Day 3992: Tobin or Not Tobin: Why Paddy Ashdown is Wrong and We Need a Robin Hood Tax like an Arrow in the Head.

Tuesday:



Time to take a leaf out of Daddy Alex's book – and take my life in my fluffy feet – by picking a fight with Lord Paddy!



Look, for starters Robbing Hoodie ROBBED the taxman; he didn't work for him! A "Robin Hood Tax" is a CONTRADICTION IN TERMS!

People say "it's an itty bitty little fraction of a percent but it raises oodles of dosh." Well, it's either one or the other. If it raises a lot of money then that's got to come from SOMEWHERE.

And here's the real kicker: it comes from YOUR pensions and insurance. It doesn't come from "the rich" or from "the bankers". It comes from YOU.

The RICH do not, on the whole, spend their time buying and selling their assets over and over. They leave their wealth invested – in bonds or shares or in gold or oil paintings or racehorses or whatever. That's your problem right there: money being locked away in unproductive assets instead of being made to work creating business and jobs. A tax on capital transfers WON'T TOUCH THAT.

The capital transfer tax or Tobin Tax is usually said to apply to buying and selling shares and bonds, although some formulations suggest that it might be applied to ANY transfer of cash (yes, including moving your own money from your current account into your savings account).

The Tobin Tax mostly affects the HIGH VOLUME of stocks and shares traded on stock exchanges, particularly in LONDON.

But Bankers, you may somehow not have noticed this, do NOT play the city casinos with their own money. They invest money on behalf of clients, and mostly that is money from the huge funds controlled by pension funds, insurance firms and other financial institutions. And THAT money comes by and large from ordinary people paying in money to their pension plan or insuring their health, home, holiday or the rest.

If you're going to take fifty billion quid in extra tax then THAT's where it's going to come out of. Pensions and insurance firms will make less profit on each transaction. It doesn't matter that it's only a little bit less per transaction; if it's going to add up to a LOT of tax raised then it's going to be a LOT less profit overall. So they will need YOU to pay that extra bit in to cover it.

We've been here before.

When Mr Frown raided the pension funds back in the days when he was Mr Pay Down the National Debt (following Fatty Clarke's plan for repaying the tripling of the national debt the Conservatories ran up under Mr Major Minor, oh those heady days), what he did was to abolish a little tax giveaway called the Advance Corporation Tax Credit or ACT.

What ACT meant was that when company dividends were paid, 20% of the dividend was sent to the treasury. Ordinary shareholders would pay tax on their dividend, but the ACT was like a payment on account, so some or all of the tax they owed was already paid. But Pension funds didn't have to pay tax, so they could reclaim ALL of the ACT credit. It was only a little thing, an itty bitty amount per dividend. But it added up to a BIG amount in total.

And through the effect of compound interest, that amount could be snowballed to really build up the value of the pension fund.

So when Mr Frown took the ACT away, that REALLY hit the long-term growth value of the funds in which pensions were invested. And that's a big factor in the way that pensions suddenly became HUGELY more expensive to fund. People with private pensions had to pay in a lot more. Many companies decided that they had to stop offering final salary pensions because they were just too expensive.

(Ironically, Mr Frown STOPPED using the pension money to pay down Britain's debts and instead started using it to pay lots more public sector workers. Which is another reason why some people are a LITTLE bit resentful about those public sector workers who are demanding EVEN more from tax payers to fund all the extra pensions that all the extra workers are going to need. It would be easier to believe "we want decent pensions for everyone" if Mr Frown had not explicitly funded public sector pensions – and salaries – by raiding the private sector pensions for the money!)

The government and the Liberal Democrats in particular say that people who are paying into pensions are doing the RIGHT THING.

Now we could have a great big debate about whether they are or they aren't – pensions are of course more tying up wealth in unproductive savings rather than spending or investing money in a business – but since we have made a retirement, and a COMFORTABLE retirement at that, not merely an ASPIRATION but an EXPECTATION for most people then someone has got to pay for that.

Until the Seventies, that someone was always the government, but since the Eighties successive governments have made it abundantly clear that they are not going to pick up the tab and people had better make their own arrangements.

So it's a bit bloody cheeky to then keep eyeing up the savings of those people and going "we'll have a chunk of that, thanks".



(And the same thing goes for the so-called Higher Rate Pension Credits too. As I Twittered last week: that's not £40bn GIVEN to private pensions; that's £40bn NOT TAKEN from them. There IS a difference. Payments into your pension pot are supposed to come from your PRE-TAX income, because you are deferring that income until later in your life and you are going to get TAXED on it when the pension pays out. So it's somewhat NAUGHTY to tax it going IN as well.)



Anyway, the WORST thing about Captain Paddy's article is that he doesn't just want to raise yet more tax, but that he already has a wishlist of things to SPEND it all on.

Yes, of course it would be wonderful to end child poverty, or to reverse climate change, or to meet our Millennium commitments. But we are ALREADY spending more than we raise in tax. And we are already taking more than half Great Britain's GDP. Somewhere between none of it and all of it there has to be a limit to how much of what the country produces the government can take in tax. Adding a new tax burden and then hypothecating it to causes, no matter how laudable and worthy, just makes it more difficult to close the gap between what we are getting in and what we are forking out.

And, at the last election, the country made the choice to go for LESS tax and LESS spend.

That's the truth about the "ideological" cuts, incidentally. The country chose to accept the need for cuts. Just as in 1997 when the county accepted the case for more spending on public services, and so the largest vote went to the party "ideologically" inclined to SPEND, so OF COURSE in 2010, knowing that there had to be cuts, the largest vote went to the Party "ideologically" inclined to implement them. As opposed to the one which promised fiscal prudence and then spent like there was no tomorrow. Which in the end, there wasn't! And then promised us fiscal prudence again. And also promised us "Cuts deeper than Thatcher's". And now deny everything.



But never mind that Paddy is having a fit of the TAX-and-SPENDS; all this austerity is bound to give even the best of us a funny turn. But I want to say why this tax is WRONG no matter WHAT you spend it on.

You see, Paddy suggests that the Robbing Hoodie Tax will have a "calming" effect on the markets, as though it will act as an automatic regulator.

The logic behind this is that people will make choices about whether or not to do transactions if there's going to be a cost involved, so there will be fewer "unnecessary" transactions. The assumption here is that FEWER transactions is necessarily BETTER.

That's because people think that more trading means that the market is more out of control.

And there have been a good few occasions now where we have seen huge drops in the stock prices allegedly driven by computers chuntering away at huge volumes of trades and getting themselves stuck into automatic selling spirals.

But a free market isn't SUPPOSED to be "under control". And those incidents stand out because they are the EXCEPTIONS; they are NOT the way the markets behave day in day out almost all year round.

There're plenty of things wrong with Free Market Theory – like the assumption that investors will always behave RATIONALLY (have you SEEN the stock market?!) or that everyone has the same access to INFORMATION (have you HEARD of insider dealing?!) – but there being TOO MUCH trade is NOT one of them.

More transactions OUGHT to be MORE stable.

This is the most basic of those things called "market forces". A famous man called Mr Adam Smith wrote a book about it called "The Wealth of Terry Nations" (clue: invent the Daleks). Mr Adam Smith called this "the invisible hand" of the market, which "guides" people to find the right price.

If you happen to be a left-wing critic of liberal economics, you might talk about "the invisible hand" as some kind of crazy right-wing belief in MAGIC or WOO.

In which case, you need punching in the head, because it's NOT belief in magic; it's A GREAT BIG FLUFFING METAPHOR.

There isn't a REAL "invisible hand"; there isn't a magic pixie who "knows" what the proper price should be and "guides" the market to it. It just means that the market reaches a consensus without everyone having to sit down and agree on what it will be.

The theory of market forces isn't a made up belief like crossing your fingers for luck, or praying to Mercury for a safe journey, or the dialectic imperative of history. It's based on the way people really behave (or at least the way they behave a lot of the time).

It's like a weight on a spring. Let the weight go and it will bounce up and down as gravity tries to pull the weight down and the spring tries to pull the weight back up. At some point the weight will settle down and stop. No one has "decided" the height it stops at; it's just the point where the downward force and the upward force BALANCE.

So, somewhere there is a fair price; no one knows what it is. BUT if some people are charging more and some people are charging less then buyers will go to the people who are charging less. The people who are charging more won't sell until they drop their prices. Prices will fall. BUT (again!) if there are limited supplies, the people who are selling might chose NOT to sell if the price is too low, so the people who are buying won't be able to buy until they raise the price. Prices will rise. Between them, these two forces will reach a BALANCE point and that is the "market price".

The ACTUAL price you might pay at any one moment will wobble up and down around this level as the market is constantly adjusting and readjusting. INDIVIDUALLY people don't "know" the market price but they can see from the trading around them what SORT of price it should be and can either squeeze a good deal out of a seller or pay over the odds if they're in a hurry to buy and so strike their own deals accordingly at ABOUT the market price.

Now if there's a REAL change to the supply in the REAL World – like frost destroying the broccoli crop or a new oil strike – then the balance of the forces CHANGES and the price goes up or down.

(That's true of demand as well – e.g. it is thought that when the Roman Empire was turned CHRISTIAN by the Emperor Constantine all the temples had to stop making sacrifices to all the other gods so there was a big fall in demand for INCENSE, and as a result the price of Frankincense collapsed, wiping out the economy of Yemen. Which, frankly, has never recovered!)

The bigger the market, the more trades there are, the better this works.

Think about it: if there's just you and a farmer, then she can offer you a price and you can only take it or leave it. But if you are at the farmers' market, then she can offer you one price and you can either take it OR go and see what several other farmers are offering for their goods. So she's less likely to quote you over the odds. And the more farmers there are at the market, then the more the market forces will work to balance out the price.

This, incidentally, is another reason why MORE TRADE is ALWAYS BETTER.

A Tobin Tax would have a CHILLING effect on the financial markets, maybe not much of a one, but a little bit and that would make them LESS efficient.

A proper REGULATOR, like the controller of a steam engine, depends on a NEGATIVE FEEDBACK mechanism. That's CYBERNETICS. If the machine goes too fast, the controller starts to slow it down; but – and this is what the Tobin Tax doesn't do – if it slows too much the controller ought to speed it back up again. Tax just takes money out; it doesn't put anything back if the market grinds to a halt.

At the moment we want MORE transactions, specifically in the form of more BANK LENDING. So, sorry Captain Paddy, but a tax that is specifically designed to make FEWER transactions is EXACTLY the WRONG prescription.
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Day 3542: Economic Literacy Test: Caroline Lucas plays Mini-Me to Bully Balls Dr Evil

Sunday:


I am FED UP of being called "economically illiterate" by people who clearly wouldn't know one end of the economy from the other.

Usually it is the Egregious Ed, Mr Bully Balls who was, don't forget, special advisor to the Chancellor who outspent the government's income for seven years running while letting the banking sector play chicken with a housing bubble.

This time, though, it was the Sickly Green MP Radio Caroline Lucas, repeating the same deluded, deceitful and frankly DANGEROUS dribble on the World this Weekend.

I'll say this once: CUTTING SPENDING DID NOT CAUSE THE GREAT DEPRESSION.


The principle cause, the thing that turned the Wall Street Crash into the Great Depression was the decision by the American government that rescuing banks that had gone bankrupt gambling on the stock market would only encourage them to do it again: so called MORAL HAZARD. So they let those banks go BUST. That wiped out the savings of huge numbers of Americans, businesses, particularly FARMS, as well as individuals, and the American economy IMPLODED.

The effect on Great Britain was twofold: firstly, with the American banks gone, our supply of credit dried up and there was a credit crunch. Secondly, with the American economy gone, our exports dried up too.

British exports were ALREADY in trouble. For starters, during World War part one a lot of our export markets got pinched while we were busy. But then Mr Winston Churchill (remember him? Oh yes) had attached the pound to the Gold Standard at too high an exchange rate making our exports more expensive and so uncompetitive. And then the Unions (remember THEM?) went and called a GENERAL STRIKE which made our exports less reliable as well as even more expensive.

So by the end of the 1920's the economy was a bit TOTTERY anyway, and the American collapse knocked us over like a domino.

Add to that the fact that countries all over the world responded to the crisis in the WORST POSSIBLE WAY™ by throwing up protectionist trade barriers.

So suddenly Great Britain stopped making money.

THIS is where the spending cuts happened. In those pre-Keynesian days the government tried to balance the budget EVERY YEAR, rather than over the course of the economic cycle (if you are a Keynesian) or NEVER (if you are Mr Frown or his Sith apprentice Bully Balls or in this case Radio Caroline).

So the then Chancellor, Mr Philip Mount Snowden cut public sector pay by 10% AND (note this) raised income tax from 22½% to 25%.

This is GENUINELY a case of a government that is "taking money out of the economy". Taxation TAKES money from the economy. Government spending puts it back. In a "balanced" budget you put back as much as you take out. If you INCREASE tax and DECREASE spending the Government is literally REMOVING MONEY from the productive part of the economy.

If there is LESS money in the economy then FEWER people can buy things and this SLOWS the economy further.

The NORTH was hit much the hardest by the collapse in exports, because it was so heavily, too heavily invested in HEAVY industry: mining, shipbuilding, steel-working. In the South, more-flexible light industry sprang up: making things like washing machines and even cars leading to economic growth and recovery in those areas. This was the beginning of the North South DIVIDE as formerly-prosperous parts of the North remained stuffed (at least until rearmament came along and the Government suddenly needed a lot of steel and coal and ships).

Rearmament, incidentally, when the Government said: "forget balancing the budget; we need to buy stuff", is ironically one of the inspirations for KEYNESIAN economics, because that Government spending kick-started the economy.


Now there are some SIMILARITIES to today's situation and some GLARING DIFFERENCES.


We HAVE recently had a big crash on the bursting of an economic bubble; we HAVE been overly reliant on foreign credit (then American, today Chinese); we have seen Government income fall and expenditure rise; and we HAVE seen a MASSIVELY SPLIT Labour Party supplanted by a Coalition of Liberals and Conservatories who have to clean up the MESS.

HOWEVER, this time we SAVED the Banks (however ODIOUS they may have been before and indeed since) so we still HAVE an economy; this time our exchange rate is NOT chained to an absurdly macho level (yes, we were all wrong about that one); this time thanks to the European Union we DON'T see trade barriers flying up between us and our major customers; but equally this time the Government was ALREADY in a lot of debt because of years of uncontrolled overspending and manufacturing was already on its knees from decades of neglect by Governments of BOTH other parties; not to mention the TITANIC (in every sense) over-reliance on the financial sector to keep us afloat: something of a case of Mr Frown placing all our eggs in one ROULETTE WHEEL.

So once again I have to say it's just not as simple as saying "cuts=bad=great depression".

The DANGER of the economy tipping back into recession because of Government making deflationary spending cuts has to be weighed against the OPPOSITE DANGER of the markets losing confidence in British creditworthiness which would see interest rates shoot up, bank lending squeezed even tighter and a whole lot of people laid off when the money just plain RUNS OUT, causing an EVEN WORSE recession.

Frankly, it is seeing both sides of the DANGER that meant the Liberal Democrats had to change their minds about the urgency of the cuts. And anyone who's saying they've got a plan for the economy WITHOUT saying they've at least considered the other threat is deceiving you.





And speaking of things I have to keep repeating, Hard Labour (and Sickly Greens) are STILL calling the Coalition Cuts "taking money out of the economy". This is, to coin a phrase, economically illiterate.

For the last nine years, and for all of the next five (heaven help us) the Government has spent and will spend MORE than it takes out of the economy in tax.

i.e. the Government is putting money IN to the economy.

It has been possible to do this by running up a rather large tab… to the extent that we are in debt for getting on for a TRILLION POUNDS that is a MILLION times a MILLION pounds or twenty grand for every man, woman, child and fluffy elephant in the country.

That is in a word Radio Caroline might understand UNSUSTAINABLE.

The Coalition policy is NOT to "take money out" of the economy but to "put in LESS", eventually to STOP because it ISN'T OUR MONEY.


"Ah ha!" says Radio Caroline, "you're making the mistake of thinking of the country's economy like your household economy where if your income goes down you have to control your spending, but it doesn't work like that."

No, Caroline it REALLY REALLY does work like that.

In an emergency, you can borrow money to cover a gap between your incomings and your outgoings. Maybe there's been a personal crisis, maybe the tumble drier exploded, whatever. You talk to the bank and agree a bridging loan.

Government debt is just a really, really BIG bridging loan.

The "bank" in this case is the world money markets. And just like you might have to negotiate with the bank in order to get the money you need, and just as the bank might give you certain conditions, then likewise the Government has to "negotiate" with the markets, sometimes literally, sometimes by taking action that convinces the markets that the UK's finances are sound and that the investment is both worthwhile and safe.

And just like a bank, eventually, the money has to be PAID BACK.

Radio Caroline's solution is to dump our problems on future generations. Which just shows up the Sickly Green's promises of a sustainable future.

We've been borrowing for years and years and years; we just can't carry on like that.

"Ah ha!" will say Mr Balls, "but Mr Milton Keynes tells us that it is OKAY to borrow. When you are in a hole… KEEP DIGGING!"

Except this is only HALF of what Mr Keynes tells us. The OTHER half is PAY OFF THE DEBT in the GOOD TIMES. Which is exactly what we DIDN'T do for the period of the BOOM YEARS between the dot.com collapse and the credit crunch.

In the late 1930s the British Government COULD borrow money to spend on British industry precisely BECAUSE it had been running PAINFUL balanced budgets up to then; in 2010 we CAN'T because we HAVEN'T.

If you just KEEP borrowing money to prop up your Government spending you end up with a completely different economic model and it is called WEIMAR GERMANY.

The value of your currency collapses; your interest rates spiral out of control; and EVERYONE gets very, very poor very, very quickly.

And yes, that ended up with a nasty bully in charge as well, so you can perhaps see the attraction for Mr Balls.

And another thing!

If one more person repeats this nonsense I swear I will SPIT!

"If you make public sector workers redundant then they stop contributing tax to the Government's coffers"

NO! WRONG WRONG WONG!

It is NOT POSSIBLE for a public sector employee, no matter how lovely and worthwhile and socially valuable, to make a net contribution to the Treasury. Not even if you count all the VAT and airport tax and Stamp Duty that they might pay

Think about it: the VERY MOST that someone could possibly pay in tax is ALL of their earnings and if all their earnings come from the Government in the first place then the VERY BEST that the Treasury could ever do is BREAK EVEN.

And in practice you must have a bit of pay left after the tax or what do you buy your sticky buns with?

In pure CASH terms the Government is always ALWAYS better off NOT paying someone than paying them.

That does NOT mean that the Government SHOULDN'T employ people. Obviously there is a HUGE BENEFIT to be had in having teachers and doctors and policemen and poets laureate (er). And often – though not always – economies of scale mean that the Government can do this more efficiently than the private sector. Can but not necessarily does.

But suggesting that the Government will somehow be worse off if it employs fewer people is STUPID SOPHISTRY.

It's a CON: if you pay me twenty quid I'll give you a tenner back; so now if you don't pay me you'll not get that tenner – you'll be ten quid out of pocket! If you believe that then I'll have ten pounds please.
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