Tuesday, 27 December 2016

The spectacular and unheeded failure of corporate tax cuts

“When corporate tax bills are cut,” Oxfam remarked matter-of-factly earlier this month, “governments balance their books by reducing public spending or by raising taxes such as VAT, which fall disproportionately on poor people.”

A 0.8% cut in corporate taxation across the 35 OECD countries between 2007 and 2014, the charity pointed out, was accompanied by a 1.5% increase in the average VAT rate. VAT (or sales tax in America) is a flat ‘regressive’ tax. When you buy a packet of chocolate digestives you pay the same amount in tax as Richard Branson, Rupert Murdoch or Bill Gates. This switch is, quite simply, a huge redistribution of wealth from poor to rich.

But while corporation tax has been reduced across the world in response to economic crisis and has been heading resolutely southwards ever since the 1980s, we are about to see corporate tax cuts on monster truck tyres. Donald Trump wants a US corporate tax rate of 15% compared to the current 35%. Theresa May’s ambition meanwhile is for the lowest corporate tax rate in the G20 (lower than Trump’s America, in other words, which is in the G20). Britain’s corporate tax rate is 17%, 11 percentage points lower than when the Tories took office in 2010 (the previous Labour government also reduced it).

This is the other arms race. Except in this one, governments fight to give money away, not accrue weapons.

I could spend paragraphs fulminating about the injustice of continually cutting taxes for the richest people on the planet while the poorest shoulder all the pain of a policy designed to repair the damage caused by a financial crisis they weren’t responsible for. I could waste energy pointing out the bizarre logic of claiming to cut a government deficit by deliberating slashing your income. But I’ll content myself with one salient fact – corporate tax cuts are presented as invigorating the economy, freeing more money for investment and jobs. They’re about making Britain ‘super competitive’, proclaiming we’re open for business, increasing research and development spending blah, blah, blah. But on that score, they’re a spectacular failure. An unexpurgated flop.  But it’s a failure almost everybody manages not to notice.

The fallacy

Because corporation tax cuts do not stimulate investment. Quite the opposite.  According to economist Michael Burke the private sector investment ratio in Britain (gross fixed capital formation as a proportion of firms’ operating surplus,) peaked at 76% in 1975, dropping to just 53% in 2008. By 2012, it had plummeted to 42.9%. By a strange coincidence in 1975 corporation tax in Britain, at 52%, was the highest it’s ever been. That’s at the same time as the peak in the investment ratio. In 2008 the corporate tax rate was 28% and in 2012, 24%.

According to Burke, corporation tax cuts are based on the ‘fallacy’ that they will ‘spur investment’. The investment rate has fallen by around a third in Britain since 1970, the same period that has seen corporation tax cut by more than 50%.

Other countries paint a similar picture. The investment ratio in the US peaked in 1979 at 69%. In 2008 it was 56% and it declined further to 46% in 2012. In Canada, which has undergone three waves of corporate tax ‘reform’ since the ‘80s, business investment has fallen steadily for two decades. In the words of one economist, Michal Rozworski, “For every dollar earned before tax, only about 60 cents goes back into maintaining and expanding business capital.  Compare this to 80 or more cents just a decade ago.”

But the political class of the western countries refuses to see the obvious. Decades of evidence that corporate tax cuts don’t work in the sense of producing more private sector investment, are met with renewed determination to institute even more drastic reductions. Even business seems to be saying, 'enough is enough'.

As Burke points out, a dynamic capitalist economy could well produce an investment ratio of over 100%, financed by borrowing in the expectation of greater profits in the future. So 69% (the US 1979 peak) is nothing to write home about, and 46% is “a sign of enfeeblement”.

The cash mountain

One rather glaring indicator that a further corporate tax giveaway won’t generate new streams of investment is that the corporate sector is already sitting on a mountain of cash that it is not using. Worldwide, this unused mass of money was estimated at $7 trillion in 2014. This year non-financial US corporations alone were judged to have $1.68 trillion in spare cash. All this while ‘underinvesting’  is the order of the day and there is pressure from shareholders to increase capital expenditure.

Apart from sitting in bank accounts, where does this mountain of cash go? The answer is in increased dividends to already bloated shareholders (which may be other companies), in share buy backs so that the company, in stock market terms, appears much healthier than it actually is, or in acquiring other companies. So the corporate sector comes across very active (mergers and acquisitions are at an all-time high), but this fevered activity just worsens inequality and increases the value of assets while producing very little of worth to society. Actual investment – new products, new machinery, new workplaces – is frequently perceived as too risky.

One theory that may tentatively rear its head at this point is that there is a negative correlation between reduced corporate taxation and investment – in other words, higher corporate taxation (and it was much higher in previous decades) is actually responsible, in some little known way, for greater levels of investment. The anthropologist David Graeber goes some way down this path in his essay Of Flying Cars and the Declining Rate of Profit, suggesting that the heyday of corporate research in the 1950s and ‘60s was really the outcome of high rates of tax – companies preferred to divert money into research, investment and rising wages rather than seeing it appropriated by the government. When that environment was transformed in the tax cutting, deregulating ‘80s and ‘90s the incentive, so to speak, for research and investment vanished.

“In other words,” writes Graeber, “tax cuts and financial reforms had almost precisely the opposite effect as their proponents claimed they would.”

Apple won’t make those ‘darn computers’ in America

Donald Trump’s proposed tax holiday for US multinationals repatriating cash gives credence to what Graeber is saying. Prior to 1986, corporations had to pay a 15% tax penalty for hoarding cash. Under Ronald Reagan, though, multinationals were allowed to hold unlimited amounts of cash provided they did so overseas. This produced a huge influx of money into tax havens. Rather than reinstituting the penalty on squirrelling away profits in other countries, Trump is proposing reduced taxation on repatriated cash as a way of incentivizing investment in manufacturing. The last time this trick was tried (under George W Bush in 2004), more than 90% of the repatriated money was used for share buybacks, increased dividends and larger salaries for executives. Another example, if one were needed, of corporate tax cuts having an altogether different effect to the one advertised.

But I think we have to look further than Graeber’s implicit suggestion that higher corporate tax is integrally linked to higher levels of private investment. If corporations are actively preferring alternatives to investment, such as share buybacks, bigger dividends or hoarding cash, the question is why has investment become so unappealing? Why has capitalism, which presents itself as a the apogee of a vigorous system transforming the world for the better, become so feeble?

Part two to follow

Tuesday, 25 October 2016

People-hating ideology let off the leash - A review of I, Daniel Blake

Before you write anything, if you choose their words, they have won half the battle. What Britain possessed in the past was a social security system – something you paid into through National Insurance contributions and then received benefits from as of right when you were unemployed or sick. Slowly, inexorably this social security system has been transformed into a ‘welfare’ state, which dispenses financial assistance from ‘hard working taxpayers’ to those unfortunates who run into hard times. Unemployment benefit has morphed into Jobseekers Allowance (don’t spend it all on sweets children or we’ll take it away). These people inevitably become a burden borne by the majority. Think of that enormous ‘welfare bill’ or the ‘welfare cap’.

But even here words tell lies. As I Daniel Blake demonstrates (a fictional film which distils the real life experiences of hundreds of thousands of people) to describe the system administered by the Department of Work and Pensions as a welfare state, is rather like dubbing the Russian military a befriending service*. A more accurate depiction of it is a ‘punishment state’ or ‘fuck you state’ or a ‘please die quietly and don’t disturb us state’. The last thing this system does is to look after the welfare of its ‘customers’. If you don’t have a mental health problem before you enter this hellish world, you probably soon will.

“They’ll fuck you around and make it as miserable as possible,” says one character in I, Daniel Blake. Therein speaks the voice of experience that a thousand newspaper pundits seem unable to grasp. That’s the entire point – to humiliate you so you accept any conceivable work, or drop your claim altogether (which the lead character in I Daniel Blake does), so they can trim the figures and tell the media how well they are combatting ‘worklessness’.

‘Can you help me fill in the form because I can’t write?’ I asked a JobCentre ‘greeter’ after they had twice lost my application for Employment and Support Allowance I submitted with the help of a friend following a stroke in 2010 which made handwriting impossible. ‘No, we can’t do that because it involves money,” was the answer. A few weeks later came the farce of a work capability assessment which declared me fit to work, when I was barely fit to go the bathroom. But for any future employers out there, I can assure them it’s been categorically proved beyond a shadow of doubt that I can raise my hands above my shoulders at least once.

I know what the reaction of many people to I, Daniel Blake will be. The story is an extreme one based on anecdotal evidence, they will protest – most people who go through the system can’t have these experiences. But, if anything, the tale of 59 year old Daniel Blake, a carpenter who suffers a heart attack and applies for Employment and Support Allowance, is restrained. He goes through a work capability assessment, and is found (surprise, surprise) fit for work, a decision confirmed by a ‘mandatory re-assessment’. He appeals but is forced to claim Jobseekers Allowance in the meantime as his only source of income. He is sanctioned (all his money is stopped) for not being able to prove he is looking for work which his doctors have told him he’s not meant to do. Eventually, he drops his claim, and lives on nothing.

I, Daniel Blake seems filmed almost entirely in close-up. I only remember one wider city-scape shot. There is a reason for that. The claustrophobic style mimics the perception the protagonists themselves for whom the outside world gradually loses all meaning. Everything becomes focussed on the next thing you have to do – filling in that form, getting that GP certificate, proving you are looking for work, phoning the DWP. You live in a state of permanent anxiety.

You could be forgiven for thinking that should Daniel Blake win his appeal and be judged retrospectively unfit for work, he’d be safe (this doesn’t come to pass for reasons I won’t spoil). But you’d be wrong. To be unfit for work, you need to be awarded 15 points in a work capability assessment. He originally gets 12 and, if he won the appeal, most likely he’d have ended up with 18 or 20. This would have placed him in the Work Related Activity Group of Employment and Support Allowance (ESA). As the name implies these people still have to look for work and if they don’t do so to the satisfaction of the JobCentre they can be sanctioned. In first three months of 2014, there were nearly 16,000 sanctions imposed on this group - people who have been found, to the satisfaction of the DWP, unfit for work. These are, just to be clear, indisputably sick people left with nothing or virtually nothing to live on.

Daniel befriends a single mother of two, Katie, who is sanctioned herself for arriving a few minutes late at Newcastle JobCentre when she had just moved up from London. Even if you are the sort of automaton that thinks this is justified, her young children are inevitably hurt too. At this point you realise you are in the presence of an ideology that has been let off the leash and knows no bounds. This is zero tolerance taken to an extreme. It, quite plainly, hates human beings.

How on earth did we get to this point? I have read several lamenting reviews of I, Daniel Blake pinning their anger on Tory austerity. If only it were that simple. Yes, the Tories have made the system Daniel Blake encounters more callous. In 2013, they abolished the right of people appealing against an incorrect fit to work decision to receive ESA while they waited (a process that can take months and months). This was an ‘incentive to appeal’ you understand. Thanks to the Conservatives, people in the work related activity group can only claim ESA as of right for 12 months – after that point if their partner earns £16,000 or more, they are screwed. Most recently, they changed the law so that new ESA claimants would receive only the same weekly amount as Jobseekers Allowance claimants - £30 a week less. This is all part of the plan to transform sickness into a personal failing of the claimant, in the same fashion that unemployment has been, where ‘work is abstracted from the material conditions of paid employment and inequality’.

But the basic rudiments of the system that awaits Daniel Blake when he has a heart attack were firmly in place when the Conservatives gained the keys to the car in 2010. It was New Labour who introduced work capability assessments as part of the 2007 Welfare Reform Act. It was New Labour who introduced sanctions for benefit claimants, including disabled benefit claimants (although, the length of sanctions and their conditionality were both intensified by the Coalition and the Conservatives). And the work capability system was actually harsher under Labour. According to the DWP’s own research over half (55 per cent) of people found fit for work after the WCA system was first introduced, were neither claiming benefits nor in work 15 months later. In 2012, this figure had been reduced to 30 per cent.

All mainstream politicians, who cleave so fervently to the fabled centre ground, support the system exposed in I, Daniel Blake. These centrists have carefully constructed it after all. It took that extremist interloper Jeremy Corbyn to finally commit the Labour party to scrapping the work capability assessment.

There is only one element of I, Daniel Blake I found remotely jarring. That is when Daniel Blake, driven to exasperation by the requirements of ‘benefit advisers’ that he can’t, indeed shouldn’t, fulfil, calmly walks out of the JobCentre to spray paint a protest on its outside walls. While he does he is cheered on by a gathering crowd across the street. I don’t know Newcastle that well, but I can’t help feeling that in many towns and cities of this country, he would not have been cheered. According former deputy Prime Minister Nick Clegg, ex-Chancellor George Osborne (a man convinced he had created the ‘new centre ground’) would relish any chance to reduce or restrict benefits “because focus groups had shown that the voters they wanted to appeal to were very anti-welfare, and therefore there was almost no limit to those anti-welfare prejudices.” That’s the tragedy of I, Daniel Blake – the realisation that the inhumanity it exposes doesn’t produce revulsion from many of your fellow citizens but applause.

*There is, actually, an uncanny resemblance between the cuts imposed on disabled people by Vladimir Putin in Russia and the policies of the British government under David Cameron and Theresa May.

Saturday, 17 September 2016

How not to be gross. The trouble with the GDP obsession

Gross Domestic Product, or GDP, even sounds slightly repellent. All the outputs a country spews out into the world, minus none of the defilements to human welfare and the natural world. Gross is a good description. Unearth all the fossil fuels in the ground, burn them and watch the GDP meter spike, while civilisation drowns. Fight a war and see GDP spiral as you repair the damage you’ve inflicted. Sit back in grim satisfaction as your products cause an obesity epidemic and the economy spreads depression like a virus. But as long the volume of goods and services shows a steady rise, you are outpacing the abyss.

But more than just being blind to suffering, the obsession with GDP actively seems to thrive on human misery. According to psychologist Oliver James, who gives it the moniker, ‘selfish capitalism’, “it is absolutely critical for everybody to go around feeling miserable, filling the emptiness with commodities, dealing with misery by trying to give themselves short-term boosts with hamburgers or drink.”

Divorce and separation, seemingly unbridled negatives for human happiness, are a positive boon for GDP statistics, James points out. They result in more homes rented out, more fridges and furniture bought, extra DVD players needed etc. A world comprising solely of single person households would be terrible on many fronts – it would be an environmental disaster and would spread the blight of our time, loneliness. But as far as GDP is concerned, this outcome would be an unadulterated blessing.

Small wonder there is mounting pressure for other measurements of the state of the economy and society to knock GDP off the statistical throne it has occupied since the Second World War. According the author Dirk Philipsen, there are more than a hundred alternatives, ranging from the ‘Happy Planet Index’, to the Genuine Progress Indicator to the ‘Beyond GDP’ initiative.

These indexes both measure things that GDP ignores, such as childcare and housework, and take account of huge negative impacts that are grist to the mill of GDP. They are thus a far more realistic or complete picture of the health of the societies we inhabit. The book, The Spirit Level, painstakingly demonstrated that rising GDP, a blunt measure of rising societal wealth, can harbour great damage to well-being, incubating trends such as rising mental illness and obesity or declining social mobility.

But before we rush to ditch GDP as an economic measure, it is necessary to recognise that it does record something meaningful in our current society.

As economist Michael Roberts points out, ‘GDP is not designed to measure benefits to people but productive gains for the capitalist mode of production.’ And in a ‘capitalist mode of production’, there is an undeniable, if regrettable, link between the productive gains of the economy’s major institutions and the welfare of most people. If the system doesn’t make its productive gains, the disappointment is swiftly transferred downwards.

The 2007-9 recession and its aftermath made this plain to see. Global output slumped by eight percentage points and GDP in the OECD area (34 wealthy countries around the world) contracted by six percentage points. Those are the bare figures. But these statistical falls were accompanied by real-world spikes in unemployment and homelessness and serious depletions of income and wealth. With GDP per person still lumbering below its 2007 level, exploitative work contracts and self-employment have mushroomed. GDP may be blind but there is a connection between it and human welfare.

But, because this connection undoubtedly exists, it is used by governments and international agencies to justify all kinds of policies to resuscitate GDP which harm people. Neutral-sounding ‘structural reforms’, such as raising the pension age, restricting collective bargaining agreements or clamping down on ‘generous’ welfare benefits, are hawked as ways to return the world economy to a path of growth.

Sure, there is anger about these policies. Left Keynesians and others protest there are other ways to revitalise GDP growth. But there is unanimity that sustainable GDP growth is a worthy aim. And at the back of our minds there exists a seedy toleration of the anti-social consequences of rising GDP because, without it, the abyss seems to beckon. This is why, despite a wish to be humane on the part of many people, there is a deep ethical rot at the heart of our economies.

But, far from accepting this miserable bargain, we need to face it down. The god of GDP growth, as one economist puts it, needs to be dethroned. We don’t need alternative measures that co-exist with GDP, we need economic alternatives to GDP. Public policy should no longer aim at maximising GDP. It should aim at maximising human welfare and if that depresses GDP, so be it.

This change can take many forms. People growing their own fruit and vegetables rather than relying on the sugar-addled products of the food industry would improve well-being but be bad for GDP. A health policy that aimed at curing, where possible, physical and mental illness rather than merely treating their symptoms with drugs would benefit human welfare but dampen GDP. And policies to keep fossil fuels in the ground forsake future economic growth in the hope of ameliorating the impact of climate change.

It is estimated that the global economy needs to grow by at least 3% a year in order to make sufficient profits for large corporations. This means compound growth; growth on top of the growth already attained. It is doubtful whether this rate is possible but unquestionably it is not desirable. “Imagined physically,” says the geographer, David Harvey, “the enormous expansion in physical infrastructures, in urbanisation, in workforces, in consumption and in production capacities that have occurred since the 1970s until now will have be dwarfed into insignificance over the coming generation if the compound rate of capital accumulation is to be maintained”.

But should we collectively decide not to pursue the aim of maintaining the rate of capital accumulation, we need to be fully aware of what this implies. Not only do large corporations directly and indirectly (through supply chains) employ large swathes of the population, they also act as the destination for pension fund investments. The current and future wealth of millions of people depends on their success. Recognising this is not to justify the economic system but state a bare fact of social reality.

Corporations thus play a dual role in the economic system. Economic viability apparently depends on them but they are taking us in fundamentally anti-social, anti-ecological directions. This state can be characterised as one of economic bondage.

It might be argued that public investment should substitute for falling GDP. After all, the definition of GDP includes – in addition to consumer spending, business spending and investment and net exports – spending by the government. But, in order for growth to be maintained in this way the level of government involvement in the economy would have to rise more than anyone is advocating (Jeremy Corbyn included). This kind of economy would be akin to the Second World War economies of Britain and America. And of course without the huge stimulus of manufacturing weapons.

Twenty years ago there was unbridled optimism that the information economy was the future of capitalism. The number of new products was only limited by the boundaries of the human imagination. Steve Jobs could “anticipate technological desires you didn’t even know you had”. But digital capitalism has not turned out to be the saviour of corporate profitability and economic growth. “Info-tech,” says the author Paul Mason, “drives labour out of the production process, reduces the market price of commodities, destroys some profit models and produces a generation of consumers psychologically attuned to free stuff.”

We are currently living in a stagnant capitalist economy. Growth has levelled out at rate well below the average prior to the 2008 crash. Another slump is very likely, which will turn growth negative again, causing a depression. That’s the scenario, and all its human consequences, we have to imagine if we explicitly decide not to make the profits of multi-national corporations a priority.

Therefore, logically, not following the GDP compulsion anymore means constructing a post-capitalist economy. And in the short-term that entails safeguarding the incomes of millions of people. This implies the free (or at negligible cost) provision of many utilities and the use of a basic income as the primary source of people’s income, not as is commonly imagined, a fall back that gives people the confidence to make money elsewhere.

The most pressing task therefore is not just to illustrate how an alternative economic system is desirable, but to show how it would work. How it would provide and distribute income and wealth, substituting for the institutions that currently perform this function.