#12 – Nine toasts to simplicity in 2014

The Year Ahead

In looking back at 2013 and ahead to 2014, I would like to thank everyone for their interest in the new discipline of Surplus Energy Economics, and for the many useful suggestions and questions that have helped me develop the thesis.

In this final article of the Old Year, I would like to welcome 2014 with a single thought, which is this –

“the simple answer is usually the right one”

*  *  *  *  *  *  *

Simple explanations and simple responses could undoubtedly give us, and our leaders, some useful pointers. Here are nine simple thoughts to be going on with (and please forgive me if some are just too simple!):

1.    “Borrowing lands you deeper in debt”.

The coalition government, to its credit, has stuck to this axiom where the public finances are concerned. Goodness only knows what debt and the deficit would look like had Labour been allowed to act on the daft nostrum that we can borrow our way out of a debt crisis.

2.    “Houses do not go out to work”

For an economy to prosper, both we and our capital need to earn an income. We are not doing that if we think that property price escalation is a substitute for enterprise. Our capital isn’t earning anything if it’s tied up in houses rather than in businesses or infrastructure.

3.    “Borrowing isn’t growth”

Time and again in our recent economic history, we have allowed ourselves to believe that using debt to boost economic activity constitutes “growth”. It doesn’t. At the moment, the British economy is picking up, but there has to be a suspicion that increased personal borrowing, plus a £12bn dollop of PPI compensation, has accounted for an uncomfortably large proportion of that growth.

4.    “A healthy economy saves and invests”

Labour, resources, energy, investment and initiative are the pillars of a successful economy, and at least one of these – domestically-created investment – is languishing alarmingly.

There are two ways (and only two ways) in which investment can be funded – you can borrow it, or you can save it. Borrowing, as we’ve seen, simply lands us further in debt, so we need healthy saving if we are to promote the formation of capital. Without capital, the economy cannot grow.

Without savers, we cannot form capital.

Higher interest rates alone can restore a propensity to save – and there is something deeply contradictory about a “growing” economy that is incapable of capital formation – but an immediate step would be to cease taxing interest when that interest is actually a sub-inflation return on capital.

5.    “Don’t feed the golden goose on strychnine”

Historic evidence should leave us in no possible doubt that small and medium-sized enterprises are the most effective creators of jobs, growth and wealth, but our fiscal system has long done its very best to poison new businesses at birth. The name of that poison is Business Rates.

It is the enterprise equivalent of strychnine.

If the Business Rates imposition on a new business is (not untypically) £50,000, and the margin is 20%, the business needs sales of £250,000 just to pay the tax-man, even before anything has been spent on useful stuff like premises, equipment, inventory or wages. In any sane economy, Business Rates would be abolished, and the income from it replaced by some form of progressive tax on profits.

6.    “We all need a home”

(Tip – it would be hard to think of a single bigger vote-winner than this one

Obvious though this ought to be, successive governments have ignored the simple fact that a house-building programme could create worthwhile economic activity whilst also beginning to make some inroads into a horrendous housing shortage. At present, housing starts are at less than half the 250,000 level that is required even to contain homelessness at its current level.

Many people are not in a position to buy a property, and need to rent. Others, no doubt, don’t want to buy in an over-priced market, especially as there is only way in which interest rates can go.

There is a simple answer to this one – build council houses.  

7.     “Each to his own”

Old Labour believed in growing the state, but all too often succeeded only in growing the super-fatted bureaucracy. Swinging to the other extreme, the Blairites believed, that privatisation, and the creation of quasi-markets, would improve the public services.

Events show that neither approach works, for a very simple reason – some services are best provided by the state, and others by the private sector.

Do you fancy a nationalised plumbing industry? Would you like to see policing privatised? Obviously not. Each to his own.

8.    “Competition is the natural order of things….”

(…..or should be, anyway, in a free-market economy).

Adam Smith – the doyen of right-leaning economists – had no time for what, today, is called corporatism. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”, wrote Smith in The Wealth of Nations.

In 1911, “trust-busters” in the US finally broke up Standard Oil using legislation passed in 1890 (and beefed up in 1914). They also broke up telecoms giant AT&T (a.k.a. “Ma Bell”) in 1982. We need to do the same now, with a particular focus on utilities, supermarkets, mobile phone operators and the retail end of energy supply.

9.    “Poor workers are poor consumers”

Legend has it that, when the first production-line robot appeared in a British car plant, a gloating manager demonstrated it to a shop-steward with the words “try to get that to join your union!”

“Try to get it to buy one of your cars”, was the obvious retort. Individual businesses may benefit by driving wages downwards, but the economy as a whole needs affluent employees with money in their pockets.

I warmly endorse yesterday’s observation by CBI Director-General John Cridland that “one of the biggest challenges facing businesses is to deliver growth that will mean better pay and more opportunities for all their employees after a prolonged squeeze”.

*  *  *  *  *  *  *

I hope you like these “simple thoughts” – and perhaps you can suggest some additions?

Here’s to a fabulous – a SIMPLY fabulous – New Year to you all!

 

Tim

 

4 thoughts on “#12 – Nine toasts to simplicity in 2014

  1. Tim,

    You have commented on business rates.

    There seems to be a whole series of questions about taxation, especially making sure that business’s & the rich pay their fair share. the recent antics around Google, Starbucks and others are a case to point.

    Would you like to make some suggestions?

    A ‘turnover tax’ seems to have some attractions as does replacing Council Tax with the rating system used in Northern Ireland

    Happy New Year

  2. John

    In the UK we have the world’s most complicated tax code, bar none. As a general principle, the more complicated the system, the greater the scope for error and unintended consequences.

    Specifically, re this article:

    – I think Business Rates are lethal

    – Taxing savers’ interest (when it’s below inflation anyway!) is a deterrent to capital formation and prudence.

    So, ideally:

    – Replace Business Rates

    – Reform taxation of returns on capital (both debt and equity)

    Let’s start with multinationals, which are tricky. We want their investment and we know they can switch tax domiciles. Simplest answer is to make them submit a UK-only tax return, which we then have to check for anomalies (transfer pricing, most obviously). But we should backstop this with a minimum tax floor, as a % of UK sales. That way, each of them pays something. If they complain, claiming that they don”t make profits here, then fine – goodbye, if you’re not making profits, you won’t miss us and we won’t miss you….

    Next, non-doms. I’ve changed my view here, especially after hearing a US expert call London “the world capital of dirty money”. Non-doms living in the UK should declare and be taxed on all income worldwide. If there are tax treaties with the countries where their income comes from, obviously tax already paid abroad is deductible. This, as I understand it, is what virtually every other developed country does. Anyone whose income comes from the US, Canada, EU etc would be unaffected by this. It would only impact those non-doms whose income comes from countries with whom we don’t have a tax treaty.

    Next, look at the tax deductibility of corporate interest expense. At present, dividends are paid out of taxed income but interest is deductible against pre-tax profit. This creates a bias by making debt cheaper to service than equity capital – obviously undesirable.

    Consider taking interest income/expense outside the tax system altogether. Individuals are taxed on interest income but in general cannot deduct interest expense against taxable incomes, whereas corporations can – obviously unfair. Maybe make borrowing and lending an after-tax activity.

    Finally, phase out Business Rates – replace it, if necessary, with some form of profits tax, or combine the two, liability worked out both ways with the lower of the two calculations payable?

    Happy New Year!

  3. A late happy new year Tim,

    I noticed this article in the NYTimes on stopping corporatism

    http://dealbook.nytimes.com/2014/01/07/overhaul-of-israels-economy-offers-lessons-for-united-states/?_r=0

    Seems like it can be done, apparently the left wing paper Haaretz gave it a big push, will we see you writing for the Guardian soon?

    With respect to borrowing, if as you told me earlier, a debt is self liquidating then its fine to borrow, if its not then no. The message would seem to be not whether its public sector or private borrowing but borrowing to invest wisely and saying private or public is better is non nonsensical.

    High interest rates just make money scarce, so would be expected to see increased thought about rates of return. However in the “wonganomics” economy we have, the highest rate of return seems to be to lend out money saved to fund more consumption, if money was lent to invest in factories to produce the things we buy or to offset the cost of importing them we could see a more balanced economy in the U.K. but its not looking likely.

  4. Dear Tim,
    Good to see you posting articles again which are excellent.
    I feel your ideas about a national housing building programme are contradictory to the rest of your ideas. You seem to be advocating a smaller state, and a reduction in personal borrowing etc, this coupled with your outlook for the economy seems to be at odds with a house building programme? If the government wasn’t propping up the housing market with cheap money, how do they know houses will still be in demand? If (when) the economy collapses completely, will houses still be in such demand or will people start living more people per house for example as living standards fall?
    For me, if there is an area that the government should leave alone it’s housing. All that should be provided is simple national regulation and then more specific local regulation.
    Be interested to hear your thoughts.
    Cheers

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