Monthly Archives: November 2010

And – most important – although household growth is modest at best whilst trade growth is negligible and businesses biggest customer is slashing spending – especially on investment which it always buys from the private sector – business is going to be investing enormously.

It’s just not going to happen. What it it going to be spending on? And why should it spend? What’s the rationale for doing so without any government stimulus for doing so?

The problem with this view is that it is assuming technological stasis. That business investment is only driven by the level of aggregate demand in an economy.

Something which we know is simply not true: this odd mixture of markets and capitalism is, as we\’ve found to our long term good fortune, actually the great innovation machine, the greatest we\’ve as yet been able to devise.

Part of my work over the past week has been to go and knock on some City doors. \”Oi, mate, wanna buy an idea?\” sort of stuff.

Project one is to prove the technology to clear up a billion tonnes odd of pollution while extracting the stuff to make fuel cells work. Project two is simpler and cheaper: a new method of separating the lanthanides. Something which would make, assuming success of course, each 1MW of windmill installed about $3,000 cheaper.

No, these aren\’t in fact huge worldchanging projects. Rather to my surprise though it looks like we can get both ideas funded (and a big shout out to those several readers of this blog who passed along contacts to get me in front of those City guys).

Which brings me to the real point. Knowledge of these sorts of things is local: they aren\’t the sort of things which would occur to a retired accountant from Wandsworth. Which is why said retired accountant is sitting in Norfolk puzzling over what business might invest in. We\’re going to go off and spend money on making his beloved Green New Deal a reality: which is why we use markets to allocate capital rather than retired accountants from Wandsworth actually.

Iris people, crippled by mortgage burdens they will never be personally be able to repay because even bankruptcy does not wise such debt in Ireland

Please Ritchie, wipe the drool off your chin.

Mortgage debt in Eire is recourse, just like it is here in the UK. So even if you give the house back you still owe the money.

But of course such debts are wiped out in bankruptcy.

Really, don\’t be absurd: and yes, this is something an accountant should know.

Most interesting today.

This for example. Not collecting tax which isn\’t due is treason now.

Or:

And why did he say this:

B[ecasue] higher business taxes will ultimately be paid by a combination of employees (with lower wages and salaries), consumers (through higher prices), or shareholders (with lower dividends). And in an open economy, such as ours, it will probably be the employee who loses out.

This is nonsense.

No, not nonsense, it\’s the standard economics of taxation.

And finally, the Exchequer Secretary to the Treasury says:

First, people’s rhetoric seeks to gloss over the relative proportion of the tax gap that is attributable to large business.

Second, their own estimates have looked at the statutory rate of Corporation Tax, and the effective rate, and classed the difference as avoidance. They’ve chosen to ignore the fact that much of the difference can be explained by double taxation relief, capital allowances, R&D tax credits, and other legitimate reliefs.

Yup, the basic criticism of Ritchie\’s calculation method that first appeared right here on this blog.

Second, there’s much debate on Ireland’s 12.5% tax rate, and rightly so, but the bigger issue concerning this rate was highlighted by me based in my report on the Irish Congress of Trade Unions and for the TUC entitled “Pot of Gold or Fool’s Gold?” . The reality is that due to lax rules on transfer pricing, the taxing of dividends and controlled foreign companies it does not really matter what the tax rate is in the Republic – the tax base is or will always be close to zero and as such the rate becomes almost irrelevant.

The tax base is close to zero? So they can\’t be raising any money from it then, right?

By EU standards, Ireland is a low tax jurisdiction overall, and because of the Exchequer deficit and the cost of the bank bail-out, that will have to change.  But we are not a low Corporation Tax jurisdiction.  Ireland’s Corporation Tax take as a percentage of GDP was 2.9% in 2008.  By comparison, Germany’s Corporation Tax take for the same year was only 1.1% of GDP.

So what\’s Germany\’s excuse then? What with them having a higher rate of corporation tax and all that?

And, as you might imagine, manages to get it really rather wrong.

He then says:

Productivity has risen because capital has sought out the cheapest labour possible to substitute for that bought in the US. That cheap labour – mainly Chinese in the US case – has forced down US labour rates. But the return to capital has grown enormously – reflected in the supposed productivity curve, which does actually reflect substitution of labour.

So, labour is much worse off as a result of free trade where capital can move and labour cannot.

Well, no, his chart does not show that labour is much worse off. It shows that of the gains which that capital mobility seems to have encouraged, much of the gains have gone to capital.  Not all of them, but much of them.

And, if we sidestep the known problems with US income statistics (household size has declined substantially over those decades, something not accounted for, meaning that income per person in the household has risen much more strongly than shown. Further, that the real hourly wages are cash compensation, not total compensation. Leaving out, crucially, medical insurance which is a substantial and major (and rising!) portion of total US labour compensation) we might leave it at that.

Mobility of capital is a bad thing for the labour in the places where the capital mobilises from.

But should we leave it like that? No, actually, we shouldn\’t.

What else has happened over that same time period?

Hmm:

World poverty is falling. Between 1970 and 2006, the global poverty rate has been cut by nearly three quarters. The percentage of the world population living on less than $1 a day (in PPP-adjusted 2000 dollars) went from 26.8% in 1970 to 5.4% in 2006 (Figure 1).

The mobility of capital seems to be hugely beneficial to those people in places where the capital moves to.

So, which should we be rooting for? That globalisation means that the hard working labourers in our own country/ies don\’t get much of the benefit but that the poorest of the poor are brought up out of destitution in the greatest reduction of poverty in the history of our species?

Me, I\’ll go for the latter really.

But, there\’s one more thing!

A really rather important thing. Ritchie is assuming that capital has in fact left the US over this time period. Which is an interesting question: has it in fact done so?

Recall our basic stuff about trade economics. The balance of payments. If you run a trade deficit you must, by definition, be running a capital surplus. That is, that the balance must balance.Conversely, still in order to balance, if you are exporting capital, in aggregate, you must also be running a trade surplus.

So, what has the US trade balance been over this period? For that will be  the inverse of the capital account.

Hmm. What\’s that? The US trade balance has been in deficit since 1976 you say? That thus the US has been importing capital since 1976, definitionally?

That capital hasn\’t in fact left the US? Has, in fact, entered the US?

All of which really rather leaves Ritchie\’s argument in something of a mess. There hasn\’t been the capital flight which he assumes has led to the reduction in labour wages, he\’s grossly overstating said reduction (apologies, failure to rise) of such wages and finally, even if everything he said were in fact true it does seem a really rather national form of socialism to insist that the poorest of the poor foreigners getting richer is a bad idea if the incomes of the richest, but \”our\”, \”national\”, working class on the planet only rise slowly as a result.

My favouritest part of the whole thing though?

But they also have no innovation of investment base left either. Free riding the system has left them financially, intellectually, and socially bankrupt. France and especially Germany took a different route. And it’s paying dividends.

Germany has been running trade surpluses over these decades, meaning that Germany really has been exporting capital over these decades. And yet, Germany is used as the example of how much better things would be if the US hadn\’t been exporting capital (which it wasn\’t anyway).

Me, I put all this confusion down to the fact that Ritchie doesn\’t in fact know enough economics to realise that the balance of payments must balance.