Tuesday, 9 October 2012

David Cameron, Fairness and Re-inventing the British Economy

David Cameron this morning argued that the rich had paid 'ten times more' than the poor towards tackling the deficit, part of an ongoing Conservative message seeking to demonstrate their commitment to fairness amid austerity. For months now we've been hearing variants of this message from individuals in the media and in politics, with some going as far as the straight-out argument that the wealthiest pay a disproportionate percentage of the overall tax take and therefore should be given something of a break in the rhetorical class war they feel is on-going.

Class warfare itself is always a strange idea. It's difficult to imagine a concept of class which is not divisive, even discriminatory in some way. It rarely has good connotations. In any case the rich pay huge amounts in tax, absolutely massive amounts more than the poor. And people like Fraser Nelson who point this out are absolutely right. The difficulty, the chief difficulty that they face is that the rich also earn huge amounts of money, absolutely massive amounts of money. That is to say, the poor are statistically less likely to earn enough to pay tax and if they do pay tax, they tend to pay tax on lower overall earnings, and to pay a lower marginal rate of tax on those earnings.

Similarly, when Cameron claims the rich have contributed far more than the poor, this is rather ignoring the fact that job losses disproportionately affect the poor, as does wage-stagnation. The rich have been getting richer while the poor get poorer. By analogy, it's true that when the public sector declines and the private sector grows, women on average lose more in earnings than men, and in that circumstance you could just as easily argue that under this Government men were contributing more towards paying down the deficit.

All of this ignores the fact that an extra pound (or one less) of income matters considerably more to someone on the minimum wage than to someone with an income over £150,000 per year. The diminishing marginal utility of units of currency is a fact of economic reality. Consider spending priorities for someone on a modest wage: At first you'd pay for the mortgage, the rent, council tax. Without these you'd lose your home, or face legal penalties. Then there's food (in the US, there's healthcare too), heating, electricity, utilities in general, and of course transport which you most likely require to get to work. Only after these necessities do you pay for other items, from a new laptop to eating out, to outright luxuries.

When you earn very little, every penny matters because you might barely be able to pay for the necessities. And luxuries you buy are precisely that, a luxury. For someone with great wealth, even luxuries can be almost effortlessly afforded, and as such cease to be rare, and lose much of their psychological value. Although, they might find even more expensive things to buy. They often do.

And of course, while the poor are often struggling to pay off the mortgage, and yes, even the credit card, the rich are able to garner interest on savings, make investments and avoid paying interest when making purchases. They enjoy greater and easier access to a range of advantageous options and opportunities, including the ability to have multiple homes, more comfortable and swifter modes of transport, more capacious living spaces and more pleasant environments. They are more easily able to make the decision to work less, and enjoy more leisure time without losing the financial means to enjoy these advantages. And they are able to outbid those poorer in society, on virtually any commodity, from housecleaners to simple food, when the supply is scarce. And of course, they routinely outbid the poor on public school educations.

Wealth performs the same function it has ever performed, it makes it easier to succeed and to survive, to develop your own potential and to thrive to the best of your ability, and to obtain even more money. By its very nature it is surplus; wealth is obtained by earning more than you need, and more even than you spend. Sometimes this is done through thrift and extreme hard work and entrepreneurial spirit, other times it is through good fortune or even by birth.

There are two lines of argument on taxing income, and wealth. One is essentially economic, and has to do with efficiency and equality, and is not entirely simple. Income serves as a labour price, and sends signals which are meant to match supply to demand in a market for specific skills, experience and capabilities. In this way, the argument is put that for example, banks pay large sums for top talent because they want the best, in order to employ their extremely large sums of money to the best of purposes. Alternately, poor households tend to have children who perform below their innate potential, and excessive inequality has the habit of reducing the productive potential of a society in many complex ways including health and social costs.

The other line of argument is in some sense moral or political. One argument is what we might term 'structural', in that it argues, for example, that wealth must be taxed to avoid intergenerational transfer of advantage which is unmeritocratic in character. This kind of thinking produces the inheritance tax. The other line is more versed in liberty, and this view demands that property rights should be treated as just that, rights attributed to the person who owns and has earned their wealth, such that state interference should be seen, again, as just that. This sort of clash of ideology, while a simplification, is very much active in our politics today.

I think most people can sympathise with both sides of each argument. We can see that people with special talents are in greater demand, and we can just as easily see that talented people sometimes aren't given chances as a result of their background. We have a desire to pass down our own assets to our children, and we don't want to be told it has to be, rather impersonally, recycled into the social vat. But equally, we can understand the price that comes with social fairness.

The Prime Minister-- it goes without saying, a man of great personal means-- cannot hope to convince the public that his budget is fair, or that the rich are paying more than the poor. Even if it was absolutely true on paper, and he was not distorting the facts to his advantage (which few members of the public would believe, even if it were true- of *any* politician), most ordinary people see rising costs and stagnating wages. And they see the richest in society becoming wealthier in newspaper headlines year on year.

David Cameron is wasting his time on fairness, his only meaningful argument was efficiency and his preference is for liberty. His goalpost was deficit reduction, and on that he has, so far, plainly failed. I need not say that in my view his economic strategy is devastatingly mis-conceived, because ignoring anyone's views or beliefs, the Conservative party's fortunes, for a generation no less, will almost certainly be decided on the deficit and household finances. Costs are destined to go up: food prices have unstoppable momentum due to surging global demand, and a serious drought this year, and energy prices are similarly disposed, and suffer from a poorly designed energy sector in the UK with a lack of forward investment. And as for wages, with diminished demand for labour and high unemployment we are unlikely to see wages rise above inflation, as indeed they have not.

 In the dying days of World War II, not long after the Great Depression, the then government of the United States drafted the G.I. Bill, seeking to provide for the veterans of the conflict. This legislation would allow former soldiers to take out low-cost loans, attend further education and generally facilitate their re-entrance into society. In the process it helped many of them to advance their lives ways otherwise not possible, including moving into better accommodation, creating new businesses and developing skills. In short, it helped create the American middle class of the post-war era and to end the staggering inequality that had preceded the great depression.

The UK is currently treading water, holding its breath until the moment of calamity passes, and things go on as normal. But normal was a delusion, economic inequality in 2008 was not so far from that before the great depression, and it has not improved since. It was obscured by the availability of credit, and the unwinding of all that leverage is the cause of much of our ongoing problems even now.

 Low rates of interest, much touted by Government are as much bad sign as good, as much a casualty as a cause. They have not risen because private money has fled away from risk and into Government debt (to say nothing of BoE purchases), and they cannot rise because to do so would quickly render the mountain of British debt unsustainable, inducing increased rates of default among households who have survived the recession only because of diminished debt-servicing costs. Household debt levels, built up during the crisis, can only be reduced by substantial wage inflation, default, or an injection of cash from elsewhere. Otherwise, stasis is the best available option for the economy, because significant recovery cannot realistically happen while Government is retrenching, Private Investment is at a standstill and demand from both domestic and foreign sources is tepid at best. The European crisis is part of a long term re-organisation of the economic landscape, and it has affected us and will, but Britain too has a reconfiguration to undergo, and right now, we aren't starting down that road anymore than they are.

 The Tories want to cut somewhat faster, Labour somewhat slower. What noone in politics seems to be able to tell us, is where our next balanced, healthy economic generation will come from. If Ed. Milliband's one nation speech had one theme, it was that society can only succeed if everyone participates, and is able to participate, if noone is left behind. It demonstrated arguably more of a coherent policy vision than the Prime Minister has for Government, but it left out that one lamentable necessity of a responsible opposition: details of a credible alternative. Labour remains afraid to commit. It is unclear whether they will commit even on the eve of the election.

In politics there are few easy answers. The coalition is essentially waiting and hoping things get better. They have no answers. George Osborne once said that if he had a magic wand that could mend the economy, he'd wave it. Which is appropriate, as what little the coalition does do seems to be little more than magical thinking, on the one hand worried about what Krugman terms the 'confidence fairy', on the other making gestures and 'signals' by reducing regulations and lowering taxes with no proven beneficial effect-- Cameron campaigned on reducing corporation tax and removing investment tax credits, with the net effect that cash-rich companies have hoarded wealth, and little private investment is currently going on. Labour clearly believes it has, or had answers, as evidenced by many of Ed Balls's speeches, but is afraid of being caught flat-footed by events. Furthermore, it is afraid that by the time of the next election there will be far less room to act with Government spending. So they are afraid to say anything meaningful.

Even as the IMF downgrades its forecast for this year's GDP growth in the United Kingdom, its projections for next year remain rosy. Just as their projections for this year were last year. It's entirely possible their predictions for 2014 will be quite upbeat in 2013. The only real question that remains, is how many years will it be until they are actually right? And how much long term damage to the nation's productivity will we suffer before we begin to re-invest in our future? These are the questions on which the next election will not hinge, these are the questions politics cannot answer, these are the questions for right now. No matter what happens to the country, the causes will be obscured and the choices relatively binary, Labour or Conservative. And neither has any answers, so neither can really be held to account.

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