Monthly Archives: November 2011

Director

Jon Thorisson
Eva Joly Institute,
Dunhagi 19
107 Reykjavik,
Iceland

TEL: 00354 821 99 54
E-mail:info@evajolyinstitute.orgThis e-mail address is being protected from spambots. You need JavaScript enabled to view it

Board of directors

• Helen Garlick, Barrister
• Helge Skogseth Berg, Attorney
• Jean Michel Matt, Accountant

Advisory board

• Björk, Artist
• Helena Kennedy, QC
• Edgar Morin, Philosopher
• Richard Murphy, Tax Research
• Yoko Ono, Artist
• Ann Pettifor, Director for PRIME and Advocacy International

Compare and contrast two statements.

Richard Murphy: “We can never solve all crime”

Richard Murphy: “Yes I am saying there isn’t an efficient level of crime”

If we can never solve all crime then there is a level of crime that it is efficient to have. Only if we can solve (or prevent, clean up, stop) all crime can it be efficient to do so.

If we cannot solve all crime then we have to make a decision about which bits we’re not going to solve: otherwise we will be devoting ever more resources to solving that last bit of crime even while we know that we cannot in fact reach the goal.

Thus there is an efficient level of crime to accept that we have.

When private sector financial services have so obviously failed and when the private sector is sitting on tens, if not, hundreds of billions of cash it has not a clue what to do with it is very obvious that paying the private sector to manage the projects we need to fund our economy, to allocate the investments that small business needs and to set long term economic priorities, on which subject they have no expertise or experience since all have been reduced to the decision making ability of the market trader, would be economic madness.

That’s why I argue we need to ensure that some of the wall of money sent into pension funds each year – just a quarter of it – be diverted instead into making real investment for the benefit of the future of this country so that those for whom those funds are supposedly invested have the prospect of a job until retirement. Second, they need to see that they’ve invested in something that their children can use and therefore pay them for – because that’s the basis for the fundamental economic contract which almost all private sector pension fund arrangements now quite explicitly ignore.

There is at the core of our economy a void right now. It’s a void because there is no demand. It’s a void because there are no new jobs. It’s a void because there’s no real investment. And there’s a void because there’s no real thinking on how to solve all three problems at once without breaking the bank.

It\’s lovely, isn\’t it? Just spend the money on the things I think are important and your pensions? No worries!

But, as ever, he\’s missing the damn point. Our question isn\’t \”where does the money come from?\” its\’ \”how does the money make money?\”.

So, let\’s agree, there\’s lots of pension money, lots of corporate money, out there not doing very much.

We\’d like it to be doing quite a lot so agreed, let\’s think about ways that we can get it to do so.

Ritchie\’s offering is the Underpants Gnomes.

1) Force Them!

2) ???

3) Profit!

There\’s no mechanism, no part 2), which allows profit to be made after we\’ve forced them to stick the money into these infrastructure investments. So forcing them won\’t lead to 3) the profts.

However, we could set up a 2), a structure for them to profit. We could allow tolls on roads. That\’s only an example you understand….but we\’ve got to provide the 2) for the plan to be able to work.

As we have done for windmills for example: yes, leave aside whether they\’re sensible at all and look just at how they did get the private money into them.

They set up a ways, ROCs and FiTs, so that we had a step 2) so that they could make money. At which point we didn\’t have to force anyone at all: in fact, we\’ve had to limit access to those profits as the wall of money came charging in.

All of which is why Ritchie\’s scheme is insane: there\’s no step 2) in his plan and if there is a step 2) then you don\’t need to do the forcing.

On the same subject but in a different piece he gives us:

Second, let’s get real: most small businesses employ just one person – and that’s the owner. there’s nothing wrong with that. But candidly it only suits some people, those not inclined to it should not try it, and those who are naturally tend to do it anyway. We don’t need to encourage entrepreneurship.

Oh, good. We\’ve just abolished incentives and their effects at the margin. but yes, I keep forgetting. Ritchie doesn\’t believe neo-classical economics so he doesn\’t believe that things happen at the margin, does he?

But jobs need to be taxed, fairly and properly so let’s not ask for tax favours for small business.

Jobs need to be taxed? What?

I can get incomes need to be taxed, get capital returns need to be taxed, but jobs? This is the man who says that unemployment is one of the great crimes of our times and he wants to tax jobs? Eh?

And capital could come in then as a flexible profit and equity sharing arrangement with lenders – as is really needed, with much less complexity than now.

Erm, if you\’re in a profit sharing and equity relationship then you\’re not in one with a lender. You\’re in one with an investor. Lending is debt, investing is equity.

And let’s not pretend that banks and business angels are going to supply this new capital – a new state invetsment bank needs to do that – funded using 25% of all pension contributions paid in this country as a condition of the tax releif  given on them. This would transform small buisiness capuital. We wouldn’t be making a few million avaiulable as Osborne wants: we’d make all the capital needed available.

And there it is: your pension is now going to be invested in the capital of start ups. Essentially, he\’s insisting that you get your pension through the medium of venture capital. Something which is going to be really, really, interesting, given his hatred of markets in second hand securities. Because without those secondary markets you can\’t sell out to buy an annuity, can you? Can\’t realise the capital value of your investments?

And this just in from the PCS paymasters:

And lastly as a matter of course make sure tax offices are open in all population centres of more than 30,000 people so people can go for HMRC advice whenever they need it.

Isn\’t that just amazingly lovely?

There\’s around 12,000 post offices for 65 million people: 5,000 people to a post office. So we need a tax office for 30,000 people. That\’s 2,000 tax offices then.

As of 2009 HMRC had 75,000 or so staff.

To staff a tax office (so you can drop in at any time! would require evening working etc) you\’re going to need, what, 5 or 6 people? Ah, no, sorry, forgot, 20 -30, eh? Manager, couple of junior managers, they\’ll have personal staff, need back office peeps, diversity training, that special person who teaches them how to mumble on the phone.

Yes, I think he might have managed it! Come up with a proposal to double the number of jobs for PCS members.

Amazing really: Ritchie\’s just so damn cheap, isn\’t he? Selling out for so little?

I do hope he\’s being misquoted here:

This week I spoke to Richard Murphy, the economist and tax expert, whose new book has the self-explanatory title The Courageous State and brims with imaginative thinking. Using pension funds for national investment, he told me, could be done much more efficiently than the Osborne plan. In exchange for the vast sums granted in pension tax relief – £38bn at the last count – we could be compelling funds to put money into the very infrastructure projects the government is so keen on – and with no need for a mouthwatering rate of return to draw them in.

Your pension would be compelled to invest in infrastructure projects. At less than exotically wonderful returns. Doesn\’t that just fill you with joy?

The same logic, he says, applies to credit easing, the roundabout method Osborne is using to persuade banks to supply businesses with money. Again, were we to insist on a quid pro quo for pension tax relief we could channel funds into a national investment bank and send credit directly to those businesses.

Again, your pension would be compelled to invest in loans to those businesses which  a politically directed national investment bank would find worthwhile.

Note that both of these are designed as loans: a perfect way to lose money. Inflation, you will note, is at 5% or so and long term interest rates at 3% or so. Your pension will be compelled to invest in something that loses you money.

If he\’s not beingmisquoted then Ritchie\’s making the same mistake he does so often. The aim isn\’t to find the money to do things. We know there\’s vast sums of money sitting in pension funds and on corporate balance sheets. The aim is to create a structure in which it is worthwhile to use this money to do these things. We\’ve got to create a revenue stream from these \”investments\”, a revenue stream which makes people want to make the investments with the money that is already there.

Once that revenue stream has been created (say, tolls on roads) then people will happily invest the money to get the revenue. Forcing people into losing money isn\’t the way: tempting them by offering a potential profit is.

And given his well known editorial policy I\’ll repeat my comment there here:

\”Let’s be explicit about what he’s saying here: he’s explicitly condoning crime. He’s saying we should simply allow it. He says we’re better off for this criminal conduct.\”

Not quite. I\’m saying we\’re better off by ignoring rather than attempting to eradicate this last amount of crime. Something we actually do all the time: we don\’t send out detective squads to catch jaywalkers, don\’t have riot police making sure late night drinkers put the burger wrappers in the bin. We chase and prosecute crime according to the resources that have to be spent to do so and the benefits we get from having done so.

As to the maths of the example above. Say it\’s cash in hand no VAT work (which a lot of it is). Pre-cracking down on the tax evasion there\’s £10 billion of economic activity going on. Post-crackdown there\’s that £2.33 billion in revenue, yes there is. But there\’s also only £6 billion in total economic activity. Is £2.33 in tax revenue worth the loss of £4 in economic activity? Clearly possible to have different views on this but I would argue probably not.

If the numbers change, we get £2.33 in tax revenue and only a £1 reduction in activity…..or let\’s say for each £1 in revenue we get only a 30 p reduction in economic activity (which is about what the tax deadweight costs are for an economy like ours) then perhaps I would argue for the crackdown.

But not when a crackdown would make us all, in aggregate, poorer, no, probably not.

Beyond the passionate intensity of Ukip and the far left, nobody is speaking with boldness and clarity about how to deal with a eurozone collapse. The [r]est lack all conviction.

So that\’s Our Jackie then.

It’s clear what we need.

Would they now step forward, please? It will take some courage to do so – to say what they think, and to say they’ll act on it – but that’s exactly what we’re asking for from politicians.

Is that too much to ask? Surely, not?

It has to be said, the idea of Ritchie turning up to UKIP meetings does disturb. But we\’ll accept his vote nonetheless, despite our being neo-liberals.