Tuesday, 15 November 2011

There is something fundamentally wrong with Economics

From http://www.guardian.co.uk/commentisfree/2011/nov/14/technocrats-europe-bad-politics-economics
And there's plenty of evidence that having an economist run your country's economic policy is no help whatsoever. Last week, Joachim Wehner of the LSE and Mark Hallerberg of the Hertie School of Governance in Berlin published some research that looked at educational backgrounds of political leaders across Europe. Since 1973, 69% of Greek finance ministers and 55% of those in Portugal have had a PhD in economics; a qualification unknown to any British chancellor.
In his book 23 Things They Don't Tell You About Capitalism, the Cambridge economist Ha-Joon Chang points out that in recent history economic policy in Japan, Taiwan, China and South Korea has largely been set by lawyers or engineers. In India and Pakistan on the other hand, many world-class economists have been in charge of the treasury – yet their record have been no match for the Asian tiger economies. 

Thursday, 10 November 2011

The Greek/Italy economic crisis is caused by failure to tackle corruption

From today's FT:

If the crises in Greece and Italy tell us anything, it is that the European Union has tolerated widespread corruption, criminality and malign governance not just in supplicants from eastern Europe but in some of its core western European members. As we Europeans lecture the world on the importance of European values – transparency, good governance and competition – too often we turn a blind eye to Mr Berlusconi’s monopoly on broadcast media, the influence of the Camorra on the politics of Campania and the chronic cronyism of the Greek economy (about which the British and German governments, to name but two, are fully informed).
If anything is to come from the catastrophe facing Europe it is essential these patterns of corruption are broken. Otherwise neither Greece nor Italy will ever be free of the institutional sclerosis that allows these practices to prosper. Before we look lovingly at northern Europe for the answer, let us remember the billions of dollars in bribes of which German companies, like Siemens and Ferrostaal, have been guilty of paying their Greek interlocutors. These were made in order to secure lucrative but overpriced contracts which have been funded by those decent Greeks who earn relatively little but, unlike the country’s super-rich, actually pay their taxes.

Tuesday, 8 November 2011

Daniel Kahneman: How cognitive illusions blind us to reason

An article from Kahneman's forthcoming book Thinking, Fast and Slow (Allen Lane, £25)

1. Most financial advisors are no better (or worse) than random.
2. It's almost impossible to predict good leaders.
3. We think we are good predictors but we are not.


Saturday, 5 November 2011

How to Solve the Economic Crisis - Transaction Taxes AND Flogging Tax Avoiders

What makes the difference between a developed and a developing country? For example, what is the difference between the UK and India? And what can this tell us about the nature of development?

In the UK, the government spends lots of money on schools, hospitals, infrastructure and welfare. The income comes from taxes on people buying things, like VAT. And from people earning salaries – income tax and NI. Almost everywhere that transactions occur, there is a tax. So the model is that governments earn money by skimming it off every time it changes hands. So the government, to keep the economy going, needs to keep the money going round and round. Even paying money out for welfare isn't "losing" the money, because the money gets spent very quickly on other stuff. And if people stick money in a savings bank, about 90% of that is going to be loaned out to someone who WILL spend it. So that's why austerity budgets don't make any sense. That's why Britain's growth is in the toilet. On the other hand, you don't want to overspend because the law of conservation of energy probably operates so you can't spend money you haven't got. Well you can, but you will end up with inflation. However, none of this seems to apply to the purchase of investments. There is no tax on financial transactions. If I buy £5000 of Invesco Perpetual High Growth Rhubarb Fund, I don't pay VAT. Why not? And if I buy some futures, I certainly don't have to pay any tax. So the Tobin Tax makes total sense. If you put just a tiny tax on all derivative transactions, what a windfall that would be! They had some idiot on Newsnight the other night arguing against it, but he was obviously a paid lobbyist paid to lie and couldn’t come up with anything sensible.

The corollary of all this is that probably the highest crime against society is not the odd murder, but cheating on your taxes. Because it strikes at the heart of the financial model of our society. Murders are few and far between and only affect the immediate families. Tax evasion probably occurs partially due to peer affect. Most people I know would happily cheat on their taxes, in part because it's socially acceptable.

Now why is India a developing country? Possibly because the middle class isn’t yet big enough to take enough tax money to build all the hospitals, schools and welfare schemes that a developed country needs. But also because at least half the economy is black, so is not contributing taxes. And because tax avoidance is of course done on a big scale there.

I read recently that if everyone in Greece (and Italy) paid their taxes properly, the Euro wouldn’t have a problem! By the way, in Spain, where my partner owns a house, it’s almost impossible to sell a house without having to pay money into the black economy.

So it could be argued that penalties for non-payment of taxes should be SERIOUSLY strengthened. I’d start off with having the head of HMRC flogged for letting Goldman and Vodafone off the hook for their taxes. (See Private Eye for the full story.)

To summarise: 1. Put a tax on every financial transaction, especially derivative transactions. In fact you might only need to tax derivative transactions. 2. Make stiff penalties for tax avoidance. 3. Shoot the head of HMRC.