A hard Brexit would be a disaster for Britain’s economy, especially in a more protectionist Trump world – and we are already all poorer due to the pound’s plunge.
My column for Prospect
Prospect
Tax the ground they walk on
Consider these three facts. One: Britain is struggling to recover from a crisis caused in large part by a huge property bubble. Two: unemployment is painfully high. Three: the government has a huge gap in its finances. So, what would you raise taxes on?
Astonishingly, Labour is proposing to raise already high taxes on labour, through an increase in national insurance contributions. Finance fails, so workers pay—this is not only unfair, it will also damage future growth by making labour more expensive. Existing income tax and national insurance already increase labour costs by half, causing unemployment. Raising taxes on something the government wants to encourage—hard work—is perverse.
Another option is taxing harmful things, like carbon emissions. A charge of £30 a tonne could raise around £16bn and reduce emissions. Even better, if the tax per tonne rose as emissions fell, it would ensure a steady source of revenue. But still bigger gains could come from taxing an unproductive asset at the heart of our most recent bubble: land.
Britons have long seemed addicted to property speculation. Yet swapping more or less the same stock of houses with each other cannot logically create riches for society as a whole. Indeed, it has huge costs because it diverts funds from productive investment—while the resulting boom and bust, as we know, can cause havoc. Taxing land could curb property bubbles, and encourage productive investment elsewhere.
It would work by valuing land holdings every year (based on recent market transactions in the same area) and imposing a charge. If this was raised when land values were rising fastest, it would take the steam out of any bubbles without affecting the rest of the economy, as interest rates do. And whereas taxing income from work is wasteful—less is produced and no tax is raised on the lost output—land supply is fixed. No matter how heavily you tax it, land cannot be spirited away to a tax haven.
Land already accounts for the bulk of property values, especially in expensive places like central London. But taxing its value, rather than property or any improvements to it, would not penalise people who do up their home. It would also encourage the development of vacant and derelict land. Unlike stamp duty, a land-value tax would not be a tax on property purchases, so it would not discourage people moving. And it needn’t force a granny in a big house of out of her home; payment could be deferred until her death if necessary.
Critics say the tax is problematic because land is hard to value. Nonsense. Property changes hands all the time; estate agents and surveyors routinely value property as part of their work. Land-value taxes could be easily and cheaply collected. Hong Kong and Singapore both derive a large share of their revenue from variants of this system and have very low income taxes as a result. Denmark also has a long tradition of land-value taxation.
Most importantly, land taxes are also fair. In most countries history means the distribution of land is highly unequal. Land in Britain is more unequally distributed than in Brazil: there 1 per cent of the population owns 49 per cent of the land; here 0.3 per cent owns 69 per cent. Britain’s biggest private landowner, the Duke of Buccleuch and Queensberry, owns 277,000 acres because he descends from a man who seized vast swathes of Scotland. Far from being taxed, he is rewarded with huge handouts from the common agricultural policy.
What’s more, the value of land increases each year not through landowners’ striving, but that of others. Mayfair and Belgravia—originally 300 acres of fields passed down to successive Dukes of Westminster—are now worth an estimated £6.5bn. Better, therefore, to tax that windfall gain rather than the work of those who really generated it. And since the distribution of land is unequal, taxing it would be progressive too.
Likewise, when a government builds a new railway line and the value of the surrounding property soars, surely it is right that this unearned wealth be taxed. When the Jubilee line extension to Canary Wharf was built, property values adjacent to its stations rose hugely—by £2.8bn at Southwark and Canary Wharf alone. Land-value taxes would pay for—and thus encourage—public investment in valuable infrastructure. It could fund, for instance, the high-speed rail network that Britain so desperately needs. Conversely, landowners would be partly compensated for new developments that reduced the value of their land.
The concept has a fine pedigree. David Ricardo, the founder of modern economics, was a fan. So is Martin Wolf, the FT’s chief economics commentator, while Liberal Democrat shadow chancellor Vince Cable has proposed a “mansions tax”, which would target the richest homeowners. Perhaps the most eloquent case was made by Winston Churchill in 1909. “Roads are made, streets are made, services are improved… To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced… he contributes nothing to the process from which his own enrichment is derived.” A century on, the rest of us would benefit from finally facing down the ultimate vested interest: the big landowners who still own most of Britain.
The economics of the madhouse
The failures of global finance have brought the world economy to its knees, threatening a re-run of the Great Depression of the 1930s. Such a terrible outcome is much more likely if policymakers follow Ha-Joon Chang’s suggestion that the world needs a dose of protectionism to see it through these troubled times.
Around the world, we are witnessing the devastating impact of globalisation going into reverse. What was once a virtuous circle of rising trade and booming economic growth has become a vicious spiral of collapsing demand and plunging exports. The question is: how to break this spiral? The answer, in my view, is coordinated government action to boost global demand, combining large fiscal stimulus packages, unconventional monetary policy measures, and the nationalisation and restructuring of zombie banks that are dragging the economy down with them. Chang, in contrast, favours limited protectionism—in effect, a tax on imports.
This should ring alarm bells among people who may be tempted by the siren song of protectionism. Most governments are scrambling to boost spending and /cut/ taxes to stimulate demand. David Cameron’s Conservatives oppose such a fiscal stimulus. Chang goes one step further: he is proposing a (selective) tax hike instead. The immediate impact would be to reduce people’s purchasing power in a highly regressive way. And since Chang proposes that all governments agree to raise their import taxes, demand would be dealt a further knock by the fall in demand for our exports. Higher taxes and lower exports as a cure for the global recession? This is the economics of the madhouse.
Chang is surely aware of this. After all, even he concedes that an all-out trade war would be a bad thing. But the difference between limited protectionism and a trade war is a matter of degree: the former would involve fewer casualties, for sure, but it would not lead to economic resurrection. And history shows that limited protectionism is often a precursor to much larger conflicts.
Chang claims that rising protectionism in the 1930s was not as harmful as is often claimed. It is true that trade collapsed for several reasons, including falling demand. But protectionism greatly amplified the damage. According to a study by Jakob Madsen of Monash University (Trade Barriers and the Collapse of World Trade During the Great Depression), world trade declined 14% in inflation-adjusted terms between 1929 and 1932 due to declining incomes, 8% because of policy-induced tariff increases, 5% due to deflation-induced tariff increases (when prices are falling, a tariff of, say, £1 per item rises in real terms), and a further 6% because of the imposition of non-tariff barriers. So, most of the collapse in trade was due to rising protectionism rather than falling demand.
Nor did protectionism save jobs. Research by Doug Irwin of Dartmouth College, the leading US trade historian, concludes that “The Smoot-Hawley tariff of 1930, for example, significantly reduced imports but failed to create jobs overall because exports fell almost one-for-one with imports, resulting in employment losses in those industries.”
Clearly, then, the costs of protectionism are large. Yet Chang claims that “temporary” protectionism would have a big benefit: it would provide breathing space for companies and workers to reinvent themselves. But that too is dubious. Protectionism does not provide the right incentives for businesses and workers to adapt. Companies that have a captive local market tend to milk it, rather than seeking out more competitive markets overseas—especially if they are prevented from doing so by others’ protectionism. And while protectionism may start off as a “temporary” response to the crisis, companies that benefit from it have every incentive to find new reasons to maintain it, and to devote their energies to lobbying politicians to that end. Just look at Europe’s Common Agricultural Policy, which was originally designed to prevent Europeans starving. The last thing we need is a CAP writ-large.
Protectionism would obstruct the world economy from adjusting, rather than encouraging it. There is, for instance, huge overcapacity in the US and European car industries. If each country acts to prop up their carmakers, none will thrive. Only if the least efficient shrink can the carmarkers that produce the cars people actually want to buy thrive. Chang’s prescription is also bizarre considering his main focus is aiding developing countries. If the EU keeps out foreign cars, India’s Tata Motors and his native South Korea’s Hyundai, Daewoo and Kia will suffer.
In Britain’s case, advocating protectionism is particularly perverse. One big reason why the manufacturing sector has shrunk so much in recent years is the pound’s prolonged overvaluation. Now that the pound has collapsed, UK-based exporters, not least its remaining manufacturers, have received a timely boost that will make them more competitive when the global economy recovers. An increase in global protectionism would close off their future export markets.
The real help that companies need to tide them through the crisis is not protectionism but access to finance and broad measures to stimulate demand. These would also boost employment, especially if combined with cuts in payroll taxes and increased help for workers to retrain and find new jobs.
Inefficient markets
Peas in a Pod™
Fears that Apple aims to become the Microsoft of the music download
business by using proprietary technology to lock in the dominance of
iTunes have already attracted the scrutiny of Nordic competition
watchdogs. So it is a worrying indication of Apple’s monopolistic
intentions that it is laying legal claim to the word "Pod," threatening
to sue companies that use the word as part of their product names for
infringing its iPod trademark. It is already taking action against the
small start-up that makes the Profit Pod, an infrared scanner used to
record activity on video-arcade machines.
But lest Steve Jobs forget,
Apple did not invent the word "pod." By trying to appropriate it, he
risks alienating millions of people who were once attracted to Apple’s
apparently upstart brand, as well as fanning the fears of European
trustbusters. After all, even Microsoft has not dared to lay claim to
the word "Word."
Inefficient markets
Doha derailed — who to blame?
So much for the lofty rhetoric about freeing trade and aiding development; when it came to the crunch, governments instead bowed to corporate protectionism. Thus the Doha round — launched after 9/11 as WTO members rallied around America in a show of unity — has collapsed in acrimony, with most blaming the US for its demise. This is not fair. America was guilty mainly of being too ambitious: it offered to prune its agricultural subsidies if others sheared their farm tariffs, but India and the EU refused.
Inefficient markets
It’s
up to Lamy
Prospects for the Doha round look grim. Over five years in, and
the World Trade Organisation’s 149 members still seem as far apart as they were
during the 2003 Cancún debacle. Only the massaging down of expectations by WTO
boss Pascal Lamy ahead of the Hong Kong summit
last December rescued it from disaster. Now another deadline looms: 30th April,
by when an outline deal must be reached if a final agreement is to be struck by
the end of the year, ahead of the expiry of Bush’s fast-track authority in
2007.
French myth-making
Many French people rejected the constitution because they regard Brussels as the handmaiden of "ultra-liberal" Anglo-Saxon capitalism, intent on deregulating markets and opening up the French economy to competition. Just look, they say, at the EU’s proposed services directive, which would tear down barriers to trade in services, or at the eastward enlargement of the EU, which has exposed French workers to competition from low-wage, low-tax economies such as Poland. The upshot, they claim, is that the EU is driving social standards down and pushing unemployment up.
Free trade fallacy II
Eight years ago, in "The Next American Nation", Michael Lind terrified Americans with the threat of "ever-increasing low-wage, high-skill competition" from the third world, to which free-traders allegedly had "no answer." But after this menace failed to materialise, Lind changed his tune. Developing countries, far from being hypercompetitive are, in fact, unable to compete with rich countries, he now argues (Prospect, January 2003).
Listening banks
The protesters who make a habit of disrupting big international financial gatherings have wrought at least one desirable change. The sprawling annual meetings of the IMF and the World Bank have been slimmed down this September. But this gesture of modesty has not silenced the critics. The global financial establishment is under unprecedented attack-not just for the alleged harm it causes, but for its perceived lack of legitimacy.
Rich hypocrites
Oxfam is an antidote to claims that people do not care about politics any longer. They may not be enthused by traditional politics but they turn up in droves to Oxfam events. That is reason enough to pay attention to its new report on world trade rules, Rigged Rules and Double Standards. There is also merit in the charity’s arguments. Oxfam says that free trade can benefit rich and poor countries alike, but claims that the rules that govern international trade are rigged in favour of the rich.
The not so global economy
When the World Trade Organisation last held a
ministerial meeting, anti-globalisation riots made Seattle seem like a
war-zone. Two years on, hapless WTO ministers are about to fly into a
real war-zone. They plan to meet on November 9th in Doha, the capital
of Qatar, the Gulf state that plays host to al-Jazeera, the Arab TV
station that is scooping the world’s media with its coverage of the war
in Afghanistan. The US and the EU insist the meeting should go ahead as
scheduled, although an escalation of hostilities could yet derail it.
Against globaphobia
Perhaps the riots in Seattle marked a turning point for
a globalising world. In the past 50 years cross-border trade and
investment have boomed, raising living standards across the world and
lifting millions out of poverty. But now a backlash against this closer
integration has begun. This backlash is surprising. By and large, it
comes not from developing countries which were battered when world
financial markets seized up in 1997-98, but from rich countries which
escaped largely unscathed. It is strongest in the US, the biggest
beneficiary of free trade, luxuriating in an economic boom. And its
main target is not multinational companies or global banks, but a once
obscure regulator with 500 staff and an annual budget of £48m: the
World Trade Organisation (WTO).