Sunday, 31 July 2016

Tax and Spend

Tax  and  Spend

Why is the "austerity" question still being debated?

     The argument between 'fiscal prudence' and 'deficit spending' has not yet been won by either side. Why is that? Back in 2010 Veronica Chick and Ann Pettifor  showed that cutting government spending would fail to decrease the deficit, but would instead increase it, by depressing the economy.
     In June 2012, Paul Krugman and Richard Layard published "A manifesto for economic sense" [2], calling for a policy of fiscal stimulus to reduce unemployment and foster growth. Yet our coalition government cut taxes, and the Debt continued to rise [3]. Week after week, year after year Krugman ran a column in the New York Times pushing the same argument.
     The Opposition declares itself "anti-austerity" but gets little support from the electorate. The ordinary citizens (and the governments they elect) are very unwilling to spend further money as a way to reduce the Debt; it is too counter-intuitive. It is easy to see [4] that a sovereign state is not the same as a household, and that borrowed money could be paid back with worthless paper. But that point is not enough to persuade the averagely cautious citizen to borrow money on world markets in order to "restore growth". We already spend 8% of GDP servicing the Debt; what if rates should rise? We are already in the hands of the money-lenders. Why has the Keynes-Pettifor-Krugman lobby failed to persuade?
It is unfortunately a quantitative problem, which makes it almost impossible for the average citizen to solve. Public works will cost the government, but will raise national income, and hence taxes. Is the latter enough to compensate for the increased expenditure? I therefore attempt a simple quantitative approach to test that question.
     It is not an algebraic analysis, but a robust and brutally simple approach to the numerical problem. I assume very rough figures for the way salaries enter into the prices of goods, and have simplified grossly to expose the argument, but I believe that this approach could be 'tuned' rather accurately if the correct splits (of one sum between its 2 or 3 parts) were determined and inserted. My conclusion is startling.
     Imagine for simplicity the United Kingdom to be a closed community with no external trade (*). I can therefore equate GDP with the sum of all incomes in the country [5]. Suppose, initially, that the annual GDP is 1trillion GB£. (1Tr£) Suppose that the government collects 20% of all income as income tax and 20% of non-exempt spending as VAT. [Table 1; Stage 1]   
     The income tax revenue stream is therefore 0.2Tr£ [Stage 2]. 
     If all the remaining net income (0.8Tr£) were spent, with half on VATable commodities, and half on VAT-free items [Stage 3],  the VAT stream would be 0.08Tr£, as that is 20% of 0.4Tr£ [Stage 4].
Of the VAT-free portion of GDP, I am going to assume that half represents salaries for farmers and shopkeepers, etc, while half is the cost of "raw materials". The salary portions, of course, constitute part of the eventual GDP, and are recycled back into the economy; the "raw material"  (**) is lost to the economy. [Stage 4]
     The VATable portion of net income, after deduction of the VAT, is spent on our voluntary purchases. I shall assume (in the first instance) that this also will be distributed 50:50 between raw materials and salaries (of boat-builders, opera singers and the like). The latter, as before, becomes part of GDP. [Stage 5],
     Let us now spend the tax we have collected (IT+V) [Stage 5], and suppose that 50% is salaries of civil servants, soldiers, nurses, etc.; so eventually part of GDP. A further 20% might go on benefits (which I shall count as GDP in that it will be treated as income by its recipients), 20% on infrastructure, leaving 10% as waste (e.g. paper clips, rubber bands, and shredded paper.) [Stage 6]
     In this very crude analysis it seems that, with an initial GDP of 1Tr£, a certain amount is lost to the economy on raw materials, infrastructure, and waste (0.444Tr£), while the remaining 0.556Tr£  recycles and swells the GDP to 1.556Tr£. This may relate to what economists know as the 'fiscal multiplier' [6]. [7]
     In Table 2 the argument is repeated with none of the assumptions changed except that VAT and income tax are both raised to 30%.  It turns out that the losses to the economy now fall to 0.4175 with an increased 0.5825 returning to GDP to produce an eventual GDP of 1.582Tr£.

The surprizing result is that raising taxes, in addition to improving infrastructure, has raised GDP, for the taxes in this model are to a considerable extent returned to the economy in the form of salaries and benefits. Raising taxes is very different in its effect from cutting government spending. (***)



Table 1.  Recycling of GDP with VAT and income tax at 20% (Units=Trillion £GB)

Initial GDP=1Tr£
Inc tax 
0.2
Net income 
0.8

VATable spending  
0.4
VAT exempt (rent, food)
0.4

VAT
0.08
Spent voluntarily
0.32
GDP
0.2
Raw material
0.2
Total tax  
0.28
GDP
0.16
Raw material
0.16


Waste
0.028 
InfraS
0.056
Benefits
0.056 
GDP
0.14





Table 2.  Recycling of GDP with VAT and income tax at 30% (Units=Trillion £GB)

Initial GDP=1Tr£
Inc tax 
0.3
Net income
  0.7

VATable spending  
0.35
VAT exempt (rent, food)
0.35

VAT
0.105
Spent voluntarily
0.245
GDP
0.175
Raw material
0.175
Total tax  
0.405
GDP
0.1225
Raw material
0.1225


Waste
0.04
InfraS
0.081
Benefits
0.081 
GDP
0.203








References:
[1] http://www.debtonation.org/wp-content/uploads/2010/06/Fiscal-Consolidation1.pdf
[3] http://www.tradingeconomics.com/united-kingdom/government-debt-to-gdp
[4] John Lanchester, London Review of Books, 8th Sept 2011
[5] http://www.investopedia.com/terms/g/gdp.asp
[7] Strictly speaking the recycled GDP will itself recycle in exactly the same way, after splitting into 'waste', 'infrastructure' etc., adding progressively smaller amounts to GDP with each cycle: 0.556, 0.309, 0.172, 0.096, etc. tending to GDP=1/(1-0.556)=2.252.  But for simplicity I consider only one cycle through the table for that is sufficient to make the argument. For the higher tax rate of Table 2 the additional GDP with successive cycles is: 0.582, 0.339, 0.198, 0.115, etc..
*  Spending of OUR money on FOREIGN goods is thereby avoided.
**  Though crude, these figures are careful not to overestimate the contribution to GDP. It is arguable that much of "raw material" is also income, e.g. for the forester. Likewise I am told that in a typical NHS Region, salaries make up more like 75% of the total cost.
*** Good government could spend taxes with this effect on salaries and GDP in mind.

Thursday, 28 July 2016

Labour Party: Splitting and Co-Operating.

Labour Party: Splitting and Co-Operating.

    In 2 months' time the Labour Party will elect  a leader by a democratic vote involving Party members and registered supporters. There are (currently) to be two names on the ballot paper; the wildly popular Jeremy Corbyn, and the practically unknown Owen Smith, who is nevertheless believed to be the preferred choice among Labour MPs. If Corbyn wins, which seems probable, there is likely to be a walkout by the Parliamentary Party. Corbyn will find himself head of a large grass-roots party, but with a mere handful of loyal MPs. What might happen then?
    To provide an effective opposition in parliament, it would be good if the rebel MPs could organise themselves to co-operate in some way with the Corbynites to test government bills. And not just the Corbynites, for the concept of an "official opposition" seems no longer appropriate. Why not cooperate with all non-Tory MPs?
     There will eventually be a general election, in 2020 if not before. The constituency parties, which may well have recruited massive popular support may find themselves forced to select Corbynite candidates. In that event the current Labour MPs may wish to fight their own seats but under a new name ("New Labour", "Blairite Labour", "Right Labour", or some such). A head-to-head fight would presumably let the Tories win practically every existing Labour seat. That dire situation might sufficiently focus the minds of non-Tory candidates to lead them to an alliance. (Something like that advocated in today's Guardian by Clive Lewis.) It seems obvious that in no constituency should a Labour fight against a New Labour, or a Scottish Nationalist, or a Green. Adequate straw polls and discussions will have to take place to make one or other of these competing candidates emerge as the "most likely to succeed", to avoid self destructive conflict.

Monday, 25 July 2016

Trying to explain the Foreign Secretary appointment


(Explaining Boris to a Taiwanese friend )



Dear Hsiu-Ju,

You raise another intriguing question – what is behind the appointment of Boris Johnson as foreign secretary. I am impressed that you continue to take such a close interest in our strange country. I am not a close confident of Theresa May, so can only guess. Here I "think as I type".

[1]  As a general principle 
Theresa May seems to have decided that those prominent Tories who voted 'Brexit' should bear the brunt of the work involved. Partly because enthusiasm and insight will be needed. Partly (perhaps) as a punishment; if they had not properly considered the difficulties, they certainly should have; and will have to do so now. The job of Foreign Secretary will tax the ability of anyone with any pretensions to leadership, or even competence.
[2]  Boris was a contender for the job of PM. Throughout the last years of David Cameron's leadership the Silly Press (and by that I include essentially all the newspapers) were forever touting the possibility that Boris Johnson was a contender for the leadership. That was no doubt galling for David Cameron, and unsettling for voters. If 
Theresa May wanted to dismiss the threat from Boris she could hardly have devised a better way. If he survives the test he is indeed worth having in the cabinet. If he flounders, he will probably have to leave politics.
[3]  Perhaps Theresa May has a strong sense of humour, and is running this one just to give us all a laugh. There was a strong intake of breath around the world as the appointment was announced. Much use was made of that absurd image of Boris J. in dark suit and hard hat, trying to zip into the Olympic arena on a wire but getting stuck a few feet from the ground. But can a grown up country, even one that prides itself more on its sense of humour than on its moral rectitude, practice such a joke on the world? The opposite numbers of all leading countries will have to keep a straight face while greeting and listening to Boris as he annunciates Britain's hopes for the future, and explains his previous (but widely bruited) derogatory remarks.
[4]  But perhaps Boris is indeed a really sharp mind with a clear understanding of Britain's role in the modern world, and is not merely a charismatic communicator and instinctive clown, with a smattering of schoolboy Latin and other vestiges of a privileged education. He has been a journalist; perhaps he can command the subtle and precise language needed for the job of 'diplomat-in-chief'. Perhaps he is an excellent choice to project British policy on foreign affairs in Europe, the Middle East, the Far East, Oceania, and the American continent – if Britain does have a policy in those areas. But perhaps Britain has no foreign policy, and the job of foreign secretary is to stall and obfuscate. In short; perhaps Boris is a good choice. We shall have to wait and watch.

Best wishes, Cawstein

Wednesday, 20 July 2016

Cut or Spend


Cut or Spend

Why is the "austerity" question still being debated?

     Still the battle rages! Ann Pettifor and Veronica Chick (Financial Times 4th Oct 2010) declared (ex cathedra) that cutting government spending (or increasing taxes) would not decrease the deficit, but increase it. But no one headed. The Nobel Prize winner Paul Krugman ran a column week after week with the same argument. In June 2012, he and Layard published "A manifesto for economic sense" [1], calling for a policy of fiscal stimulus to reduce unemployment and foster growth. Yet the ordinary citizens and their ordinary governments are very loath to spend further money as a way to reduce the deficit; it is too counter-intuitive.
     Part of the argument is easy: "A sovereign state is not the same as a household."  Obviously! But that point is not enough to persuade the averagely cautious to borrow money on world markets in order to "restore growth". Though I have grappled before with this topic [2],  I take it up again now, and attempt a more quantitative approach. I do not have the mental power to follow an algebraic analysis, and nor will my intended readership. But I have evolved a robust and glaringly simple approach to numerical problems of this sort. I assume very rough figures for the way salaries enter into the prices of goods, and have simplified grossly to expose the argument, but I believe that this approach could be 'tuned' rather accurately if the correct splits (of one sum between its 2 or 3 parts) were determined and inserted. My conclusion is startling.
     Imagine for simplicity the United Kingdom to be a closed community with no external trade. I can therefore equate GDP with the sum of all income in the country [3]. Suppose, initially, that the annual GDP is 1trillion GB£. (1Tr£) [Table 1; Stage 1]  Suppose that the government collects 20% of all income as income tax and 20% of non-exempt spending as VAT. The income tax revenue stream is therefore 0.2Tr£ [Stage 2].  
     If all the remaining net income (0.8Tr£) were spent, half on VATable commodities, and half on VAT-free items [Stage 3],  the VAT stream would be 0.08Tr£, as that is 20% of 0.4Tr£ [Stage 4]. Of the VAT-free portion of GDP, I am going to assume that half represents salaries for farmers and shopkeepers, etc, while half is the cost of "raw materials". The salary portions, of course, constitutes part of the eventual GDP [Stage 4]. (It is arguable that much of "raw material" is also income, e.g. for the forester.)    
     The VATable portion of net income, after deduction of the VAT, is spent on our voluntary purchases. I shall assume (in the first instance) that this also will be distributed 50:50 between raw materials and salaries (of boat-builders, opera singers and the like). The latter, as before, becomes part of GDP.
     Let us now spend the tax we have collected (IT+V) [Stage 5], and suppose that 50% is salaries of civil servants, soldiers, nurses, etc.; so eventually part of GDP. A further 20% might go on benefits (which I shall count as GDP in that it will be treated as income by its recipients), 20% on infrastructure, leaving 10% as waste (e.g. paper clips, rubber bands, and shredded paper.) [Stage 6]
     In this very crude first analysis it seems that, with an initial GDP of 1Tr£, a certain amount is lost to the economy on raw materials, infrastructure, and waste (0.444Tr£), while the remaining 0.556Tr£  recycles and becomes part of the final GDP of 1.556Tr£. (This may relate to what economists know as the 'fiscal multiplier' [4].) [5]
     In Table 2 the argument is repeated with none of the assumptions changed except that VAT and income tax are both raised to 30%.  It turns out that the losses to the economy now amount to 0.4175 with 0.5825 returning to GDP to produce an eventual GDP of 1.582Tr£.

The surprizing result is that raising taxes, in addition to improving infrastructure, has raised GDP, for the taxes in this model are largely returned to the economy in the form of salaries and benefits.

Table 1.  Recycling of GDP with VAT and income tax at 20% (Units=Trillion £GB)

Initial GDP=1Tr£
Inc tax 
0.2
Net income 
0.8

VATable spending 
0.4
VAT exempt (rent, food)
0.4

VAT 0.08
Spent voluntarily
0.32
GDP
0.2
raw material
0.2
Total tax 
0.28
GDP
0.16
raw material
0.16


Waste
0.028
InfraS
0.056
Benefits
0.056
GDP
0.14





Table 2.  Recycling of GDP with VAT and income tax at 30% (Units=Trillion £GB)

Initial GDP=1Tr£
Inc tax 
0.3
Net income
  0.7

VATable spending 
0.35
VAT exempt (rent, food)
0.35

VAT 0.105
Spent voluntarily
0.245
GDP
0.175
Raw material
0.175
Total tax 
0.405
GDP
0.1225
Raw material
0.1225


Waste
0.04
InfraS
0.081
Benefits
0.081
GDP
0.203





References:
[3] http://www.investopedia.com/terms/g/gdp.asp
[5] Strictly speaking the recycled GDP will itself recycle after splitting into 'waste', 'infrastructure' etc., adding progressively smaller amounts to GDP with each cycle: 0.556, 0.309, 0.172, 0.096, etc..  But for simplicity I consider only one cycle through the table for that is sufficient to make the argument. For the higher tax rate the additional GDP with successive cycles is: 0.582, 0.339, 0.198, 0.115, etc..


Sunday, 17 July 2016

Dear Jeremy Corbyn


Dear Jeremy Corbyn,

You would doubtless like to see [1] a Labour Party that espoused good Socialist principles, [2] that advocated them clearly, [3] that attracted gifted men and women to the party, [4] that motivated them sufficiently to dedicate a couple of years of their life to fighting an election, and [5] that won over sufficient voters in the United Kingdom to win a general election. Should any one of those let you down, you will be ineffectual. 
You are thrilled to find the wave of enthusiasm for your stance on Iraq, Trident, and Austerity that swept you to the leadership of the Labour Party in September 2015. On that basis there are some grounds for thinking that your stance might win a majority in the event of a general election, and no doubt you would like that put to the test. But, as Bismarck  shrewdly said, "Politics is the Art of the Possible". An idealist would doubtless stick to "the truth" even when no one listens, and no one follows. But the pragmatic dictum is nevertheless true to the extent that what actually happens is not achieved by the ineffectual idealist, but by the effectual realist; either a high-minded realist, or a low-minded realist.
To win a general election you need 650 loyal and able candidate MPs, and 10 million voters in the country. What is needed is idealism plus management skills, plus analytical power to calculate the effect of policy options, plus energy, rhetoric and luck. So, there is work to be done. Do you need help? Are you making good use of the available talent in the Party?
Has Labour a policy on:
Quantitative Easing?
Sale of council houses?
Proportional representation?
Worker participation on boards (Mitbestimmung)?
High-Speed rail?

Ownership of rail and telephone networks?
Grammar schools and Academies?
Curtailing the scope of the NHS so that it can achieve its aims?
Reforming the tax system along the lines of the Mirrlees Report?


Yours sincerely, Ian West
Middleton Cheney, Northamptonshire.

Monday, 4 July 2016

Is Corbyn the only possible Labour Leader?

If the Labour Party is looking for a leader they should work out what they want. Labour MPs might like someone to lead the opposition in parliament, particularly at prime minister's question time; a sharp intellect, quick with words, someone with antennae sensitive to the mood of the 'party in parliament', and the media, but resilient to the buffeting of envious critics. 

That would be nice. But the party leader MUST have a grass-roots following. They should have a potential constituency as large as that of the current governing party, or the ability to co-operate with smaller (protest) parties till they have a commanding lead in parliament. Therefore they should not be divisive, in the way that clause 4 (calling for state ownership of the means of production) was divisive. But instead should adhere to principles with a wide appeal, like honesty, generosity, and consistency; and advocate policies ensuring international stability, and the rule of law; and ensuring that "...power, wealth, and opportunity .. (lie) in the hands of the many, not the few...", (as written on the back of the Labour Party membership card). 

I cannot see anyone as a potential Labour Party leader who supported the sale of council houses, or of the GPO, or the invasion of Iraq or the bombing of Syria. Whom, amongst current MPs, does that leave?

--
Ian West, Middleton Cheney, Banbury,