Given that the next election is possibly 5 years away, am I the only one to find arguments about Labour’s election strategy just a little premature?  I keep trying to remember what such discussions must have been like for the Lib Dems in 2005, and then find I can’t.  Because five years is such a long time … What is that saying about a week in politics?

But there are some excellent discussions, and I can’t ignore this one: between Julian and the Fink on Comment Central.

Meantime (and thank goodness, for this policy oriented blog), the discussions about POLICY are restarting.  Here is the excellent Rick on May 2012, and a Grand revolt against the Immigration Cap. Rick is an HR guru:

A combination of factors has meant that, five months into the year, the 2012 immigration cap has already been reached. Unemployment has fallen rapidly as the economy has improved and ideal weather conditions have caused farmers to bring in foreign workers to prepare for a bumper harvest. There has been little interest from local people in jobs at the Olympic Games, so London 2012 sent out an urgent appeal for migrant workers in January. The annual cap on migrants was reached a few days ago when EasyTandoori, the joint venture between Stelios Haji-Ioannou and Gulam Noon, brought 500 Indian waiters and kitchen staff to the UK, in preparation for the opening of its restaurants later this year.

Ian Cowie of the Telegraph is more, well, Telegraph-ish about the prospects for people suffering higher CGT bills.

Investors with substantial portfolios of property and/or shares who have not protected them in tax shelters – such as trusts, individual savings accounts (Isas) or pensions – face the daunting possibility that HM Revenue (HMRC) may grab half their gains.

If you are a reader with substantial wealth, it is a very expert and informed piece that may help you work out what to do to protect your wealth.  If you are NOT such a fortuante person, it is an intruiging insight into the amount of brainpower and cunning that goes into protecting the wealth of people who have the ‘problem’ of how best to sell their artwork, racing cars and second properties.

I think CGT is an important issue.  But I am most exercised about the people starting up value-added business that end up making the whole economy grow well, not the multi-generational maintenance of wealth hordes.  There are dilemmas, sure – the sanctity of property, social justice clashing as always, blah blah – but I am more concerned about the truth or otherwise of the complaints of Private Equity managers:

The British Private Equity & Venture Capital Association, which represents the industry, said it would be “bizarre” if the sector’s capital gains were taxed as non-business gains. It said the generous exemptions for entrepreneurial business activities should “obviously” be applicable to private equity and venture capital, highlighting “the positive role that private equity and venture capital are playing in the recovery”

I am an empiricist.  All sorts of things might be true in theory about taxes, but we need to know what actually happens. For example, the Right loves to construct a narrative in which the Government is the whole cause of the financial crisis. Sure, you can ‘construct a narrative’ (read my review of Norberg for an example).  But is it true?  Barry Ritholtz takes it to pieces – see this post on Economist’s View, concluding in damning fashion:

I demand evidence, data and facts. The blame Fannie & Freddie crowd have managed to remain blissfully data free. They have steadfastly ignored all calls for proof. Its way past the time to call out their intellectual dishonesty. If you cannot show any data, if you cannot prove what you are alleging with actual facts, you need to be called out for what it is you actually are: Proponents of a failed philosophy.

The version over here is our own dear IEA, so very right in the 1970s, but so pure and religious in their views against taxes that they go to the extremes, those extremes where your views are just ignored for being predictable in advance.  Consider their post asserting that inheritance tax is a tax on entrepreneurialism. I keep asking where the proof is, and I keep getting fanciful, evidence-free theories back.  There is huge cash wealth in this country.  Asserting that IHT prevents the venture capital industry getting what it needs is just daft.

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13 thoughts on “‘Labour’s electoral strategy’ – and a call for Empiricism

  1. Hello.
    Sorry, not sure what you mean by entrepreneur, but I think there might be some correlation between rates of change in self-employment and inheritance tax rates.
    If you look at the countries without (or with low) inheritance tax,( Australia, Canada, Mexico, Italy) the rates of self-employment seem to have held up pretty well over the last 50 or so years whereas those countries with high inheritance tax rates (France, USA, Japan) have seen a decline in self-employment. Not too sure about Korea and the UK has done the opposite… but anyway.

    1. I would not be surprised if there was some sort of link here, though I would argue that entrepreneurialism and self-employment are not the same.

      What really matters is whether rational risks are rewarded or not sufficiently. I worry a lot abotu CGT on this one, but not about the idea of people not wanting to build businesses, because they are miffed that when they die at 80 their 50 year old children will not get a large enough pot.

      Bill Gates and Warren Buffett have a positive spin on estate taxes from the inside – that they encourage charitable giving

      http://www.commondreams.org/headlines01/0214-01.htm

      Here is a splendid quote

      Mr. Buffett, the Omaha investor who ranks fourth on the Forbes magazine list of the richest Americans, said in an interview that he had not signed the petition itself because he thought it did not go far enough in defending “the critical role” that he said the estate tax played in promoting economic growth, by helping create a society in which success is based on merit rather than inheritance.

      I appreciate I am using the argument from authority rather than evidence here …. but would use as evidence that Microsoft was somehow built up while its founder was powerfully aware of future estate taxes. ..

  2. I must say, that you as often as not take the same approach as those you criticise. Indeed, we all have to have conversations that are not based on continual proofs using strict standards of evidence otherwise we could have virtually no bearable interactions at all. You say that the IEA is “so pure and religious” – what is your evidence? David Smith’s book on taxation was totally empirical – but not everything we do is empirical. You say that we were so right in the 1970s. What is your evidence? In the 1970s too we published a mixture of deductive Austrian work and empirical material. You use as evidence that fact that nobody responded to your blog comment. I am afraid that blogs do not work like that – those who comment do not necessarily come back and read all the comments and then research and post back. I am surprised you describe yourself as “freethinking” and “liberal” because to judge things only by evidence is not a liberal approach. I don’t want to sound over-critical, but I think your criticisms of those with whom you disagree go too far and if you applied them to yourself as well as to those who criticise all reasonable discussion of political issues would grind to a halt. It is true that we should make sure that we can answer the question that Milton Friedman used to pose “how do you know?” where that is appropriate. It is also reasonable to deduce from axioms about human behaviour and natural law (though not, of course, if you do not believe in it).

    1. Hello Philip, nice to have you here.

      But I must admit to being baffled by the idea that judging things by evidence somehow denies liberalism. Of course, we need both theories and practisen – models and econometric backing for the models, perhaps, in the jargon. But in my view of history, far more illiberalism has taken place in the name of asserted theories/systems that did not seem to match up the way the world actually worked, than anything else.

      Be this the collapse of economies in the 1930s in a way that the ‘natural law’ of Economics should not have seen happening (it turns out the natural law needed to be supplemented with the idea of insufficient demand – an idea that needed observation of the world to inspire it)

      or the hierarchical assumptions of feudalism/rule by aristocracy (‘it is right and just that power lies with us’ etc)

      Or the collapse of the neat Marxist assumption that common ownership of resources and government allocation would somehow improve outcomes and justice. It is this sort of observation that I imagine the IEA used to butress its powerful theoretical assault on the overweening government in the 1970s. Government’s inability to direct the economy, the consequences for inflation and profitability (which were dreadful in the 1970s) were all readily observable, and must have played a big part in your ideas being accepted. Didn’t it? I mean, if unemployment had stayed low, productivity high, and inflation at 2%, would the IEA have had the success it did purely on the basis of its assertion of natural laws?

      On the matter of taxation, the sort of thing I had in mind that might have justified the assertions about inheritance tax, can be found on this blog here in this discussion about VAT where the OECD has an impressive table about the effect of various taxes on economics.

      Yes, I appreciate that this is only a blog, but when on this blog people simply assert ‘laws’ about how the world should work (such as R Murphy/TUC and his assertions about the consequences of a transactions tax), we demand evidence or judge that perhaps the ‘natural law’ of a Leftist (in this case) is not really justified by how things really work. I apologise if I implied that the IEA’s work is all like this; but I repeat that until there is evidence on this particular statement (that IHT damages entrepreneurialism) it looks like an ‘assertion from natural law’, and can be attacked as such.

      I am very nervous of pure deductions from axioms and human behaviour, because I spent 10 years in the markets and continuously observed them behaving in ways that were utterly different from what a naive extrapolation of ‘natural laws’ of economic behaviour would imply. Fortunately, economics tends to evolve through a continuous dynamic interplay between how things MIGHT be according to some theory or other, and how things actually turn out.

      So I remain where I was in the title: defending empiricism, in particular as an important corrective within liberal thinking against the bad consequences that have often arisen over the years from overstrong faith in theories and natural laws unmixed with a reality that appears to be behaving differently. And coming back to the original point, I don’t think that a continual use of inheritance tax as a small part of our revenue gathering mechanism will be any worse for entrepreneurialism than the alternatives; though as an honest empiricist I ought to consider the evidence that Mark has just provided to this comment stream.

      have a nice day

      1. I don’t think so!

        Philip, can I thank you now for what looks like an excellent and serious response. I may have to wait till tomorrow to reply at length, but for now can only thank you for enriching this blog. I post things partly to educate myself, and this will certainly help me in that.

  3. There’s no particular reason why there should be any exemptions on CGT, and the IFS seemed to agree when they evaluated the proposal. Robert Chote and Norman Lamont don’t look like they’re going to be joining any communes any time soon.

  4. this post could be very long so let me try to make a few brief points!

    By natural law, rather than natural economic laws I just meant certain things that are justified by the nature of things that are necessary for human flourishing – in other words the Christian concept of natural law. One of those in private property. So I would argue that deductions from natural law and from axioms of human behaviour can get you a long way in economics and it is dangerous when we try to over-rule those by empirical evidence. It is a different methodogical approach and you may say it is not economics but I think, in fact, that economics needs to be set in a wider philosophical framework. It is not just the empirical bit of philosophy that relates to the allocation of scarce resources. In other words if you found me evidence that IHT did some good, that would not necessarily convince me that it was a good thing. I believe in private property for its own sake.

    Now you may respond by saying that that’s fine but you are attacking people making assertions without evidence and not attacking this different argument against IHT. That is fair enough. However, if we can deduce things then we should not ignore them and if we cannot find evidence that does not make the deduction invalid. I would have to say that I don’t know whether IHT stopped entrepreneurship (it was not my comment) but I think I can deduce from reasonable axioms of human behaviour that it either reduces entrepreneurship or it can be avoided at some legal expense by people with a reasonable amount of money or it leads to the proceeds of entrepreneurship being consumed (so less saving). Now, of course, one can have an empirical debate about whether alternative taxes are MORE damaging in these respects but we should bear in mind that IHT is levied at high marginal rates to raise not a lot of money so it probably does do quite a bit of altering of economic behaviour for the people who might be caught by it (I have a small four bed detached house in the south east and nothing much else and, at the age of 46 – despite Darling’s most welcome change – I am having to think about IHT).

    Empicism more generally – the problem is we do not know enough to be empiricists. Empiricism can help us understand the world a bit more but it cannot prove things for certain – especially in economics. I have looked at some of those Norberg reviews, for example, and I am stunned at the limited empirical evidence that the reviewers suggest “destroy” theories or “prove” things. For example, with regard to the unemployment there is a lot of micro economic evidence that suggests that these micro economic things (such as real wages) are important. And, in intepreting the facts, we need some theory as to how it might happen (in particular if there is a deflationary shock, expectations can be shot to pieces, real wages rise as a result of expectations not being met, people laid off, capital goes redundant and people’s skills deteriorate and it can be a long time before employment recovers; it does not need people to be well off on unemployment benefit). With regard to fiscal policy which I think one of the reviewers suggests got US moving again before the stimulus was withdrawn, I am afraid that just does not seem to translate across countries. There are deep and complex issues here (including ones of high tax rates, poor Fed handling of the money supply, huge uncertainty surrounding business investment because of FDR’s powers) that were different in the US from the rest of the world and quite convincingly explain why the US lingered so long in depression. If one merely judges from evidence without theory then there is a real danger of mixing up cause and effect – together with other errors. I should say that I thought the reviews, as far as i had time to read them – and it is a Saturday(!), of Norberg were unfair. The reviewer who dealt with the Fannie/Freddie stuff is quoting stats rather selectively and Norberg had a whole lot of other chapters on a whole lot of other mistakes (including mistakes by private sector actors).

    Why is empiricism illiberal? Well, it is simple really. Liberalism relies on higher principles because we do not know all the effects of our actions. Socialism tries to predict the exact effect of our actions and plans accordingly and conservatism (when not the sort of liberal conservatism practised by Mrs. Thatcher) fears the uncertain effects of our actions so fears change (according to the liberal party leader in what I thought was quite a good quote!). Empiricism surely is a long step down the road to utilitarianism. It is also interesting how empiricisim relates to the private sector mistakes that led to the crash (in my view compunded by public sector mistakes with the biggest public sector mistake being not having a legal system that ensured that private sector actors that made mistakes went bust). In the private sector, the biggest problem was that people thought everything could be quantified. There was no “that looks wrong in principle, don’t like it, too complex, avoid it like to plague” It was more “the risk is 0.00001% exactly so let’s do it”. And the Stiglitz/Orszag report on Fannie/Freddie before it went bust is most enlightening.

    I agree with your limited point that if people make assertions (in serious work – not on blog posts necessarily) that are empirical in nature they should be prepared to back them up. If they make assertions derived from axioms of behaviour (such as mine above re. IHT) then that is different. But we should be careful about too much empiricism in economics because the main purpose of economics (as Hayek said) is to educate people to understand how little they really know. Empirical facts are very aggregate – itself not a very liberal way of going about economic evidence building – and it can be surprising how little they tell you. This is particularly true with macro aggregates, much less true with micro.

    1. Let me give a concrete example from an area of research I used to bump into in my previous chair – real estate finance. There appears to be (unless some has been uncovered since I stopped being seriously involved with the subject) no empirical evidence that commercial property returns (capital plus income) are related to unanticipated inflation (in other words that commercial real estate is a real asset). Torture the data how you like and it did not make any difference. But, deductively, it must be a real asset (excepting frictions such as upward only rent reviews). The purchasing power of the pound has fallen by about 98% since 1946: can it seriously be suggested that commercial real estate value and rents would be at today’s levels (ie 50 times higher in real terms) if that had not happened? It is a great puzzle. The link must be there somewhere but we cannot find it with any confidence in the poor old tortured data! (Of course, Friedman had the same problem with the consumption function). Now, that does not mean that empirical evidence cannot enrich a debate between us about (say) whether minimum wages help the poor – but if the data is telling you something that is counter-intuitive about that subject it is worth sitting back. Good debate. On a separate note, i wonder if we should try to put some people together to discuss the local pay bargaining subject (see your Wolf paper) with appropriate politicians (maybe as a joint Centre Forum/IEA thing).

      1. Hello Philip

        On that last point, I’m really glad you too think that subject is worthy of discussion – we are half way through trying to get an event organised with someone or other in business, though, centred on Alison’s paper. I will try to make sure that I get in touch when we know when and who it involves – it would be great to have the IEA there in any capacity.

        best

        Giles

    2. “axioms of behaviour”

      Humans are not theoretical constructs. There are no “axioms of behaviour” divorced from empirical reality.

      Your attitude towards empiricism is not the hallmark of science (for that is what economics is – a social science). You can construct as many variations of String Theory as you want, but if empirical investigation reveals consequences that you would not expect from your theorising, then your theory is bunk. It is falsified.

      And if you can’t examine whether you theory conforms to reality? Then by all means pontificate and extrapolate, but know this – no one need accept your equations and arguments, because reality is the only test of a theory. And we also cannot accept alternative theories, as they have the same problem.

      “the nature of things that are necessary for human flourishing – in other words the Christian concept of natural law. One of those in private property.”

      You see, an institution of “private property” doesn’t tell us much. That runs the whole gamut from libertarianism all the way to Lenin’s New Economic Policy.

      As for human flourishing, I think we would agree that NEP goes against that. But then I would argue that so would libertarianism. But what is “human flourishing” anyway? Different people disagree – no universal morality exists. So on this point, we are into a moral debate, which takes on board philosophy and politics, but it most certainly isn’t science.

      If though, we have an agreement on what criteria satisfy “human flourishing”, then you can use economics to see what satisfies that criteria (normative economics). But that is an empirical undertaking.

      So when you say that “I would argue that deductions from natural law and from axioms of human behaviour can get you a long way in economics and it is dangerous when we try to over-rule those by empirical evidence”, you are not doing economics. You are doing politics. You are basically saying “I don’t care how good IHT is for humanity under criteria X as found empirically, I prefer criteria Y”. Just because you prefer criteria Y, does not change the consequences of IHT. Reality is what it is.

      “Why is empiricism illiberal? Well, it is simple really. Liberalism relies on higher principles because we do not know all the effects of our actions.”

      Yes, we don’t know all the effects of our actions (although I question that being an axiom of liberalism – if we did know, does that imply that the government should clamp down on, say, free speech?), but when we do know the effects of actions, then any policy should be based on that empirical evidence. That ideas and policies should be based on evidence where available is hardly a controversial concept. If you are ignoring reality then by definition you are taking a faith-based position. Adopting the labour theory of value, David Ickian lizard theory, or the Adam and Eve story might be comforting for some people, but comfort is not a substitute for truth.

      We know that generally, 20% inflation is bad for the economy. Is it illiberal to know that?

    3. I cannot do such a magnificent comment justice in one go, but will just make a few

      observations

      1. I share your concerns about utilitarianism, and insofar as empiricism points in that

      direction I can see your point. It is one of my problems with New Labour – that towards the

      end they were willing to consider any actions whatsoever that might conceivably improve a

      measured outcome that they were happy to override other basic liberties.

      2. … and I won’t deny that an inheritance tax does impinge upon a ‘natural’ liberty to a

      significant extent – my objections were more to a perceived utilitatian statement that such a

      tax also has a large measurable impact on the total national pie, through a variety of

      suggested mechanisms.

      3. I also think the degree of avoidance is both a clear observable fact, significant in itself

      and in its subsequent effects on the economy. I think it constitutes a clear reason for

      restructuring the way the tax works – on receivers rather than givers, perhaps – rather than

      escalating the pointless war between legislators, enforcers and tax accountants.

      4. It is getting on to 6 months since I reviewed Norberg so my memories are hazy, but I

      remember objecting to what seemed to me to be a blanket denial of the possibility of a massive

      collapse in aggregate demand. Clearly monetary mismanagement,technological change and

      ‘hysteresis’ effects on the usefulness of the labour market must have had an effect – but I did not think that in the slim chapter of a slim book that he devoted to the subject, that he demonstrated that in the 1930s the government was the problem, to any reasonable degree.

      5. I really like that statement about empirical facts being aggregate – must remember to quote it some time – as it crystallizes a concern I have had about the way society is organised and judged by deciles of income/wealth etc, and much richness is lost that way. Anything that is not immediately good for a snapshot of the bottom 10% is judged ‘regressive’ – see the Fabian attack on LibDem tax policy for example

      My weekend is childcare-dominated, so I’m sorry this is all I can say for now.

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