Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 13 July 2016

A referendum on taxes

Suppose we had a referendum on taxes. A simple question: should taxes be reduced or not? Polling evidence suggests that the resounding answer would be yes. But polling evidence also suggests that most voters would also say yes to more money for schools and the NHS. They might also say yes to reducing the deficit. Referenda do not need to respect constraints, which in this case is a simple budget constraint.

You might say that polls are a bad guide to what might happen in a real referendum on lower taxes. Those in the No campaign would point out that you cannot have over the longer term both lower taxes and higher public spending. But those arguing yes would say that lower taxes could be 'paid for' through greater efficiency in public spending. They might even say that lower taxes pay for themselves because the incentives they provide would lead to more growth and therefore more tax receipts. Most economists would say that this was highly unlikely, but we know economists will be ignored.

There was a similar constraint in the EU referendum. Reject free movement of labour and you cannot be part of the single market, and if you are not in the single market growth will suffer. Some might say that the success of the Leave campaign lay in making the EU referendum into a referendum on immigration, but as I argued before the campaign started this was always likely to happen. While the equation relating free movement to EU membership was straightforward and uncontested, the constraint relating free movement to the single market and growth was contested.

The real failure of Cameron and Osborne was not to forsee this would happen when they agreed to a referendum in the first place. They should have known, because they had managed to shut out economic expertise in the 'debate' over austerity. Their mistake, and perhaps arrogance and conceit, was not to realise that their opponents would do the same to them over Brexit.

32 comments:

  1. Things I have learnt about the referendum.

    1. 'EU referendum: youth turnout almost twice as high as first thought' by Toby Helm, Sunday 10 July 2016:

    "The turnout among young people aged 18 to 24 in the EU referendum was almost double the level that has been widely reported since polling day, according to evidence compiled at the London School of Economics. The new findings – based on detailed polling conducted since the referendum by Opinium, and analysed by Michael Bruter, professor of political science and European politics at the LSE, and his colleague, Dr Sarah Harrison – suggests the turnout was 64% among this age group...The results found that 64% of those young people who were registered did vote, rising to 65% among 25-to-39-year-olds and 66% among those aged between 40 and 54. It increased to 74% among the 55-to-64 age group and 90% for those aged 65 and over. It is thought that more than 70% of young voters chose to remain in the EU.

    2. Jonathan Coe at the LRB:

    "As a passionate Remainer I’m trying to accept the result with good grace but it’s hard when it was brought about by a campaign eloquently described by Robert Harris as ‘the most depressing, divisive, duplicitous political event of my lifetime’: words which, incidentally, were written before the announcement of the murder of Jo Cox, the defacement of London’s Polish Social and Cultural Association, and the prominent appearance of a member of Combat 18 among those celebrating the result on the front page of the Sun."

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  2. Why is it always "free movement" vs "no movement", what about something in between? Something that has mysteriously allowed 3m of the 4m Brits abroad to work and settle in the RoW ex-EU.

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  3. Simon - I had trouble understanding your last two paragraphs. Have I got this right?
    Economic experts said that if you want growth you (a) have to be part of the single market and (b) have to accept free movement of labour, under EU rules.
    Leavers reject the EU but do not believe that rejecting free movement and rejecting the single market would result in low growth. This is because it was merely "economic experts" who were predicting low growth and the Leave campaign could ignore this prediction---just as Osborne had ignored the same experts when they had predicted that austerity would also cause low growth.

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  4. "They might also say yes to reducing the deficit. Referenda do not need to respect constraints, which in this case is a simple budget constraint."

    But the only constraint for government is *real resources* not money. Secondly, economists need to explain that people saving causes a deficit. I suggest doing this via a credit card analogy.

    You might get a measly percentage when you spend money at Tesco, but when the government spends at Tesco not only does it get a percentage, but when Tesco pays its staff the government gets another percentage, and then when the staff buy beer at the pub the government takes another chunk. And so on until the initial government spending turns entirely into cashback.

    For the government it is a cracking cashback deal - for every £100 it spends, it always gets £100 back in cashback. For everybody else it is known as taxation and besides death it is the only certainty in life.

    So with this in place the only time they will run a balance on the credit card would be if people out there haven't spent everything they've earned. In other words a balance on the credit card is caused by people saving.

    That balance on the credit card would then be known as the 'national debt' and the change in the balance as the 'deficit'. But the cause is still the same - people saving.

    "Reject free movement of labour and you cannot be part of the single market, and if you are not in the single market growth will suffer."

    We trade across the globe without 'deals'. It's hardly an issue. This idea that trade will suddenly stop is ludicrous.

    Firstly most of the UK trade is within the UK and that bit that is outside is global in focus and will be more so in the future given the action is in Asia, not Europe.

    This has been done to death. Why are you still catastrophising? You'll notice that BMW cars are still on sale.

    The best way to deal with globalisation is actually to erect those regulatory barriers they moan about, and to force them to use multiple currencies. That way you have control over them if they want to sell their stuff to you.

    The Single Market is based on the theory that what is good for global business is good for the people of a nation, and the government can therefore be abolished (or turned into a glorified parish council).

    Immigration is much more important than trade. 88% of EU immigrants wouldn't otherwise get a work visa. That means they earn less than £20K and compete with existing sub-median wage earners.

    Freeing up those slots creates more space for higher skilled people from the rest of the world, which increases the net benefit to all.

    Very simple, very rational, very desirable. Only blinkered EU fans struggle to see it.

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    1. Did anyone say that trade would stop completely? S W-L says only that growth would suffer, restricting access to a market of 0.5m where about 45% of our exports go is almost certainly going to hit growth. There will still be trade, but the reason we joined is that not being in the EU meant restrictions, often non-tariff, on our trade. As so often in economics, you need to look at the margin, just saying there will still be trade tells us nothing. PS Go to the Oxford Migration Obs, UCL, LSE or NIESR for more reliable information on immigration

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    2. That's a pretty dumb analogy.

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    3. For most of the people who voted to leave, growth stopped back in the 1980s. It was supposed to trickle down, or perhaps trickle out from London, but it hasn't. Most leave voters had a good empirically grounded reason to completely ignore anything any expert said about growth.

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    4. Why is it a bad analogy?

      The saving happens anyway, so just leave them with the cash if they don't want to spend it. They certainly don't need 'rewarding' for the privilege.

      You have to understand that saving financially is essentially voluntary taxation. They have refused to spend the money - leaving space for somebody else to spend instead.

      So to keep things going you *have* to do one of the following things:

      - reduce taxation on people who spend money, so they can spend some more to use up the spare capacity.

      - let the central government spend some more directly to use up the spare capacity.

      - hand out credit cards to all and sundry so they spend some more, and make more profit for private banks. We already know how that ends. Badly.

      - one of the first two above, plus confiscation of financial saving by taxation. You only do the confiscation because you want the numbers to be some sort of shape for religious reason.

      So that's your choice. Accommodate the saving, or confiscate it. Pick one.

      If you actually want to get rid of 'debt' you have to stop people saving. Get the Tories to try and sell that one.

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    5. "To erect those regulatory barriers" is minding your own business, with external effects. "To force them to use multiple currencies. that way you have control over them.." Is colonialism. Tastes differ. Indignation on reluctance to welcome colonialism will disagree greatly on this motive.

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    6. Yes Kaleberg, and this is the key point. During New Labour's term in office the experts (particularly mainstream economists whose views were repeated throughout the press - particularly the Times, FT etc) said that free movement would lead to big win win outcomes for all - this view is of course based on neo-classical theory. But history tells us that this is just a theory - it may or may not happen. We did not get big increases in real GNP per capita following EU expansion without transition controls or a big net increase in wages for low income natives who have long suffered a reversal in their relative real wages, but we did get rising inequality.

      Immigration is important for Britain and we have a duty to accept many more refugees (before economic migrants). But immigration must be managed well and in a manner that does not spark off community concerns.

      The eventual outcome - Brexit - is a tragedy. And it can be traced to very narrow policy advice over the last 20 years.

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  5. Simon, could you blog on your views about Paul Krugman's pieces about there being essentially zero short-term economic deterioration from Brexit? Feel free to delete this comment because it doesn't relate to the post I've commented on.

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  6. Nice post. Another analogy I like relates to why we should have a second referendum: if a person is convicted of a crime but evidence emerges soon after sentencing of their innocence, is it not right to re-run the trial?

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  7. Certainly, it is the case that from my (our) standpoint this is obviously true, but the trick with austerity has been to ignore economists through action but not necessarily words.

    Many more words- and a warm front towards serious economic thought- may have tied these things together; though I can't say I KNOW the result would have been different.

    As an aside, the attempt to make BoJo, fox, and Davis 'have their cack and eat it' (sic) through appointments to the cabinet is probably a more, not less divisive approach to dealing with this dichotomy.

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  8. The important thing is we have left now. It is done. Deal with it. It’s a very progressive development because it gets rid of the EU albatross around the UK’s neck. That now opens up political possibilities that were not there before.

    Unfortunately the Left, in their infinite wisdom, have done what they usually do – collapsed into a fog of cognitive dissonance.

    From now on the script usually goes as follows. The Tories will leave the EU, and Labour – because it knows how to win things – will support the losing side in the referendum. I’ve already seen influential people calling for Labour to represent the ‘48%’ quite ardently without for a moment considering how ridiculous a position that is for a party that needs a majority (particularly when you look at the electoral map projections which would give ‘leave’ a 192 seat majority in parliament).

    They will then lose to the Tories, and being Labour they will double down on what they believe even more without actually asking real people what the issues are, then they’ll probably lose again before finally somebody comes along and changes the direction.

    The problem on the Left is that they are attached to religious beliefs far more than the more pragmatic right and they cling to them long past their sell-by-date. So at the moment we have internationalist basic income people in charge – essentially the UK Green party – which is a non-starter as a policy base, but the alternative is market segmenting, poll watchers who try and PR their way into power by trying to pretend to be the type of Tory they think people want.

    I’m really not sure where the ‘nation-first’ Labour person is going to come from who is just going to ensure everybody has a job to go to, a house to live in and a pension to look forward to. Because fundamentally that’s what people are after.

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    1. I'm afraid I disagree that the 48% should just deal with it. The Remain campaign may have stated the risks too strongly for people's tastes, but the Leave campaign was knowingly based on lies and deceit. Frankly, regardless of whether or not Brexit would be a good thing, we should not allow such a cynical campaign to go unchallenged. I thought Britain was better than this.

      S

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    2. "The problem on the Left is that they are attached to religious beliefs far more than the more pragmatic right and they cling to them long past their sell-by-date"

      Nigel Farage "pragmatic"?
      Gove? IDS? Hunt? Fox?

      Utter utter cobblers.

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    3. Dude, the "Leave" campaign was financed via the Rothschilds through Murdoch. Stop playing that "Left/Right" nonsense.

      You aren't getting the albatross off your doorstep at all. You are bringing in a truly globalist one now. You have been used. Think fool.

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  9. Good analogy. Another view is that the vote came down to a simple choice : do you want things to stay the same, or do you vote for change? Many wanted change. It just happened that the only change offered was leaving the EU.

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  10. Although I think the reasons for the loss were multifaceted, and one needs to look at things like the stark London-rest of England divide for serious answers, I agree that the linking of "uncontrolled" immigration with the EU was critical. Although it was Brexiters and UKIP that made this issue into their winning card (even though neither were anti-Europe for primarily that reason - their real motives had more to do with free market ideology and dislike of "Brussels bureaucracy"), the fact the establishment since New Labour let the immigration issue fester and did not take it seriously meant that something was eventually going to give. Unfortunately it was our EU membership.

    NK.

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    1. There were plenty of places that voted remain other than London. The divide was in the way people consume information about Europe.

      If you know Europeans at a personal level, work with European companies, or have some level of education about economics or demographics, then you probably voted remain. If you don't, and hence your entire exposure to the debate was via the MSM, then you probably voted leave.

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    2. Ah, yes, the free market "collectivism", which market based economics is. Dopamine driven mind control, which they may lose if a social nationalist party comes to rule............the EU is a market based organization itself. UKIP's Rothschild overlords are taking a big risk. But they have been beaten down by America for so long, I guess they were desperate.

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  11. .
    You can have lower taxes and higher spending.

    Borrow the difference and use other levers to control inflation.

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  12. It is useless wondering how could the majority of the British people vote against their own economic interest, while all the vote was about entirely different question. The referendum was about if a tribal-national community like Britain exists only to secure economic wealth or for a different ethical value, like being proud for having unique national features that belong only to the British, and you name these features, that for me as an outsider seems to be quite obvious. As to the old British citizens, who mostly don't participate anyway in the new wealth created by the new economy, the national anthem seems to be more important than truffle mushroom in the stew sauce.

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  13. They should have known, because they had managed to shut out economic expertise in the 'debate' over austerity. Their mistake, and perhaps arrogance and conceit, was not to realise that their opponents would do the same to them over Brexit.

    Chris Dillow has a nearly identical post up. I wonder whether it's not so much calculated misinformation about austerity that then backfired in the Brexit debate than the fact that they actually believed what they said about austerity.

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  14. This question isn't relevant to this post, but it might be relevant to the next one.

    What do you think of the things that Philip Hammond has been saying or indicating about his plans as chancellor, in particular that the government will probably start to borrow to invest?

    Do you think a full or partial rejection of austerity (which appears to be one of the leading reasons that most people voted to leave the EU) could result in the British economy finally recovering, and if so does that mean that Brexit was a net-positive decision if it frees us from the austerity pressures of Merkel and Co?

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  15. 1. The 1977-election was an overwhelming vote for a bis of the coalition and after almost a year of negotiation - a really serious try - that road was taken to be blocked. Federal Belgium doubled on it upon the June 2010 election: 541 days. (Anything you can do, I can do better...) The boss has spoken, and one should really try, but one cannot do the impossible.

    2. There is a legal or constitutional dimension. For changes in a constitution most countries have a "heavy" procedure. The decisions on Scottish independence and Brexit were submitted to a toss up of a coin, as they were 50/50 cases, no two thirds. It be noted I come up with this point too late for any reproach on what happened, and in time for further steps in the minefield. This is a case for the silly remark: you ought not be here, and you are.

    Your blog is better on 1. (Mine is shorter) I foresee a blog on "Others things equal and some are more equal."

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  16. All government spending pays for itself as long as there is a positive tax rate because your spending becomes someone elses income.

    HM Treasury is not revenue constrained. It can spend as much as it likes as long as too much money does not chase too few goods.

    Supply side economics has not worked it is time to go back to demand side economics as clearly laid out by Michal Kalecki

    Political Aspects of Full Employment

    http://mrzine.monthlyreview.org/2010/kalecki220510.html

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  17. I suspect you will find that the UK economy was built of sand long, long before the referendum...and I also suspect that the EU will fail more spectacularly than an EU-free ever could...

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  18. The (mediamacro) machine, whihc helped Dave and George across the line in May 2015, turned on them in June 2016. George's misleading aggregate data, which he trumpeted without perhaps fully understanding, hid the truth from him. Rough/poetic justice. But now we all have to deal with Brexit.

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  19. It's inconceivable the public would give an informed answer to any of those questions. Even you don't try to set the facts straight, but allow the article to keep on with the economic falsehoods promoted by certain interests.
    The answer SHOULD BE :- Yes you can have lower taxes and increased government
    spending on education, welfare and pensions. AND the reason is that monetary sovereign nations cannot be bankrupted in their own currency, that MS nations do not have to borrow or save their own money, that deficit spending promotes economic growth [budget deficits promote recessions]. You know all these I suspect, but are leery of talking truthfully about them. This attitude has got to change!


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  20. This is a great argument for representative democracy.

    But you can't lump Cameron and Osborne together when it comes to the EU referendum. It's well known that Osborne always argued against it in private (though he never said it publically for reasons of collective responsibility). See Alastair Campbell here:

    http://www.alastaircampbell.org/blog/2016/06/28/a-national-catastrophe-and-a-vacuum-in-leadership-this-is-what-we-voted-for/

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