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November 24, 2019

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Blissex

«the share of business investment in GDP is much lower now than it was in the late 90s, despite the fact that the corporation tax rate has fallen from 31% to 19% in this time (and interest rates have too).»

But the UK has invested enormous amounts of capital in property valuations, mortgages increased by nearly 2 trillions in 10 years, or 200 billion a year.
Those property valuations return much better profits much more securely than business investment, as they are backed by the voting mass of a lot of middle class tories. Here is a report about Lord Sugar, one of my usual quotes:

«Speaking about his first year in business with Lord Sugar, Mark Wright, the winner of last year’s Apprentice, said the Amstrad founder had given him tips on creating long-term wealth. “Lord Sugar said you make money from property and do business for fun.”»

Blissex

«Decades of neoliberal ideology have taught British bosses to regard social democracy as abnormal even though it is perfectly familiar on the continent.»

They know very well it is not performative, but they know that "There Is No Alternative" was a plan not a statement, a plan executed well by the whig wings of both Conservatives (ejection of "one nation" tories) and New Labour (ejection of socialdemocratic labourists).

They also know that investing in property or offshore are always readily available alternatives to the riskier or less profitable investment in productive activities in the UK.

nicholas ford

I really feel I should refer Chris to one of his previous posts entitled 'Bad Faith Arguments', for that is what we are getting here.
Chris refers to either 'business' or 'workers' paying or not paying corporate taxation. It is not 'business' that ultimately pays additional corporation tax, but the owners of these these businesses, which means mostly 'shareholders'. In so far as the 'workers' are also 'shareholders', either directly, by investing in funds, or through their pension, it is they who will be paying additional corporate taxes not some non-defined entity called 'business'.
But Labour attempts to cause voters to believe putting taxes on 'business' does not involve taxing them. Rather they are engaged in a deliberate attempt to mislead voters that taxing 'business' somehow means taxing billionaires, greedy bankers, overpaid chief executives and other hate figures.
This is supposed to be a respectable economics column. I am disappointed to see Chris collaborating in this attempt to deceive the electorate.

nicholas ford

Blissex - Surely the most important point that Chris is missing is that 'investment' is not 'productive' unless the money is spent wisely and produces returns. Investment by the state in industrial capital assets has a history of being badly directed - for examples, the billions poured into nuclear power, and state run industries such as steel and coal. It seems to me doubtful whether even state spending on infra-structure is effective- HS2 does not look like it will yield genuine economic returns, nor productivity improvements. Even council house building may not have yielded economic returns, if the social impacts and costs of council housing schemes were properly evaluated. Yet Chris, Keynes, Wren- Lewis all glibly suppose simply increasing the volume of investment (with little or no regard to the quality of this investment) would be a good thing per se.

Blissex

«the most important point that Chris is missing is that 'investment' is not 'productive' unless the money is spent wisely and produces returns.»

Indeed, see the great dotcom boom and the second dotcom boom, or the extravagant waste of capital during the early coal industry era or the early electrical industry era.

«Investment by the state in industrial capital assets has a history of being badly directed - for examples, the billions poured into nuclear power, and state run industries such as steel and coal.»

This to me reads like a comically stupid handwaving claim that since sometimes some states make investment mistakes, arguably. eventually, then it is pointless for the state to make *any* investments. Exactly the same reasoning can be applied to private investment, where for example the vast majority of new businesses fail.

«[...] Even council house building may not have yielded economic returns, if the social impacts and costs of council housing schemes were properly evaluated.»

That seems more comically stupid handwaving to me, because that investment needs to be compared to the actually existing alternative, the slums.

«increasing the volume of investment (with little or no regard to the quality of this investment)»

That "little or no regard to the quality" seems to be something you have hallucinated.

While JM Keynes wrote explicitly that in case of insufficient demand ("a general glut") even wasteful investment is better than nothing, and gave powerful reasons for that, he also argued that well directed investment was a lot better than that.

«HS2 does not look like it will yield genuine economic returns, nor productivity improvements.»

Like CrossRail (and the fantastic 40 year long explosion in private debt) it is most likely designed to boost property prices in the south midlands and thus create new tory voters.

Blissex

«In so far as the 'workers' are also 'shareholders', either directly, by investing in funds, or through their pension»

Ah the usual handwaving innuendo that somehow most workers are business rentiers too.

I have read some studies that show that this is a negligible case as most workers cannot afford to have savings and only a minority has even token amounts of shareholdings, and pension funds own a pretty small percentage of the stockmarket.

In any case as to "incidence", one of the arguments of our blogger has made is that "studies find different results for the impact of corporate taxes on wages", and those studies presumably take into account also the pretty small and rare case where workers are also business rentiers via personal or pension fund shareholdings.

nicholas ford

Blissex - 1. J M Keynes was wrong if he wrote that wasteful investment is better than 'nothing', because the clear alternative to wasteful investment is additional consumption, either by the state or by the private sector. We would have all better enjoyed the state providing us with free champagne , wine ,beer, sandwiches crisps and balloons than building us a £10 billion (ish) plutonium extraction reprocessing plant that was barely used before being closed down.
2. The point is not whether'all' state investment has been bad, the point is whether there has systemically been lower investment returns on investments made by the statye than the private sector. Given that much of the states investment into companies operating in competitive markets seems to have disappeared ( shipbuilding, coal, steel, British Leyland) I think we can be pretty sure this systemic failure is real.
3. The alternative to council housing was not slums. It was private sector construction and rental, as has happened in most other European countries.
4. 'Workers'accumulate assets - including pension entitlement- throughout their working lives, up to the point where they retire. Clearly, that means the majority of assets will be owned by those who have retired and were in well paid work. You make repeated references to 'rentiers'. Who are these bogeymen? Retired dentists, who should be taken out and shot like Kulaks?

jim2

Labour plans, Tory plans, Snoring plans. All ripped up on December 13th.

I would like to ask if it is even possible to increase significantly the overall wealth of the UK? A country that does genteel poverty and not so genteel poverty. A country of snobbery and vested interests and all our money tied up in property and land. Encased in political concrete unable to move.

What would we have to do? Become more like Germany or more like France or more like the USA. Germany and France have carefully cultivated their industries and education systems. We have a more laid back approach and admire the USA. We don't do plans, not for more than 5 minutes.

Will we get the West Coast can-do dynamism and big money flows. Or will we be more like the East Coast, more finance and government oriented. Or like the USA's middle, not much at all. The Tory party has a strong 'admire USA' background and their laissez faire, devil-take-the-hindmost approach seems a natural fit. Despite Boris's fine words that is what we will get.

If you don't know where you are going then any direction is OK and Boris looks like a meanderer (rhymes with philanderer). The likely path is nowhere much and that represents Labour's opportunity in 2024/5.

Andrew Curry

@nicholas ford. You have a basic misunderstanding of Keynes’ point here. Since there’s no natural equilibrium point for the economy, it is possible for it to settle at an equilibrium that produces poor economic and social outcomes. Hence Keynes’ point about ‘wasteful investment’ (his example was putting money into holes in the ground and leaving people to recover it).

And the UK economy is pretty clearly below equilibrium at the moment: low wages, low productivity, low investment, no-to-low growth.

Responding to your other point about shareholders: well, they seem to think they are entitled to 4% returns, or so, which was the long-run historic return, while doing nothing that enables the businesses in which they hold their shares to produce those returns in a world of persistent (and falling) sub 2% growth. (Have a look at the World Bank data on western European growth rates since the 1960s if you disbelieve this point.) There’s a wider point here about the role of neoliberalism in legitimating rentier capitalism at the expense of productive capitalism, but I don’t have the time to expand on it.

georgesdelatour

Chris

What do you mean by neoliberalism? Is it simply any economic policy not positively hostile to the market? Does that mean Lenin’s 1921 New Economic Policy was neoliberal?

The implication of the word is that Wagner’s Law went into sustained reverse during the Reagan-Thatcher era, and has stayed on that reverse trajectory ever since. But as far as I know, that’s not true.

TowerBridge

@georgesdelatour If you are not simply playing stupid then please listen here to what is meant by neoliberalism: https://neweconomics.org/2019/05/a-beginners-guide-to-neoliberalism.

Please forgive me but I just strongly suspect bad faith.

@nicholas ford - Andrew has dealt with your points 1 and 2. I'm interested in 3. The alternative I'm afraid was slums and Blissex is right.
The first ever public housing estate was built because the establishment suddenly found that when it needed people to man the factories and fight on the front(s) the people themselves were in such poor condition because of the state of housing. As with everything Britain, you can usually trace an improvement back to some kind of war need.

The rest of Europe provides much better conditions for renters than we do and many more restrictions on landlords. Even then, they provide a lot of council housing. This, for example, is a council housing project in Vienna which has a swimming pool on the roof, tennis courts, sauna, swimming pool indoors and lots of things to do and provisions for children. https://designurbanhearth.wordpress.com/2018/07/29/wohnpark-alt-erlaa/

georgesdelatour

@TowerBridge

Unfortunately, the link you provide seems to be dead.

I still insist the word is far too broad, vague and contradictory to be analytically useful. David Harvey’s “A Brief History Of Neoliberalism” interprets Neoliberalism simply to mean the persistence of capitalism beyond the point where its supposed contradictions should have destroyed it; in which case there’s nothing obviously neo- about it.

In contrast, Benjamin Noys’ “The Grammar Of Neoliberalism” sees a type of Keynesian state interventionism as a basic design feature of Neoliberalism. I find Noys’ argument interesting. I even think he’s probably on to something.

For Noys, State expenditure could grow very far above 50% of GDP, and the result could still be very Neoliberal. But you can’t use the term “Neoliberalism” in a day-to-day economic argument and expect people to intuit that Noyesian meaning. Most people probably assume Neoliberalism means a deliberate policy of shrinking state expenditure as a percentage of GDP, motivated by some kind of AnCap Libertarian ideology. This seems to be what Chris intends us to take from his post, since he contrasts alleged British Neoliberalism with continental social democracy (UK government expenditure is 40% of GDP, France government expenditure is 56% of GDP).

Blissex

Oh some other great hallucinations and handwaving:

«3. The alternative to council housing was not slums.»

Well perhaps in your alternate reality, but in this reality, in this country, that was what we had for millions until the great slums clearances of the 1950-1960, where most previous slum dwellers were then put in council housing (some in "new towns", some in dreary council estates, which were however a huge step up from slums).

«It was private sector construction and rental, as has happened in most other European countries.»

But this has not happened in the UK, there has been instead a collapse in "private sector construction", and as to rentals the high rate of rent inflation seems to show that it is rather insufficient wrt to demand, in part because most housing demand is concentrated in already-congested tory-voting areas by government policy to subsidize jobs there.

In those areas extensive slums have re-appeared, under the euphemistic soviet-style label of "shared housing" ("doss houses"), where low income workers often cluster 4-8 to a bedroom, if they don't already bunk-shift.

Blissex

«Most people probably assume Neoliberalism means a deliberate policy of shrinking state expenditure as a percentage of GDP, motivated by some kind of AnCap Libertarian ideology.»

I personally think that ostensibly "neo-liberalism" is defined by the 10 points of the Washington Consensus, but in practice its main aspect is "labour market reform". That is what I think distinguishes 19th century liberalism from late 20th century neo-liberalism: in the 19th there was no need for "labor market reform".

In the USA specifically "neo-liberalism" means the roll-back of the New Deal, where the crucial part is again "labor market reform".

Blissex

«And the UK economy is pretty clearly below equilibrium at the moment: low wages, low productivity, low investment, no-to-low growth.»

Sadly I reckon the opposite: it is above a sustainable trend, looking at the trade deficit, at the ratio between private debt growth and GDP growth.
My impression is that the english economy has been for decades in a simultaneous "Barber" consumer debt boom and "Lawson" asset debt boom (but for the mid 1990s and the late 2000s), balanced earlier by scottish oil income and later by a tight fiscal squeeze, to contain wages and wage-good inflation (what CPI by design measures). George Osborne indeed said:

“A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.”

Tony Blair had written in 1987 in the LRB (my usual quote, that should be commonly known):

“Mrs Thatcher has enjoyed two advantages over any other post-war premier. First, her arrival in Downing Street coincided with North Sea oil. The importance of this windfall to the Government’s political survival is incalculable. ...
Bank lending has been growing at an annual rate of around 20 per cent (excluding borrowing to fund house purchases); credit-card debt has been increasing at a phenomenal rate; and these have combined to bring a retail-sales boom – which shows up dramatically in an increase in imported consumer goods.
Previously such a boom and growth in imports would have produced a balance-of-payments deficit, a plunging currency and an immediate reining-back on spending, with lower rates of growth.
Instead, oil has earned foreign exchange and also produces remittance payments from overseas investments bought with oil money. The situation is neither stable nor healthy in the long term: but in the short term it allows the living standards of the majority to rise rapidly, even though the industrial base, the ultimate foundation of a successful economy, is still only achieving the levels of output of 1979.
The fact that we have failed to use oil to build a productive and modern industry for the future is something historians will deplore.”

Little has changed since then, except that the assets being sold abroad are no longer barrels of scottish oil, but deeds to south-east properties.

Blissex

«distinguishes 19th century liberalism from late 20th century neo-liberalism: in the 19th there was no need for "labor market reform".»

As to this the opinion of Tony Benn on the infiltration of Mandelsonian Tendency entrysts into Labour, from his diary entry of his last NEC appearance 1993-05-19:

“PR is being advocated with a view to a pact with the Liberals of a kind that Peter Mandelson worked for in Newbury, where he in fact encouraged the Liberal vote. The policy work has been subcontracted.
These so called modernisers are really Victorian Liberals, who believe in market forces, don't like the trade unions and are anti-socialist.”

Here he missed that they are not exactly victorian whigs, because in victorian times there was no need to push forward constantly more "labour market reform" to go back to a victorian style labour market.

the_last_name_left

-----"corporation tax plays a pretty small roll in investment decisions."-----

Role. Just saying. ;)

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