuting instructor, suffered near-fatal injuries when both her main and reserve parachutes failed in a jump at the Army Parachute Association... Her husband, who was an experienced parachute packer, [had] tampered with equipment he knew his wife was going to use.

Her survival was described as a "near-miracle". It was put down to the soft soil of the ploughed field where she landed.

Mr Justice Sweeney said Mrs Cilliers, although recovered physically, had sustained serious and long-lasting psychological damage.

"This was wicked offending of extreme gravity", he told Cilliers.

Lewisham East by-election result and YPP (London) meet-up tomorrow

1. Watch out for the Lewisham East by-election results tomorrow, with a bit of luck our candidate Thomas Hall won't come last (which would be a first for us!). Honourable mention to Richard G who has delivered thousands of our leaflets over the past couple of weeks.

2. We'll be at the Brewmaster nr Leicester Sq tube, exit 1, turn left and left again, from 5.00 onward for an hour or two to celebrate/commiserate the by-election result. We'll put a yellow leaflet on the table so you recognise us.

They had it coming

From City AM:

Big Four accountancy giant PwC has been slapped with a record £10m fine from the Financial Reporting Council (FRC) for its work auditing retailer BHS prior to its sale for £1.

The PwC partner who conducted the audit, Steve Denison, is also facing a personal fine of £500,000 from the FRC relating to his work on BHS in the year to 30 August 2014. Denison is said to have left the UK’s largest accounting firm last week after more than 30 years on the job, according to reports from Sky News.

A statement from the FRC said that PwC and Steve Denison have admitted misconduct, and accepted "substantial fines and non-financial sanctions".

From experience, auditors will pick up low level fraud sooner or later, i.e. people robbing the petty cash, forging invoices and so on, and so we can assume they deter it to some extent, even though detecting/deterring fraud is not one of the main purposes of an audit. (The actual stated purposes of an audit are so vague and lofty as to be meaningless.)

When it comes to higher level fraud, auditors are either so useless they don't notice it; or they are actually complicit in it.

BHS wasn't like Enron, it went out of business because it was badly run, not because of actual malice or dishonesty on the part of the directors, that's not fraud. But auditors turning a blind eye to a potential bankruptcy after the event, in order to bank the big fat audit fees, is IMHO an actual fraud in itself.

End Unfair Evictions Campaign Launch (Generation Rent)

Generation Rent are launching a campaign to scrap Section 21, also known as no-fault evictions.

Wed 13 June 2018
18:45 – 21:00

Karakusevic Carson Architects
Unit E03, The Biscuit Factory
100 Clements Road
London
SE16 4DG

Book a free ticket here

https://www.eventbrite.co.uk/e/end-unfair-evictions-campaign-launch-tickets-45968987479

Boo hoo, frankly.

Something tax related was in the news a bit last week, the most recent/relevant article I can track down is a six months old Daily Mirror article, which refuses to load properly so lets go with the Daily Mail's version:

Hundreds of workers risk bankruptcy after using alleged £13m tax avoidance scheme

... The scheme, which was entirely legal, allowed AML contractors to become staff and were paid via its base on the Isle of Man.

They appear to have been paid a low salary with the rest of the cash paid as a loan with zero or little interest from its 'employee benefit trust' on the Crown dependency. Staff would then pay as little as three per cent income tax.

One client John Dickinson was paid a £11,826 salary in 2009/10 with £85,718 in the form of interest-­free loans, according to the Mirror. At the time he paid just under £9,000 in income tax - but HMRC has now asked for almost £27,000.

More crocodile tears.

Clearly, it is morally and economically wrong for employment income to be taxed at the highest rates of all forms of income, but HMRC has spent the last decade cracking down on 'workers' (i.e. employees) being paid in the form of soft/non-repayable loans, whether directly from their actual employer, or via an 'Employment Benefit Trust', an umbrella company or some even more bizarre offshore trust/company arrangement.

A couple of years ago HMRC made it quite clear that all outstanding loans would simply be treated as employment income, earned and taxable on a certain cut-off date.

The sensible thing to have done is to take money out of an umbrella company as dividends, that gives you slightly lower rate than taking it out subject to PAYE. You can always argue that in reality you were self-employed rather than employed, so you might have got away with it. Pretending that you were receiving a loan and paying next to no tax was taking the piss and was bound to blow up in people's faces later on.

As to "entirely legal", of course it is perfectly legal for an employer to lend an employee money, but there is also tax law that says how the loan will be taxed. And the law is the law, whether unfair or not, and there is no point whining now IMHO.

It's going to be one heck of a closing down sale...

From the BBC:

Discount retailer Poundworld has appointed administrators, putting 5,100 jobs at risk.

The move came after talks with a potential buyer, R Capital, collapsed leaving Poundworld with no option other than administration.

Poundworld, which serves two million customers a week from 355 stores, also trades under the Bargain Buys name.

Friday Night Gearchange

The Scorpions, "Tease me, please me" (yes. it's as gloriously awful as you would assume), they chuck in a nifty gearchange after 4 mins 8 seconds:

Daily Mail on top form.

Unusually, you have to plough through several paragraphs before you get to the money shot:

The court heard the couple had been married for ten years but had a turbulent relationship and Mrs Clark had taunted her husband about having a 'small d***'. She had also had a lesbian affair with one of their friends' daughters which they were arguing about on the night she was stabbed.

Mrs Clark, who had four children from a previous relationship, was pronounced dead at the scene 12 minutes into the New Year. Just minutes later her two sons Sheldon, 22, and Slade, 19, returned home from a party to find police swarming over their home.

Clark was arrested in blood-soaked pyjamas on his birthday at the three-bedroom, £200,000 semi-detached home in Cloverdale, Bromsgrove, Worcester.

Tesco boss - wrong facts, wrong logic.

Emailed in by Shiney, from the BBC:

The boss of Britain's biggest supermarket has blamed the collapse of some retailers partly on the expense of business rates.

Dave Lewis, Tesco chief executive, said the charges that firms must pay on their buildings played a "large part" in sending some retailers to the wall... He questioned whether raising business rates was resulting in an "uneven playing field" for some firms...

"Are we allowing it to stay competitive, or are we by stealth lowering corporation tax and increasing business rates to a place which is creating an uneven playing field and forcing people to think about how it is they avoid that cost and find other routes to the market?" he asked.

The Tesco boss said business rates was the biggest tax his company paid, adding up to more than £700m a year.

The last claim is a straight lie. To put that figure in context, it is a smidge more than 1% of Tesco's annual turnover of around £60 billion.

If he could be bothered to look at his own company's accounts for the years when VAT was reduced from 17.5% to 15%, then increased to 17.5% and then to 20%, he would know that Tesco bears about two-thirds of the VAT it pays every year.

He knows better than I do how much of Tesco's turnover is VAT-able items (basically anything except basic food), but sure as heck the VAT born by Tesco is several times as much as the £700 million Business Rates it pays.

He's wrong in logic as well.

- For premises which Tesco rents, the Business Rates is just part of the rent bill. As we know, Business Rates are supposed to be a certain percentage of the total rental value, although some individual valuations are miles out, so by definition, the official rent bill is at least twice as much as the Business Rates Tesco pays on its rented premises.

- The Business Rates on the premises Tesco which *thinks* it owns is just rent on that part of the premises which it doesn't own and never owned.

The point is that Business Rates (which have existed for over four centuries - so it's not like businesses are unaware of them) reduce the selling price of commercial premises by an equal and opposite amount, thus saving the purchaser a chunk of change up front. The government claws back the under-value via Business Rates, so the total cost to an owner-occupier is much the same with or without Business Rates.

(Clearly, the downside with Business Rates is that it is calculated on the total rental value including the occupant's own improvements. Which is absolutely no different to normal land law - if a tenant pays for improvements, legally they belong to the landlord and he can increase the rent accordingly, unless the rental agreement says otherwise.)

Many a crocodile tear shed over Trump's steel tariffs.

From the BBC:

EU leaders have a "gun held to their head" over the threat of US tariffs on steel imports, the head of trade body UK Steel has warned. Gareth Stace said the EU needed to impose safeguards to curb Chinese steel once destined for the US that will now be heading to Europe...

Mr Stace said US tariffs would be "purely protectionist... The Trump administration says protecting America's steel and aluminium producers is a matter of national security. What President Trump is proposing to do here is not free trade and it's against WTO rules," he told BBC Radio 4's Today programme...

Mr Stace admitted that there was a problem of global over-capacity in the steel industry, but said most of that was in China. About 20 million tonnes of Chinese steel would need to "find a new home to go to and, because we are a free and open market here in the UK/the EU, it'll come here, we believe, and therefore further damage our sector - not only from the direct impact of tariffs in the US but the surge of steel coming here", he said.

Does the man not listen to himself? He appears to be arguing against and for tariffs at the same time. As to over-capacity, who's to say that the over-capacity is 'in China'?? The Chinese would have a better argument that it is the higher cost producers in Europe who are the over-capacity.
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It appears to be agreed across the board* that Trump's tariffs are A Bad Thing, which they are IMHO. Can these people now apply the same logic to the 20% tariff which the UK government imposes on most ostensibly free-market transactions, even where both supplier and customer are within the UK?

* I do have the impression that if a left-wing government of a developing country were to impose such tariffs, a lot of the same people would fully support them.

Hypothecated taxes etc.

1. For an economist, the idea of hypothecating taxes is a bit of a nonsense. Nonetheless, politicians know that earmarking a tax makes it more acceptable to those paying it.

2. I received a classic KLN via Twitter (so classic that even some socialist LVT supporters have advanced it), along the lines of this:

"If you phase out National Insurance and have Land Value Tax instead, how will the government pay for people's unemployment benefit and old age pensions?"

To which the answer is, don't confuse the tax raising side and the spending side. The government can pay pensions and welfare out of borrowing, National Insurance, income tax, Land Value Tax or anything else.

3. We also know that the Home-Owner-Ist majority hate the idea of Land Value Tax. Why should they pay for something they already own, that sort of thing.

4. It is widely believed that it is widely believed the NHS to be some sort of highly prized national treasure (I have no idea how true this is), but we know that it has to be paid for, cost approx £125 bn per year.

5. Sticking with politics, Value Added Tax is imposed on each Member State by the EU. (There is a also widespread misconception among the chronically innumerate that all our VAT receipts are handed over to the EU, but put that to one side). Brexit is our Golden Opportunity to rid ourselves of this troublesome tax, revenues approx. £120 bn per year, economic damage/deadweight costs at least half as much again.

6. With my Georgist propagandist hat, I have merged 1 to 5 into a nice simple policy proposal:

Now that we are leaving the EU, we can scrap the most damaging and regressive tax, Value Added Tax. To make up the shortfall and pay for the NHS, we can have annual "NHS contributions" of 1.8% on the value of each home, which landlords can add to the rent if they so wish. On average and in the longer run, people will get their money back. It's low cost mass insurance - those who seldom need the NHS should be grateful to have their health.

Pensioners, who cost the NHS on average £5,000 a year each, have nothing to complain about, as in most cases their "NHS contributions" will be far less than the corresponding cost of private health insurance/private health treatment. Some people in higher value homes will be paying over the odds, but they are free to trade down to something better value. 

Photoshop fail

The first thing I noticed is the kink in the jetty behind the bloke's knee on the right. On closer inspection, the shadows look weird as well:

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.

Killer Arguments Against Citizen's Income, Not (17)

From Medium.com:

The author misses no opportunity to make an unsubstantiated claim and then contradict herself as to what the effect might be:

A Universal Basic Income is capitulation to capitalism

Capitalism is A Very Good Thing indeed, if you strip out the rent-seeking. UBI goes with the flow of capitalism, so must also be A Very Good Thing.

While sovereign governments (those that issue their own currency) can certainly afford a UBI, simply throwing money at a problem, instead of addressing its root cause presents serious concerns.

Firstly, it ignores overwhelming psychological evidence regarding the impact employment has on our physical and mental wellbeing. We derive our sense of self-worth from work. It is where we meet many of our friends, partners. Income replacement does not sufficiently offset the impacts of involuntary unemployment.

Agreed, it's nice to have a job that is reasonably bearable/well paid, and it is horrible being made redundant and then having all your job applications turned down. A UBI softens the blow of unemployment, so is a good safety net for people on the margins.

More to the point, a UBI is paid, by definition, to those not in a position to seek and/or accept work - stay at home parents, other carers, the disabled, students, the enforced early retired.

Second, a UBI is designed to work as a partial or complete substitute for existing welfare and social security programs.

Correct, that reduces the cost enormously. I also fail to see why a welfare claimant would prefer to have all the means-testing, bureaucracy, conditionality, cheating (on both sides).

It was only a matter of years ago politicians were railing against handouts. But former tech executive, and Presidential candidate, Andrew Yang told the New York times that a UBI is necessary for capitalism to continue. Andrew Yang — in his words “I’m not a career politician… I’m an entrepreneur who understands the economy.” Oh, and he is running for US president in 2020.

If the Silicon Valley suite love the idea, you can bet your socks it’s one that works against the interests of most people.

Non-argument, don't blame a message for its supporters, as Bayard always says.

Here are four reasons why a UBI is a bad idea:

1. A UBI is a smokescreen for the destruction of the social safety net

The godfather of neoliberalism himself, Milton Friedman, argued in his book Capitalism and Freedom that a UBI is an efficient way to eliminate and privatise public sector programs including welfare, social security, the minimum wage, public health, housing, hospitals, pensions and aged-care. “If enacted as a substitute for the present rag-bag of measures directed at the same end, the total administrative burden would surely be reduced,” he wrote.

Paying out of pocket for things once provided by the public sector means it is not a Universal Basic Income at all, but a poor tax by another name.

UBI is not "destruction of the social safety net", it IS the social safety net and the best kind of safety net, it's always there. How on earth is a cash payout a 'poor tax'? Again, she's damning the idea for its supporters, most proponents just want to replace cash benefits and would leave the NHS and state education as quite separate universal benefits.

2. A UBI has the potential to further drive down wages

Some advocates claim a UBI empowers workers to reject jobs with insufficient compensation. To the contrary, a UBI that covers the cost of living creates zero incentive for employers to provide wages that do the same and encourages the continuation of outsourcing.

See what she did there? UBI recipients can refuse very low paid work (correct), which ought to put upward pressure on wages - not downward as she says. She makes the equal and opposite claim (which has some substance) that employers will use UBI as an excuse to reduce wages. The two largely cancel out and overall, the impact will be negligible.

But, if we go with her incorrect assumption that wages fall, why would this encourage outsourcing? Outsourcing and automation are employers' response to HIGH wages, or not-so-high wages plus HIGH payroll taxes!

3. Tax implications may render the UBI redundant

Economist, Ian Gogh has described a UBI as a “powerful new tax engine that pulls along a tiny cart.” Particularly for the middle and working class (who already pay more than their fair share proportionally), a UBI risks driving workers into higher tax brackets, meaning their “free money” will inevitably land back in government coffers, defeating the purpose of a UBI in the first place.

The UBI itself is not taxable, and unless "middle and working class people" have a marginal tax rate of 100%, the claim is clearly nonsense.

4. A UBI is expensive & barely makes a dent in working-age poverty

Experts have predicted a UBI could cost anywhere between 6.5% (UK), to 35% of GDP (France and Finland), but barely makes a dent in working-aged poverty which would decline by less than 2%, according to a report by Compass, by less than 1% for pensioners. Though child poverty could decline from 16–9%, a UBI still doesn’t deliver the necessary bang for the government’s buck.

In the intro, she writes that a sovereign government can always afford to pay a UBI, why is she now whining about the 'cost'. It is not a cost, it is a transfer, and the net transfer will be a small fraction of the gross 'cost' - the more equal a society is to start with, the lower the net transfer.

The rest of this claim is not without substance, it's something Malcolm Torry worries about but I don't. The way to fix this particular perceived issue is to have a higher UBI entitlement with some measure of income based withdrawal.

But of course, it is a bit fatuous of here to highlight the impacts on child poverty and pensioner poverty, two groups who would clearly have nothing to gain from a Job Guarantee, her preferred alternative, see below.

If we’re going to spend that kind of money, it is not unreasonable to demand an ROI that equips current and future workers with transferable skills capable of earning them a lifetime’s worth of income. This is why a job guarantee program is essential not only for eradicating poverty but ensuring the future health of the global economy.

Aha, she's a JG-er... What about the aforementioned stay-at-home home parents, other carers, the disabled, students, the enforced early retired? You'd still need welfare for them, and the level of income they receive would have to be somewhat lower than the income from a Job Guarantee, or else few will sign up to it unless forced to.

Why a job guarantee trumps a UBI any day

Even the most ardent neoliberal recognises that for capitalism to continue, more people need to afford to buy, lease or invest in non-essential items.

A job guarantee ensures a permanent pool of skilled workers the private sector can call on when their need for staff increases, and creates an employer of last resort in lean times to keep the economy ticking over. If the private sector has a problem with a job guarantee, it can defeat it entirely by employing more people.

Still no catering for the stay-at-home parents etc. And what makes her think that the government can correctly guess which skills will be needed and what the best kind of training is? Why does she think that businesses will suddenly stop automating and outsourcing? Does she not realise that a UBI also "keeps the economy ticking over"?

There are plenty of industries within the public sector badly in need of both human and financial resources. The Department of Child services comes to mind, along with mental health, domestic violence services and shelters, police resources for sexual assault investigations (including provisions for rape-kit testing) and white collar crime (hello RBS), not to mention skills training, the sciences and education.

That's not Job Guarantee, that's Job Creation. Some of that stuff might be worth doing, in which case the government should be paying for it to be done anyway, the rest is digging and filling in potholes. And however well trained or experienced somebody is in those jobs, it does not equip them for working in the private sector.

While some small-scale UBI experiments have been trialed in countries like Finland and Canada, no economy-wide tests have been conducted.

Yes they have.

The same cannot be said about a Job Guarantee which has already been proven to work in the US, UK and Australia whose post-war full-employment policies were responsible for the creation of the middle class and the subsequent prosperity that lasted all the way-through to the late ’80s, early ‘90s.

Is she talking about British Leyland?

Unfortunately, permanent poverty is no longer seen as a problem to overcome but a policy tool to maintain price stability, which is why we are unlikely to see any similar guarantees anytime soon.

Woah! Try telling UBI campaigners to their face that they don't see "poverty as a problem to be overcome"!

A UBI is an ideological surrender to capitalism. It should be renamed ‘Not My Problem’: because it formalises the complete abdication of the government’s responsibility for employment.

Capitalism is good, see above. Does she seriously credit a load of bureaucrats to know exactly what sort of training each individual needs, and to provide it? Beyond a certain point, people are best off making their own decisions.

EPIC FAIL.

Pity the poor landlords.

Emailed in by SG, from The Guardian:

High street landlords are gearing up for war with retailers, whom they accuse of railroading them into agreeing to rent cuts via increasingly controversial company voluntary arrangements (CVAs).

Struggling businesses including the department store chain House of Fraser, the children’s retailer Mothercare and the Carluccio’s Italian restaurant chain are all seeking CVAs, where property owners accept lower rents to help a tenant avoid financial collapse.

Good, as the alternative is the parasite killing the host. Nice to see that retailers have woken up to the fact that they pay a lot more in rent than they do in Business Rates; there's no point whining about the latter if you can do something about the former.

But we've covered that point before, here's the classic bit of Home-Owner-Ist one-sided economics:

Begbies Traynor partner Mark Fry said: “Landlords represent pension funds, investment funds – they’re spending the ordinary man in the street’s money. So when rents aren’t paid, that affects the performance of these funds. It’s not just about rich property owners.”

That cuts both ways.,,

Begbies Traynor partner Mark Fry said: “Shares in retailers are owned by pension funds, investment funds – landlords are taking the the ordinary man in the street’s money. So when high rents are enforced, that affects the performance of these funds. It’s not just about rich business owners.”

Fact is, if pension funds own the right mix of retailers and land-and-buildings, they couldn't really care less how this pans out. In fact, it is better to err on the safe side, which is lower rents and higher returns from their retail investments, than it is to wipe out the value of their retail investments by trying to enforce high rents, and then ending up just owning a load of empty buildings.