Update 1, Oct 30: the results of our Freedom of Information Request are now in. See our updated article UK’s bank levy reforms will cost £4.2bn in tax over 5 years.
Update 2: see also How ‘Competitive’ Tax and Incentive Policies hurt U.S. small businesses.
(Now cross-posted at Naked Capitalism)
The ‘competitiveness’ of a country can be taken to mean many things. Many people, such as Martin Wolf or Paul Krugman, have argued forcefully that it is a meaningless or dangerous concept. On another level it’s a question of language: you can make national ‘competitiveness’ mean whatever you like.
But there is a very common use of the term out there — what we are starting to call the Competitiveness Agenda — which accepts a particular meaning for the word ‘competitive.’ This agenda involves special pleading to bestow perks such as tax cuts on capital (or on capital owners), on the basis that if they aren’t pampered they will flee to other more hospitable jurisdictions. (Whether they would actually do this is another matter: the point here is that the scaremongering is often effective in securing pork for capital.)
One of the core insights driving the Fools’ Gold project is this: national ‘competitiveness’ is a confused and dangerous term to use when talking about an economy. What people (politicians, especially) often seem to think is that if you support one economic sector, that will necessarily make your economy as a whole more competitive. The problem is: that ‘support’ generally has to come from somewhere else in your economy.
So a corporate tax cut, for instance, is paid for by others in the economy, via lower corporate tax revenues, which may mean reduced fewer universities and courts, and so on. A more deregulated (and hence supposedly ‘competitive’) financial sector will see taxpayers taking on risks and eventually being forced to pay for them, while bankers get the cream.
These kinds of internal transfer do not automatically enhance growth, productivity, or anything that one might call ‘competitiveness.’
(Updated with Krugman comments.) Two years ago Anat Admati and Martin Hellwig published a popular book about banking, The Bankers’ New Clothes, which Martin Wolf in the FT described as “the most important book to emerge from the [Global Financial] Crisis.”
The book pulls off the trick of explaining a lot of technical points about banking in highly accessible detail, and perhaps its most valuable contribution is to have explained so clearly why it is foolish to run banks with only small amounts of loss-absorbing equity. Partly because of the way bank equity is so misleadingly portrayed in the media and elsewhere – as a cost to a bank, and by mindless extrapolation to an economy as a whole – bankers have been able to get away with blunting urgent reforms.
Here we go again. Look at this latest piece of financial sector lobbying, courtesy of Reuters, which normally strives to be a fair and balanced news organisation.
This requires quite some unpacking. To begin with:
“Britain is prepared to review a tax on banks to head off the threat that large multinational banks like HSBC could leave London’s financial centre and shift their operations overseas, the Sunday Times reported, citing industry sources.
Finance minister George Osborne is to lay the ground for such a review in a speech this week, by saying that the newly-elected Conservative government is committed to maintaining the competitiveness of banks, the paper reported.”
This month a group called the American Action Forum (AAF) published a document entitled “The Growth Consequences of Dodd-Frank,” looking at the U.S. Dodd-Frank legislation introduced to curb financial excesses in the wake of the global financial crisis that first emerged in 2007.
Reflecting the complexity and — how shall we put this delicately? — dodginess of large parts of the financial sector, Dodd-Frank is a huge and unwieldy creature. It’s also been set upon by sharks: read this stunning (though out of date) Matt Taibbi article about how it’s done. As he put it:
Update: this post has now been published on Naked Capitalism.
Martin Wolf, the Financial Times’ chief economics commentator and one of the world’s most influential economists, published a book in 2004 called Why Globalization Works: the case for the global market economy. A forceful, heavily researched and uncompromising work, it became for a while a bit of a bible for those pushing for freer trade and further liberalisation of the global economy.
When the global financial crisis hit in 2007, calling into question some of the mainstream economic profession’s most cherished beliefs, Wolf – unlike many economists – seems to have done a serious re-think, and he has found a dramatic and radical new enthusiasm for reining in an out-of-control financial sector, while remaining essentially in favour of free trade. Wolf told us in an email in response to an earlier draft this post:
“I have only changed my mind on finance and even then I was already quite sceptical. I think my chapter on the state was rather good.”
The chapter in question, the subject of this blog, is entitled “Sad About the State”.
One of our inaugural articles on this site was a post in March looking at the causes of the “Celtic Tiger” boom in Ireland. It contained a striking graph and a wealth of analysis suggesting strongly that what caused the boom was, above all, Ireland’s accession to the EU single market, rather than its supposedly ‘competitive’ corporate tax policies. After all, Ireland has been trying to be a tax haven since the 1950s, but it was only in the early 1990s that take-off began (also see this rollicking historical account of how Ireland became a corporate and financial tax haven, or offshore financial centre.)
By Jack Copley.
Financial markets are fundamentally concerned with the future. Loans to businesses enable future profits, derivatives supposedly insure against future risk, and speculative practices attempt to profit from future price movements. Yet to truly understand how we arrived at the current financial status quo, we must turn our gaze backwards. This is exactly what Greta Krippner does in her 2012 book Capitalising on Crisis.