Avoiding Tax and Panama

The big story at the moment surrounds Panama, which many folk may know best from Prison Break rather than its financial sector. A truly massive leak of confidential files from a law firm (terabytes, not just gigabytes…) is causing embarrassment and more for many leading global figures. UK Prime Minister David Cameron is fending off questions about his family’s involvement with the law firm via his father, while the Icelandic Prime Minister was more deeply embroiled and has already bitten the bullet. Links to Vladimir Putin do not appear to have caused quite so much shock and consternation

What exactly is going on, and why does it matter from a macroeconomic perspective? It must matter, since it pertains to billions of dollars. Economies have billions of dollars (or pounds, or euros) moving around within them, and hence that billions ended up in Panama rather than the places that the people mentioned above are located is of interest.

Towards the end of term we covered the Balance of Payments, which is the financial account of a country – what financial flows go in and out of a country. Clearly, it seems, considerable flows went out of the UK, Iceland, and Russia to Panama, and for what? Money is moved from one place to another usually for some purpose – for example an investment, or to pay for imported goods. The claim, however, is that much of these financial flows were “offshore” – moving of money primarily for the purpose of avoiding paying taxes.

In the case of Ian Cameron, the PM’s dad, their company Blairmore Holdings was based in Panama, it would seem, to avoid paying as much tax as would be paid in the UK. However, as the leaks appear to make clear, major decisions about the firm were still made in the UK (based on documented meetings of board members revealed in the leaks) – which apparently is the test of where a company is “located”. What this makes clear is the difficulty of regulation – definitions have to be made for things that are easy to think about, but harder to pin down the detail of – what is the definition of where a company is located? And once a definition is made in a country’s law, it will provoke those in that country to consider ways in which that law can be avoided. As a result, it’s likely that those involved will claim nothing illegal was done, regardless of the wider moral implications about doing right and wrong.

Economic activity, you’ll learn more as you study further in microeconomic topics, tends to need some level of regulation. However, that regulation need not be a panacea, and need not lead to unintended consequences. The rise of offshore tax havens came primarily in response to higher tax rates in major Western economies, particularly in the 1970s, and of course regulation is something that many in favour of the UK leaving the EU cite as a reason to leave. A very thoughtful friend of mine has noted the link between these two – the UK remains a place for lots of finance taking place onshore, and is so at least in part because of its position within the single market (single market = more customers = more revenues). If that attraction was lost, the UK may need to consider other ways to retain its position, which may include more favourable tax and regulatory arrangements for finance – yet financial markets are precisely the markets where the clamour for “more regulation” has been greatest since the financial crisis.

As with anything in macroeconomics, it’s complicated, but it’s well worth studying!

The Losers from Free Trade (and Donald Trump)

Thomas Frank writes in the Guardian that when Donald Trump “isn’t spewing insults, the Republican frontrunner is hammering home a powerful message about free trade and its victims”.

It’s a challenging point about a central aspect of what Frank calls “Econ 101”, but we understand as EC114, Introductory Macroeconomics: comparative advantage. The idea that all countries specialise in the things they are comparatively better at (rather than absolutely better at), and as a result we all do better. So Mexico produces air conditioning units, while America produces the designs for awesome Apple computers (made in China).

However, what does that mean for those who used to produce air conditioning units in America? Or those here in the UK who used to build ships?

As we pointed out in the lecture, free trade doesn’t mean all benefit. However, free trade does envisage that those displaced from industries that a country is not specialising in are able to move into those industries that a country is specialising in. So why hasn’t that happened in so many parts of the UK, and the US? Undoubtedly the article written by Frank could be applied here in the UK to the rhetoric of Nigel Farage and Ukip.

It’s tempting to say that we’ll find an answer at some point in the rest of the course, yet the reality is that depressed parts of the UK have been depressed for decades now, and things never seem to change – which suggests that the problem hasn’t really been solved as yet… or has it?

Frank concludes with a tirade against free trade but more: “Ill-considered trade deals and generous bank bailouts and guaranteed profits for insurance companies but no recovery for average people, ever – these policies have taken their toll.” To what extent have bank bailouts left us with a banking system unwilling to extend credit to firms willing to move into depressed areas of the country and create jobs?

Even if that’s true, however, most depressed areas of the UK have been depressed for longer than just the time since the Financial Crisis…

Brexit Referendum: So it all begins!

As was fully expected, the UK In/Out referendum will happen on June 23. Which way will you vote?

If the 48 hours or so since this was announced is anything to go by, it promises to absolutely dominate all news headlines between now and then. So expect to be thoroughly bored by it all by the time June comes around.

However, please as students of the economy, don’t get bored and switch off until you’ve worked out what the right decision is on June 23. This is a huge decision for the UK economy, as hopefully what we’ve learnt in Intro Macro has taught you already.

Everything we’ve learnt about has had implications and applications in the EU debate.

We started with economic growth, and the kinds of conditions that would foster higher trend economic growth, looking at the supply side of the economy, and Total Factor Productivity. This is the most fundamental question we have to ponder: what impact does EU membership have on our trend growth rate? At the moment, most commentators are focussed on relative positions in the business cycle (UK better, EU not so good). But (1) the work of Robert Lucas was cited in our lectures to point out that trend growth is hugely more important than business cycle fluctuations, and (b) it’s been far from always this way, and indeed for much of the post-war economic history, European growth has been stronger than UK growth. Is that a reason for thinking about staying then? I’d argue probably not, I’d suggest you should think about why it might be that trend growth might increase or decrease.

We covered unemployment after that. Isn’t unemployment higher because of free movement of labour, meaning that cheap labour from Eastern Europe can come over and take all “our jobs”? This argument covers over a lot of important detail. Firstly, there isn’t some fixed supply of jobs, which we alluded to by thinking about shifts in labour demand curves. Hence it may be that by having Eastern European migrants here, more is produced in the UK economy, and hence more jobs become available.

Which jobs are being taken? By and large, it’s lower skilled (or unskilled) jobs. And the problem with these kinds of jobs is that they are equally the first to go in economic downturns, and are the easier jobs to be replaced by computers and automation. Hence unskilled labour is under threat from immigration, but equally it’s under threat from the machines.

We can carry on going through the course so far, and I’ll be trying in lecture to relate things we cover to the EU Brexit debate, since it matters hugely. At the outset I’ll make it clear: I think, having thought a lot about the issues, and looked at the arguments in favour of leaving in particular, that the UK is much better off inside the EU. That doesn’t mean some killer argument for leaving isn’t lurking around the corner, and I’ll encourage you to find that killer argument – it’s very important you, and we as a class, have considered all possible arguments, and been rigorous about them, before deciding which way to vote.

The UK-EU Deal

Today we have found out what all the renegotiation was about: the possibility that the UK might be able to put a stop temporarily to in-work benefits being paid to EU nationals working in the UK (assuming other EU countries are happy with this happening in any particular situation).

If that sounds a little underwhelming, it is probably because it is, which must be both good and bad.

Good, since there is no dramatic altering of the right of free movement of labour within the EU, as was hoped by some in the Conservative Party. As we’ve just covered in unemployment in our lectures, labour mobility is a good thing. Yes, it does lead to more uncertainty for us since there’s a larger pool of labour potentially for any job we do, but equally it gives both us, and firms, great opportunities to move into new jobs that are better suited to us, and better suited to firms. Workers aren’t restricted simply on the basis of a passport within the EU from taking their ideal job, and equally, firms aren’t stopped from recruiting the ideal worker for the post they’ve advertised because the ideal worker doesn’t have the right (European) passport.

Bad, since those hoping for big reforms in order to vote to remain may well be unhappy with this rather weak deal. Those seeking the UK’s exit claim that the UK gets little back from the EU, and simply gets told what to do. Rules and regulations we just have to accept are made in Brussels, not Westminster. This outcome, which reflects on Cameron’s inability to get what members in his party would ideally have hoped for (ability to stop inward migration unilaterally, plus other grabs back of national sovereignty). As I’ve written before on this blog, and mentioned in lecture, such issues regarding sovereignty clash with the reality of a common market – we can’t be involved in a common market without a common regulatory structure determined by some central regulatory body.

On balance, will it leave the UK any closer to the exit door? This is obviously impossible to say; even opinion polls can only give so much insight.

Will it even matter? Clara Sanderlind makes the point here that since most EU migrants working in the UK don’t claim in-work (or out of work) benefits, the deal will make no difference whatsoever to actual flows of migrants.

This week in lectures we’re covering trade and globalisation, topics which have so many obvious applications into the current UK relationship with the EU. See you later in the week!

Yesterday’s News: Carney and the EU

This week the Bank of England Governor, Mark Carney, gave a speech on the EU in Oxford. It’s well worth reading the whole thing, rather than the various responses to it. It’s not particularly long, and there’s even a bit of humour injected in places.

Firstly, why does it matter that the Bank of England Governor has given a speech? It matters because he is head of the institution tasked with carrying out monetary policy – what happens to interest rates, essentially, to keep inflation at around 2%, and also financial regulation – to try and ensure another financial crisis doesn’t occur.

What is the context? As you’ll be aware, the UK is holding a referendum by the end of 2017 on its membership of the EU. The UK, as a very open economy, is highly affected by international events – both good and bad. At times, high demand from Europe and elsewhere has helped drive UK growth, but at other times instability in neighbouring countries has inhibited our growth. Additionally, it means our policy decisions affect others in the same way that many decisions we make on a crowded train impact those who happen to be sat/stood near us.

What did Carney have to say? Essentially, he said that the founding principles of the EU: freedom of movement of goods and services, capital and labour, have been a good thing for the UK economy. These are arguments we’ll cover in much more detail next term, but here’s some food for thought in the meantime. However, he did add caution (something Eurosceptics have been quick to seize upon): financial regulation may threaten the UK economy in the future, as may the unwillingness of other European nations to reform and become more competitive.

All things we’ll be talking about in much more detail in the Spring: see you then!

The EU Referendum

The news this morning is that a new anti-EU group, “Vote Leave”, has been announced. This is apparently the second such group to be formed in recent weeks ahead of the EU referendum that will happen before the end of 2017.

As you’ll be no doubt aware, the UK is part of the EU, what Wikipedia describes as a “politico-economic union of 28 countries”. It’s what economists would refer to as an institution, and it’s supra-national in that it acts above national governments, overriding their ability to make their own decisions (sovereignty) at times.

That is the prime criticism of the EU, namely that it dictates things we must do here in Britain, rather than allowing us to make our own decisions. That does seem like quite an appealing argument – we should surely be able to make our own decisions as a nation?

We’ll have only about a lecture and a half to think really about international economics during EC114, but you’ll get plenty of chances in your second and third years to study this further, should it interest you; see the blog post earlier today, “You’re doing Intro Macro: what comes after it?”, for the options ahead of you.

The UK is a very open economy, which means we trade a lot, both in goods and in (financial) services. This means that what we do as a country affects countries around us for better or worse. It also means that what countries around us do affects us, particularly if those countries are economically powerful. Economists talk a lot about the Prisoner’s Dilemma, which illustrates a situation where by not co-operating, all individuals/groups in that situation can be made worse off, and points towards co-operation as allowing us all to be made better off.

These considerations have led macroeconomists to think about whether co-ordination between nations might be a good thing, and the EU is one example of such attempts at co-ordination. But in order for co-ordination to work, it must be that nation states forgo the ability to do what they want in all situations – they must accept less sovereignty.

The decision we as a country make in 2017 about our EU membership matters a lot, and it will be good to make sure you’re informed about what it means. That means looking at the objective facts as much as you possibly can; this will be difficult given that pro- and anti-campaign groups will attempt to convince you without necessarily using those facts properly. This is where learning the tools of macroeconomic analysis can help you, and we’ll start after Christmas!