Fear of the robots is founded in the messy reality of labour — FT.com

Interesting argument about how technological innovation which increases productivity should lead to higher wages creating demand for new jobs to take those made redundant by the new technology. Everybody happy in the long run, of course we know what happens to people in the long run.

What this assumes is that technological innovation will lead to growth and the problem is that does not seem to be happening at the moment and even if it did there are some “headwinds” which might undermine the growth potential.

When the employment destructive potential of robots is discussed there is always a quick reference to how wrong the luddites were. I guess this is another thing about being wrong in the long term. How much consolation that is to luddites who only lived short term is debatable.

It is not clear that the current innovations are qualitatively different from previous ones and thus may have a qualitativly different economic effect. Mr Weldon is right however about the way power relationships will structure how new technologies are implemented and the economic impact they have on labour. The current levels of inequality means that much power is concentrated in very few hands. This has the potential to generate tensions which are resolved in seismic rather than evoutionary ways.

Political context matters in the face of rapid technological change, writes Duncan Weldon

Source: Fear of the robots is founded in the messy reality of labour — FT.com


The budget of the European Union: a guide – Institute For Fiscal Studies – IFS

Fascinating to see what scale the bloated bureaucracy of Europe operates on. This is a really useful summary of who pays what and who gets what out of the EU. As background for a decision about whether we want to remain in or out of the EU it is excellent.

Source: The budget of the European Union: a guide – Institute For Fiscal Studies – IFS

Live Feed | Does Starbucks Pay Enough Tax?

How and Why We Tax Large Multinational Firms The 2015 Annual Public Lecture ”Does Starbucks Pay Enough Tax? – How and Why We Tax Large Multinational Firms” will be given by Professor Rachel Griffith.

Source: Live Feed | Does Starbucks Pay Enough Tax?

The Institute for Fiscal Studies (IFS) is a genuine national treasure. Its enlightenment focus on facts means that its publications are always interesting. Prof Rachel Griffith is theResearch Director at the IFS and gave this really interesting lecture on Corporation Tax at The Royal Economic Society in 2015.

She makes the point that Corporations are not people and when they pay tax it simply redistributes the burden of that tax amongst real human beings. If corporation tax goes up it can be paid for by employees through lower wages, by consumers through higher prices or by shareholders through lower dividends.

She also points out that the level of the tax take provided by Corporations over the past thirty years has been remarkably consistent at around 7% of total tax revenue despite the fact that the tax rate has fallen from 52% in 1980 to 20% in 2015.

In her lecture she looks at the way in which Corporations are currently taxed based upon the location their corporate registration as opposed to where they generate their profits.

It is worth watching the lecture to help clarify some of the issues around a more effective and progressive taxation system that works in a world of global multinational corporations.

The Hidden Wealth of Nations

Recently read a really interesting book on the issue of the moment following the leaking of the Panama papers. It is by Gabriel Zucman and in a very concise and clear 116 pages sets out the scale of the problem of tax havens, how they operate and what might be done about them.

He estimates on a conservative basis that some 8% of personal financial wealth amounting to $7.6 trillion is held in tax havens. By way of comparison the UK’s total GDP is about $2.5 trillion. Also this does not take any account of income that is hidden by corporations.

Zucman looks at the history of the growth of private banking in Switzerland at the centre of much of the operations that utilise other tax havens to make as opaque as possible who owns what and where it should be taxed. He addresses a number of myths about Swiss banking and illustrates that any reform predicated on the goodwill of the bankers is doomed to fail as it has done in the past.

He goes on to contrast the European Union’s Savings Tax Directive (STD) which he believes to be essentially flawed with the United States approach through the Foreign Account Tax Compliance Act (FATCA) (where is that final T?). Whilst FATCA might not be perfect it is having an impact and has much to recommend it.

Essentially if banks do not themselves let the US tax authorities know what holding US citizens have in their overseas accounts then the US will impose a 30% tax on all interest and dividends payments from the US to that bank. They can also levy substantial fines. To ensure bankers apply FATCA they encourage whistle blowers to let them know of abuses. What is more they pay them handsomely. Bradley Birkenfield an ex-employee of UBS was paid $104m for revealing the non-compliant activities of his former employer.

Whilst FATCA is a real step in the right direction Zucman identifies three other things that should be done on a global scale to address the problem of very wealthy people hiding their wealth from the tax man.

Firstly, he proposes a worldwide register of wealth that would be a public record of the beneficial owners of stock, share and bonds and ultimately all derivatives. In fact national and regional registers of stocks and shares already exist however they are private documents. By bringing them into a single, public register it would make visible the financial wealth of all individuals.

Secondly he recommends that sanctions against tax havens should be proportional to the losses that they impose on other countries. This is in essence what FATCA does with banks. By doing this the economics of being a tax haven break down.

Finally, he recommends that international taxation agreements should be amended for corporations. In essence this would mean taxation of multinationals should derive from their consolidated profits. So if Starbucks sells 50% of its products in the US and employs 50% of its people there and has 50% of its plant then it should pay 50% of its tax there. This gets around the issue of having transfer-pricing arrangements where subsidiaries, providing services based in tax havens, charge large fees to the US subsidiary thus reducing its tax bill their, shifting it to the lower rates in the tax haven.

It would also address the nonsense that a company like Apple with $500bn in the bank borrows money in the US to pay dividends because if it repatriated the profits from abroad they would be subject to tax.

Others have suggested that individuals should have a strict liability to inform the state of all their wealth and income. If they fail to do so and thus hide wealth from the state then they forfeit the right to state protection for that wealth. If it is found then 100% of it is immediately confiscated, and to assist the process anyone who reveals the existence of the wealth can claim 50% of it as a bounty. I do like something that is clear and simple.

We have had years of fine words about what we are going to do about tax evasion and tax havens it is time something started to happen. The governments seems to have two responses first “well Labour did nothing about it”. So what. Labour aren’t in power. Second, the Prime Minister has been spearheading the issue in Europe. Well the tax deals done so far with large multinationals suggest he might want to get his spear out over here.

The first step might be to appoint a few tax inspectors to replace those that have been made redundant since the government came to power. They are an unusual part of the government machine in that they bring in vastly more in tax than they cost. Surely austerity demands we maximise our income. What business, even one wanting to save money would sack people collecting more than they coast to employ?

If the MP’s expenses scandal was anything to go by, the press will probably have more interesting revelations to bring out of the 11m+ documents over the coming days and weeks.

Now is the time to push our politicians to do something significant about tax havens and tax evasion. If you want to get a good overview of the issue in a short but well argued book this is it.

The Hidden Wealth of Nations: The scourge of tax havens. G Zucman. The University of Chicago Press. 2015.

Panama Papers: Millions of leaked documents expose how world’s rich and powerful hid money | Americas | News | The Independent

Mossack Fonseca said it has operated “beyond reproach” for 40 years and has never been acused or charged with criminal wrong-doing.

Source: Panama Papers: Millions of leaked documents expose how world’s rich and powerful hid money | Americas | News | The Independent

Does this not sound like “we never got caught”?

The Rise and Fall of American Growth

This is a work whose central thesis is relatively straightforward but of immense significance not just for the United States but also for the rest of the world. In essence Mr Gordon argues that the growth rate of the American economy, which for so long has driven much of the world economy and transformed the lives of its citizens has its best days behind it. This is not because of a loss of entrepreneurial flair or lack of self-confidence. Rather, more substantive structural issues relating to an unprecedented and unrepeatable period of innovation mean that the levels of economic growth achieved over a period from 1870 to 1970 are unlikely to be recovered in the foreseeable future i.e. the next 25 years, or perhaps ever.

The book analyses economic growth in the States over three historical periods, first 1870 to 1940, then 1940 to 1970 and finally 1970 to 2014. For someone who has sat through more strategic planning meetings than I care to remember which have been peppered with phrases such as “the pace of change is unprecedented”, “learn to love change”, “change is here to stay”, it is absolutely fascinating to have pointed out how truly revolutionary was the first of the periods Mr Gordon addresses.

Part one of the book covering the period 1870 t0 1940 considers what people ate, how they dressed, how they got around, what their heath was like, how illness was managed, what their homes were like, how they communicated, and what working conditions existed. Each area is addressed in exhaustive and, one feels, loving detail. The book is a treasure trove of practical illustrations about how America has evolved over the past 150 years.

If we take the homes Americans lived in in 1870, they were lit by candle or paraffin lamp, which was inefficient, dangerous, required significant maintenance, and smelly. Water was provided by wells or other external sources. It had to be brought in and taken out of the home by hand, predominantly women’s. Human waste was deposited outside of the home in pits. Heating and cooking was mainly by open fire and centered on the main room of the home the kitchen/dining/living and occasionally bathing area.

To say life in such a home was “mean brutish and short” may be an exaggeration however compared with the home of the 1940’s not much of one. In a powerful use of language Mr Gordon describes the homes of the 1940’s as having become “connected”. I know that if our home lost its connection to the internet my youngest son would think the world was about to collapse and to be fair I would not be far behind him. However, it would be interesting to see how important the internet connection would be if it had to be traded off against connection to clean, running water, an effective sewage system or electricity.

One of the great things Mr Gordon’s book does is make visible the incredibly transformative function of advances which are now so ubiquitous in developed economies they are “invisible”.

One example from the book is the calculation of what a typical North Carolina housewife had to do to provide the home with water in 1886. She had to carry water 8 to 10 times a day meaning that over the course of a year she toted more than 36 tons of water over 148 miles. Washing, boiling and rinsing a single load of washing would require 50 gallons of water to be brought in and out of the home by hand. Running water and effective sewage were, of course, not just about convenience. Their impact on public health and urban development was immense.

In area after area a similar picture emerges. In 1870 transport was powered by horses or steam trains the internal combustion engine transformed this so that by the end of the period cars, trucks, electric transit systems and, even more spectacularly, airplanes were the norm. The germ theory of medicine and antibiotics extended average life expectancy significantly by reducing the high levels of infant mortality commonplace in 1870. Clarence Birdseye perfected the process of freezing food thus transforming the diets of the population. Electronic communications moved on from the telegraph to the phone to the radio, to the silent movie and by 1939 the release of The Wizard of Oz and Gone with the Wind.

The changes that occurred were overwhelmingly the product of the general purpose innovations of the second industrial revolution specifically the application of electricity to lighting and other uses, and the invention of the internal combustion engine. These reached into every aspect of peoples’ lives revolutionising how they lived.

Many of them were quantum shifts which were subsequently refined and developed but cannot be repeated. The provision of the first motorcar is such a paradigm shift. In the space of a few decades it meant the horse, which had effectively been the only mode of personal transport for millennia, was made redundant. This had enormous implications for areas as diverse as urban design, allowing suburbs to be “invented”, and public health with the removal of literally tons of animal waste from the streets of cities.

The productivity increases of the agricultural revolution and the growing application of steam power to production of the first industrial revolution were supercharged with the inventions of the second industrial revolution leading to the rapid and massive process of urbanisation. In every area productivity was increasing at a spectacular pace and the whole of the environment within which people lived was being transformed.

The Depression and the Second World War threatened all this and there was a fear that after the hot house of planned military production the post war period would lead to a collapse in productivity rates and a return to the stagnation of the 1930’s. What happened could not have been further from the truth. The period from 1940 to 1970 saw the rapid expansion of consumer capitalism as wartime production facilities were turned to peacetime white goods creation.

The era from after the war to the early 1970’s some have labelled as the Great Compression because of its redistribution of wealth transforming blue collar workers into what became, up until recently, the middle class bedrock of American politics. Trade unionism flourished, redistributive taxation with higher rates of 70% and 90% enabled the federal government to investment in infrastructure projects to do things like bring electrification to the South, establish social programmes such as Medicaid and Medicare and mount a war on poverty.

Whilst innovation continued it was largely about the more effective exploitation of the technologies that had been created in the earlier period from 1870 to 1940. Nothing was discovered that had the all purpose transformative power of electricity or the internal combustion engine.

Finally, we move to the era from 1970 to 2014. The story in this era is far less positive. The newly created middle class, who had experienced nothing but growth with living standards effectively doubling every 30 years, began to find their incomes stagnating or declining in real terms. Inequality began to grow and the pace of economic growth began to slow down.

This process was punctuated with the third industrial revolution around information and communications technology (ICT). This had a significant but relatively brief impact on productivity growth in the decade from the mid-1990’s to the mid-2000’s. There is a famous quote by Robert Solow, the Nobel prize winning economist that “You can see the computer age everywhere but in the productivity statistics.” This encapsulates what has become known as the “productivity paradox”, the fact that spectacular improvements in computer technology have had little impact on the overall level of productivity growth in the economy.

In essence Mr Gordon believes the period 1870 to 1940 saw a scale of transformation that is very unlikely to be repeated in the medium term and possibly never again. What it enabled was a period of economic growth unprecedented in human history. The speed of that growth was spectacular but has been in decline for over 30 years. If we take the annualised growth rate of output per hour in the period from 1870 to 1920 it was 1.79% per annum. In the period from 1920 to 1970 it was a very impressive 2.82%, but in the period from 1970 to 2014 it fell back to an average 1.62% per annum and of course this included the decade of growth between 1995 to 2005 associated with the ICT revolution. If this is stripped out the average growth rate in this period is 1.38%.

However Mr Gordon identifies four critical “headwinds” that might undermine even this rate and may mean “the future growth of real median disposable income will be barely positive and far below the rate enjoyed by Americans dating back to the nineteenth century.”

The headwinds he identifies are a) growing inequality which means that increasing amounts of whatever growth does occur is captured by a tiny fraction of the population; b) a faltering education system where the poor enter the system late and at a massive disadvantage leading to their early exit with all the negative career and income implications of this; c) a demographic shift with baby boomers retiring over the next twenty years reducing the supply of labour and increasing the dependency ratio; d) government debt to GDP ratio will inevitably increase as a result of these demographic changes and lead to the need for action in terms of cuts or tax increases to reduce the fiscal imbalance.

Taking account of the potential economic consequences of these headwinds Mr Gordon estimates that real GDP per person may grow at around 0.8% per annum over the next 25 years. This is a third of the rate achieved in the period 1920-1970, and barely half the rate achieved in the period 1970-2014. If the success of Mr Trump is in any way connected with the stagnation of the blue collar / middle class standard of living over the past thirty years what might a future of lower growth and more extreme inequality hold for politics in the States?

Mr Gordon ends his work with a number of policy prescriptions to mitigate the worst of the slowdown in economic growth. These include, a much more progressive tax system, a higher minimum wage, increased earned income tax credits, drug legalisation, improved pre-school education, a move away from the current property tax based system for the funding of education, increased but targeted immigration.

I suspect Mr Trump has not read this book, for if he had I am sure we would have heard the howls of condemnation from across the Atlantic. It is impossible to get across the quantity or quality of information contained within it nor the humane tone with which it is suffused. It is an important book that deserves to be debated widely amongst policy makers on both sides of the Atlantic. If even only partially correct its implications are profound for the economic, social and political future of the United States.

Further, one suspects the thesis has traction in the UK and Europe. This may mean any assumptions about future growth solving the UK’s current fiscal problems may be completely misplaced.

“The Rise and Fall of American Growth: The US standard of living since the civil war.” Robert J Gordon. Princeton University Press. 2016.